September 17, 2019

U.S. Weighs Inquiry Into Big Banks’ Storage of Commodities

The Commodity Futures Trading Commission has taken the first step in an examination of warehouse operations that are controlled by Goldman Sachs, Glencore Xstrata, the Noble Group and others and used to store vast amounts of aluminum. The operations were the subject of an article by The New York Times that was published on Sunday.

The commission has told the firms to retain internal documents and e-mails related to the businesses, according to people who reviewed the requests and spoke on the condition of anonymity because the notices had not been made public.

The call comes as a Senate committee prepares to open hearings on Tuesday on how Wall Street has extended its reach beyond banking and into global markets for essential commodities. The panel is expected to focus on how banks have taken advantage of loosened federal regulation to buy warehouses, pipelines, oil tankers and other infrastructure used to store basic goods and deliver them to consumers.

The overarching question is whether banks should control the storage and shipment of commodities, and whether such activities could pose a risk to the nation’s financial system.

But other crucial issues are expected to arise as well. Among them is how Wall Street’s push into these markets has affected the prices paid by manufacturers and ultimately consumers. Another is whether Goldman and Morgan Stanley have operated their storage facilities at arms’ length from their banking business, as required by regulators.

Goldman has exploited industry pricing regulations set by the London Metal Exchange by shuffling tons of aluminum each day among the 27 warehouses it controls in the Detroit area, The Times reported on Sunday. The maneuver lengthens the storage time and generates millions a year in profit for Goldman, which charges rent to store the metal for customers, the investigation found. The C.F.T.C. issued the notices late last week, and it was unclear on Monday whether the agency or other authorities would open a full-fledged investigation into banks’ activities.

The agency’s request included a specific admonition against destroying internal documents or deleting e-mails, a warning that often precedes more formal inquiries. Among other things, the agency asked the companies to retain communications regarding monetary incentives that they provide to customers to store metal in the warehouses, as well as any complaints they may have received about their practices, according to the people who have reviewed the notices.

The delays at Goldman’s Detroit-area warehouses, which are owned by a subsidiary, Metro International Trade Services, make aluminum more expensive nearly everywhere in the country because of a formula used to determine the cost of the metal on the spot market. The delays are so long that Coca-Cola and many other manufacturers avoid buying aluminum stored there. Nonetheless, they still pay the higher price.

Michael DuVally, a Goldman spokesman, said that Goldman had arranged its ownership of Metro to be in complete compliance. A spokesman for the commission declined to comment.

Wall Street’s maneuverings in the commodities markets have added many billions to the coffers of investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more for gasoline, electricity and a wide range of products, from cars to cellphones. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices, and on Monday JPMorgan was working to reach a settlement that could cost it $500 million.

Tuesday’s hearings, led by Senator Sherrod Brown, Democrat of Ohio, will focus on banks’ ownership of aluminum warehouses, oil tankers and other facilities. Among those scheduled to testify is Saule T. Omarova, a professor at the University of North Carolina at Chapel Hill, who has been critical of bank ownership of commodities operations, and Tim Weiner, an executive at MillerCoors, the big brewing company.

For much of the last century, banks were barred from owning nonfinancial businesses, and vice versa. These restrictions were weakened or lifted during the 1990s, when Congress allowed banks to expand into storing and transporting commodities.

Questions about Wall Street’s activities in the commodities markets have been growing for years. A spokeswoman for the Federal Reserve Board said last Friday that the Fed was “reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.”

In 2008, during the depths of the financial crisis, Goldman Sachs and Morgan Stanley were granted bank holding company status; before that time they had been investment banks and not subject to the restrictions on commodities operations that covered commercial banks.

Still, it is unclear if big banks would be required to divest themselves of their commodities operations immediately. Goldman Sachs and Morgan Stanley purchased some of these operations as part of their merchant banking units, and regulations give them 10 years from the date of purchase to sell them. Goldman Sachs bought Metro International, the warehouse unit, three years ago, meaning it could hold on to the warehouse company until at least 2020.

One line of regulatory inquiry could relate to whether officials at Goldman, a bank holding company, are sufficiently separated from the activities of the merchant banking unit, which actually owns Metro International. Under the terms of the exemption under which Goldman bought the company, the two are supposed to be separated to prevent conflicts of interest.

Article source: http://www.nytimes.com/2013/07/23/business/inquiry-possible-into-storage-of-commodities-by-big-banks.html?partner=rss&emc=rss

DealBook: Regulators Overhaul Derivatives Market, but With a Caveat

Gary Gensler, chairman of the Commodity Futures Trading Commission, voted in favor of the new overhaul of the derivatives market.Peter W. Stevenson for The New York TimesGary Gensler, chairman of the Commodity Futures Trading Commission, voted in favor of the new overhaul of the derivatives market.

Federal regulators approved new rules on Thursday to shine a light on Wall Street trading, but they also softened a crucial aspect of the plan in the face of lobbying pressure from the nation’s biggest banks.

In a long-awaited vote to tackle an essential cause of the 2008 financial crisis, the Commodity Futures Trading Commission voted to adopt an overhaul of the derivatives market, pushing the risky trading from the shadows of Wall Street into the light of trading platforms. For decades, such trading has eluded regulators and the public.

“This is a paradigm shift for the American markets,” Gary Gensler, the chairman of the commission, said at the meeting. “When light shines on a market, the economy and public benefit.”

Yet, in the fine print, the agency also effectively empowered a handful of select banks to continue controlling the $700 trillion derivatives market.

Just five banks hold more than 90 percent of all derivatives contracts, which allow companies to either speculate in the markets or protect against risk. This tight grip came under fire amid concerns that those banks overcharge some companies for derivatives and pose a systemic risk to the economy. Derivatives, for example, pushed the insurer American International Group to the brink of collapse before it was rescued by the government.

In the wake of the crisis, the commission initially planned to require hedge funds, asset managers and other corporations to contact at least five banks when seeking a price for a derivatives contract. The proposed requirement was intended to bolster competition among the banks.

Under pressure from the banks — and some firms that buy derivatives — the agency agreed to lower the requirement to two banks. In about 15 months, the standard will automatically rise to three banks, but the agency agreed to produce a study that could undermine that broader standard.

The move was the product of a compromise among the agency’s five commissioners, who voted 4 to 1 in favor of the plan. Mr. Gensler, a Democrat, pushed for the higher standard. So did Bart Chilton, a fellow Democrat and frequent critic of financial risk-taking. But their plan met opposition from the Republican commissioners, and from Mark P. Wetjen, a Democrat who has sided with Wall Street on other rules.

Mr. Wetjen argued that five price quotes was an arbitrary number. He pushed for the two-bank plan, arguably the minimum required under Dodd-Frank Act of 2010, the law that mandated an overhaul of derivatives.

Even that compromise failed to please Wall Street. The Securities Industry and Financial Markets Association, the industry’s main lobbying group, said in a statement that the rules “impair market liquidity at the expense of all market participants.”

But consumer advocates, and even some regulators, have questioned whether the agency ceded too much ground. In the futures market, regulators note, a request for a price quote must be broadcast to the entire market.

“I’ve never been a more reluctant and reticent regulator than today on these rules,” Mr. Chilton said at the meeting. “I just wish we had reached a different compromise.”

Mr. Chilton joined Mr. Gensler in supporting the measure. Mr. Wetjen, who said that the more flexible plan “is not code for status quo as some might suggest,” also voted for the plan.

Jill E. Sommers, a Republican commissioner, cast the lone vote against the proposal.

In some ways, the compromise overshadowed the broader magnitude of the agency’s effort.

Under the adopted plan, many types of derivatives that have traded exclusively in private must now shift to a regulated trading platform. The platforms, known as swap execution facilities, will open a rare window into the secretive world of derivatives trading and serve as a check on risky activity.

In another rule, adopted in a 3-to-2 vote on Thursday, the agency required that large swaths of derivatives trades enter a swap execution facility. The rule captured more derivatives than the financial industry had hoped.

“No longer will this be a closed door market,” Mr. Gensler said.

Mr. Chilton was not satisfied. Before casting his vote for the plan, he said, “I’m still holding my nose and biting my tongue.”

A version of this article appeared in print on 05/17/2013, on page B8 of the NewYork edition with the headline: Regulators Tighten Rules On Trading of Derivatives.

Article source: http://dealbook.nytimes.com/2013/05/16/regulators-overhaul-derivatives-market-but-with-a-caveat/?partner=rss&emc=rss

Banks Criticize Strict Controls for Foreign Bets

WASHINGTON — Wall Street bankers and some of the world’s top finance ministers are waging a bitter international campaign to block Washington financial regulators from extending their policing powers far beyond the nation’s shores.

The effort — centered on oversight of the $700 trillion marketplace of the financial instruments known as derivatives — is just one front in the battle still being waged nearly three years after Congress passed the Dodd-Frank law, which revamped financial regulations in the United States in hopes of curtailing the risky trading practices blamed for the global financial crisis in 2008.

Industry players have spent tens of millions of dollars to avert, delay or weaken new rules that are being drafted as part of the law. Members of Congress from both parties have joined in the effort, directed at an obscure but increasingly powerful agency, the Commodity Futures Trading Commission, which has written and must approve some of the most contentious provisions.

Banks and overseas regulators are resisting an agency proposal, intended to go into full effect as early as mid-July, that would require overseas offices of American-based banks, foreign institutions and hedge funds to turn over information on foreign trades if they involve United States customers, or are guaranteed by a financial institution with American ties, requirements that the industry calls redundant and excessive.

The battle — led by high-powered lawyers and lobbyists, including former top regulators and Congressional staff members, like a former aide to retired Representative Barney Frank, a chief author of the law — has played out in hundreds of meetings with Gary Gensler, the chairman of the commission, other commission members and major players on Capitol Hill.

It has divided Democrats in Congress, caused strains in the commission and provoked public charges by industry officials that Mr. Gensler is overreaching his authority and private complaints that he is “reckless” and “stubborn.”

A former investment banker, Mr. Gensler defends his proposals, arguing that too many bad bets in the global derivatives market can be traced to overseas locations — including the $6 billion loss last year by a JPMorgan Chase trader called the London Whale — and threatened markets in the United States.

“It would be letting down the American public if we said, we are just about to complete the task but now, let’s retreat,” Mr. Gensler said in an interview. “If we don’t do this right, we will blow a hole in the bottom of the boat of reform.”

Industry officials argue that the proposals, called the cross-border guidance, will inevitably produce conflicts with foreign regulators and perhaps even drive trading away from Wall Street banks to competitors overseas.

“We should all care, because that cost will have to be passed on, in the form of higher prices for products sold to consumers or a lower return for investors,” said Kenneth E. Bentsen Jr., a former House lawmaker turned financial industry lobbyist, whose organization Sifma has urged Mr. Gensler to compromise on the cross-border rules.

Some of the strongest objections have come from foreign regulators, including officials from Britain, Russia, Japan and Germany, who complained about the plan last month in a letter to Treasury Secretary Jacob J. Lew. Global markets, they said, “will not be able to function under such burdensome regulatory conditions,” advocating instead that the United States agree to respect rules each nation adopts, assuming they are reasonably compatible.

Mary L. Schapiro, who recently stepped down as chairwoman of the Securities and Exchange Commission, said she admired Mr. Gensler for his doggedness. But, she noted, “he believes very strongly in the positions he takes — that does not always lend itself to compromise quickly.”

The S.E.C., which has jurisdiction over a much smaller share of derivatives trading than Mr. Gensler’s agency, is scheduled to consider a narrower cross-border requirement on Wednesday. With American regulators in disagreement, the industry could have more leverage.

The role of Mr. Gensler’s agency greatly expanded under Dodd-Frank, which called for significantly tighter regulation of derivatives, used by a broad array of companies to help manage risk. An airline, for instance, uses them to hedge against the fluctuating cost of jet fuel. One form of derivatives, credit-default swaps, helped topple the giant insurer American International Group in 2008, deepening the financial crisis.

In the fight over the law’s provisions, the commission has been outmatched, said Bart Chilton, one of three Democratic appointees on the panel. “They have really unlimited resources,” he said of industry officials. Rules expected to take one year in the making have stretched out to three.

“It has created what I call dysfunction junction,” he added.

Bank of America, Citigroup and JPMorgan Chase were among the first to weigh in. Kenneth M. Raisler, a former general counsel at the commodity commission and now a partner at the New York-based law firm Sullivan Cromwell, said the plan would damage his clients in overseas markets, as foreign customers would start to avoid American banks. JPMorgan Chase alone had $70 trillion of derivatives outstanding at the end of last year, a large portion of which were booked overseas.

Annette L. Nazareth, a former Securities and Exchange Commission member and now a lawyer at Davis Polk Wardwell, whose clients include Goldman Sachs and an industry trade association, said that foreign regulators, in most cases, should be able to oversee transactions that take place in their own nations, including those handled by American-based banks.

“You might have Citibank London doing business with a Swiss branch of a Dutch bank,” Ms. Nazareth said in an interview. “That is the kind of stuff that is coming up every day.”

The protests by the banks have been reinforced by dozens of members of Congress, who have written letters complaining to Mr. Gensler, introduced legislation to try to block the cross-border plan and questioned him about the proposal.

Ben Protess contributed reporting.

Article source: http://www.nytimes.com/2013/05/01/business/banks-criticize-strict-controls-for-foreign-bets.html?partner=rss&emc=rss

DealBook: British Panel Castigates Ex-UBS Officials at Hearing

Marcel Rohner, former chief of UBS, leaving a parliamentary hearing in London on Thursday. I did the best I could, he told lawmakers.Tal Cohen/European Pressphoto AgencyMarcel Rohner, former chief of UBS, leaving a parliamentary hearing in London on Thursday. “I did the best I could,” he told lawmakers.

LONDON — Several former senior executives at UBS were labeled negligent and incompetent on Thursday for failing to detect illegal activity that caused the Swiss bank to pay a $1.5 billion fine to global regulators.

On the second day of hearings at the British Parliament related to the recent rate-rigging scandal, Marcel Rohner, the former chief executive of UBS, and a number of former heads of the firm’s investment bank were questioned about whether they were aware that some 40 people had altered major benchmark interest rates for financial gain.

The executives, who no longer work at the Swiss bank, denied any knowledge of the illegal activity, and said they had found out only when UBS officially confirmed in 2011 that investigations into the firm were being conducted by the Justice Department, Commodity Futures Trading Commission and international authorities.

“What we have heard are appalling mistakes that can only be described as gross negligence and incompetence,” said Andrew Tyrie, a politician who leads the Parliament’s commission on banking standards that is investigating wrongdoing at the firms operating in London. “The level of ignorance seems staggering to the point of incredulity.”

UBS agreed to pay the $1.5 billion fine in late 2012 to settle allegations that some of its traders had altered the London interbank offered rate, or Libor, and the euro interbank offered rate, or Euribor, to increase their own profits. The benchmark rates underpin trillions of dollars of financial products, including mortgages, worldwide.

Some UBS senior managers also tweaked the bank’s submissions to present the Swiss bank in a better financial position than it actually was, according to regulatory filings.

Libor Explained

Mr. Rohner, who led UBS from 2007 to 2009, a period when the bank wrote down around $50 billion of sophisticated credit products, said he was embarrassed and ashamed by the misconduct related to Libor.

“I did the best I could,” said Mr. Rohner, who appeared taken aback by the angry questions from the British politicians, who repeatedly called his actions incompetent and negligent.

Mr. Rohner said the firm’s operations had become too complex before the financial crisis and that had made it difficult to keep track of potential illegal activity by some of its employees.

The parliamentary hearing focused on speculation at the beginning of the financial crisis that highlighted banks’ so-called lowballing of rates. The practice involved submitting lower Libor numbers in an effort to portray the firms as being in strong financial health despite a severe cut in lending.

Mr. Rohner and three former chiefs of UBS’s investment bank — Huw Jenkins, Alex Wilmot-Sitwell and Jerker Johansson — all denied being aware of the rate submissions during 2007 and 2008 when the bank raised billions of dollars of new capital to bolster its own finances.

“I had the responsibility to actively seek out information about things that concerned me,” Mr. Johansson, who ran UBS’s investment bank from 2008 to 2009, told the parliamentary hearing on Thursday. “I failed to recognize this Libor issue as being one of these issues.”

Yet British politicians refused to believe that senior executives at the Swiss bank had not known about the Libor submissions at a time when the financial markets were focused on the problems of the world’s largest banks.

“You are stretching belief to its limit to get us to believe that you were completely unaware,” Andrew Love, a politician on the parliamentary committee, told the former UBS executives.

The hearing also questioned several current and former senior members of the Financial Services Authority, Britain’s financial regulator, about their actions leading to the fine against UBS, the largest financial penalty so far levied against a bank in the continuing Libor investigation.

British regulators said that only nine out of the 40 individuals involved in the UBS rate-rigging scandal had worked in the country’s financial services industry, and that authorities were continuing to investigate a number of firms and individuals.

“This is not the end of the Libor story,” said Tracey McDermott, director of enforcement and financial crime at the Financial Services Authority.

Article source: http://dealbook.nytimes.com/2013/01/10/former-ubs-executives-are-grilled-over-libor/?partner=rss&emc=rss

DealBook: Three Arrested in Libor Investigation

9 p.m. | Updated

David Meister of the Commodity Futures Trading Commission.Dave Cross PhotographyDavid Meister of the Commodity Futures Trading Commission.

American and British authorities are shifting to an aggressive new phase in their broad investigation of interest-rate manipulation as they identify potential criminal targets and complete settlements with some of the world’s biggest banks.

In a sign of the escalation, Britain’s Serious Fraud Office made the first arrests in connection with the rate-rigging inquiry on Tuesday.

In a predawn raid, police took three men into custody at their homes on the outskirts of London. One of the men is Thomas Hayes, 33, a former trader at UBS and Citigroup, according to people briefed on the matter who spoke on condition of anonymity. The other two men arrested worked for the British brokerage firm R P Martin, said another person briefed on the matter.

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British authorities typically make arrests in the early stages of an inquiry, and the actions on Tuesday do not necessarily signal that the individuals will be charged with wrongdoing.

UBS, Citigroup and R P Martin declined to comment. A lawyer for Mr. Hayes, who has not been accused of any wrongdoing, could not be reached for comment.

Mr. Hayes also faces scrutiny from American authorities. The Justice Department could file criminal charges against him in the coming weeks, according to people briefed on the matter who spoke on the condition of anonymity because the investigation is continuing. The people cautioned that American authorities had not made a decision about charging Mr. Hayes and might have difficulty extraditing him to the United States.

Lanny A. Breuer, the head of the Justice Department's criminal division.Joshua Lott/ReutersLanny A. Breuer, the head of the Justice Department’s criminal division.

The evidence against Mr. Hayes is considered a linchpin in a broader case involving UBS, the Swiss banking giant. UBS is expected to settle accusations that Mr. Hayes and other employees carried out a scheme to push interest rates up and down to bolster trading profits, according to the people briefed on the matter. The people said the expected settlement, which could come as early as Friday, would include more than $450 million in fines and wider sanctions, the largest penalties to date related to the rate-rigging inquiry.

Building on the momentum in the UBS inquiry, authorities are preparing a spate of civil and criminal actions. After gathering thousands of internal bank e-mails and interviewing dozens of employees over the last four years, regulators and prosecutors are using the evidence to negotiate settlements with banks and draw up arrest orders for individuals.

Libor Explained

Offices of the Swiss bank UBS in London.Carl Court/Agence France-Presse — Getty ImagesOffices of the Swiss bank UBS in London.

The cases have deep roots. Regulators around the world have been investigating more than a dozen big banks that help set benchmarks like the London interbank offered rate, or Libor. Such benchmark rates are used to determine the borrowing costs for trillions of dollars in financial products, including credit cards, student loans and mortgages.

In June, authorities scored their first major victory, extracting a $450 million settlement with Barclays, the big British bank. The Commodity Futures Trading Commission, the Justice Department and the Financial Services Authority of Britain claimed that Barclays traders tried to manipulate Libor to bolster profits. They also claimed that Barclays had submitted low rates to deflect concerns about its health during the financial crisis.

Other banks are bracing for the potential fallout, including major fines and regulatory sanctions. The Royal Bank of Scotland, which is in settlement talks with regulators, said it would probably disclose fines before its next earnings report, in February. Deutsche Bank, Germany’s largest bank, said in November that it had put aside money for potential penalties related to the Libor case.

Even as authorities prepare a new wave of actions, they have not always coordinated with each other. Some American authorities were caught off guard when the Serious Fraud Office announced the arrests on Tuesday. And the various regulators are still not certain if they will jointly announce the UBS settlement this month, according to the people briefed on the matter.

The Justice Department’s criminal division and the Commodity Futures Trading Commission’s enforcement unit, in contrast, have kept close ties. Lanny A. Breuer, head of the Justice Department’s criminal division, and David Meister, who runs the commission’s enforcement team, are said to be friends. As they built Libor cases over the last two years, the units have shared evidence that they say points to a systemic problem with the rate-setting processes.

The Serious Fraud Office is a relative newcomer to the Libor case. After hesitating to enter the investigation, the agency opened a criminal inquiry into Libor manipulation in July, in response to the furor over the rate-rigging scandal at Barclays.

“The S.F.O. works incredibly slowly,” said a defense lawyer representing other individuals implicated in the Libor inquiry, who spoke on the condition of anonymity. “It’s not surprising that people have been arrested. But how long it will take to lead to criminal charges is another matter.”

Under British law, London police can hold the three men arrested on Tuesday for 24 hours. Authorities can apply for an extension if they need more time for questioning the men.

Mr. Hayes, who got his start at the Royal Bank of Canada, built his reputation as an interest rates trader at UBS, a person briefed on the matter said. He worked at UBS’s Tokyo office from about 2006 to 2009 before departing for Citigroup. At the American bank, he received a promotion, earning a director title.

Mr. Hayes spent less than six months trading at Citigroup. The bank suspended him in 2010 after he approached a London trading desk about improperly influencing the yen-denominated Libor rates, a person briefed on the matter said. He was fired in September 2010, and the bank reported his suspected actions to authorities.

UBS also raised concerns about Mr. Hayes to the Commodity Futures Trading Commission, according to another person briefed on the matter. In the course of an internal investigation, the Swiss bank concluded that Mr. Hayes had worked with traders at other banks to influence rates, according to officials and court documents.

At the time, the trading commission ordered other institutions that helped set Libor rates to conduct similar inquiries. Those investigations have formed the basis of the agency’s cases.

Mr. Hayes also emerged in court documents filed this year by Canadian authorities. The documents — collected by Canada’s Competition Bureau, the country’s antitrust authority — highlight an alleged scheme in which Mr. Hayes and other traders may have colluded to influence yen Libor rates. The Canadian investigation, which covers conduct from 2007 to 2010, also referred to traders at JPMorgan Chase, HSBC, Deutsche Bank and the Royal Bank of Scotland.

The traders, the documents said, at times corresponded using instant messages on Bloomberg machines. While the activity took place outside Canada, the trading affected financial contracts in the country that were pegged to yen Libor.

The traders further asked middlemen at brokerage firms “to use their influence” on other banks that set Libor, according to the documents. The brokers included employees at R P Martin, a person briefed on the matter said.

“Traders at participants’ banks communicated with each other their desire to see a higher or lower yen Libor to aid their trading positions,” the Canadian documents said.

Azam Ahmed and Ian Austen contributed reporting.

Article source: http://dealbook.nytimes.com/2012/12/11/three-arrested-in-connection-to-rate-rigging-scandal/?partner=rss&emc=rss

DealBook: Regulators Clarify Timing of New Derivatives Rules

Gary Gensler, chairman of the Commodity Futures Trading Commission.Scott Eells/Bloomberg NewsGary Gensler, chairman of the Commodity Futures Trading Commission.

As Wall Street gears up for an overhaul of the $600 trillion derivatives business, big banks have grumbled that regulators failed to specify when the new policies will take effect.

After months of uncertainty, the issue reached a happy conclusion for the banks. Federal authorities now say the new regime will not kick in until Jan. 1, providing clarity and a brief — but important — extension to Wall Street.

Until now, the Commodity Futures Trading Commission had warned banks that they were likely to have to register as so-called swaps dealers by October. The agency’s chairman, Gary Gensler, also recently told Congress that “light will begin to shine on the swaps market,” a prominent area of derivatives trading, this fall.

But last week, Mr. Gensler expressed a more lenient timeline in a private meeting with Wall Street groups, according to people briefed on the meeting. His spokesman, Steve Adamske, confirmed on Wednesday that banks need not become registered swap dealers until January at the earliest.

It was the latest regulatory reprieve for Wall Street. Last week, the agency also granted an extension for rules that, for example, require firms to verify that their trading partners meet certain “eligibility standards.”

The Commodity Futures Trading Commission is planning to issue a formal document that spells out some of the agency’s due dates. The decision drew praise from Wall Street lawyers, whose clients have grown anxious about the unclear deadlines.

“In ending market uncertainty as to the registration date, the C.F.T.C. will provide a major service to the market,” said Annette L. Nazareth, a partner at the law firm Davis Polk and a former regulator at the Securities and Exchange Commission. “Entities planning to become swap dealers are working incredibly hard to implement a plethora of new C.F.T.C. requirements, and certainty as to the compliance timeline is a necessary prerequisite.”

The agency’s rules are a central component of the Dodd-Frank Act, which overhauled Wall Street regulation in the aftermath of the financial crisis. The law took particular aim at swaps trading, an opaque business that blew up in the crisis.

The swap-dealer designation, which applies only to firms that arrange more than $8 billion worth of swaps contracts annually, was among the most contentious aspects of the crackdown. The title carries requirements that banks, among other things, adopt internal risk management controls, bolster disclosures to trading partners and report their trades in real time.

But even the most sophisticated financial firms — and their high-priced lawyers — could not ferret out the registration deadline. The confusion stemmed from the vagaries of several overlapping rules. While the fine print of Dodd-Frank suggested that January was the likely deadline, some conflicting statements from the Commodity Futures Trading Commission confused the banks.

One Dodd-Frank provision implies, in effect, that banks must register by Oct. 12, when a rule that defines “swap” and other terms takes effect. But a separate provision requires only that banks start counting on that date to see if they hit the $8 billion threshold for swaps contracts in any given year. Big banks like Goldman Sachs and JPMorgan Chase are likely to pass that point in a matter of days.

At the end of the month in which a bank reaches the $8 billion mark, likely Oct. 31, banks then have an additional 60 days to sign up. That time frame will prompt most large banks to register by Jan. 1, while smaller firms might end up taking months to comply.

It is unclear if any banks will register early. Only one firm, Newedge, has opted to move ahead of the deadline.

Article source: http://dealbook.nytimes.com/2012/09/05/regulators-clarify-timing-of-new-derivatives-rules/?partner=rss&emc=rss

DealBook: After Barclays Scandal, Regulators Say Rates Remain Flawed

Ben S. Bernanke, the chairman of the Federal Reserve, testified before the Senate Banking Committee on Tuesday.Stephen Crowley/The New York TimesBen S. Bernanke, the chairman of the Federal Reserve, testified before the Senate Banking Committee on Tuesday.

9:06 p.m. | Updated

Federal authorities cast further doubt on Tuesday about the integrity of a key interest rate that is the subject of a growing investigation into wrongdoing at big banks around the globe.

In Congressional testimony, the chairman of the Federal Reserve and the head of the Commodity Futures Trading Commission expressed concern that banks had manipulated interest rates for their own gain. They also indicated that flaws in the system — which were highlighted in a recent enforcement case against Barclays — persist.

“If these key benchmarks are not based on honest submissions, we all lose,”
Gary Gensler, head of the trading commission, which led the investigation into Barclays, said in testimony before the Senate Agriculture Committee.

In separate testimony before the Senate Banking Committee,
Ben S. Bernanke, the Federal Reserve chairman, said he lacked “full confidence” in the accuracy of the rate-setting process.

The Fed faces questions itself over whether it should have reined in the rate-manipulation scheme, which took place from at least 2005 to 2010.

Documents released last week show that the New York Fed was well aware of potential problems at Barclays in 2008. At a hearing in London on Tuesday, British authorities said the New York Fed never told them Barclays was breaking the law.

Gary Gensler, the head of the Commodity Futures Trading Commission, testified before the Senate Agriculture Committee on Tuesday.Mark Wilson/Getty ImagesGary Gensler, the head of the Commodity Futures Trading Commission, testified before the Senate Agriculture Committee on Tuesday.
Mervyn A. King, governor of the Bank of England, addressed a parliamentary committee on Tuesday.ReutersMervyn A. King, governor of the Bank of England, addressed a parliamentary committee on Tuesday.

The scrutiny intensified on Tuesday as Representative Randy Neugebauer, chairman of the House subcommittee investigating the Libor scandal, announced plans to seek additional documents from the New York Fed about JPMorgan Chase, Citigroup and Bank of America, the three American banks involved in setting interest rates.

The concerns center on the London interbank offered rate, or Libor, an essential benchmark that affects the cost of borrowing for consumers and corporations. Trillions of dollars in mortgages and other financial products are tied to Libor, which is set daily based on reports from a panel of large banks.

Several government agencies, including authorities in the United States, Canada, Britain and Japan, are examining whether the banks made bogus reports.

Last month, Barclays agreed to settle with the Commodity Futures Trading Commission, the Justice Department and the Financial Services Authority of Britain for $450 million. The British bank was accused of reporting false rates that both bolstered its profits and projected an overly rosy image of its health during the financial crisis.

“The conduct occurred regularly and was pervasive,” Mr. Gensler said on Tuesday.

The actions also happened in plain view of regulators.

In 2008, Barclays informed the New York Fed that it was submitting artificially low rates. The concerns were passed on to
Timothy F. Geithner, then the chief executive of the regulatory body.

But the New York Fed did not tell other authorities in the United States or Europe about the specific problems at Barclays. Instead, it proposed changes to the rate-setting process. At the time, Mr. Geithner recommended in an e-mail that British officials “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport,” according to documents released last week.

“At no stage did he or anyone else at the New York Fed raise any concerns with the bank that they had seen any wrongdoing,” Mervyn A. King, governor of the Bank of England, told a British parliamentary committee on Tuesday, referring to Mr. Geithner.

Mr. King said his discussion with Mr. Geithner did not represent a warning sign about potential illegal activity.

“There was no suggestion of fraudulent behavior,” the British central bank official told Parliament. His colleague Paul Tucker, who also received the e-mail from Mr. Geithner, echoed his statements, saying in testimony that the recommendations “didn’t set off alarm bells.”

Rather, the British central bank passed along the proposed changes to the British Bankers’ Association, a trade group that oversees the rate.

In his testimony on Tuesday, Mr. King said that some of the New York Fed’s recommendations were included in a Libor review conducted by the trade group.

The British Bankers’ Association also sought feedback from the CME Group, the Chicago-based exchange, according to documents provided to The New York Times. In a July 2008 letter, the exchange argued that the plan “must have teeth” and “credibility.”

In late 2008, the British Bankers’ Association adopted changes to the Libor process. But neither the regulators nor the trade group put a stop to Barclays’ illegal activities, which continued through 2009.

On Tuesday, Mr. Bernanke issued a broad defense of the Fed’s actions in 2008 after it learned that banks were misrepresenting interest rates.

“Isn’t there a responsibility to alert the customers?” Senator
Jeff Merkley, Democrat of Oregon and a member of the Banking Committee, asked Mr. Bernanke. “If you had it to do over again, would you also be alerting the customers?”

Mr. Bernanke said it was hardly a secret that Libor was losing credibility. During the financial crisis, the media and the markets were swirling with speculation about problems with the rate-setting process. At the time, the Fed was primarily focused on saving Wall Street from collapse.

“The responsibility of the New York Fed was to make sure that the appropriate authorities had the information, which they did,” Mr. Bernanke said.

The Barclays case was the first to stem from the broader global investigation, which involves more than 10 other banks, including UBS and the Royal Bank of Scotland. While much scrutiny has focused on European banks, authorities are also investigating big Wall Street companies like Citigroup and JPMorgan.

Mr. Gensler on Tuesday said his agency “has and will continue vigorously to use our enforcement and regulatory authorities to protect the public, promote market integrity, and ensure that these benchmarks and other indices are free of manipulative conduct and false information.”

Banks, Mr. Gensler said, “must not attempt to influence” Libor. “It’s just wrong and against the law.”

But the problems may remain, say regulators. On Tuesday, Mr. Bernanke said the benchmark still lacked credibility.

“It’s clear beyond these disclosures that the Libor system is structurally flawed,” he told lawmakers.  

Binyamin Appelbaum contibuted reporting.

Article source: http://dealbook.nytimes.com/2012/07/17/after-barclays-scandal-regulators-say-rates-remain-flawed/?partner=rss&emc=rss

DealBook: Regulators Charge Futures Brokerage Firm and Chief With Fraud

10:00 p.m. | Updated

The Commodity Futures Trading Commission on Tuesday charged a futures firm and its chief executive with fraud and making false statements after nearly $200 million in customer funds went missing.

The regulator is seeking a restraining order against the Peregrine Financial Group, also called PFGBest, to prevent the destruction of any information that may be needed in the course of the investigation.

The commission is also asking a federal court to appoint a receiver for the firm and freeze its assets. A day earlier, the chairman and chief executive, Russell Wasendorf Sr., tried to commit suicide outside of the firm’s offices in Cedar Falls, Iowa.

The Federal Bureau of Investigation is investigating the matter, according to a spokeswoman for the Omaha division, Sandy Breault. Ms Breault indicated that the Chicago office of the F.B.I. might also become involved.

Late Tuesday, the firm filed for bankruptcy.

News of the missing money surfaced Monday, when the firm’s primary regulator, the National Futures Association, determined that an account that was supposed to have $225 million of customer money actually held just $5 million.

A further review of records showed that the firm had been falsifying its records as far back as 2010, the regulator said in its complaint. In February 2010, an account that purported to have some $218 million in reality contained just $10 million.

“P.F.G. and Wasendorf have used customer funds for purposes other than those intended by its customers, and consequently, have misappropriated these funds,” the complaint states. “The whereabouts of the funds is currently unknown.”

How the money came to be siphoned off from customer accounts remained a mystery, particularly in the wake of increased scrutiny on the futures industry after the collapse of MF Global.

After the fiasco at MF Global, in which more than $1 billion in customer money went missing, regulators vowed to ensure the safety of such accounts.

Both the National Futures Association and the futures commission conducted reviews of futures firms to reassure investors. The regulators granted them all clean bills of health.

PFGBest is well-known in the tight-knit community of futures brokerage firms. Mr. Wasendorf was considered by many to be a pioneer of the industry, and was registered with the commission since 1992. He fully owned PFGBest, and his son, Russell Wasendorf Jr., served as president of the company.

On Monday, the National Futures Association, which is an industry self-regulator, moved to halt operations at the firm immediately after discovering the shortfall.

In a report filed late Monday, the association said that bank statements from US Bank, where customer money was held, could have been fabricated.


This post has been revised to reflect the following correction:

Correction: July 10, 2012

Based on documents provided by the Commodity Futures Trading Commission, an earlier version of this article listed the incorrect headquarters of Peregrine Financial Group. The firm is based in Cedar Falls, Iowa, not Cedar Rapids.

Article source: http://dealbook.nytimes.com/2012/07/10/regulators-charge-futures-brokerage-with-fraud/?partner=rss&emc=rss

DealBook: Barclays’ C.E.O. Resigns as Bank Frames a Defense

Barclays's headquarters in Canary Wharf in east London.Carl Court/Agence France-Presse — Getty ImagesBarclay’s headquarters in Canary Wharf in east London.

When Barclays bank manipulated key interest rates to bolster profits during the 2008 financial crisis, senior executives said they were following a common practice that regulators implicitly approved, according to documents released by the bank and authorities.

But the illicit acts, which led to a $450 million penalty for the bank, claimed its biggest victims on Tuesday: Robert Diamond, the British bank’s chief executive, and one of his top deputies, Jerry del Missier, the chief operating officer. The scrutiny is expected to grow on Wednesday, when Mr. Diamond appears before a British parliamentary committee.

Even as they resigned, Barclays published documents indicating that some executives thought they were responding to an implied directive from the Bank of England, Britain’s central bank.

Barclays, in its defense, said that it not only advised the Bank of England and other British authorities about interest rate discrepancies across Wall Street, but also the Federal Reserve Bank of New York. The Wall Street firms weren’t told to stop the practice, Barclays said.

The disclosures put a spotlight on the interaction between regulators and big banks over the setting of interest rates during the financial crisis, raising questions about what authorities knew about the practice.

Investigators cast some doubt on Barclays’ view. The bank never explicitly told regulators that it was reporting false interest rates that amounted to manipulation, according to regulatory documents.

“Barclays is just one example of why we need a culture shift in the financial world — and that means all the way to the top,” said Bart Chilton, a member of the Commodity Futures Trading Commission, the American regulator leading the investigation.

After the Barclays settlement, American and British authorities are now shifting their focus to a pattern of wrongdoing on Wall Street, pursuing action against more than 10 big banks scattered across the globe, including UBS, JPMorgan and Citigroup. Authorities suspect that big banks reported false rates throughout the crisis to squeeze out extra trading profits and mask their true financial health.

The Barclays case is the first blow in a series of potential actions against the banks that help set the London interbank offered rate, which is used to determine the borrowing costs for numerous financial products, including student loans, mortgages and credit cards. Libor and the other interbank rates are published daily, based on surveys from banks about the rates at which they could borrow money in the financial markets.

Amid the Barclays fallout, other British banks are now scrambling to settle with authorities, according to people with knowledge of the matter who spoke on the condition of anonymity. American regulators have set their sights on a large European institution, another person said.

The Commodity Futures Trading Commission is building several cases in piecemeal fashion, choosing at this point to mount evidence against each bank rather than unveil a single global settlement, according to the people. The next case is not expected to be imminent.

The agency pursued Barclays first, viewing it as a case study in Libor manipulation. The enforcement action hit all the flash points in the broad investigation, exposing a multiyear scheme touching nearly every layer of management and business practices across three continents.

Regulators accused the bank of lowering its Libor submissions to deflect concerns about its high borrowing costs amid the crisis. Mr. Diamond’s top deputies sought rates in line with rival banks and directed employees not to put your “head above the parapet,” according to regulatory filings.

Barclays was also accused of “aiding attempts by other banks to manipulate” interest rates, further underscoring the clubby nature of Wall Street. In some cases, bank employees coordinated with former colleagues who worked at rival firms as a way to manipulate the rates, according to the regulatory documents.

“This scandal is another indication of how the massive growth of the financial markets did not go hand-in-hand with any thought about how to control the trading activity,” said Pete Hahn, a fellow at Cass Business School in London.

In building the case, regulators benefited from a series of brazen e-mails that outlined the scope of the scheme. At one point, a trader called a colleague a “superstar” for furthering the illicit actions. Another employee even acknowledged that the bank was submitting “patently false” rate information.

Barclays initially resisted scrutiny from the trading commission. The C.F.T.C., Barclays argued, was overstepping its authority when it opened an investigation in early 2008.

When that argument failed, Barclays switched gears, claiming it had briefed government officials. Over the course of a year, the bank discussed its Libor submissions 13 times with the British regulator, the Financial Services Authority, and 12 times with the Federal Reserve, according to documents Barclays made public on Tuesday ahead of Mr. Diamond’s testimony.

In one call on April 2008, a Barclays manager acknowledged to the Financial Services Authority that the bank was understating its Libor submissions. “So, to the extent that, um, the Libors have been understated, are we guilty of being part of the pack? You could say we are,” the Barclays manager said, according to regulatory documents.

“I would sort of express us maybe as not clean clean, but clean in principle.”

Or, as one Barclays official told the British Bankers Associations, the organization that oversees Libor, “we’re clean but we’re dirty-clean, rather than clean-clean.” Barclays made similar comments to the Federal Reserve Bank of New York, the documents say.

The back-and-forth illustrated the tangled web of relationships on Wall Street, where authorities and bankers maintain close ties. Despite the troubling acknowledgments from the bank, regulators didn’t put an immediate halt to the practice. Some executives said they thought that regulators encouraged the actions.

In October 2008, Mr. Diamond received a call from a Bank of England official, Paul Tucker, who questioned why Barclays was submitting rates consistently higher than rivals, a sign of relatively poor health.

Mr. Diamond then e-mailed a top deputy about the conversation, saying that Mr. Tucker stated it “did not always need to be the case that we appeared as high as we have recently,” according to documents the bank released on Tuesday.

The deputy, Mr. del Missier, then directed employees to keep the submissions lower, or at least in line with rivals. His actions, some regulators say, was owed to a “miscommunication,” rather than instructions from Mr. Tucker.

The Financial Services Authority investigated Mr. del Missier’s actions, but did not pursue a prosecution, Barclays said. The agency, however, did issue a rebuke of the bank’s activities.

“The Libor scandal has caused a huge blow to the reputation of the banking industry,” Adair Turner, chairman of the Financial Services Authority, said in a speech on Tuesday.

Article source: http://dealbook.nytimes.com/2012/07/03/barclays-c-e-o-resigns-as-bank-frames-a-defense/?partner=rss&emc=rss

DealBook: Robert Diamond, Chief Executive of Barclays, Resigns

1:52 p.m. | Updated

LONDON – Barclays is trying to quickly stem the fallout from a rate-manipulation scandal, as its chief executive, Robert E. Diamond Jr., resigned abruptly on Tuesday.

Less than a week ago, the big bank agreed to pay $450 million to settle accusations that it had tried to influence key interest rates for its own benefit, sparking a political firestorm in Britain.

Now, the scandal has claimed three Barclays executives: Mr. Diamond; Marcus Agius, the chairman; and Jerry del Missier, who was promoted to chief operating officer last month.

The resignations come as regulators in London and Washington are investigating whether big banks manipulated interest rates to their own advantage, aiming to increase profits and fend off questions about their financial health. Such benchmarks, including the London interbank offered rate, or Libor, are essential to setting the lending rates for corporations and consumers. In the Barclays case, regulators accused the bank of lowering its Libor submissions to deflect concerns about its high borrowing costs.

While Mr. Diamond is stepping down, he will face continued scrutiny on Wednesday when he testifies before a British parliamentary committee. Local politicians are expected to question him about the actions within the bank that culminated in multimillion-dollar fines from the Justice Department and the Commodity Futures Trading Commission in the United States and the Financial Services Authority in Britain.

Robert E. Diamond Jr., Barclays' chief, is scheduled to testify before a British parliamentary committee on Wednesday.Jerome Favre/Bloomberg NewsRobert E. Diamond Jr., who has resigned as chief of Barclays, is scheduled to testify before a British parliamentary committee on Wednesday.Jerry del Missier, who was appointed chief operating officer last month, was said to know of the actions and didn't stop them.Brendan McDermid/ReutersJerry del Missier, who was appointed chief operating officer last month, was said to have knowledge of the actions and did not stop them.

On Monday, Prime Minister David Cameron of Britain also announced a wide-ranging inquiry into the British banking sector, with the findings to be published by the end of the year. “We need to take action right across the board,” he told Parliament.

The Serious Fraud Office of Britain also said on Monday that it might pursue criminal prosecutions in connection with the manipulation of Libor. British authorities, who continue to work with their overseas counterparts, will make a decision about the evidence gathered by the country’s Financial Services Authority.

Mr. Diamond’s resignation, which was effective immediately, came after mounting criticism of the bank’s actions from politicians and shareholders. Mr. Diamond’s decision to leave was made on Monday afternoon in response to this pressure, according to a person with direct knowledge of the matter, who spoke on the condition of anonymity because the discussions were private. Mr. Diamond had wanted to avoid prolonging the public focus on the bank’s past activities, the person added.

“My motivation has always been to do what I believed to be in the best interests of Barclays,” Mr. Diamond said in a statement. “No decision over that period was as hard as the one that I make now to stand down as chief executive. The external pressure placed on Barclays has reached a level that risks damaging the franchise. I cannot let that happen.”

Mr. del Missier resigned as chief operating officer on Tuesday with immediate effect. He was the co-president of Barclays Capital, the firm’s investment banking unit, from 2005 to 2008, and become co-chief executive of corporate and investment banking at Barclays in 2009.

Mr. Agius, who resigned as chairman on Monday, will stay at the bank until a new chief executive has been found, and he will then step down, Barclays said in a statement. While the search is under way, he will head the executive committee, and will be supported by Michael Rake, the bank’s deputy chairman.

Further resignations could be in the works.

Fresh details about the case show how Mr. Diamond and other senior executives played a role in the questionable actions and failed to prevent them, according to several people familiar with the details of the case.

Mr. Diamond’s top deputies told employees in 2007 and 2008 to report artificially low rates in line with those of rivals in an effort to deflect scrutiny about the bank’s health at the height of the financial crisis, according to the people, who spoke on condition of anonymity because they were not authorized to speak publicly.

Barclays declined to comment about the involvement of senior executives.

Mr. Diamond’s resignation comes after the settlement that Barclays reached last week with American and British authorities. The deal is one result of a wide-ranging inquiry into how big banks set certain benchmarks, including the London interbank offered rate, or Libor.

Those rates are used to determine the costs of $350 trillion in financial products, including credit cards, mortgages and home loans. American and international regulators are still investigating several other banks, including HSBC, JPMorgan Chase and Citigroup.

In a letter to Barclays employees on Monday, Mr. Diamond said he was “disappointed and angry” about the bank’s past attempts to manipulate key interest rates.

“I am disappointed because many of these behaviors happened on my watch,” he wrote.

The leadership changes at Barclays come after Mr. Diamond helped transform the firm’s investment bank into a major player on Wall Street.

The American-born Mr. Diamond joined the British bank in the late 1990s, expanding the investment banking unit into new areas like derivatives and commodities trading.

Mr. Diamond, then the head of Barclays Capital, also extended the firm’s presence in the United States in 2008 by acquiring the North American operations of Lehman Brothers at the height of the financial crisis.

Shares in Barclays rose as much as 4.8 percent during the day in London, but eventually finished down 0.8 percent by the end of trading on Tuesday.

Article source: http://dealbook.nytimes.com/2012/07/03/chief-executive-of-barclays-resigns/?partner=rss&emc=rss