Category: Social Media

Simulated Wall Street Cybersecurity Attack to Test Preparedness

On Thursday, July 18th 2013, the Securities Industry and Financial Markets Association (SIFMA) will be carrying out Quantum Dawn 2, a simulated cybersecurity attack meant to assess preparedness.

Since the last cybersecurity simulation in 2011, the list of firms and institutions wishing to be included in this year’s attack has more than doubled, according to the SIFMA brief released today. The organizations undergoing the attack has grown to include stock exchanges, businesses, the U.S. Treasury and Department of Homeland Security, and the simulation will attempt to expose any critical weaknesses in security these firms may have. The previous exercise, that was held in November 2011, was designed to analyze the continuity of equities trading and clearing in the event of a system disruption.

The importance of cybersecurity has come to the forefront of discussions of the greatest risks posed in the financial markets. The focus of the exercise is not to mimic the act of one or two hackers attempting to gain access to a personal computer or account, but rather to simulate state-sanctioned actions targeting entire systems. Issues of cyber security became even more serious in light of last summer’s Flame, a malware that infected about 1000 computers across the world, and was so advanced that experts agreed that no singular hacker could have been it’s origin.

The simulation will be orchestrated on July 18th, and more than 50 banks will be participating.

 

Dodd-Frank Swaps Reform Undertaken by Bipartisan Group

U.S. House and Senate lawmakers introduced legislation that would facilitate more swaps trading to be conducted at banks that have federal insurance by repealing a part of the Dodd-Frank Act.

Bloomberg reports that the bipartisan measures would alter the law’s 2010 requirement that banks with access to deposit insurance and the Federal Reserve’s discount window, would move some derivatives trades to separate affiliates that have their own capital.

Approval By Congress

This legislation would need approval by Congress, then would need President Barack Obama’s signature, as the legislation is part of a series of congressional efforts to amend or limit Dodd-Frank’s derivatives regulations.

Representative Jim Himes, a sponsor of the bill and a Democrat from Connecticut, told Bloomberg: “People who object are going to say this allows banks to take huge risks. Not true,” adding that “It’s going to allow them to maintain inventory of the swaps that their customers need to buy from them; just the same way when you go to buy a car from a car dealer.”

The new legislation was introduced by Senators Kay Hagan, a North Carolina Democrat, Pat Toomey, A Pennsylvania Republican, Mark Warner, a Virginia Democrat, and Mike Johanns, a Nebraska Republican.

Efforts to change the law have failed to win in Congress, while the CFTC and other regulators seek to finish writing regulations. The Securities Industry and Financial Markets Association (SIFMA) released a statement from their acting president and CEO, supporting the new legislation:

This action is a bipartisan, bi-cameral recognition that Section 716 was an ill conceived provision, one that elicited strong reservations from multiple federal prudential regulators when originally adopted and still today. Adoption of the Hultgren-Himes-Hagan-Toomey legislation will forestall a misguided action that would force swaps to migrate to other entities that are not subject to prudential regulation, and could likely increase systemic risk instead of reducing it. We urge the House and Senate to address, on a bi-partisan basis, the need for amending this section of Dodd-Frank and pass this legislation.

Major Banks Argue that Libor Lawsuits Should be Thrown Out

Lawyers for a number of the world’s biggest banks have asked a U.S. judge to throw out a collection of lawsuits accusing them of manipulating Libor, key interest rates, and cheating investors out of billions of dollars.

The banks involved in the lawsuit include Bank of America Corp, JPMorgan Chase & Co. — while more than 30 lawsuits have been filed in California and New York by plaintiffs ranging from a retired cable-car driver in San Francisco, to the city of Baltimore. The Wall Street Journal reports that plaintiffs are seeking damages that could reach into tens of billions of dollars from financial institutions that determine the London interbank offered rate.

Libor in Court

At a hearing in Manhattan, lawyers for big banks prompted U.S. District Judge Naomi Reice Buchwald to throw out these cases before trial. The cases included a proposed class action lawsuit that alleged violations of antitrust law and the Commodities Exchange Act.

Bloomberg reported that Robert Wise Jr., a lawyer for North Carolina-based Bank of America told the judge, “Libor is not something that’s bought or sold or traded. It’s simply a benchmark, an average. Banks don’t sell Libor.”

Reuters reports that Bill Carmody, a lawyer representing the city of Baltimore, among other plaintiffs, argued that Libor is a crucial component of the price some customers paid for interest-rate swaps and other financial products tied to Libor. Carmody indicated that banks don’t compete against each other when they submit Libor rates to the British Bankers’ Association each business day, though he clarified later, stating that banks do compete over products tied to the interest rate that they set.

Judge Naomi Reice Buchwald did not make a decision Tuesday, but expressed concern as to why it took plaintiffs’ attorneys such a long time to file lawsuits, pointing to media attention surrounding the potential manipulation of Libor in the spring of 2008. The Wall Street Journal reports that Judge Buchwald stated to lawyers: “Your job is not to piggyback on the government. You are supposed to be the private attorneys general who, for legitimate self-interest, seek out wrong doing.”

CFTC Charges Agape Entities with Futures Trading Scheme

CFTC Charges Agape

The U.S. Commodity Futures Trading Commission (CFTC) has charged Agape World, Inc. and Agape Merchant Advance with defrauding customers of tens of millions of dollars in a commodity futures trading scheme. The CFTC’s press release stated that the Order of Permanent Injunction imposes permanent trading and registration bans against the Agape entities, while also permanently barring them from engaging in any commodity-related activity.

Judge Leonard D. Wexler of the U.S. District Court for the Eastern District of New York, entered in the Order of Permanent Injunction, banning the entities permanently from the futures industry.

A History of Fraud

In 2009 the CFTC charged the Agape Entities and defendant Nicholas Cosmo, the owner of Agape Entities, with engaging in a fraudulent scheme in which tens of millions of dollars were solicited from investors to invest in bridge loans and merchant advances. According to the Complaint, the defendants used a significant portion of those funds to engage in unauthorized commodity trading – resulting in tens of millions of dollars in losses that were never disclosed to investors.

Cosmo, in a related criminal case, was sentenced to 300 months in prision and ordered to pay over $179 million of restitution to defrauded investors.

In October of 2012, Judge Wexler of the U.S. District Court for the Eastern District of New York, entered a Default Judgement and Permanent Injunction Order against Cosmo, which imposed a $240 million civil monetary penalty, permanent trading and registration bans and other equitable relief against him.

The Agape Entities are also debtors in a Chapter 7 Bankruptcy proceeding pending before Judge Dorthy T. Eisenberg in the U.S. Bankruptcy Court for the Eastern District of New York.

Basel III Rules Slated for March Deadline, EU Says

The European Union (EU) is pushing ahead with Basel III capital standards to avoid delays. Bloomberg reports that the EU’s financial services chief, Michel Barnier, stated in an interview that, “We need agreed rules as soon as possible so that banks know which way they are going.”

March 22 Deadline for Basel III

Lawmakers and EU negotiators will meet tomorrow to try and settle disputes over banker bonuses, financial reporting requirements and the amount of power retained by national regulators. A document outlining the EU’s planning warned that the EU should finish its laws on these new rules by March 22.

Bloomberg indicates that if deadlines aren’t met next month, the EU would run out of time to meet their January 2014 target date to implement the Basel III accord. Missing the March deadline could potentially force the EU to shorten the transition period, putting strain on lenders to adjust by the start of next year. Barnier spoke to this delay, saying, “The commission is very attached to having a working single regime.”

Basel III Measures

The Basel Committee on Banking Supervision unites banking regulators from 27 nations including the U.S., U.K., and China to coordinate their rule-making. The Basel III measures, which must be written into national laws, could triple the core capital lenders must hold, and set industry standards for how lenders should manage risks. Negotiations on the Basel rule have come to a standstill regarding how much additional capital should be required for systemically important financial institutions and banker bonuses.

Lawmakers are encouraging the EU to include in the capital rules a requirement for country-by-country reports on profits, losses and taxes, according to documents obtained by Bloomberg. Many nations are hesitant to expand the scope of the capital rules, and are waiting until a separate accounting legislation to debate the topic.

NFA Registers Cargill as Swap Dealer

The National Futures Assocation (NFA) announced yesterday that Cargill Inc is the first major non-financial entity to be registered as a swap dealer. Cargill operates in a range of commodity markets and is based out of Minneapolis.

NFA, CFTC and Swap Dealer Registration

The NFA is the futures industry’s self-regulator. Swap dealers must be members of the NFA, a process that involves an audit. According to CFTC rules, any firm that deals in more than $8 billion in swaps must be registered as a swap dealer.

The new rule mandating registration for crossing the threshold was instated earlier this year. According to Reuters:

Cargill said it had applied to be a swap dealer because services its Cargill Risk Management unit provided had brought it within the definitions of the law.

NFA and CFTC do allow some space for firms that employ swaps for hedging commodities or liabilities; these firms are exempt from rules mandating swap dealer registration.

Another effect of registration: now Cargill must clear its swaps transactions through clearing houses that were instated to curb risk of defaulting.

As it stands, most registered swaps dealers are enormous financial entities – JPMorgan, Bank of America, and Deutsche Bank, for example. Cargill is the first of its kind: a non-financial entity that has crossed the $8 billion dollar swaps threshold.

Read more.

 

CFTCs Gary Gensler Continues Crusade for Libor Reform

U.S. Commodity Futures Trading Commission (CFTC) chairman Gary Gensler has stated that the Libor interest rate is not yet free of fraud. Gensler said to the BBC in London that the rate was often “completely made up.” Many banks, within the past year, have been fined hundreds of millions of pounds for rigging the lending rate.

Libor and The FSA

Gensler was in London to meet officials and discuss Libor at the Financial Services authority. Libor, the London inter-bank offered rate, is a benchmark interest rate set each day by the British Bankers’ Association. It is based on estimates received from 16 major international banks based in London of how much they must pay in order to borrow cash from other banks. Libor is meant to reflect the average rate that banks pay to lend each other and is used to benchmark everything from car loans and mortgages to complex financial transactions around the world.

A Libor scandal emerged in June of last year when UK and US authorities fined Barclays £290m for fixing the key inter-bank interest rate. Since the scandal, Swiss bank UBS and Royal Bank of Scotland have been fined. Speaking to the scandal, Gensler mentioned “pervasive rigging,” saying authorities could not guarantee a fraud-free rate, though Gensler did refuse to criticize the FSA or suggest that setting the rate should be moved to the United States.

CFTCs Gensler at the BBC

Gensler, in a statement to the BBC, likened the manipulation of rates to an estate agent attempting to sell a house:

They are trying to reference the price of the houses in the neighborhood [when] there have been no transactions in the neighborhood and furthermore, the agent is not willing to share the data and is often just making it all up.

The BBA did not respond to Gensler’s comments, but stated to the BBC: “The BBA has strongly stated the need for greater regulatory oversight of Libor,” adding that it was working closely with the government and regulators to change the system.

A government commissioned review suggested placing responsibility in the hands of an outside authority such as a commercial body or an industry group, which would in turn place less emphasis on the BBA.

Read More.

CFTC Orders Enskilda Futures to Pay $125,000 for Margin Errors

The U.S. Commodity Futures Trading Commission (CFTC) has filed and settled charges with Enskilda Futures Limited (EFL) for failing to meet capital requirements.

From the CFTC Statement

The CFTC statement explains that Enskilda’s failure to meet capital requirements stemmed from margin errors:

The failure to meet the minimum capital requirements was a result of EFL’s failure to call for sufficient margin collateral on an intra-month basis from its ultimate parent, Skandinaviska Enskilda Banken, AB (SEB), which holds an omnibus account at EFL, the Order finds. The CFTC Order requires EFL to pay a $125,000 civil monetary penalty and to maintain the remedial measures adopted following discovery of the error.

The CFTC Order finds that during the period of July 14 to August 2, 2011 (the Relevant Period), EFL collected only net margin collateral from SEB on an intra-month basis and not gross margin collateral as required. At month end, EFL and SEB settled up and EFL called for gross margin; thus, there was no effect on EFL’s monthly capital. However, because EFL failed to collect adequate margin collateral on an intra-month basis from SEB, EFL incurred charges to its adjusted net capital. As a result of these charges, EFL failed to meet the minimum capital requirements on 11 days in violation of Section 4f(b) of the CEA, 7 U.S.C. § 6f(b) (2006), and CFTC regulation 1.17, 17 C.F.R. § 1.17 (2011), according to the Order.

The error was discovered during a routine risk-based audit conducted by CME Group, Inc. (CME) on or about November 8, 2011, the Order finds. On November 9, 2011, EFL filed notice with the CFTC, the National Futures Association, and the CME, pursuant to CFTC regulation 1.12(a) and (f)(3), 17 C.F.R. §1.12(a) and (f)(3) (2011), advising of its failure to meet the net capital requirements during the relevant period. EFL immediately undertook measures to revise its policies and procedures and collect adequate margin collateral from its customer, the Order further finds.

According to the CFTC statement, EFL “cooperated fully” with the agency.

Read the statement here.

Gone in 60 Seconds: CFTC’s New Rule Will Force Rejections

U.S. Commodity Futures Trading Commission’s (CFTC) new 60-second rule will require futures commission merchants (FCMs) to have a maximum of 60-seconds to accept or reject a trade for clearing. Risk reports that the CFTC regulation 1.74–Timing of acceptance of trades for clearing – was announced in April of last year, which requires clearing decisions to be made “as quickly as would be technologically practicable if fully automated systems were used.”

FCM’s Err On the Side of Caution with New CFTC Rule

After two extensions, the CFTC required FCMs the ability to accept or reject trades within 120 seconds from February 1, 2013. The first phase of mandatory clearing in the U.S., at 60 seconds, begins after March 11. Complying with these new rules will not prove to be too difficult, but as clients consume more of the clearing capacity allocated to them by FCMs, this will make quick decisions more difficult. According to Risk, banks warn they will err on the side of caution.

Piers Murray, global head of fixed-income prime brokerage and OTC clearing in the markets prime finance unit at Deutsche Bank in New York, said in a statement to Risk, that the rule has the potential to cause particular problems for trading strategies that have two or more legs:

Think about a relative-value trading strategy that involves putting on trades where the risk information is being transmitted trade-by-trade rather than as a single, three-legged transaction. We would have 60 seconds to accept each of those trades, not knowing if there’s an additional, risk-reducing leg coming down the pipe.

Other FCMs are concerned about the practicalities of complying with the rule, when there is little room for error. This argument was made to the CFTC unsuccessfully, and FCMs are warning their clients of the consequences, reports Risk. Murray speculates:

I suspect you will see a very, very high percentage of trades accepted within 60 seconds in the first stages of clearing – when the consumption of risk limits is still low – but the risk of rejections will rise over time. Eventually, technology development will also enable the sequencing issues to be addressed, but between now and then the 60-second rule will continue to stress the relationship between client and FCM, and will be a constraint on risk management standards.

Other FCMs believe the markets will need to adapt, and see these issues as growing pains that come with the implementation of new systems and rules.

Read more.

CFTCs Gensler and Chilton Renew Call for Position Limits


U.S. Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, alongside Commissioner Bart Chilton, has renewed the call for speculative position limits.

In October, 2011, the CFTC rule was blocked by Judge Robert Wilkins. “The CFTC’s error in this case was that it fundamentally misunderstood and failed to recognize the ambiguities in the statute,” Wilkins wrote in his decision. The ruling hinged on whether the CFTC had made a case that its rule was necessary and appropriate.

The rule, a mainstay of Dodd-Frank financial reform, was meant to curb speculative trading in the wake of the 2008 financial crisis.

CFTC Renews Call for Position Limits

Although it is presently unclear whether the CFTC will rewrite the rule, pursue an appeal, or both, it is clear that Gensler and Chilton have taken a more aggressive, public stance on position limits in the last week. In his statement before Congress last week, Gensler detailed the CFTCs accomplishments before outlining the agency’s upcoming calendar.

“The CFTC is seeking to consider and finalize the remaining Dodd-Frank swaps reforms this year. In addition, as Congress directed the CFTC to do, I believe it’s critical that we continue our efforts to put in place aggregate speculative position limits across futures and swaps on physical commodities,” Gensler said.

Meanwhile, in Arkansas, Bart Chilton held forth on the benefits of market functionality and position limits:

So, what’s to be done? How do we ensure that these 150-year-old-plus markets keep working for you? Well, Congress and President Obama told us to put in place what are called speculative position limits as part of the financial reform law in 2010—Dodd-Frank.  So far, however, they’re not in place in large part because the largest speculators on the planet are gripping position limits like Charlton Heston’s gun. They’ve tried to kill them on Capitol Hill when the bill was considered. They tried to defund them. They tried to mute them through the rulemaking process, and now they are trying to litigate them to death.

Chilton then used the example of the ever increasing price of gas to further elaborate his point on position limits:

Today, energy costs for most families have risen more than 20 percent since 2001. This hurts not only American households, but also American business—like many of your businesses—that rely on energy. According to the Energy Information Administration (EIA), nearly nine percent of our economy or $1.4 trillion is spent on energy annually. Imagine if that figure dropped by just ten percent—$140 billion freed up for investment and economic growth.

So that’s why I continue to lead the charge for position limits—to help keep the markets working for you. The efforts to stop position limits will ultimately fail. Congress told us in no uncertain terms to get it done, and I intend to see that we do that, before more families and businesses go into the “red” column on their balance sheets.

Read Gensler’s statement here. Chliton’s here.