The Resolution Law Group: Volcker Rule is Approved by SEC, FDIC, Federal Reserve, CFTC, and OCC

Five regulatory agencies in the US have voted to approve the Volcker Rule today. The measure establishes new hurdles for banks that engage in market timing and will limit compensation arrangements that previously provided incentive for high risk trading.

While the Federal Reserve Board and the Federal Deposit Insurance Corporation voted unanimously to approve the Volcker Rule, the Securities and Exchange Commission approved it in a 3-2 vote, the Commodity Futures Trading Commission approved it in a 3-1 vote, and the Office of the Comptroller of the Currency’s sole voting member also said yes. President Barack Obama praised the rule’s finalization. He believes it will improve accountability and create a safer financial system.

Named after ex-Federal Chairman Paul Volcker, the rule sets up guidelines that impose risk-taking limits for banks with federally insured deposits. It mandates that they show the way their hedging strategies are designed to function, as well as set up approval procedures for any diversions from these plans. Per the rule’s preamble, banks have to make sure hedges are geared to mitigate risks upon “inception” and this needs to be “based on analysis” regarding the appropriateness of strategies, hedging instruments, limits, techniques, as well as the correlation between the hedge and underlying risks.

Banks with federal insured deposits won’t able to take part in proprietary trading, which involves engaging in risky investment endeavors for their own benefits. They also won’t be allowed to take ownership stakes in private equity funds and hedge funds.

Unlike an earlier version of the rule, which gave an exemption to the proprietary trading ban involving US Treasury securities, this final rule lets firms trade foreign debt. That said, foreign banks in the US will have to contend with stringent trading restrictions and overseas banks with US offices won’t be allowed to sell, buy or hedge investments for profit.

According to CNN.com, advocates of reform believe that with the Volcker Rule’s restrictions taxpayers wont have to bail out these institutions In the future. Meanwhile, representatives of the industry are calling measure burdensome and too complicated.

Banks wanted the rule to protect market timing (with the firms hold the securities to engage in customer transactions). They also wanted to keep their ability to trade for hedging purposes.

Now, with the Volcker Rule, to show that they are taking part in market making (rather than speculation), banks will need to demonstrate that trades are being determined by customers’ “reasonably expected near-term demands,” and that historic demand and existing market conditions have been factored into the equation. Also, although banks will now have to contend with more limits on foreign bond trading, they can still take part in the proprietary trading of federal, state, municipal, and government-backed entities’ bonds.

As for hedging, firms will have to identify specific risks that such activities would offset. Bankers involved in hedging won’t be compensated in a manner that rewards proprietary trading.

The Resolution Law Group represents institutional investors and high net worth individual investors throughout the US. We help our clients recover their securities fraud losses

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The Resolution Law Group: SIFMA, ISDA, and IIB Sue CFTC Over Alleged Unlawful Rulemaking Regarding Cross-Border Rules, Swap Regulations

The Securities Industry and Financial Markets Association, Institute of International Bankers, and Swaps and Derivatives Association, Inc. are suing the US Commodity Futures Trading Commission over rules that they believe are hurting its members’ businesses, which includes among the biggest broker-dealers in the world. The plaintiffs contend that the agency engaged in unlawful rulemaking involving CFTC Interpretive Guidance and Policy Statements about Compliance With Certain Swap Regulations and other cross-border matters. They want the CTFC’s reach in its overseas rules curtailed.

ISDA, SIFMA, and IIB, whose members include swaps dealers such as Deutsche Bank AG (DB), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and many others, want to vacate a number of rules having to due with cross-border application completely. According to Bloomberg.com, at least half the largest banks work with overseas clients in their swaps business. The CFTC approved the overseas swaps guidelines this summer, and last month, two staff opinions came out shedding more light on the breadth of the guidelines.

Now, the plaintiffs are contending that with these rules the CFTC illegally circumvented the Administrative Procedure Act and Commodity Exchange Act by saying its regulations were “guidance,” did not set up cost-benefit analysis even though the law mandated it, performed a rulemaking process that was flawed, and set up rules that contradict international cooperation and could hurt global markets.

The complaint tackles the way agencies establish policies. Formal agency rules typically require commissioner votes and cost benefit-analysis. (Commissioners who vote were selected by the president and received senate confirmation.) The plaintiffs are unhappy because they say that the guidance document that came out about overseas swaps guidelines did not have economic analysis and the two advisories that were issued also lacked this analysis and were never put through a formal vote. They want the court to vacate the CFTC policy.

In a formal press release, SIFMA CEO Judd Gregg, who used to be a US Senator, said his constituents are in favor of regulatory reform that will lead to accountability and transparency in the derivatives market and that the association wants to engage constructively with regulators and for procedures to be fair and open. He called the CFTC’s handling of cross-border regulation “arbitrary… unilateral.. backdoor rulemaking.” Meantime, ISDA chairman Stephen O’Conner said that the CFTC’s current Cross-Border Rule is a “step backward” in attempts to set up a “consistent” vibrant, “global framework” regarding OTC derivatives regulation that gets rid of systemic risk.

Also commenting in the press release, IIB CEO Sally Miller noted that while the banker group’s members have made efforts to comply with CFTC regulations that were not properly adopted, still they are growing concerned with what they believe are the agency’s efforts to use “unpredictable ‘guidance documents.. directives” to regulate the global swaps market.

The Resolution Law Group represents institutional investors and high net worth individual investors in recouping their securities fraud losses.

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: MF Global to Pay $1.2B to Customers

U.S. District Court Judge Victor Marrero has ordered MF Global to pay customers over $1.2 billion. The defunct brokerage firm left an about $1.6 billion shortfall for approximately 38,000 customers when it filed for bankruptcy protection in 2008.

Now, with this court order, along with the attempts of a liquidation trustee to get back the missing funds, customers are going to get almost all of their money back. Also, in addition to paying certain creditors and customers, MF Global will pay a $100 million penalty.

The brokerage tanked financially after it revealed that it had placed bets worth billions of dollars on high risk European debt. As customers started to leave MF Global in bulk and trading partners demanded bigger margin payments, the firm used customer funds for its own purposes (more than a billion dollars was taken out of their accounts) and did not replace them. This is not allowed. Also the estimated shortfall was about $1.6 billion.

It was the US Commodity Futures Trading Commission that got the federal court consent order against MF Global obligating the latter to pay the restitution. The CFTC filed its complaint against MF Global in June charging the firm and others with unlawfully using the funds of customers. The agency also accused the brokerage of making false statements to cover up the shortfall in filings it submitted to the regulator.

In the consent order, MF Global admits to the allegations related to its liability on the basis of omissions and actions committed by its employees. (Also, a bankruptcy judge has just cleared the firm to repay all the funds it owes to commodity customers both in the US and abroad.)

Just last week, Judge Marrerro rejected Corzine’s attempt to get a shareholder securities lawsuit against him and other MF Global executives dismissed. The plaintiffs are accusing them of misleading investors about the high-risk bets that were made on European debt. In his decision, Marrero commented on how the defendants appeared convinced that none of them did anything wrong. He speculated that maybe instead, “supernatural forces” or “stuff happens” was to blame for the firm’s spectacular “multi-billion dollar” crash. Meantime, the CFTC’s civil case against MF Global Holdings Ltd, ex-CEO John Corzine, and ex-Assistant Treasurer Edith O’ Brien have yet to be resolved.

While it is a positive that customers are finally getting their money back—it doesn’t mean that this makes up for the last two years when they were unable to access their funds. Some folks were shut out of trading while others lost their businesses.

Our securities lawyers at The Resolution Law Group were among those that investigating MF Global claims of customers. We represent institutional and individual investors in getting their losses back.

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.

 

J.P. Morgan’s $13B Residential Mortgage-Backed Securities Deal with the DOJ Stumbles Into Obstacles

Reuters is reporting that according to a source in the know, J.P. Morgan Chase & Co.’s (JPM) tentative $13 billion residential mortgage-backed securities settlement with the US Justice Department has hit a couple of stumbling blocks. The firm is reportedly trying to include a provision that would close any criminal probes into its packaging and sale of mortgage securities—except for an inquiry by California prosecutors. This counters the bank’s earlier decision to agree to keep criminal investigations out of the deal.

The settlement, preliminarily reached last week, includes $4 billion to resolve claims made by the Federal Housing Finance Agency, which contends that J.P. Morgan misled Freddie Mac (FMCC) and Fannie Mae (FNMA) about the quality of loans the latter two bought from the investment bank before the 2008 economic crisis. Another $4 billion is for consumer relief, while $5 billion is for penalties.

The agreement also would settle a separate mortgage securities lawsuit filed separately by NY AG Eric Schneiderman against the firm over Bear Stearns (BSC)-packaged mortgage bonds. The state’s top prosecutor contended that Bear Stearns misled investors about the faulty loans behind the securities, neglected to complete assess the debt, disregarded defects that were found, and concealed its failure to properly examine the loans or reveal their risks.

The deal isn’t final and certain matters still need to be resolved, such as the disagreement with the Federal Deposit Insurance Corp. over who should be responsible for legal liabilities stemming from the bank’s takeover of Washington Mutual’s (WAMUQ) obligations and assets during the economic collapse. JPMorgan paid $1.9 billion to acquire that bank from FDIC. However, the firm is disputing its degree of responsibility for investor losses on the failed savings holding company’s mortgage securities. The DOJ wants a provision that will stop the bank from attempting to move WaMu liabilities covered under the agreement to the FDIC.

Other Recent JPMorgan Settlements
Also last week, JPMorgan consented to pay $100 million to the Commodity Futures Trading Commission over its “London whale” trades debacle. The CFTC accused the bank’s London traders of employing a reckless derivatives strategy that cost JPMorgan $6.2 billion in losses. While the firm didn’t deny or admit to the agency’s finding that there was a violation, it did agree about “certain facts.” For one, J.P. Morgan admitted that it did not properly supervise the traders who tweaked prices to lower the bank’s losses at cost to investors.

That settlement comes a month after the firm said it would pay $920 million over related charges to the Securities and Exchange Commission, the Federal Reserve, Office of the Comptroller of the Currency in the US and the Financial Conduct Authority in the UK.

Please contact our RMBS fraud lawyers if you think you might have grounds for a mortgage-backed securities case.