Swiss FX Probe, Mizuho Apology, FCA Fines, Reg NMS: Compliance
Swiss authorities said they’re investigating several banks for allegedly colluding to manipulate the $5.3 trillion-a-day foreign exchange market.
The Swiss Financial Market Supervisory Authority “is coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated,” it said in a statement Oct. 4. Separately, the competition commission said it opened a preliminary probe on Sept. 30 after receiving allegations of collusion among banks to manipulate some foreign-exchange rates.
The probes come after Bloomberg News reported in June that dealers at banks pooled information through instant messages and used client orders to move benchmark currency rates. Britain’s Financial Conduct Authority said that month it was reviewing the allegations. The U.S. Commodity Futures Trading Commission has also been reviewing potential violations of the law with regards to foreign currency markets, according to a person familiar with the matter who asked not to be identified.
European regulators are reviewing allegations of collusion in crude oil and biofuels markets, while the CFTC and FCA are also probing the potential manipulation of ISDAfix, a benchmark for interest-rate swaps.
In the Oct. 4 statement, Finma didn’t identify which firms it’s investigating or give details of the scope of its probe, saying it would decide at a later date on what further action to take. Vinzenz Mathys, a spokesman for Bern-based Finma, declined to comment further.
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Mizuho Takes Steps to Improve Compliance After Crime-Group Loans
Mizuho Financial Group Inc. (8411)’s banking unit set up an internal committee and will assemble a panel of outside experts to improve compliance after it failed to act on loans made to crime groups.
Deputy President Toshitsugu Okabe told reporters of the measures after bowing in apology at a news conference in Tokyo Oct. 4. It was the first briefing by Japan’s third-biggest bank by market value since the Financial Services Agency ordered the lending unit to improve business a week ago.
Mizuho Bank Ltd. failed to take steps to end loans to “anti-social” groups for more than two years after becoming aware of them, the FSA said Sept. 27. Okabe said Oct. 4 that at least four senior executives responsible for compliance at the time knew of the transactions and didn’t inform superiors.
Okabe replaced Masakane Koike as head of compliance at the holding company on Sept. 30, the Tokyo-based bank said this week.
The company must submit a report to the FSA by Oct. 28.
London Whale Lifts U.K. Regulator to Highest Fines in a Decade
The U.K. finance regulator recorded its largest month of fines in more than a decade in September, buoyed by a 137.6 million-pound ($221.2 million) penalty against JPMorgan Chase & Co. (JPM) over the London Whale debacle.
Industry fines totaled 169.5 million pounds last month and brought total penalties from the Financial Conduct Authority in 2013 to 339.5 million pounds, according to statistics published Oct. 4 by Wolters Kluwer NV. The year-to-date total is larger than any other full year since 2002.
The regulator fined JPMorgan as part of a probe into losses exceeding $6.2 billion on a derivatives position built by a trader who came to be known as the London Whale because his bets were so large. The past year has also seen the regulator punish banks embroiled in the scandal over rigging of the London Interbank Offered Rate, or Libor.
Jefferies Ordered to Pay Ex-Employee’s Costs in Fraud Case
Jefferies & Co. was ordered to pay expenses including legal fees of Jesse C. Litvak, a former managing director accused of defrauding customers on trades of mortgage-backed securities.
Litvak, who has pleaded not guilty, was indicted in January on charges of securities fraud, fraud connected to the Troubled Asset Relief Program and making false statements to the federal government. Alleged victims include investment funds, among them six established by the U.S. Treasury Department in 2009 in response to the financial crisis.
Litvak filed a petition in New York State Supreme Court in Manhattan Oct. 3 seeking to confirm an award made by Financial Industry Regulatory Authority arbitrators last month. Richard Khaleel, a spokesman for New York-based Jefferies LLC, declined to comment on the arbitration award. Leucadia National Corp. (LUK) acquired the investment bank earlier this year.
Litvak says he is legally entitled to have Jefferies pay his legal costs for the case. He has accused the government of pressuring the company to cut off funding, denying him rights to counsel and due process, according to court filings.
Assistant U.S. Attorney Jonathan Francis at a hearing last month said the dispute is between Litvak and his former employer and that the government did nothing to pressure Jefferies.
Litvak was hired by Jefferies in April 2008 and was fired on Dec. 21, 2011, according to the indictment. He has moved for dismissal of the charges and is currently free on a $1 million bond. A trial is scheduled for February.
The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).
Rule That Fragmented Trading Worth Reviewing, SEC Official Says
U.S. regulators should reconsider the 2007 rule change that helped disperse stock trading among more than 50 different platforms and caused complexity that critics say increased malfunctions, Securities and Exchange Commissioner Daniel Gallagher said.
The SEC’s Regulation NMS, named for National Market System, mandates that U.S. stocks must trade on the venue that has the best price at any time, helping private trading platforms and upstart exchanges take business from the incumbent public markets, NYSE Euronext (NYX) and Nasdaq OMX Group (NDAQ) Inc.
“It’s a prime candidate for a retrospective review,” Gallagher told the Security Traders Association market structure conference Oct. 3.
The commissioner, one of five members of the SEC, also said the agency should re-examine other market-structure rules, including the move to quoting all stocks in 1-cent increments and the self-regulatory role played by exchanges, Gallagher said.
While NYSE Euronext and Nasdaq OMX Group still run the exchanges serving as the home markets for all U.S. stocks, the importance of listing venues has dwindled since Reg NMS took effect in 2007.
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Stein Sees Market Risk in Securities Financing Transactions
Federal Reserve Governor Jeremy Stein said the market for securities financing transactions poses a risk to the financial system that may require further regulatory steps to contain.
“This market is one where a large number of borrowers finance the same securities on a short-term collateralized basis, with very high leverage -- often in the range of twenty-to-one, fifty-to-one, or even higher,” Stein said Oct. 4 at a speech at the Federal Reserve Bank of New York. “Hence, there is a strong potential for any one borrower’s distress -- and the associated downward pressure on prices -- to cause a tightening of collateral or regulatory constraints on other borrowers.”
Stein didn’t discuss the outlook for monetary policy or the economy in his prepared remarks. His speech focused on securities financing transactions, which include repurchase agreements, reverse repos, securities lending and borrowing, and securities margin lending.
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Kocherlakota Says FOMC ‘Falling Short’ on Dual Mandate
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota spoke about Fed policy and the U.S. economy.
Kocherlakota, who spoke in Minneapolis, also commented on the U.S. government shutdown and the debt ceiling.
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