SEC Swaps Plan, Grassley, Spanish CoCos, FCC: Compliance

May 2 (Bloomberg) -- JPMorgan Chase & Co., Goldman Sachs Group Inc. and other U.S. swap dealers would gain limits on the Dodd-Frank Act’s reach for overseas trades under a Securities and Exchange Commission proposal released yesterday.

SEC commissioners voted 5-0 to seek comment on measures that would exempt overseas affiliates, including those guaranteed by U.S. banks, from registration when they conduct business predominantly with foreign clients. Overseas branches of U.S. banks could be exempt from Dodd-Frank standards for conduct with clients for equity and some credit swaps.

The proposal approved yesterday would govern how other SEC swap rules, many of which haven’t been completed, apply in cross-border transactions. The vote releases the proposal for a public-comment period to solicit views on its ideas.

The SEC said it hoped the proposal would influence how global regulators address rule differences while working to reduce risk and increase transparency in the swaps market. The Commodity Futures Trading Commission is the predominant U.S. regulator for the $639 trillion global swaps market. The SEC, whose staff said the agency oversees 5 percent of the overall market, is writing rules for equity and some credit-default swaps.

Dodd-Frank, the regulatory expansion enacted in response to the 2008 credit crisis, calls on the SEC and CFTC to have most swaps guaranteed at clearinghouses, traded on exchanges or other platforms and reported to regulators. The U.S. agencies have come under pressure to limit their international reach from JPMorgan and Goldman Sachs, both based in New York, as well as European, Asian and South American regulators.

Swaps rules under consideration by the SEC and CFTC are fragmenting the global market, nine overseas finance officials said in an April 18 letter urging Treasury Secretary Jacob J. Lew to limit Dodd-Frank’s reach.

The cross-border rules is the SEC’s first major proposal under White, who took over as chairman on April 10.

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Compliance Action

SAC, Viking Questioned in Grassley’s Medicare Rate Plan Probe

SAC Capital Advisors LP and Viking Global Investors LP are being questioned by Senator Charles Grassley in his review of a possible leak of a U.S. government decision on payment reimbursements to health insurers.

Grassley, an Iowa Republican, sent letters yesterday to the investment firms, asking about their dealings with “political intelligence” firms that try to predict government decisions. A Height Analytics LLC report on April 1 told clients more than 40 minutes before the official announcement that the U.S. would reverse plans for a Medicare Advantage rate cut.

Shares of Humana Inc., UnitedHealth Group Inc. and other insurers soared after the report. Trades by Andreas Halvorsen’s Viking hedge fund company and Steven A. Cohen’s SAC “raise questions regarding the transmission of political intelligence from Washington, D.C. to Wall Street,” Grassley said in his letter. He cited a Wall Street Journal report that the two firms traded in health stocks before the Medicare decision.

Eric Komitee, general counsel for New York-based Viking, said he couldn’t confirm the trades and declined to comment on Grassley’s letter. Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, also declined to comment.

The U.S. Centers for Medicare and Medicaid Services, the agency that runs Medicare, and the inspector general for the Health and Human Services Department are also investigating whether there was a leak of the Advantage decision. Spokesmen for the two agencies didn’t immediately respond to e-mails yesterday asking about the status of their investigations.

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BBVA Sells First CoCo Deal as Europe Tests Basel Regulations

Banco Bilbao Vizcaya Argentaria SA’s $1.5 billion of new perpetual bonds are the first debt securities in Europe complying with new rules published last month setting out how debt securities can be used to bolster banks’ capital.

Spain’s second-biggest bank April 30 sold 9 percent preferred notes known as contingent convertibles, or CoCos, that it intends to include in its Tier 1 capital, the riskiest segment. The bonds meet the so-called capital requirements directive, or CRD IV, endorsed on April 16 as part of the introduction of the Basel III regime in Europe.

The 2008 financial crisis underlined that many debt securities banks counted as capital couldn’t absorb losses outside of a default, prompting regulators to tighten the rules for what can be Tier 1, the most junior layer of capital. While that must consist of equity and retained earnings, lenders can also hold additional securities, such as BBVA’s new bonds, that are specifically designed to absorb losses in a crisis.

The bonds, which are expected to be rated BB-, three steps below investment grade, at Fitch Ratings, will automatically convert to equity if BBVA’s Tier 1 capital ratio falls to below 5.125 percent of assets weighted by risk.

Other capital ratios that may trigger conversion include a drop below 7 percent using definitions from the European Banking Authority and from national regulators, as well as a 6 percent level that’s triggered if four quarters of losses reduce capital by a third.

Bond buyers have shown they are willing to buy CoCos as central banks print money to hold down rates, forcing investors to take more risk to get a return. CoCos absorb losses either by converting to equity or by being written down.

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SEC Should Approve Pilot to Widen ‘Tick Size,’ Niederauer Says

The U.S. Securities and Exchange Commission should approve the pilot program to widen the so-called tick size, the agency was told yesterday.

The penny tick for shares hurts small-cap liquidity, NYSE Euronext CEO Duncan Niederauer said yesterday in a presentation to an SEC advisory committee meeting.

Niederauer also said NYSE Euronext is pushing the SEC to review dark-pool trading, saying banks can exploit loopholes to trade in dark.

The SEC staff is set to recommend a pilot program to test whether larger trading increments, or “tick size,” promote more active trading of small stocks, Bloomberg’s Dave Michaels reported last month.

Interest-Only Mortgage Alert in U.K. Downgraded to Wake-Up Call

The U.K. financial regulator backed off warnings that interest-only mortgages were a “ticking time bomb,” saying most borrowers can repay the loans.

Britons who took out the loans during the property boom and don’t have enough savings to repay the principal still have relatively high incomes and equity in the property, the Financial Conduct Authority, the U.K.’s markets and consumer finance regulator, said in a report today.

The regulator has tightened mortgage-lending rules since the 2008 U.S. subprime-lending crisis, banning interest-only mortgages when the borrower is betting on rising house prices to repay the loan. Around two of every five U.K. mortgages are interest-only, a product where borrowers pay no principal on the actual loan.

Martin Wheatley, the head of the FCA, told lawmakers last year that the mortgages were a “ticking time bomb.” Today, he said banks that offered the loans maturing by 2020 must send customers “a wake-up call” reminding them to make a plan for repayment.

Of the 2.6 million interest-only borrowers who must repay their mortgage in the next 30 years, around 10 percent don’t have a strategy to meet their obligations, according to the research. One in seven don’t check their yearly mortgage balance, the FCA said.


Fannie Mae Found Exempt From Maryland County’s Transfer Tax

Fannie Mae’s and Freddie Mac’s charters exempt them from paying real-estate transfer taxes, a federal judge in Greenbelt, Maryland, ruled, dismissing a claim by the state’s Montgomery County.

The tax exemption issue could eventually come before the U.S. Supreme Court.

The ruling April 30 by U.S. District Judge Deborah Chasanow is the latest in a series of decisions in similar suits filed across the U.S. against Fannie Mae and Freddie Mac to recover the taxes. Most rulings have favored the home-mortgage finance companies, Chasanow said.

“There will be an appeal,” Don Springmeyer, a Las Vegas-based attorney for Montgomery County, said in an e-mailed statement. Springmeyer, who is handling similar complaints in seven other states, said he expects the U.S. Supreme Court to eventually decide the issue.

The case is Montgomery County, Maryland v. Federal National Mortgage Corp., 13-cv-00066, U.S. District Court, District of Maryland (Greenbelt).

Defunct Madoff Brokerage Cost $774.8 Million to Liquidate

Liquidating Bernard L. Madoff’s defunct brokerage has cost $774.8 million, including lawyers’ and consultants’ fees and expenses of $737.1 million, the trustee for the firm said in a report.

Irving H. Picard, who has been liquidating the firm since Madoff’s December 2008 arrest, has paid customers about $4.6 billion, out of as much as $20 billion he says they lost in the Ponzi scheme. Another $802 million went to customers from the Securities Investor Protection Corp., which spent almost as much picking up the lawyers’ and consultants’ bills, according to the report filed yesterday in federal court in Manhattan.

Picard, a bankruptcy lawyer whose firm has billed SIPC for $440 million, files twice-yearly reports on his progress. Most of the money he has raised in more than four years has come from settlements with investors whom he accused of profiting from the fraud.

The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-bk-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Chiasson Seeks Leniency From U.S. Judge Citing Charitable Deeds

Level Global Investors LP co-founder Anthony Chiasson, convicted of an insider-trading scheme that reaped $72 million, asked a judge to give him less time in prison than the 13-year term called for by U.S. sentencing guidelines.

Lawyers for Chiasson, 39, called such a sentence “draconian” in an April 29 court filing. They urged U.S. District Judge Richard Sullivan in Manhattan to impose an unspecified shorter prison term, saying the alleged crimes were “aberrant” and that Chiasson has led an “exemplary life,” and cited his charitable work.

Chiasson, who began his career on Wall Street at Salomon Brothers and left SAC Capital Advisors LP to start the hedge fund, is scheduled to be sentenced May 13.

While U.S. court officials said that based on non-binding guidelines Chiasson should serve 121 to 157 months in prison, his lawyers said the appropriate range is 78 to 97 months.

The case is U.S. v. Newman, 1:12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).

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Schwab Sues BofA and Other Banks Over Alleged Libor Manipulation

Charles Schwab Corp., whose antitrust claims against banks over manipulation of the London interbank offered rate were tossed from federal court in New York, sued Bank of America Corp. and other financial institutions for fraud in state court in San Francisco.

Schwab alleged in a complaint filed April 29 that it and other company entities purchased billions of dollars in Libor-based instruments that are paying artificially low returns because the banks agreed to depress the rate.

Bank of America and other banks won dismissal in March of more than two dozen interrelated federal antitrust cases brought by San Francisco-based independent brokerage Schwab and other institutional investors, when the court ruled the plaintiffs were unable to show they were harmed.

In its new complaint against more than a dozen banks, Schwab alleges they concealed their conduct even after questions were raised beginning in 2007 about potential Libor manipulation. The lawsuit includes claims of fraud, violation of California unfair business practices and federal securities laws and seeks to rescind purchases of Libor-based instruments.

Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, didn’t immediately respond to an e-mail seeking comment on the complaint after regular business hours April 30.

The case is Charles Schwab Corp. v. Bank of America Corp., CGC-13-531016, California Superior Court, San Francisco.


BOE’s Bailey Says New Bank Entrants Must Be Easy to Wind Down

Bank of England Deputy Governor Andrew Bailey said he will prioritize approving new banks that can demonstrate they will be simple to wind down in a crisis without needing a public bailout.

If new entrant banks can “satisfy us on their resolvability in order to be authorized, we will lower the barriers and costs of opening for business,” Bailey, chief executive officer of the Prudential Regulation Authority, said in a speech in Edinburgh late yesterday.

“Put simply, if we don’t know how to deal with a failed firm, we will inevitably set a higher barrier to entry,” he said. “We have already started to put this new approach into operation.”

The PRA, which took over from the Financial Services Authority as the U.K.’s chief banking supervisor last month, announced plans in March to reduce by half both the time it takes startups to get approval and the amount of capital they must hold. The regulator will let new lenders operate with a capital ratio as low as 4.5 percent, the minimum allowed under global standards, in an attempt to encourage competition.

Comings and Goings

Obama Names Watt for Housing Finance Agency, Wheeler for FCC

President Barack Obama yesterday named U.S. Representative Mel Watt as his choice for director of the Federal Housing Finance Agency and fundraiser Tom Wheeler to head the Federal Communications Commission.

Watt, a North Carolina Democrat, would replace acting FHFA director Edward J. DeMarco to lead the agency that oversees Fannie Mae and Freddie Mac, the two mortgage-finance companies. Both have been under U.S. conservatorship since they were seized during the 2008 credit crisis.

Wheeler, managing director at Core Capital Partners LP in Washington, is a former leader of wireless- and cable-industry groups. He would join the independent agency that regulates broadcasters, cable-television companies and telephone-service providers, replacing Chairman Julius Genachowski.

Their nominations are subject to confirmation by the Senate.

To contact the reporter on this story: Carla Main in New Jersey at

To contact the editor responsible for this report: Michael Hytha at

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