Odd Lot Tally, EU Tobacco Rules, Danish Sifi: Compliance

A plan to start including U.S. stock trades of fewer than 100 shares, known as odd lots, in the official tally of American volume was delayed by seven weeks.

The change, which was supposed to take effect on Oct. 21, will now start on Dec. 9, pending regulatory approval, according to notices on the websites of New York-based Nasdaq OMX Group Inc. and NYSE Euronext.

U.S. Securities and Exchange Commission Chairman Mary Jo White has set a mid-November deadline for market owners to devise suggestions for preventing outages like Nasdaq’s three-hour halt on Aug. 22. That shutdown was caused by an error in Nasdaq’s securities information processor, or SIP, the same system exchanges are updating to accommodate odd lots. The Oct. 21 date for the odd lot transition was announced two weeks before the Nasdaq malfunction.

Rising share prices and the spread of computer strategies have reduced the size of stock trades, making more transactions ineligible for inclusion in the public record.

Compliance Policy

EU Parliament Dilutes Proposal for Tougher Tobacco Rules

The European Parliament scaled back plans for more stringent regulation of the tobacco industry, setting up a clash with national governments over draft legislation meant to curb smoking in Europe.

The European Union assembly rejected a proposal to regulate nicotine-containing goods like electronic cigarettes as medicines, opting instead to apply rules on general product safety. As part of a plan to ban the sale of cigarettes and roll-your-own tobacco with characterizing flavors, the 28-nation Parliament also voted to phase out menthol cigarettes over eight years rather than three years agreed by EU governments.

The stance by the EU’s only directly elected institution follows months of industry lobbying over the latest bid to prevent young people from starting to smoke in Europe, where tobacco-related illnesses are estimated to kill one person every minute.

British American Tobacco Plc, Europe’s largest cigarette maker, praised what it called “sensible modifications” by the European parliamentarians to the draft EU law while saying it is still too tough.

A deal on the draft legislation, known as a directive, could be reached by year-end, said Linda McAvan, a U.K. Socialist who steered the draft law through the EU Parliament. While she opposed the looser provisions for electronic and menthol cigarettes, she expressed satisfaction that the assembly upheld two central positions of governments regarding labels.

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Danish Lawmakers Extend Sifi Talks After Agreeing on Most Points

Danish lawmakers will continue talks on a bill for systemically important banks this week after initially targeting a deal planned for as early as yesterday.

Members of Denmark’s parliament committee overseeing banks ended yesterday’s meeting after agreeing on a number of key points including which banks are too big to fail and how much capital the lenders must hold, two lawmakers who participated in the talks said. They asked not to be identified by name because the content of the talks is private.

The final bill, which would require a group of lenders led by Danske Bank A/S to hold more capital than their smaller competitors, is based on a proposal put forward by a government-appointed committee in March. Once parliament’s business committee agrees on the wording of the legislation, the bill’s passage into law is a formality.

An accord would mark the latest example of Scandinavian legislators moving faster on bank regulation than the rest of Europe as near record-low interest rates distort credit and housing markets in some of the world’s richest economies.

Lawmakers in Denmark are discussing imposing a 3 percent additional buffer on Danske Bank -- less than recommended in the March proposal, according to a different person close to the talks who asked not to be identified by name because the terms of the accord aren’t yet public. All other systemically important banks will probably be asked to build extra capital in line with levels in the March proposal, the person said.

Lawmakers are still struggling to hammer out the final text, the person said.

Danish talks on too-big-to-fail banks have been hampered by lawmaker disagreement over trigger levels at which debt converts to equity and at which management loses its freedom to decide payouts.

Commodity Prices Wrong as Often as 27% of Time for Traders

Commodities traders who buy and sell as much as $5.67 trillion of raw materials a year say the benchmark prices for everything from oil to iron ore to gasoline are wrong as often as 27 percent of the time.

In a Bloomberg News survey conducted during the past eight weeks, 85 traders and analysts said they have little confidence in the assessed prices of crude, metals and iron ore. Regulators, including European Union Competition Commissioner Joaquin Almunia, may examine commodities markets, having already increased investigations of manipulation of benchmarks for interest rates, derivatives, foreign exchange and oil.

Five years after the global credit crisis prompted more regulation of banks, benchmark prices for hundreds of commodities are determined through surveys of anonymous traders who may have a stake in the outcome of the assessments. Unlike stock prices, available in real time at regulated exchanges for all investors to see, many raw materials that go into food, clothing and power are bought and sold in private.

Actual trades on exchanges, benchmarks for coal, iron ore, fertilizer, gas and some metals are determined by journalists. They establish the prices by collating data on available bids, offers and trades as well as phone and e-mail surveys. Those assessments are often used to determine payments in long-term contracts between buyers and sellers.

Bloomberg surveyed analysts and traders of energy, metals, iron ore, carbon and power. They were granted anonymity so they would give their unguarded opinions to the question: “How many times out of 100 instances do you estimate the assessed benchmark price for the main commodity you trade is unrepresentative of the true level?”

The mean answer was 27 and the median was 20. Crude benchmarks were the least representative in markets where more than five respondents gave answers, followed by oil products, metals and iron ore. Agricultural commodities had the greatest accuracy, according to the survey. About 270 people were contacted. Most of those who declined to give answers said they couldn’t quantify how frequently prices were inaccurate.

The responses represent a fraction of the thousands of commodities and energy traders in the world.

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Compliance Action

SAC’s Cohen Said to Face $1.8 Billion Cost to Settle Case

Steven Cohen’s SAC Capital Advisors LP was told $1.8 billion and an admission of wrongdoing by the hedge fund firm would be the price tag for resolving securities-fraud charges, people familiar with the matter said.

Including about $600 million that Cohen has already agreed to pay the U.S. Securities and Exchange Commission to settle a related lawsuit, for which Cohen’s lawyers are arguing their client deserves credit, would leave about $1.2 billion still to be paid in a criminal probe by Manhattan U.S. Attorney Preet Bharara’s office.

SAC is accused in a grand jury indictment of encouraging its traders to obtain information from company insiders while ignoring indications it was illegal. In the talks, the government is seeking an admission of wrongdoing by SAC as part of a resolution, said one of the people familiar with the matter who asked not to be identified because it wasn’t public.

SAC was told the longer it waits to settle, the higher the price will be, according to the people. The government’s position is that as the process drags on, prosecutors have to do more work and invest more time in preparation for a trial, which ostensibly costs more money. SAC, which presumably wants to avoid trial, is expected to come back with a counteroffer, the people said.

The deadline to accept the deal, according to the Financial Times, which reported the $1.8 billion figure yesterday, is the beginning of November.

Jonathan Gasthalter, a spokesman for SAC with Sard Verbinnen & Co., declined to comment yesterday on the talks. Cohen, 57, has denied the charges and said he and his firm behaved appropriately.

Jim Margolin, a spokesman for Bharara’s office, declined to comment on the case.

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Mizuho Told to Explain Executives’ Knowledge of Crime Loans

Japan’s financial regulator told Mizuho Financial Group Inc. to explain how and when top executives found out about the bank’s loans to crime groups, ramping up pressure on President Yasuhiro Sato.

The Financial Services Agency issued the order today after Mizuho yesterday said it erred in reporting only lower-ranking officials knew of the loans, an FSA official told reporters in Tokyo, asking not to be named in accordance with its policy.

The order, the first against the parent company about the matter, comes less than two weeks after the FSA told Mizuho’s banking unit to improve compliance for allowing members of crime groups to borrow money through a consumer credit affiliate. Sato said yesterday that he was unaware of the lending until the regulator’s investigation in March.

Satoru Nishibori, president of Mizuho’s banking unit at the time, knew of the loans in 2010, Sato said yesterday, amending earlier statements by the bank that four senior compliance officials were aware and didn’t inform superiors.

Sato said he himself was in a position where he could have found out about the loans in executive meetings as early as July 2011, when reports mentioning the transactions were distributed.

Masako Shiono, a spokeswoman for Mizuho in Tokyo, said the holding company and banking unit both received the latest orders today. They must report back to the FSA by Oct. 28.

The agency yesterday called Mizuho’s correction “extremely regrettable” and said it will take appropriate action after the bank and an independent panel complete investigations.

FDIC Says Insurance Fund’s Growth Unlikely to Alter Banks’ Rates

The Federal Deposit Insurance Corp. said it is unlikely to change the rates banks pay for insurance that guarantees customer deposits even as the fund continues to stay on track to meet deadlines for its health.

The federal backstop, funded by assessments on banks, was at $37.9 billion by June 30, up from a deficit of $20.9 billion at the end of 2009 as bank failures surged during credit crisis. The FDIC predicted it will spend $4 billion to cover bank shutdowns in the next five years, a projection that declined another $1 billion since April as the industry improves, according to a report issued yesterday updating the fund’s health.

FDIC Chairman Martin Gruenberg said the fund “has a long way to go.” He said rates charged the banks probably won’t rise as industry health improves and numbers of banks failing or at risk of doing so continues to decline.

The fund returned to a positive balance in 2011, and the FDIC anticipates that its income from assessments on banks will drop from about $12.4 billion in 2012 to about $10 billion this year as conditions improve and growth in the assessment base has been more sluggish than expected, according to the report.

The fund still has less than its required reserve ratio of

1.15 percent of the deposits it insures, and the FDIC expects to reach that goal by 2019 -- an extension of one year from earlier estimates because of a “more conservative projection of future assessment revenue.”

Assurant Cuts Florida Insurance Rates 10% in Deal With Regulator

Assurant Inc., under pressure from Florida regulators, agreed to cut rates 10 percent in the state for home insurance that borrowers must buy when they miss payments on their initial policies.

The new rates are expected to be effective in the first quarter of next year, the New York-based insurer said yesterday in a statement.


Ex-Madoff Workers Trial Will Be Jurors’ New Reality for 5 Months

The trial of five former employees of Bernard Madoff, including his longtime personal secretary and two computer programmers, will become a full-time job for about five months for jurors.

U.S. District Judge Laura Taylor Swain in Manhattan yesterday began asking a group of about 300 New Yorkers detailed questions about their backgrounds and ability to be objective. Twelve jurors, along with six alternates, will be chosen to decide the fate of Madoff’s inner circle, charged with helping carry out the biggest Ponzi scheme in U.S. history.

The length of the trial could pose a problem for the defense in particular, since some jurors may be inclined to rush the process so they can return to work, said Tamar Frankel, a professor at the Boston University School of Law.

The jury selection process could take all week, and opening arguments may not start until Oct. 15, said Stephanie Cirkovich, a public information officer for the court.

The former employees, all of whom have pleaded not guilty, are Annette Bongiorno, Madoff’s personal secretary who worked with him for 40 years and helped recruit investors; Joann Crupi, a back-office worker who managed large accounts; ex-operations chief Daniel Bonventre and computer programmers Jerome O’Hara and George Perez.

The defendants, who took turns standing and facing the group of potential jurors, face 33 counts including securities fraud, mail fraud, bank fraud, falsifying records and submitting false information to regulators. Some of the defendants also face tax-fraud claims.

Madoff was arrested Dec. 11, 2008, after telling federal agents that his company was a sham. Four months later, he pleaded guilty to 11 charges including securities fraud and wire fraud and was sentenced to 150 years in prison.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).

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FDIC Urges Judge to Reject $500 Million Countrywide Accord

The Federal Deposit Insurance Corp. urged a U.S. judge to reject a proposed $500 million settlement of Bank of America Corp.’s liability for billions of dollars in securities backed by mortgages that were later downgraded to junk.

The FDIC claims the bank accord is too small and benefits too few investors. Its objection was made in a filing Oct. 7 in a Los Angeles court.

The settlement in April was to end a class action led by the Iowa Public Retirement System. The consolidated lawsuit filed in 2010 sought damages of more than $351 billion concerning downgraded Countrywide mortgage-backed securities after the 2007 subprime collapse. The settlement requires a judge’s approval.

The Los Angeles case is Maine State Retirement System v. Countrywide Financial Corp., 10-cv-00302, U.S. District Court, Central District of California (Los Angeles).


Algo Traders Main Flash Crash Victims, Market Maker RSJ Says

Lightning-fast market plunges like the 2010 “flash crash” don’t hurt long-term investors and taxing algorithmic trading will drive the business from Europe, said the founder of RSJ AS, which trades a notional volume of $106 trillion in financial derivatives a year.

Investors would be protected by rules against unethical techniques and an introduction of random electronic delays to slow microsecond transactions by high-frequency trading companies, said Karel Janecek, the biggest shareholder in Prague-based RSJ, the largest such trader on NYSE Euronext’s Liffe derivatives platform.

He made the remarks in an interview at Bloomberg offices in Prague Oct. 7.

Regulators worldwide are seeking to improve their understanding of how markets behave and reduce price swings since the May 2010 plunge and recovery known as the flash crash that wiped out about $862 billion in U.S. equity value in minutes. They’re also working to determine whether methods used by sophisticated traders give them an unfair advantage and if they should crack down on high-frequency deals.

“If we take a manager of private money or long-term investors, they don’t care about flash crashes,” Janecek said.

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