The Financial Report - Volume 2, No. 15 • August 15, 2013

by DLA Piper


Discussion and Analysis

News from the Americas

News from Asia and the Pacific

News from Europe

Global Regulators

US Securities and Exchange Commission Developments

US Commodity Futures Trading Commission Developments

US Banking Developments

US Judicial Developments

US Exchanges and Self-Regulatory Organizations

Discussion and Analysis

Motorcycle enthusiasts will tell you that a substantial majority of all motorcycle riders are law abiding citizens who follow the rules of the road and use their vehicles for transportation and recreation. This leaves a very small minority of the riding community that are often referred to as the “one-percenters.” These “outlaws” (as they also like to be known) engage in many forms of illegal activity, some of which involves the use of their motorcycles, some of which does not. Regardless, the illicit activity tends to be lumped together by those who have a general impression or bias against “bikers.” The 99 percent of riders who are law abiding rightfully take offense to the implication that they are criminals or anti-social gang members simply because they happen to engage in the same activity - motorcycle riding - that is also engaged in by the one-percenters.

Those of us who work with the financial services industry know that the overwhelming majority of financial services professionals are smart, hardworking, law abiding people. But, as with any industry or group, a small number of “outlaws” engage in illicit activities, trying to gain an edge, game the system or, in some cases, engage in outright fraud. Each time allegations of such activities are reported, the media pages and the blogosphere explode with absurd declarations that everyone working in the financial markets is “a crook,” “criminal,” or worse. This is often followed by a flurry of demands for regulations that will severely restrict anyone whose activities are even tangentially similar to those of the latest reprobate. Even when the allegations are shown to be unfounded, the cries for more regulation continue.

For example, in the wake of the stock market “flash crash” a few years ago, there were calls for restriction or elimination of computerized trading, based on the faulty assumption that program traders were manipulating the market. To this day, there are many commenters who call for a return to the human intervention in trading that just a few years earlier was criticized as an unnecessary bottleneck to anyone seeking liquidity. Similarly, many have blamed “derivatives” (a broad category if ever there was one) for the financial market problems in 2008, leading to a plethora of restrictions on the use of such instruments. Some have even advocated elimination of computerized trading and derivatives altogether.

We certainly recognize the need for rational regulation of the financial markets, and we champion those whose efforts are directed to maintaining such a regulatory structure. Indeed, appropriate, well-considered regulation is the life-blood of the markets, making them safer, fairer, and more accessible for all participants, including the vast majority of honest financial services professionals of which we speak and with whom we deal on a daily basis. What is troubling, however, is the way that so many so-called “experts” (usually unnamed commentators, “pundits” and bloggers, whose statements indicate a poor understanding of the topic on which they are commenting) continue to demand broad and unnecessary limitations on anyone and everyone engaged in financial market activity. Ironically, these calls for increased regulation tend to fuel misconceptions about the markets, rather than educate potential market participants.

As far as we know, no one has advocated outlawing motorcycles because of the actions of the one-percenters. Perhaps similar restraint should be observed when trying to figure out how to deal with the small minority of inside traders, market manipulators and outright crooks that populate the financial markets.

News from the Americas

Constitutional Challenge to CFPB dismissed. Corporate Counsel reported that a federal judge dismissed a constitutional challenge to the Consumer Financial Protection Bureau, holding that the plaintiffs lacked standing to sue. Plaintiffs had argued that the Dodd-Frank Act violated the separation of powers by “delegating effectively unlimited power” to the bureau and to the Financial Stability Oversight Council. The judge found that the plaintiffs failed to allege any actual injuries and their claims of future injury were too speculative. (8/5/2013) CFPB challenge.

News from Asia and the Pacific

Hong Kong issues short selling warning. Hong Kong’s Securities and Futures Commission warned investors and intermediaries that they could be held criminally liable for illegal short selling if they sell conditional placing shares before completion of a placement. (8/1/2013) SFC press release.

ASIC consultation on recordkeeping obligations. The Australian Securities & Investments Commission published Consultation Paper 214, “Updated record-keeping obligations for AFS licensees,” which outlines the types of records that must be kept by Australian financial services licensees including records to prove that the licensee and its representatives have complied with the best interests duty and related obligations; records of ongoing fee arrangements entered into with a client; copies of such documents as fee disclosure statements and renewal notices; and records to prove that the licensee and its representatives have complied with the ban on conflicted remuneration. Comments should be submitted on or before June 30, 2014. (7/31/2013) ASIC press release.

ASIC releases market integrity rules. The Australian Securities & Investments Commission released market integrity rules on dark liquidity and high-frequency trading. Guidance clarifying expectations of market operators and participants was also released. The rule changes include crossing system controls and transparency requirements and harmonization of manipulative trading rules. (8/12/2013) ASIC press release.

SFC issues guidelines on principles for financial market infrastructures. The Securities and Futures Commission has issued guidelines for recognized clearing houses to use in applying the “Principles for Financial Market Infrastructures,” a joint publication by IOSCO and the Committee on Payment and Settlement Systems. The SFC considers all recognized clearing houses to be systemically important FMIs. (8/9/2013) SFC press release.

News from Europe

UK consultation on capital requirements for investment firms. The UK’s Financial Conduct Authority published a consultation paper concerning the application of the EU’s CRD IV, which is the European Union’s implementation of Basel III, to firms regulated by the FCA. Comments should be submitted on or before September 30, 2013. (7/31/2013) FCA press release.

The European debt crisis isn’t over. The Telegraph disputes the notion that the Euro crisis has ended. With the immediate threat of banking and fiscal meltdown on the periphery and after one of the longest recessions in European history, intolerable levels of unemployment, meager growth, and the failure to implement structural reforms still threaten the stability of the Euro zone. (8/12/2013) Euro debt.

Structural issues in Europe. The European Central Bank released a report on structural issues of corporate finance and economic activity in the Euro area, analyzing and reviewing the corporate finance structure of non-financial corporations in the Euro area, including how they interact with the macroeconomic environment. Special emphasis is placed on the crisis that began in 2007-08, underlining the relevance of financing and credit conditions to investment and economic activity in turbulent times. (8/8/2013) ECP report.

FCA appoints four new Supervision directors. The Financial Conduct Authority has appointed four directors to lead key areas of its Supervision division. These appointments complete the senior structure in Supervision and are the final step in implementing a new structure for the division. The appointees are: Karina McTeague, as director of retail banking; Linda Woodall, as director of mortgages & consumer lending; Nick Poyntz-Wright, as director of long-term savings & pensions; and William Amos, as director of wholesale banking & investment management. (8/7/2013) FCA Appointments.

ESMA proposes delay in reporting date for exchange traded derivatives. The European Securities and Markets Authority has sent the European Commission its Final Report proposing an amendment to Article 5 of the Commission Implementing Regulation (EU) No.1247/2012 (ITS on reporting) on the format and frequency of reporting to trade repositories under EMIR. The amendment relates specifically to the reporting of exchange traded derivatives and proposes postponing the reporting start date by one year. (8/8/2013) ESMA report.

IOSCO publishes principles for financial benchmarks. The International Organization of Securities Commissions published the final report on Principles for Financial Benchmarks, which provides an overarching framework of principles for benchmarks used in financial markets. The principles form an integral part of IOSCO’s work in leading efforts to enhance the integrity, the reliability and the oversight of benchmarks by establishing guidelines for benchmark administrators and other relevant bodies. (8/1/2013) IOSCO report.

EBA publishes second interim report on the consistency of risk-weighted assets in the banking book of EU banks. The European Banking Authority released its second interim report on the regulatory consistency of risk-weighted assets for credit risk in the banking book. The report illustrates the outcomes of the next stage in the EBA’s review into RWA consistency in sovereigns, institutions and large corporate exposures, generally referred to as low default portfolios. The aim is to identify, and further understand, the sources of any material differences in RWA outcomes for portfolios, which are specifically challenging for the banks due to limited availability of data. This analysis is closely aligned with the global work of the Basel Committee, which recently released the results of its report. (8/5/2013) EBA report.

Bank of England provides explicit guidance regarding the future conduct of monetary policy. The Bank of England’s Monetary Policy Committee voted to provide some explicit guidance regarding the future conduct of monetary policy. The Committee intends, at a minimum, to maintain the current highly stimulative stance of monetary policy until economic slack has been substantially reduced, provided this does not entail material risks to either price stability or financial stability. (8/1/2013) Bank of England press release.

Global Regulators

FSB consults on implementation guidance for the key attributes of effective resolution regimes. The Financial Stability Board launched a public consultation on the application of the Key Attributes of Effective Resolution Regimes for Financial Institutions to non-bank financial institutions and on principles governing information sharing for resolution purposes, and has developed Annexes to the Key Attributes that set out guidance on: (1) resolution of Financial Market Infrastructure and resolution of systemically important FMI participants; (2) resolution of insurers; and (3) client asset protection in resolution. (8/12/2013) FSB press release.

The global effects of the euro debt crisis. The European Central Bank released a working paper focusing on the global effects of the euro debt crisis of 2010-2013 in an attempt to measure the impact of the crisis on global financial markets. (8/12/2013) ECP paper.

US Securities and Exchange Commission Developments

Selected Enforcement Actions

Stock promoters charged with market manipulation. The SEC announced the filing of a civil injunctive action against two stock promoters. According to the complaint, the defendants had a kickback arrangement with a third person who represented a group of registered representatives. The arrangement involved the promise of a kickback in exchange for the purchase of several million dollars of stock in two companies by customers of the registered representatives. The kickbacks were to be between 25% and 35% of the value of the stock purchases. The action was filed in US District Court for the Eastern District of New York. (8/6/2013) SEC Release No. LR-22771.

Former systems administrator charged with insider trading. The SEC announced that a former systems administrator at Green Mountain Coffee Roasters has been charged with insider trading after allegedly trading on internal company drafts of earnings announcements. A friend he allegedly tipped off was also charged. Together, the two allegedly made US$7 million in profits on the insider trades. The action was filed in US District Court for the District of Connecticut. (8/2/2013) SEC Release No. LR-22769.

Other Developments

SEC report cautions investors and foreign exchanges. The SEC issued a report cautioning exchanges and investment professionals to monitor the composition of indices used in offering financial instruments to ensure they are complying with the federal securities laws. The SEC’s report also notes that when swaps are securities-based, investment professionals must appropriately monitor the characteristics of such financial instruments to avoid violating the federal securities laws. (8/8/2013) SEC Press Release.

Certain broker-dealers exempted from the recordkeeping and reporting requirements. Broker-dealers that are large traders but do not self-clear, and broker-dealers effecting transactions, directly or indirectly, for a large trader where a non-broker-dealer carries the account for the large trader, are temporarily exempted from recording and reporting Transaction Data through the EBS system for the duration of Phase Two, which ends November 1, 2013. They must come into compliance by the end of Phase Three, which ends November 1, 2015. (8/8/2013) SEC Release No. 34-70150.

New SEC Commissioner. The Securities and Exchange Commission announced that Kara M. Stein was sworn in as an SEC Commissioner, replacing former Commissioner Elisse Walter. (8/9/2013) SEC press release.

Risk alert on options trading. The Securities and Exchange Commission issued a Risk Alert that describes the strategies used by certain customers, broker-dealers and clearing firms to evade Regulation SHO; summarizes related enforcement actions; and notes practices that some firms have found to be effective in detecting and preventing inappropriate trading. (8/9/2013) SEC Press Release.

US Commodity Futures Trading Commission Developments

Chicago floor broker ordered to pay restitution for major commodity futures fraud. A former Chicago floor broker reached a settlement agreement with the US District Court for the Northern District of Illinois that would require restitution payment of approximately US$4.565 million, along with a US$3 million civil monetary penalty, for committing commodity futures fraud from January 2008 through May 2012. (8/6/2013) CFTC Release 6661-13.

No-action relief from aggregation prohibition. CFTC No-Action Letter No. 13-48, originally issued July 30, 2013, was amended on August 6th by the CFTC’s Division of Market Oversight. The relief confirms the exception, until October 1, 2013, that permits aggregation of orders by certain commodity trading advisors and investment advisors for block transactions subject to the rules of a swap execution facility or designated contract market to large notional off-facility swaps. (8/6/2013) CFTC Release 6660-13.

US Banking Developments

Federal Reserve reverse repos. The Fed pulled a total of nearly US$3.3 billion in reserves from the US banking system with tri-party reverse-repurchase agreements. The moves were expected and said to be preparation for withdrawal of monetary stimulus. Reverse Repos. (8/9/2013)

Reform of Freddie Mac and Fannie Mae. As both Fannie Mae and Freddie Mac report near-record profits and payments on their Treasury debt, President Obama has endorsed a plan that would replace the housing finance giants with a new approach to guaranteed mortgages modeled on the FDIC. (8/6/2013) A bipartisan bill that lays out essentially the same approach was introduced in the Senate in June. The FHFA announced that it is seeking public input on how to reduce the presence of Fannie Mae and Freddie Mac in the multifamily housing market. FHFA press release. (8/9/2013)

European bank exposure to US municipal debt encouraged by EU rules. EU region banks loaded up on US muni bonds, encouraged by “a favourable EU application of global bank capital rules,” and now face substantial writedowns. The amount of capital banks held to cover potential losses was based on the rating of the country, rather than the municipality, where the bonds originated. German banks are said to have €18.5 billion of exposure to US municipalities. (8/12/2013) Muni exposure.

Vatican adds internal monitoring to bank. A new decree by Pope Francis gives the Vatican Financial Information Authority, an internal watchdog, more supervisory power over the Vatican Bank and other financial departments. The European anti-money laundering committee, Moneyval, had recommended such changes in 2012 to help the Vatican meet international standards on crimes such as money laundering, funding of terrorism, and proliferation of weapons. (8/9/2013) Monitoring.

US Judicial Developments

Third Circuit upholds class action denial. In a case bearing a “striking resemblance” to Wal-Mart v. Dukes, the Court upheld denial of a class action settlement and certification in a race discrimination suit brought against National City Bank. Notwithstanding its policy favoring voluntary settlement of class actions, the Court held that plaintiffs failed to satisfy Rule 23 requirements and were unable to identify specific employment practices that would bind class members and prove commonality. (8/12/2013) Rodriguez v. Nat’l City Bank.

Printing trading codes makes them tangible property. The Second Circuit affirmed convictions under the Economic Espionage Act and the National Stolen Property Act, of an analyst for a French bank’s New York office. The analyst printed the bank’s proprietary high-speed trading code and attempted to leverage the documents into a high-paying job with a rival firm, which satisfied the product and nexus requirements of the EEA. By printing the code, he transformed the intangible code into a tangible object. US v. Agrawal.

US Exchanges and Self-Regulatory Organizations

Minor Rule Violation Plan amendments proposed by FINRA. On July 24, 2013, the Financial Industry Regulatory Authority filed a proposed rule to add isolated failure to comply with rules that require periodic reporting, filings or notifications; certain isolated or technical failures to timely register; late filing and notification requirements related to market regulations to be eligible for disposition under FINRA’s Minor Rule Violation Plan. (8/7/2013) FINRA Rule Filing. See also SEC Release 34-70131.

NYSE proposes change to emergency powers. The New York Stock Exchange LLC, NYSE Arca, Inc., and NYSE MKT LLC separately filed proposed rule changes to better delineate the self-regulatory functions of each exchange during an emergency condition, reflect the operational preferences of the industry, and reflect the current structure of connectivity to and system coding for exchange systems. Comments should be submitted on or before August 29, 2013. (8/6/2013)


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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