UBS Dark Pool Fines, BOJ Lending, EU Rule: Compliance

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U.S. regulators ordered UBS AG to pay more than $14 million in penalties for a series of rule violations from 2008 to 2012 at its internal venue for trading stocks.

UBS was cited by the Securities and Exchange Commission for letting users of its dark pool submit orders at prices denominated in increments smaller than a penny, something SEC rules prohibit because it can be used to get a better place in line when buying or selling stock. The SEC blamed both “technical problems” and two order types that effectively allowed such increments to be used.

One of the orders, a “PrimaryPegPlus,” let users enter orders based on a percentage above or below prevailing market prices. The other, known as “Whole Penny Offset,” let users enter orders one penny above or below the midpoint between the national best bid or offer for a given stock.

UBS, which runs the second-largest U.S. dark pool, didn’t admit to or deny the SEC’s findings.

“UBS is pleased to resolve charges by the SEC arising from historical shortcomings in the operation of its ATS,” UBS said in a statement. “The issues that led to these charges were remedied in mid-2012, and the firm has updated and enhanced its supervisory and operational procedures.”

While arcane, electronic order types for trading shares have become a focus in the debate around high-frequency trading. Where in the past human market makers acted as traffic cops matching requests to buy and sell stocks on exchange floors, now the process is managed by software that critics say is poorly understood by anyone but professional traders.

Just this week, a person with knowledge of the matter said the SEC was considering rules that would force dark pools to comply with some of the same requirements exchanges face. Among the ideas under review is forcing dark pools to disclose the types of orders they offer, according to the person.

Compliance Policy

BOJ Said to Consider Extending Lending Programs to Spur Economy

The Bank of Japan is considering extending two lending programs set to expire in March, said people familiar with the central bank’s discussions.

The BOJ is likely to push back the deadline to apply for the facilities by a year, according to the people who asked not to be identified because the talks are private.

The programs, intended to stimulate capital expenditure and encourage banks to extend credit, complement the central bank’s record asset purchases aimed at spurring inflation in the world’s third-biggest economy. The BOJ expanded the programs last February.

The BOJ is expected to come to a decision on the possible extensions of the Growth-Support Funding Facility and the Stimulating Bank Lending Facility sometime before the end of a March 16-17 policy board meeting, according to the people.

EU Raises Volcker Rule Concerns in Meeting With U.S. Regulators

European Union regulators raised concerns regarding the application of the Volcker rule to foreign funds in a meeting this week with U.S. authorities, according to a statement published Jan. 15 in Brussels.

The Volker rule bars banks from making risky trades with their own capital.

Representatives from the European Securities and Markets Authority and the European Commission and U.S. regulators from the Federal Reserve and the Treasury Department met in Washington D.C. on Jan. 12.

The EU’s concerns were raised as part of the regular dialog between the U.S. and EU financial markets regulators, in what were described as productive talks.

The next meeting is scheduled for July in Belgium.

Compliance Action

Banks in London, New York to Test Security in Cyber War Game

Banks in London and New York will simulate a massive cyber attack on their computer systems later this year as part of joint war games run by the U.S. and U.K. governments.

The exercise, designed to test the institutions’ resilience, is part of a new program of cooperation against cyber-crime and terrorism in the wake of the hacking of Sony Corp. last year. The U.S. has blamed North Korea for the attack, which led to internal documents being posted online.

A trans-Atlantic “cyber cell” will be established at which U.S. and U.K. computer-security experts will share information and coordinate their response to attacks.

Prime Minister David Cameron issued a statement announcing the move in Washington, where he is holding talks with President Barack Obama. Cameron was due to discuss economic cooperation with Obama over dinner at the White House before turning to security in a meeting on the second day of his visit.

The first cyber-security simulation will involve agencies from both countries, as well as the Bank of England and commercial institutions. It will be followed by further exercises to test the durability of critical national infrastructure systems.

A report in Great Britain today by Government Communications Headquarters, the U.K.’s code breakers, said four out of five large British companies reported a security breach in 2014, with costs ranging from 600,000 pounds ($911,000) to 1.5 million pounds.

In the U.S., the National Security Agency and the Federal Bureau of Investigation are running their own cyber cell. That will now be matched by one in the U.K., staffed from MI5 and GCHQ. There will also be a scholarship program to encourage research into computer security.

(Updates with U.S.-U.K. cyber war game in Compliance Action. To be sent this column daily, click SALT COMPRPT.)
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