Libor Criticism, Bernanke on Currency, Oxbow: Compliance
The London interbank offered rate was expected to face a prominent U.S. critic yesterday as financial regulators look to improve oversight after three banks paid more than $2.5 billion in fines to settle interest-rate rigging charges.
The Commodity Futures Trading Commission was set to hold a roundtable meeting scheduled to include representatives of CME Group (CME) Inc., Intercontinental Exchange Inc., (ICE) NYSE Euronext and Pacific Investment Management Co. to consider changes to Libor. Barclays Plc (BARC), UBS AG and the Royal Bank of Scotland Group Plc were the first banks to settle charges with regulators in a global investigation encompassing about 20 financial firms. Banks aren’t slated to attend the meeting.
CFTC Chairman Gary Gensler has questioned the long-term viability of Libor and other benchmark rates, saying the underlying markets must be based on transactions and not estimates from banks.
The roundtable meeting is part of a task force run by the CFTC and U.K. Financial Services Authority that published an initial consultative paper on benchmark rates on Jan. 11.
The Global Financial Markets Association, a trade association representing securities advocacy groups in Europe, the U.S. and Asia, said benchmarks don’t need to be based on actual transaction data. Some markets have little transaction volume and still benefit from having a benchmark, the groups said.
“GFMA believes that it is unnecessarily limiting to mandate that a benchmark be based solely on actual transaction data,” the organization said in a Feb. 11 letter to the task force. “Provided that a sufficiently robust governance and control framework is in place and there is clear transparency, benchmarks determined under a variety of methods can be of great value to users.”
Small Bankers Call on Congress to Ease Regulations, Revamp CFPB
Independent Community Bankers of America (ICBA) unveiled a legislative proposal aimed at helping small banks and thrifts lend more to local small businesses and residents, the group said in an e-mailed statement.
The group seeks an assistant U.S. Treasury secretary for community banks, in addition to changes at the U.S. Consumer Financial Protection Bureau to “ensure more balanced regulation.”
The plan also calls for exempting community banks from certain mortgage rules; reducing yearly privacy notice redundancies to cut paperwork; easing municipal adviser registration “burdens” to help serve local governments; and improving accountability in bank exams with a “workable appeals process.”
OCC Goal Isn’t to ‘Punish’ Banks, Curry Tells Attorneys General
“The purpose of our actions is not to punish banks or make examples of anyone,” U.S. Comptroller of the Currency Thomas Curry said in prepared remarks to National Association of Attorneys General conference in Washington.
The OCC’s role as prudential bank supervisor “is not always well understood, people sometimes ask why enforcement actions are typically done through consent agreements,” Curry said in the prepared remarks.
Banks typically take necessary corrective action when OCC finds issues that need to be fixed.
“Those are the cases no one hears about since under law the supervisory process is confidential,” Curry said.
The OCC, unlike the Department of Justice, has no power to investigate, and prosecute criminal activity, he said. Most actions brought by the Department of Justice, the Securities and Exchange Commission, the Federal Trade Commission and other agencies are resolved through negotiated settlements for “good reasons,” such as ensuring victims are compensated in timely manner.
Treasury Should Curb Pay for Bailed Out Companies, Watchdog Says
The U.S. Treasury Department should reevaluate total compensation for employees in companies that were bailed out and apply guidelines that will curb excessive pay, Christy Romero, the special inspector general for the Troubled Asset Relief Program, said.
“Treasury’s success should not be judged based on reductions in pay from a time when these companies stood on their own without taxpayer assistance,” Romero said yesterday in prepared testimony to the House Committee on Oversight and Government Reform. “Rather, Treasury’s success should be based on whether Treasury awards appropriate pay for executives while taxpayers continue to fund these companies’ bailouts.”
Pay for top executives at seven bailed-out companies was scrutinized and restricted by the Treasury special master’s office starting in 2009. General Motors Co. (GM) and Ally Financial Inc. (ALLY) are still in TARP. American International Group Inc. (AIG), Bank of America Corp. (BAC), Citigroup Inc. (C), Chrysler Group LLC and Chrysler Financial Corp. have left the program and are no longer subject to the special master’s rulings.
Romero said yesterday that AIG may return to “past compensation practices,” and that it falls to the insurer’s new regulator, the Federal Reserve, to ensure that the insurer’s pay practices don’t encourage “excessive risk taking.”
AIG has said pay limits imposed as part of a rescue package that swelled to $182.3 billion harmed the New York-based company’s ability to attract, retain and motivate employees.
Hedge Fund Employees Arrested in U.K. Inside-Trading Probe
Three hedge fund employees were arrested in London on suspicion of insider trading by the U.K. finance regulator and police.
The men, 33, 37 and 39 years old, are in custody for questioning, the U.K. Financial Services Authority said in an e-mailed statement, without identifying them. The arrests aren’t tied to other insider-trading probes previously announced by the agency.
The FSA and London’s Metropolitan Police also executed six search warrants on homes and offices in the British capital and the surrounding areas, according to the statement. The men hold positions that required FSA approval.
The regulator has sought to limit insider trading in the U.K.’s financial hub after previously targeting lower-profile individuals. None of three men arrested today have been charged. The FSA declined to provide further details.
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AGL Says Rules May Stop A$2 Billion in Coal-Seam Gas Plans
AGL Energy Ltd. (AGK), Australia’s second-biggest electricity retailer, may drop plans to invest about A$2 billion ($2.1 billion) on coal-seam gas in New South Wales after the state moved to restrict access to some areas.
“This is an arbitrary announcement,” Chief Executive Officer Michael Fraser said today in a phone interview after the Sydney-based company reported that it may need to write down the value of two proposed coal-seam gas projects in the state. “You’ve got to work out ways to develop those resources in a way that addresses community concerns and avoids what is going to be a huge cost to the New South Wales economy.”
AGL’s proposal to expand its Camden project southwest of Sydney and another in the Hunter Valley wine region north of the state capital may not go ahead after the government declared country towns and suburbs “no-go zones” for coal-seam gas, Fraser said. The state will prohibit exploration and production in 2-kilometer (1.2-mile) areas around residential communities, Premier Barry O’Farrell said Feb. 19.
AGL is seeking to extract natural gas from coal deposits to help decrease reliance on supplies from outside Australia’s most populous state and address a looming gas shortage. The company’s coal-seam gas projects are among proposals that have faced opposition from some environmental groups and farmers.
The company’s Gloucester gas project in New South Wales, which received federal government approval earlier this month, and its existing Camden gas operation aren’t expected to be “materially affected,” AGL said today. AGL said it expects an investment decision on Gloucester in mid-2014.
AGL expects to carry out further analysis of the consequences of the regulations this half year, the company said today.
Consob Bans Intesa, Banca Carige Short Sales
Italy’s stock market regulator banned Intesa short-sales from 12:15 p.m. in Milan yesterday.
The stock market regulator, known as Consob, said the decision was taken in line with European Union rules for shares that fall more than 10 percent, according to a statement. The ban is to last through end of trading today.
The regulator also banned short sales on Banca Carige yesterday and today, according to an e-mailed statement. The Banca Carige short-sale ban started at 1:20 p.m. yesterday.
Consob is in discussions with the Italian Stock Exchange on measures to control volatility by tightening limits on stock fluctuation, Consob official said by phone.
Consob also is considering short-sell bans for stocks in the Milan Italian Bourse, or FTSE MIB, that move outside preset trading bands.
Oxbow Price-Fixing Suit Against Buffett’s BNSF Dismissed
Oxbow Carbon & Minerals LLC’s price-fixing suit against Union Pacific Railroad Co. (UNP) and Warren Buffett’s Burlington Northern Santa Fe railway was dismissed by a federal judge, who ruled the mineral company hadn’t shown that the rail carriers engaged in monopolistic behavior.
Oxbow “failed to allege adequate facts to state claims” under the Sherman Antitrust Act, U.S. District Judge Paul Friedman in Washington said in a ruling released yesterday.
Friedman invited Oxbow to refile the suit to address the shortcomings he cited, saying “it is possible, of course, that plaintiffs will be able to cure these defects by amendment.”
Closely held Oxbow, which mines and markets coal and natural gas, was founded by William Koch, son of the founder of Koch Industries Inc.
The case is Oxbow v. Union Pacific, 11-01049, U.S. District Court, District of Columbia (Washington).
Mantega Says Currency War He Named Eases as Brazil Recovers
As the currency war intensifies in the developed world, the Brazilian official who coined the phrase says for his country it’s softened.
Brazil succeeded in reducing swings in the real after letting the currency depreciate 19 percent in the two years ending in December to protect local manufacturers from foreign competition, Finance Minister Guido Mantega said in an interview. Now with the real hovering around 2 per dollar, Brazil is abandoning policies to depress the exchange rate even as Japan weakens the yen and the U.S. sticks to policies Mantega has said spurred the start of the currency war.
“We haven’t resolved it, but we neutralized, softened the currency war issue that other countries are facing,” Mantega, 63, said at Bloomberg’s headquarters in New York. “We are in Brazil in a transition to a more solid, competitive and efficient economy.”
Brazil started introducing capital restrictions in 2010 after Mantega said rich nations had engaged in a currency war to boost their exports at the expense of developing countries.
Central bank President Alexandre Tombini said Feb. 25 Brazil had learned to operate in a currency war environment. The more stable currency this year will also help slow inflation that has exceeded the central bank’s 4.5 percent target for more than two years, Tombini said at a conference in New York.
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BBA Says Resolution Plans May Hinder EU Single Market
British Bankers’ Association Chief Executive Officer Anthony Browne talked about bank resolution plans in some European countries, financial-transactions tax and the outlook for U.K. banks.
He spoke with Bloomberg Television’s Caroline Connan on the sidelines of a banking conference in Paris organized by “The Economist.”
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Bernanke Defends Asset Purchases, Sees No Currency War
Federal Reserve Chairman Ben S. Bernanke defended the central bank’s unprecedented asset purchases, saying they are supporting the expansion with little risk of inflation or asset-price bubbles.
“We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery,” Bernanke said yesterday in testimony to the Senate Banking Committee in Washington. “Inflation is currently subdued, and inflation expectations appear well anchored.”
Automatic federal budget cuts set to begin March 1 will put a “significant” burden on the economy if lawmakers can’t avert the reductions, Bernanke told lawmakers in the first day of his semiannual monetary policy report to Congress. He also urged lawmakers to put the budget on a “sustainable long-run path.”
Bernanke and his colleagues on the Federal Open Market Committee are debating whether to curtail $85 billion in monthly bond-buying amid concern the Fed’s record $3.1 trillion balance sheet may encourage excessive risk-taking by investors and complicate the Fed’s exit from easing. Several participants at the Jan. 29-30 meeting said the Fed should be prepared to vary the pace of purchases as the economic outlook changes, according to minutes released last week.
Bernanke, 59, repeated prior Fed statements that the asset purchases will continue unless the labor-market outlook shows “substantial improvement” from current levels. He also described the job market as being “generally weak.”
In exchanges with senators during a question-and-answer period, Bernanke denied that the Fed is engaging in a “currency war” through its asset purchases and responded to a suggestion that he is a “dove” who favors easy policy.
Fed policies “are increasing demand globally and helping not only our businesses but the businesses in other countries that export to us,” he said. “This is not a beggar-thy-neighbor policy.”
“You called me a dove,” Bernanke said in response to a question from Republican Senator Bob Corker of Tennessee. “Well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period -- at least one of the best, about 2 percent average inflation.”
Bernanke also defended the Fed’s asset purchases and near-zero target interest rate, saying that “monetary policy is providing important support to the recovery.”
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Comings and Goings/Executive Pay
EU Bonus Cap Risks Banks’ Efforts to Raise Capital, Bailey Says
A proposed European Union ban on bonuses that exceed fixed pay would harm banks’ ability to build up capital, said Andrew Bailey, the U.K.’s chief banking supervisor.
Bailey, who is chief-executive-elect of the U.K.’s Prudential Regulation Authority, said at a Paris conference he was “skeptical and concerned” about the plan to limit bonuses, because it would “make the cost base inflexible and make it more difficult to retain earnings and build capital.”
Lawmakers in the European Parliament have insisted that the legislation to implement Basel capital rules include tougher curbs on variable pay.
“It also makes it harder to pull back remuneration when things have gone wrong,” Bailey said at the Economist conference. “Clawing back unvested remuneration when things have gone wrong is a big part of what we are pushing for. We favor longer time periods for vesting.”
Lawmakers will today resume negotiations with governments on the bonus rules, as part of an attempt to seal a deal on how to implement the so-called Basel III accord in the EU.
Banks should defer bonus payouts for staff for as long as 10 years to improve “prudence” in remuneration, Andrew Haldane, executive director for financial stability at the Bank of England, said last month.
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Australia Exchange CEO Funke Kupper Hiring for Derivatives
ASX Ltd. (ASX), Australia’s main exchange operator, will hire at least 25 more people this year to expand its clearing business as the contribution of derivatives to profit expands and equity volume falls.
Exchanges from the U.S. to Europe and Hong Kong are relying more on derivatives as stock-trading profit wanes. Funke Kupper is diversifying ASX’s business amid competition from Chi-X Australia Pty and operators of so-called dark pools, venues that don’t publicly display participants and prices. Average daily value of equity trades on ASX fell by 24.5 percent in the six months through Dec. 31, the bourse said Feb. 21.
The Australian exchange operator, which had an $8.3 billion merger with Singapore Exchange Ltd. vetoed by the government in 2011, this month won its battle to maintain a monopoly in equity clearing and settlement. Clearers act as central counterparties in derivatives contracts to dilute the risk of default.
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