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HSBC Private Bank Appeals $78 Million Fine Imposed in Hong Kong
May 4, 2016 | Bloomberg
By Alfred Liu
HSBC Private Bank (Suisse) SA is appealing a HK$605 million ($78 million) fine imposed by Hong Kong’s securities regulator in connection with its sales of structured products including Lehman Brothers Holdings Inc.-related notes between 2003 and 2008. -
New Fed Bailout-Prevention Rule to Reach Beyond Banks
May 3, 2016 | The Wall Street Journal
By Ryan Tracy and Katy Burne
...Regulators have said the move will help ensure that the bankruptcy of a big bank won’t get so messy that it destabilizes the whole financial system. When Lehman filed for bankruptcy, regulators were scrambling to contain the damage in part because the firm’s trading partners had the right to terminate certain financial contracts and receive payments instantly from the firm after it had failed. -
Fed Plan to Avoid Another Lehman Targets Big Bank Customers
May 3, 2016 | Bloomberg
By Jess Hamilton
...The plan released Tuesday is meant to give authorities ample time to unwind a firm, hopefully heading off the frantic contagion that spread through markets in 2008 when Lehman Brothers Holdings Inc. toppled and its trading partners demanded instant payment on terminated contracts. -
New Federal Reserve push to limit fallout from bank failures
May 3, 2016 | Financial Times
By Barney Jospon and Ben McLannahan
...In an effort to prevent a re-run of Lehman Brothers’ collapse in 2008, the Fed unveiled a proposal for lenders to stop counterparties from immediately exercising certain contractual rights when a bank goes into bankruptcy. -
Fed Board Green-Lights Capital Holding, Default Rules
May 4, 2016 | Law 360
By Dani Kass
...The second proposal serves as regulators’ attempt to avoid a mass withdrawal of investors if one company fails, as happened after Lehman’s failure, which can lead to otherwise stable companies following in their path.
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HSBC Private Bank Appeals $78 Million Fine Imposed in Hong Kong
May 4, 2016 | Bloomberg
By Alfred Liu
HSBC Private Bank (Suisse) SA is appealing a HK$605 million ($78 million) fine imposed by Hong Kong’s securities regulator in connection with its sales of structured products including Lehman Brothers Holdings Inc.-related notes between 2003 and 2008.
The appeal hearing began in the city on Wednesday after the Securities and Futures Commission previously alleged failures in internal controls and sales practices in relation to the sale of the Lehman notes and products called Leveraged Forward Accumulators.
Anthony Neoh, the bank’s senior counsel, told the hearing that the penalty was excessive. Private-bank clients had a higher risk appetite than retail-bank clients and the case featured “vanilla-type” products, the lawyer said.
The bank’s parent, HSBC Holdings Plc, is among global lenders that have been battered by fines for misconduct...
For full story: http://www.bloomberg.com/news/articles/2016-05-04/hsbc-private-bank-appeals-78-million-fine-imposed-in-hong-kong
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New Fed Bailout-Prevention Rule to Reach Beyond Banks
May 3, 2016 | The Wall Street Journal
By Ryan Tracy and Katy Burne
Asset managers such as Pacific Investment Management Co. look set to lose hard-fought protections against the cost of a bank failure, as the Federal Reserve on Tuesday proposed another rule aimed at preventing taxpayer bailouts for financial firms.
The proposal would force changes to derivatives and other esoteric financial contracts of the type that destabilized broader financial markets after the 2008 collapse of Lehman Brothers Holdings.
The proposal would see investment firms lose certain contractual rights to terminate financial deals with big banks—rights that essentially have allowed them to claim payments in the event of a bankruptcy filing without having to stand in line with other creditors. Big banks already agreed to waive such rights in 2014, but asset managers and hedge funds have resisted the change because it threatened to put them in a weaker contractual position.
While the broad outlines have been under discussion for years, key details were announced for the first time Tuesday. One potentially controversial provision could make the rules retroactive by requiring changes to existing contracts as soon as a bank and its counterparties enter into any new contracts.
“Pimco believes that this retroactive removal of a client’s existing rights in exchange for the ability to continue to trade is an overreach and removes a very valuable protection designed to help reduce risk,” said William De Leon, global head of portfolio risk management at Pimco.
Some investment firms said they are sympathetic to the Fed’s broader goals. Bill Thum, a principal in Vanguard Group’s legal and compliance unit, said some of the postcrisis rules have addressed risks that investment firms faced from swaps and big bank failures, so “some of the early-warning triggers” the industry had developed before 2008 are no longer as relevant. “The most important thing is the regulators have time to rehabilitate” a failing firm “so that a successor can be found,” he said.
Fed officials said the cost of the rule would be relatively small and would be significantly outweighed by the benefits to financial stability. “The crisis underscored that when a large financial institution gets into trouble, its failure can destabilize other firms,” Fed Chairwoman Janet Yellen said in remarks prepared for a Fed meeting on the proposal Tuesday. The new requirement “will help manage the risk when a very large firm fails, and will thus strengthen the resiliency of the financial system as a whole.”
The proposed rule would govern contracts between banks and hedge funds as well as large asset managers, a rare example of the central bank indirectly regulating investment firms that don’t fall directly under its authority. It applies to contracts with the eight U.S. banks considered by regulators to be “systemically important” to the global economy, as well as the U.S. operations of foreign banks that have that label.
The Fed is taking comments on the proposal before finalizing it, and the rule would take effect more than a year after it becomes final.
Officially, the rule is voluntary, and firms would have the choice not to rewrite their contracts. However, fund managers and their clients are likely to sign on because they have few alternatives. The big U.S. banks overseen by the Fed are the largest providers of some derivatives. Big banks also are considered to be safer and less likely to fail than nonbanks or smaller firms.
The proposal effectively would ask the investment firms to waive their rights to terminate derivatives and other relevant contracts for at least 48 hours after a bank’s bankruptcy filing.
Regulators have said the move will help ensure that the bankruptcy of a big bank won’t get so messy that it destabilizes the whole financial system. When Lehman filed for bankruptcy, regulators were scrambling to contain the damage in part because the firm’s trading partners had the right to terminate certain financial contracts and receive payments instantly from the firm after it had failed.
Lehman’s trading partners terminated thousands of derivatives known as swaps, effectively sending money—in the form of cash and collateral such as bonds—flying out Lehman’s door to counterparties that were owed money by the failed investment bank. That complicated matters for authorities, who were simultaneously trying to unwind the firm’s financial obligations in an orderly way.
Regulators also worry that similar early-termination provisions in other types of financial contracts, such as repurchase agreements, would allow a failing bank’s counterparties to seize bonds and sell them at fire-sale prices to raise cash, which can drive down prices across financial markets and spread a panic. Fire sales spread contagion after the Lehman bankruptcy...
...Regulators in other countries, including the U.K. and Germany, already have set out their versions of the rule. The International Swaps and Derivatives Association, a trade group, has created a protocol for investment firms to adhere to the changes.
The changes are likely to be opposed by some in the asset-management industry. The Managed Funds Association, a trade group whose members include hedge-fund giants Citadel LLC and D.E. Shaw Group, published a paper last fall suggesting the rules would actually harm financial stability by encouraging investors to exit trades at the first sign of trouble, lest they be hemmed in by the termination restrictions after a bankruptcy filing. The trade group had no immediate comment Tuesday.
Fed officials said they envisioned the rule as a sort of new normal that would make trading counterparties to big banks subject to the same delay, and therefore less likely to panic.
They said that under the rule, a hedge fund still would have protections. It still could terminate its contract at any time if the bank failed to make a required payment or delivery of collateral. Investors also typically deal with a bank or broker dealer that is owned by a larger bank holding company, and still could close out contracts if those subsidiaries filed for bankruptcy.
The “early termination rights” would now be suspended when the parent company of those trading units filed for bankruptcy. The idea is to prevent a Lehman-like scenario where a bankruptcy filing by the parent company, which had guaranteed deals by its affiliates, caused investors dealing with Lehman’s subsidiaries to terminate contracts and flee.
For full story: http://www.wsj.com/articles/new-fed-bailout-prevention-rule-to-reach-beyond-banks-1462267806?mg=id-wsj
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Fed Plan to Avoid Another Lehman Targets Big Bank Customers
May 3, 2016 | Bloomberg
By Jess Hamilton
Hedge funds, insurers and other companies that do business with Wall Street megabanks are poised to pay a price for regulators’ efforts to make sure any future collapse of a giant lender doesn’t tank the entire financial system.
The Federal Reserve proposed that so-called stays be included in contracts for derivatives and other financial instruments to prevent counterparties from immediately pulling collateral from a failed bank. The plan released Tuesday is meant to give authorities ample time to unwind a firm, hopefully heading off the frantic contagion that spread through markets in 2008 when Lehman Brothers Holdings Inc. toppled and its trading partners demanded instant payment on terminated contracts.
Industry groups representing firms such as Citadel LLC, BlackRock Inc. and MetLife Inc. have resisted efforts to rewrite financial contracts, arguing that it abuses investors’ rights and could make things worse by encouraging trading partners to try to pull away from a bank at the first whiff of trouble, even before a failure. But asset managers and insurers face a tough task in persuading the Fed to change course. Banks have already agreed to impose delays on deals with other lenders, and regulators insist the plan is key to their strategies for avoiding another crisis.
The Fed’s proposal would expand the stays to more contracts, affecting any new agreement signed by eight of the biggest and most complex U.S. bank holding companies and the U.S. arms of major foreign banks. So, hedge funds and asset managers that want to keep doing business with such lenders would have to toe the line.
Fed Governor Daniel Tarullo said the rule is “another step forward in our efforts to make financial firms resolvable without either injecting public capital or endangering the overall stability of the financial system.”
The Fed’s plan is part of a global effort announced by the Financial Stability Board two years ago to set the contract stays in stone through regulation. The Office of the Comptroller of the Currency will follow with its own similar version for the companies’ national-bank units, the Fed said. The U.K. is well ahead, with banks doing business there required to put the stays in place by June 1, while U.S. institutions will get more than a year to implement the Fed’s proposal.
While banking authorities can’t require money managers, pension funds and insurers to rewrite contracts, the regulators can force their hands. The Fed’s rule would prevent banks from doing business with firms that won’t agree to keep non-cleared derivatives, repos and securities-lending contracts in place for at least 48 hours after a failure.
“This wasn’t the industry’s idea; this was the regulators’ idea,” Ken Bentsen, head of the Securities Industry and Financial Markets Association, said in an interview before the rule was released. While Bentsen said he recognizes that agencies see the rule as necessary to take down faltering banks, the “biggest problem” would be sweeping in existing contracts, rather than just targeting new ones.
Any company that signs a contract after the proposal takes effect would be roped in. Existing accords aren’t affected, as long as a firm doesn’t enter into any new business with a bank. But once a firm signs a fresh contract with a bank, all their previous agreements with that lender must include stays, the Fed said.Insufficient Benefits
Before they can finalize the rule, which comes with a one-year implementation period, U.S. regulators must seek public comment on the proposal. The Fed will accept feedback until Aug. 5. Fed officials said they are still working on a way to include stays in contracts that go through clearinghouses, platforms where banks and others firms deposit collateral to guarantee trades...
For full story and video: http://www.bloomberg.com/news/articles/2016-05-03/fed-expected-to-drag-hedge-funds-into-plan-to-halt-next-lehman
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New Federal Reserve push to limit fallout from bank failures
May 3, 2016 | Financial Times
By Barney Jospon and Ben McLannahan
The Federal Reserve is proposing new measures to prevent a chaotic bank collapse by asking institutions that trade with a failing lender to pause before demanding their money back.
In an effort to prevent a re-run of Lehman Brothers’ collapse in 2008, the Fed unveiled a proposal for lenders to stop counterparties from immediately exercising certain contractual rights when a bank goes into bankruptcy.
The move on Tuesday marks the US’s latest effort to end “too big to fail” lenders by finding ways to handle a bank collapse without jeopardising financial stability or requiring a taxpayer-funded bailout.
The proposal would require the rewriting of contracts so that counterparties such as fund managers waive their right to terminate contracts, and thus claim payments, for a period of up to 48 hours when a bank enters bankruptcy.
Janet Yellen, the Fed chair, said it would help manage the risks around a big bank’s collapse by allowing time to transfer certain contracts — notably derivatives, repo and securities lending transactions — from a failed institution to a solvent one.
“When these contracts . . . unravel all at once at a failed, large banking organisation; an orderly resolution of the bank may become far more difficult, sparking asset fire sales that may consume many firms,” she said at a Fed public meeting to discuss the rule on Tuesday.
The move would have implications for asset managers, hedge funds and insurance companies that do business regularly with banks through contracts known as qualified financial contracts, or QFCs.
Don Hawthorne, a partner at law firm Axinn Veltrop & Harkrider, said that the proposal could be counter-productive.
“Holding the show up” for 48 hours “may not seem a major burden for creditors, but in reality, your options change dramatically based on what happens in that period,” he said.
“If institutional investors do not have that flexibility, when they see a bank that is not insolvent but looking vulnerable, they may start to terminate positions and move their business elsewhere — which will cause the very problems regulators are trying to remedy.”
Lehman’s collapse triggered bedlam that tipped the world into recession as market players scrambled to figure out how the fallen bank’s financial exposures would be unwound.
The requirement to alter contracts would apply to eight US banks tagged as institutions that have the potential to cause systemic disruption: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo...
For full story: http://www.ft.com/intl/cms/s/0/2dd5639e-115c-11e6-bb40-c30e3bfcf63b.html#axzz47fHjVjJE
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Fed Board Green-Lights Capital Holding, Default Rules
May 4, 2016 | Law 360
By Dani Kass
The Board of Governors of the Federal Reserve System unanimously agreed Tuesday at a board meeting to publish two proposed rules aimed at preventing another financial collapse if larger banks fall.
The public has until August to comment on the proposals, one of which joins other federal regulators in defining a quantitative amount of capital banks must have on hand, called the net stable funding ratio, and the other that prevents investors from immediately pulling out of certain contracts with failing global systemically important banking organizations, or GSIBs.
The Fed’s proposal for the net stable funding ratio mirrors a proposal released on April 26 by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The regulation requires banks to balance their use of short-term funding sources that can be subject to a run in a distressed environment with more stable funding sources such as deposits and regulatory capital tools like equity.
Regulators told the Board that this would not apply to community banks, non-bank financial institutions — although they said that may be subject to change — and foreign banks with U.S. business. The government is working on a separate rule for that final exception.
All banks that are applicable would meet the regulations if this were go to into effect today, according to Michael Gibson, the Fed’s director of banking supervision and regulation.
The second proposal would make it so for 48 hours or one business day — whichever is longer — after a financial institution declares bankruptcy, the institution and its subsidiaries wouldn’t immediately have to default on qualified financial contracts, such as derivatives contracts and repurchase agreements. During that time, the failing institution can shift the contracts to more stable institutions in an effort to stop one failure from spiraling through the industry.
Both are part of global regulators’ response to the 2008 financial crisis. After the failure ofLehman Brothers Holdings, regulators feared that even when banks maintained sufficient capital levels, they could be in danger if they relied too heavily on the repo market and other wholesale funding sources.
Since then, they have put a heavy emphasis on mandating that banks maintain enough liquid assets to withstand a run on the riskier entries on their balance sheets.
The net stable funding ratio would complement the liquidity coverage ratio, which targets short-term economic fallouts. That rule, which forces banks to hold enough easily convertible, high-quality liquid assets such as Treasury notes and certain high-quality corporate debt and equity, to cover their cash needs for 30 days in case of a sudden crisis, was finalized by the Fed and FDIC in September 2014.
The second proposal serves as regulators’ attempt to avoid a mass withdrawal of investors if one company fails, as happened after Lehman’s failure, which can lead to otherwise stable companies following in their path.For full story: http://www.law360.com/articles/789258/fed-board-green-lights-capital-holding-default-rules
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