Swaps Exemption, Libor ‘Delay,’ Brazil Swaps: Compliance

Barclays Plc, JPMorgan Chase & Co. and other banks will be exempt from Dodd-Frank Act swap market rules when trading between their own affiliates under a measure completed by the U.S. Commodity Futures Trading Commission.

Commissioners approved a rule excluding inter-affiliate trades from requirements that swaps be guaranteed at clearinghouses that protect buyers and sellers against defaults, the CFTC said April 1. The rule is part of the CFTC’s mandate to cut risk and expand transparency in the $639 trillion global swaps market.

Lobby groups for banks including New York-based JPMorgan and Goldman Sachs Group Inc. and London-based Barclays urged the agency to exclude such trades from Dodd-Frank rules enacted in response to the 2008 credit crisis. Prudential Financial Inc. and a group of so-called end-users -- commercial and manufacturing firms that use swaps to hedge risk -- also sought exemption.

The exemption is allowed for swaps between majority-owned affiliates of companies that file consolidated financial statements, CFTC Chairman Gary Gensler said in a statement. Swaps between affiliates and other unrelated counterparties must be cleared.

The CFTC granted a greater exemption than originally proposed in 2012 by not requiring variation margin for interaffiliate swaps. Variation margin is typically exchanged daily to offset the risk from incremental price movements in a trade.

Compliance Policy

SEC Approves Using Facebook, Twitter for Company Disclosures

U.S. companies will now be able to post their earnings on Twitter or update their status on Facebook as long as investors have been told in advance where to look.

The U.S. Securities and Exchange Commission issued guidance April 2 permitting companies to use social media sites including Facebook Inc. and Twitter Inc. to communicate company announcements. The guidance came as part of a report detailing its investigation into Netflix Inc. Chief Executive Officer Reed Hastings, who in July posted monthly viewership results on his Facebook page rather than in an SEC filing or news release.

The SEC refrained from bringing an enforcement action against Hastings or Netflix, which runs a subscription service for watching television programs and movies, because rules around using social media for company disclosures had been unclear, the agency said.

The SEC confirmed that a regulation prohibiting companies from disclosing material information to select investors applies to social media and other emerging means of communication the same way it applies to company websites. Company communications made through social media channels could constitute a violation of the fair disclosure rule known as Regulation FD if investors hadn’t been told in advance where the information would be posted, the SEC said.

Jim Prosser, a spokesman for San Francisco-based Twitter, declined to comment.

“We welcome, and certainly agree with, the SEC’s finding that Facebook is an established means for companies and individuals to share and disseminate information broadly,” Menlo Park, California-based Facebook said in a statement.

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U.K. Lawmakers Challenge Regulator on Banks’ Proprietary Trading

The U.K.’s new banking regulator must explain to a panel of British lawmakers how it intends to monitor and restrict lenders’ proprietary trading.

Prudential Regulation Authority Chief Executive Officer Andrew Bailey should outline how he intends to monitor banks’ trading on their own account, what regulatory actions could be taken and whether the supervisor needs changes to the existing rules to “carry out these actions,” the Parliamentary Commission on Banking Standards said in a letter dated March 28.

The panel on March 15 stopped short of immediately recommending a ban similar to that required under the U.S. Volcker rule, citing the difficulties of separating proprietary trading and customer market making. Regulators should “bear down” on banks’ proprietary trading and review the case for an outright ban within three years, the commission said.

The PRA, a unit of the Bank of England, took over banking supervision from the Financial Services Authority this week as part of an overhaul of the U.K.’s regulatory system. The Financial Conduct Authority, another new regulator, will be responsible for market abuse and consumer issues.

The parliamentary commission was set up by Chancellor of the Exchequer George Osborne last year to review the government’s plans to overhaul how Britain’s banks are regulated after taxpayers were forced to bail out Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

BBA to Delay Publishing Libor Submissions of Individual Banks

The British Bankers’ Association, the lobby group that oversees Libor, said it will delay publishing banks’ individual submissions by three months in an effort to restore confidence in the benchmark rate.

Individual entries of the lenders that contribute to the London interbank offered rate each day in different currencies and maturities will no longer be made available on the same day from July 1, the London-based BBA said in a statement yesterday. Libor will also no longer be published on U.K. bank holidays.

The measures were ordered by Martin Wheatley, the U.K. regulator charged with overhauling the global benchmark rate, after banks around the globe admitted to low-balling their submissions during the financial crisis to appear healthier than they were. Barclays Plc was fined 290 million pounds ($439 million) in June for rigging Libor, prompting senior executives including Chief Executive Officer Robert Diamond to resign.

Libor, a benchmark for more than $300 trillion of financial products worldwide, is calculated by a poll carried out daily on behalf of the BBA that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. The top and bottom quartiles of quotes are excluded, and those left are averaged and published for individual currencies before noon in London.

The U.K. government is preparing to select a new operator for Libor.

Brazil Swap Rates Rise on View Tax Cuts Won’t Work

Brazil’s shorter-term swap rates rose on speculation the government’s latest tax breaks will fail to contain inflation, prompting policy makers to increase benchmark borrowing costs.

The Finance Ministry said March 30 that it would extend to December a reduction of the so-called IPI tax on vehicles that was due to expire April 1. The central bank said last week that inflation has spread, boosting the probability that price increases will breach the upper limit of the target range for the first time in a decade.

Brazil’s government has extended payroll tax cuts to new industries, reduced electricity costs and eliminated federal taxes on food staples to cushion Brazil’s economic recovery while taming consumer price increases.

Swap rates on longer-term contracts fell April 1 after a report showed U.S. manufacturing grew less than forecast in March, dimming external factors that support Brazil’s growth.

The central bank has swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by preventing excessive gains.

Won Bets Ease as South Korean Calls for Transaction Tax Escalate

Threats by South Korea to institute a tax on foreign-exchange transactions may finally be starting to curb the won’s appreciation after it rose to the highest level versus the yen since 2008 and cooled economic growth.

The won fell in March against the yen after climbing 23 percent for seven straight months through February, the longest rally since 2005, as Japanese Prime Minister Shinzo Abe called for more monetary easing to end deflation. Strategists are starting to temper their calls for the won to appreciate, data compiled by Bloomberg show.

South Korea’s economic prospects took a turn for the worse as the won appreciated, causing exports to rise less than analysts forecast last month. Eun Sung Soo, director general at Korea’s Finance Ministry, said on March 20 that the nation will consider measures to stem inflows if needed while “various” financial taxes will be studied.

The proposed Spahn Tax, named after German professor Paul Bernd Spahn, would likely weaken the exchange rate by at least 50 won per dollar, Oh Suk Tae, head of research at Standard Chartered First Bank in Seoul, said in a March 26 interview. No country has adopted the method.

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Compliance Action

SEC Investigates ‘Rebecca’, Adding to Offstage Legal Drama

“Rebecca,” the Broadway musical still in its production stages, has attracted the attention of the U.S. Securities and Exchange Commission.

Based on a murder mystery by Daphne du Maurier, the musical has been buffeted by two postponements. At the center is Ben Sprecher, a New York producer hoping to score with this Austrian production of Sacher-Torte tunes and mammoth sets. The show was previously produced in Europe.

“The SEC subpoenaed all of our files,” said Ronald Russo, a lawyer for Sprecher. “I have no concerns about this.”

The commission is trying to determine whether Sprecher misled a prospective investor, Larry Runsdorf, said Jeffrey Lichtman, a lawyer who has spoken with the regulator.

Lichtman represents the show’s former press representative, Marc Thibodeau, who is being sued by Sprecher for defamation and breach of contract. Runsdorf decided not to invest $2.25 million in the show after receiving an anonymous e-mail saying “the walls are about to cave in” on the production. Thibodeau later admitted to having written the e-mail.

The SEC is investigating whether Sprecher “made misrepresentations to Larry Runsdorf, either by commission or omission,” Lichtman said. The producer, said Russo, is an innocent victim of fraud.

Sprecher said he needs to raise about $7 million more if the show is to open this year.

Kevin Callahan, an SEC spokesman, declined to comment. Runsdorf didn’t return calls.

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SEC Sticks With Approval of JPMorgan’s Physical Copper Product

The proposed copper exchange-traded product planned by JPMorgan Chase & Co. in the U.S. will be allowed to proceed after objections were raised, the Securities and Exchange Commission said.

Redemption of shares won’t necessarily lead to longer lines for metal out of warehouses monitored by the London Metal Exchange, the SEC said in a March 28 notice on its website.

Finance Companies Account for Two-Thirds of U.K. Fraud Fines

The U.K. financial services industry was fined more than 550 million pounds ($831 million) by regulators for fraudulent activity since 2007.

Total fraud fines in all industries during the period exceeded 1 billion pounds, with banks, lenders and other financial firms accounting for 68 percent of the penalties, Ernst & Young LLP said in a report. Consumer companies that produce food, beverages, tobacco and household goods had the second-largest total of fines during the period, the accounting firm said.

Britain’s biggest banks have been caught up in several regulatory probes. Banks including Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc have set aside more than 13 billion pounds to compensate customers who were improperly sold payment-protection insurance. Barclays, UBS AG and RBS have been fined more than $2.5 billion by U.S. and U.K. regulators for manipulating Libor rates.

The study examined 721 cases of fraud reported since 2007 by the Financial Services Authority, Serious Fraud Office and the Office of Fair Trading. The average prison sentence for the director of a company that committed fraud was three years and three months.

U.K. Prospective Brokers Have to Take Ethics Test, FT Reports

Prospective brokers in the U.K. are now required to take an ethics test, to be administered by the Chartered Institute for Securities & Investment, the Financial Times reported.

The test is required before candidates take exams for professional qualifications, FT reported, citing institute head Simon Culhane.

The move is intended to offset damage to London’s reputation created by the Libor scandal, the paper said.


Wisconsin Researcher Accused of Economic Spying for China

A Medical College of Wisconsin researcher was charged with economic espionage by stealing a patented cancer-research compound to give to a university in China.

Hua Jun Zhao, 42, may have stolen the compound from a Medical College office in Milwaukee and taken steps to deliver it to Zhejiang University, according to a Federal Bureau of Investigation agent’s affidavit in support of a criminal complaint dated March 29.

A copy of the complaint against Zhao was obtained yesterday from the office of Milwaukee U.S. Attorney James L. Santelle.

Zhao joins a Motorola Inc. engineer and a researcher at Dow AgroSciences who, in separate cases, have been accused by the U.S. of economic espionage or stealing on behalf of Chinese entities.

Zhao is in the Milwaukee County Jail and no bail has been set, said Fran McLaughlin, a spokeswoman for the Milwaukee County Sheriff’s Department. A preliminary hearing is set for April 11.

Dean Puschnig, a spokesman for Santelle, declined to comment on the status of Zhao’s case. Theft of trade secrets to benefit a foreign government is punishable by as long as 15 years’ imprisonment.

The case is U.S. v. Zhao, 13-mj-00220, U.S. District Court, Eastern District of Wisconsin (Milwaukee).

Paulson Hedge Fund Investor Case Dismissed for Lack of Standing

An investor’s lawsuit against John Paulson’s $23 billion hedge fund over its reported loss of about $460 million in Sino-Forest Corp. was dismissed by a federal judge.

U.S. District Judge Marcia Cooke in Miami threw out the case saying the investor, Hugh Culverhouse, who had sought group status for the suit, didn’t have the legal right to sue, according to an order filed March 29.

Paulson & Co., based in New York, told clients in a June 2011 letter that it lost the money since the end of May on its Sino-Forest investment. The hedge fund held 31 million shares of Sino-Forest in May of that year, or 13 percent of outstanding stock, and sold its entire stake by June 17, according to the letter.

Sino-Forest’s shares dropped more than 80 percent when Carson Block’s Muddy Waters LLC said the Hong Kong-based company overstated its timber holdings. Sino-Forest denied the allegations.

Culverhouse’s lawyers, Harvey Gurland and Felice Schonfeld of Duane Morris LLP, didn’t immediately respond to an e-mail seeking comment on the ruling.

Dawn Dover, a spokeswoman for Paulson at Kest & Co., said by e-mail that the company maintained “from the outset” that the suit was “completely without merit.”

The case is Culverhouse v. Paulson & Co., 12-cv-20695, U.S. District Court, Southern District of Florida (Miami).

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