CME-ICE ‘Systemic,’ Chipotle Probe, Facebook: Compliance
Derivatives clearinghouses owned by CME Group Inc. (CME) and Intercontinental Exchange Inc. have been designated systemically important by U.S. regulators, moving them closer to heightened supervision under the Dodd-Frank Act.
ICE Clear Credit, the world’s largest clearinghouse for credit-default swaps, and CME Inc., a unit of the biggest futures exchange, got designations from the Financial Stability Oversight Council, a panel of regulators created by the 2010 regulatory law. The moves were confirmed by Kelly Loeffler, a spokeswoman for Atlanta-based Intercontinental Exchange, and Michael Shore, a spokesman for Chicago-based CME Group.
The designations were approved this week by FSOC as part of an initial set of so-called financial market utilities that require increased oversight by regulators including the Federal Reserve. The designations, subject to appeal, may be completed “as early as this summer,” according to Anthony Coley, a U.S. Treasury Department spokesman.
Dodd-Frank, U.S. lawmakers’ response to the 2008 credit crisis, requires most swaps to be guaranteed by clearinghouses that stand between buyers and sellers to reduce risk in the financial system. The systemic designation will be the FSOC’s first delineation of which companies aside from banks would threaten the broader economy if they collapse.
The Clearing House Payments Co. LLC, which operates a cross-border and domestic wire-transfer system, also received a letter of designation, according to Erica Hurtt, vice president for communications at the Clearing House.
Derivatives Competition Plan May Be Scrapped by EU Lawmakers
Deutsche Boerse AG (DBK) may win a reprieve from draft European Union proposals to force exchanges to open up their derivatives clearing services to competition.
Some members of the European Parliament are seeking to scrap part of the proposals by Michel Barnier, the bloc’s financial services chief, amid fears they would threaten market stability, according to a document obtained by Bloomberg news.
The legislators are concerned that Barnier’s plans to boost competition will “fragment liquidity in trading platforms,” which “played a vital role in promoting stability during the financial crisis,” according to the document that lists proposed amendments to Barnier’s draft law.
The parliament’s economic and monetary affairs committee is scheduled to vote on its opinion on the draft law on July 9, according to the assembly’s website. The legislation must be approved by the parliament and by the EU’s national governments before it can come into effect.
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Fitch Wavers Over Plans to Loosen Derivatives Rules for Banks
Fitch Ratings is wavering on part of its plan to loosen rules for banks that sell derivatives contained in securitizations and covered bonds.
The company is readying a series of adjustments to its guidelines for transactions that rely on counterparties in the $700 trillion derivatives market. Swaps can be used to turn mortgages in one currency into securities in another or to create floating-rate bonds out of fixed car loans.
The ratings firm said in a March report that as part of the overhaul it may expand the types of assets that downgraded counterparties can post as collateral to maintain grades on securitized or covered bonds, or that lower-rated banks can use with new deals. Eligible collateral, which now includes only cash and government debt rated at least AA-, may extend to corporate notes, covered bonds and securitized debt.
Debt from the more than $4 trillion securitization market such as mortgage bonds can be harder to trade and tougher to value. In 2007 and 2008 those characteristics roiled financial firms, funds and so-called structured investment vehicles, whose top-rated debt then formed a $400 billion market before often losing most of its value.
The revised protocols should be finished this month with otherwise minor adjustments, the London-based analysts said last week in a telephone interview.
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JPMorgan Copper ETF Plan Seen Creating Havoc by Merchant Groups
JPMorgan Chase & Co. (JPM)’s plan to introduce an exchange-traded fund linked to copper will “severely disrupt” the market, a group of industrial copper users told the U.S. Securities and Exchange Commission.
Funds backed by copper would leave less of the metal available for manufacturers, creating shortages and driving up prices, according to a letter filed to securities regulator by Vandenberg & Feliu, a New York-based law firm representing a major copper-merchant company and several copper fabricators.
NYSE Arca Inc., the electronic platform of NYSE Euronext, filed with the SEC to list and trade JPM XF Physical Copper Trust, according to an April 2 document.
JPMorgan’s offering initially calls for the removal from the market of as much as 61,800 metric tons of copper, or the withdrawal of more than 30 percent of the supplies available for immediate delivery worldwide, the merchants group said in its letter.
“JPM’s offering will therefore result in a substantial artificially-induced rise in near-term copper prices on the London Metal Exchange, which will severely disrupt the world market for the trading of such copper,” the group said in the letter, dated May 9.
The Financial Times reported the copper group’s letter to the SEC earlier.
Japan’s FSA Plans Auditing Rules to Detect Fraud, Nikkei Says
The Financial Services Authority, Japan’s financial watchdog, plans to implement revisions to auditing rules to detect fraud in the fiscal year ending March 2014. The new rules follow cases that have arisen, including hidden losses at Olympus, the Nikkei newspaper reported, citing an unidentified senior official at the agency.
The agency is to provide procedures for identifying deceptive accounting, and will consider rules for handing over information to new auditors, according to Nikkei.
UAE Wants to Revamp Financial Regulation, WAM Reports
A United Arab Emirates government committee headed by the finance minister proposed that the central bank and bourse regulator be given joint duties to regulate the financial industry and safeguard it from global crises.
The committee also recommended that a comprehensive financial law be considered by the Cabinet along with amendments to legislation governing financial companies and banks, the official WAM news agency reported.
The panel proposed that the Securities and Commodities Authority be renamed the Emirates Financial Services Authority. The purpose of the changes would be to help avoid “falling into” any global financial crisis.
Special Section: Facebook IPO
Senate Banking Committee Looking Into Facebook IPO, Aide Says
The U.S. Senate’s banking committee is probing Facebook Inc.’s (FB) initial public offering, said Sean Oblack, a committee spokesman.
The committee, led by Senator Tim Johnson, a South Dakota Democrat, will have staff-level briefings with Facebook officials, regulators and other stakeholders, Oblack said.
Morgan Stanley, Goldman Sachs Sued Over Facebook Stock Sale
Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. were sued along with other underwriters and Facebook Inc. by investors who claimed they were misled in the purchase of the social network firm’s stock.
The investors said the members of a proposed class action, or group lawsuit, have lost more than $2.5 billion since the initial public offering last week, in a complaint filed yesterday in Manhattan federal court. They claimed Facebook and the banks didn’t disclose lower revenue estimates.
Andrew Noyes, a spokesman for Menlo Park, California-based Facebook, said in an e-mail: “We believe the lawsuit is without merit and will defend ourselves vigorously.” Pen Pendleton, Michael DuVally and Mark Lane, spokesmen for Morgan Stanley (MS), Goldman Sachs and Barclays, respectively, declined to comment. Representatives of JP Morgan and Bank of America didn’t immediately return calls for comment.
Also named as defendants in yesterday’s suit are Facebook’s co-founder and chief executive, Mark Zuckerberg, and its chief financial officer, David Ebersman.
The underwriter case is Brian Roffe Profit Sharing Plan v. Facebook, 12-04081, and the Nasdaq case is Goldberg v. Nasdaq OMX Group Inc., 12-cv-04054, U.S. District Court, Southern District of New York (Manhattan).
Separately, Facebook Inc. may fall more than 42 percent below its initial public offering price by the end of the year, according to bets by structured-product investors.
The most actively traded structured products tied to Facebook since its IPO have been so-called put warrants, whose buyers profit if the shares drop below a pre-defined level, in some cases as low as $22, data compiled by Bloomberg show. UBS AG (UBSN), Commerzbank AG (CBK) and Julius Baer Group Ltd. (BAER) are among lenders that listed 1,504 warrants and certificates in Europe linked to shares of the social networking site that were offered at $38.
Put warrants give investors a cash payment depending on how far a stock falls below a set level.
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Facebook Suit Shows Rules Need Updating, Lopresti Says
Marc Lopresti, an attorney at Tagliaferro & Lopresti LLP, discussed the lawsuit filed against Facebook Inc. and various underwriters including Morgan Stanley, Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co.
He spoke with Deirdre Bolton on Bloomberg Television’s “Money Moves.” Bloomberg’s Serena Saitto also spoke.
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Chipotle Says Worker Investigations May Continue for Two Years
Chipotle Mexican Grill Inc. (CMG), the eatery that fired workers after an immigration probe began, said investigations by the U.S. Securities and Exchange Commission and Department of Justice may continue for as long as two more years.
Federal prosecutors are investigating possible criminal securities-law violations, the Denver-based company said in a filing with the SEC May 22. Last week, the SEC subpoenaed Chipotle regarding work authorizations.
The investigations into Chipotle employees are part of President Barack Obama’s efforts to crack down on illegal immigrants working in the U.S.
The 1,260-store burrito chain fired about 450 workers after an immigration investigation began in 2010 in Minnesota. It has since spread to other U.S. cities including Washington, where it let go about 50 workers last year.
Chipotle has been using the government’s E-Verify system to validate the identity of all of its employees since March 2011, Chris Arnold, a company spokesman, said in an e-mail. Chipotle had about 30,940 employees, including 2,570 salaried and 28,370 hourly workers, as of Dec. 31, according to a company filing.
Adidas Says Indian Authorities to Examine Criminal Complaint
Adidas AG (ADS), which said last month that it discovered irregularities at the Indian arm of its Reebok unit, filed a criminal complaint and is working with Indian authorities investigating the matter.
The complaint has been registered for investigation by Indian law enforcement authorities, Adidas, based in Herzogenaurach, Germany, said yesterday in a statement.
Police are investigating two former executives of Reebok India after the company made allegations of fraudulent practices worth as much as 8.7 billion rupees ($160 million), according to one person involved in the inquiry, who declined to be identified because the matter is private.
Adidas spokeswoman Katja Schreiber declined to comment on the details of the complaint.
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JPMorgan Loss Is Bad Risk Management, U.K. FSA’s Bailey Says
JPMorgan Chase & Co.’s, trading loss in its London unit is an example of “bad risk management,” Andrew Bailey, head of banking supervision at the U.K. Financial Services Authority, told reporters today.
Bailey said he didn’t “see a conduct issue for the moment” in the U.K. for the bank.
“It’s a very salutary lesson about the use of models and the dangers of over-reliance on single models,” Bailey said.
Schapiro Says SEC’s JPMorgan Review Focused on VAR Models
U.S. Securities and Exchange Commission Chairman Mary Schapiro said the agency is “very focused” on determining whether JPMorgan Chase & Co. appropriately disclosed changes it made during the first quarter to a complex risk calculation.
She made the remarks May 22 during an appearance before the Senate Banking Committee in Washington.
Schapiro’s comments were the most extensive she has made since the biggest U.S. bank announced a $2 billion trading loss on May 10. The remarks indicated that the SEC is examining how JPMorgan measured its “value at risk,” or VaR, which is a measure of how much the company estimates it could lose on securities on 95 percent of days.
JPMorgan Chief Executive Officer Jamie Dimon told investors on May 10 that the company used a new model, which later proved to be “inadequate,” to calculate VaR some time during the first quarter. The change ended up cutting the unit’s estimated risk profile by about half.
JPMorgan spokesman Joseph Evangelisti declined to comment on Schapiro’s remarks. The bank did disclose the change in an official financial statement filed on May 10, though not in the earlier earnings release.
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FDIC Warns Investors of Potential Risks in Derivative-Tied CDs
The Federal Deposit Insurance Corp. warned investors of the potential risks involved in certificates of deposit that use derivatives for customized bets, which are currently being marketed “aggressively” to investors.
The investments can have longer maturities than fixed-rate CDs, higher penalties for early withdrawal and could earn zero interest with buyers on the hook to pay taxes on income they didn’t earn, the regulator said. While the products may offer higher returns than traditional CDs, the formula for calculating the potential return may be “extremely complex” and the CDs also may not track the underlying index closely.
Meron Wondwosen, an FDIC Consumer Affairs Specialist, made the statement in a May 18 article that appeared in the Spring 2012 issue of “FDIC Consumer News.”
The warning follows record sales of the investments last year. Demand for the so-called “structured CDs” has increased as interest rates on traditional deposits fall to record lows and after Congress approved a permanent expansion of FDIC coverage of bank deposits in July 2010.
Comings and Goings
U.S. Prosecutor Patrick Fitzgerald in Chicago to Step Down
U.S. Attorney Patrick J. Fitzgerald in Chicago, the chief federal prosecutor in the Northern District of Illinois since Sept. 1, 2001, said he will step down effective June 30.
During his decade-long tenure, the appointee of Republican President George W. Bush won convictions of two Illinois governors, Republican George Ryan and Democrat Rod Blagojevich, newspaper publisher Conrad Black, and Bush White House aide I. Lewis “Scooter” Libby.
Fitzgerald, 51, who scheduled a press conference for today, has no immediate employment plans and “will take time off this summer before considering career options,” according to a Justice Department statement.
His northeastern Illinois territory encompassed Chicago, the third-most populous U.S. city, as well as its surrounding Cook County and 17 other counties, according to the government statement.
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