Portfolio Hedging, London Metals, RBS Accord: Compliance

Nov. 8 (Bloomberg) -- Treasury Secretary Jacob J. Lew warned chief executive officers of top U.S. banks in a private meeting last month that the final Volcker rule ban on proprietary trading would be tougher than Wall Street expects, likely putting limits on portfolio hedging.

At the meeting, details of which haven’t previously been disclosed, Lew told industry leaders that he has been encouraging regulators to make provisions of the Volcker rule more stringent, according to two people familiar with the meeting. The bank executives, members of the Financial Services Forum, left the meeting concerned the final rule would be more restrictive on their trading business than previously indicated, the people said.

This week, regulators are putting the final touches on the rule, which could be released as soon as Dec. 10, according to two other people familiar with the process. That timeframe would put regulators on track to meet the administration’s self-imposed deadline to complete the rule by the end of the year.

Administration officials have signaled that one provision that will be more restrictive than the rule’s first draft is its exemption for trades conducted as hedges against other risks. The revised rule is expected to require hedges to be taken against individual positions and limit broader hedges against a bank’s entire portfolio. The change came in response to JPMorgan Chase & Co.’s “London Whale” trades, which cost the bank $6.2 billion in 2012 and were described by bank officials as portfolio hedging.

A first draft of the Volcker rule, which is part of the Dodd-Frank Act, was released in October 2011; Lew has been pushing regulators to complete the revised rule by the end of the year.

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Separately, the Chamber for Capital Markets Competitiveness said in a letter that the “rule, as proposed, will have far reaching, negative consequences.”

The letter was sent to the heads of Federal Reserve, the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and Office of Comptroller of the Currency, and the Commodity Futures Exchange Commission.

The group said the rule will impede ability of non-financial businesses to raise capital and manage risk.

“The CCMC does not see how these concerns can be addressed by any final rule that is a logical outgrowth of the proposed rule that the regulators published for comment,” the group said in the letter.

Compliance Policy

Venezuela Fights Economic War With Increased Currency Regulation

Venezuela signaled it will impose increased currency and price regulations with the creation of an agency to manage foreign exchange and imports as well as a broad review of consumer websites.

The South American country will create the National Foreign Trade Center to manage foreign currency and import policies, President Nicolas Maduro said Nov. 6, attributing rising inflation and a decline in the bolivar on the black market to an “economic war” being waged by political opponents.

The moves seek to stabilize the economy and promote economic growth, while “neutralizing” factors perturbing the economy, Maduro said, without providing specific details on how the new agency would function. Venezuela, which devalued the bolivar by 32 percent in February to 6.3 per dollar, has been unable to arrest the decline of the bolivar on the black market, where companies and individuals unable to access the official rate pay as much as 58 bolivars per dollar.

Speculation mounted last week that the South American country would devalue the bolivar for the second time in a year after the publication of a decree in the official gazette that authorized the creation of a new exchange rate for tourists.

Maduro last month re-started dollar auctions at an undisclosed rate in an effort to stem product shortages in time for Christmas as annual inflation reached almost 50 percent in September. The “fictitious” black market dollar is used to “perturb” the economy as part of the economic war and “psychological disturbance,” Maduro said.

The country will soon start a nationwide operation against price speculation and hoarding, using part of the armed forces, he said.

LME Changes Warehousing Rules to Shorten Withdrawal Times

The London Metal Exchange, the world’s biggest industrial-metals marketplace, altered its rules to speed up withdrawals from warehoused stockpiles amid consumer complaints that prompted scrutiny from U.S. regulators.

The changes will affect depots where waiting times exceed 50 calendar days, a notice e-mailed to LME members yesterday showed. The exchange’s original July proposal pertained to sites where waits were longer than 100 days. The LME also said it will review its warehouse system every six months and is studying its powers to regulate warehousing companies’ charges.

Consumers of metals including brewer MillerCoors LLC complained that lengthy waits for stockpiled supplies inflated costs, spurring U.S. regulators to subpoena documents from warehouse operators, according to people with knowledge of the probe. The changes are scheduled to take effect April 1, said the LME, founded in 1877 and now a unit of Hong Kong Exchanges & Clearing Ltd.

Warehouses with waiting times of more than 50 days will be required to ship out metal every day exceeding the amount they take in by at least 1,500 metric tons under the changes.

The LME, where investors bought and sold contracts worth $14.5 trillion last year, oversees more than 700 warehouses around the world.

The changes are the first step in strengthening the LME’s warehousing arrangements and making the market more transparent, the U.K. Financial Conduct Authority, which supervises the exchange, said in a statement on its website.

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Compliance Action

RBS to Pay More Than $150 Million in SEC Mortgage-Bond Case

Royal Bank of Scotland Plc will pay $153.7 million to resolve U.S. regulatory claims that a brokerage unit misled investors about the quality of a 2007 financial product backed by subprime mortgages.

RBS told investors that the loans backing the $2.2 billion security “generally” met the lender’s underwriting guidelines even though almost 30 percent fell so short of the standards that they should have been excluded, the Securities and Exchange Commission said in a statement yesterday.

The company’s Stamford, Connecticut-based RBS Securities Inc. unit, then known as Greenwich Capital Markets Inc., was paid about $4.4 million for underwriting the transaction yet only quickly reviewed the investment, the SEC said. RBS knew or should have known that many of the loans didn’t meet the lender’s underwriting standards, according to the statement.

RBS said in a statement that it cooperated fully with the SEC throughout the investigation and that the settlement payments are covered by provisions the bank has already made. In resolving the claims, RBS didn’t admit or deny wrongdoing.

RBS offered the security, known as Soundview Home Loan Trust 2007-OPT1, to investors in May 2007. Investors have lost at least $80 million to date, the SEC said. The settlement money will be used to compensate harmed investors, the SEC said.

Japan’s METI Orders 18 Credit Firms to Report on Crime Loans

Japan’s Ministry of Economy, Trade and Industry ordered 18 firms to report on loans to criminal organizations, a trade ministry official said in a briefing in Tokyo.

The official asked not to be named in accordance with ministry policy.

Orient Corp. was ordered to submit an extra report on loans to criminal organizations, the official said.

The 18 companies must report on their loan screening processes by Dec. 9 and Orient must report on transactions to crime groups made with its biggest shareholder Mizuho Financial Group Inc. by Nov. 22, according to the official.

Orient submitted a report to the trade ministry last month pledging to promptly recall or end such loans. Mizuho submitted a business-improvement plan on Oct. 28 after regulators said it failed to act to break off such loans.

HSBC Joins RBS, Lloyds in U.K. Interest-Rate Swap Payback

HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc will pay partial settlements to small businesses over losses on improperly sold interest-rate swaps to speed up the compensation process.

The three banks will pay back the purchase price of the products to customers first and later consider added losses they may have suffered, the Financial Conduct Authority said in a statement yesterday. Barclays Plc hasn’t signed up to the agreement to split compensation payments.

The regulator ordered the four largest U.K. banks earlier this year to compensate clients after it found “serious failings” in reviews of product sales. The banks paid back 15.3 million pounds ($24.6 million) as of the end of last month, the FCA said.

“It is in Barclays’s interests as well as our customers’ to complete the review as soon as possible,” Barclays said in an e-mailed statement. “Where we have made mistakes, we will put them right.”

Lloyds is planning to double the number of redress claims it has resolved in November, the bank said in an e-mailed statement, while RBS said it is “prioritizing those businesses that are most in distress first.”

“Our recent decision to introduce ‘split payments’ is speeding up the process,” HSBC said in an e-mailed statement. It “means customers get redress that is due to them at the earliest opportunity, potentially months earlier than under the process for a single payment.”


AT&T to Pay $3.5 Million to Resolve Claims in FCC Call Program

AT&T Inc. agreed to pay $3.5 million in addition to $18.25 million it already paid to resolve allegations it overbilled for a system for the deaf that the company knew was used for fraudulent calls from other countries.

The settlement announced yesterday by the U.S. Justice Department involves a Federal Communications Commission program that reimburses telecommunications companies that provide phone service for people who are hearing or speech impaired.

AT&T paid an initial $18.25 million in a May 7 agreement with the FCC, the government said. Yesterday, the Justice Department said in a statement that AT&T agreed to pay another $3.5 million to resolve civil allegations under the federal False Claims Act.

Marty Richter, a spokesman for AT&T, said in an e-mailed message that although the company denies the allegations, it decided the “most productive course” was to settle the suit.

The government, which joined a whistle-blower lawsuit in federal court in Pittsburgh in March 2012, said that a large share of the calls came from Nigeria or other countries and that the callers used the program for credit card fraud or other fraudulent actions.

The case is Lyttle v. AT&T Communications of Pennsylvania, 10-cv-01376, U.S. District Court, Western District of Pennsylvania (Pittsburgh).

Deutsche Bank, Barclays Lose Bid to Block Libor Lawsuits

Deutsche Bank AG and Barclays Plc lost a court bid to stop companies from linking claims about the manipulation of benchmark rates to lawsuits initially filed over improper sales of interest-rate hedging products.

The U.K. Court of Appeal in London said Unitech Ltd. and Guardian Care Homes could try to void money-losing swap contracts because they were pegged to the London interbank offered rate. The ruling resolves split decisions from lower courts.

Judge Andrew Longmore said that while the issues were complicated, they should be resolved at a full trial. “The banks did propose the use of Libor and it must be arguable that, at very least, they were representing that their own participation in setting of the rate was an honest one.”

Regulatory probes into banks’ attempts to manipulate Libor have led to fines and settlements totaling about $3.7 billion.

Kathryn Hanes, a spokeswoman for Deutsche Bank, said in a separate statement that the allegations about Libor were a bid to divert attention from Unitech’s unpaid debts. “This is a long-standing case of a loan that was made and not paid back.”

Unitech’s lawyer, Richard Gwynne, declined to comment.

The cases are Graiseley Properties Ltd & Ors. v. Barclays Bank Plc, High Court of Justice, Queen’s Bench Division, Commercial Court, 12-1259; and Deutsche Bank AG & Ors v. Unitech Global Limited & Anr, High Court of Justice, Queen’s Bench Division, Commercial Court, 11-1199.

Comings and Goings

Dodd-Frank Derivatives Momentum Threatened by Vacancies on CFTC

The top U.S. derivatives regulator may dwindle to just two voting commissioners and struggle to approve new rules unless the White House and Senate can overcome political hurdles to fill the vacancies by the end of the year.

The Commodity Futures Trading Commission, designed to have five members, could instead have only one Democrat and one Republican early next year. The split would probably delay votes on contentious Dodd-Frank Act regulations.

President Barack Obama’s administration has for more than a year been considering nominees to succeed Chairman Gary Gensler, whose term expires at the end of the year, according to people briefed on the deliberations.

Gensler is expected to leave by the beginning of next year, while Bart Chilton, a Democratic commissioner, said this week that he will also leave this year. A third spot has been vacant since July when Jill E. Sommers, a Republican, stepped down from the agency.

Timothy Massad, a Treasury Department official, is under consideration to succeed Gensler, a person familiar with the matter said in October.

Sharon Y. Bowen, a securities lawyer at Latham & Watkins LLP in New York, is being considered to replace Chilton, four people in the financial industry said this week. Their possible nominations and the pending nomination of J. Christopher Giancarlo, an executive at New York-based inter-dealer broker GFI Group Inc. to replace Sommers, could face hurdles in the Senate, which has split along party lines.

Amy Brundage, a White House spokeswoman, declined to comment on the CFTC openings.


Accounting Regulator’s Plan Calls on Auditors to Name Partners

The Public Company Accounting Oversight Board will vote Dec. 4 on the proposal that calls for auditors to name the partner responsible for grading a public company’s financial statements, agency Chairman James Doty said.

He made the remarks at the 45th Annual Institute on Securities Regulation meeting in New York.

The proposal requires firms to name the partner in charge of an audit and require disclosure of all outside firms and individuals that assisted the audit firm and its named partner.

The PCAOB first proposed naming an audit’s so-called engagement partner in October 2011. The new proposal will cite research that shows a link between identifying the audit partner and the reaction of market participants to the information, Doty said.

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

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

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