Audio Records of Swaps and Futures Trades Required by CFTC Rule

Derivatives traders will be required to keep audio records of commodities transactions under U.S. Commodity Futures Trading Commission rules completed in a private vote yesterday.

The regulation, revised by commissioners to limit the impact on smaller brokers, could help CFTC's enforcement unit determine traders' intent when later probing claims of market manipulation and false reporting, the agency said in a statement. It is already common practice for equities traders to make such audio recordings.

Under the rule approved in a 5-0 vote, derivatives brokers and certain members of exchanges and swap-execution facilities will be required to record quotes, bids, offers, trading and prices that lead to transactions whether communicated by telephone, voice-mail, mobile or other electronic media.

The CFTC backed away from requiring records of oral communications that lead to trades in grains, according to a statement. Companies will have a year to comply with the regulation.

The agency delayed consideration of the rule in September amid resistance from industry groups representing trading firms and exchanges.

Fed Stresses Bank Governance in Letter to Boards, Supervisors

The Federal Reserve stressed the responsibility of boards and managers for governance in a letter to banks and their supervisors that also outlined other priorities for oversight.

A bank's “board is expected to establish and maintain the firm's culture, incentives, structure, and processes that promote its compliance with laws, regulations, and supervisory guidance,” the letter, released yesterday in Washington, said. The letter also called for managers to set “appropriate compensation and other incentives that are consistent with the institutional risk appetite.”

Many of the items on the Fed's letter, such as heightened standards for capital and liquidity, are already under way as a result of the annual stress tests and tougher supervisory oversight. Governance is one area the Fed rarely discusses.

The Fed has been evolving its approach to large bank supervision partly as a result of the Dodd-Frank Act and also in response to its own shortcomings during the 2008-2009 financial crisis. The Fed said the guidance in the letter “does not apply to community banking organizations, defined as institutions supervised by the Federal Reserve with total consolidated assets of $10 billion or less.”

Treasury Plan Would Fund Rate Cuts on Mortgages in Private Bonds

Some struggling homeowners left out of current U.S. government mortgage-aid programs because their home loans have been packaged into private securities could see their interest rates cut through a subsidy being considered by the Treasury Department.

Under the plan, the government would pay the difference between the new and original interest rates to the owners of the loans for five years in an effort to overcome investors' objections to mortgage modifications, according to a person familiar with plan who asked not to be identified because the initiative isn't final or public. Details on the cost of the program and how it would be paid for weren't available.

The proposal is among efforts by the Obama administration to aid homeowners who remain under stress even as the housing market begins to recover. Borrowers who owe more than their homes are worth and who have mortgages that have been packaged into bonds issued by private securitizers have been unable to take advantage of existing government aid programs.

Borrowers who are current on their mortgage payments and who owe at least 25 percent more than the value of their properties would be eligible for the program.

JPMorgan Wins Approval for First U.S. Physical Copper ETF

JPMorgan Chase & Co. won regulatory approval for the first U.S. exchange-traded fund backed by physical copper, which some industrial users said may disrupt the market.

The proposed rule change by NYSE Arca Inc. to list JPM XF Physical Copper Trust was approved, the regulator said in an order on its website dated Dec. 14. BlackRock Inc. and ETF Securities Ltd. also have said they plan to start physically backed ETFs for industrial metals in the U.S.

A group of industrial copper consumers including AmRod Corp., Southwire Co. and Encore Wire Corp. and hedge fund RK Capital LLP opposed the plan, saying funds backed by copper would leave less of the metal available for manufacturers, creating shortages and driving up prices. Senator Carl Levin, a Michigan Democrat, in July advised rejecting the planned ETF.

A review released last month by an SEC division concluded that asset flows from exchange-traded products tied to metals don't have a significant impact on the price of the commodity. Those findings were disputed by the copper-users group.

Patrick Burton, a London-based spokesman for JPMorgan, declined to comment on when the firm plans to introduce the fund.

ETFs trade like stocks, giving investors access to commodities such as copper without taking physical delivery. ETF Securities started the first exchange-traded products backed by copper, nickel and tin in London in December 2010.

NYSE Arca Inc., the electronic platform of NYSE Euronext, filed with the SEC to list and trade JPM XF Physical Copper Trust, according to an April 2 document. It sought approval to list BlackRock's iShares Copper Trust on June 19.

Separately, South Korea, the world's fifth-biggest copper consumer, is expected to introduce an exchange-traded fund backed by physical metal this week.

The ETF will be listed on the Korea Exchange by the Public Procurement Service, a government agency that manages strategic commodities, Soon Jae Yoo, deputy director for stockpiling, said Dec. 10 at a seminar in London. The fund will be backed by metal stored in the agency's warehouses and will hold 1,100 metric tons of copper when trading starts, he said.

Allianz Pays $12.3 Million to Settle SEC's Indonesia Bribe Claim

Allianz SE will pay more than $12.3 million to settle U.S. Securities and Exchange Commission claims that the Munich-based insurer made improper payments to government officials in Indonesia during a seven-year period.

The company was cited for violating the Foreign Corrupt Practices Act after an SEC investigation found 295 insurance contracts on government projects from 2001 to 2008 that were obtained or retained by payments of $650,626 by an Allianz subsidiary to employees of state-owned entities, the agency said in a statement yesterday. Allianz made more than $5.3 million in profits as a result of the improper payments, the SEC said.

Allianz resolved the claim without admitting or denying wrongdoing. Joel Cohen, a Gibson Dunn & Crutcher LLP partner representing Allianz, didn't immediately comment on the settlement when reached by telephone yesterday.

Morgan Stanley Fined $5 Million by Massachusetts on Facebook IPO

Morgan Stanley's handling of Facebook Inc.'s initial public offering, a deal that cost investors billions of dollars, broke a decade-old pledge to block investment bankers from influencing analysts, according to Massachusetts regulators, who fined the bank $5 million.

A senior Morgan Stanley banker wrote a script that Facebook's then-treasurer used to update research analysts on the company's revenue outlook before the IPO, according to a settlement document with Secretary of the Commonwealth William Galvin. He faulted Morgan Stanley for dishonesty, ethics violations and failing to supervise employees — the first regulatory claims to stem from the bank's handling of the deal.

A plunge in Facebook's stock after it began trading in May has fueled government probes and more than 40 lawsuits, with some investors claiming the social-network company failed to disclose revised forecasts before the IPO. The small size of Morgan Stanley's fine relative to investors' losses shows other regulators may struggle to pin much blame on the bank, said Erik Gordon, a professor at the University of Michigan's Stephen M. Ross School of Business.

Michael Grimes, the bank's global co-head of technology investment banking who helped lead the IPO, and a spokesman for Secretary of the Commonwealth William Galvin's office, didn't respond to messages seeking comment on the unidentified banker described in the complaint. Mary Claire Delaney, a spokeswoman for Morgan Stanley, declined to say whether Grimes is the banker.

Japan's FSA Joins Probe Into RBS Rate Setting, Officials Say

Japan's Financial Services Agency joined a probe into possible rigging of interest rates at Royal Bank of Scotland Group Plc, two regulatory officials with knowledge of the matter said.

The FSA earlier this month began reviewing RBS's Japan banking and brokerage units on issues including compliance related to the setting of London and Tokyo interbank offered rates, the people said, asking not to be named as the matter is confidential. Japan's Securities and Exchange Surveillance Commission began its inspection last month, a government official with knowledge of the matter said at that time.

RBS, Britain's biggest taxpayer-owned lender, is among banks facing allegations by regulators worldwide that they manipulated Libor, the benchmark for more than $300 trillion of securities. The FSA was scrutinizing RBS's Tokyo banking branch and RBS Securities Japan Ltd. as of Dec. 5, the agency said on its website without disclosing additional details. It informed RBS about the probe on Nov. 27, one of the people said.

“We are fully co-operating with all of our regulators,” said Atsuko Yoshitsugu, a Tokyo-based spokeswoman for RBS. She declined to comment further.

Hiroshi Okada, a spokesman for Japan's FSA, declined to comment. RBS hasn't been accused of any wrongdoing by Japanese regulators, which conduct regular inspections of financial companies, according to the FSA's website.

Courts

Hedge Fund Managers Convicted by Jury of Insider-Trading Scheme

Level Global Investors LP co-founder Anthony Chiasson and former Diamondback Capital Management LLC portfolio manager Todd Newman were convicted of securities fraud and conspiracy for an insider-trading scheme that reaped more than $72 million.

After deliberating a little more than two days, a federal jury in New York found both men guilty of conspiracy to commit securities fraud for a scheme to trade on Dell Inc. and Nvidia Corp. using illicit tips.

The panel found Chiasson, 39, guilty of five counts of securities fraud, earning Level Global $68.5 million on inside tips trading on the two technology company stocks. Newman, 48, was convicted of four counts of securities fraud related to trades on inside information that earned his fund about $3.8 million.

Manhattan U.S. Attorney Preet Bharara's office has charged 75 people with insider trading since October 2009. Seventy-one of those pleaded guilty or were convicted after trial. Newman and Chiasson, after the seventh trial connected to the probe, are the ninth and 10th defendants convicted by federal juries in Manhattan.

The two men face as long as 20 years in prison for securities fraud when they are sentenced by U.S. District Judge Richard Sullivan on April 19.

Assistant U.S. attorneys Antonia Apps, Richard Tarlowe and John Zach argued during the trial, which began Nov. 7, that the two portfolio managers were part of a “corrupt chain” of analysts and insiders at the two technology companies who swapped and traded on illicit tips. The scheme ran from late 2007 until 2009, prosecutors said.

Six people charged with being part of the insider-trading ring have pleaded guilty and are cooperating with the U.S., including Jon Horvath, a former analyst at SAC Capital Advisors LP's Sigma unit.

Steve Bruce, a spokesman for Diamondback, declined to comment on the verdict. The fund told clients on Dec. 6 it will shut after the FBI raided its offices two years ago, prompting investors to flee.

Ford Loses Bid for $445 Million in Interest on Income Taxes

Ford Motor Co. can't collect $445 million in interest on overpayment of income taxes, an appeals court ruled, saying the Internal Revenue Service didn't improperly calculate what the company was owed.

Ford sued the U.S. in 2008, claiming that the government shortchanged the auto company on interest accrued on overpayment of corporate income taxes. A federal judge in Detroit rejected Ford's claim in 2010, agreeing with the government that the U.S. had correctly calculated the interest Ford was due on the overpayment.

Ford asked the U.S. Court of Appeals in Cincinnati to overturn the decision, contending that U.S. revenue procedure required interest to accrue from the time the company deposited money with the Internal Revenue Service. The appeals court yesterday ruled that revenue procedure couldn't be used to support the company's argument.

Jay Cooney, Ford spokesman, declined to comment immediately on the court's decision.

The case is Ford Motor Co. v U.S., 10-1934, U.S. Court of Appeals for the Sixth Circuit (Cincinnati).

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