CFTC in Action: Agency Adopts Rules on SIDCOs, Reissues Relief for Contemporaneous Swaps Documentation Requirements, & Its Chair Gensler Praises Swaps Markets

CFTC Adopts Systemically Important Designated Clearing Organization Rules
The US Commodity Futures Trading Commission has adopted its final rules regarding systemically important designated clearing organizations. The new SIDCO rules line up CFTC regulations to with the Principles for Financial Market Infrastructures set up by the International Organization of Securities Commissions and the Bank for International Settlements.

Per the rules, SIDCOs can remain Qualifying Central Counterparties (QCCPs) for international bank capital standard purposes. The rules come with substantive requirements having to do with financial resources, governance, system safeguards, special default rules and procedures for shortfalls or losses that are not covered, disclosure requirements, risk management, efficiency, and recovery and wind-down procedures. The rules also tackle the procedures through which derivatives clearing organizations besides SIDCOs can choose to become subject to additional standards so they can also be considered QCCPs.

Relief on Contemporaneous Swaps Documentation Requirements is Reissued
In other CFTC news, the agency’s Division of Swap Dealer and Intermediary Oversight says that it is extending the no-action relief that it issued earlier this year to swap dealers (SDs) and major swap participants (MSPs). The earlier relief gave certain exemptions to CFTC rules that were put into place in February 2012 and established business conduct standards for MSPs and SDs in their counterparty dealings.

Now, with this latest no-action letter, relief has been issued again along with modifications, including obligatory CFTC registration of swap execution facilities and additional staff guidance regarding CFTC straight-through-processing requirements. Also included are modifications that acknowledge the required immediate and efficient processing of swaps all the way through to clearing. Meantime, conditions that require an agreement between and MSP or SD and its counterparty before swaps can be executed have been removed.

CFTC Chair Speaks at Swaps Execution Facility Conference
At the recent Swaps Execution Facility Conference, CFTC Chair Gary Gensler said that now, for the first time, all swaps market participants are able to compete on a level playing field. He noted that prior to 2012 there was no transparency in the swaps market and that this played a role in the 2008 financial crisis. Gensler credits the Dodd-Frank Act and the significant compliance dates that are now in effect.

He spoke about how real-time clearing now exists and that there are 18 temporarily registered swaps execution facilities that offer impartial market access. Gensler also talked about how his agency’s staff just put out guidance reminding SEFs about their duty to make sure that all market participants can fully engage on order books or request-for-quote systems while addressing questions that market participants had wanted the CFTC to answer.

Additionally, the CFTC chief talked about how he believed that by February a trade execution requirement for a significant chunk of the interest rate and credit index swaps markets would be in place. Gensler also spoke about how in addition to a finalized block rule for swaps there should also be one for futures.

The Resolution Law Group is a securities fraud law firm that represents institutional investors and high net worth individuals seeking to recoup their financial losses.

The Resolution Law Group: CFTC Votes to Restrict Commodities Trader’ Position Sizes in the Market

In a 3-to-11 vote, the Commodity Futures Trading Commission chose to favor restricting the size of any traders’ footprint in the commodities market. This is the CFTC’s second vote on a proposal over “position limit” rules. A rule that it proposed two years ago was turned down by the United States District Court for the District of Columbia after two Wall Street trade organizations sued claiming that the rule would cause prices to become erratic.

The proposal is related to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The CFTC already has rules to limit market speculation but before they were just applicable during the last days before a futures contract delivery and only to specific agricultural commodities.

Now, the agency’s new rules are proposing to set up limitations that are more broad so that they include derivative contracts for 28 kinds of commodities futures contracts, and not just agricultural contracts but also metal and energy ones and regardless of when the delivery date would be. Exemptions for traders with genuine hedging needs would be allowed, as it will be for firm-held positions involving banks with nearly 50% ownership. To avail of exemptions, trading firms would have to prove that they are not in control of an affiliate. Aside from that, just non-consolidated firms will get exemptions.

The CFTC’s rules would restrict a trader’s maximum size in derivatives to 25% of the deliverable supply of the commodity that has been estimated. It also will bring back conditional limits, which let traders hold five times more than the limit in cash-settled contracts as long as they don’t have a position in physical-settled contracts. The rule will also modify details about what is considered hedging, which, per Dodd-Frank, is exempt from position limits. Additionally, the rule won’t let there be an exemption for derivative contracts that traders entered into in order to make good rent paid for empty storage facilities.

The rule is now subject to public comment. After 60 days, commissions will vote on a final rule.

The Resolution Law Group handles securities fraud cases for institutional investors and individual investors. Contact our commodities trading fraud lawyers today.

The Resolution Law Group: SEC May Propose New Swaps Margins & Title VII Rules

At a Securities Industry and Financial Markets Association conference last month, the Securities and Exchange Commission’s Division of Trading and Markets acting director John Ramsay said that the regulator will likely consider reworking a 2012 proposal that would establish margin requirements on specific swap trades now that international financial supervisors have established new margin requirements. It was The International Organization of Securities Commissions and the Basel Committee on Banking Supervision that issued the document setting up a final framework for margin requirements related to non-centrally cleared derivatives.

Ramsey said that in the wake of this document, the proposed rules that the SEC might withdraw are the ones that affect margin requirements as they pertain to certain swaps. The structure set up by the Basel-IOSCO document partially puts into place specific margin requirements on financial firms and the systematically integral non-financial entities that take part in non-centrally cleared derivatives transactions.

The regulator’s earlier proposal would have established margin requirements for security-based swap dealers and major swap participants while upping the minimum net capital requirements for brokerage firms allowed to implement the alternative internal model-based method to compute net capital. Now, however, said Ramsey, the agency could propose a new rule to make sure there is comment on a “full range of initiatives,” including the ones addressed in the Basel-IOSCO document.

Ramsay also spoke about a likely rulemaking sequence the SEC could use to put into place sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII, which was in part responsible for introducing swaps market regulation. He stated that the agency could assess Title VII rules that were finalized or proposed by the Commodity Futures Trading Commission to identify possible differences between CFTC rules and SEC rules. However, said Ramsey, even though the SEC is concerned that registrants might feel burdened from having to deal with two compliance regimes, this did not mean the agency would only issue rules that are in complete alignment with CFTC rules.

If you feel you are the victim of Securities Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.

 

The Resolution Law Group: Five Years After Lehman’s Bankruptcy, How is the US Financial System Doing Now?

It was nearly five years ago on September 15, 2008 when the public learned that Lehman Brothers had gone bankrupt, resulting in billions of dollars of losses on a financial system already struggling with a housing market that was failing, as well as a growing credit crisis. Also, Merrill Lynch (MER) would be forced to join with Bank of America (BAC), the US car industry was in trouble, and insurer AIG stood on the brink of collapse. Now, while there has the economy has somewhat recovered, many Americans can’t help but worry that such a financial meltdown could happen again.

Back then, Wachovia (WB) was also in peril of going down and Washington Mutual (WAMUQ) was failing miserably—to become the biggest US banking failure to date—and government and financial industry leaders scrambled to save what they could. Bailouts were issued and emergency measures taken including: a federal takeover of housing finance giants Freddie Mac and Fannie Mae, which kept the housing market going by allaying worries that the two entities would default on bonds,the guaranteeing of money market mutual funds that the then-trillion dollar industry depended on for the business short-term funding as well as retirement, and the setting up of the Troubled Asset Relief Program (allowing the Treasury to help put back confidence in banks via the buying of equities of securities in many of these banks and recapitalizing the system.

In a USA Today article, ex-US senator Christopher Dodd said that he believes there will be another crisis; only this one could also involve China, Brazil, and India—not just the US and the European continent. Meantime, while US Chamber of Commerce’s Center for Capital Markets Competitiveness CEO and President David Hirschmann said that a crisis as big as the one in 2008 is not as likely, he predicts there will still be failures. He also said that it is unclear whether we’ve established a better system for identifying problems and risks.

In August, US President Obama delineated a proposal to rework the country’s housing finance-system, which would phase out Freddie and Fannie. While putting them under government control a few years back provided some reprieve, this was never meant to be permanent solution to the problems that happened.

Also in the article, ex-US Treasury Secretary Henry Paulson said he wants broader industry reform and while he believes the Dodd-Frank Wall Street Reform and Consumer Act is a big move n the right direction, he expressed the need for a reworking of the federal financial regulatory agencies and a closer examination of their duties, which sometimes overlap. There also have been calls from government watchdogs for reforms to the biggest US banks because of concerns that their interrelatedness and complexities make them an ongoing risk to the financial system.

If you feel you are the victim of Broker Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.

 

The Resolution Law Group: Regulatory Reform – Delay or Destruction?

10 Democrats in the US Senate are calling on the Obama Administration to delay a proposal by the Department of Labor involving retirement plan-related investment advice until after the SEC makes a decision over whether to put out its own proposal about retail investment advice. The Commission is looking at whether it should propose a rule that would up the standard for brokers who give this type of advice. The lawmakers are worried that the two rules might conflict and obligate investment advisers and brokers to satisfy two standards.

Meantime, the Labor Department is getting ready to once more propose a rule that would broaden what “fiduciary” means for anyone that gives investment advice about retirement plans. Its previous proposal in 2010 met with resistance from the industry and some members of Congress. Even now there are also Republican lawmakers that want the DOL to wait until after the SEC makes a decision.

Commission Chairman Mary Jo White says she would like the agency to make this decision as “as quickly as we can.” Also, earlier this month she said it would be “premature” to talk about whether the regulator will change or withdraw a recent proposal to amend Regulation D to improve requirement for companies wanting a more relaxed general solicitation arena.

In a letter to House Financial Services Capital Markets Subcommittee Chairman/Rep. Scott Garrett (R-N.J.), White said the proposal is still subject to comment and it was too early to talk about what the SEC might do. Garrett and Financial Services Oversight Subcommittee Chairman Patrick White had written her following the Commission’s proposal to up Reg D requirements for companies wanting to employ general solicitation in private offerings.

The SEC put out the proposal on the same day that it adopted rules regarding private placement and general solicitation, per the Jumpstart Our Business Startups Act. Contending that the proposed amendments violate the JOBS Act, Reps. White and Garrett want them withdrawn. For example, the proposed changes would mandate that issuers submit notice, via Form D, 15 days before advertising offerings.

The two men say that imposing this type of waiting period on solicitation violates the Act. In response, Commission Chairman White said their concerns would be noted in the SEC’s comment file.

Earlier this week US President Barack Obama met with Federal Reserve Chairman Ben Bernanke and other senior regulators and called for the full implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to officials, while Mr. Obama praised the regulators for all the work they’ve done up to now to implement the act’s reforms and consumer protections, he made it clear that they need to complete implementing all the reforms that have yet to be set in place. Regulators have been challenged with finishing up the rules needed to fully implement the law, touted as the most important reform of the country’s financial sector since the 1930’s.

The Resolution Law Group is a securities law firm that represents institutional clients and high net worth individuals with financial fraud claims. Contact our securities fraud attorneys today.

The Resolution Law Group: AIG Shuts Down Customers’ Bank Accounts in the Wake of Dodd-Frank Limits

American International Group (AIG) will give its banking unit back their money and close out their accounts. The move is because the Dodd-Frank Wall Street Reform and Consumer Protection Act has imposed limits on insurers that have units that take deposits.

In a letter to clients, the insurance giant said that retail deposit accounts would stop being serviced as of September 30 and AIG Bank will become a “trust-only organization.” Interest will be included in the fund returns.

AIG is streamlining its focus before rules limiting proprietary trading and investments by insurance companies in banking units in hedge funds or private equity go into effect. Already, Allstate Corp., Hartford Financial Services Group Inc., MetLife Inc. (MET) have stepped back from banking or sold deposits because of greater regulator oversight.

Because of AIG’s involvement in banking, the Office of Thrift Supervision was its main federal regulator before the economic crisis. In 2009, the OTS said that it “fell short” of that oversight and failed to identify the risk involved in the insurer’s credit-default swap portfolio. The US later spent $182.3 billion to bail out the insurer, which the latter repaid last year. AIG is now overseen by the Fed, and state watchdogs can regulate its insurance units.

In July, AIG received the designation of “systematically important,” which could subject it to stricter cap rules and additional oversight by the Fed. To receive this designation indicates that regulators believe the company could threaten the financial system if the insurer were to fail.

Our securities fraud law firm represents investors that sustained losses because financial representatives, investment advisers, broker-dealers and/or firm executives were negligent, careless, or committed financial fraud.  If you feel you are the victim of Securities Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.

The Resolution Law Group: On Wall St., a Culture of Greed Won’t Let Go

Ethics. Values. Integrity.

Wall Street firms spend a lot of time using those catchwords when talking about developing the right culture. Bank chief executives often discuss how much effort they devote to instilling a sense of integrity at their institutions. The firms all have painstakingly written codes of conduct, boasting, “Our integrity and reputation depend on our ability to do the right thing, even when it’s not the easy thing,” as JPMorgan Chase says, or, “No financial incentive or opportunity — regardless of the bottom line — justifies a departure from our values,” as Goldman Sachs says.

And yet a new report on industry insiders about ethical conduct, to be released on Tuesday, disturbingly suggests that Wall Street’s high-minded words may largely still be lip service.

Of 250 industry insiders from dozens of financial companies who responded to questions — traders, portfolio managers, investment bankers, hedge fund professionals, financial analysts, investment advisers, among others — 23 percent said that “they had observed or had firsthand knowledge of wrongdoing in the workplace.”

If that’s not attention-grabbing enough, consider this: 24 percent said they would “engage in insider trading to make $10 million if they could get away with it.”

As we approach the fifth anniversary of the onset of the financial crisis this September, it appears memories are shorter than ever. If the report is accurate, the insidious culture of greed is back — or maybe it never left.

The questions were posed last month by the law firm Labaton Sucharow at the behest of one of its partners, Jordan A. Thomas, a former assistant director and assistant chief litigation counsel in the enforcement division of the Securities and Exchange Commission. The results are a telling reminder of the continued challenges the industry faces, challenges that appear endemic.

While the results may not be scientific, they are stark. For example, 26 percent of respondents said they “believed the compensation plans or bonus structures in place at their companies incentivize employees to compromise ethical standards or violate the law.”

There is a view that the ethical problems come from the very top: 17 percent said they expected “their leaders were likely to look the other way if they suspected a top performer engaged in insider trading.” It gets even more troubling: “15 percent doubted that their leadership, upon learning of a top performer’s crime, would report it to the authorities.”

There is nothing acceptable about these responses.

Wall Street has a very real problem, whether the leaders of the industry want to believe it or not.

It is often said that it is unfair to paint an entire industry with a broad brush, and it is. There are clearly good people out there doing good work. A large majority falls in that category. But the numbers presented in the report reflect an unsettling reality that there may be more than just a few bad apples in the industry, too. It should be considered a red flag when insiders say this: “28 percent of respondents felt that the financial services industry does not put the interests of clients first.”

Perhaps oddly, the problem is most pronounced among the youngest employees in finance, the next generation of leadership on Wall Street.

Remember the question about whether an executive would commit insider trading for $10 million if there were no repercussions? Well, if you parse the numbers by seniority in the industry, respondents with under 10 years of experience were even more likely to break the law: 38 percent said they would commit insider trading for $10 million if they wouldn’t be caught.

That result is particularly striking since I would have expected the next generation of financiers to be the most interested in helping to build a new, anti-Gordon Gekko culture on Wall Street.

Virtually every top M.B.A. program in the country now teaches ethics classes, many of them required. In 2008, a coalition of students started the MBA Oath, a voluntary pledge among students to “create value responsibly and ethically.” So far, more than 6,000 students have signed the pledge.

And yet, the report and other anecdotal evidence suggest that whatever is being done both in the classroom and on the job is not enough. According to a controversial study called “Economics Education and Greed” that was published in 2011 by professors at Harvard and Northwestern, an education in economics surprisingly may be making the problem worse.

“The results show that economics education is consistently associated with positive attitudes towards greed,” the authors wrote. “The uncontested dominance of self-interest maximization as the primary (if not sole) logic of exchange, in business schools and corporate settings alike, may lead people to be more tolerant of what other people see as morally reprehensible.”

The problem is compounded by a trait shared by everyone, no matter their industry. “People predict that they will behave more ethically than they actually do,” according to a 2000 study led by Ann E. Tenbrunsel, a professor at Harvard. “They then believe they behaved ethically when they didn’t. It is no surprise, then, that most individuals erroneously believe they are more ethical than the majority of their peers.”

That may help explain why, in the Labaton Sucharow report, 52 percent said they “believed it was likely that their competitors have engaged in illegal or unethical activity in order to be successful.”

It may also explain why 89 percent of respondents “indicated a willingness to report wrongdoing” yet so few do.

As part of the Dodd-Frank financial overhaul law, the S.E.C. developed a $500 million whistle-blower program that pays 10 to 30 percent of penalties collected to the whistle-blower. The fund still has some $450 million in it, despite recent remarks by Stephen L. Cohen, associate director of the S.E.C.’s enforcement division, that we should expect bigger payouts soon. Mr. Thomas of Labaton Sucharow helped develop the whistle-blower program when he was at the S.E.C., and he now represents whistle-blowers.

“We are seeing a culture of silence,” he said. “There’s an unwillingness to come forward.”

Greed, for far too many, is still good, apparently. There’s still much work to be done before the catchwords become the culture.

The Resolution Law Group represents institutional and individual investors that have sustained losses due to Securities Fraud.

If you feel you are the victim of Securities Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.

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