Rate-Rigger Jail, Merrill Fined, BOE Governor: Compliance
European Union lawmakers should enact tougher punishments for market abusers, including jail time, by the end of the year in response to the Libor scandal, the bloc’s financial-services chief said.
A culture of banks rigging interest-rate benchmarks shows the importance of an agreement on tougher market-abuse rules, Michel Barnier told a panel of EU lawmakers in Brussels yesterday. EU regulators are also investigating possible breaches in cartel rules from both banks and brokers in the setting of Libor, Joaquin Almunia, the EU’s competition commissioner, said in his testimony to the European Parliament.
Confidence in Libor, the benchmark interest rate for more than $500 trillion of securities, was shaken following Barclays Plc (BARC)’s admission in June that it submitted false rates. The revelations provoked renewed calls for tougher oversight of the financial system and pushed regulatory and criminal probes of interbank lending rates to the top of the political agenda.
The parliament’s economic and monetary affairs committee is preparing to vote on Oct. 8 to boost the bloc’s sanctions against market abuse, including jail sentences for bank staff found guilty of collusion to fix interbank lending rates.
The cartel probes will end as soon as possible, Almunia said, and will result in hefty fines if antitrust violations are proven.
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Denmark Is Biggest Loser in Basel Plan Redefining Assets
Denmark’s mortgage system, already fighting global liquidity rules the industry warns would spell its demise, is now battling a plan to redefine trading assets it says ignores the Nordic country’s centuries-old framework.
A proposal by the Basel Committee on Banking Supervision would require banks to shift all mark-to-market assets to trading books. That would force Denmark’s $480 billion mortgage industry to reclassify home loans as traded assets, even though they’re not resold. The plan also ignores the fact that a mortgage’s interest-rate risk is passed on to the bondholder, leaving issuers with a capital shortfall as big as $61 billion, according to the Association of Danish Mortgage Banks.
Denmark’s home-loan industry, which backs the world’s third-largest mortgage-bond market, is still trying to persuade regulators in Europe to change Basel liquidity rules it says would force banks to dump mortgage assets.
The Basel Committee’s deadline for accepting comments on the proposal was this month. Denmark’s central bank and Financial Supervisory Authority, in a letter dated Sept. 11, said such a requirement would raise Danish mortgage bank capital needs by “several multiples” without reflecting lenders’ actual risk levels.
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Basel Group Publishes Guidelines on ‘Financial Conglomerates’
Global regulators yesterday published guidance to supervisors of banks with insurance arms.
The “principles” on so-called financial conglomerates, drawn up by the Basel Committee on Banking Supervision and insurance regulators, updates guidance from 2001. Subjects covered in the guidance include supervision, corporate governance, capital adequacy and liquidity, and risk management.
The principles examined include the “role of supervisors in assessing capital adequacy on a group basis, taking into account unregulated entities and activities,” and the risks they pose, according to the statement issued by the Bank for International Settlements yesterday.
RBS Managers Condoned Libor Manipulation During Expansion
Royal Bank of Scotland Group Plc managers condoned and participated in the manipulation of global interest rates, indicating that wrongdoing extended beyond the four traders the bank has fired.
In an instant-message conversation in late 2007, Jezri Mohideen, then the bank’s head of yen products in Singapore, instructed colleagues in the U.K. to lower RBS’s submission to the London interbank offered rate that day, according to two people with knowledge of the discussion. No reason was given in the message as to why he wanted a lower bid. The rate-setter agreed, submitting the number Mohideen sought, the people said.
Mohideen wasn’t alone. RBS traders and their managers routinely sought to influence the firm’s Libor submissions between 2007 and 2010 to profit from derivatives bets, according to employees, regulators and lawyers interviewed by Bloomberg News. Traders also communicated with counterparts at other firms to discuss where rates should be set, one person said.
RBS, 81 percent owned by the British government, is one of at least a dozen banks being probed by regulators worldwide over allegations that traders colluded to manipulate the benchmark interest rate so they could profit from bets on interest-rate derivatives.
Regulators are now probing RBS’s yen, Swiss franc and U.S. dollar sales-and-trading businesses, all part of the fixed- income division, said two people who asked not to be identified because the bank’s internal investigation, begun more than two years ago, is still in progress. Investigators are focusing on the firm’s swaps, inflation-trading and foreign-exchange teams, as well as on money-market traders who made daily Libor submissions, the people said.
The process of setting rates was open to abuse because RBS failed to establish guidelines until June 2011, four people familiar with the business said. Managers encouraged rate- setters to discuss Libor with traders across the company as a way of ensuring the bank’s submissions reflected market conditions, particularly after money markets froze in 2007, the people said. These communications -- by e-mail, instant messages and telephone -- are the focus of regulators’ probes.
David Greene, a senior partner at law firm Edwin Coe LLP in London said this kind of activity “was widespread in the industry” and a lot of traders didn’t consider it to be wrong.
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BofA’s Merrill Fined by Finra for Failing to Report Complaints
Bank of America Corp. must pay a $500,000 fine for failing to report complaints and lawsuits against stock brokers at Merrill Lynch, the Financial Industry Regulatory Authority said.
Merrill Lynch didn’t tell Finra about more than 650 lapses, keeping them off the records that investors use to research advisers, the industry-funded regulator said on its website yesterday. The brokerage failed to report any of about 300 lawsuits and arbitrations filed against brokers from 2007 to 2009, according to Finra.
Finra maintains records on its website that investors and potential employers use to check the background of financial advisers. Merrill Lynch’s lack of reporting may have made it difficult for regulators to review transfers and investigate complaints, Finra said.
In November 2009, about 10 months after Bank of America bought Merrill Lynch, the Charlotte, North Carolina-based bank told Finra that it had a backlog of complaints to investigate and resolve, according to a letter on the regulator’s website. Some of the reporting problems continued for the next two years.
“We have enhanced our policies and procedures to address issues raised in this matter and to ensure that client complaints are properly reported,” Bill Halldin, a spokesman for the bank, said in an interview. The bank didn’t admit or deny wrongdoing, according to Finra’s statement.
Rothschild’s Bumi Probes ‘Irregularities’ at Bakrie Coal Company
Bumi Plc (BUMI), the London-listed Indonesian coal venture founded by Nathaniel Rothschild, began a probe into alleged irregularities at associated companies in the Asian country, pushing the shares down as much as 39 percent.
The stock has lost more than half its value in the past five days, or about $600 million. “An independent investigation has been commissioned to investigate the allegations on an urgent basis, and is to report to the board,” Bumi said in a statement yesterday. PT Bumi Resources (BUMI), 29 percent-owned by Bumi Plc, said it was unaware of the investigation.
The probe will focus on “extensive” development funds at Bumi Resources and an asset in Berau Coal.
The probe is the latest development in a dispute involving Rothschild and the Bakries, the Indonesian palm-oil-to-property family empire founded in 1942.
EU Will Fine Microsoft Over Browser Choice, AFP Says
Microsoft Corp. (MSFT)’s failure to comply with a settlement to give users a choice of web browsers will result in a penalty, Agence France-Presse reported, citing European Competition Commissioner Joaquin Almunia.
Almunia didn’t give the size of fine, saying the commission will “react in a very firm manner,” the news service reported.
Gruebel Brought ‘Change of Ethos’ UBS Head of Cash Equities Says
Gruebel pushed for more proprietary trading by the Zurich- based bank and more risk to increase profits, Allison testified today at the London fraud trial of former UBS trader Kweku Adoboli.
Adoboli, 32, is charged with fraud and false accounting over unauthorized trades on which UBS lost $2.3 billion. Gruebel stepped down after the loss the bank attributed to Adoboli.
John DiBacco, who worked previously worked at the bank’s New York office and had overseen the desk Adoboli worked on, said in an interview after the trader’s arrest that he was surprised by the size of the risks UBS’s London traders took.
“There was a lot of risk-taking happening in London that was of a proprietary nature and not strictly for facilitation of clients,” DiBacco had said, referring to trading with the lender’s own money. “There is a culture that was risk-seeking and not risk-averse.”
Ex-Snoras Bank Owner Sued by U.K. Prosecutors Over ‘Crime’ Money
Former Bankas Snoras AB owner Vladimir Antonov was sued by U.K. prosecutors under a law used to confiscate crime proceeds, while he challenges a related extradition case with Lithuania, where he is wanted for fraud.
The lawsuit was discussed at a London court hearing yesterday that was closed to the public after requests by Antonov’s lawyer, James Lewis, and the Crown Prosecution Service.
Antonov, a Russian, and his Lithuanian business partner Raimondas Baranauskas were detained in London in November after Lithuanian authorities issued a European arrest warrant on claims they forged documents and fixed accounts to siphon at least 1.7 billion litas ($635 million) from the country’s third- biggest bank by deposits, causing its collapse.
Snoras, based in Vilnius, filed a separate civil lawsuit in Britain in May seeking a similar amount in damages, and won a court order freezing Antonov’s assets. Antonov, accused of using the money for luxury purchases, claims the cases may be politically motivated.
The Crown Prosecution Service’s press office and Kevin Gold, another lawyer for Antonov, didn’t immediately return calls for comment about the case.
External Auditing Rules ‘Weak’ in Japan, Allen Says
Jamie Allen, Hong Kong-based secretary general of the Asian Corporate Governance Association, talked about Olympus Corp. (7733)’s accounting scandal, and corporate governance in Japan and Asia.
Former executives of Olympus, including Chairman Tsuyoshi Kikukawa, admitted to roles in the fraud at a trial that began at the Tokyo District Court yesterday. Allen spoke with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”
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Almunia Says Libor Fines May Increase Due to ‘Gravity’
European Union Competition Commissioner Joaquin Almunia, Chairman of the International Organization of Securities Commission Board Masamichi Kono and Bloomberg LP Chief Executive Officer Dan Doctoroff spoke at a European Parliament hearing about the London interbank offered rate.
Finance Watch Secretary-General Thierry Philipponnat and BlackRock Inc. (BLK) Head of Government Affairs Joanna Cound also spoke. Among the topics discussed included the Libor investigation, penalties for market abuse, and the target of probes.
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Mustafa Sees Basel III ‘Traps’ for 3,000 to 5,000 Banks
Kamal Mustafa, chief executive officer of Invictus Consulting Group LLC, talked about the outlook for the U.S. financial services industry and the potential impact of capital requirement regulations on U.S. banks.
Mustafa spoke with Erik Schatzker and Scarlet Fu on Bloomberg Television’s “Market Makers.”
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German Lawmakers Should Reject Swiss Tax Accord, Says Grinberg
German lawmakers should vote against a tax agreement with Switzerland because it won’t deter wealthy individuals from hiding their money overseas, said Itai Grinberg, a law professor at Georgetown University.
The bilateral accord signed last year would impose new withholding taxes on Germans with accounts in Switzerland while keeping their identities secret. Germany’s lawmakers have yet to ratify the agreement due to take effect from 2013 amid opposition from the Social Democratic Party.
Grinberg favors building a global automatic information exchange system through measures such as the U.S. Foreign Account Tax Compliance Act, which requires banks to report information on consenting American account holders directly to the Internal Revenue Service. Switzerland agreed in June to implement the FATCA legislation, while Swiss lawmakers also voted this month to allow group requests for information on Americans with cross-border accounts in the Alpine nation.
Those measures equate to automatic information exchange, according to Grinberg.
Comings and Goings
Next BOE Governor Must Be Independent From Banks, Cable Says
U.K. Business Secretary Vince Cable said the next Bank of England governor must be independent of the banking system and that he hasn’t heard of any bankers applying for the job.
Cable made the remarks in an interview at his Liberal Democrat party’s annual conference yesterday in Brighton, on England’s south coast. The successor to Mervyn King must be someone “understanding the banking system but independent of it and able to speak frankly where necessary.”
Asked if a banker could do the job, he said: “I don’t know that there are any applying.”
Conservative Chancellor of the Exchequer George Osborne this month formally began his search to replace King, who steps down in June. Former Bank of England Deputy Governor John Gieve said on Sept. 12 that it would be “very difficult” for the government to select a banker who had worked recently in light of recent scandals tarnishing London’s financial center.
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