Financial Regulatory Forum

UK’s FSA recruits “panthers” to stalk banks

Reuters Staff — Fri, 27 Nov 2009 07:30:08 +0000

   LONDON, Nov 26 (Reuters) - Britain’s Financial Services Authority (FSA) has appointed five senior “corporate panthers” to prowl the city of London and help it judge the competence of top banking executives and improve governance.
   The FSA named Dominic Cadbury, Sarah Hogg, Colin Marshall, Brian Pitman and David Scholey to bulk up its clout and aid its quest to improve banking practices, supervise senior banking executives and quiz financial candidates applying for top jobs.
   “These new advisors have extensive experience acting on the boards of major companies and in senior policy positions and will bring valuable insight to the work the FSA is pursuing on governance,” said Hector Sants, the FSA’s chief executive.
   The FSA first appointed a group dubbed the “grey panthers” around a decade ago to its insurance division in the wake of the collapses of insurance companies.
   The new panthers, who are established business figures and less likely to be intimidated by bank grandees, will help the FSA judge the competence and capability of those applying for and holding influential banking positions.
   But one lawyer said the appointments sounded “a bit chummy and old fashioned”.
   “The problem with this approach is that it can be self-referential,” he noted. “It’s winding the clock back to how the city (of London) was 40 or 50 years ago.”
   Cadbury is a former chief executive and chairman of eponymous confectionery giant Cadbury , Hogg is a non-executive chairman of private equity firm 3i Group and senior independent director of BG Group.
   Marshall is a non-executive chairman of Nomura International, an investment bank, Pitman is senior independent director of phone retailer and service provider Carphone Warehouse and a senior adviser at bank Morgan Stanley and Scholey is an adviser to Swiss bank UBS . (Reporting by Kirstin Ridley, editing by Will Waterman) ((kirstin.ridley@thomsonreuters.com; +44 207 542 7987; Reuters Messaging: kirstin.ridley.reuters.com@reuters.net))
Keywords: FSA APPOINTMENTS/

Thursday, 26 November 2009 16:17:17RTRS [nGEE5AP1RW] {C}ENDS

LSE stops trading for more than 3 hours

Reuters Staff — Fri, 27 Nov 2009 07:19:18 +0000

   By Jane Baird
   LONDON, Nov 26 (Reuters) - The London Stock Exchange halted trading for more than three hours on Thursday because of technical glitches, while it placed all order-driven securities in an auction call period.
   Trading resumed at 1400 GMT, following an auction call period that started shortly after 1030 GMT.
   “Our decision was a result of customer feedback,” said an LSE spokesman. “Some customers were experiencing connection issues while others were not, and customers requested for the market to be put into auction status so that there would be a level playing field.”
   But Chi-X Europe, the LSE’s leading rival, said the exchange’s decision to put its market into auction status prevented the routing of trades to other venues.
   “The auction status hampered investors’ ability to trade by not enabling participants to seek a reference price on another venue,” the multilateral trading facility (MTF) said in a statement.
   Chi-X said the LSE should have halted trading, as it did on Nov. 9 during a partial system failure, because that would have allowed firms’ trading systems to switch to other venues.
   The LSE spokesman denied the Chi-X claim.
   The auction process “had the effect of halting trading but allowed clients to continue to interact with orders on the system”, the LSE said in a later statement.
   An investor was critical of the way LSE, Chi-X and many brokerage firms handled the breakdown.
   “The LSE should have had an auction process for a half-hour, not more than three hours,” said Adrian Fitzpatrick, European head of centralised dealing for Aegon Asset Management.
   He said that while Chi-X had a point, they and the brokers should have developed contingency plans to handle such a situation.

   SMART ORDER ROUTING NEEDED
   “In the U.S. this doesn’t happen, because you have smart order routing, and it (trading) would automatically move to the MTFs that would be generating prices,” Fitzpatrick said.
   In Europe, at least a few brokers were able to switch off their connection to the exchange, but a lot of brokers do not have genuine smart order routing that allows such a switch, he said.
   In September last year the LSE suffered its worst systems failure in eight years, causing the share market to suspend trading for about seven hours, infuriating its users.
   One London fund manager said the LSE breakdown came at yet another inconvenient time, when the market was stirred by the Dubai debt crisis.
   LSE Chief Executive Xavier Rolet said, “We are working hard to ensure this doesn’t happen again ahead of switching (to a new trading platform next year).”
   A system breakdown can be a very bad event for the LSE “in the current market environment where there is so much competition and the LSE is trying to win back institutional customers”, said Axel Pierron, a senior analyst at Celent.
   “It could push market participants who didn’t have access to other liquidity pools such as Chi-X or Turquoise to show them that they need a back-up solution,” he added.
   But that is not what happened on Thursday, said Fitzpatrick, who predicted that volume of trading would be tiny for the day.
   “For the MTFs, it should have been mannah from heaven, but they have all struggled today to make a price,” he said.
   “The only way you could do it is by looking at comparable stocks in Europe, put a limit order on and put it in a couple of dark pools and hope you start getting ticked off (trades executed),” he added.
   Pierron said it would be interesting to see how much volume on Thursday went to regulated MTFs and how much to the unregulated over-the-counter side.
   Chi-X called on the the LSE to close the market when failures occur in future to allow trading to continue.
   “To a certain extent it is fair for Chi-X to complain about the situation, and one can imagine that they will eventually benefit from it,” Pierron said.
   But “issuers come into play as well, and some of them could be concerned if the LSE closed its market that Chi-X would become the relevant trading venue for their issue,” he added. (With additional reporting by Daisy Ku, editing by Will Waterman)
((jane.baird@thomsonreuters.com, Reuters Messaging: jane.baird.reuters.com@reuters.net, +442075422471))
Keywords: LSE/CHI X

Thursday, 26 November 2009 18:55:35RTRS [nGEE5AP19I] {C}ENDS

HK jails four in $516 mln share price manipulation case

Reuters Staff — Fri, 27 Nov 2009 07:15:54 +0000

    HONG KONG, Nov 27 (Reuters) - A Hong Kong court has jailed four investors for conspiring to boost the share price of a listed company, underscoring the city’s increasingly assertive financial sector oversight.
   The case involved a conspiracy to manipulate shares of Asia Standard Hotel Group Ltd (ASH Group) <0292.HK> in 2005, which helped boost the firm’s share price by 78 percent and its market capitalisation by HK$4 billion ($516 million), said Hong Kong’s financial sector watchdog.
   The Securities and Futures Commission (SFC), which spearheaded the investigation, said the four had “effectively rigged the market” and “provided a false picture of the depth and liquidity” of ASH’s shares by actively trading the stock through scores of brokerage accounts.
   Following an earlier conviction, a district court in Hong Kong sentenced the alleged head of the conspiracy, Chan Chin Yuen, to 30 months in jail. Three others, including Chan’s brother and sister-in-law, were given 26 months.
   “This was a conspiracy to rip money out of the hands of innocent investors and is the largest market manipulation case brought before a court in Hong Kong,” said Mark Steward, the SFC’s Executive Director of Enforcement.
   Hong Kong’s SFC has pursued an aggressive campaign amid the financial crisis to combat insider trading and other market abuses, which recently snared Morgan Stanley Managing Director Du Jun along with a score of others over the past year or so.
   Steward said the sentence “sends the clearest possible deterrent message to those who wrongly think they can get away with defrauding the market and the investing public. The message is that they can’t get away with it, they will be caught and they will go to jail.” (Reporting by James Pomfret; Editing by Valerie Lee) ((james.pomfret@thomsonreuters.com; +852 2843 6390; Reuters Messaging: james.pomfret.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com)) ($1=7.750 Hong Kong Dollar)
Keywords: SFC HONGKONG/MANIPULATION

Friday, 27 November 2009 00:51:14RTRS [nHKG29240 ] {C}ENDS

SCENARIOS-U.S. Congress targets Fed for changes

Reuters Staff — Thu, 26 Nov 2009 08:31:59 +0000

    WASHINGTON, Nov 25 (Reuters) - The U.S. Congress is debating proposals that could change the Federal Reserve’s role in the financial system and expose the central bank to more scrutiny, threatening its cherished political independence.
   Following are brief descriptions of regulatory reform proposals affecting the Fed and possible scenarios for them:

   HOUSE PROPOSAL
   * House of Representatives Financial Services Committee is considering a systemic risk regulation bill agreed upon by House Democrats and the Obama administration to allow Fed to limit credit exposures at financial firms, block acquisitions, restrict pay and shut down undercapitalized firms.
   * Bill makes Fed part of an inter-agency Financial Services Oversight Council chaired by Treasury secretary.
   * Bill would strip Fed of its consumer protection job and give it to new agency.
   * Long-time Fed critic Republican Representative Ron Paul won surprise approval for amendment to allow audits of monetary policy and the Fed’s lending to financial firms. Paul’s measure had attracted 313 co-sponsors.
   * Monetary policy audits under Paul’s amendment could not become public until six months after any Fed decision.
   * Bill would put new limits on Fed’s “lender of last resort power” by restricting its so-called 13-3 authority to lend money to firms other than banks in “unusual and exigent circumstances.”
   * Bill expected to undergo committee vote on Dec. 2.

   SENATE PROPOSAL
   * Senate Banking Committee is debating a bill to create a systemic risk regulation agency with an inter-agency board.
   * Senate bill would strip Fed of consumer protection duties and relocate them in new agency, like House bill.
   * Bill would also strip Fed of bank supervision duties and centralize them in new super-regulator for banking industry, a more dramatic step that House bill lacks.
   * Bill would give power to name members of the boards of the 12 regional Fed banks to Washington, taking it away from banks in those regions. President would appoint regional Fed board chairmen, subject to Senate confirmation.
   * Like House bill, Fed’s 13-3 authority would be limited.
   * Senate bill would permit audits of Fed emergency lending facilities, allowing for disclosure of borrowers after one year, but does not authorize audits of monetary policy.
   * A separate bill mirroring Paul’s measure in the House has been introduced in the Senate and has gained 30 co-sponsors.

   HOUSE SCENARIOS
   * In the House, if the Financial Services Committee approves the systemic risk bill, it would then be consolidated into a larger financial reforms bill to go to the House floor, likely in mid-December, for debate and amendments.
   * On the House floor, Democrats could kill or weaken Paul’s audit proposal. One way would be to allow more scrutiny of Fed emergency lending, but shield monetary policy decisions.
   * After a House vote on financial reforms, with or without the Fed audit proposal, attention would shift to the Senate.

   SENATE SCENARIOS
   * Debate in the Senate Banking Committee is expected to extend well into 2010.
   * Senate Republicans disagree with Banking Committee Chairman Christopher Dodd on key parts of his proposal.
   * Approaching November mid-term elections may frustrate efforts to pass far-reaching financial reform legislation.
   * Fed expected to lobby to block Paul provision. May cede consumer protection authority, but likely to fight to retain bank supervision authority.
   * If Senate Banking Committee approves reforms like the ones Dodd is proposing, Fed would be relegated largely to managing monetary policy.
   * Any bill approved in Senate would have to be reconciled with the House bill, then signed into law by the president.

   MARKET OUTLOOK
   * Financial markets could be unsettled if a measure opening interest rate decisions to audits survives.
   * Investors could view Fed as under political pressure to keep growth humming, especially as elections approach. Inflation expectations and longer-term interest rates could rise. Fed officials have said economy could be harmed.
   * Fed, knowing Congress is looking over its shoulder, could become more cautious and choose options that conform to established models, rather than using unconventional tactics.
   * Or, the audit provisions, if enacted, could draw only a yawn from markets. Investors may assume monetary policy remains insulated from politics due to the six-month delay in making deliberations public. Fed officials could find their decisions are easy to justify to lawmakers whose constituents favor a tight grip on inflation and price stability.
   * Markets could also view the Fed as weakened if Congress strips it of bank supervision duties. Britain is eyeing a bigger regulatory role for the Bank of England, which had focused solely on monetary policy, after the financial crisis exposed weaknesses in the oversight structure. Fed officials have argued their supervisory duties inform their rate decisions.
   (Reporting by Mark Felsenthal and Kevin Drawbaugh; Editing by Andrew Hay)
((mark.felsenthal@thomsonreuters.com; +1 202 898 8329; Reuters Messaging: mark.felsenthal.reuters.com@reuters.net)) Keywords: USA FED/CONGRESS

Wednesday, 25 November 2009 20:02:27RTRS [nN24323051] {C}ENDS

Fed told rule change could help with exit -source

Reuters Staff — Thu, 26 Nov 2009 08:27:54 +0000

    By Kristina Cooke
   NEW YORK, Nov 25 (Reuters) - A handful of banks have told the Federal Reserve they could do more to support the central bank’s exit from its emergency cash infusions if a key accounting rule was changed, according to a person familiar with the situation.
   At issue are reverse repurchase agreements, a cash-draining tool, that the banks said could be used to a greater extent when the time comes if dealers did not have to record them on their balance sheets when they act as middle-men, the source said.
   In its efforts to help the economy recover from a severe recession, the Fed cut interest rates to near zero last December, and this year further eased financial conditions by buying longer-term Treasuries and mortgage-related securities. The Fed’s balance sheet has more than doubled to $2 trillion in the process.
   No decision has been made on what tools the Fed will use and in what order to eventually tighten monetary policy once the recovery picks up steam.
   Reverse repurchase agreements are one option, but given the scale at which they might be needed, the Fed has said it could go beyond its usual primary dealer partners to tap cash-rich money market mutual funds.
   In a reverse repo, the Fed sells assets for cash with an agreement to buy them back at a later date, thus draining extra cash from the system.
   Dealers told the Fed they could play a bigger role as middle-men between the Fed and money market mutual funds if they didn’t have to record the assets in the reverse repo transactions on their balance sheets and could “net” them instead, the source said.
   An accounting rule change that would enable dealers to net their positions would mean the dealers could be intermediaries on reverse repo trades without incurring the costs of having to hold additional capital against a bigger balance sheet, the source said.
   A precedent for this is the netting of positions used between dealers in the Fixed Income Clearing Corp (FICC), but with money market mutual funds and the Fed on either side of the transaction, the source said.
   If dealers act as middle-men between the Fed and money market mutual funds they would be expanding their balance sheets for little benefit, the source said.
   “All the dealer community receives is a big balance sheet consequence,” the source said.
   “And that is why dealers have made the point to the Fed that encouraging large balance sheet charges without positive economics will not serve as a strong foundation for a successful program.”
   Any accounting rule change would have to be made by the accounting standard setter, the Financial Accounting Standards Board (FASB). The Securities and Exchange Commission can also provide accounting guidance.
   A FASB spokesman said board was “unaware of any current accounting issues pertaining to repos”; the SEC was not immediately available for comment. The New York Federal Reserve Bank — the Fed’s operational arm on Wall Street — declined to comment.
   Accounting rules would require banks to record assets on their balance sheets when they act as go-betweens if they take on credit risk in a transaction.
   Direct reverse repurchase transactions between the Fed and money market mutual funds would likely prove more difficult than using dealers as intermediaries, because the Fed does not have existing relationships with these funds — and thus would have to craft new documentation, the source said.
    The New York Fed said in a statement in October that it has been testing the mechanics of conducting tri-party reverse repos.
   However, the New York Fed stressed that just because it was conducting tests to have its toolkit ready when needed, it didn’t mean it was about to use it. For a factbox on other tools the Fed could use to eventually tighten policy, please see [ID:nN04354370] (Additional reporting by Rachelle Younglai in Washington; Editing by Leslie Adler)
((kristina.cooke@thomsonreuters.com; Tel: +1 646 223 6154; Reuters Messaging:rm://kristina.cooke.reuters.com@reuters.net))
Keywords: USA FED/REVERSES

Wednesday, 25 November 2009 21:08:09RTRS [nN25363811] {C}ENDS

UK bank review recommends greater pay disclosure

Reuters Staff — Thu, 26 Nov 2009 08:13:29 +0000

    By Huw Jones and Raji Menon
   LONDON, Nov 26 (Reuters) - Banks must disclose how much they pay top employees, a UK government sponsored report recommended on Thursday in a bid to quell public anger over “bonuses as usual” in a sector shored up by taxpayer bailouts.
   The report published on Thursday from David Walker, former chairman of Morgan Stanley bank’s international unit, lays down 39 steps to improve how banks are run.
   Touted as the toughest set of pay rules in the world — though stopping short of actual caps — they aim to stop banks and staff betting the shop through too risky activities.
   Board members should spend more time on the job and pay be closely monitored. Shareholders also have a duty to scrutinise how their companies are run, the report says.
   Britain had to shore up its financial sector hit by the credit crunch. It nationalised or took major stakes in several banks such as Northern Rock, Lloyds and RBS .
   Walker published his recommendations in draft form in July but has toughened up sections on pay as policymakers warn banks there can be no return to “business as usual” of unjustifiably large bonuses. [ID:nLG47052]
   He also wants the recommendations to be implemented in law, rather than on a “comply or explain” basis outlined in July.
   “There will still be public anger over bank pay and bonuses and that’s understandable,” Walker told Reuters on Wednesday.
   “But this disclosure is not designed to appease the great British public. It is designed to deal with the problem that these high end people are capable of influencing the risk profile of banks and it is unsatisfactory that shareholders and remuneration committees have so far focused almost exclusively on executive board remuneration.”
   The government said it will introduce all of Walker’s recommendations as soon as possible. Last week it published a draft financial services bill with provisions to implement the review.
   “Sir David’s proposals are the blueprint for how banks must be run in the future,” Britain’s Finance Minister, Alistair Darling, said.
   “We will issue draft regulations for consultation in the new year and bring them into force as soon as practicable after enactment of the bill. This will force disclosure for the 2010 performance year,” Darling said.
   There could be changes, however, as the opposition Conservative Party is tipped in the polls to win the election due by June when the draft law may not have been adopted yet.
   Walker said he has “no reason to believe” the Conservative Party will take a different view.
   “Whether this government continues or a new government takes charge, they are going to have to face this question next year and I am not for trimming my sails,” he said.

   TOUGHEST IN THE WORLD
   Big listed banks and even unlisted firms such as building societies should report from 2010 all employees and board members whose annual packages top a million pounds.
    Disclosure would be in bands, starting at one million to 2.5 million pounds ($4.14 million), with a second band at 2.5 to 5 million pounds, with bands in 5 million pound lots thereafter.
   In July, Walker had recommended disclosure of pay higher than the median of executive board members — which would typically be around two million pounds.
   Remuneration for each of the unnamed employees should be broken down along business lines, salary, cash bonus, deferred shares, performance-related long-term awards and pension contributions. UK-based subsidiaries of foreign banks should also make similar disclosures.
   The report also recommends that all big banks operating in Britain abide by rules on pay structures that are tougher than those agreed by the G20 group of top countries in September and which major banks in Britain have already signed up to.
   “These recommendations on pay are tougher than anywhere else in the world. But I am not imposing these recommendations on UK banks at this moment of time — they have to implement these recommendations by 2010,” Walker said.
   At least half of an employee’s variable pay would be in the form of long-term incentives such as shares that vest over several years.
   No more than a third of a bonus can be paid in the first year and pay can be clawed back if it was unmerited but some fear being too tough will put UK banks at a disadvantage.
   “The recommendations around deferral and long performance periods go in the right direction but we remain concerned about over prescriptions and the danger that the UK may move too far ahead of international practice,” the Association of British Insurers said.
   Other recommendations seek to ensure that the chair and non-executive directors of banks spend more time on the job and are suitably qualified to understand the risks in some of the complex products being sold.
   Walker is also recommending that institutional investors play a more active role as owners of businesses by adopting the Institutional Shareholders’ Committee’s (ISC) stewardship principles on a “comply or explain” basis. [nLG222766]
   “Institutional investors should be less passive and prepared to engage earlier if they suspect weaknesses in governance,” Walker said.
   The Financial Services Authority (FSA) will also require fund managers to clearly disclose their commitment to the stewardship rules. ($1=.6045 Pound) (Reporting by Huw Jones and Raji Menon, editing by Ron Askew) ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))
Keywords: BRITAIN WALKER/

Thursday, 26 November 2009 00:01:05RTRS [nGEE5AO18S] {C}ENDS

India to scrap bank voting rights cap

Reuters Staff — Thu, 26 Nov 2009 08:11:31 +0000

   By Rajesh Kumar Singh
   NEW DELHI, Nov 25 (Reuters) - India plans a major boost for foreign investors in privately-run banks by allowing them voting rights in proportion to their stakeholdings.
   A bill to amend a banking law that caps voting rights at 10 percent will be moved early next year, a senior finance ministry official told Reuters on Wednesday.
   Analysts say the current restrictions hinder sector growth.
   “When we move the amendment to the Banking Regulation Act, that will be part of the Act,” the official, who spoke on condition of anonymity, told Reuters.
   “Budget session, yes, we should be ready with the amendment bill,” the official added.
   The current session of parliament runs until Dec. 21. The budget session of parliament starts in the second half of February.
   The official also said the government could frame a rule by end-March that would allow insurance firms to list on a stock exchange before they had been operating for 10 years, pending a change in the relevant legislation.
   “It (the legislation) will take a little more time. So, we are in fact, framing a rule,” said the official, who had direct knowledge of the matter.
   The insurance regulator will frame the required regulation, the official added.
   Existing regulations do not allow insurance firms to list in their first 10 years of operations. Reliance Capital’s insurance unit has sought the government’s permission for an initial public offering (IPO) before the stipulated 10-year qualification period.
   BANKS’ MERGER
   The re-election of the Congress party-led government in May, which freed it from dependence on communist allies, lifted investor hopes of an acceleration in long-delayed financial reforms that would expand participation by overseas players and increase opportunities for domestic and global players.
   Prime Minister Manmohan Singh on Monday said his government would push ahead with economic reforms particularly in the financial sector as the country looked to return to an annual economic growth rate of 9 percent in two years.
   Analysts see consolidation in the banking sector as one of those reforms.
   Last week, senior finance ministry officials met heads of some of the state-run banks to discuss mergers in the sector.
   However, the official said the discussions were preliminary in nature and no merger proposal is on the cards.
   The official also said the government is likely to approve the IPO of state-run lender United Bank of India in two weeks. (Editing by David Cowell) ((rajeshkumar.singh@thomsonreuters.com; +91-11-4178-1056; Reuters Messaging: rajeshkumar.singh.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))
Keywords: INDIA BANKING/AMENDMENT

Thursday, 26 November 2009 02:44:19RTRS [nBOM120855] {C}ENDS

ANALYSIS-Prepare for Asia capital controls-lite

Reuters Staff — Thu, 26 Nov 2009 08:09:02 +0000

   By Kevin Plumberg, Asia Asset Allocation Correspondent
   HONG KONG, Nov 26 (Reuters) - Tighter capital controls in emerging Asia are inevitable if money keeps pouring into the region and interest rates in the developed world remain at rock bottom.
   But don’t expect a rerun of knee-jerk, Draconian measures of the past, which sent investors to the exits en masse. Asian policymakers appear to have learned that the impact of strict controls to deter foreign speculators can take years to undo and wind up being ineffective over the long term.
   Authorities from Brazil to Taiwan have moved over the past month to curb what they say are “hot money” speculative flows into their countries which are pushing up their currencies, making their exports less competitive, and fueling potentially destabilising asset bubbles in stock and property markets.
   Russia and Indonesia have also indicated concern that heavy inflows could be economically disruptive. [ID:nLJ437424]
   Measures taken thus far, however, have been aimed at slowing and controlling massive capital inflows, not staunching them completely.
   Emerging Asia has led the global recovery, but with central bank policy rates currently averaging a low 4 percent, the region’s economies have not even begun to normalise.
   Higher interest rates will put even more upward pressure on Asian currencies, especially with the Federal Reserve promising to keep U.S. rates near zero for a long time, which is diminishing the value of the dollar.
   Still, this is all the more reason for policymakers to avoid pulling the gates down on foreign investment and take more targeted action against “footloose capital,” said Bill Belchere, an economist at Mirae Securities in Hong Kong.
   “Asia has been adept at absorbing liquidity and handling bubbles in its major countries,” he said.
   “When economies strengthen further and you begin to reach full employment and you need higher rates, that’s when it will become a problem. But we are not there yet.”
   Indeed, it is one thing for policymakers to identify loopholes and another to actually crack down on speculation with tough measures such as the so-called “Tobin tax” on all global financial transactions, a concept gaining traction in Europe.
   But why would they at this point?
   Flows into Asia ex-Japan equity funds stand at $17 billion so far this year, not yet offsetting the $25 billion outflow last year, fund tracker EPFR Global says.
   Also, officials are more intent on directing foreign investment to where they want the money to go, rather than closing the doors. Taiwan’s ban on foreign deposits was meant to shift the money to the domestic equity and bond market.
   Officials from India and South Korea, two countries expected to raise interest rates early in 2010, have told Reuters capital controls are not on their agenda at this point.

   THAILAND’S BAD EXPERIENCE
   Controls on foreign investment, the antithesis of Western free market principles, have long been a fixture of modern Asian financial markets. And, of course, the region has had its fair share of capital control flops.
   Thailand’s capital controls in late 2006 were similar to Chile’s in the 1990s and took the form of a 30 percent tax on portfolio investments of less than a year. The stock market slumped, forcing authorities to repeal some of the measures, and most instruments were gradually exempted from this ruling.
   Sriyan Pietersz, head of ASEAN research with JPMorgan Chase, said: “If they (policymakers) do feel the pressure building and they have to adopt bond market measures, which I think is a small risk, they are more likely to address it through non-resident deposit accounts.”
   Thailand may also look at encouraging outflows, rather than limiting inflows, by enabling local asset managers to invest more in foreign funds, raising limits on foreign currency holdings and increasing the time limit on when exporters are required to remit their proceeds back onshore, Pietersz said.

   TOO MUCH OF A GOOD THING?
   Reluctance by Asian policymakers to use punitive measures on foreign investment has been on display this week.
   In India, where foreign investment has been concentrated in the stock market, the deputy chairman of the government’s planning commission told Reuters flatly there was no possibility of increasing taxes to curb capital flows, a move that Brazil made last month. [ID:nBMA006450]
   Two officials with India’s central bank, who are not directly involved with currency policy but have direct knowledge of policy decisions, said capital inflows are substantial, and the Reserve Bank of India may use more existing tools, such as raising the reserve ratio for banks, to drain liquidity as early as January.
   C. Rangarajan, chairman of the prime minister’s economic advisory council, said this week that India would need to act if inflows neared $100 billion, but added that expected flows this year would be far less at $57-60 billion. [ID:nBOM105873]
   South Korea was careful to target domestic institutions with restrictions this week on currency forwards trading, leaving foreign banks alone.
   A senior official with the Bank of Korea said capital controls “would trigger capital flight out of the country. That’s not what we want to see. And the forex market situation is not so critical and urgent that we need to introduce such a barrier.”

   MUDDLED MESSAGE IN INDONESIA
   For now, among Asia’s big emerging markets, Indonesia is the wild card.
   Indonesia’s currency, equity and U.S. dollar bonds have been the biggest gainers in the region this year. But investors were spooked last week by central bank studies on limiting foreign ownership of 1-month central bank notes and a new regulation cracking down on tax evasion by domestic bond investors, which was in itself would not be a form of capital control.
   The lack of a clear message from policymakers in Jakarta ultimately triggered the biggest one-day sell-off of the rupiah in nine months last Thursday.
   Economists at Standard Chartered said in a note that Indonesia is unlikely to slap outright controls on inbound investment for three reasons: the lesson taught by Thailand’s recent negative example; most investment is in the country’s stock market, not the bond market; and, limits to foreign investment may be illegal according to a 1999 law.
   Still, without a clear, unified message by policymakers on where they stand with regard to more controls, investors will keep believing where there is smoke, there will soon be fire.
   “It’s the expectations of controls that can be just as damaging as the controls themselves,” said Sanjay Mathur, Asia economist with Royal Bank of Scotland in Singapore. (Additional reporting by Suvashree Dey Choudhury in MUMBAI, Manoj Kumar in NEW DELHI, Seo Eun-kyung in SEOUL, Lu Jianxin in SHANGHAI and Vidya Ranganathan in SINGAPORE) (Editing by Kim Coghill) ((Reuters Messaging: kevin.plumberg.reuters.com@reuters.net Email: kevin.plumberg@thomsonreuters.com; 852-2843-6370))
Keywords: ASIA CONTROLS

Thursday, 26 November 2009 05:48:18RTRS [nHKG263506] {C}ENDS

UK watchdog FSA sees tougher trading supervision

Reuters Staff — Tue, 24 Nov 2009 09:35:42 +0000

   By Huw Jones
   LONDON, Nov 23 (Reuters) - The UK financial services sector must face a “profound shift in regulatory philosophy” that includes tougher curbs on trading to cut risk, Britain’s financial watchdog said.
   “We have had to change that mindset and we have now done so, and that has implications for our regulatory approach,” Financial Services Authority Chairman Adair Turner said.
   “It means for instance that in setting capital against trading activity we will move from a bias in favour of more trading to a bias to conservatism, whenever we are worried about risk and whenever the real value of the activity is unclear,” Turner told the CBI business lobby conference.
   The FSA is reforming how it supervises banks by applying lessons from the credit crunch.
   New global bank capital rules on trading activities are due to come into force at the end of 2010 and will double or triple the amount of capital firms will have to set aside to cover trading risks.
   The Group of 20 emerging and developed economies has asked the International Monetary Fund to look at ways banks could help pay for taxpayer bailouts, such as a “Tobin Tax” on transactions or a levy towards a global fund. [ID:nGEE5ALOBG]
   The Tobin tax, named after the economist James Tobin who proposed it as a way to dampen speculation in cross-border foreign exchange trading over 20 years ago, has never found enough global support to be introduced.
    Turner was criticised by Britain’s financial district in the summer for raising the possibility of such a tax and the United States has said it would not introduce a transaction tax.
   “We should be willing to think about whether that is possible and desirable,” Turner said.
   Traders help to provide liquidity to markets but not all trading was limitlessly beneficial, he said.
   “I think the chances of it happening are relatively small,” Turner said.
   He also said that “if we are going to have higher capital requirements for larger banks, it should be a gradually moving charge, like progressive income tax.”
   Regulators must be willing to “extend their regulatory boundaries” to stop banks finding ways to circumnavigate tougher new rules, he said.
   Moves in the past to give building societies freedom to compete with banks were not an “undiluted success story” and they should “stick to their knitting”.
   The FSA had to rescue the Dunfermline building society which owned a hotel, he said.
   The volatile credit extension in the boom years cannot be analysed well or addressed effectively either by a central bank solely focused on an inflation target, nor by a regulator seeking to ensure an individual firm is stable, Turner said.
   The UK government is proposing to give new powers to the FSA to keep the broader financial system stable and Turner said new tools were needed to do this but have yet to be developed.
   (Reporting by Huw Jones, editing by Toby Chopra/Ruth Pitchford)
   ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))
Keywords: BRITAIN FSA/

Monday, 23 November 2009 17:18:11RTRS [nGEE5AM2E6] {C}ENDS

The disappearing Wall St “bonus,” but in name only

Reuters Staff — Tue, 24 Nov 2009 09:30:44 +0000

   By Karey Wutkowski and Steve Eder
   WASHINGTON, Nov 23 (Reuters) - “Bonus” has become a dirty word on Wall Street, prompting image consultants to advise the biggest financial firms to use euphemisms that carry less stigma as the season of lavish payouts approaches.
   A look at Goldman Sachs’ quarterly filings with regulators reveals that the term “discretionary bonuses” has been replaced with “discretionary compensation” in the past nine months.
   In fact, the most recent quarterly filing had no references to “bonus” at all, despite the fact that the Wall Street giant is on pace to pay out more than $20 billion in year-end bonuses and other compensation, a record level.
   Alan Johnson, a compensation consultant with his own New York-based firm, said the change in language is no coincidence. He has been advising his clients, which include the largest investment and commercial banks, to banish the word “bonus” and use “incentives” instead.
   “We try to avoid the term wherever we can because it is a flash point,” Johnson said. “We’re going back to using what it really is, it’s an incentive.”
   Johnson said for the top earners on Wall Street, their bonuses can be anywhere from 50 to 90 percent of their annual compensation, and is a built-in part of compensation, not an extra.
   He said that can be hard for the general public to understand or relate to.
   The financial crisis has been littered with flare-ups over bonuses, perhaps most notably in March, when lawmakers balked at $165 million in bonuses being paid to employees at the AIG unit largely responsible for the firm getting just over $180 billion in government pledges of assistance.
   The issue sparked calls for the resignation of Treasury Secretary Timothy Geithner and prompted left-leaning groups to organize bus tours to visit the homes of AIG employees.
   The financial industry is now approaching another land mine as they gear up to disclose in the coming weeks the amount of year-end bonuses.
   The disclosures will likely reveal bonus boosts of up to 50 percent over last year, as Wall Street earnings have come back strong, even though unemployment is at a 26-1/2-year high.
   “I think everybody’s holding their breath,” Johnson said about potential fallout from the disclosures.
   A Goldman Sachs spokesman did not immediately respond to a request for comment.

   WINDOW DRESSING
   Jesse Derris, a crisis communications consultant with Sunshine, Sachs & Associates, said it will take an industrywide push and public relations initiative to reduce the use of the term “bonus” and replace it with another term, or at least make it better explained.
   “You are at a point now where the visual that people get is awful,” said Derris, who represents Wall Street executives including former Merrill Lynch Chief Executive John Thain.
   The public anger over pay and concerns that excessive pay helped fuel the financial crisis has led to a government-driven attempt to better police compensation.
   The Obama administration appointed a “pay czar” in June to dictate pay at seven firms that received “exceptional” taxpayer bailouts, including Bank of America , Citigroup and AIG .
   The Federal Reserve has embarked on a deeper review of pay at the biggest financial firms, and the Securities and Exchange Commission is trying to empower shareholders with more control over executive compensation.
   The goal is to encourage compensation structures that align the pay of Wall Street workers with the long-term success of the company instead of rewarding short-term gains.
   In the meantime, financial giants are trying to quiet some of the furor through cosmetic means.
   Brad Hintz, an analyst with Sanford C. Bernstein in New York and a former Wall Street executive, said he is hearing plenty of talk that firms are trying to use language like “total compensation” and “annual earnings” instead of “bonuses.”
   But some skeptics say any efforts to change the use of the word “bonuses” would come across as window-dressing on the real problem of excessive pay.
   “Call it what you want — right now it is somewhat broken,” said Todd Gershkowitz, a compensation consultant with Farient Advisors in New York. “The real issue is how much do you actually make.” (Reporting by Karey Wutkowski in Washington and Steve Eder in New York; Editing by Tim Dobbyn) ((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8374))
   Keywords: FINANCIAL BONUSES

Monday, 23 November 2009 18:50:21RTRS [nN23262238] {C}ENDS