Tag: Rice

Congresswoman Urges Review of Bank Guarantees of Offshore Affiliates

Maxine Waters, ranking member of the House Financial Services Committee, urged the CFTC this week to begin investigating the offshore actions of Wall Street banks in avoiding certain mandates set forth in the Dodd-Frank Act. In a letter to Timothy Massad, the CFTC’s recently-confirmed chairman, Representative Waters criticized the removal by banks of parent guarantees from overseas affiliates, which allows banks to trade in the interdealer market while skirting Dodd-Frank restrictions aimed at increasing price competition and transparency. By cutting off these guarantees, banks are able to trade in the United States through swap execution facilities established under Dodd-Frank, while their non-guaranteed subsidiaries are subject only to local laws of foreign jurisdictions.

Rep. Waters also sent letters to the Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Federal Deposit Insurance Corporation. In these correspondences, Rep. Waters reiterated that the CFTC should take a more aggressive stance in reviewing changes to the guarantees.

TeraExchange Announces First Bitcoin Derivative

TeraExchange has recently announced that it has created a swap involving the average exchange rate of bitcoin and plans to list it on its Swap Execution Facility.

This bitcoin derivative was created on behalf of two clients as a bilateral swap, and while neither party has acted upon the agreement, they are expected to soon, according to Reuters.

This agreement marks the first time a bitcoin derivative will be traded, and as such, it will be the first time the digital currency will come under regulation from the Commodity Futures Trading Commission.

Bitcoin was created in 2009, with mainstream interest around the digital currency rising sharply over the last year.

A bitcoin derivative should prove to be an interesting swap to watch, as it has become rather notorious for its wild price fluctuations over the past few years. Just this December, Bitcoin’s value shot up to $1,200 and then quickly fell to $450. It is currently priced at around $500 dollars.

Reuters to Set Swaps Rates during ICAP Investigation

According to Bloomberg, Thomson Reuters Corp. will be setting benchmarks for US swap trading rates during the ICAP investigation. Being performed by the International Swaps & Derivatives Association (ISDA), the regulator will be looking into whether or not the banks had manipulated the way ICAP set its benchmark rates.

Before the ISDA can move forward with the ICAP investigation, they must phase it out of its current roles within the$ 463 trillion dollar swaps market, which will begin this week.

Reasoning behind the ICAP investigation stems from evidence found that points toward the organization having rigged data used to determine the US swap rate to change prices at the expense of pensions and other institutional investors.

ISDA spokesman Steven Kennedy told Bloomberg that phasing ICAP out of its swap rate setting responsibilities is the first step toward utilizing best practices in the setting of benchmark rates. He went on the mention that the next step would be moving the whole process onto an automated system, which he says should begin sometime in the second quarter of this year.

Swap rate automation should help tame the manipulation of swaps, an important issue, as several scandals undermined the reliability of financial benchmarks just last year.

UK Challenge to Short-Selling Law Dismissed by EU Court

According to Reuters, the UK’s attempt to challenge a short-selling law that bans the ability to short-sell shares during market emergencies has been denied by a European Union Court.

Attempting to limit the reach of financial rules designed to regulate the industry, the UK had challenged a part of the short-selling law that grants the European Securities and Markets Authority (ESMA) power to ban betting on falling share prices when the ESMA deems it a threat to either markets or financial system stability.

In order for the UK to challenge the short-selling law, those involved stated that the law overstepped the ESMA’s boundaries based on an EU treaty provision. However, because the ESMA can only enforce this law if national leaders haven’t taken action to deal with disorderly markets, the court ruled against this claim.

Short-selling involves the selling of borrowed shares with the hopes of buying them back at a lower price later.

Britain will also be challenging rules that involve bonus caps for bankers, a financial transaction tax, and the forcing of clearing houses to be moved to the euro zone by the European Central Bank in the near future.

IVSC and Global Regulators Begin to Create Valuation Standards for Bank Assets

According to Reuters, global regulators, including the International Valuation Standards Council (IVSC), have begun to plan the first worldwide standard for valuing some of the more difficult-to-price assets held by banks.

The first task of the IVSC, it seems, will be developing a benchmark by which to base this valuation. There is currently little to no guidance on how to price an asset contained within a company’s account, particularly when there is no market for the asset.

The independent, not-for-profit IVSC will be playing a large role in valuating these assets.

According to the IVSC, the main difficulty behind pricing will be derivatives, which should not be much of a surprise, given their reputation for being more risky than most assets.

The IVSC, which is headed by David Tweedie, consists of 74 member bodies from 54 countries, but does not actually have any enforcement powers, which leaves the question of who will be ensuring that any new rules created are followed up for debate.

At any rate, based on the large scope with which the standards will encompass, and with many top accountants in the industry currently warning of moving too fast, it seems unlikely that any actual effect from these standards will be seen for quite some time.

Federal Reserve to Discuss New Physical Commodity Rules

According to Reuters, the Federal Reserve is setting up to take public comments on new physical commodity rules that will limit banks’ ability to trade certain commodities this week.

This marks the Federal Reserve’s first steps in what will most likely be a long road ahead for reforming physical commodity rules. The driving force behind this reform comes from public and political complaints over the risk involved with having banks trade physical commodities like crude oil and aluminum.

During a Senate hearing last July, people involved in the industry spoke out about the banks’ ownership of the storage facilities that are required for physical commodities, and how this allowed them to inflate prices. Hundreds of millions were paid out in fines by big banks for manipulating energy markets in 2013 alone, producing a strong argument for reforming physical commodity rules.

Those taking part in the hearing as witnesses will include Norman Bay of the Federal Energy Regulatory Commission (FERC), market oversight chief Vince McGonagle of the Commodity Futures Trading Commission (CFTC), and Michael Gibson, the Federal Reserve’s director of banking supervision and regulation.

The Federal Reserve has not disclosed how it plans to reform physical commodity rules, but members of the industry will have 60 to 90 days to submit letters to be used in the forming of these new rules after the hearing.

EU Proposal Drafted, Offers leniency for Banks

According to Reuters, Banks in the European Union are going to see limits on proprietary trading, based on a draft of an EU proposal.

The EU is drafting a proposal in an attempt to curb the risky trading done by banks that has been considered to be a major factor in the 2008 financial crisis. However, it seems their attempt to tame the $59 trillion dollar market isn’t enough for some, with experts considering it to be lacking in authority, and merely designed to be passed without contest.

Among other issues with the EU proposal, lobbyists have said it gives banks in certain countries a lot of room for interpretation, and may allow some to avoid separating risky investment banking from the deposit taking functions of large banks.

While the proposal will apply to all the bloc’s banks, only thirty top lenders will see limits imposed on their proprietary trading.  And proprietary trading is defined very tightly in the EU proposal, which will allow banks to trade on behalf of customers, “make markets,” and quote prices in securities.

Reasoning for the EU proposal’s leniency seem to stem, at least in part, from financial services chief Michel Barnier’s term being up at the end of October, and his not wanting to “make any waves,” as stated by to a financial industry official quoted by Reuters.

CFTC Charges Principal Trading Organization for “Banging the Close” and “Spoofing”

According to CFTC.gov, the Commodity Futures Trading Commission has filed a civil enforcement action against principal trading organization for both ”banging the close” and “spoofing” the IDEX USD Three-Month Interest Rate Swap Futures Contract.

In order to manipulate the value of the three month contract, the CFTC claims that the principal trading organization “banged the close” during the fifteen minute settlement period of the contract.

The CFTC defines “banging the close” as: a manipulative or disruptive trading practice whereby a trader buys or sells a large number of futures contracts during the closing period of a futures contract (that is, the period during which the futures settlement price is determined) in order to benefit an even larger position in an option, swap, or other derivative that is cash settled based on the futures settlement price on that day.

The organization repeatedly placed bids during the settlement period, placing 60 percent of overall bids on the three month contract and actually placing all of the bids on 13 days between January and August of 2011.

The CFTC has determined that the organization had also “spoofed” those bids, defining “spoofing” as: bidding or offering with the intent to cancel the bid or offer before execution.

According to the CFTC, “none of [the principal trading organization] electronic bids were accepted or “hit” to consummate an actual transaction.”

Federal Reserve to Delay Commodity Regulation until Next Year

According to Reuters, it seems unlikely that the Federal Reserve will be detailing their plans on commodity regulation until after next month’s Senate hearing over the rigging of the aluminum market. A final decision on commodity regulation should be expected early next year.

After receiving complaints from MillerCoors, the Federal Reserve is looking into a decade old rule that allows large banks to trade physical commodities. According to MillerCoors and other large aluminum manufacturers, banks trading stocks in aluminum were driving up the price through their control of warehouses.

Although they are waiting until after the hearing to move forward, the Federal Reserve will not be taking market manipulation into account, leaving the issue up to the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC).

The review of commodity regulation rules has many banks feeling the heat. Many feel that the Federal Reserve will implement new rules that will drive up the cost of business for trading. This fear has already led some banks to sell their positions and give up on the physical commodities industry all together.

The Federal Reserve will also not be doing much to change the significant amount of scope in the industry some banks have over others. Banks who changed their status to bank holding companies allowed them to grandfather in their commodity trading activates, including the storage and transportation of commodities, saying that they may change some orders, but are unlikely to change the law as a whole.

CFTC Commissioner Chilton Talks Banks, Wall Street, and Bruce Springsteen

CFTC Commissioner Bart Chilton spoke before the Society of American Business Editors and Writers in New York City earlier this month. Apparently inspired by American singer-song writer Bruce Springsteen, Chilton discussed—through Springsteen song titles– some of the causes of the financial crises of 2008, what the CFTC and the government has to do to prevent a second occurrence, and what he feels needs to happen in the future.

Chilton says a main reason for the 2008 crash was the years of deregulation of the market that had occurred before hand, allowing institutions to make enormous and complicated trades that very few people actually understood. Chilton also placed blame on the removal of the Glass-Steagall Act,  which allowed banks to make proprietary trades, leading to many of them betting against their own customers.

Chilton then goes on to talk about the CFTC and the Dodd-Frank Act, and how these new regulations have created a more transparent, safer market. He did however express concern with the Volker Rule, stating that in its current form, there are loopholes that will allow for banks to continue engaging in proprietary trading. Chilton also discusses his desire to significantly limit the banks power to own commodities, saying they have the potential to control markets by manipulating supply and demand.

Interestingly, Chilton goes on to explain that despite his criticisms, he is in fact a fan of the banks, saying that they fuel the economy, and thus, the democracy of the U.S. However, he seems rather disheartened over the amount of scandal within the banks, citing the now fourth major settlement over manipulation of the Libor rate.

In closing, Chilton mentions that the fines the CFTC enforces on these large institutions simply isn’t enough to discourage their behavior. Not even having to admit to any wrongdoing, these institutions can simply pay fines and chalk it up to the price of doing business. Chilton hopes to force an admission of guilt with settlements in the future, and urges reporters to continue to talk about these scandals, as he feels that forcing them to be accountable for their actions may be the only viable way of discouraging risky behavior.

The Full transcript can be read at CFTC.gov.