Swaps Clearing, EU Short-Selling, BOE Process: Compliance

June 11 (Bloomberg) -- Citadel LLC, the Chicago-based hedge fund firm founded by Kenneth Griffin, cleared the first credit-default swap tied to a company’s debt after the Securities and Exchange Commission reversed a decision on margin rules.

Barclays Plc acted as the clearing member for the trade, which was processed at IntercontinentalExchange Inc.’s ICE Clear Credit clearinghouse, the bank said in a statement yesterday.

Hedge funds and asset managers won relief from Dodd-Frank Act collateral requirements for credit swaps after the SEC disclosed on June 7 it had revised a policy that called for some clients to put up double the collateral dealers post for portfolio margin accounts at clearinghouses.

Ryan Garino, senior portfolio manager at Citadel, making brief remarks in a Barclays statement, described the event as “a watershed moment,” and a “critical step forward.”

IntercontinentalExchange, or ICE, said in a separate statement yesterday that as of June 6 it had cleared more than $1 trillion in notional value of credit swaps for banks’ clients.

Yesterday was the beginning of the second phase of mandatory clearing for interest-rate and credit swaps under Commodity Futures Trading Commission guidelines. Hedge funds, regional banks and insurers must now clear most of their trades, while the world’s largest swap-dealing banks and the most-active traders in the market have been required to clear transactions since March 11.

Separately, the new collateral rules for hedge funds, insurers and others in the $633 trillion over-the-counter derivatives market are poised to boost demand for U.S. Treasuries, potentially slowing rising yields as the Federal Reserve considers scaling back unprecedented stimulus.

Swaps traders will need to come up with $800 billion to $4.6 trillion to meet Dodd-Frank Act regulations requiring that the derivatives be backed by clearinghouses that collect upfront collateral such as cash or Treasuries, according to estimates from the Treasury Borrowing Advisory Committee.

The rush for collateral may be an unintended benefit from swaps rules designed to protect against a cascade of bank failures.

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Compliance Policy

India Said to Plan Higher FDI Cap for Telecom, Defense Firms

India plans to eliminate the cap on foreign-direct investment in telecommunications and raise the limit in defense to lure funds and boost the rupee, two Finance Ministry officials with direct knowledge of the matter said.

Overseas investors would be able to own all of a telecoms company, up from 74 percent currently, with the ceiling in defense rising to 49 percent from 26 percent, the officials said, asking not to be identified as the information isn’t public. The moves are set to be unveiled late June or early July, they said.

Finance Minister Palaniappan Chidambaram said in March that a review of foreign-direct investment caps had begun, part of a government push to woo capital, fund a record current-account deficit and revive economic growth. The imbalance in the broadest measure of trade has weighed on the rupee, which plunged to its weakest level on record this week.

Telecoms and defense are the two major areas of the economy where investment caps are set to be eased, the officials said. Minor adjustments may be made in other industries.

The government can announce changes in the foreign investment caps for defense and telecoms without Cabinet or Parliament approval, one of the officials said.

Finance Ministry Spokesman D.S. Malik declined to comment when asked about the plans.

U.K. Fights EU Short-Selling Powers After Defeat on Bank Pay

The U.K., defeated in a campaign to derail European Union curbs on banker bonuses, goes to the bloc’s top court today in a bid to overturn the powers of an EU agency to ban short selling.

Britain will argue at the Luxembourg-based EU Court of Justice that the European Securities and Markets Authority’s decision-making ability comes at the expense of national supervisors, in the latest skirmish against the EU’s growing powers over financial services.

Prime Minister David Cameron has promised to seek a new settlement with the EU, amid a rising tide of opposition that saw the U.K. Independence Party, which advocates a divorce from the bloc, gain seats in local elections last month. While Cameron has said he plans a referendum on EU membership by the end of 2017, this has failed to quell calls from members of his Conservative Party for Britain’s European destiny to be put to the people sooner.

The U.K. has often found itself on the defensive in EU discussions on financial regulation. The nation, which lacks a veto on financial laws, was the sole dissenting voice in March opposing a deal to ban bonuses more than twice fixed pay.

Britain’s Chancellor of the Exchequer George Osborne last week said that plans being discussed by 11 other EU nations for a common financial transactions tax were “unlawfully extraterritorial” and “poorly designed.” The country started a legal challenge over the draft measures in April.

The U.K. is also suing the European Central Bank over policies that it says push clearing of some derivatives away from London and into the euro area.

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ESMA Willing to Take on Rate-Benchmark Oversight, FD Reports

The European Securities and Markets Authority would be willing to supervise interest-rate benchmarks if asked, Het Financieele Dagblad reported, citing the authority’s chairman Steven Maijoor.

The European Commission has to decide, Dagblad cited Maijoor as saying. Banks should be obliged to participate in panels.

Compliance Action

Glencore Investigated by Italy on $158 Million Tax-Evasion Claim

Glencore Xstrata Plc, the world’s largest exporter of power station coal, is being investigated by Italian tax police, which accused the group of evading more than 120 million euros ($158 million) in taxes.

The authorities are reviewing some transactions between its Portovesme unit, a zinc and lead smelter on the island of Sardinia, and the larger group, Baar, Switzerland-based Glencore said yesterday in an e-mailed statement.

“All transactions were conducted in accordance with applicable Italian tax laws and on an arm’s length basis between Portovesme and the Glencore group,” it said. “Portovesme continues to engage with the tax authorities to ensure a swift conclusion to the review.”

The company allegedly hid profits by paying other units of the Swiss company above-market prices for raw materials, the Rome financial police said in a separate e-mailed statement that gave the amount under investigation, without naming the company.

Glencore Xstrata is the world’s fourth-biggest mining company.

Detroit Money Manager Pays $3.1 Million to End SEC Theft Claims

A Detroit investment adviser will pay $3.1 million to settle U.S. Securities and Exchange Commission claims that he stole money from a police pension fund to finance his purchase of two California strip malls.

Chauncey C. Mayfield and his firm, MayfieldGentry Realty Advisors, were accused of siphoning money from the Detroit Police and Fire Retirement System in 2008, the agency said in a statement yesterday citing a complaint filed in federal court in Michigan. Four other MayfieldGentry executives were accused of trying to cover up the theft, the agency said in the statement.

The MayfieldGentry executives, who become aware of the misappropriation by May 2011, covered it up for another year, the SEC said. The executives informed the pension fund the evening before the SEC filed a complaint against them in May 2012 for participation in a “pay-to-play” scheme involving Detroit’s former mayor.

Mayfield, the firm and the other executives resolved the claims without admitting or denying wrongdoing. Their attorneys either declined to comment or couldn’t immediately be reached.

Corinthian Colleges Shares Fall After SEC Begins Investigation

Corinthian Colleges Inc. fell as much as 18 percent in extended trading after the U.S. Securities and Exchange Commission began an investigation of the for-profit college chain.

The SEC issued a subpoena for documents relating to student recruitment, attendance, degree completion, job placement, loan defaults and compliance with U.S. Education Department regulations, Santa Ana, California-based Corinthian said today in a filing.

Congress, the Justice Department and state attorneys general have been investigating recruitment practices and student borrowing at for-profit colleges. Corinthian received a subpoena from the California Attorney General in the quarter that ended Dec. 31, and was subpoenaed by the Wisconsin Attorney General in January.

Corinthian intends to cooperate with the investigation, according to the statement. Kent Jenkins, a Corinthian spokesman, declined to comment.

Sony Ownership Blurred by Third Point Swaps to Goldman Bonds

Billionaire Daniel Loeb proposed a breakup of Sony Corp. after saying his hedge fund was its largest owner. Data from Sony, a Goldman Sachs Group Inc. vehicle and Japan’s Finance Ministry don’t support that claim.

As Sony board members deliberate on Third Point LLC’s call for an initial public offering of part of its entertainment assets, shareholdings in the Japanese company are clouded by Third Point’s use of cash-settled swaps and convertible bonds held by Signum Coral Ltd., a special-purpose company set up by Goldman Sachs to repackage a 2012 convertible bond sale.

Third Point has “exposure” to about 64 million Sony shares, according to a letter from Loeb to Sony Chief Executive Officer Kazuo Hirai last month. The stake, which equates to about 6.3 percent of the Japanese company’s stock, doesn’t show up in regulatory filings and is less than the 8.9 percent holding announced by Signum Coral.

Shareholdings of more than 5 percent of a company have to be reported to Japan’s Ministry of Finance. Third Point hasn’t lodged a notice with the government that its stake exceeds that threshold, according to a search of filings.

The New York-based hedge fund used cash-settled swaps for about 38 percent of its investment, according to the May 14 letter. Japan’s disclosure requirement is exempted if the investor uses a structure that doesn’t transfer voting rights, according to the Financial Services Agency.

Elissa Doyle, a New York-based spokeswoman for Third Point, declined to comment on its holding or any changes to its investment.

Sony hasn’t confirmed a large-volume holding from Third Point, Yuki Shima, a Sony spokeswoman, wrote in an e-mail. The company’s annual investor meeting is scheduled for June 20.

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Ex-Bristol-Myers Executive Pleads Guilty to Insider Trading

Robert Ramnarine, a former Bristol-Myers Squibb Co. executive, pleaded guilty to insider trading.

Ramnarine, 46, admitted yesterday in federal court in Trenton, New Jersey, that he made $311,361 in illegal profit by trading on inside information while helping the New York-based drugmaker evaluate whether to buy targeted companies.

In pleading guilty to securities fraud, Ramnarine admitted he illegally bought stock options before the company’s acquisitions of Amylin Pharmaceuticals and ZymoGenetics Inc., as well as its participation in a confidential auction to buy Pharmasset Inc.

Ramnarine, who lives in East Brunswick, New Jersey, faces as many as 20 years in prison when he is sentenced on Sept. 26. As part of his plea agreement, Ramnarine agreed to forfeit $311,361. He was arrested last August by the Federal Bureau of Investigation and sued by the Securities and Exchange Commission.

His attorney, Douglas R. Jensen, declined to comment in an e-mail.

Ramnarine worked in several positions at Bristol-Myers from 1997 to August 2012, including executive director of pensions and savings investments, and assistant treasurer for capital markets, according to a statement by U.S. Attorney Paul Fishman.

The case is U.S. v. Ramnarine, 12-mj-08121, U.S. District Court, District of New Jersey (Newark).

Ex-Millennium Fund Manager Balboa’s Bond Fraud Trial Starts

Ex-Millennium Global Investments Ltd. portfolio manager Michael Balboa’s securities-fraud trial, in which he is accused of participating in a scheme involving Nigerian sovereign debt, began in federal court in New York.

Balboa, who worked at Millennium from December 2006 to October 2008, was named in an indictment unsealed in March. He is charged with five counts including two counts of conspiracy and one count each of securities fraud, wire fraud and investment adviser fraud, U.S. District Judge Paul Crotty told jurors yesterday.

Prosecutors said Balboa, who was based in London, and two unnamed co-conspirators participated in a 10-month scheme in 2008 in which he sent “phony mark-to-market quotes” to an independent valuation agent who inflated month-end market prices for Nigerian warrants.

The U.S. Securities and Exchange Commission filed a related lawsuit in December.

Balboa faces as long as 20 years in prison if convicted of the securities fraud, Manhattan U.S. Attorney Preet Bharara said at the time of Balboa’s arrest in December.

His fund was liquidated by London-based Millennium Global after lenders withdrew credit in the wake of the financial crisis, two people familiar with the situation said in October 2008. His portfolio suffered almost $1 billion in losses, the SEC said in court papers.

The criminal case is U.S. v. Balboa, 12-cr-00196, and the civil case is SEC v. Balboa, 11-cv-08731, U.S. District Court, Southern District of New York (Manhattan).


Nowotny Says ECB Should Supervise Major Banks First

European Central Bank Governing Council Member Ewald Nowotny spoke at a conference in Vienna about the central bank’s preparations to assume a supervisory role over the region’s lenders.

The central bank should start with supervising only a small group of major lenders to make sure it doesn’t take on more than it can handle and widen the scope later, Nowotny said.

Taking on bank supervision in the countries sharing the euro currency and beyond “is fraught with risks” to the central bank’s reputation, he said.

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Arthur Levitt Says ‘Shell’ Companies Mask Theft

Arthur Levitt, former chairman of the Securities and Exchange Commission, said a bill to register shell companies will help discourage money laundering and other illegal activity. Levitt talked with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.”

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Comings and Goings

U.K. Treasury Committee to Probe Bank of England Appointments

The U.K. Parliament’s Treasury Committee will investigate the Bank of England’s appointment process and the independence of the Bank’s Financial Policy Committee.

The committee on June 5 expressed reservations about the appointment of Clara Furse, the former chief executive officer of the London Stock Exchange, to the FPC. it questioned her “awareness of the importance of asserting the independence” of the body.

The inquiry will look at the different rules governing the appointment and behavior of members of the FPC, the Monetary Policy Committee and the Court of the Bank of England. In a statement, the committee raised “serious inconsistencies and complexities in the structure of accountability of the Bank of England.”

“The FPC is still finding its feet,” Andrew Tyrie, chairman of the Treasury Committee, said in a statement. “It is crucial that its independence is safeguarded from the start. It is therefore particularly important that the appointment process and early exchanges between the Treasury and the FPC don’t give the appearance that it has been compromised.”

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.

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