CFTC Closes Loophole, Treasuries, Tech REITs: Compliance

The top U.S. derivatives regulator moved to close off large banks’ ability to avoid new regulation by arranging trades in America and then booking the deals in overseas affiliates.

The guidance, released Nov. 14 by the Commodity Futures Trading Commission, undermines a legal interpretation Wall Street had found buried in a footnote, No. 513, in an agency policy document. Banks relied on the footnote to keep swap deals off electronic platforms and away from the agency’s rules that were put in place in the wake of the financial meltdown.

The Nov. 14, two-page guidance, while not mentioning the footnote, effectively closes the loophole. It tells traders that if they are based in the U.S. and arrange, negotiate or execute a deal -- even on behalf of an overseas affiliate -- they must comply with the CFTC regulations.

Lawyers said the new policy gives the CFTC a greater reach to police the swaps market and makes it harder for banks to keep trades away from tough U.S. regulations, passed in the 2010 Dodd-Frank Act. CFTC Chairman Gary Gensler has fought for more than four years to extend his agency’s reach.

The issue of footnote 513 arose in October after Bloomberg News reported that several Wall Street banks, the biggest dealers of derivatives, asked their swaps brokers to set up trades in the U.S. while booking them in affiliates overseas.

The trades at issue will be conducted on electronic platforms, known as Swap Execution Facilities, or Sefs, created by Dodd-Frank in an effort to make prices more public and reduce risk in the system. They started trading on Oct. 2.

Compliance Policy

CFTC Passes Collateral Rule to Backstop Treasuries in Swap Trade

The U.S. Commodity Futures Trading Commission approved a rule aimed at ensuring that Treasuries pledged as collateral for swaps and futures trades can be instantly converted to cash.

With vote on Nov. 15, the nation’s main derivatives regulator toughened safeguards in a market blamed for worsening the 2008 global financial crisis. The four commissioners didn’t change language mandating that Treasuries be subject to a “prearranged and highly reliable funding arrangement,” according to a copy of the rule on its website.

The derivatives industry argued that the backstop to Treasury collateral was unnecessary because U.S. government securities can be converted into cash fast enough. While U.S. debt is considered to be among the safest investments, policy makers are concerned liquidating them will require too much time -- up to a day -- during a crisis, a government official familiar with the stance at the Federal Reserve, which shares oversight of clearinghouses, said earlier last week.

The 2008 crisis developed so rapidly that the Fed had to give out more than $2 trillion in emergency aid. Fed officials have told banks and exchanges that the CFTC’s new collateral rule means U.S. debt must be covered by credit lines, according to three industry executives briefed on the matter.

CME Group Inc., the owner of the Chicago Mercantile Exchange, estimated that liquidity facility costs “would approximately double,” according to a Sept. 16 letter it sent to the CFTC.

Gary Gensler, chairman of the CFTC, said in an interview in New York Nov. 14 that while he doesn’t envision the rule putting a dent in the Treasuries market, “there is some cost to the clearinghouses.”

The goal is to align U.S. clearinghouses with international rules, Gensler said. The change affects collateral posted in the swaps and futures markets, where outstanding contracts have a notional value of about $430 trillion, he said Nov. 14.

Credit-Card Rewards Programs Examined by U.S. Consumer Bureau

The U.S. Consumer Financial Protection Bureau is examining whether customers are being misled when they sign up for complex credit-card reward programs and will mull new rules in this area.

Restrictions on card rewards programs could crimp the ability of banks to use the enticements to sign up customers. Top issuers such as JPMorgan Chase & Co., Bank of America Corp. and American Express Co. rely on rewards to attract and keep cardholders.

The consumer bureau’s inquiry involves the marketing of rewards programs, particularly the marquee promise of a given card, such as cash back, or redeemable airline miles, and what a customer needs to do to get it, said a person involved in the work who asked not to be identified because the effort is in an early stage.

Oliver Ireland, an attorney for card issuers at Morrison & Foerster LLP, said that rewards could prove a “tempting issue” for regulators. In contrast to interest rates and fees, there’s no existing federal regulation on the disclosure of rewards.

Regulating rewards isn’t justified, Nessa Feddis, a senior vice president at the American Bankers Association, said in an interview.

Pamela Banks, senior policy counsel at Consumers Union, the nonprofit publisher of Consumer Reports, lauded the CFPB for examining rewards programs even in the absence of evidence of widespread abuse.

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Xi’s Reform Plan Setting Scene for Local Debt Clampdown

China’s Communist Party signaled a bigger focus on fiscal concerns during President Xi Jinping’s tenure, setting the scene for a clampdown to control the finances of indebted regional authorities.

Local governments will be able to sell bonds to fund construction and officials will be rated on measures including borrowing levels, the party said Nov. 15. An easing of the one-child policy and extra land rights for farmers also featured in the biggest package of reforms since at least the 1990s.

Tightening control over local finances and allowing new channels for funding would limit the risk of a debt crisis hobbling the world’s second-biggest economy, while corruption arrests since Xi became party chief may signal that officials ignore directives at their peril. The scale of regional debt woes is set to be shown in an audit that the Finance Ministry said was due last month although it has yet to be released.

In a Nov. 1 speech on local-government reform, Premier Li Keqiang said some authorities, in their own self-interest, had only paid lip service to changes demanded by the central government, according to a transcript published in the China Daily newspaper. Local authorities must not be allowed to “play tricks or conduct reform as a mere formality,” he said.

The fiscal proposals were agreed to at a four-day Communist Party meeting ending Nov. 12 that laid out economic and social reforms for the next decade, with pledges to reduce the state’s role in the economy and make markets “decisive” in allocating resources.

The party listed fiscal and tax reform as the fifth out of 16 main points in its document, describing finance as a foundation and important pillar of the country’s governance and which guarantees long-term stability.

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Compliance Action

U.K. Bank Whistle-Blowers Increase as Regulator Scrutiny Grows

The number of whistle-blower calls to the U.K. Financial Conduct Authority increased 23 percent during the past year, even as the regulator was criticized for failing to do enough to encourage bank employees to come forward.

The FCA received 4,718 complaints on its whistle-blower hotline in the 12-month period ending Aug. 31, according to London-based law firm RPC LLP. The firm attributed the rise to calls for individuals to report malpractice.

The U.K. markets regulator was criticized in June by lawmakers for its lack of support offered to whistle-blowers in a government review of culture in the finance industry by the Parliamentary Commission on Banking Standards.

Financial rewards for whistle-blowing, similar to the U.S. system, has been a key topic of government debate in the U.K. The U.S. Securities and Exchange Commission’s Office of the Whistleblower in fiscal year 2013 received more than 3,200 tips and complaints, Jane Norberg, deputy chief of the SEC unit, said last week.

The FCA said in an e-mailed statement that it has conducted a “detailed review” of its whistle-blowing procedures and has increased its resources to track and analyze whistle-blowing information.

FX Traders Said to Be Called for Interviews by U.K. Regulator

Foreign-exchange traders were asked to come in for interviews by the U.K. markets regulator as the probe into currency-rigging widens, two people with knowledge of the investigation said.

The U.K. Financial Conduct Authority has written and called the traders in recent weeks, inviting them to voluntarily discuss the probe, according to the people, who asked not to be identified because the probe is confidential. The individuals are among at least 40 traders whose communications are being examined by the regulator, one of the people said.

Regulators in the U.K., Switzerland, the U.S. and Asia are probing allegations of rate-rigging in the $5.3 trillion-a-day foreign-exchange market. Dealers in the industry were front-running client orders and attempting to rig the benchmark WM/Reuters rate by colluding with counterparts and pushing through trades before and during the 60-second windows when the benchmarks are set, Bloomberg News reported in June.

Chris Hamilton, a spokesman for the FCA based in London, declined to comment.

Regulators around the world are examining alleged abuses of a number of financial benchmarks by companies that play a central role in setting them after it emerged the London interbank offered rate, or Libor, was being manipulated.

Everbright Securities Cancels Private Placement Plan

Everbright Securities Co., the China brokerage and provider of asset-management services, canceled its private placement plan, according to a Nov. 16 statement posted to the Shanghai Stock Exchange.

A May 16 approval from the China Securities Regulatory Commission that allowed Everbright’s private placement plan became invalid because the company didn’t complete the placement within six months, according to the statement.

Earlier, Everbright’s plan to raise as much as 8 billion yuan ($1.3 billion) in a private share placement was blocked by the securities regulator after it started investigating the firm in July.

Iron Mountain, Equinix Advance as IRS Resumes REIT Rulings

Iron Mountain Inc. and Equinix Inc., two technology companies seeking to convert to real estate investment trusts, rose Nov. 15 after saying the U.S. Internal Revenue Service is proceeding with evaluating their eligibility.

The IRS said Nov. 14 that it will resume issuing rulings on the definition of real estate for purposes of REIT conversions, Iron Mountain said in a regulatory filing. The agency is “actively resuming work” on Equinix’s request and will respond in due course, that company said separately.

The IRS has been evaluating whether nontraditional real estate businesses should qualify as REITs, which are subject to lower taxes and pay higher dividends than other companies. Equinix, which runs data centers and Iron Mountain, which rents storage space and maintains paper and electronic records, have tumbled since disclosing the review.

The agency is “ready to resume ruling on these requests consistent with existing law,” regulations and previously published guidance, according to the statement. Federal law prohibits the IRS from commenting publicly on individual companies and taxpayers.

“Equinix continues to implement its plan to convert to a REIT,” the Redwood City, California-based company said in a filing Nov. 15. The company doesn’t expect the delay to date to push back its plan to elect REIT status for the taxable year beginning in 2015.

Iron Mountain said it is moving forward with other aspects of its conversion plan to ensure readiness for REIT status for the 2014 tax year.


Ex-Porsche CFO’s Fine Won’t Rise as Prosecutors Miss Deadline

German prosecutors’ bid to increase former Porsche SE Chief Financial Officer Holger Haerter’s sentence in a loan-fraud case was rejected by a Stuttgart court after a deadline expired.

Prosecutors failed to file arguments within a month of the release of the written judgment, Florian Bollacher, spokesman for the Stuttgart Regional Court, said in an e-mail.

Haerter was fined 630,000 euros ($847,539) for credit fraud in a criminal case over the refinancing of a 10 billion-euro loan during a failed bid to buy Volkswagen AG in 2009. The court found he downplayed Porsche’s liquidity needs and failed to disclose the correct number of put options on VW shares Porsche held during negotiations with BNP Paribas SA about the lender’s 500 million-euro share of the syndicated loan.

“We deliberately let the deadline elapse, because that has the same effect as retracting an appeal,” Claudia Krauth, a spokeswoman for the Stuttgart prosecutors, said in an interview. “We came to the conclusion that our appeal wouldn’t have had a sufficient chance to succeed, so we dropped it.”

Prosecutors filed their appeal immediately after the conviction, saying they are seeking a stiffer sentence for the former executive. At trial, they requested a fine of as much as 1 million euros and a one-year suspended prison sentence.

Haerter has denied the allegations and is challenging the conviction. Prosecutors oppose his appeal and have filed briefs in those proceedings, Krauth said.

Anne Wehnert, Haerter’s lawyer, didn’t immediately return a call seeking comment.

Comings and Goings

Ex-Glencore Oil Trader Can’t Sue for Shares Worth $1 Million

A Glencore International Plc trader fired over an alleged alcohol problem can’t sue the company to recover about $1 million in shares that were awarded when he was hired, a U.K. court ruled.

Judge Richard Seymour dismissed the claim Nov. 15, saying it was not valid.

Andrew Kearns, an oil trader who earned about $500,000 a year, sued Glencore seeking the shares, worth at least $1.2 million, after he was fired for missing important meetings because of what the company said were alcohol problems. Kearns is still suing for wrongful dismissal, which would result in a smaller amount in damages.

“He is a married man with three children and his reputation is on the line,” Ahmed Miah, Kearns’s lawyer, said in court. “What is said about him by Glencore is entirely wrong, unreasonable and untrue.”

Kearns said in court documents he didn’t have an alcohol problem and was singled out because he disagreed with managers.

“An employer cannot be expected to allow an employee who allows himself to become inappropriately inebriated to remain in the workplace,” Jonathan Cohen, Glencore’s lawyer, said in written arguments, citing the precise nature of financial work.

Kearns missed meetings after an evening out with clients on a Singapore business trip, Glencore said in court documents.

The trader said that Glencore owed him 25 share options, allocated when he joined the company, that were due to vest before his October 2010 dismissal. The commodities company revoked his shares when he was fired.

Wrongful dismissal occurs when an employer breaks the terms of a contract during the dismissal process, according to a U.K. government website.

The case is Kearns v. Glencore UK Ltd., High Court of Justice, Queen’s Bench Division, HQ12X03294

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