CDO Exemption, EU Speculators, Circuit Breaks: Compliance

U.S. regulators granted banks an exemption from Volcker Rule limits for collateralized debt obligations composed mostly of small-bank securities, according to a statement from regulators.

The adjustment to Volcker answers concerns from smaller U.S. banks that they would have to rush into taking millions in losses on their holdings. Instead, the regulators let banks keep CDOs backed by trust-preferred securities established before May 19, 2010, and obtained by Dec. 10, 2013, five financial agencies, including the Federal Reserve, said yesterday in a joint statement.

As a so-called interim final rule, it will be implemented while the agencies also open a 30-day public-comment period.

Trust-preferred securities, issued by banks and insurers, are hybrid instruments that occupy territory between stocks and bonds. The regulators published a list of 86 CDOs backed by these securities that won’t be covered by Volcker Rule limits.

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Compliance Policy

EU Reins In High-Frequency Traders to Commodity Speculators

European Union lawmakers clinched a deal to toughen the bloc’s financial-market rulebook, backing sweeping measures that will put the brakes on high-frequency trading and curb speculation in commodity derivatives.

The overhaul, which will push more activity on to regulated platforms, is designed to remedy deficiencies laid bare in the 2008 financial crisis. The accord ends more than two years of haggling over proposals.

The EU’s bid to revamp its market legislation, known as Mifid, is a centerpiece of the 28-nation bloc’s work to implement agreements reached by the Group of 20 nations in the wake of 2008 market turmoil. Members of the European Parliament and officials from Greece, which holds the rotating presidency of the EU, resolved outstanding differences on the law late in the day on Jan. 14.

The accord must still be formally approved by the assembly and by national governments.

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Banks Fail to Meet Trading Data Standards, Global Regulators Say

The world’s biggest banks must give a better account of what financial products they trade and who they trade them with, a group of global regulators said yesterday.

About a third of banks surveyed failed to produce weekly trading reports that met regulatory standards, according to a report from the Senior Supervisors Group.

Nineteen banks took part in the survey that measured ability to report trades within three days. Regulators have sought better information from banks on their trading activities since the collapse of Lehman Brothers Holdings Inc. in 2008.

Hong Kong Said to Mull Circuit Breakers as Plunge Protection

Hong Kong Exchanges & Clearing Ltd. is studying whether the world’s fourth-largest stock market needs circuit breakers to prevent trading errors from causing large declines or surges in prices, according to a person familiar with the matter.

Hong Kong Exchanges hasn’t reached any conclusions on circuit breakers, said Lorraine Chan, an exchange spokeswoman.

Exchanges have responded to the increased automation of trading by introducing curbs to prevent mistaken transactions from influencing prices. U.S. equity markets are now protected by a system known as limit up/limit down. Chicago-based futures market CME Group Inc. pauses trading during extreme volatility. Singapore Exchange Ltd. plans to add circuit breakers this year.

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Compliance Action

Banned Stocks Held by SEC Employees Trigger Agency Ethics Review

Securities and Exchange Commission attorneys are reviewing the stock holdings of about 3,400 employees after some New York staffers were found to own securities prohibited by ethics rules.

The agency’s ethics office has begun an examination of all personal financial disclosures to ensure that employees don’t have a financial interest in companies they regulate or investigate, SEC ethics counsel Shira Pavis Minton said in an interview.

The review raises questions about compliance with SEC trading rules, which bar workers from owning shares of most Wall Street firms. The agency relies on employees to disclose their investments themselves.

The ethics office’s review isn’t considered an investigation, Minton said. The ethics attorneys advise SEC employees on how to follow internal rules with the goal of preventing conflicts of interest; investigations of violations are handled by the SEC Inspector General.

Minton declined to speculate on how widespread the problem might be or discuss whether recent reviews of New York-based employees turned up improper holdings.

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Volcker Rule Change Isn’t Enough, Sifma CEO Bentsen Says

“While we welcome the relief provided to certain holders of TruPS CDOs, we believe that regulators must address the larger problem of the inclusion of senior debt securities issued by collateralized loan obligations in the Volcker Rule’s prohibitions,” Securities Industry and Financial Markets Association Chief Executive Officer Kenneth Bentsen said in statement.

Failure to address the issue could result in higher credit costs for banks and “unnecessary losses” resulting from the technical language of the Volcker Rule, Bentsen said.

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