Friday

Aug. 28, 2015

www.bloombergbriefs.com

 

Hoenig on Exempting Smaller Banks From Dodd-FrankBY MELISSA KARSH, BLOOMBERG BRIEF

Regulators are seeking to address issues around the regulatory burden for communityand regional banks, said the 's .Federal Deposit Insurance Corp. Thomas Hoenig

The Dodd-Frank Act "brings more regulation forward, and it does fall unevenly acrossthe banking industry, so smaller and regional banks proportionately are more affected,"the FDIC Vice Chairman told Bloomberg's Michael McKee and Brendan Greeley Aug. 27from Jackson Hole. "What we've proposed is for those institutions, not by size but byactivity, that maintain more of a traditional banking model that they should be exemptfrom some of the regulatory burden that's imposed under Dodd-Frank and related rules."

Under Hoenig's plan, which he about at a meeting earlier this month, a bankspokewould be eligible for Dodd-Frank regulatory relief if it holds no trading assets or liabilities;it holds no derivative positions other than interest rate and foreign exchange derivatives;the total notional value of all of the bank’s derivatives exposures, including cleared andnon-cleared derivatives, is less than $3 billion; and it maintains a ratio of GenerallyAccepted Accounting Principles (GAAP) equity-to-assets of at least 10 percent.

Hoenig said about 90 percent or more of commercial banks would meet most of thecriteria. "Two thirds would meet the last in terms of the capital requirement," he added."The remaining one-third of those banks could meet this within 200 basis points, sothey're at least at 8 percent, which isn't a real hard hurdle to meet. If you do that, thenyou'd be exempt completely from the Basel III requirements. If you held it on your ownbooks and you met this criteria, you would meet [the] qualified mortgage."

As Wall Street regulators to soften the leverage ratio, Hoenig has said thatlobbieseasing the requirement to determine how much capital banks need to offset their riskswould undermine the rule. "I want them to be able to take risk," Hoenig said of banks inyesterday's interview. "I want them to be able to make loans, but I don't want it soextremely leveraged that when we have stress that then the government has to come inand promise liquidity and all these sorts of things that I think are taxpayer burdens."

Douglas Kass@DougKass

In part changing regulation (DoddFrank, etc) has contributed to abroken market mechanism in whichdealers no longer provide liquidity.Details

"Under every regulator orliberal is a Calvinist trying touse the state to root out sin."

— , senior managingChristopher Whalen

director at Kroll Bond Rating Agency, on the

impact of on the markets this weekregulation

QUOTE OF THE WEEK

Eiopa will discuss its final onadviceinfrastructure investment risk Sept. 4.

MEETING TO WATCH

TWEET OF THE WEEK

—Three Global banks that are indanger of their ability tolosingmanage pension funds in the U.S.

67% Share of companies that are—unable to determine the source oftheir in a GAO report.conflict minerals

$1.7 Million — Amount UBS agreedto pay to settle potential civil liabilityfor 222 apparent sanctions violations,the OFAC on its website.said

NUMBER OF THE WEEK

Around the World: Hawaii, Iowa, Ohiosee the highest percentage increasein CFPB credit reporting complaints.

Structured Notes: Industry urgessimplicity for documents.

Reg Trackers: would policeFundsclients in a money laundering probe.EU regulators go too far in scope ofbank bonus . Singapore rules weighs cyberattack reporting.

IN THIS ISSUE

AROUND THE WORLD: U.S. CREDIT REPORTING COMPLAINTS

Risk Governance Practices Improve at Banks, Moody's Says

Almost all of the 62 banks surveyed by in an August report have at Moody's Investors Service least one dedicated board-level risk committee, separate from the audit committee, versus onlyhalf of the banks examined in 2009, according to the ratings agency. The authors of the reportsaid in an   that this is a credit positive for bank creditors and an improvement over 2009interviewdriven by regulatory changes including the 'sBasel Committee on Banking Supervisioncorporate governance principles initially proposed last year. The report cautioned that many ofthe committees have been recently established and don't yet have a performance track record.

Aug. 28, 2015 Bloomberg Brief Financial Regulation 2

 

AROUND THE WORLD: U.S. CREDIT REPORTING COMPLAINTS

Hawaii, Iowa, Ohio See Highest Percentage Rise in CFPB Credit Reporting Complaints

CFPB Says Credit Reporting Complaints Have Risen 'Sharply'The ’s monthlyConsumer Financial Protection Bureau

consumer grievances showed that credit reportingreport complaints have “sharply increased.”

The majority of the complaints were about problems withincorrect information on reports, the CFPB said in e-mailedstatement.

“As we see a rise in the number of consumers complainingabout this issue, the bureau will continue to work to ensure thatcredit reports are fair, accurate and readily available to allconsumers,” CFPB Director said.Richard Cordray

The CFPB saw a 56 percent rise in the number of creditreporting complaints submitted by consumers between June andJuly, while for the May to July period, complaints increased by 45percent versus the same prior-year period.

Hawaii, Iowa and Ohio experienced the highest percentageincrease in credit reporting complaints from the May to July 2014period to the May to July 2015 period with 279 percent, 157percent and 120 percent, respectively. Utah, South Dakota andWyoming experienced the greatest percentage decrease in thatsame time period with -56 percent, -39 percent and -32 percent,respectively. Of the five most populated states, New York sawthe highest percentage increase at 118 percent, and Texas hadthe largest percentage decrease at -8 percent during this period,according to the report.

The CFPB said it handled 6,696 such complaints last month,more than any other month since it began accepting creditreporting complaints in July 2011.

— Kim Chipman, Bloomberg First Word

NEWS: LEVERAGE RATIO

Aug. 28, 2015 Bloomberg Brief Financial Regulation 3

NEWS: LEVERAGE RATIO

Bank Regulators Considering Concessions on Key Capital RuleBY SILLA BRUSH AND JESSE HAMILTON,BLOOMBERG NEWS

Wall Street is making headway in acampaign to persuade regulators tosoften a key rule that has forced banks toboost capital since the financial crisis.

After financial firms complained forabout a year that some of the newrequirements will make it overlyexpensive to offer derivatives to clients,regulators planned to discuss possibleconcessions at a private meeting startingWednesday, according to two people withknowledge of the talks. The meetingconsists of policy advisers to a group ofglobal authorities that includes the

, the Federal Reserve European Centraland the , theBank Bank of England

people said.The lobbying is tied to one aspect of

how industry overseers set leverageratios, which determine how much capitallenders need to offset their risks. As therules are now written, banks take a hit onthe billions of dollars in collateral theyreceive from customers for handling theirderivatives trades.

Regulators around the world stiffenedcapital demands to make banks saferafter the 2008 market meltdown. Federal

Vice ChairmanDeposit Insurance Corp. said easing theThomas Hoenig

requirement for derivatives wouldundermine a rule meant to be a blunt toolto curtail excessive risk-taking.

“The industry is very active in tellingtheir side of the story,” Hoenig said in aninterview this week. “If you reduce thecollateral requirements and you allow theleverage to increase, you’re alsoincreasing the risk.”

Wall Street banks dominate a list of thebiggest derivatives brokerages ranked by

the amount of collateral posted by theirclients, according to data kept by the U.S.Commodity Futures Trading

for futures and optionsCommission trades.

One clearing division of Goldman SachsGroup Inc. has $22.6 billion in customers’assets in segregated accounts, while aunit of JPMorgan Chase & Co. has $18.3billion, according to the regulator’s dataas of June 30. The totalderivatives-brokerage industry has about$158 billion in segregated accounts.

While Fed Chair said lastJanet Yellenyear that the leverage ratio set to takeeffect in 2018 would limit “the damagethat would be done to our financialsystem if one of these firms were to fail,”bankers have criticized it as punishingthem for holding low-risk assets.

When U.S. banking agencies completedthe leverage rule late last year, theyrejected an industry bid to excludecollateral posted by clients when addingup each bank’s total assets.

Since its approval, groups representingbanks, exchanges and commodity tradershave pressed regulators to makechanges. The industry says collateral,often cash or highly-rated bonds, is heldin segregated accounts that banks can’ttap to finance risky trading.

“Including customer-segregated marginin the leverage calculation ignores thefact that client margin actually reducesexposure for clearing member banks,”

, executive director at the Jackie Mesa’s FIAFutures Industry Association

Global group, said in an e-mail. “Ifcustomer segregated margin is includedin the leverage ratio and subject to capitalrequirements, it will become significantlymore expensive to centrally clear trades.”

Executives fromderivatives-clearinghouse owners CMEGroup Inc., Intercontinental ExchangeInc. and LCH.Clearnet Group Ltd. madesimilar comments to regulators in acomment letter last November. Theirletter was also signed by the head of FIA,which represents JPMorgan, GoldmanSachs and other banks that clearderivatives for clients.

In a February presentation to investors,JPMorgan said capital rules could lead tohigher prices to clear derivatives andmight cause some brokerage firms to exitthe market.

The Commodity Markets Council, whichrepresents Cargill Inc., BP Plc and othercommodity traders, has also warnedregulators that the rule would increasecosts by more than five times from currentlevels.

The industry has found an ally inTimothy Massad, chairman of the CFTC,who has said the added costs may deterbanks from processing client tradesthrough clearinghouses. Massad hasbeen talking with other regulators toprepare a response.

The policy group meeting this weekadvises the Basel Committee on

. Industry lobbyistsBanking Supervisionhave pushed the Basel Committee tochange how the leverage ratio iscalculated. E-mails seeking commentsfrom the Basel Committee and the Bankfor International Settlements wentunanswered this week.

Hoenig said granting an exemption forderivatives collateral could set up aslippery slope and encourage futureexclusions that damage the intent of theleverage rule.

See some related tweets below: 

MRodriguezValladares@MRVAssociates

@sabrush Terrible@jesseahamiltonidea to weaken the ratio It#leverageis the only part of Basel III that cannotbe manipulated as muchDetails

StefanLoesch@oditorium

@MRVAssociates @sabrush @jesse RWAs for derivatives basedahamilton

on VaR- not ideal, but more difficult togame than random notional figureDetails

Sam@SamHam7

@sabrush @MRVAssociates @jesse & even if they were Id takeahamilton

the tradeoff(more capital w more OTCtrades>less capital w more cleared)Details

SPOTLIGHT: STRUCTURED NOTES

Aug. 28, 2015 Bloomberg Brief Financial Regulation 4

 

SPOTLIGHT: STRUCTURED NOTES

Brokers Ignore Own Rules About Structured Note Sales, SEC Says    Broker-dealers ignore their own rules about how to sell

structured notes, the U.S. Securities and Exchangesaid in a risk alert released Monday.Commission

None of 10 dealer branch offices it examined had adequatecontrols for determining whether recommended notes wereappropriate for particular investors, according to a report by theOffice of Compliance Inspections and Examinations. Also noneproperly reviewed whether the products were being sold tosuitable customers, according to the alert, for which the regulatorstudied 26,600 sales of the securities.

Regulators have targeted sales practices in the $41.7 billionU.S. market for structured notes, investments that have beencriticized for being opaque and illiquid. One in 14 brokers madepotentially unsuitable recommendations of structured notes andmarket-linked CDs to senior citizens, according to a report by theSEC and Financial Industry Regulatory Authority in April.

“I believe there’s a very serious fundamental concern at theSEC with respect to complex products that are being marketed toconsumers,” said Steven Scholes, a Chicago-based partner atMcDermott Will & Emery LLP, and a former attorney in the SEC’senforcement division. “I wouldn’t be surprised as a result of someof these exams that you’ll see some enforcement actions in thisarea.”

At one branch of a firm that was reviewed, roughly 60 percentof 3,000 structured note sales exceeded the company’s own

maximum for the proportion of a client’s net worth that could betied up in the products, according to the report. None of the firmsin the report was identified.

E-mails reviewed by the SEC showed a branch at one firm“aggressively” recommended structured products whileappearing to mischaracterize their attributes to fit the needs ofthe investors, particularly when dealing with non-Englishspeakers. Another firm retroactively changed a client’s listedinvestment objectives without approval to justify concentratedpositions in structured notes.

“These types of products are increasingly sold to retailinvestors, so we want to make sure these firms adequatelysupervise for their suitability,” said the SEC’s Kevin Goodman inan interview. Goodman heads the broker-deal exam programwithin the Office of Compliance Inspections and Examinations.He declined to comment on whether any cases were referred fordisciplinary action.

The report also found that many notes held by trusts andindividuals were sold back at below face value.

For reverse convertible notes, which pay coupons liketraditional bonds and put principal at risk if an underlying assetdrops below a certain threshold, nearly a quarter were returnedto brokers. Almost 36 percent of those were liquidated at lessthan 80 percent of their face value.

— Ben Eisen, Bloomberg Brief

Industry Devoted to Complexity Urges Simplicity for Documents    The same industry that dreams up complex structured products

wants a more straightforward way to talk about their costs andrisks when new disclosure documents are rolled out in Europe in2017.

Regulators received more than 60 feedback responses to theirproposals for three-page “key information documents” that aremeant to convey crucial facts about securities to individualinvestors. A common theme among the comments, which werepublished last week, was the desire for simplicity.

The documents, mandated in legislation passed by theEuropean Union last year, are meant to provide investors withenough information to evaluate financial products, includingstructured notes. They must include a section on risks andreturns that includes a visual “risk indicator.” Most of a technical127-page paper issued by regulators in June was devoted todiscussing what that might look like.

“There’s an earnest wish to have some sort of simplified figure”for the indicator, David Stuff, CEO of structured-product providerCube Investing Plc in London, said in a telephone interview.

The options in the discussion paper include finely tunedcategories for risk and multiple ways of calculating it. TheGerman Banking Industry Committee, which represents 1,700banks, wrote in its response that it doubts “whether retailinvestors would be able to understand some of the optionsdiscussed.”

BNP Paribas SA, France’s largest bank, remarked that the

choices “currently under consultation are of such a complexitythat readability for investors may be harmed and feasibility formanufacturers is questionable.”

The risk indicator may be a “single dimension” or“multi-dimensional,” the paper suggested. Options for it includecombining credit and market risk, separating the two, or evenusing a “two-level indicator” that does both. It would includedueling scales, 1-7 and A-G, to signal credit versus market risk inone rating.

The German Derivatives Association said investors won’t beable to understand a two-scale indicator. “How shall investorsdistinguish between a product ranked 1B and 2A for instance?”they write. The group favors using a single number instead.

The June paper also laid out dozens of different expenses andfees that could be presented for various financial products. Forstructured products, a half-dozen “entry” costs, two categories of“ongoing” expenses and two types of “exit” costs were listed.

Regulators should keep the cost calculations “as ’simple’ aspossible,” the Association of Austrian Certificates Issuers urged.The group proposes a less-granular breakdown than the oneproposed in the discussion paper. “The KID should be easy tounderstand,” they wrote.

Regulators expect to issue a final paper on the standards in fall2015, they said. A draft submission to the European Commissionis due by March 31.

— Yakob Peterseil, Bloomberg Brief

Aug. 28, 2015 Bloomberg Brief Financial Regulation 5

 

 

   

FOR THE RECORD

Aug. 28, 2015 Bloomberg Brief Financial Regulation 6

FOR THE RECORD

What people are saying this week about the

impact of increased financial market regulation on

the global market selloff and volatility. Comments

have been edited and condensed.

"The genesis of the breakdown in themarket mechanism has started withregulatory changes in the banking andinvestment industries, in a nutshell youhad Basel and Dodd-Frank. That'sbasically served to reduce dealers'incentive and abilities to provide liquidity.As a result, risk-free assets have grownlarger on bank balance sheets while othermore risky assets have shrunk. This hasall occurred at a time when retailinvestors have exited the markets. Thatmeans that high-frequency trading andleveraged exchange-traded funds havetaken a much more dominant role in dailytrading activity, accounting for as much as70 percent of volume which is doubletheir historic role. Remember that pricemomentum based strategies are agnosticto balance sheet statements, so you getwhat you saw on Monday morningbetween 9:30 a.m. and 9:45 a.m. It's kindof reminiscent of portfolio insurance in thelate 1980s, which many feel caused theOctober 1987 market massacre.Basically, these price momentumstrategies exacerbate short-term moves,and the high-frequency trading boys arecrowing on the business networks abouthow much money they made in themarket they are billed for, which is reallythe market that they made. The regulatorsare asleep or worse, which is terrifying."

— , founder and president atDoug Kass

Seabreeze Partners, speaking with Pimm Fox and

Mike McKee on "Bloomberg Markets" on Aug. 25

"Increased regulation has reducedcredit creation and liquidity. Profits forfinancial institutions have been reducedby regulation vehicles like the VolckerRule and the Consumer FinancialProtection Bureau, and credit available toconsumers in the form of home loans hasplummeted. Autos and other areas havegrown as a result. The below-primeconsumer is now considered a toxicspecies by many banks, who aremigrating toward a greater focus oncommercial real estate and business lending. The Volcker Rule and Basel III

have greatly reduced liquidity, and credit

available for all borrowers. Remember,under every regulator or liberal is aCalvinist trying to use the state to root outsin."— , senior managing directorChristopher Whalen

at the Kroll Bond Rating Agency Inc., responding

via e-mail on Aug. 27

"I've seen markets similar to this relativeto the times when I headed a brokeragefirm, when I headed the stock exchange,and when I was at the SEC. What they allhave in common is they are emotional,they're scary, but they are different perspectives. ... At the SEC, my concern

— will thewas the viability of the firms system hold up? Will the firms stay alive?Are we going to see a cascade of brokenbusinesses? So it depends on where youare. What I've learned is don't movequickly. Unless you're a professional trader, individual investors should be very

buying or selling. This iscautious about not the time to make strategic decisions."

— Former U.S. Securities and Exchange

Commission Chairman ,Arthur Levitt a senior

Promontory Financial Group LLC and aadviser at

director at Bloomberg LP, speaking with Mike

McKee and Bryan Curtis on "Bloomberg

Surveillance" Aug. 24 on how regulators are likely

responding to the market rout

"This trend of increased regulationclearly had an impact on this past week’ssell-off. The regulatory trading curbs(circuit breakers) implemented over thepast several years halted trading incertain stocks at times. The directionalimpact that these trading curbs had onthe declines is debatable. Some arguethey exacerbated the declines given their‘stifling of free markets’, while othersargue they mitigated the declines giventhe ‘cooling off period’ they brought. However, the most profound regulatoryimpact may be the regulatory changes tocome as a result of this week's selloff. Asthey did after the Flash Crash of 2010,regulators will likely study the workings ofthe circuit breakers during this past week,and propose changes. Those changesmay include a tightening of existing circuitbreakers, or the creation of new ones, orother initiatives."

— Former Fidelity Investments CFO Robert J.

, a professor of finance and economics atChersi

Pace University's Lubin School of Business and

executive director of its Center for Global

Governance, Reporting and Regulation,

responding via e-mail on Aug. 27

"Some equate the stock market to aroller coaster and we all saw some of thatthis week. The U.S. market went throughsome of the same camelbacks, bowties,corkscrews and diving loops, but at leastone of its safety systems had someunintended consequences. The circuitbreakers that regulators put in place forsingle stocks after the 2010 flash crashcaused exchange-traded fund holders tocome away a little more bruised andbattered than expected. Many of theapproximately 1200 'pauses' this weeklocked out trading in certain ETFs for atleast five minutes while their underlyinginstruments continued to fall. This leftshareholders wishing to sell in the lurch.So while some were able to get off theETF coaster as expected othersexperienced another sort of ride."

— , compliance officer at Fidessa,Matt Grinnell

via an e-mailed response Aug. 27

"The turmoil witnessed this week inequity and currency markets remindedmany of previous secular marketdisruptions. One substantive difference isthis week saw the most significant marketturbulence since new capital and liquidityrules were imposed post-recession. Thereis, of course, significant debate about thelong-term effects of these regulations.But, in the short term, the higher levels ofcapital and liquidity held by regulatedentities may have helped assuage marketconcerns about the U.S. banking system,to wit, there was virtually no seriousdiscussion about bank runs or the healthof balance sheets this week. Marketsseem to support this thesis, consideringthe higher volatility observed in the equitymarkets, for example, versus fixedincome markets, where manydepositories express market sentiment. This storyline has not yet reacheddenouement and legitimate concerns arebeing expressed about the role that ‘realmoney’ will play in markets rife with lessliquid and more levered participants. Mostof the banks that are regularly tested forliquidity and capital, however, exhibitedthis week the level of resilience imaginedwhen these tests were envisioned. Marketcapitalizations notwithstanding, perhaps,it is not readily apparent that much haschanged in terms of balance sheets orbusiness plans for regulated entities fromlast week to this week."

— , head of U.S. depository strategyGreg Hetrich

at Nomura Plc, in an e-mailed response Aug. 27

REGULATION TRACKER: NORTH AMERICA

Aug. 28, 2015 Bloomberg Brief Financial Regulation 7

 

Upcoming Deadlines

DATE REGULATORY AGENCY ACTION DESCRIPTION

Sept. 3Office of the Comptroller of the Currency,FDIC, Federal Reserve

Comments DueReview of issued regulations to identify outdated or unnecessary requirements imposed on insureddepository institutions.

Sept. 11 Federal Deposit Insurance Corp. Comments Due Proposed rulemaking to refine the deposit insurance assessment system for small insured depositoryinstitutions that have been federally insured for at least five years.

Sept. 14 Commodity Futures Trading Commission Comments Due Proposed margin requirements rule for uncleared swaps for swap dealers and major swap participants.

Sept. 14 Securities and Exchange Commission Comments Due Proposed rule on listing standards for erroneously awarded compensation.Source: Compiled by Bloomberg Brief. To submit items for consideration, please e-mail the editor at mkarsh@bloomberg.net

REGULATION TRACKER: NORTH AMERICA

Money managers and hedge fundswould be required to establish anti-moneylaundering programs and reportsuspicious activity under a U.S. proposalthat could increase the companies’compliance costs.

The firms would be included in thegeneral definition of “financial institution”under the plan released Tuesday byTreasury Department’s Financial Crimes

. The changeEnforcement Networkwould require investment advisers to filecurrency transaction reports and keeprecords relating to the transmittal offunds, similar to those maintained bybanks.

“Investment advisers are on the frontlines of a multi-trillion dollar sector of ourfinancial system,” FinCen Director

said in aJennifer Shasky Calvery statement. “If a client is trying to move orstash dirty money, we need investmentadvisers to be vigilant in protecting theintegrity of their sector.”

Costs will probably hit small firms thehardest, said Karen Barr, president andCEO of the Investment AdviserAssociation. Larger advisers already areimplementing anti-money launderingprograms because they’re affiliated withbanks and broker-dealers that arerequired to have them in place, she said.

“We want to take a good look at theproposal and make sure that in thebalance of risk and reward, cost andbenefit, that the balance is struckappropriately,” Barr said.

Funds Would Police Clientsin Money Laundering Probe

The rule would apply to investmentadvisers that are required to be registeredwith the U.S. Securities and Exchange

, including those that workCommissionwith certain hedge funds, private-equityfunds and other private funds, FinCensaid. The proposal will be open forcomment for 60 days after publication inthe Federal Register, the agency said.

An earlier version of the proposal was made in 2003 but withdrawn in 2008.

Obama administration officials have saidthey were working on reintroducing it, and

a draft of the plan was approved by theWhite House’s Office of Management andBudget in July.

Anthony Coley, a spokesman for the Managed Funds Association, the group that represents hedge funds, said in an e-mail that the MFA supports FinCen’s mission to help safeguard the financial

system from illicit use and is lookingforward to reviewing the proposed rule.

— Gregory Mott and Ian Katz, Bloomberg News

U.S. regulators moved to crack down onretail currency markets by endorsing rulesthat will boost capital requirements afterSwiss franc losses left a leadingbrokerage needing a $300 million rescueearlier this year.

The Commodity Futures Trading on Thursday backed stepsCommission

meant to improve transparency andbolster resources of currency dealerswhen they face risks from overseastransactions. Two commission members

CFTC Backs Stiffer Rules forRetail Currency Dealers

said they would consider taking additionalsteps to rein in the market.

“The losses that many customers anddealers incurred in connection with theunpegging of the Swiss franc last Januarywere a stark reminder of the risks of thesemarkets,” CFTC Chairman Timothy

said in a statement. “We willMassadcontinue to monitor these markets as wellas consider whether there are additionalsteps that would be appropriate toadvance the goals of customer protectionand market integrity.”

The , theNational Futures Associationindustry’s self-regulatory organization,proposed the rules after New York-basedFXCM Inc. needed a bailout fromLeucadia National Corp. following lossesat its U.K. affiliate, which hadmore-lenient oversight for leverage.FXCM faced the shortfall in January aftercustomers suffered big losses when theSwiss central bank decided to let thefranc float against the euro.

Massad and Commissioner Sharon Y., a fellow Democrat, said the retailBowen

market suffers from less-stringentregulation than other types of derivativesthat are guaranteed at centralclearinghouses and regulated onexchanges.

“These proposals are not, bythemselves, enough to provide retailcommodity investors the basic protectionsthey enjoy for every other commodityexcept foreign exchange,” Bowen said ina statement. “The CFTC itself needs toadopt more rigorous regulations on retailforeign exchange dealers.”

— Silla Brush, Bloomberg News

  

REGULATION TRACKER: EUROPE

Aug. 28, 2015 Bloomberg Brief Financial Regulation 8

Upcoming Deadlines

DATE REGULATORY AGENCY ACTION DESCRIPTION

Aug. 31Financial Stability Board, International Association of InsuranceSupervisors

Comments DueFeedback on topics discussed at a May workshop on compensation practicesin the insurance sector.

Sept. 7 U.K. Financial Conduct Authority Consultation Ends Consultation on capital resources requirements for Personal InvestmentFirms, or PIFs.

Sept.11

Basel Committee on Banking Supervision Consultation EndsConsultative document on the risk management, capital treatment andsupervision of interest-rate risk in the banking book.

Sept.30

International Organization of Securities Commissions,Committee on Payment and Settlement Systems

Comments DueConsultative report on the harmonization of the unique transaction identifier,or UTI. 

Source: Compiled by Bloomberg Brief. To submit items for consideration, please e-mail the editor at mkarsh@bloomberg.net

REGULATION TRACKER: EUROPE

EU Regulators Go Too Far in Scope of Bank Bonus Rules, EBF SaysNew European Union curbs on banker

bonuses may go beyond legislators’intentions by dragging in legal, advisory,and support staff at banks, according to

, the head of the Wim Mijs European.Banking Federation

The and European Banking Authoritythe could goEuropean Commissionbeyond the goals of laws designed to reinin executive excess if regulators don’tchange their approach, Mijs said in aphone interview. He said the rules, asinterpreted in draft guidelines, would taplower-level employees such as localbranch heads, information technologyworkers and auditors, because of a broadinterpretation of the EU law.

“Is it absolutely necessary to broadenthe scope to cover people who are not inthe top bracket, and not in the top bracketof variable remuneration?” Mijs said.“These rules were meant and designedfor risk takers and now they will hit normalbank employees who do not have themandate to be risk takers.”

EU lawmakers adopted the world’stoughest bonus rules in 2013, cappingpay in a bid to control a culture blamed forcontributing to the 2008 financial crisis.Regulators now are deciding how toimplement the new rules, which will bebased on a legal opinion published by theEBA last year. The consultation period forthe revised guidelines ended on June 4.The EBA is in the process of finalizing theguidelines, which the agency expects topublish by year-end, an EBAspokesperson said.

According to the commission, the newrules are intended to help reduceshort-term and excessively riskymanagement

strategies at banks, which in turn willmake banks healthier and protectfinancial stability. All nations have agreedto the new rules and they are being put inplace after wide consultation, commissionspokesman Christian Wigand saidThursday.

The EBF has been studying the issueas the rules have been taking shape. Thegroup has been in touch with the EBAand commission, asking for meetings inSeptember to discuss the topic, Mijs said.“We had no problem with the debate andoutcome” of the bonus-curb laws, “but wecame upon this when the EBA

consultation came about and we realizedthis was a much stricter interpretationthan we had anticipated and seenbefore,” Mijs said. No dates have beenset for the meetings, the EBF said. In adraft letter to the EBA and thecommission obtained by BloombergNews, the EBF said the current approachto putting the law in place is “incorrect”and “not supported” by the wording of thelaw, the EU’s capital requirementsdirective. The EBF also warned the newrules will result in “significant deviations”from prior supervisory approaches.

— Julia Verlaine, Bloomberg News

REGULATION TRACKER: ASIA PACIFIC

Drop in U.K. Banking Bonuses May Partly Reflect New Rules

Total U.K. bonus payments in the year through March were up 2.7 percent, while bonuses in thefinance and insurance industry dropped 9.6 percent in the same period and remain belowpre-downturn levels, the Office of National Statistics . The drop in banking bonuses maysaidpartly reflect changes in pay structures, as firms boost base salaries to avoid regulatory limits onbonuses and tougher claw-back rules. The drop is also due to a shift in the timing of bonusseason, the ONS said. For the rest of the story, click .here

— Scott Hamilton, Bloomberg News

Aug. 28, 2015 Bloomberg Brief Financial Regulation 9

Upcoming Deadlines

DATE REGULATORY AGENCY ACTION DESCRIPTION

Sept. 6 Securities and Exchange Board of India Comments Due Consultative paper on proposed amendments to rules on infrastructure investment trusts.

Oct. 2 Australian Securities & Investments Commission Comments Due Consultation on remaking class orders on takeovers and schemes of arrangements.

Oct. 16 Hong Kong Securities & Futures Commission Comments DueConsultation paper on changes to rules relating to capital and other prudential requirements forlicensed corporations engaged in OTC derivatives activity.

Source: Compiled by Bloomberg Brief. To submit items for consideration, please e-mail the editor at mkarsh@bloomberg.net

REGULATION TRACKER: ASIA PACIFIC

Faced with a renewed stock marketslide that has wiped out $5 trillion intrading value, China is again on the prowlfor scapegoats.

Authorities announced a probe ofallegations of market malpracticeinvolving the stocks regulator onTuesday, while the official Xinhua NewsAgency called for efforts to “purify” thecapital markets. The news service alsocarried remarks by a central bankresearcher attributing the global rout to anexpected Federal Reserve rate increase.

The Shanghai Composite Index hasplunged more than 40 percent from itspeak, after concerns over the Chineseeconomy helped snap a months-long rallyencouraged by state-run media.Authorities have repeatedly blamedmarket manipulators and foreign forcessince the selloff began in June and ledofficials to launch an unprecedentedstocks-support program.

Now, after suspending that program,the administration has embarked on anew round of allegations and fault-finding.

Police are investigating peopleconnected to the China Securities

, CiticRegulatory CommissionSecurities Co. and Caijing magazine onsuspicion of offenses including illegalsecurities trading and spreading falseinformation, Xinhua reported.

They’re probing suspects linked to theCSRC, including a former employee, over

insider trading and forging official document stamps, Xinhua said. Eight

people at Citic Securities are suspectedof illegal securities trading and the Caijing

employees are under investigation for allegedly fabricating and spreading fake

stock and futures trading information.Citic Securities said Wednesday in a

statement posted to the Shanghai stockexchange that it hasn’t received noticerelated to the report and said the

China Authorities EscalateBlame Game

company’s operating as normal. Caijing ina statement Wednesday confirmed areporter had been summoned by police.The magazine said it didn’t know thereason and would cooperate withauthorities. Calls and a fax to the CSRCwent unanswered.

Another Xinhua report citing Yao, head of the Yudong People’s Bank of

’s Research Institute of Finance,Chinaattributed the global market rout toexpectation of a Fed rate increase inSeptember, not concern about theChinese economy.

Separately, Haitong Securities Co., GFSecurities Co., Huatai Securities Co. andFounder Securities Co. — four of China’slargest brokerages — said they’re beinginvestigated by the CSRC on suspicion offailing to comply with identity verificationand “know-your-clients” requirements,according to statements to the HongKong and Shanghai exchanges Tuesday.

“The company will fully cooperate withthe CSRC and strictly fulfill anyobligations of information disclosureunder regulatory requirements,” Haitongsaid in its statement. “So far, the businessof the company is under normaloperations.”

GF, Huatai and Founder made similarpledges of cooperation with the probes intheir filings.

— Bloomberg News

Singapore is considering regulationsthat would require companies to reportcyberattacks, a government official said.

, strategy director atWong Yu Hancity-state's ,Cyber Security Agencydeclined to say when the governmentwould reach a decision on reportingrequirements. He also suggested thatcompanies double their informationtechnology security budgets and speedup responses to cyberattacks.

Singapore WeighsCyberattack Reporting

“At this point what I will say is, these areimportant issues, but the solution iscomplex,” Wong told reporters Aug. 25 atthe inaugural Data Privacy Asiaconference in Singapore. “It will involvenot just laws but also involves how weprotect infrastructure and also how weeducate users and also decision makers.”

, chairman ofLeong Keng ThaiSingapore's Personal Data Protection

, agreed that breaches mustCommissionbe “managed and reported immediately,depending on their severity, so thatrelevant authorities can address theincident appropriately.”

In the opening speech at theconference, Leong said such mandatorynotifications are one way for Singapore to“keep pace with developments in otherparts of the world, particularly Europe,United States and the Asia-Pacific.”

But at least one lawyer said companiesshouldn't interpret the lack of a duty tonotify to mean that data protection rulesare lax in Singapore. The frameworkPersonal Data Protection Act requirescertain companies to appoint dataprotection officers, and it created Leong'scommission, which has been an activeregulator. The act was enacted in 2012.

Steve Tan, a partner at Rajah & TannSingapore LLP, pointed to severalhigh-profile investigations by the PersonalData Protection Commission, especiallyunder the city-state's do not callrestrictions. For instance, one educationcompany had to pay S$39,000 ($27,698)in 2014 for sending text messages thatmarketed to customers without theirconsent. The company director personallyhad to pay another S$39,000 on top ofthat. To strengthen data security andcompliance, businesses should docyberattack simulations, appoint breachresponse teams, train employees and beprepared for related investigations andlitigation, Tan said at an Aug. 26conference session.

— Lien Hoang, Bloomberg BNA

Aug. 28, 2015 Bloomberg Brief Financial Regulation 10

 

   

   

ENFORCEMENT

Aug. 28, 2015 Bloomberg Brief Financial Regulation 11

ENFORCEMENT

Three global banks are in danger of losing their ability to manage pension funds in theU.S., as the wrestles with how to hold financial institutionsDepartment of Laboraccountable for criminal misconduct.

The Labor Department, in mid-July letters reviewed by Bloomberg, told Deutsche, and that it hadBank AG UBS Group AG Royal Bank of Scotland Group Plc

tentatively rejected their requests to keep managing U.S. pension money. The banks,which admitted guilt earlier this year over manipulating foreign exchange or benchmarkinterest rates, were required to seek the department’s permission to maintain theirQualified Professional Asset Manager status. Such a rejection would be a departure forthe Labor Department, and the tentative decision comes early in a process that allowsfor additional bank response and public comment.

Public interest groups and lawmakers including U.S. Senator , aElizabeth WarrenMassachusetts Democrat, have pressed the Labor Department for tougher reviews ofbanks convicted of crimes before clearing them to continue their pension-managementbusinesses. The department could use a threat of denial as leverage to place stricterconditions on any permission it may ultimately grant.

“You shouldn’t discount the possibility that the Department of Labor is asking for moreinformation so they can better craft conditions for a final exemption,” said AndrewOringer, an attorney at Dechert LLP who specializes in pension issues.

JPMorgan Chase & Co., Citigroup Inc. and Barclays Plc pleaded guilty to settlecurrency-manipulation charges in May and have also requested waivers for theirpension-management operations, which are pending. UBS and Deutsche Bank areactively engaging with the Labor Department to address the issues it raised, according tospokesmen for the banks. Michael Trupo, a Labor Department spokesman, declined tocomment. Spokesmen for RBS, Citigroup, JPMorgan and Barclays declined to comment.

The department told the banks it had “tentatively decided not to propose the requestedexemptions” they sought, according to the notices dated July 16 and 17. In each case,the department wrote, the banks had failed to demonstrate that their continuedpension-fund management would be in their clients’ interests, or that they wereprotecting the rights of plan participants. The letters gave the banks 40 days to submitadditional information to support their requests, a period that would end this week.

— Keri Geiger and Greg Farrell, Bloomberg News

A former analyst was charged with giving non-public JPMorgan Chase & Co.information about a Salesforce.com Inc. deal to two friends as part of a $600,000insider-trading scheme.

Ashish Aggarwal, 27, of San Francisco, and the two longtime friends who were alsocharged surrendered to the FBI Tuesday, Los Angeles U.S. Attorney saidEileen Deckerin a statement. They pleaded not guilty and would be released on bond, said ThomMrozek, a spokesman for Decker.

Aggarwal worked for the J.P. Morgan Securities unit in San Francisco from June 2011to June 2013, according to the statement. He’s accused of passing on non-publicinformation about Integrated Device Technology Inc.’s planned acquisition of PLXTechnology Inc. in 2012 and Salesforce.com’s June 2013 acquisition of ExactTarget Inc.

The U.S. separately sued Aggarwal and hisSecurities and Exchange Commissionfriends in federal court in Los Angeles.

“Mr. Aggarwal denies the charges against him,” his lawyer, Grant Fondo, said in ane-mail. “He has retained Goodwin Procter to represent him in this matter and intends tovigorously defend himself against these allegations.”

Aggarwal left the bank in 2013 after completing a two-year analyst program, said aperson briefed on the matter who asked not to be identified discussing personnel.JPMorgan declined to comment on the arrests. The former analyst has the same firstand last names as a JPMorgan executive director in Mumbai who isn’t involved in thecase. Aggarwal faces as long as 20 years in prison if convicted of fraud, according to theU.S. attorney’s statement.

— Edvard Pettersson, Bloomberg News

U.S. Puts Pension Businesses at Three Banks on Notice

Ex-JPMorgan Analyst Charged With Tipping Friends

European Union antitrust regulators areinvestigating precious-metals tradingfollowing a U.S. probe that embroiledsome of the world’s biggest banks.

The disclosedEuropean Commissionthe review after saidHSBC Holdings Plcin a filing earlier this month that it hadreceived a request for information fromthe EU in April. The watchdog isexamining possible anti-competitivebehavior in spot trading, spokesmanRicardo Cardoso said in an e-mail.

“This is just another potential scandalwhere fines will suppress banks’earnings, and rightly so,” said SandyChen, analyst at Cenkos Securities Plc.

U.S. prosecutors have been examiningwhether at least 10 banks, includingBarclays Plc, JPMorgan Chase & Co. andDeutsche Bank AG, manipulated prices ofprecious metals such as silver and gold.The scrutiny follows international probesinto the rigging of financial benchmarksfor rates and currencies, which haveyielded billions of dollars in fines. The triowas among companies that agreed in anEU settlement to pay a total of 1.7 billioneuros ($1.9 billion) in December 2013 forcolluding over derivatives linked to Liborand Euribor. HSBC remains underinvestigation in the Euribor case afterrefusing to join the accord. HSBC said inits half-year earnings report Aug. 3 thatthe commission in April sought detailsabout its precious-metals operations andthat it’s “cooperating” with the authorities.

In the U.S., UBS Group AG said in Maythat it won immunity from criminal fraudcharges in a Justice Departmentinvestigation into misconduct in thetrading of precious metals. UBS declinedto comment on the EU metals inquirybeyond its second-quarter report, whichnoted investigations by a number ofauthorities into precious-metals prices.

Barclays said in a July filing it has been“providing information to the DOJ andother authorities in connection withinvestigations into precious metals andprecious metals-based financialinstruments.” Joanne Walia, a Barclaysspokeswoman, declined to comment onwhether the authorities included the EU.Representatives for the other banks didn’trespond to requests for comment.

   — Gaspard Sebag and Stephen Morris,

Bloomberg News

EU Probes Precious-MetalsTrading After U.S. Inquiry

LEGAL NEWS

Aug. 28, 2015 Bloomberg Brief Financial Regulation 12

LEGAL NEWSWall Street State Campaign-Cash Challenge Rejected by CourtBY ANDREW HARRIS AND ROBERT SCHMIDT, BLOOMBERGNEWS

A federal court rejected a legal challenge to a U.S. rule thatmakes it difficult for some political candidates to raise moneyfrom Wall Street.

The Washington-based U.S. Court of Appeals dismissed anattempt to overturn the 2010 Securities and Exchange

regulation, ruling Tuesday that two stateCommissionRepublican Party committees waited too long to file their lawsuit.The SEC rule effectively bars banks, hedge funds and privateequity firms from giving campaign contributions to governors andother state officials.

The decision comes as several Republican governors, whosefundraising is restricted by the regulation, seek their party’spresidential nomination. They include Chris Christie of NewJersey, Scott Walker of Wisconsin, John Kasich of Ohio andLouisiana’s Bobby Jindal.

Known as the pay-to-play rule, the SEC regulation prohibitsinvestment advisers from overseeing state assets for two yearsafter giving more than a nominal contribution to an official whocould help the fund manager get hired.

It was put in place after a series of scandals involvinginvestment advisers donating to politicians who later helped themwin business from state pension funds.

The rule covers current office-holders and candidates in stateraces as well as state officials running for a federal office.

Many investment firms, which profit from their work forstate-pension plans and college-savings plans, decided to forgogiving to any state officials to avoid the possible draconianconsequences.

The New York Republican State Committee and theTennessee Republican Party filed their suit last year amid ageneral loosening of U.S. campaign finance rules by theSupreme Court. The parties argued the restriction violated theirconstitutional right to free speech. They also contended that theSEC didn’t have the authority to regulate campaign contributions.

In Tuesday’s decision, the court left the door open for a newchallenge, saying the parties could first ask the SEC to repeal therule and then file suit if the request is denied.

An SEC spokeswoman declined to comment on the ruling.Lawyers for the state parties didn’t immediately respond to a calland e-mail seeking comment.

 

Court Rejects Conflict Minerals Rule No One Could ObeyBY ELLEN ROSEN, BLOOMBERG NEWS

The court case over the so-calledconflict minerals rule has been anacademic exercise in at least one sense.

The rule, which requires companies todisclose whether any of their productscontain components from strife-riddenareas of Africa, including the DemocraticRepublic of the Congo, was once againstruck down by a federal appeals court inWashington last week.

The same court had, in 2014, held thatthe rule, which was created by the U.S. Securities and Exchange Commissionunder the Dodd-Frank Act, violated theFirst Amendment because it compelledspeech.

In rehearing the case, the court onceagain found that the rule wasunconstitutional, despite an unrelatedcase which seemed to give thegovernment broad powers to regulatecommercial speech.

As it turns out, even those companiesthat have tried haven’t been able tocomply with the rule.

According to a by the U.S. report,Government Accountability Office

coincidentally published on the same daythat the D.C. Circuit issued its opinion,most companies couldn’t “determine the

source of their conflict materials.”Additionally, the GAO found, none of

the companies “could determine whetherthe minerals financed or benefited armedgroups” in the countries covered by therule, which, in addition to the DRC,include Angola, Burundi, Central AfricanRepublic, the Republic of the Congo,Rwanda, South Sudan, Tanzania,Uganda and Zambia.

The GAO report was posted in a blogby , special counsel at Cydney Posner

.Cooley LLPIt’s unclear whether the SEC will take

any further action. According tospokesman John Nester, the agency isreviewing the decision.

Peter Keisler of Sidley Austin LLPargued the case for the National

.Association of Manufacturers

PEOPLE NEWS

Most Firms Unable to Determine Source of Conflict Minerals

Aug. 28, 2015 Bloomberg Brief Financial Regulation 13

 

PEOPLE NEWSBank of England Governor Mark

has been asked by lawmakers toCarneyreview the code of conduct for policymakers after controversy surrounding theappointment of . Gertjan Vlieghe Therequest was made by , whoAndrew Tyrieleads the cross-party parliamentarycommittee that oversees the bank.Vlieghe, an economist at Brevan HowardAsset Management, was named to theMonetary Policy Committee in July andhad initially planned to retain rights to ashare of future payouts. He later said he’dsell his remaining interest in thepartnership. Tyrie said the subsequentaction to remove a perception of a conflictof interest suggests that the code “wouldbenefit from re-examination,” and askedCarney to report on the progress of hisreview. “It is essential that thoseappointed to the MPC have no conflicts of

interest, nor perception of them,” Tyrie said in the letter released by his office in

London on Monday. “A well designed code of conduct, sensibly applied, should

capable of achieving this withoutbe diminishing the quality of applicants.”Vlieghe, who once worked at the centralbank as an adviser to then-GovernorMervyn King, will serve an initial

three-year term as a part-time policymaker at the BOE. The central bank’scode of conduct says such officials “maynot retain any directorship, trusteeship,advisory post or other interest, whether ornot remunerated” if that could conflict withtheir MPC membership. Chancellor of theExchequer announcedGeorge Osbornehis appointment of Vlieghe on July 28.Vlieghe said on July 31 that he wouldsever ties with Brevan Howard “to avoidany mistaken impression of a conflict ofinterest.”

— Fergal O'Brien, Bloomberg News

Jeremy Stein, a former FederalReserve Board governor, was added tothe board overseeing Harvard University's$36.4 billion endowment. Stein is aHarvard economics professor whoreturned to the university faculty last yearafter serving as a member of the Fed’sboard of governors for two years. He alsobegan working as a consultant to thehedge fund BlueMountain CapitalManagement this year, according toHarvard’s website. Stein along withJoshua Friedman, a co-founder of hedgefund Canyon Partners LLC,  wereappointed effective July 1 and will attendtheir first meeting next month, Paul

Finnegan, the newly appointed chairmanof the endowment board, said in ane-mail. Stein confirmed his appointment inan e-mail.

At the same it adds expertise, the boardis losing , a former viceRobert Kaplanchairman of Goldman Sachs who hasbeen on the Harvard Business Schoolfaculty. The Federal Reserve Bank ofDallas named Kaplan president Aug. 17.

— Michael McDonald, Bloomberg News

Bill Christie, executive vice presidentand the head of the Federal ReserveBank of New York's Technology ServicesGroup (TSG), is retiring from the bank inmid-November, according to an e-mailedstatement. Christie, who joined the bankin 2008, will step down immediately asthe chief information officer and head ofTSG, and will focus exclusively on themodernization of the Fedwire SecuritiesService, part of the Fed's paymentssystem improvement strategy, the banksaid in the statement. ,Lee Alexandersenior vice president for applicationdevelopment, will serve as acting CIOwhile the bank searches for a permanentreplacement.

— Melissa Karsh, Bloomberg Brief

EVENTS CALENDAR TO SUBMIT AN EVENT PLEASE E-MAIL MKARSH@BLOOMBERG.NET

Aug. 28, 2015 Bloomberg Brief Financial Regulation 14

DATE EVENT DESCRIPTION LOCATION

Aug.31-Sept. 4

International Association of Financial CrimesInvestigators Training Conference

Speakers include David A. Montoya, inspector general at HUD, David C. Williams, inspector generalat USPS, and Richard Weber, chief of IRS criminal investigation at the IRS.

Minneapolis

Sept. 4 Eiopa public hearing Will discuss the authority's final advice to the European Commission on infrastructure investments. Frankfurt

Sept. 7 U.K. FCA Mortgage ConferenceSpeakers include Linda Woodall, director of supervision, retail and authorizations at the FinancialConduct Authority, Nigel Wilson, CEO of Legal and General, and Olivier Defraux, managing directorand head of European mortgage strategies at BlackRock.

London

Sept. 8-94th Conference on Global InsuranceSupervision

Topics include insurance sector financial stability and resilience, the development of an internationalcapital standard for insurance and a risk-based and proactive approach for conduct risks.

Frankfurt

Sept. 9-11  Eurofi Forum 2015 Speakers include BOE's Jon Cunliffe, Bundesbank's Andreas Dombret, and BaFin's Felix Hufeld.   Luxembourg

Sept. 10-11 Compliance & Regulation Summit Topics include corporate governance, privacy governance and effective regulator relationships. Boston

Sept. 14-17 NAFCU Congressional Congress Speakers include House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) andTreasury Financial Crimes Enforcement Network Director Jennifer Shasky-Calvery.

Washington,D.C.

Sept. 16-1711th Annual SEC Reporting & FASB Forumfor Mid-sized & Smaller Companies

Topics include the future of SEC reporting, new capital-raising options for small companies and therenewed focus on auditor independence.

Las Vegas

Sept. 17-1818th National Forum on ResidentialMortgage Litigation & RegulatoryEnforcement

Speakers include Jedd Bellman, assistant commissioner of the Office of the Maryland Commissionerof Financial Regulation, Howard Lindenberg, managing associate general counsel at Freddie Mac,and Christopher Tuite, assistant U.S. attorney for the middle district of Florida.

Dallas

Sept. 18 Internal Revenue Service public hearingHearing will be on proposed rules that would consider some offshore insurers passive foreigninvestment companies.

Washington,D.C.

Sept. 20-22MBA's Regulatory Compliance Conference2015

Speakers include Bryan Greene, general deputy assistant secretary of the Department of Housingand Urban Development's office of fair housing and equal opportunity, Mary Pfaff of the Conferenceof State Bank Supervisors, and Federal Housing Finance Agency General Counsel Alfred Pollard.

Washington,D.C.

Sept. 21IA Watch's 15th Annual Compliance FallConference 2015

Keynote speaker is Sharon Binger, regional director of the SEC's Philadelphia regional office. Philadelphia

Sept. 27-29 NASAA 2015 Annual Conference Former Securities and Exchange Commission Chairman Arthur Levitt is a featured speaker.San Juan,Puerto Rico

Sept. 27-29 Money Laundering in Canada 2015Topics include trends and typologies of criminal behavior, effective compliance managementpractices and demonstrating how reporting entities are strengthening risk management outcomes.

Banff,Alberta

Sept. 28-30ACAMS 14th Annual AML & Financial CrimeConference

FBI's Timothy J. Delaney, OFAC Acting Director John E. Smith and the U.S. State Department'sAndrew N. Keller are keynote speakers.

Las Vegas

Sept. 28-30 Building Blocks for Directors workshopHosted by the Office of the Comptroller of the Currency, topics include directors’ duties and coreresponsibilities, major laws and regulations and familiarity with the examination process.  

New York

Bloomberg Brief: Financial Regulation

EVENTS CALENDAR TO SUBMIT AN EVENT PLEASE E-MAIL MKARSH@BLOOMBERG.NET

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Q&A

Aug. 28, 2015 Bloomberg Brief Financial Regulation 15

Q&A

Regulation Is Biggest Driver of Bank Risk Committees, Say Moody's Credit Officers

Chris Plath, vice president

and senior credit officer at

Moody's Investors

, and Service Mark

, managingLaMonte

director and chief credit

officer at Moody's, told

Bloomberg Brief's Melissa

Karsh that regulation has

been a key driver of banks'

improvement in their risk

governance practices since

2009. Their report, released

this month, looks at public

disclosures from 62 global

large and mid-size banks to

see how the systems and

processes firms use to

assess corporate risk have

changed since 2009.

Q: How have banks' risk governancestandards tightened since 2009?Plath: Since we looked at this in 2009,we saw a wide-scale improvement in thequality of disclosures across the banks. Interms of corporate governance disclosurein 2009, the disclosure regimes were justweaker in continental Europe than in theU.S. and Canada. That's improved a bitover time. A specific focus on issues ofrisk management and regulation havehelped improve the disclosure. It waseasier for this report to comb through theannual reports, proxy statements and10Ks, which include a lot of the riskgovernance disclosures. For the banks'websites it's very clear now where youcan find committee memberships andlinks to risk committee charters.

Q: You mention that most of the bankshave established changes over the last18 months, but why not sooner? Whatrole do post-crisis rules play in this?

Regulatory changes have been thePlath: key driver in improving risk governance,including bank board risk committees andthe independence of those committees.The Basel Committee on BankingSupervision and Financial StabilityBoard's principles have played a key rolein shaping regulators' views on these

issues. In 2009, particularly in the U.K.and in continental Europe, all banks werestruggling with figuring out the best way toform these committees. Some bankswanted to have more executives on themand now there are very few banks in ourreport where an executive sits on the riskcommittee. There are some anomalieslike with the China state-owned bankswhere you have governmentrepresentatives on the board and thenthey form part of the committees just byvirtue that they comprise the majority ofthe membership of the boards. As bestpractice has evolved, it's crystalizingaround the fact that these committeesshould be 100 percent independent andchaired by an independent director.

Q: Is there an area that's still evolving?Plath: One is the requirement for themembers of the risk committee, or at leastone member, to have deep knowledge ofrisk management practices and issues.Part of that may be because it's becomingharder to find individuals with these typesof qualifications because all of the firmsare looking for the same things,particularly large banks. They all want tohave a risk committee with solidexpertise, but the supply of theseindividuals might be limited. Other banksmay feel the best approach is just to havea committee comprised of individuals fullof very diverse backgrounds and that waythey'll get to questions they wouldn't havegotten to without a diverse set of views onthe committee. Another area was in thestature of the chief risk officer. It wasdifficult in a number of instances from thepublic disclosures to discern things likereporting line and stature in theorganization. For example, is the CRO amember of the senior managementcommittee or not?

Q: What does a bank's risk governanceframework mean for its credit quality?

We view it as a positive forLaMonte: credit risk for financial firms with thecaveat that until it's really tested andproven over time it's hard to see it as adefinitive risk reducer. Not only have thefinancial firms learned some valuablelessons from the financial crisis, we have

as well. One of the insights we've gainedis that it's easier to identify issues frompoor risk governance than from good riskgovernance. It's easier to spot those firmswith challenges than those that havebeen doing well ahead of time.

Q: You mention that the reportingdemonstrates compliance with globalstandards, including Basel. How dothese rules differ by jurisdiction?Plath: Continental Europe has alwayshad a more prescriptive approach tocorporate governance, while the U.S. andthe U.K. and common-law countries havebeen much more principles-based orcomply or explain. That means 'we wantyou to follow these standards, but we alsowant to give you the flexibility because werecognize one size doesn't fit all so if youaren't following for whatever reason,explain why you aren't following the rules.'U.S. bank regulators have maintainedsome flexibility with one exceptionperhaps for the largest banks where theydefinitely want them to be following bestpractices. The approach in the U.S. hasbeen 'we're going to leave it mostlyvoluntarily or as part of stock exchangeguidelines, but where it can't be resolvedthen it might be subject to regulation.'Executive compensation is an example ofthat where in Dodd-Frank it was includedas part of the say on pay regulation.

Q: How does risk governance impactbank culture and misconduct?LaMonte: We're still recovering from thefinancial crisis. The results of this crisis interms of cultural change are stickier thanthey have been in the past. We're seeingit in the attitude toward increased riskmanagement, in compensation practices,in some of the transparency anddisclosures, and in banks workingtogether. There are groups like theenhanced disclosure task force formed bythe FSB, which show banks workingtogether to try to improve theirdisclosures, and you also see it in lendingstandards and the risk that banks aretaking. As shareholder pressures returnand memories of the crisis fade, it will beinteresting to see if the good practices wesee today are able to hold.

(This interview was edited and condensed.)

Chris Plath

Mark LaMonte