By Julien Toyer and John O'Donnell
BRUSSELS, Nov 20 (Reuters) - A former French foreign minister is expected to take charge of financial services in the European Union, diplomats said, a move that would unsettle bankers worried he may take a hard line with the industry.

EU diplomats said a deal to install Britain's Catherine Ashton as the bloc's foreign affairs chief foresaw Frenchman Michel Barnier becoming its commissioner for internal markets, a powerful role that covers financial services.The job carries significant influence in the aftermath of the global economic crisis as the commissioner will broker agreements on tough new rules that span banker pay to restricting investment banking.

"It is practically done -- 99 percent," one diplomat told Reuters, playing down rumours that financial services would be removed from the internal market portfolio in the Commission, the 27-country bloc's executive arm.

"It is part of the deal," a second diplomat said. "Now that the British have secured the nomination of Ashton, one could logically think that they won't block the internal market portfolio going to Michel Barnier."

A spokesman for the Commission denied a deal had been concluded and said its president, Jose Manuel Barroso, had not yet agreed the line-up.

"There is no deal. President Barroso has made no final decision yet on the make-up of the new Commission," he said. "He is awaiting the final nominations and once this has happened he will discuss portfolios in the coming week."
IMPORTANT ROLE
The Commission has much leeway to set the financial services agenda and is responsible for drafting new laws.

France, which led a drive to clamp down on banker bonuses, is seen by many as being in favour of regulating the industry.

The appointment of the former French foreign and agriculture minister would receive a cool welcome in Europe's financial capital, London, where many believe a Paris-driven agenda lies behind strict rules proposed for hedge funds and others.

"There has been a strategy from (French President) Nicolas Sarkozy even before his election when he went to London in January 2007 and said: 'French expatriates, you have to come back to Paris because we want to make a strong financial centre in Paris'," said Karel Lannoo, chief executive of the Centre for European Policy Studies, a Brussels think-tank.

Lannoo said France was likely to push for a single rulebook for banks and others "which could be to the benefit of Paris".

Others played down the significance of the Frenchman, who has already worked as an EU commissioner, taking the post.

"I think we are fairly resigned to the fact that it will go to Club Med (a Mediterranean country) this time," said a senior figure in the City of London, the centre of financial services in Britain.

"The French approach is more interventionist and probably more regulation. But frankly, we would be going that way anyway."

The EU is in the throes of a regulatory overhaul of the way banks and others work. The Commission has drawn up rules including ones that will require banks to hoard more capital, restricting their power to lend. A further wave of rules will shake up trading and exchanges.
(Additional reporting by Darren Ennis and Niclas Mika, editing by Jon Boyle) ((+32 2 287 6817 or +32 473 92 48 90; john.odonnell@thomsonreuters.com))

   By Jonathan Spicer
NEW YORK, Nov 20 (Reuters) - NYSE Euronext, LCH.Clearnet, BATS Global Markets and other firms partnered with banks have urged two U.S. legislators to drop a proposed "rigid" cap on dealer ownership of clearinghouses, according to a letter sent this week.

The letter to Representatives Barney Frank and Spencer Bachus, dated Nov. 16 and obtained by Reuters, said "overly restrictive limits on swap dealer ownership will significantly hamper the development of derivatives clearinghouses and execution facilities."The House Financial Services Committee, which is chaired by Frank, approved a bill last month that included a 20 percent limit on the collective ownership of clearinghouses by dealers or major market participants, to avoid conflicts of interest.

The so-called Lynch Amendment was later dropped due to a procedural error, but Frank said this month he wants to reinsert it during a wider House debate.

The bill is one of two House bills approved to regulate the $450 trillion over-the-counter swaps market, seen as a major cause of the financial crisis. The other, by the Agriculture Committee, had no such dealer ownership cap.

The letter, also signed by trading networks Tradeweb and FXall, said such a cap would dissuade banks from developing and participating in clearinghouses, which stand between swaps traders and are seen as key to bringing transparency and protecting participants from defaults of others.

The cap "would freeze the ability of each of our businesses to evolve, by making it impossible for us to grow or even to decrease the ownership stake that a broker-dealer holds in the business," the letter said.

NYSE Euronext, which runs the New York Stock Exchange, recently sold a big stake in its U.S. derivatives venue to five banks, including Goldman Sachs Group Inc and Morgan Stanley. LCH.Clearnet, Europe's top independent clearinghouse, is majority owned by its users.

Banks have a big stake in privately-owned exchange operator BATS, while Tradeweb and FXall are also partly owned by banks. Thomson Reuters Corp is among Tradeweb's owners.
(Reporting by Jonathan Spicer; editing by Andre Grenon) ((jonathan.spicer@thomsonreuters.com; +1-646-223-6253; Reuters Messaging: jonathan.spicer.reuters.com@reuters.net))
Keywords: FINANCIAL CLEARING/LIMIT

Friday, 20 November 2009 15:12:15RTRS [nN20227589] {EN}ENDS

By Cheon Jong-woo and Seo Eun-kyung
SEOUL, Nov 20 (Reuters) - A top South Korean regulator said on Friday the authorities would take steps to encourage local and foreign banks to use naked short selling of bonds, a move analysts said could trigger a flood of foreign buying.

Kim Jong-chang, governor of the Financial Supervisory Service (FSS), said in a revised statement that the regulator would discuss guidelines on naked short selling of bonds, when an investor sells a bond that has not yet been borrowed.

The move comes as South Korea has been seeking inclusion in Citigroup's World Government Bond Index (WGBI) in an effort to attract more foreign investors to the domestic bond market, for which it offered tax advantages and allowed application of the international settlements system.

"We plan to hold discussions with related agencies to draw up guidelines on short-selling for bonds," Kim said in a speech to a forum on the local bond market.

FSS spokeswoman Kim Soomi said the governor was referring to naked short selling.

Bond prices turned higher on foreign buying, with front-end treasury bond futures <KTBc1> up 4 ticks by 0540 GMT.

In an initial version of the statement, released to reporters prior to the speech, Kim said the authorities would allow naked short selling.

Kim gave no timing for when the guidelines might be agreed.

Rules for naked short selling were introduced in July last year, but there were no clear guidelines and the authorities have effectively blocked any transactions. The government does allow covered short-selling.

The outstanding value of South Korea's bond issues stood at 1,200 trillion won ($1,029 billion) by the end of October, ranked the world's 10th largest, with foreign investors accounting for 5.5 percent, according to the regulatory agency.

Transaction volume is expected to reach 2,500 trillion won this year, more than 20 times the amount in 1997.

Governor Kim said that if foreign investors, active in short-end debt and futures market, had more trading tools, the domestic bond market would see major progress.

He also said that the nation would improve the trading system, which usually relies on closed messenger services or calls, so foreign investors could participate more easily.

"It seems the authorities are trying to open the door far wider to foreign investors and this could be related to the government's efforts to join the Citigroup global bond index," said Yang Jin-mo, a fixed-income analyst at SK Securities.

"If put into action, the move will likely lure in sizeable foreign funds while increasing market volatility," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities.

Analysts said officials needed more discussions because of the potential impact of the move on the won and following newly announced measures to tighten foreign exchange liquidity controls to reduce the risk of capital flight.

"Foreign investors could flood into the country, which will boost the won further. But at the same time the won would plunge again if they fly out, like last year," said Park Tae-keun, a fixed-income analyst at Hanwha Securities.

"The authorities will have to find ways to reduce volatility," he added.
(Reporting by Cheon Jong-woo and Seo Eun-kyung; Editing by Jonathan Thatcher and Jonathan Hopfner) ((eunkyung.seo@thomsonreuters.com;+822 3704 5648; Reuters Messaging:eunkyung.seo.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com)) ($1=1165.6 Won)

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By Jane Merriman
LONDON, Nov 20 (Reuters) - Investment bankers are already pitching to clients a new form of hybrid bond that financial regulators see as a potential saviour of troubled banks, but it is uncertain if they will work or if investors will buy them.The bonds, which convert to equity if a bank's capital runs low, have been created for Lloyds as part of a 21 billion pound ($34.63 billion) capital raising to free the UK bank from a government insurance scheme for bad loans.

The new Lloyds' hybrids -- known as enhanced capital notes -- are a special case because the bank is offering them to investors in exchange for bonds where coupon payments will be deferred for two years.

These investors are expected to bite because they will get a higher coupon rather than no coupon.

One banker likened it to a forced exchange. As such, the real test for contingent convertibles (CoCos) will come if and when other banks decide to issue them.

"CoCos will have a role if they are priced efficiently by the market and this is where we have to still see more new deals coming to the market which are not part of an exchange," said Thibaut Adam, head of capital markets structuring at BNP Paribas.

"We need to see new issues from stronger names and see how they price." He said there were proposals in the United States to have systemically important banks issue these instruments.

Hybrid structurers said that the price needs to be attractive relative to the cost of raising true equity capital.

A number of financial regulators have given their support to CoCos, including the Bank of England.

"All the regulators are looking at them," said Thomas Huertas, FSA banking sector director. "It's a rapidly evolving area where a consensus is developing," he said, speaking on the sidelines of a Citi European Credit Conference.

"We'll look to see how the Lloyds' ECNs (hybrids) go." The results of Lloyds' bond exchange are due on Monday.

Huertas said CoCos would be discussed by regulators at the Basel Committee on Banking Supervision in December.

CoCos' selling point with regulators is that they convert into equity just when a bank needs more equity. And equity is the kind of bank capital regulators like because it can absorb losses while the bank is still a going concern.

In Lloyds' case, the bonds would convert if the UK bank's capital fell to 5 percent.

"Technically, the bank gets more capital in because the CoCos convert," said Gary Jenkins, head of fixed income research at Evolution Securities.

"It's got to be a positive and it's better than what we had before, but it doesn't necessarily mean it saves it."

Jenkins said most troubled banks fail because of liquidity problems, which would not be solved, even by a capital injection from CoCos.
DIFFERENT UNIVERSE
Bond investors have so far given Cocos a cool reception.

Bank of America Merrill Lynch, for example, had to row back on a decision to include them in its bond indexes after investors objected.

Investors say CoCos do not really have the characteristics of traditional bonds, which should offer stable cashflows and relatively low-risks.

"There will be people who opportunistically use them," said Lise Coleman, head of global credit fixed income at JP Morgan Asset Management. "It's a way of getting a higher beta play into your portfolio. But it won't be the traditional buyer base... it will be a different universe."

The type of investors attracted to CoCos could pose questions for regulators.

"Would it be an issue for the FSA who provides this (capital) buffer?," said Oliver Judd, financials analyst at Aviva Investors. "Is it a long-term stable investor base or a more short-term volatile investor base?"

CoCos could evolve to reassure mainstream investors.

One additional feature under consideration is that the bonds convert into a variable number of shares, bankers said. Another issue is whether regulators would have some discretion over when to activate the conversion, they said.

With regulatory momentum behind them, CoCos could gain some credibility, but bankers said they doubted if a brand new CoCo bond could come to market before Christmas.

"But would someone start to add a sort of contingent spin on Tier 1 issuance in 2010? Well, we are certainly pitching for that and people are listening," said Adam.
($1=.6064 Pound) (Additional reporting by Claire Milhench; editing by Simon Jessop)
((jane.merriman@thomsonreuters.com; +44 207 542 3121; Reuters Messaging:jane.merriman.reuters.com@reuters.net))

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   By Susan Fenton
HONG KONG, Nov 20 (Reuters) - Hong Kong's central bank chief Norman Chan warned that asset prices in the city could climb sharply next year and disconnect from fundamentals, raising the risk of a bubble, and said surging capital inflows posed a dilemma for policymakers across Asia.

"With interest rates exceptionally low and with abundant liquidity around the world, Hong Kong faces the potential risk next year that asset prices may go up sharply and become increasingly disconnected from economic fundamentals," Chan, head of the Hong Kong Monetary Authority, said in an article on its website.

While other economies could raise interest rates in a bid to curb inflation in assets such as property, that tactic could backfire and attract even more outside investors who are hungry for higher yields, Chan noted.

Hong Kong faces a different challenge. Its currency peg to the U.S. dollar forces it to track monetary policy in the United States, which is expected to keep rates low for some time.

The financial centre, a key gateway to mainland China, also prides itself on its open economy and thus would be unlikely to look at capital controls at this stage, analysts said. However, more measures to curb property speculation may be in the offing.

Emerging markets such as Brazil and Taiwan have both announced capital controls in recent weeks to keep what they say are "hot money" speculative flows from fueling sharp gains in their currencies and destabilising their recovering economies.

Russia said on Thursday it would consider "soft" measures to curb inflows, while Indonesia is also studying ways to control foreign investment in one-month central bank bonds.

HOT MONEY
Hong Kong attracted a record HK$567.5 billion (US$73 billion) in fund inflows between Oct. 1 2008 and Nov. 13, 2009, according to the HKMA. That has helped Hong Kong stock prices soar 57 percent this year and property prices surge nearly 30 percent.

Prices of luxury property in the city, however, have surged over 40 percent this year as mainland Chinese have been snapping up apartments. A weak dollar and expectations that U.S., and therefore Hong Kong interest rates will stay low for some time are also encouraging foreigners to buy Hong Kong assets.

That prompted the HKMA last month to tighten mortgage lending rules, especially on luxury property, by capping the mortgage limit for property valued at $2.6 million or more at 60 percent, compared with 70 percent previously. However, as many mainland Chinese buyers are flush with cash, that may not work.

The government has also said it is ready to release more land for sale to ward off a possible property bubble. This week it announced its first large-scale land sale in two years.

On Friday the government announced that property developers would have to make public their sales transactions of uncompleted first-hand residential property within five working days rather than one month from the end of November, saying it wanted to improve transparency in the market.

Developers must also show an apartment's price per square foot/metre in 'saleable area' under the new rules, not just the overall apartment price, as the government said it was "deeply concerned" about some recent sales tactics.

Chan said it was not easy to say whether Hong Kong was now seeing an asset bubble but warned that values risked deviating from fundamentals.

Massive fund flows into the city's banking system have put intense upward pressure on the Hong Kong dollar, forcing the HKMA to intervene repeatedly to keep the currency within its trading band against the U.S. dollar. The HKMA has injected a record HK$620 billion since October 2008.

In nearby South Korea, officials have also warned of the risk of a housing bubble and have threatened to raise interest rates from a record low 2 percent to calm prices.

(Reporting by Manoj Kumar in New Delhi and Seo Eun-kyung in Seoul; Editing by Kim Coghill) (susan.fenton@thomsonreuters.com; +852 2843 6367; Reuters Messaging: susan.fenton.thomsonreuters.com@reuters.net)

In his ill-spent youth my brother owned a Ford Capri. It was a monstrosity.

I've just called him and the car's specifications slipped off his tongue as though he was still driving it. "It was a classic -- a Mark One, 1600 GT XLR with fake wood dashboard, a clock in the centre console, not forgetting the twin choke Weber and the huge General Grabber tyres."

He seemed to spent most of his weekend primping, preening and pimping his motor and while his head was under the bonnet I would laugh at him incessantly.

But maybe I was wrong. Crap cars are now apparently highly desirable and 20-year old Trabants are selling for over £5,000. In these days of financial uncertainity that's quite a nice little investment.

Ah the Trabant. Immortalised by U2's "Achtung Baby" album cover in 1991, with its fibre-glass body and  600cc engine Vorsprung durch Technik it was not.

Not that bone-rattling suspensions and outdated designs were confined to behind the Iron Curtain.

Just over a year ago the Austin Allegro was voted Britain's worst ever car, leaving the Morris Ital and Talbot Sunbeam in second and third place.

What was the worst car you've driven? And let us know how much an Austin Allegro, often referred to as the 'All-aggro', is going for these days?

By Huw Jones
LONDON, Nov 19 (Reuters) - Britain's financial watchdog will have powers to claw back bank bonuses that breach globally agreed rules on remuneration and force hedge funds to provide data, a draft law published on Thursday showed.

The draft law's main provisions were announced by the government on Wednesday and enforce pledges Britain and other members of the G20 group of leading countries made this year to apply lessons from the credit crunch.

"The bill we are introducing today is central to the government's reform agenda that seeks to empower consumers and make sure that, in the future, taxpayers will not be called on to protect banks from the consequences of their actions," Britain's Finance Minister Alistair Darling said in a statement.

The Financial Services Authority (FSA) will have "information gathering powers extended to non-regulated firms, including hedge funds, where information is relevant to financial stability", the draft law says.

Hedge fund managers are already required to register and provide data. The European Union is adopting a law with similar provisions.

The FSA will have a new, explicit objective of helping to ensure financial stability, giving it a bigger role in monitoring and assessing risk that could destabilise the broader financial system -- a supervisory gap the credit crunch highlighted in many countries.

"The measures in the bill, particularly under the proposed financial stability objective, will give the FSA more powers to carry out its remit from parliament in a more effective manner," an FSA spokesman said.

BOE BACK ON TOP?
The opposition Conservative Party, tipped by pollsters to win the election due by June, has said it wants to abolish the FSA, saying its joint "tripartite" supervision of banks with the Bank of England and Treasury had failed.

"Instead we need to put the Bank of England back in charge because only central banks have the authority and the judgment that is needed," the party's treasury spokesman, George Osborne, said in the London Evening Standard newspaper.

Britain's financial services minister Paul Myners said there were no plans for tearing up existing pay contracts.

"That's an abrogation of legal contracts which governments should not contemplate," Myners told Sky News television.

"What we are saying is that going forward all contracts have to comply with the framework specified by the FSA, and if a bank were to offer a contract which the FSA regarded as reckless... then that contract could be voided and penalties could arise," Myners said.

He does not expect this to happen in practice and banks are keen on the provision as it will help them "manage better the greed they have been confronted" with.

FIRMS' FSA FEARS
Lawyers said firms will be able to get out of bonus payments by referring to regulatory obligations.

Paul Edmondson of law firm CMS Cameron McKenna said FSA powers on pay, living wills and enforcement won't be restricted to banks but apply to all authorised firms and insurers.

"Firms will be concerned about inappropriate read across from the banking crisis," Edmondson said.

The bill will also give the FSA powers to curb short-selling and require disclosure on short selling, a practice favoured by some hedge funds and blamed by policymakers for amplifying selloffs in bank shares at the height of the credit crunch.

Such measures have already been used by the FSA.

The watchdog will also have a duty to require firms to plan for their possible demise by drawing up "living wills" or recovery and resolution plans for a speedy wind down that avoids the need for taxpayer bailouts.

The G20 wants all major financial firms to draw up living wills by the end of 2010 and the FSA has already announced that several banks are taking part in a pilot scheme to complete first drafts of living wills in coming weeks.

The bill also contains provisions on pay in light of a UK government commissioned review by former top banker David Walker on how to strengthen corporate governance and make boards more accountable for a bank's activities.

The final version of the Walker Review is published on Nov. 26 but the government has already said it backs the findings of a preliminary version released this year.

There will also be a new Financial Services Compensation Scheme to compensate British customers of overseas financial firms. Britain had to step in to safeguard deposits held by UK customers of failing Icelandic banks.

(Additional reporting by Avril Ormsby; Editing by Andy Bruce/Victoria Main) ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

By David Lawder and Emily Kaiser
WASHINGTON, Nov 19 (Reuters) - U.S. Treasury Secretary Timothy Geithner defended on Thursday the costly bailout of AIG and urged swift regulatory reform to safeguard the economy from the failure of big financial firms.

Before Congress' Joint Economic Committee Geithner faced fierce criticism of his role in the rescue of insurer American International Group Inc in 2008 when he was president of the New York Federal Reserve Bank.

Representative Kevin Brady, a Republican, called for Geithner's resignation.

Geithner said AIG's failure posed as significant a risk to the economy as the collapse of investment bank Lehman Brothers, which sparked a panic that virtually shut down global trade and threatened to topple the entire financial system.

"The United States of America -- largest financial system in the world, dollar the reserve asset of the entire financial system -- came into this crisis without anything like the basic tools countries need to contain financial panics," he said.

"Coming into AIG, we had basically duct tape and string."

The AIG bailout has been become a symbol of voter outrage over the failings of Wall Street and the government's $700 billion bailout fund, complicating the White House's efforts to get a regulatory reform bill passed.

Congress has been wrangling over how best to revamp financial rules to give the government tools to prevent another crisis, while striking the right balance between clamping down on risky lending and hampering the flow of credit.

The U.S. House of Representatives Financial Services Committee has been working on a bill for weeks, and the Senate Banking Committee kicked off a similar effort on Thursday.

Senator Richard Shelby, the top Republican on the Senate panel, said he would not support a bill put forward by Senator Christopher Dodd, the Democrat who chairs the committee, and called for a "complete rewrite."

NO GOOD CHOICES ON AIG
Geithner said because the United States had no authority to seize and wind down complex financial firms that were in danger of collapse, it had no choice but to step in when the failure of AIG appeared imminent in September 2008.

High unemployment has sparked complaints that Washington was quick to rescue Wall Street but ignored the plight of those who lost their jobs in a recession blamed partly on chancy lending.

"Conservatives agree that as point person you failed. Liberals are growing in that consensus as well," Brady said during a tense exchange with Geithner. "For the sake of our jobs, will you step down from your post?"

In response, Geithner defended the actions he and others in the Obama administration had taken to restore financial calm and economic growth.

The Treasury chief used his testimony to press his case that action on reforms was needed before the impetus for change fades.

He said no financial firm should be able to escape regulation, and the largest institutions need oversight from a single, strong regulator.

"The regulation of the largest, most interconnected
firms requires tremendous institutional capacity, clear lines of authority and single-point accountability. This is no place for regulation for council or by committee,"
he said.

As part of a sweeping reform plan, the Obama administration has proposed that the Federal Reserve be given powers to oversee the largest financial firms, and Geithner's comments signaled opposition to proposals to give this authority to a council of existing regulators.

"The stakes are simply too high to allow diffuse authorities and responsibilities to weaken accountability," Geithner said.

Geithner said he expected U.S. economic growth to continue in the fourth quarter and into 2010 but argued that the United States' long-term stability and strength could not be ensured without a broad revamp of financial regulation.

"Unfortunately, the regulatory regime that failed so terribly leading up to the financial crisis is precisely the regulatory regime we have today," Geithner said.

"To ensure the vitality, the strength and the stability of our economy ... we must bring our system of financial regulation into the twenty-first century," Geithner said. (Additional reporting by Rachelle Younglai; Editing by Kenneth Barry) ((david.lawder@thomsonreuters.com; Tel: +1 202 898 8395; Reuters Messaging: david.lawder.reuters.com@reuters.net)) ((Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com
* BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.com)) Keywords: FINANCIAL REGULATION/GEITHNER

Thursday, 19 November 2009 12:20:12RTRS [nN1945258 ] {C}ENDS