Danske Bank, Ex-JPMorgan Trader, China: Compliance

Aug. 28 (Bloomberg) -- Denmark’s bank regulator reprimanded Danske Bank A/S for inadequate management of market risks two months after ordering Denmark’s biggest lender to add $18 billion in risk weighted assets.

The Financial Supervisory Authority said yesterday the Copenhagen bank must ensure control of market risks across the company, weigh risks against returns, and safeguard against alterations to risk models driving changes in assessments. The agency also called for greater transparency in decision making.

The Copenhagen-based agency ordered the improvements after reviewing a study on the bank’s risk management systems that Danske paid for and that was requested by Denmark’s 14-member Financial Council, which advises the FSA on key cases. The FSA said it received the analysis, conducted by the consulting firm Oliver Wyman, on June 18. The review was ordered to determine whether Danske had taken on more risk than it budgeted for and whether its assessments mirrored reality.

Danske agreed to increase capital allocated to meet its solvency requirements, the FSA said.

The bank has taken steps to improve risk management, the FSA said. It is hiring an external consultant to assess its models, and the market risk committee hired four people earlier this year, bringing total employees in the unit to about 46. Management has agreed to hire more people as needed, the FSA said.

Danske was identified by a government panel as one of Denmark’s too-big-to-fail banks earlier this year.

Compliance Policy

Eased Mortgage-Risk Regulation to Be Proposed by U.S. Agencies

An eased version of a rule requiring lenders to keep a stake in risky mortgages that they securitize, a restriction designed to discourage the kind of lax underwriting that contributed to the subprime credit crisis, is set to be proposed by U.S. regulators today.

The 500-page draft regulation written by a panel of six agencies will replace a more stringent proposal for the Qualified Residential Mortgage rule. The first version, which was released in 2011, drew protests from housing industry participants and consumer groups, concerned it would be too restrictive on home lending.

The plan would require banks to retain a slice of mortgages when borrowers are spending more than 43 percent of their monthly income to repay their debt. The earlier proposal would have required banks to keep a stake in loans when borrowers were spending more than 36 percent of their income on all loan payments and in loans with down payments of less than 20 percent.

The regulation, mandated by the 2010 Dodd-Frank Act, will reshape who can lend and who can borrow because banks will probably make only those loans that conform to the new standards.

The agencies will seek public comment before each holds a vote on the final rule. The agencies involved in the rulemaking are the Federal Reserve, Federal Deposit Insurance Corp., Department of Housing and Urban Development, Federal Housing Finance Agency, Office of the Comptroller of the Currency, and Securities and Exchange Commission.

India Regulator Sets Rules for Commodity Exchange Board Members

New rules in India provide that not less than 50 percent of the board strength of a commodity futures exchange shall be independent directors and they should be appointed for a period of three years, the Forward Markets Commission said on its website.

The Forward Markets Commission shall appoint four independent directors, the regulator said in the rules.

In addition, directors should satisfy criteria of “fit and proper person,” and the appointment of the chief executive officer shall be subject to prior approval of the commission, the regulator said.

Exchanges have to furnish information related to the board and corporate governance to the commission by Sept. 2.

Compliance Action

Currency Spikes at 4 P.M. in London Provide Rate-Rigging Clues

In the space of 20 minutes on the last Friday in June, the value of the U.S. dollar jumped 0.57 percent against its Canadian counterpart, the biggest move in a month. Within an hour, two-thirds of that gain had melted away.

The same pattern -- a sudden surge minutes before 4 p.m. in London on the last trading day of the month, followed by a quick reversal -- occurred 31 percent of the time across 14 currency pairs over two years, according to data compiled by Bloomberg. For the most frequently traded pairs, such as euro-dollar, it happened about half the time, the data show.

The recurring spikes take place at the same time financial benchmarks known as the WM/Reuters rates are set based on those trades. Now fund managers and scholars say the patterns look like an attempt by currency dealers to manipulate the rates, distorting the value of trillions of dollars of investments in funds that track global indexes. Bloomberg News reported in June that dealers shared information and used client orders to move the rates to boost trading profit. The U.K. Financial Conduct Authority is reviewing the allegations, a spokesman said.

Authorities around the world are investigating the abuse of financial benchmarks by large banks that play a central role in setting them.

Investors and consultants interviewed by Bloomberg News say dealers at banks, which dominate the $4.7 trillion-a-day currency market, may be executing a large number of trades over a short period to move the rate to their advantage, a practice known as banging the close.

Benchmark providers such as FTSE Group and MSCI Inc. base daily valuations of indexes spanning different currencies on the 4 p.m. WM/Reuters rates, known as the London close. Index funds, which track global indexes such as the MSCI World Index, also trade at the rates to reduce tracking error, or the drag on funds’ performance relative to the securities they follow caused by currency fluctuations.

For more, click here.

Banks on Course to Meet Tougher Capital Rules, Basel Group Says

Large international banks are on course to meet tougher capital rules drawn up by global regulators in a bid to stave off financial crises, the Basel Committee on Banking Supervision said.

Global banks had core capital reserves equivalent on average to about 9 percent of their risk-weighted assets at the end of 2012, above the 7 percent required under the updated Basel standards, the group said. While some individual lenders still have a shortfall, this is “well below half the aggregate annual profits of the industry,” according to the group.

The group said that 25 of its 27 member countries have adopted the capital standards, which are set to fully take effect by 2019. The remaining two, Indonesia and Turkey, have draft rules in place, and expect to finalize them.

EU Investigation Finds China Solar-Panel Makers Got Aid

Chinese solar-panel makers received subsidies, a European Union investigation showed, increasing the likelihood of EU tariffs on imports of the renewable-energy technology from China to counter trade-distorting state aid.

The European Commission has concluded in the probe opened last November that Chinese manufacturers of crystalline silicon photovoltaic modules or panels, and cells and wafers used in them, benefited from preferential lending, tax programs and other aid, an EU official said yesterday in Brussels. The inquiry is one of two that the commission is conducting into alleged unfair Chinese trade in solar goods.

The commission on Aug. 2 approved an agreement with China to curb Chinese shipments of solar panels as part of a parallel probe into below-cost sales, a practice known as dumping. Chinese manufacturers that take part in the pact are being spared provisional EU anti-dumping duties as high as 67.9 percent.

The commission is engaged in a political balancing act as it seeks to limit Chinese competition against European manufacturers. On Aug. 7, the commission decided against imposing preliminary anti-subsidy tariffs on Chinese solar panels.

SEC’s White to Meet With Exchanges on Nasdaq Trading Halt

U.S. Securities and Exchange Commission Chairman Mary Jo White will meet Sept. 12 with the heads of exchanges and other self-regulatory organizations to discuss last week’s trading halt in Nasdaq-listed stocks.

“The meeting at the SEC will address the market data dissemination system involved in last week’s halt as well as other critical market systems and infrastructure issues,” John Nester, an SEC spokesman, said in a statement yesterday.

Nasdaq’s Aug. 22 shutdown stopped trading in more than 2,000 U.S. stocks for three hours. The outage stemmed from a communication error between another exchange and a network that Nasdaq OMX Group Inc. operates to disseminate data on quotes and prices.

White also said after the outage that the SEC should advance a proposal that would require exchanges and other entities that facilitate trading to test the reliability of their technology.

Ex-JPMorgan Trader Released, Saying He Opposes Extradition

Former JPMorgan Chase & Co. trader Javier Martin-Artajo was released from police custody after telling a Madrid court he opposed attempts by U.S. prosecutors to extradite him on charges he hid trading losses that cost the bank $6.2 billion.

The former trader turned himself in yesterday morning after being contacted by investigators, a Spanish police official said. He was released after a hearing in Madrid yesterday in which he said he was unwilling to be extradited, according to a spokeswoman for the National Court.

The U.S. this month charged Martin-Artajo, a Spanish citizen, and Julien Grout, a French citizen, with trying to hide the losses stemming from trades by Bruno Iksil, the Frenchman at the center of the case who became known as the “London Whale.” Grout and Martin-Artajo face as many as 20 years in jail if convicted of the most serious counts, including conspiracy and wire fraud.

Martin-Artajo, 49, oversaw trading strategy for Iksil’s synthetic portfolio at JPMorgan’s chief investment office in London, while Grout was a trader who worked for him.

Martin-Artajo’s lawyer, Lista Cannon, didn’t immediately respond to a call seeking comment yesterday. He “is confident that when a complete and fair reconstruction of these complex events is completed, he will be cleared of any wrongdoing,” a spokeswoman for his law firm said earlier this month. Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment.

At a hearing yesterday, Martin-Artajo’s lawyer filed documents in which his client denied the allegations, according to a court official who asked not to be identified because they weren’t authorized to speak publicly. The U.S. now has 40 days to file sworn statements in support of its extradition request.

The extradition process “can take up to several months,” said Ivan Mercado, managing partner at Mercado & Rengel, a law firm in Spain that works on U.S. extradition cases. Mercado is not involved in the case.

The spokeswoman for the court said Martin-Artajo’s passport has been confiscated. Another court official said that wasn’t the case, but that he can’t leave Spain without court approval.

Grout is living in France and isn’t a fugitive, his lawyer, Edward Little, a partner at Hughes Hubbard & Reed LLP in New York, said in an Aug. 12 interview, two days before his client was charged.

“He visited the U.S. last month with confidence he was not being indicted and moved to France to save money and look for a job,” Little said at the time. France has no obligation under its extradition treaty with the U.S. to send Grout to New York. Little declined to comment yesterday.

Amazon Drops Price Parity Clause for German Retailers

Amazon told Germany’s antitrust regulator it will drop the company policy, known as the price parity clause, that forced retailers to offer their lowest price at Amazon marketplace as well as elsewhere.

The Federal Cartel Office said it is reviewing whether it can now drop the probe of Amazon’s policy. The company’s price parity clause prevented retailers that offer goods on Amazon’s platform from selling them cheaper elsewhere on Internet.

Earlier this year, Germany’s Cartel Office said it was surveying 2,400 retailers as it examined the impact of Amazon’s price parity clause on Amazon marketplace online retailers. At that time, the Cartel Office said Amazon may need to remove the clause if the survey shows it leads to higher prices without benefit to consumers.


BofA FDIC Suit for $1.7 Billion in Investor Losses Thrown Out

Bank of America Corp.’s lawsuit against the Federal Deposit Insurance Corp. over $1.7 billion in investor losses was dismissed by a federal judge.

The suit was based on the bank’s role as trustee for Ocala Funding LLC.

U.S. District Judge Barbara Rothstein in Washington threw out the case, saying there weren’t enough assets to make any payments on general creditor claims, according to her decision yesterday.

The case stems from a mortgage-fraud scheme at failed lender Taylor, Bean & Whitaker Mortgage Corp. From 2002 through August 2009, Lee Farkas, while he was chairman of Taylor Bean, sold more than $1.5 billion in fake mortgage loans to Colonial Bank with the collusion of its employees and diverted more than $1.5 billion from Ocala Funding, a financing vehicle Taylor Bean controlled.

Farkas is serving a 30-year sentence, following conviction for 14 counts of conspiracy and bank, wire and securities fraud relating to the scheme.

The case is Bank of America v. FDIC, 10-cv-01681, U.S. District Court, District of Columbia (Washington).


Ryanair CEO Says Nobody Wants to Buy Aer Lingus Stake

Ryanair Holdings Plc Chief Executive Officer Michael O’Leary talked about the order from U.K. antitrust regulators to cut its stake in Aer Lingus Group Plc to no more that 5 percent to address competition concerns.

The discount carrier has vowed to contest the ruling.

O’Leary spoke from Dublin with Francine Lacqua on Bloomberg Television’s “On the Move.”

For the video, click here, and for more, click here.

Hong Kong Has ‘Last Mover Advantage’ on Dark Pools, Adler Says

Having a single market without much fragmentation, stamp duty and regulations around dark pools, which keep their market share low, have helped to keep issues associated with high frequency trading out of Hong Kong, Ashley Alder, chief executive officer of H.K. Securities and Futures Commission, said at a conference in the city Aug. 26.

Dark pool consultation “hopefully” will be out this year, Alder said in his remarks. Dark pool rules will create a marketwide code to replace current license conditions, according to Alder.

The Hong Kong SFC is in discussions with exchanges on issues including circuit breakers, Alder said.

Fed’s Williams Says Effective Communication to Aid Next Step

Federal Reserve Bank of San Francisco President John Williams said clear communication will be needed as policy makers try to wind down stimulus in the U.S.

The Fed must “communicate very effectively with other central banks around the world what our plans are so that there’s a good understanding of how policy in the U.S. is likely to proceed,” Williams, who doesn’t hold a vote on policy this year, said yesterday on a panel in Gothenburg, Sweden. “That will help avoid at least somewhat the risks of big market turmoil.”

Williams’s comments echoed those by International Monetary Fund Managing Director Christine Lagarde and Bank of Mexico Governor Agustin Carstens last week at the annual Fed conference in Jackson Hole, Wyoming, where they said U.S. policy makers should spell out their intentions better to safeguard global economic growth and reduce market volatility.

Emerging-market stocks worldwide have lost $1 trillion in market value since May, when Chairman Ben S. Bernanke testified to Congress that the Fed “could take a step down” in its bond purchases. Such buying helped channel $3.9 trillion in capital flows to developing nations in the past four years.

“There’s no question that there are a lot of challenges ahead in executing the normalization,” Williams said yesterday. “The experience of the last few months with the bumpy path of interest rates and flows across the globe can show that this may not always be an easy process.”

Other Fed presidents speaking at Jackson Hole rebuffed international calls to take the threat of fallout in emerging markets into account when tapering U.S. monetary stimulus.

For more, click here.

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.

Before it's here, it's on the Bloomberg Terminal.