Finra Trader Probe, Morgan Ratio, Dow Appeal: Compliance

The Financial Industry Regulatory Authority is investigating whether high-frequency traders have established controls to ensure their algorithms don’t malfunction and cause broader harm to markets.

Finra sent letters this week to about 10 trading firms asking nine detailed questions about how they use and deploy algorithms, according to George Smaragdis, a spokesman for the U.S. brokerage industry’s self-regulator. Finra had expressed concern about how firms supervise trading algorithms after Knight Capital Group Inc. bombarded exchanges in August with mistaken orders that cost the company $400 million.

The examination, described in a letter on Finra’s website, as part of an effort to explore technology controls more deeply, according to exam priorities the Washington-based regulator published in January. Finra asks firms in the letter to disclose whether they use kill switches to halt individual algorithms and under what conditions they would shut off trading.

“In light of several high-profile algorithmic trading failures that caused significant market disruption in 2012, Finra continues to be concerned about how firms are supervising the development of algorithms and trading systems,” the regulator said in a document laying out examination priorities for this year.

Compliance Policy

ASIC, EU Authorities Cooperate on Alternative Investment Funds

The Australian Securities & Investments Commission entered into 29 supervisory cooperation arrangements with European Union securities regulators, in which they agree to help each other supervise fund managers operating across borders.

Cooperation is “crucial” in allowing Australian fund managers to manage and market Alternative Investment Funds, or AIF, in the EU under rules of the Alternative Investment Fund Managers Directive, ASIC said in a statement.

AIFs include hedge funds, private equity funds and real estate funds, according to the statement.

EU to Submit Shadow Banking, Money-Market Fund Plans on Sept. 4

The European Commission on Sept. 4 will present plans for tougher regulation of money market funds and broader plans to strengthen oversight of shadow banking, the institution said in a statement on its website.

The commission said only that money market funds are “at the core of international work on shadow banking” because of their “systemic interconnectedness” with banks, without giving further details.

It initially planned to make the proposals July 24.

Too-Big-to-Fail Insurers to Face Tougher Capital Standards

Global insurers identified as too big to fail will have to hold higher reserves and draw up recovery and resolution plans to limit the economic fallout should they go bust, the industry’s watchdog said.

The International Association of Insurance Supervisors, which collected data from 50 insurers in 14 jurisdictions, including the U.S., to help the Financial Stability Board draw up a list of systemically important firms, released its assessment methodology and policy measures yesterday. The list of insurers will be announced by the Basel, Switzerland-based FSB in coming days.

The FSB, led by Bank of England Governor Mark Carney, is coordinating global regulators’ response to the financial crisis. The companies on the FSB insurer list will be included based on criteria such as size, global activity and the amount of non-insurance businesses they have. The designation of systemically important means the failure of the company could threaten the financial system.

The IAIS would impose tougher capital standards on the systemically important insurers. The FSB said in June it will follow up next year with a list of too-big-to-fail reinsurers.

The IAIS said non-traditional activities, including alternative risk transfers such as insurance-linked securities and financial guarantee insurance, as well as capital-markets businesses, banking, third-party asset management and industrial activities, are deemed the most risky and are the most important categories for assessing the systemic importance of an insurer. The firm’s interconnectedness was the next most significant consideration, the watchdog said.

Top Senate, House Tax Writers Predict Passage of Code Rewrite

A tax code rewrite has a greater than 50 percent chance of passing, said Senate Finance Committee Chairman Max Baucus, a Democrat from Montana, and House Ways and Means Committee Chairman Dave Camp, a Republican from Michigan.

Speaking at an Economic Club luncheon in Washington, Camp said the bill would probably start first in the House. Baucus said “tactics” concerning its passage haven’t been decided.

Camp has released draft legislation on international taxation, small businesses and financial products. Baucus has begun a series of closed-door committee meetings on rewrites.

Compliance Action

Morgan Stanley Says Leverage Ratio Missed Proposed Minimum

Morgan Stanley, owner of the world’s largest brokerage, said it fell short of a minimum leverage ratio proposed by U.S. regulators last week that measures a firm’s ability to withstand losses.

The company’s supplementary leverage ratio, a gauge of capital to total assets, was 4.2 percent in the second quarter, below the proposed 5 percent minimum, Chief Financial Officer Ruth Porat said on a conference call with analysts yesterday. The ratio at Morgan Stanley’s deposit-taking bank subsidiary was above the proposed 6 percent minimum, she said.

Morgan Stanley will exceed both requirements by 2015, Porat said. The company announced plans earlier in the day yesterday to buy back $500 million in stock, and Porat said the firm’s plan to reach 5 percent by 2015 includes further capital returns to shareholders.

While banks would have more than four years to comply, lenders may have to retain some capital to meet the requirements that they otherwise could pay out through dividends or share repurchases. Chief Executive Officer James Gorman has said his plan to boost return on equity to 10 percent by next year depends on regulators allowing the firm to return a “reasonable” amount of capital to shareholders.

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Falcone’s Harbinger Settlement Not Approved by SEC, Filing Says

The U.S. Securities and Exchange Commission voted not to approve a settlement agreement for two civil actions tied to Philip Falcone’s Harbinger Capital Partners, Falcone’s publicly traded Harbinger Group Inc. said today in a regulatory filing.

The SEC informed Harbinger Capital of the decision yesterday, according to the filing from Harbinger Group, which wasn’t a target of the SEC actions, according to the filing.


South Korea Indicts Chaebol Head in Tax Evasion Crackdown

Seoul prosecutors indicted the head of CJ Group, a South Korean food and entertainment group, for tax evasion and embezzlement as part of a government drive to crack down on corporate crime.

Lee Jay Hyun, the 53-year-old chairman of the group, was charged yesterday after an investigation that started in May, according to the prosecutors. The group is the country’s 14th-largest chaebol, the conglomerates that dominate South Korea’s economy.

President Park Geun Hye pledged to crack down on tax evasion and the country’s tax agency began 23 separate investigations in May.

Lee avoided 54.6 billion won ($49 million) in taxes and misappropriated 96.3 billion won in company assets, the Seoul Central District Prosecutors’ Office said in a statement yesterday. Lee had used a CJ Group unit to provide collateral and guarantees for property purchases in Japan, according to the statement.

Dow Loses Appeal of $84.5 Million Fine in Rubber Cartel Case

Dow Chemical Co. failed to overturn a 64.6 million-euro ($84.5 million) antitrust fine in a rubber cartel after a European Union court rejected arguments that it shouldn’t be liable for the actions of subsidiaries more than 10 years ago.

The EU Court of Justice in Luxembourg rejected the appeal in a ruling yesterday.

The commission, the 27-nation EU’s antitrust regulator, in November 2006 fined five companies 519 million euros for rigging prices of synthetic rubber in a cartel that lasted from at least 1996 to 2002. Bayer AG escaped a fine after it tipped off the EU about the cartel.

Dow said in a statement that it didn’t participate in any of the wrongful conduct and that it was disappointed with the ruling.

The case is: C-499/11 P, Dow Chemical and Others v. Commission

Goldman Sachs Witness Says Tourre Didn’t Disclose Paulson Role

The Goldman Sachs Group Inc. employee who ran the firm’s mortgage correlation trading desk testified that Fabrice Tourre failed to tell investors about the role of Paulson & Co. in the deal at the center of the U.S. Securities and Exchange Commission’s fraud case against him.

The SEC sued Tourre and Goldman Sachs in 2010 over the transaction. Paulson, run by billionaire John Paulson, used the deal to bet against mortgage-backed securities. Investors on the other side of the bet lost more than $1 billion. New York-based Goldman Sachs paid a then-record $550 million to settle the case.

Jonathan Egol, now a Goldman Sachs managing director, told jurors in Manhattan federal court yesterday that he is “not aware of any” disclosures to investors that Paulson, a New York hedge fund, helped select the mortgage-backed assets underlying Abacus 2007-AC1, a synthetic collateralized debt obligation.

Egol said Tourre did make sure to tell a superior that Paulson helped pick the portfolio of 90 subprime mortgage-backed securities when Goldman’s money was at risk.

The SEC sued Tourre after dropping a plan to file claims against Egol, according to interviews with SEC enforcement staff conducted by the agency’s inspector general, which were made available to Bloomberg News through a Freedom of Information Act request. Egol testified July 17 that Tourre was the Goldman Sachs employee primarily responsible for the Abacus transaction.

Earlier this week, SEC lawyer Matthew Martens found himself sparring with his own witness, Paolo Pellegrini, 56, a former Paulson executive who claimed the agency intimidated and tricked him in its investigation into the deal at the heart of its civil fraud case against Tourre.

At one point Pellegrini disavowed testimony he’d given in a 2008 deposition, in which he said he didn’t recall telling a key participant in the transaction that Paulson planned to take a short position. Pellegrini said he thought he was being tricked at the deposition and was scared.

Later, with the jury and the witness outside the courtroom, Martens told U.S. District Judge Katherine Forrest that Pellegrini’s claims of being scared at the deposition were “garbage” and “utter nonsense.”

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

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Peabody Calls JPMorgan’s Balance Sheet ‘Pro-Cyclical’

Charles Peabody, an analyst at Portales Partners LLC, talked about bank earnings and capital requirements in the current regulatory environment, including remarks coming out of Capitol Hill.

Peabody spoke with Tom Keene, Sara Eisen and Matthew Dowd on Bloomberg Television’s “Surveillance.”

For the video, click here.

OECD Proposes Measures to Stop Companies Avoiding Tax

Organization for Economic Cooperation and Development Secretary General Angel Gurria discussed proposals to crack down on tax avoidance by companies.

He talked with Ryan Chilcote in Moscow on Bloomberg Television’s “The Pulse.”

For the video, click here.

Isaac Says U.S. ‘Needs’ Big Banks to Compete Globally

William Isaac, chairman of Fifth Third Bancorp and a former chairman of the Federal Deposit Insurance Corp., talked about the outlook for U.S. banks and financial regulation.

Isaac spoke with Tom Keene, Sara Eisen, Scarlet Fu and Joshua Green on Bloomberg Television’s “Surveillance.”

For the video, click here.

Bernanke Testifies on Economy, Policy to Senate Panel

Federal Reserve Chairman Ben S. Bernanke delivered his semi-annual report on the U.S. economy and the central bank’s monetary policy before the Senate Banking Committee in Washington.

In wide-ranging remarks, Bernanke touched on topics including quantitative easing, the U.S. housing market, the Volcker rule, too-big-to-fail banks, financial regulation and the Basel III accords.

For the video, click here.

Levitt Says White House Soft on Financial Regulation

Arthur Levitt, former chairman of the Securities and Exchange Commission, discussed the Obama Administration’s role in financial regulation. Levitt talked with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Gorman Says He’s Encouraged by Merrill’s Higher Margin

James Gorman, chief executive officer at Morgan Stanley, talked about his company’s second-quarter profit, banking regulation and Federal Reserve policy.

He spoke with Erik Schatzker on Bloomberg Television’s “Market Makers.”

For the video, click here.

Comings and Goings

SEC Nominees Stein, Piwowar Approved by Senate Banking Committee

The U.S. Senate Banking Committee approved the nominations of Michael Piwowar and Kara M. Stein to be members of the Securities and Exchange Commission.

The committee approved the nominees by voice vote yesterday along with a full five-year term for SEC Chairman Mary Jo White, who is currently serving the remainder of a term vacated by her predecessor Mary Schapiro. The nominations now move to the full Senate, where they may be approved before lawmakers leave for the August Congressional recess.

Stein and Piwowar would join the SEC as it adapts to a new agenda under White, who says the agency’s rulemaking priorities are prescribed by the Dodd-Frank Act of 2010 and the Jumpstart Our Business Startups Act of 2012.

Stein, 49, would replace Elisse B. Walter as a Democratic commissioner and Piwowar, 45, would succeed Troy A. Paredes as a Republican appointee on the five-member commission.

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