Crop Insurance, Short-Sell Fight, Data Backup: Compliance

Sept. 13 (Bloomberg) -- Critics of the U.S. crop insurance program are calling for cuts to it and other agribusiness subsidies as Congress revamps farm policy.

A bipartisan group of lawmakers planned to meet yesterday in Washington to re-examine U.S. farm spending for the next five years.

Under the insurance program, the U.S. taxpayer subsidizes the majority of premiums paid by farmers, covers much of the administrative costs tallied by insurers to run the program, and guarantees that all losses are covered, according to a series of articles published by Bloomberg News this week.

Crop insurance covered $117 billion worth of product in 2012, including almost all the corn, soybeans, cotton and wheat produced in the country. The U.S. Department of Agriculture spent about $14 billion last year on the program, due to drought.

Supporters of crop insurance are stepping up their lobbying to preserve the program’s funding levels.

Richard Gibson, founder of American Agrisurance Inc. and a business consultant, told agents of NAU Country Insurance Co. in an e-mail this week to lobby their lawmakers. In e-mails to agents, he criticized Bloomberg News stories that examined the program’s costs and vulnerability to fraud. Crop insurers and the USDA said subsidized insurance helps stabilize food prices and protects farmers from the vagaries of weather.

Adjustments to the farm bill are still possible as both houses of Congress reconcile separate measures in a conference to shape the final law.

The House legislation is H.R. 2642; Senate is S.954.

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Compliance Policy

ISDA to Change Calculation for Swaps Rate Amid Regulatory Probe

The International Swaps & Derivatives Association plans to change how it calculates a benchmark measure of interest-rate swaps that U.S. and U.K. regulators are investigating for possible price manipulation.

The organization is working to base the rate, known as ISDAfix, on actual trades from several trading systems rather than just bank submissions, with a goal of finishing within six months, said Morgan Stanley’s Ed Ocampo, chairman of ISDA’s benchmark committee. The test phase of the project is based on trades denominated in euros and will move to U.S. dollar rates if successful, he said yesterday at a conference in New York.

ICAP Plc controls the U.S. dollar swap submissions for ISDAfix from its Jersey City, New Jersey, office, and plays an exclusive role in the lucrative trading that helps set the rate. Broadening the calculation to other platforms threatens to loosen ICAP’s grip on ISDAfix a decade after it acquired control of the computer screen used by the industry to price swaps in the $379 trillion market.

The U.S. Commodity Futures Trading Commission and the U.K. Financial Conduct Authority are investigating alleged manipulation of ISDAfix, FCA Chief Executive Officer Martin Wheatley told lawmakers in London this week.

ISDAfix is currently determined daily by a panel of banks based on their submissions of the midpoint of their rate swap trades.

For more, click here.

Separately, software services company Clarus Financial Technology has proposed an alternative to a benchmark measure of interest-rate swaps that’s based on trades submitted to a derivatives repository.

The so-called SDRfix measure is based on cleared interest-rate swaps denominated in U.S. dollars and euros, Clarus said in a statement yesterday.

The 2010 Dodd-Frank Act mandated that all swap transactions be reported to data repositories to provide regulators with a view into the market and to keep track of risks. The SDRfix rate is derived from cleared trades submitted to the data repository owned by the Depository Trust and Clearing Corp. and is calculated each day, Clarus said in the statement.

SEC Orders Exchanges to Collaborate on Bolstering Markets

U.S. securities regulators told stock exchanges to collaborate on making markets more resilient, an attempt to prevent another disruption like Nasdaq OMX Group Inc.’s three-hour halt last month.

After Securities and Exchange Commission Chairman Mary Jo White’s meeting with the top executives of the nation’s stock and options markets in Washington yesterday, the regulator said it asked them to “identify a series of concrete measures designed to address specific areas where the robustness and resilience of market systems can be improved.” NYSE Euronext Chief Executive Officer Duncan Niederauer said they have 60 days to respond.

White scheduled the gathering after Nasdaq’s securities information processor, a system for distributing stock quotes, failed on Aug. 22, prompting a three-hour trading halt for thousands of companies. The SEC asked exchanges to develop plans to bolster the SIPs run by Nasdaq and NYSE Euronext, review other potential points of failure, and evaluate rules for canceling transactions and restarting trading after halts.

In the SEC’s statement, White said she emphasized the need for exchanges to work together on the issues she identified. Niederauer and CBOE Holdings Inc. Chairman William Brodsky both characterized the talks as “constructive” during interviews in Washington.

Meeting participants included representatives from the U.S. stock and options exchanges, the Financial Industry Regulatory Authority, Depository Trust & Clearing Corp. and Options Clearing Corp.

Nasdaq’s computers were flooded Aug. 22 with data from NYSE Arca, a rival exchange, revealing a bug in Nasdaq’s SIP software that disabled systems that should have prevented the malfunction from snowballing.

Exchanges were told yesterday in the private meeting to “provide comprehensive action plans that address the standards necessary to establish highly resilient and robust systems for the securities information processors,” the SEC said in a statement yesterday. That includes “testing standards and disclosure protocols.”

White, who was a Nasdaq Stock Market Inc. board member from 2002 to 2006, has said she will seek new protocols for breaking trades if a network fails and push to advance rules that would require exchanges to show trading can continue through natural disasters and programming glitches.

The SEC asked market operators to figure out how to implement “kill switches” that shut trading following a technology breakdown.

Gary Katz, the CEO of Deutsche Boerse AG’s International Securities Exchange, said the most important outcome of the meeting could be the focus on addressing single points of failure, where one computer bug or mistake paralyzes the entire market.

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Fed District Bank Presidents Support SEC Money Fund Proposal

Presidents of the 12 Federal Reserve District banks backed a Securities and Exchange Commission proposal for regulation of money market mutual funds, saying the measure will better safeguard investors and financial stability.

“We believe the SEC is well-positioned to implement meaningful reforms,” the Fed district bank presidents said to the SEC in a letter dated Sept. 12 and released by the Boston Fed. Such measures “not only better protect investors but also address the risks to financial stability posed by MMMFs,” they said.

U.K. Banks Face $79 Billion Capital Boost in Future Rules

The eight biggest U.K. banks may need to boost capital levels by 50 billion pounds ($79 billion) or shrink their balance sheets by 20 percent to meet tougher international rules in the future, a report said.

Regulators may require banks to meet a higher 5 percent leverage ratio, guidelines on transparency and tougher rules on how they weight assets for risk in the next round of capital regulations set by the Basel Committee on Banking Supervision, once the current standards are put in place by 2019, New York-based accounting firm KPMG said in the report.

Global banks had core capital reserves averaging about 9 percent of their risk-weighted assets at the end of 2012, more than the 7 percent required under the updated standards, the Basel committee said in a report last month. The minimum ratio of equity to debt, known as the leverage ratio, is 3 percent.

International standards set by the Basel committee require banks to meet minimum capital requirements, measured as a percentage of their assets. The amount of capital that must be held is linked to the riskiness of the assets, with large banks allowed to use their own models to calculate the likelihood of losses. This process is known as risk-weighting.

The Bank of England in June ordered the five largest U.K. lenders, including Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, to plug a 13.4 billion-pound capital shortfall by the end of the year.

Compliance Action

Taxation Aid to Companies Examined by EU’s Competition Arm

The European Union is quizzing Ireland, Luxembourg and the Netherlands on the legality of their tax deals with certain companies amid a global crackdown on tax avoidance.

The European Commission’s competition arm is seeking information on whether selective advantages were granted, Antoine Colombani, spokesman for EU Competition Commissioner Joaquin Almunia, said yesterday. It’s too early to say whether formal state aid investigations will be opened, he said.

With European governments struggling to increase revenue and reduce deficits, company taxes have come under intense scrutiny. The Group of 20 nations last week endorsed the Organization for Economic Cooperation and Development’s blueprint for cracking down on tax-avoiding strategies used by companies such as Google Inc., Apple Inc. and Yahoo! Inc. Most government support, including specific tax breaks, that enable companies to gain an unfair advantage over competitors is illegal under EU rules.

Jean-Claude Juncker, Luxembourg’s Prime Minister, said the information request “doesn’t particularly worry” him. “There won’t be a probe,” he said yesterday at a press conference.

The Dutch Finance Ministry declined to comment on the information-gathering exercise.

“Ireland does not do special tax rate deals with companies,” the Irish Finance Ministry said in an e-mail. “The essence of state aid is about aiding a particular sector or type of investor -- the Irish rules do not do that.”

The Irish Finance Ministry said “we always cooperate fully” with such requests.

The Financial Times reported on the EU’s information-gathering exercise earlier in the day yesterday.


Visa-MasterCard Judge Questions Lawsuit Shield in Fee Accord

A federal judge said he is concerned that the Visa Inc. and MasterCard Inc. multibillion-dollar price-fixing settlement over merchant swipe fees might go too far in protecting the card firms from future lawsuits over new payment technologies.

U.S. District Judge John Gleeson heard arguments yesterday in Brooklyn, New York, over whether to grant final approval to the nationwide class-action settlement, which aims to end future antitrust battles with U.S. merchants over fee-setting practices. Scores of big-box retailers and other consumer businesses oppose the settlement in part because they think the release is too broad.

Visa, based in Foster City, California, and MasterCard, based in Purchase, New York, asked the judge to grant final approval in order to put to rest antitrust claims over fees paid by U.S. merchants to support the credit-card networks.

New payment technologies such as contactless or mobile phone-based payment systems might offer opportunities for merchants to reduce or escape from interchange fees, Michael Canter, a lawyer for some of the objectors, said in the hearing.

Developed by banks half a century ago, Visa and MasterCard have been subject to government scrutiny over their business practices for decades, Georgetown University law professor Adam Levitin wrote in 2008. The card firms faced an antitrust suit filed by Wal-Mart Stores Inc. and other retailers in 1996 and actions by the Justice Department, leading to some rule changes.

Bank-owned groups spun off the card companies through initial public offerings in 2006 and 2008 in a move that merchants alleged was intended to dodge antitrust liability.

The card companies received final approval of their previous settlement of more than $4 billion in January 2004. The current case was brought against them in 2005.

Merchants are expected to receive about one-third of a year’s worth of interchange payments if final approval is granted and the order isn’t delayed by an appeal. That estimate is based on assumptions about the number of merchants that will file claims and other factors.

The case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05-md-01720, U.S. District Court, Eastern District of New York (Brooklyn).

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U.K. Wins Backing in Court Fight Over EU Short-Selling Rules

The U.K. was denied a veto over rules giving a European Union agency powers to ban short selling, a top judge said in an opinion that boosts Britain’s chances of winning a turf war with EU financial regulators.

Emergency powers granted to the European Securities and Markets Authority were based on a flawed interpretation of EU treaties, Niilo Jaeaeskinen, an advocate general at the EU Court of Justice said in a non-binding opinion yesterday. A unanimous vote among nations should have been required to ensure “enhanced democratic input.”

The short-selling skirmish is one of several legal U.K. challenges against EU financial regulations at the bloc’s courts, including opposition to a proposed common financial transactions tax. U.K. opposition has prompted warnings from EU officials that it can’t pick and choose the terms of its relationship with the bloc.

The Luxembourg-based court follows these opinions in a majority of cases and normally rules about six months later.

A provision in the short-selling rules that grants ESMA the powers to intervene in the financial markets to regulate or prohibit short selling was adopted in a manner that goes beyond what is “necessary for the establishment or functioning of the internal market,” the court said in the opinion.

Jaeaeskinen dismissed the government’s remaining claims.

If the full court disagrees on the interpretation, “then the U.K.’s challenge could still be lost,” Michael Wainwright, a partner at Eversheds LLP in London, said in an e-mail.

“We take note of the advocate general opinion,” Chantal Hughes, a spokeswoman for Barnier, said in an e-mail. “We will look at it carefully, and need to wait for the court’s final ruling.”

Ernst & Young Ignored Request From China for Papers, Court Told

Ernst & Young Huaming, the Beijing-based affiliate of the accounting firm, ignored a request from Chinese authorities to produce audit papers from a withdrawn Hong Kong initial public offering application, a lawyer for the city’s regulator said in a court hearing yesterday.

The China Securities Regulatory Commission, at the request of its Hong Kong counterpart, asked Huaming in 2010 to hand over the documents, lawyer Jat Sew Tong said in a Hong Kong court. Hua Ming declined, Jat, who represents the Securities & Futures Commission, said.

Ernst & Young Hong Kong resigned in March 2010 as the auditor for Standard Water Ltd., a Chinese water treatment company planning to list in the city, citing the discovery of inconsistencies in documents. It says it can’t provide the working papers to Hong Kong’s regulator because of mainland legal restrictions.

The Securities and Futures Commission is making banks criminally liable for false statements in IPO documents and strengthening regulation after a series of accounting scandals involving Chinese companies. It said auditors must be able to discuss their working papers as part of Hong Kong’s regulatory framework, and that its lawsuit against Ernst & Young followed consultation with Chinese authorities.

The Hong Kong office of the accounting firm would have to sue its mainland counterpart to obtain the documents, its lawyer Benjamin Yu said yesterday in court. Ernst & Young Hong Kong has some computer hard drives that may contain relevant documents, he said.

The CSRC did not immediately return a request for comment.

The lawyers delivered their final arguments yesterday to Justice Peter Ng Ka-fai, who will deliberate before making a ruling.

The case is Securities and Futures Commission and Ernst & Young, HCMP1818/2012 in the Hong Kong Court of First Instance.


Isakson Might Support Summers, Questions Independence

U.S. Senator Johnny Isakson, a Republican from Georgia, talked about the outlook for President Barack Obama’s nomination to lead the Federal Reserve.

Isakson, who spoke with Bloomberg reporters and editors in Washington, also discussed Obama’s nomination of Representative Mel Watt to lead the Federal Housing Finance Agency.

For the audio, click here.

Warren Says Congress Should Act Now on Too Big to Fail Measure

U.S. Senator Elizabeth Warren said banks remain too big to fail even amid the progress that has been made on financial regulation since the 2008 credit crisis.

“If Dodd-Frank gives the regulators the tools to end too big to fail, great -- end too big to fail,” Warren, a Massachusetts Democrat, said of the Wall Street rules overhaul in a Washington speech yesterday. “If the regulators won’t end too big to fail, then Congress must act to protect our economy and prevent future crises.”

Warren, who set up the Consumer Financial Protection Bureau before being elected to Congress in 2012, used her speech at an event marking the fifth anniversary of the crisis to promote her proposal to re-create the Glass-Steagall Act, the 1930s law that separated commercial and investment banking.

The senator’s call to end too big to fail aligns her with Federal Reserve Governor Daniel Tarullo and Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig. While regulators and lawmakers acknowledge the problem still exists, consensus hasn’t formed around a single approach.

Previous Senate attempts to revive Glass-Steagall, which was repealed in 1999, or otherwise limit the size of banks have failed to gain enough support to become law.

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

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

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