EU Bonus Rules, Aussie Bank Rate, Wal-Mart: Compliance

By Michael Bathon & Ellen Rosen


The European Parliament may ease a planned ban on fund-manager bonuses that top fixed pay if investors get to vote on the larger awards, bringing the rules closer into line with those approved yesterday by national ambassadors on how much bankers can be compensated.

reputational compliance

The parliament’s economic and monetary affairs committee approved a ban last week on fund-manager bonuses higher than salaries as well as curbs on performance fees in a 22-16 vote. Legislators plan talks on the draft rules for managers of so- called UCITS funds ahead of a vote by the full assembly in May, said Sven Giegold, the lawmaker leading work on the standards.

If the fund industry came up with a clear solution to ensure investors got a vote on pay, “I would welcome that,” Giegold said in an interview.

The draft rules for fund managers go beyond planned EU curbs on banker pay that won approval yesterday from national representatives despite U.K. opposition. Those measures allow bonuses of as much as twice a banker’s fixed pay if shareholders agree. The financial industry has warned that both sets of plans could drive up fixed costs and harm European competitiveness.

Under the rules for bankers, bonuses higher than fixed pay would need approval by two-thirds of shareholders taking part in the vote, with this threshold rising to 75 percent if fewer than half of shareholders are present.

“EU lawmakers simply do not understand the financial and economic implications of the measures that they are proposing. It is difficult to predict the damage that this will cause as, no doubt, a lot of money will be spent on trying to ensure that these pay curbs are circumvented,” said Philip Booth, professor at London’s Cass Business School.

Giegold said he could support a similar two-to-one pay rule for UCITS, or Undertakings for Collective Investment in Transferable Securities, if a practical solution could be found for how to organize a vote by fund owners on the awards.

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Compliance Policy

Australia to Shut Bank-Rate Panel as HSBC, Citigroup Exit

Australia plans to scrap the panel that sets its benchmark interbank borrowing rate, becoming the first major developed economy to replace its rate-setting regime following the global Libor-rigging scandal.

The nation’s bank bill swap rate will be compiled directly using prices from brokers and electronic markets instead of asking a panel of banks, the Australian Financial Markets Association, which publishes the benchmark, said in a statement yesterday. HSBC Holdings Plc (HSBA) and Citigroup Inc. (C) will stop contributing to the rate from the end of this month, AFMA said.

Their exit will reduce the panel to 10 members after UBS AG (UBSN) left last month and JPMorgan Chase & Co. said it will leave by today. Banks are quitting rate-setting panels worldwide, under tougher scrutiny and rising compliance costs following scandals that cost Barclays Plc, UBS and Royal Bank of Scotland Group Plc about $2.5 billion in fines.

AFMA’s proposal is subject to meeting technical requirements, it said yesterday. The group, which represents 130 brokers, banks and fund managers in Australia, plans to start the new system “within a period of months,” it said.

At least A$350 billion ($366 billion) of Australian syndicated loans and floating-rate bonds are priced off BBSW, according to data compiled by Bloomberg. Trading of swaps, forward rate agreements and options tied to BBSW was worth more than A$8.7 trillion in the 2009 financial year, according to an AFMA letter to global banking regulators in 2010.

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Fannie Mae Regulator Sets No-Doc Modifications for Borrowers

Seriously delinquent borrowers with mortgages owned or backed by Fannie Mae (FNMA) and Freddie Mac will be able to reduce monthly payments without documenting finances under a program introduced by the companies’ regulator.

The move announced yesterday by the Federal Housing Finance Agency is designed to stem losses to the U.S.-owned firms by letting borrowers at least 90 days behind on their loans bypass the administrative hurdles of typical loan modifications. Homeowners may still give their lender documents on financial hardships and can save more money by doing so, the agency said.

“This new option gives delinquent borrowers another path to avoid foreclosure,” Edward J. DeMarco, the FHFA’s acting director, said in a statement.

About two-thirds of U.S. home mortgages are backed by Washington-based Fannie Mae and Freddie Mac (FMCC) of McLean, Virginia, which package loans into securities on which they guarantee payments of principal and interest. About 3.2 percent of mortgages they guarantee were at least 90 days in arrears in January, according to data from the two companies.

The Streamlined Modification Initiative will begin July 1 and end on August 1, 2015, the FHFA said. Borrowers must be at least 90 days delinquent, have a loan at least a year old and have less than 20 percent equity in their home to qualify.

Fannie Mae and Freddie Mac have been operating under U.S. conservatorship since September 2008, when they were seized by federal regulators amid losses on risky loans during the subprime mortgage crisis.

Luxembourg Opposes Steps to ‘Renationalize’ EU Banking Market

Luxembourg warned that the European Union risks hurting financial stability if it moves to isolate banking systems within national borders.

“Luxembourg will therefore not adhere to policies that intend to renationalize elements of the single market,” the government said in an e-mailed statement.

The Luxembourg statement counters recent remarks from Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area finance ministers, that countries need to rein in their banking sectors or face EU consequences. “Push them back. You deal with them,” Dijsselbloem said this week in comments on how the EU should respond to banks in trouble.

When asked about a policy of “pushing back the risks” on banks for countries including Luxembourg, Dijsselbloem said: “It means: deal with it before you get in trouble. Strengthen your banks, fix your balance sheets, and realize that if a bank gets in trouble, the response will no longer automatically be we’ll come and take away your problems.”

Countries shouldn’t be judged solely on the size of their banking sectors in relation to gross domestic product, nor should they be penalized for the business model of international finance, according to the Luxembourg statement.

Banking systems should be judged by their quality, “solidity” and size relative to the euro area as a whole, Luxembourg said. A more “restrictive approach” runs counter to the EU’s single market and toward the currency bloc’s move to establish common banking supervision.

EU Starts Debate on 2030 Energy, Climate Rules Amid Crisis

The European Union’s executive started a debate yesterday on EU climate and energy rules as the crisis-ridden bloc seeks a long-term plan to cut greenhouse gases and promote clean power technologies.

While the 27-nation bloc is making “good progress” toward its 2020 goals to boost the share of renewable energy and cut greenhouse gases, a framework for the subsequent decade is needed to give investors legal certainty, spur innovation and prepare for a global climate deal, the European Commission said in a consultation paper published in Brussels.

The commission invited member states, the European Parliament, industry groups and non-governmental organizations to submit their views until July 2 on EU objectives for 2030.

The EU, in the fourth year of the sovereign-debt crisis, wants to remain the leader in the global fight against climate change while ensuring the security of energy supply and fostering competitiveness. The new rules must draw on the lessons from the current framework and identify how to best use synergies and deal with trade-offs between various policy objectives, the commission said.

While the document published yesterday is aimed at triggering a debate among policy makers on the future policy framework, the commission wants to present concrete legislative proposals toward the end of this year, Energy Commissioner Guenther Oettinger said. A new set of goals could become binding toward the end of 2014 or in 2015 at the latest, he said.

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U.K. Ministers Caution Banks Against Recapitalizing Too Fast

U.K. ministers warned the Bank of England against pushing banks to strengthen their balance sheets too quickly, saying restrictions on lending to small and medium-sized enterprises could further damage the economy.

U.K. lenders need to raise 25 billion pounds ($38 billion) to make up a shortfall in capital, the central bank’s Financial Policy Committee said yesterday, following an examination by the Financial Services Authority into banks’ exposures to commercial real estate and euro-area economies, risk models and provisions for compensation and fines over a three-year period. The BOE didn’t provide details for individual lenders or say how many need to raise capital.

“The idea that banks should be forced to raise new capital during a period of recession is an erroneous one,” Sky News cited Business Secretary Vince Cable as saying on its website. Cable’s office confirmed the comments.

China Regulator Tells Banks to Limit Holdings of Non-Traded Debt

China’s banking regulator told lenders to limit investments of client funds in debt that isn’t publicly traded and to isolate such risks from their operations.

Such investments can’t exceed 35 percent of all funds raised from the sale of wealth management products, or 4 percent of the lender’s total assets at the end of the previous year, the China Banking Regulatory Commission said in a statement on its website.

Investments by banks’ wealth management funds into “non- standardized debt assets,” such as loans, letters of credit and receivables that aren’t traded on exchanges or the interbank market, “increased rapidly” recently, the CBRC said. Some lenders didn’t isolate related risks promptly, and some used the practices to skirt lending restrictions, according to the statement, dated March 25.

The outstanding balance of banks’ wealth management products may have reached 13 trillion yuan ($2.1 trillion) at the end of last year, compared with 8.5 trillion yuan a year earlier, according to Fitch Ratings. Such products, which pay higher rates than regulated deposits, help lenders retain clients.

Clegg Says U.K. to Look at Tax Breaks for Employee-Owned Firms

U.K. Deputy Prime Minister Nick Clegg said the government will look at offering tax breaks for employee-owned firms, which he’ll argue offer a superior model of growth to other companies.

In his March 20 budget, Chancellor of the Exchequer George Osborne announced a capital-gains tax exemption for owners selling a controlling stake in their company to their employees. In a speech in London, Clegg will propose tax relief on bonuses paid through “benefit trusts,” which are set up to own a stake in a company and pass on rewards to staff.

Clegg, who heads Conservative Prime Minister David Cameron’s Liberal Democrat coalition partners, yesterday made a speech to the Employee Ownership Association. The EOA has been a critic of plans by Osborne, a Conservative, to allow people to give up employment rights in exchange for shares in a company. Those plans suffered a setback last week when they were voted down in the upper House of Lords.

German Snags Hold Back EU Approval of ECB Bank-Supervisor Deal

The European Union will reconsider details of a proposed law to make the European Central Bank a supervisor after Germany requested technical changes.

Germany told a meeting of national diplomats in Brussels yesterday that the EU should extend rules for firing the chairman of the ECB’s bank oversight board to cover the vice chairman, according to two EU officials who declined to be identified because the talks are private. It also wants the text to state more clearly that national parliaments can quiz the ECB on its supervisory policies. Germany, along with other EU governments, can veto the plans.

EU leaders called for the new supervisor in 2012 as they sought to tame a fiscal crisis that has forced Greece, Portugal, Ireland, Spain and, most recently, Cyprus to seek international aid.

Germany also wants stronger references in the text to possible changes to bloc’s treaties that would place the supervisor on what it says would be a sounder legal footing, the EU officials said. The issues shouldn’t affect the timetable for setting up the supervisor, according to the officials.

Compliance Action

JPMorgan Tells SEC New VaR Model Didn’t Require Prior Disclosure

JPMorgan Chase & Co. (JPM), facing criticism that it misled investors about a change to a risk model as trades backfired last year, told U.S. regulators that the bank wasn’t obligated to disclose the move until May.

While there was an “interim change” to the lender’s so- called value-at-risk model during the first three months of 2012, that adjustment had been reversed by the time the company filed its quarterly report in May, then-Chief Financial Officer Douglas Braunstein told the Securities and Exchange Commission in a Dec. 3 letter that was released yesterday.

“As a result, the firm believes there was no model change within the meaning of” securities-disclosure laws, he wrote.

The alteration to the model in January 2012 has been blamed for exacerbating trading losses that exceeded $6.2 billion last year. The bank disclosed the change and initial losses of about $2 billion in a May 10 regulatory filing, almost a month after reporting first-quarter results.

Braunstein, 52, was responding to a Nov. 7 letter from the SEC that asked the bank to explain why it didn’t think it was required to disclose the change sooner.

Chief Executive Officer Jamie Dimon, 57, said May 10 that the company had reviewed the effectiveness of the January VaR model, deemed it “inadequate” and decided to return to the previous version. Restoring the use of the earlier model meant the risk was twice what the bank told investors in April.

VaR measures the maximum possible trading losses on a position or trading unit with 95 percent probability.

Ex-Morgan Keegan Fund Directors to Settle SEC Valuation Case

Eight former Morgan Keegan & Co. mutual-fund directors agreed to settle U.S. regulatory claims that they allowed assets backed by subprime mortgages to be overvalued as the housing market collapsed in 2007.

The settlement outlined yesterday in a Securities and Exchange Commission administrative order would resolve claims filed by the agency in December 2010. A hearing set for April 2 has been stayed, according to the order.

“The parties have agreed in principle to a settlement on all major terms,” the SEC said in the order signed by an agency official and attorneys for the eight former directors. Terms weren’t disclosed.

Morgan Keegan agreed to pay $200 million to settle related fraud allegations in 2011. The brokerage, formerly owned by Regions Financial Corp. (RF), was acquired by Raymond James Financial Inc. (RJF) last year.

The eight directors, who were responsible for determining the fair value of securities that lacked readily available quotations, delegated valuation to a committee without providing meaningful guidance, the SEC said in 2010. The directors made little effort to learn how the values were being determined, according to the regulator.

Wal-Mart Expects to Incur More Costs in Bribery Probes

Wal-Mart Stores Inc. (WMT), the world’s largest retailer, said it expects to continue incurring costs related to its investigations of possible bribery in its international operations.

The cost related to the probes was $157 million in the year ended Jan. 31, the Bentonville, Arkansas-based company said in a March 26 filing with the U.S. Securities and Exchange Commission.

Wal-Mart last year began investigating allegations that executives in Mexico paid more than $24 million in bribes to speed the retailer’s expansion there and has since said it also is probing operations in Brazil, India and China. The retailer said it is spending money on its internal probes, responding to information requests from government investigators and defending shareholder lawsuits.

While Wal-Mart doesn’t expect the matters to have a material adverse effect on its business, the company said it can’t reasonably estimate the potential loss from the situation.

The U.S. Department of Justice and the SEC as well as federal and local government agencies in Mexico are investigating the allegations that Wal-Mart systematically bribed Mexican officials. The allegations were first outlined in a New York Times article in April 2012. Democratic Representatives Henry Waxman of California and Elijah Cummings of Maryland also are probing the retailer.

Wal-Mart named Karen Roberts as general counsel in December as her predecessor, Jeff Gearhart, focuses on global compliance efforts. That followed the company combining its compliance office with ethics, investigations and legal functions to form one organization in October.

South Africa’s Construction Industry to Settle Antitrust Fines

South Africa’s construction companies should expect a relatively lenient fine from the country’s Competition Commission when its investigation into collusion in the industry ends later this year.

“Leniency will vary from company to company, depending on level of cooperation, projects won, and value of projects,” Trudi Makhaya, deputy commissioner of the antitrust body, said in an interview yesterday with Bloomberg News’s Kamlesh Bhuckory. The fine “will be lower than normal circumstances,” she said.

The Competition Commission is investigating construction companies over cartel-style collusion on prices for contracts issued back as far as three years, Makhaya said last month.

Companies including Wilson-Bayly Holmes-Ovcon Ltd. (WBO) and Murray and Roberts Holdings Ltd. have put cash aside to pay potential penalties. Basil Read Holdings Ltd. (BSR) has increased provisions to 75 million rand ($8.1 million) from 65 million rand a year ago.

The commission has entered talks with 18 companies including the “major ones” with an aim of reaching a settlement, according to Makhaya. The process is expected to conclude by the end of June.

Mercedes-Benz Trucks, Dealers Fined $4.2 Million by U.K. Agency

Daimler AG (DAI)’s Mercedes-Benz trucks unit and five dealers in Britain selling its vehicles were fined 2.8 million pounds ($4.2 million) by the U.K. antitrust regulator for allegedly coordinating prices and sharing commercially sensitive information.

The fines relate to five violations of competition law from 2007 to 2010, with each including two or three dealers, the Office of Fair Trading said in a statement yesterday.

The OFT last year dropped a separate probe into the Mercedes unit and companies including Fiat Industrial SpA (FI)’s Iveco brand to let the European Union focus on the case, which involves a suspected cartel of truckmakers. In that probe, the head of Mercedes-Benz trucks in the U.K. was arrested in 2010, and then released on bail when the probe began.

Mercedes said it reached a settlement with OFT to resolve the probe and has learned from the investigation. The company said the deal relates to a single meeting held in 2009.


Fannie Mae, Freddie Mac Ruled Exempt From Paying Transfer Tax

Fannie Mae and Freddie Mac are exempt from paying real- estate transfer taxes, a federal judge in Philadelphia said in a ruling that threw out a lawsuit by two Pennsylvania counties.

U.S. District Judge Gene E.K. Pratter rejected Delaware and Chester counties arguments that the transfer tax is a levy on real estate and thus is an exception to broad, Congressionally- mandated immunity from state and local taxes enjoyed by Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corp., known as Freddie Mac.

“Pennsylvania Supreme Court and U.S. Supreme Court case law makes clear that the transfer tax is a tax on the transaction and not on the real property itself,” Pratter wrote in a March 26 decision.

Fannie Mae and Freddie Mac own or guarantee $5.2 trillion in mortgages and back more than two thirds of mortgages currently being originated.

The Pennsylvania counties’ suit is one of several cases in the U.S. over transfer fees. Other cases have been brought by Montgomery County in Ohio; Montgomery County in Maryland and Miami-Dade County and Hernando County in Florida.

Pratter said there have been at least five decisions in such cases, with Fannie Mae and Freddie Mac winning four of them.

The case is Delaware County, Pennsylvania v. Federal Housing Finance Agency, 12-cv-04554, U.S. District Court, Eastern District of Pennsylvania (Philadelphia).

Comcast Backed by High Court on Philadelphia Antitrust Suit

Comcast (CMCSA) Corp., the nation’s largest cable-television company, doesn’t have to defend against an $875 million antitrust lawsuit on behalf of as many as 2 million Philadelphia-area customers, the U.S. Supreme Court ruled.

The justices, voting 5-4 to reverse a lower court, said the case against Comcast was too unwieldy to proceed as a single class-action lawsuit.

The company was accused of monopolizing the Philadelphia market. The suing customers said Comcast swapped territories and subscribers with competitors to ensure it could control the market and charge higher prices. Comcast has denied the allegations.

The high court, in an opinion by Justice Antonin Scalia, said the customers didn’t meet requirements for outlining a common method needed to receive class-action status that could be used to determine monetary damages for each of the thousands of individual parties to the lawsuit.

The customers’ effort to devise a common methodology fell short when they produced a general theory about alleged overcharges from lack of competition without more detailed information about the impact of the specific antitrust allegation in the lawsuit, the court ruled.

The case is Comcast v. Behrend, 11-864.

Speeches and Interviews

Two Fed Presidents Call for Pressing on With QE Through 2013

Two regional Federal Reserve presidents said they want the Fed to keep buying bonds through the end of 2013, while a third official said the central bank isn’t doing enough to spur economic growth.

“We should continue our large-scale asset purchases of Treasury and mortgage-backed securities through this year — although the amount may need to be adjusted up or down, depending on how the economic situation evolves,” Boston Fed President Eric Rosengren said yesterday in a speech in Manchester, New Hampshire. “This is a point when we have to be patient and let our policies work,” with stimulus “firing on all cylinders,” Chicago’s Charles Evans said to reporters.

The comments by Evans, Rosengren and Minneapolis’ Narayana Kocherlakota reinforce Chairman Ben S. Bernanke’s push to sustain record easing even as some policy makers voice concern the stimulus is ineffective or harmful. The Fed affirmed a plan last week to buy $85 billion in bonds each month in quantitative easing that has ballooned its assets beyond $3 trillion.

“Monetary policy is currently not accommodative enough,” Kocherlakota said yesterday in Edina, Minnesota. He said he favored easing policy by reducing to 5.5 percent from 6.5 percent the threshold at which the Fed will consider raising the main interest rate.

“I’m going to have a lot more confidence if I begin to see indications that growth is well above trend and it’s going to be sustainable,” Evans, a voting member of the Federal Open Market Committee, said at the Chicago Fed. “We have gone through this type of thing before, where we saw improvements in the labor numbers” only to watch job growth slow “to unhelpful levels.”

Since reducing its benchmark interest rate almost to zero in December 2008, the FOMC has experimented with large-scale asset purchases to bolster growth. The Fed started a third round of quantitative easing in September, specifying neither an end date for the program nor a total amount officials plan to buy.

Kocherlakota and Rosengren don’t vote on monetary policy this year.

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France’s Hollande, Spain’s Rajoy on Cyprus

French President Francois Hollande and Spanish Prime Minister Mariano Rajoy speak at a news conference about the Cyprus bailout and European banking regulations.

This article was written by  Michael Bathon & Ellen Rosen    and originally published on bloomberg


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