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In the Night Kitchen - read by James Gandolfini

Rick Santelli Rages

Singapore raps banks in rate-rigging probe

Singapore on Friday censured 20 banks, including top global lenders, over attempts to manipulate local benchmark rates -- part of a widening rate-rigging scandal being investigated by financial regulators worldwide.

The Monetary Authority of Singapore (MAS) said a yearlong review found that 20 banks -- including Bank of America, JP Morgan Chase and Standard Chartered -- had insufficient internal controls and risk management which allowed traders to attempt manipulation.

"MAS has censured these banks and directed them to adopt measures to address their deficiencies," the city-state's central bank said in a statement.

"The banks are required to report their progress to MAS on a quarterly basis and conduct independent reviews to ensure the robustness of their remedial measures."

Singapore is a global financial and wealth management centre that houses the regional offices of the world's top financial institutions.

MAS, the city-state's central bank, said 133 traders from these banks were found "to have engaged in several attempts to inappropriately influence the benchmarks".

Three-quarters of these traders have resigned or been fired, while the rest face disciplinary actions including loss of bonuses and demotion.

The MAS crackdown is the latest in a global campaign by financial regulators to curb malpractices in the setting of benchmark rates, which has resulted in banks such as Royal Bank of Scotland, UBS and Barclays paying fines worth millions of dollars.

MAS ordered 19 of the banks to set aside deposits ranging from Sg$100 million ($80 million) to Sg$1.2 billion for one year.

ING Bank N.V, UBS AG and the Royal Bank of Scotland had the highest deposit requirements due to the "severity of attempts" by their traders to influence the rates.

Three of Singapore's homegrown banks were also censured, with Oversea-Chinese Banking Corp asked to set aside up to Sg$800 million while DBS and United Overseas Bank were told to put aside up to Sg$600 million each.

"While there is no conclusive finding that... benchmarks were successfully manipulated, the traders' conduct reflected a lack of professional ethics," MAS said.

However, it said that based on available information and evidence, no criminal offence appears to have been committed under current Singapore laws.

MAS said it will propose a new regulatory framework for financial benchmarks to strengthen safeguards against manipulation.

"Ensuring the integrity of the processes for setting financial benchmarks is vital," said MAS deputy managing director Teo Swee Lian.

"MAS has taken firm supervisory actions against the banks, based on a careful assessment of their respective deficiencies."

-- Dow Jones Newswires contributed to this report --

I Love Sheila Bair

Everything the IMF wanted to know about financial regulation and wasn’t afraid to ask

Sheila Bair, 9 June 2013

I was honoured when the IMF asked me to moderate the Financial Regulation panel at this year’s Rethinking Macro II conference. And while naturally, I delivered one of the more enlightening and thought-provoking policy discussions of the conference, I did fail in my duties as moderator to make sure my panellists covered all the excellent questions our sponsors submitted to us. Of course, this was to be expected, as panellists at these types of events almost never address the topics requested of them (I certainly never do), but rather, like Presidential candidates, answer the questions they want to answer. However, being the conscientious person I am, who accepts responsibility for my mismanagement (unlike some bank CEOs we know), I will now step up and answer those questions myself.

1) Does anybody have a clear vision of the desirable financial system of the future?

Yes, me. It should be smaller, simpler, less leveraged and more focused on meeting the credit needs of the real economy. And oh yes, we should ban speculative use of credit default swaps from the face of the planet.

2) Is the ATM the only useful financial innovation of the last thirty years?

No. IF bankers approach the business of banking as a way to provide greater value at less cost to their customers, (I know – for a few bankers, that might be big 'if') technology provides a virtual gold mine for product innovations. For instance, I am currently testing out a pre-paid, stored value card which lets me do virtually all my banking on my I-phone. It tracks expenses, tells me when I’ve blown my budget, and lets me temporarily block usage of the card when my daughter, unbeknownst to me, has pulled it out of my wallet to buy the latest jeans from Aeropostale. The card, aptly called Simple, was engineered by two techies in Portland, Oregon. (Note to mega-banks: ditch the pin stripes for dockers and flip flops. The techies are coming for you next.)

3) Does the idea of a safe, regulated, core set of activities, and a less safe, less regulated, non-core make sense?

No.

The idea of a safe, regulated, core set of activities with access to the safety net (deposit insurance, central bank lending) and a less safe, MORE regulated, noncore set of activities which DO NOT UNDER ANY CIRCUMSTANCES have access to the safety net – that makes sense.

4) How do the different proposals (Volcker rule, Liikanen, Vickers) score in that respect?

Put them all together and you are two-thirds of the way there. The Volcker Rule acknowledges the need for tough restrictions on speculative trading throughout the banking organisation, including securities and derivatives trading in the so-called “casino bank”. Liikanen and Vickers acknowledge the need to firewall insured deposits around traditional commercial banking and force market funding of higher risk “casino” banking activities. Combining them would give us a much safer financial system.

But none of these proposals fully address the problem of excessive risk taking by non-bank financial institutions like AIG. Title I of Dodd-Frank empowers the Financial Stability Oversight Council to bring these kinds of “shadow banks” under prudential supervision by the Fed. Of course, that law was enacted three years ago and for nearly two years now, the regulators have promised that they will be designating shadow banks for supervisory oversight “very soon”. This was repeated most recently by Treasury Secretary Jack Lew on 22 May 2013, before the Senate Banking Committee (but this time he REALLY meant it). For some reason, the Fed and Treasury Department were able to figure out that AIG and GE Capital were systemic in a nano-second in 2008 when bailout money was at stake, but when it comes to subjecting them to more regulation now, well, hey we need to be careful here.

5) How much do higher capital ratios actually affect the efficiency and the profitability of banks?

You don’t have to be very efficient to make money by using a lot of leverage to juice profits then dump the losses on the government when things go bad. In my experience, the banks with the stronger capital ratios are the ones that are better managed, do a better job of lending, and have more sustainable profits over the long term, with the added benefit that they don’t put taxpayers at risk and keep lending during economic downturns.

6) Should we go for very high capital ratios?

Yep. I’ve argued for a minimum leverage ratio of 8%, but I like John Vickers 10% even better (and yes, he put out that news-making number during my panel…)

7) Is there virtue in simplicity, for example, simple leverage rather than capital ratios, or will simplicity only increase regulatory arbitrage?

The late Pat Moynihan once said that there are some things only a PhD can screw up. The Basel Committee’s rules for risk weighting assets are Exhibit A.

These rules are hopelessly overcomplicated. They were subject to rampant gaming and arbitrage prior to the crisis and still are. (If you don’t believe me, read Senator Levin’s report on the London Whale.) A simple leverage ratio should be the binding constraint, supplemented with a standardised system of risk weightings to force higher capital levels at banks taking undue risks. It is laughable to think that the leverage ratio is more susceptible to arbitrage than the current system of risk weightings given the way risk weights were gamed prior to the crisis, e.g. moving assets to the trading book, securitising loans to get lower capital charges, wrapping high risk CDOs in CDS protection to get near-zero risk charges, blindly investing in triple A securities, loading up on high-risk sovereign debt, repo financing … need I go on?

8) Can we realistically solve the “too big to fail” problem?

We have to solve it. If we can’t, then nationalise these behemoths and pay the people who run them the same wages as everyone else who work for the government.

9) Where do we stand on resolution processes, both at the national level and cross border?

Good progress, but not enough. Resolution authority in the US could be operationalised now, if necessary, but it would be messy and unduly expensive for creditors. We need thicker cushions of equity at the mega-banks, minimum standards for both equity and long-term debt issuances at the holding company level to facilitate the FDIC’s “single point of entry” strategy, and most importantly, we need regulators who make clear that they have the guts to put a mega-bank into receivership. The industry says they want to end “too big to fail” but they aren’t doing everything they can to make sure resolution authority works smoothly. For instance, industry groups like ISDA could greatly facilitate international resolutions by revising global standards for swap documentation to recognise the government’s authority to require continued performance on derivatives contracts in a Dodd-Frank resolution.

10) Can we hope to ever measure 'systemic risk'?

Yes. It’s all about inter-connectedness which mega-banks and regulators should be able to measure. Ironically, inter-connectedness is encouraged by those %$#@& Basel capital rules for risk weighting assets. Lending to IBM is viewed 5 times riskier as lending to Morgan Stanley. Repos among financial institutions are treated as extremely low risk, even though excessive reliance on repo funding almost brought our system down. How dumb is that?

We need to fix the capital rules. Regulators also need to focus more attention on the credit exposure reports that are required under Dodd-Frank. These reports require mega-banks to identify and quantify for regulators how exposed they are to each other. Mega-bank failure scenarios should be factored into stress testing as well.

[Since these questions relate to financial regulation, I will not opine on measuring systemic risks building as a result of loose monetary policy.]

10) Are banks in effect driving the reform process?

Sure seems that way.

11) Can regulators ever be as nimble as the regulatees?

Yes. Read Roger Martin’s Fixing the Game. Financial regulators should look to the NFL for inspiration.

12) Given the cat and mouse game between regulators and regulatees, do we have to live with regulatory uncertainty?

Simple regulations which focus on market discipline and skin-in-the-game requirements are harder to game and more adaptable to changing conditions than rules which try to dictate behaviour. For instance, thick capital cushions will help ensure that whatever dumb mistakes banks may make in the future (and they will), there will be significant capacity to absorb the resulting losses. Unfortunately, the trend has been toward complex, prescriptive rules which smart banking lawyers love to exploit. Industry generally likes the prescriptive rules because they always find a way around them, and the regulators don’t keep up.

You can see that dynamic playing out now, where the securitisation industry is seeking to undermine a Dodd-Frank requirement that securitisers take 5 cents of every dollar of loss on mortgages they securitise. They say risk retention is no longer required because the Consumer Bureau has promulgated mortgage lending standards. But these rules are pretty permissive (no down payment requirement, and a whopping 43% debt-to-income ratio) and I’m sure that the Mortgage Bankers Association is already trying to figure out ways to skirt them.

Rules dictating behaviour can sometime be helpful, but forcing market participants to take the losses from their risk-taking can be much more effective. One approach tells them what kinds of loans they can make. The other says that whatever kind of loans they make, they will take losses if those loans default.

http://voxeu.com/article/everything-imf-wanted-know-about-financial-regulation-and-wasn-t-afraid-ask

Singapore - New Gold Trading Hub

Go Zoe Go

Some Heavy Metal down at Ingleside

Olympus TLP, Lucius spar on The Might Servant, Big Foot TLP, and Jack-St. Malo Deep Draft Semi at Kiewit Offshore Services quayside on the La Quinta channel, module heavy lifting device in background.

NSA is ‘bamboozling’ lawmakers to gain access to Americans’ private records – agency veteran

Video is a bit boggy.  Full transcript can be found at the following source link.

http://rt.com/usa/bill-binney-nsa-leaks-546/

FX Manipulation

Traders Said to Rig Currency Rates to Profit Off Clients

By Liam Vaughan, Gavin Finch & Ambereen Choudhury - Jun 11, 2013 6:00 PM CT

Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.

“The FX market is like the Wild West,” said James McGeehan, who spent 12 years at banks before co-founding Framingham, Massachusetts-based FX Transparency LLC, which advises companies on foreign-exchange trading, in 2009. “It’s buyer beware.”

The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said. The Financial Conduct Authority, Britain’s markets supervisor, is considering opening a probe into potential manipulation of the rates, according to a person briefed on the matter.

The $4.7-trillion-a-day currency market, the biggest in the financial system, is one of the least regulated. The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.

Benchmark Investigations

The WM/Reuters rates are used by fund managers to compute the day-to-day value of their holdings and by index providers such as FTSE Group and MSCI Inc. that track stocks and bonds in multiple countries. While the rates aren’t followed by most investors, even small movements can affect the value of what Morningstar Inc. (MORN) estimates is $3.6 trillion in funds including pension and savings accounts that track global indexes.

One of Europe’s largest money managers has complained about possible manipulation to British regulators within the past 12 months, according to a person with knowledge of the matter who asked that neither he nor the firm be identified because he wasn’t authorized to speak publicly.

The FCA already is working with regulators worldwide to review the integrity of benchmarks, including those used in valuing derivatives and commodities, after three lenders were fined about $2.5 billion for rigging the London interbank offered rate, or Libor. Regulators also are investigating benchmarks for the crude-oil and swaps markets.

“The FCA is aware of these allegations and has been speaking to the relevant parties,” Chris Hamilton, a spokesman for the agency, said of the WM/Reuters rates.

World Markets

It may be difficult to prosecute traders for market manipulation, as spot foreign exchange, the trading of one currency with another at the current price for delivery within two days, isn’t classified as a financial instrument by regulators, said Arun Srivastava, a partner at law firm Baker & McKenzie LLP in London.

The WM/Reuters rates data are collected and distributed by World Markets Co., a unit of Boston-based State Street Corp. (STT), and Thomson Reuters Corp. (TRI) Bloomberg LP, the parent company of Bloomberg News, competes with New York-based Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg LP also distributes the WM/Reuters rates on Bloomberg terminals.

State Street hasn’t been alerted to any allegations of wrongdoing involving the rate, said a person with knowledge of the matter.

Automated, Anonymous

“The process for capturing this information and calculating the spot fixings is automated and anonymous, and the rates are monitored for quality and accuracy,” State Street said in an e-mailed statement. The data are derived from “multiple execution venues through a streaming rather than solicitation process,” it said.

World Markets states in the methodology posted online that it doesn’t guarantee the accuracy of its rates.

State Street hired London-based Freshfields Bruckhaus Deringer LLP to ensure that the rates comply with the set of draft principles for financial benchmarks published in April by global regulators following the Libor scandal, according to a person briefed on the matter.

Nick Parker, a spokesman for Freshfields, declined to comment. Thomson Reuters referred inquiries to State Street.

‘Extremely Costly’

Introduced in 1994, the WM/Reuters rates provide standardized benchmarks allowing fund managers to value holdings and assess performance. The rates also are used in forwards and other contracts that require an exchange rate at settlement.

“The price mechanism is the anchor of our entire economic system,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “Any rigging of the price mechanism leads to a misallocation of capital and is extremely costly to society.”

The rates are published hourly for 160 currencies and half-hourly for 21 of them. For the 21 -- major currencies from the British pound to the South African rand -- the benchmarks are the median of all trades in a minute-long period starting 30 seconds before the beginning of each half-hour.

If there aren’t enough transactions between a pair of currencies during the reference period, the rate is based on the median of traders’ orders, which are offers to sell or bids to buy. Rates for the other, less-widely traded currencies are calculated using quotes during a two-minute window.

Big Four

The benchmarks are based on actual trades or quotes, rather than the bank estimates used to calculate Libor. Still, they’re susceptible to rigging, according to the five traders, who said they had engaged in or witnessed the practice.

While hundreds of firms participate in the foreign-exchange market, four banks dominate, with a combined share of more than 50 percent, according to a May survey by Euromoney Institutional Investor Plc. Deutsche Bank AG (DBK), based in Frankfurt, is No. 1, with a 15.2 percent share, followed by New York-based Citigroup Inc. (C) with 14.9 percent, London-based Barclays Plc (BARC) with 10.2 percent and Zurich-based UBS AG (UBSN) with 10.1 percent.

The traders interviewed by Bloomberg News declined to identify which banks engaged in manipulative practices and didn’t specifically allege that any of the top four firms were involved. Spokesmen for Deutsche Bank, Citigroup, Barclays and UBS declined to comment.

Trading Window

As market-makers, banks execute orders to buy and sell for clients as well as trade on their own accounts.

Companies and asset managers typically ask banks to buy or sell currencies at a specified WM/Reuters fix later in the day, most commonly the 4 p.m. London close. That arrangement is open to abuse, as it gives traders a window in which they can adjust their own positions and try to move the benchmark to boost their profit, three of the dealers said.

Customers often wait until the hour before the 4 p.m. close to place large orders to minimize the opportunity for banks to trade against them, one investor and a trader said.

Index funds, which track baskets of securities from around the world each day, are particularly vulnerable because they need to place hundreds of foreign-exchange trades with banks using WM/Reuters rates, according to two money managers. The funds buy securities to match their holdings to the indexes they are required to track. The issue is most acute at the end of the month, when index-tracker funds invest new money from clients.

Concentrating Orders

By concentrating orders in the moments before and during the 60-second window, traders can push the rate up or down, a process known as “banging the close,” four dealers said.

Three said that when they received a large order they would adjust their own positions knowing that their client’s trade could move the market. If they didn’t do so, they said, they risked losing money for their banks.

One trader with more than a decade of experience said that if he received an order at 3:30 p.m. to sell 1 billion euros ($1.3 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.

He would profit from the difference between the reference rate and the higher price at which he sold his own euros, he said. A move in the benchmark of 2 basis points, or 0.02 percent, would be worth 200,000 francs ($216,000), he said.

Risky Strategy

To maximize profit, dealers would buy or sell client orders in installments during the 60-second window to exert the most pressure possible on the published rate, three traders said. Because the benchmark is based on the median of transactions during the period, placing a number of smaller trades could have a greater impact than one big deal, one dealer said.

Traders would share details of orders with brokers and counterparts at banks through instant messages to align their strategies, two of them said. They also would seek to glean information about impending trades to improve their chances of getting the desired move in the benchmark, they said.

The tactic is most effective with less-widely traded currencies, the traders said. It could still backfire if another dealer with a larger position bets in the other direction or if market-moving news breaks during the 60-second window, one of them said.

A former dealer characterized it as a risky strategy that he only attempted when he had a high degree of knowledge of other banks’ positions and a particularly large client order. Typically, that would need to exceed 200 million euros to have a chance of moving the rate, two of the traders estimated.

‘Massive Size’

Because the market is so large and competitive, it would be difficult for traders to influence rates, said Andy Naranjo, a finance professor at the University of Florida in Gainesville who specializes in foreign-exchange markets.

“I’m skeptical of the ability of traders to manipulate the major currencies in a meaningful way given the massive size of this market,” Naranjo said. “Governments themselves often have a difficult time moving foreign-exchange markets through their interventions, yet they have the additional ability to create fiat money and alter both monetary and fiscal policies.”

Some fund managers say they prefer to use the WM/Reuters rates even if they can be rigged because it’s more convenient and often cheaper than seeking quotes from individual banks, according to two investors. Dealers who agree to trade at the benchmark rate offer a service by taking on the risk that the market moves against them between the time the order is placed and the fix, they said.

ISDAfix Probe

Bloomberg News contacted foreign-exchange traders and investors after some market participants expressed concern that the WM/Reuters rates were vulnerable to manipulation. The traders and investors said they expected their market would be the next to be scrutinized.

In attempting to rig Libor, traders at Barclays, Royal Bank of Scotland Group Plc and UBS misstated their firms’ cost of borrowing and colluded with counterparts at other banks to profit from bets on derivatives, regulators found.

Libor is one of at least three benchmarks under investigation. The European Commission is probing companies including Royal Dutch Shell Plc, BP Plc and Platts, an oil-pricing and news agency, for potential manipulation of the $3.4 trillion-a-year crude-oil market. The firms have said they are cooperating with the probe. U.S. regulators are investigating the ISDAfix rate, the benchmark used for the swaps market.

No Rules

While U.K. regulators require dealers to act with integrity and avoid conflicts, there are no specific rules or agencies governing spot foreign-exchange trading in Britain or the U.S. That may make it harder to bring prosecutions for market abuse, according to Srivastava, the Baker & McKenzie partner.

Spot foreign-exchange transactions aren’t considered financial instruments in the same way as stocks and bonds. They fall outside the European Union’s Markets in Financial Instruments Directive, or Mifid, which requires dealers to take all reasonable steps to ensure the best possible results for their clients. They’re also exempt from the Dodd-Frank Act, which seeks to regulate over-the-counter derivatives in the U.S.

“Just because Mifid doesn’t apply, the spot FX market shouldn’t be a free-for-all for banks,” said Ash Saluja, a partner at CMS Cameron McKenna LLP in London. “Whenever you have a client relationship, there is a duty there.”

Sixteen of the largest banks, including Barclays, JPMorgan Chase & Co. (JPM) and Deutsche Bank (DBK), signed a voluntary code of conduct for foreign-exchange and money-market dealers in 2001 that was later included as an annex to guidelines issued by the Bank of England in November 2011.

The BOE’s Non-Investment Products Code, which some banks use in contracts with clients, states “caution should be taken so that customers’ interests are not exploited when financial intermediaries trade for their own accounts.” It also says that “manipulative practices by banks with each other or with clients constitute unacceptable trading behavior.”

That only goes so far, according to Saluja.

“The thing about the code is it is a voluntary code,” the lawyer said. “It may be that compliance with that has almost been seen as optional.”

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net; Ambereen Choudhury in London atachoudhury@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net