Compliance Issues/Law Developments/Taxes

Obama Plan Could Help, Hurt Hedge Funds






by: FINalternatives


January 26, 2010




Steering clear of hedge and private equity funds is at the heart of
President Barack Obama’s proposal to rein in banks and cut down on
systemic risk, but experts are divided on how the rules, if adopted,
would affect the alternative investment industry. On the one
hand, the bar on banks from owning, investing in or sponsoring hedge
funds or p.e. funds, combined with a ban on proprietary trading, could
cut down on the competition for top talent and trading opportunities.
On the other hand, banks are major players in the p.e. sphere and,
while relatively minor direct investors in hedge funds, the
institutions do manage more than $180 billion in funds of hedge funds.
There are also fears that the Obama plan would negatively impact the
prime brokerage industry. “Although the full implications of
Obama’s statement remain unclear, the potential disruption that such
widespread reform could bring to the alternatives industry is
significant, and could affect hundreds of banking institutions in the
U.S. investing in alternatives,” Tim Friedman of research firm Prequin
told The Wall Street Journal. Private equity seems to
have the most to lose: Banks have raised 60 buyout funds in the last
four years, with a combined $80 billion, according to Prequin. Those
banks still have $50 billion in uncommitted capital in those funds, and
in the process of raising 18 new funds seeking about $18 billion.
Goldman Sachs alone has some $27.2 billion in “dry powder,” and is
likely to be the hardest hit by the new rules. “There is going
to be less private equity competition in the market as capital will be
more expensive,” Tim Snyder of British buyout shop Electra told the Journal.
“Where it is going to have an effect is that banks are not going to be
investors in funds.” Currently, according to Prequin, banks account for
about 9% of money invested with p.e. firms. Accounting firm Grant Thornton has something of a different take. “For
those players that are captives and still part of banking groups, the
writing appears to be on the wall,” the firm’s Paul Cooper told Reuters. That writing reads, “spin out.” For
hedge funds, the implications are somewhat less clear. If the “Volcker
rule,” named for its chief champion, former Federal Reserve Chairman
Paul Volcker, becomes law, it would likely accelerate the longstanding
trend of top traders joining hedge funds or founding funds of their own. Of course, hedge funds don’t only compete with prop. desks for talent, they also battle for returns. “For
some strategies, particularly many arbitrage-related and quantitative
strategies, fewer parties chasing the same trades will improve margins
and hence profits,” Odi Lahav of Moody’s Investor Services told Reuters. But
some hedge fund players say they fear the rules would hurt liquidity
and damage the relationship between hedge funds and their prime
brokerages, which, more often than not, are the big banks.

Taxes are a B*$#@ excuse my french. Recently had to file a 1065 form
and wow can that get complicated. Good think we started only at the end
of 09 otherwise things coudla gotten real complicated.

If
anyone else has US source income don't forget to file those 1040's and
1065's and if you are a foreigner you have separate schedules.

Snapman wrote:

Taxes are a B*$#@ excuse my french. Recently had to file a 1065 form
and wow can that get complicated. Good think we started only at the end
of 09 otherwise things coudla gotten real complicated.

If
anyone else has US source income don't forget to file those 1040's and
1065's and if you are a foreigner you have separate schedules.

Snapman A.K.A. Chief Auditing Consultant

SEC Issues Rules to Ward Off 'Flash Crash'
In response to last month's "flash crash," the SEC approved rules Thursday requiring exchanges and FINRA to pause trading in individual stocks during large, fast price swings.

The SEC said in a statement that if the price of certain stocks moved 10% or more in a five-minute period, these so-called circuit breaker rules would go into effect.

The rules were in response to the May 6 disruption in the markets when the Dow Jones fell almost 1,000 points and then shot up again within an hour.

There has still been no definitive answer as to what exactly happened on May 6.

The new SEC rules, which at this point apply only to stocks in the S&P 500 Index, could go into effect as early as Friday, the agency said.

"The May 6 market disruption illustrated a sudden, but temporary, breakdown in the market's price setting function when a number of stocks and ETFs were executed at clearly irrational prices," said SEC Chairman Mary Schapiro in the statement.

The current circuit breakers are a pilot program which will be in effect until Dec. 10. The exchanges and regulators will use that time to study the effects of the rules and to expand to securities beyond the S&P 500 including ETFs.


VIA HFN DAILY

There is so much misconception in the market its ridiculous


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Senate and House Reconcile Rules for Hedge Funds, Private Equity
The Congressional committee in charge of reconciling the Senate and House versions of the proposed financial reform bill reportedly has struck an agreement on new regulations governing the private investment industry.

If the current proposals go to the President for his signature, hedge funds with more than $100 million in assets under management and private equity funds with more than $150 million AUM will have to register with the SEC, according to news reports.

However, venture capital funds will be entirely off the hook when it comes to registration, although they could be subject to additional reporting requirements.

If passed, the new regulations would be phased in over one year.

The new requirements for the private investment industry are part of an overall financial reform bill that was proposed in the wake of the financial crisis.
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Why a Bank Might Like Owning a Hedge Fund, Lehman & R3 Capital Division

Posted in Uncategorized by Mike on June 21, 2010
David Dayen reports Last Chance for Lobbyists as FinReg Conference Concludes:

This actually isn’t entirely new. Certain promises around asset management companies in Massachusetts were promised to Brown in exchange for his cloture vote on the Senate bill. But there’s absolutely no need to do anything for the sole benefit of Scott Brown at this point. Lawmakers in the Senate have probably already picked up one vote in the form of Maria Cantwell, if they close the enforcement loophole to the derivatives title (which they expect to do). Russ Feingold then becomes a consequential figure, and his support for the bill would more than cancel out Brown flipping to No.

On the policy, this would be a disaster. The biggest banks already own asset management companies and private equity firms, and some own insurance companies too (or would certainly be incentivized to buy one so they could keep trading). This rips out the heart of what the Volcker rule seeks to accomplish.

So Scott Brown is also a problem on the Volcker Rule. Like some House Democrats, he is seeking to weaken reform by allowing commercial banks to have stakes in hedge funds and private equity firms.

Now besides using their charter to leech value from taxpayers as well as take bets in a manner that doesn’t benefit their clients, why else would a bank want to own a hedge fund? I got a reason: How about massaging the books?

Hopping into the blog time machine, let’s go back to June 2008, Yves Smith at nakedcapitalism, Bloomberg: Lehman Sold $5 Billion of Assets to Investee Hedge Fund:

Lehman did indeed sell $5 billion of assets to a fund in which the investment bank has an economic interest, R3 Capital Partners, and its founder was indeed the former head of Lehman’s principal investing group. The disparity with our report was that the amount alleged to have been sold was much greater, $55 billion versus the $5 billion in the Bloomberg story. However, this $5 billion is material relative to the $70 billion of net asset sales Lehman reported for the last quarter and begs the question of whether it should have been disclosed in the supplemental information provided at the same time as the earnings press release. We hope that the 10-Q filing, which will contain the balance sheet and footnores, will be more forthcoming.

Which was following a bad case scenario that turned out to be true, So How Did Lehman Delever? A Not-Very-Pretty Possibility, with an anonymous email:

Curious whether, to your knowledge, they’ve given much detail around the reduction in gross & net leverage they achieved in the May qtr. My understanding is that the vast majority of the reduction came from spinning out two large businesses into independent entities: the mortgage trading business (now called “One William St Capital”) and the principal investing business (now called “R3 Capital”). R3 Capital is starting life with assets of around $55 billion.

From friends both inside & outside LEH, I understand that LEH is keeping a 45% stake in each business…The main driver, unsurprisingly, was to allow LEH to maintain as much econ interest as possible, consistent with meeting accounting standards to get the biz’s off LEH’s balance sheet.

I haven’t spoken to anyone who has had much to say either way about whether (& to what extent) LEH would face contingent liabilities in the event the new entities were counterparties to losses…but it’s not that hard to imagine a situation where either of these two entities faced losses from derivatives contracts that exceeded (by a wide margin) the capitalization of the newco’s. Will the counterparties, in those cases, look to LEH as a backstop? How could they not?

(Ah, summer 2008.)

We now know, from the Jenner Report, there was even more manipulation of earnings from the mechanisms of Repo 105. Letting banks take ownership in hedge funds is inviting this kind of dual-book keeping, the activity of hiding the actual balance sheet from actual investors through funneling it into hedge funds that the bank has ownership over.

There’s no reason people can’t start hedge funds, but creating conditions where banks are encouraged to take what we’ve recently learned from Lehman and apply it across the financial sector is asking for trouble. It’s sad to see Scott Brown not get the lesson from State Street or this lesson from Lehman.

New York May Change Carried Interest Law Early Thursday Morning
With New York struggling to make ends meet during the recession, Gov. David Paterson is planning to enact a change to the state tax code whereby carried interest earned by fund managers who work in the Empire State but live outside of it would be taxed as ordinary income rather than as capital gains, The New York Times reported.

There is speculation New York could enact this change to the tax code as early as 12:01 a.m. on Thursday, a source told HedgeFund.net.

The newspaper said state lawmakers approved Paterson's proposal last weekend, estimating the change in the tax code would bring in an additional $50 million annually into the state's depleted coffers.

A spokesman from the New York State Budget Division confirmed the Times' report to HedgeFund.net as being "essentially accurate."

Under the current tax code managers are taxed on their income by the state in which they work and are taxed on their investments by the state in which they live. Typically, ordinary income tax rates are 35% and capital gains tax rates are 15%.

Should New York go through with its plan to tax non-residents' carried interest as ordinary income, there is the potential for double taxation, the Times reported.

However, the NYS Budget Division spokesman said double taxation was not a sure thing because it depended upon what other states do with their own tax codes.

Despite a handful of attempts to change the tax code on Capitol Hill, all have failed thus far. Still, with federal and state governments needing to fill budget gaps, there is speculation some sort of federal change to the way alternative investments are taxed is likely to pass relatively soon.

Not surprisingly, industry trade groups have been opposed to federal legislation changing the way carried interest is taxed.

The Managed Futures Association (MFA), a trade group representing the hedge fund industry, spent $1.4 million in the first quarter alone in lobbying efforts on U.S. lawmakers.

The National Venture Capital Association (NVCA) has put out a media blitz in its efforts to segregate its constituents from the carried interest discussion. The group has gone so far as to create an entire page on its Web site voicing its disapproval of any change.

"This policy would essentially double the taxes for venture capitalists - our country's job creators, discouraging investment in new companies at a time when Congress should be doing all it can to support the start-up ecosystem," the NVCA says on its site.

Snapman wrote:

New York May Change Carried Interest Law Early Thursday Morning
With New York struggling to make ends meet during the recession, Gov. David Paterson is planning to enact a change to the state tax code whereby carried interest earned by fund managers who work in the Empire State but live outside of it would be taxed as ordinary income rather than as capital gains, The New York Times reported.

There is speculation New York could enact this change to the tax code as early as 12:01 a.m. on Thursday, a source told HedgeFund.net.

The newspaper said state lawmakers approved Paterson's proposal last weekend, estimating the change in the tax code would bring in an additional $50 million annually into the state's depleted coffers.

A spokesman from the New York State Budget Division confirmed the Times' report to HedgeFund.net as being "essentially accurate."

Under the current tax code managers are taxed on their income by the state in which they work and are taxed on their investments by the state in which they live. Typically, ordinary income tax rates are 35% and capital gains tax rates are 15%.

Should New York go through with its plan to tax non-residents' carried interest as ordinary income, there is the potential for double taxation, the Times reported.

However, the NYS Budget Division spokesman said double taxation was not a sure thing because it depended upon what other states do with their own tax codes.

Despite a handful of attempts to change the tax code on Capitol Hill, all have failed thus far. Still, with federal and state governments needing to fill budget gaps, there is speculation some sort of federal change to the way alternative investments are taxed is likely to pass relatively soon.

Not surprisingly, industry trade groups have been opposed to federal legislation changing the way carried interest is taxed.

The Managed Futures Association (MFA), a trade group representing the hedge fund industry, spent $1.4 million in the first quarter alone in lobbying efforts on U.S. lawmakers.

The National Venture Capital Association (NVCA) has put out a media blitz in its efforts to segregate its constituents from the carried interest discussion. The group has gone so far as to create an entire page on its Web site voicing its disapproval of any change.

"This policy would essentially double the taxes for venture capitalists - our country's job creators, discouraging investment in new companies at a time when Congress should be doing all it can to support the start-up ecosystem," the NVCA says on its site.

you beat me to this! This is not something I like to read about.

SEC Steps Into Pay-to-Play Fray
In the wake of the far-reaching pay-to-play scandal involving handfuls of politicians, hedge fund and private equity managers and third-party fundraisers, the SEC announced it has adopted three new rules to prevent influence peddling of public pension plans.

The SEC's new rules include the prohibition of an investment adviser from providing services for compensation for two years if that adviser, or any of its employees, make a political contribution to an elected official who has influence on choosing an adviser for the pension. Advisors are also prohibited from soliciting or coordinating campaign contributions from others for politicians with influence on the selection of an adviser for the pension. Finally, the adviser is prohibited from paying a third party, such as a placement agent, to solicit a government client on behalf of the adviser unless that third party is registered with the SEC and is subject to similar pay-to-play restrictions.

"The rule adopted by the SEC today includes prohibitions intended to capture not only direct political contributions by investment advisers, but also other ways that advisers may engage in pay to play arrangements," the SEC said in its announcement on Wednesday.

The SEC's actions stem from an alleged pay-to-play scandal in the New York State Common Retirement Fund (CRF), in which fundraisers and firms provided kickbacks to officials from the pension in return for plan placing money with managers.

The scandal happened during the watch of Alan Hevesi, the former comptroller for the CRF.

Since then, Thomas DiNapoli, the current comptroller for the CRF has been working with New York Attorney General Andrew Cuomo and the SEC on investigating the scandal. Their efforts have yielded a handful of guilty pleas by hedge fund and private equity managers, third party fundraisers and others. That is in addition to a number of private investment firms that have settled government charges without legally admitting or denying their guilt.

Snapman wrote:

SEC Steps Into Pay-to-Play Fray
In the wake of the far-reaching pay-to-play scandal involving handfuls of politicians, hedge fund and private equity managers and third-party fundraisers, the SEC announced it has adopted three new rules to prevent influence peddling of public pension plans.

The SEC's new rules include the prohibition of an investment adviser from providing services for compensation for two years if that adviser, or any of its employees, make a political contribution to an elected official who has influence on choosing an adviser for the pension. Advisors are also prohibited from soliciting or coordinating campaign contributions from others for politicians with influence on the selection of an adviser for the pension. Finally, the adviser is prohibited from paying a third party, such as a placement agent, to solicit a government client on behalf of the adviser unless that third party is registered with the SEC and is subject to similar pay-to-play restrictions.

"The rule adopted by the SEC today includes prohibitions intended to capture not only direct political contributions by investment advisers, but also other ways that advisers may engage in pay to play arrangements," the SEC said in its announcement on Wednesday.

The SEC's actions stem from an alleged pay-to-play scandal in the New York State Common Retirement Fund (CRF), in which fundraisers and firms provided kickbacks to officials from the pension in return for plan placing money with managers.

The scandal happened during the watch of Alan Hevesi, the former comptroller for the CRF.

Since then, Thomas DiNapoli, the current comptroller for the CRF has been working with New York Attorney General Andrew Cuomo and the SEC on investigating the scandal. Their efforts have yielded a handful of guilty pleas by hedge fund and private equity managers, third party fundraisers and others. That is in addition to a number of private investment firms that have settled government charges without legally admitting or denying their guilt.

Lobbyists suck. I know they serve a purpose, but the influence they have over policy makers, and allocating money is tremendous. It makes you wonder weather or not we should vote for Lobbyists along with our house and senate leaders. I applaud the SEC, even if late, for this stance.

Financial Reform Bill: What it Means to Hedge Funds, PE
With the Senate passing the Dodd-Frank financial reform bill 60-39 Thursday, hedge fund and private equity firms might do well to turn to their compliance and legal advisors.

The bill now goes to President Obama for his signature.

Although much of the law has been changed in the months of debate among and between both houses of the U.S. legislature, essential provisions for the private investment industry have remained the same.

The big one is registration, something hedge fund firms fought against, but ultimately lost. They did, however, get the threshold for registration raised to $150 million.

Venture capital firms also managed to stay exempt from registration requirements.

Firms will also have additional reporting requirements, but those are being left to the regulatory agencies to thrash out the final regulations.

Sen. Byron Dorgan (D.-N.D.) said in his comments on the proposed bill Thursday, "The financial agencies have a lot of work to do," to achieve the law's goals.

Kevin Scanlan, a partner with law firm Dechert, told HedgeFund.net the new regulations would make it harder for smaller managers because it would require more outlay for fund administration.

"At the same time, you need to get there to attract the big institutional money; the big institutional investors want to see a robust infrastructure and a good legal structure," Scanlan said. "It will be simply part of the cost of doing business."

There have also been changes to the net worth requirements for accredited investors. Although $1 million is still the required net worth, individual investors can no longer include the value of their primary residence in calculating that figure.

Scanlan said there is an additional requirement for individual investors that hedge fund firms should be aware of.

"If you're an advisor who wants to bring in a natural person as an investor, he will generally have to meet the $1 million net worth requirement not including the value of his primary residence," Scanlan said. "But if you want to charge a performance fee, the same investor would generally need a net worth of $1.5 million which will increase over time because it has to be adjusted for inflation."

To meet the $1.5 million requirement for the performance fee threshold, the value of the primary residence can be included, however, Scanlan said.

Hedge funds and private equity firms may also be the unintended beneficiaries of another aspect of the financial reform bill: the enactment of a rule that severely restricts banks' proprietary trading desks, as well as the stakes they can take in hedge fund and private equity firms.

Called the Volcker rule after former Federal Reserve Chairman Paul Volcker who is a proponent, it restricts banks to trading only 3% of their funds for their own account.

That could mean an influx of talent and investor money for independent hedge fund firms.

"My sense is that if the capital raising markets were better and start-up funds could raise money easier, a lot of people would flee the banks because proprietary trading will be severely restricted," Scanlan said. "A lot of proprietary traders are moving over to client accounts.

"But once the fund-raising market comes back and people can raise capital, a lot of these guys will just leave because of the restrictions that will be imposed on their activities at banks," he said.

Batman



Posts: 481
Join date: 2009-08-06
Age: 22
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Subject: Regulation Fri Apr 16, 2010 5:26 pm
SEC Proposes to Out Large Equities Traders

The Securities and Exchange Commission proposed new rule that would help the agency identify the largest market traders. The new rule would also help the SEC uncover potential securities violations, like insider trading, the agency said in its rule-making proposal. What the SEC is calling a "large trader" is a person whose equities transactions equal or exceed two million shares or $20 million during any calendar day or 20 million shares or $200 million during any calendar month.

The SEC is particularly concerned about technological advances that allow large market participants to trade huge volumes of shares electronically in a matter of seconds. The rules are now open to public comment before the SEC takes action.

The biggest hedge fund firms often own millions of equities worth in the billions, although how much they might trade on any given day or month depends on their strategy and the markets. Quantitative firm Renaissance Technologies, for example, held positions in more than 3,000 equities as of Dec. 31 with a total value of more than $26 billion, according to a regulatory filing.

On the other hand, Paulson & Co., the firm that made a mint on the subprime mortgage crisis, held position in about 55 positions as of Dec. 31, with a total value of more than $19 billion, according to a regulatory filing.

Under the proposed SEC rule, large traders would be required to identify themselves to the agency. They would then be issued a unique identification number, which, in turn would be provided to the trader's broker-dealer. The broker-dealer would be charged with keeping transaction records and report back to the SEC on the agency's request.

Since the market turmoil that started with Lehman's Bros. bankruptcy in September 2008 and continued into early 2009, Congress has been calling on the nation's securities watchdog to do something about market volatility.

In the Fall of 2008, the SEC put a temporary ban against short selling in most financial sector securities. In February the SEC voted to bring back a version of the uptick rule. The rule calls for brakes on short selling when a stock drops by a set percent within a certain time period.


Snapman



Posts: 522
Join date: 2009-06-25
Age: 22
Location: New York City


Subject: Re: Regulation Fri Apr 16, 2010 11:25 pm
Batman wrote:
SEC Proposes to Out Large Equities Traders

The Securities and Exchange Commission proposed new rule that would help the agency identify the largest market traders. The new rule would also help the SEC uncover potential securities violations, like insider trading, the agency said in its rule-making proposal. What the SEC is calling a "large trader" is a person whose equities transactions equal or exceed two million shares or $20 million during any calendar day or 20 million shares or $200 million during any calendar month.

The SEC is particularly concerned about technological advances that allow large market participants to trade huge volumes of shares electronically in a matter of seconds. The rules are now open to public comment before the SEC takes action.

The biggest hedge fund firms often own millions of equities worth in the billions, although how much they might trade on any given day or month depends on their strategy and the markets. Quantitative firm Renaissance Technologies, for example, held positions in more than 3,000 equities as of Dec. 31 with a total value of more than $26 billion, according to a regulatory filing.

On the other hand, Paulson & Co., the firm that made a mint on the subprime mortgage crisis, held position in about 55 positions as of Dec. 31, with a total value of more than $19 billion, according to a regulatory filing.

Under the proposed SEC rule, large traders would be required to identify themselves to the agency. They would then be issued a unique identification number, which, in turn would be provided to the trader's broker-dealer. The broker-dealer would be charged with keeping transaction records and report back to the SEC on the agency's request.

Since the market turmoil that started with Lehman's Bros. bankruptcy in September 2008 and continued into early 2009, Congress has been calling on the nation's securities watchdog to do something about market volatility.

In the Fall of 2008, the SEC put a temporary ban against short selling in most financial sector securities. In February the SEC voted to bring back a version of the uptick rule. The rule calls for brakes on short selling when a stock drops by a set percent within a certain time period.


looks like we are on the same news haha


Batman



Posts: 481
Join date: 2009-08-06
Age: 22
Location: NYC


Subject: Knock-on effect of NYSE slowdown Sat May 08, 2010 7:50 pm
The New York Stock Exchange came under fire from its rivals on Friday for slowing trading during the tumultuous trading session on Thursday afternoon, during which $1,000bn was briefly wiped off share values.

Rival exchange chiefs said the move had exacerbated the plunge in prices. Once NYSE slowed trading on its floor in companies that had experienced big price moves, the reduction of liquidity exacerbated volatility in those shares at other trading venues.

“Because the NYSE goes into a slow, or ‘manual’ mode, other market participants necessarily disregard the NYSE quotes, functionally rendering the NYSE irrelevant while it is in this mode,” said Joe Ratterman, chief executive officer at BATS Trading.

In an interview with CNBC, Robert Greifeld, chief executive of Nasdaq, also criticised the move by NYSE to slow trading.

But Duncan Niederauer, chief executive of NYSE Euronext, defended its policy. “My guess is regulators will take a look at this and say, if it’s just 30 or 60 seconds, no one’s walking away,” he told CNBC. “We’re simply slowing down the race car when we think it’s dangerous.”

The dispute between the exchanges underscores the difficulties regulators face in overseeing the computer programs that direct most US stock trading.

Soon after stocks fell on Thursday, there were further calls in Washington for greater oversight of so-called algorithmic traders – known as “algos”.

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Batman



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Subject: Brussels unveils framework for bank levy Wed May 26, 2010 6:09 pm
Via FT:

European taxpayers should not have to bear the costs of rescuing ailing banks, a top European Union official said on Wednesday as Brussels formally unveiled its proposal for EU countries to form national funds to insure against future bank failures. The plan, which would be financed by levies on the banking industry, would aim to ensure that future bank failures do not destabilise the financial system.

“It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector – they should not be in the front line,” said Michel Barnier, EU internal market commissioner in Brussels. Mr Barnier was speaking as US Treasury secretary Timothy Geithner arrived in Britain at the start of a trip to Europe in which he will press for united action to tackle the eurozone’s deepening debt crisis. He is also expected, according to some reports, to urge EU officials to conduct bank stress tests similar to those carried out by the US last year,

The proposals from the EU’s executive body are at an early stage and there will be much debate among EU governments over whether any bank levies should be dedicated to a specific purpose or available for use by national treasuries generally. But the commission plan will be discussed by EU finance ministers and leaders next month, and Brussels is hoping for sufficient endorsement to allow representatives to push the “bank resolution” fund idea at the G20 meeting in Toronto at the end of June. Mr Barnier said on Wednesday that the European Commission believed that banks should be asked to contribute to funds designed to “manage bank failure, protect financial stability and limit contagion”.

But he stressed that these funds – which Brussels wants all EU countries to establish individually, but with common rules – should not be bail-out funds. Rather, they should be designed to ensure that future failures and insolvencies are managed in an orderly way and do not destabilise the financial system generally. They could be used, for example, to provide bridge financing, guarantees, or the temporary purchase of “bad assets” where an institution is being split into a “good” and a “bad bank” – a solution used repeatedly during the recent financial crisis.

A commission paper published on Wednesday also emphasises that actions by such funds will have to be fully compliant with EU state aid rules. The scale of these funds is likely to be a subject of much discussion, and Brussels is not setting out firm recommendations at this stage. However, it does note that some countries are already moving to impose levies on banks, in order to establish dedicated funds.

In Germany, for example, it is estimated that these could raise about €1bn annually, although details are still being developed. In Sweden, a “bank stability” fund is due to amount to about 2.5 per cent of gross domestic product within 15 years. The International Monetary Fund, meanwhile, has suggested that – on the basis of past experiences of financial crises – resolution funds that amount to about 2-4 per cent of GDP should be adequate.

Another issue left open by Brussels at this stage is whether levies should be based on bank assets, liabilities or profits. But the commission does emphasise that funding must be “ex ante” – that is, upfront – and that banks should not be allowed to pass the costs on to their customers. It also stresses that funds should be kept ring-fenced from national budgets – a particularly contentious subject. Officials in Brussels plan to produce more detailed proposals in the autumn, before coming forward with legislation early in 2011.

This EU-wide network of “bank resolution” funds is seen by EU officials as a key plank in establishing a much stronger “crisis management” system at European level. Two months ago, Mr Barnier made clear that he felt that “non-binding” co-operation between supervisors – the current set-up – was insufficient.

But the banking industry, although resigned to some sort of new tax to cover future bank failures, is likely to fight intensely over the details of any proposal. Views within the industry are divided, with the European Banking Federation describing this as a “very difficult issue”.


Batman



Posts: 481
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Subject: Re: Regulation Tue Jun 01, 2010 10:06 pm
A Financial Reform Primer

For those of you who aren't dying to read the Senate's latest thesis, otherwise known as the ''Restoring American Financial Stability Act of 2010" (all 1,336 pages of it), The Shadow will take on the public spirited task of explaining it all to you.

But first, a minor gripe. The Shadow wrote to his Senator and suggested a name that resulted in the acronym RASS, which The Shadow thought had a nice Bronx cheer ring to it and stood for Removing Any Semblance of Sanity. The good Senator chose to ignore his constituent; it will be remembered at the voting booth.

Now to the proposed bill itself. First and foremost, this is government we're talking about, therefore, if our fine legislators want to go to the bother of producing 1,336 pages of legislation, you'd better believe they are going to put in more levels of bureaucracy. In the case of the RAFSA (see, wouldn't you prefer RASS?), there are whole new bureaucracies with important sounding names such as the Financial Stability Oversight Council, the Bureau of Consumer Financial Protection and the Office of National Insurance.

In other words, if our already existing government agencies, like the SEC, the CFTC, the Fed, Treasury and the FDIC, among others, couldn't do right by the American taxpayer, well, by golly, let's see if a few more agencies can't.

There's also some shuffling around of duties amongst all the alphabet soup agencies so that the SEC can now do what the FDIC didn't and the Fed will give up its hegemony to Treasury, which will shift responsibility to Thrift, and Thrift, in the meanwhile, will do something or other (as it hasn't done anything other than rubber-stamp AIG derivative bets over the last decade or so, it might as well start doing something) and the CFTC will do something else again, once it figures out who pulled the plug on the NYSE on May 6.

You get the idea.

Then, there's the requirement to register for the big, bad hedge funds (the current AUM cut-off is more than $100 million to register) that everyone suspects, but cannot prove, caused the near breakdown of the U.S. financial system. Yes, we know Lehman Bros., with its $613 billion bankruptcy filing (the largest in U.S. history), on Sept. 15, 2008 was more likely the proximate cause of the worldwide financial crisis and that Lehman, as a bank and a public company, had regulators and investors and compliance departments up the wazoo.

But doesn't it sound better to shake fingers at hedge funds because, (a) they're secretive, and (b) your average elected official has not a clue what they actually do.

There are some other parts of the bill, like moving derivatives onto exchanges (which nobody seems to seriously dispute is a bad idea) to telling regulatory agencies to do what they should have been doing in the first place, but it's getting perilously close to the holiday weekend and The Shadow is thinking about, oh, barbecues, beaches, that sort of thing.

You read the bill and tell me what it says. I'll be the one with a tall, frosty drink under the third beach umbrella to the left of nowhere.


Snapman



Posts: 522
Join date: 2009-06-25
Age: 22
Location: New York City


Subject: Re: Regulation Tue Jun 01, 2010 10:53 pm
Batman wrote:
A Financial Reform Primer

For those of you who aren't dying to read the Senate's latest thesis, otherwise known as the ''Restoring American Financial Stability Act of 2010" (all 1,336 pages of it), The Shadow will take on the public spirited task of explaining it all to you.

But first, a minor gripe. The Shadow wrote to his Senator and suggested a name that resulted in the acronym RASS, which The Shadow thought had a nice Bronx cheer ring to it and stood for Removing Any Semblance of Sanity. The good Senator chose to ignore his constituent; it will be remembered at the voting booth.

Now to the proposed bill itself. First and foremost, this is government we're talking about, therefore, if our fine legislators want to go to the bother of producing 1,336 pages of legislation, you'd better believe they are going to put in more levels of bureaucracy. In the case of the RAFSA (see, wouldn't you prefer RASS?), there are whole new bureaucracies with important sounding names such as the Financial Stability Oversight Council, the Bureau of Consumer Financial Protection and the Office of National Insurance.

In other words, if our already existing government agencies, like the SEC, the CFTC, the Fed, Treasury and the FDIC, among others, couldn't do right by the American taxpayer, well, by golly, let's see if a few more agencies can't.

There's also some shuffling around of duties amongst all the alphabet soup agencies so that the SEC can now do what the FDIC didn't and the Fed will give up its hegemony to Treasury, which will shift responsibility to Thrift, and Thrift, in the meanwhile, will do something or other (as it hasn't done anything other than rubber-stamp AIG derivative bets over the last decade or so, it might as well start doing something) and the CFTC will do something else again, once it figures out who pulled the plug on the NYSE on May 6.

You get the idea.

Then, there's the requirement to register for the big, bad hedge funds (the current AUM cut-off is more than $100 million to register) that everyone suspects, but cannot prove, caused the near breakdown of the U.S. financial system. Yes, we know Lehman Bros., with its $613 billion bankruptcy filing (the largest in U.S. history), on Sept. 15, 2008 was more likely the proximate cause of the worldwide financial crisis and that Lehman, as a bank and a public company, had regulators and investors and compliance departments up the wazoo.

But doesn't it sound better to shake fingers at hedge funds because, (a) they're secretive, and (b) your average elected official has not a clue what they actually do.

There are some other parts of the bill, like moving derivatives onto exchanges (which nobody seems to seriously dispute is a bad idea) to telling regulatory agencies to do what they should have been doing in the first place, but it's getting perilously close to the holiday weekend and The Shadow is thinking about, oh, barbecues, beaches, that sort of thing.

You read the bill and tell me what it says. I'll be the one with a tall, frosty drink under the third beach umbrella to the left of nowhere.


i was gonna post this it seems you saved me the work:

this is posted via HFN "Shadow's opinion" ... haha, got to love the shadow...


green lantern



Posts: 14
Join date: 2010-06-04


Subject: Re: Regulation Tue Jun 08, 2010 5:42 am
Derivatives Market May Be Reshaped Even Without Swap-Desk
Rule





Bloomberg:





Debate in the U.S. Congress over whether to restrict
swaps-trading by commercial banks has taken the spotlight away from other
proposed derivatives rules that may soon be approved.





Lawmakers are set to negotiate a bill passed May 20 by the
Senate that would require standardized derivative trades to be cleared through
a third party and traded on an exchange or so- called swap-execution facility;
place a fiduciary duty on dealers in transactions with municipalities; and
subject the foreign exchange swaps market to regulation.




As the large Wall Street banks that dominate the $615
trillion over-the-counter derivatives market, including Goldman Sachs Group
Inc. and JPMorgan Chase & Co., have focused on trying to kill the most
contentious rule -- one that would require them to push out their swaps-trading
desks to subsidiaries -- the other provisions have moved a few votes away from
law.


Batman



Posts: 481
Join date: 2009-08-06
Age: 22
Location: NYC


Subject: Re: Regulation Tue Jun 08, 2010 5:48 am
green lantern wrote:
Derivatives Market May Be Reshaped Even Without Swap-Desk
Rule





Bloomberg:





Debate in the U.S. Congress over whether to restrict
swaps-trading by commercial banks has taken the spotlight away from other
proposed derivatives rules that may soon be approved.





Lawmakers are set to negotiate a bill passed May 20 by the
Senate that would require standardized derivative trades to be cleared through
a third party and traded on an exchange or so- called swap-execution facility;
place a fiduciary duty on dealers in transactions with municipalities; and
subject the foreign exchange swaps market to regulation.




As the large Wall Street banks that dominate the $615
trillion over-the-counter derivatives market, including Goldman Sachs Group
Inc. and JPMorgan Chase & Co., have focused on trying to kill the most
contentious rule -- one that would require them to push out their swaps-trading
desks to subsidiaries -- the other provisions have moved a few votes away from
law.


Welcome to TLOT!


green lantern



Posts: 14
Join date: 2010-06-04


Subject: Re: Regulation Wed Jun 16, 2010 7:21 am
Bloomberg/Businessweek:


http://www.businessweek.com/news/2010-06-15/frank-proposes-altering-plan-on-new-york-fed-chief-update3-.html





Frank Proposes Altering Plan on New York Fed Chief (Update3)


By Scott Lanman and Craig Torres


June 15 (Bloomberg) -- Barney Frank, the U.S. House’s chief
negotiator on an overhaul of financial regulation, proposed dropping a
provision making the president of the Federal Reserve Bank of New York a White
House appointee, while also requiring more disclosure from the central bank.


Frank, chairman of the House Financial Services Committee,
would instead reduce the role of commercial banks in choosing all 12 regional
Fed chiefs. His measure counters a proposal by Senate Banking Committee
Chairman Christopher Dodd, who wants to make the New York Fed chief a political
appointee as part of efforts to avoid what he said are “conflicts of interest.”


“There is going to be a debate,” said Karen Shaw Petrou,
managing partner at Federal Financial Analytics, a Washington- based research
firm whose clients include America’s biggest banks. “For Senator Dodd to just
roll and say ‘sure’ on the Frank offer would put him in a difficult position.”


Frank aims to increase transparency at the Fed as part of
financial-regulatory overhaul legislation that would also grant the central
bank a bigger role in overseeing Wall Street. His proposal, made as House and
Senate lawmakers meet to reconcile different versions of legislation, would
mandate an unprecedented level of disclosure by the Fed.


The joint conference committee of legislators from the two
chambers is scheduled to discuss the Fed provisions tomorrow.

The aim is “complete transparency” from the Fed, Frank
told reporters during a break in talks today. “The Fed will not be interacting
with any private party without that ultimately becoming public, although not
right away because you don’t want it to affect markets.”


green lantern



Posts: 14
Join date: 2010-06-04


Subject: Re: Regulation Wed Jun 16, 2010 7:26 am
http://www.google.com/hostednews/ap/article/ALeqM5g7ffRdswXTlfgaQS0FCOZmrvbwcAD9GC0S5G0

Lawmakers delay credit ratings change, seek study


By JIM KUHNHENN
(AP)
–
6 hours ago
WASHINGTON — House and Senate negotiators assembling a giant
financial regulation bill diluted a measure Tuesday that would have
upended how Wall Street assesses risk.Lawmakers agreed to remove a
proposal that would have ended the ability of financial institutions to
choose the firms that rate the risk of their investment products.Instead,
negotiators altered the bill to require that the Securities and
Exchange Commission, after a two-year study, set up a system for
assigning credit rating agencies in a way that avoids conflicts of
interest with issuers or underwriters of financial products.The
new proposal changes a provision approved 64-35 in the Senate last month
that would have required an independent board to assign ratings firms
to assess the risks of new financial products. That requirement,
proposed by Sen. Al Franken, D-Minn., would replace a long-standing
practice whereby banks select and pay ratings agencies to rate their new
offerings.Critics of the current system argue that the
relationship between financial firms and the credit agencies creates
conflicts of interest and that the agencies overrate risky investments
that fueled the financial crisis.During negotiations to merge
House and Senate versions of the financial regulation legislation, House
Democrats on Monday proposed striking Franken's provision in exchange
for a study by the SEC.Eager not to alienate Franken, Senate
Banking Committee Chairman Christopher Dodd insisted that the SEC give
"thorough consideration" to the plan passed in the Senate."Today's
compromise is not everything we wanted, but it's a major step in the
right direction," Franken said. "The language agreed on by the
conference committee means more time and more study than I think is
necessary, but it also means definite action will be taken."The
proposed study was the most significant adjustment to the legislation
Tuesday as the House-Senate conference committee worked methodically
through the bill section by section.Separately Tuesday, House
Democrats on the panel asked to expand a proposal in the Senate that
would require a one-time audit of the Federal Reserve's emergency
lending during the months surrounding the financial meltdown in fall
2008.The House, which passed a tougher audit measure, wants to
add other Fed transactions to the scope of the audit. The Senate will
consider that request Wednesday.House Democrats also want to
strike a Senate provision that would require a presidential appointment
for the president of the Federal Reserve Bank of New York. Instead, the
House Democrats are recommending that bankers who sit on the Fed's
regional bank boards have no say on presidents of the regional boards.


Snapman



Posts: 522
Join date: 2009-06-25
Age: 22
Location: New York City


Subject: Re: Regulation Wed Jun 16, 2010 12:14 pm
green lantern wrote:
http://www.google.com/hostednews/ap/article/ALeqM5g7ffRdswXTlfgaQS0FCOZmrvbwcAD9GC0S5G0

Lawmakers delay credit ratings change, seek study


By JIM KUHNHENN
(AP)
–
6 hours ago
WASHINGTON — House and Senate negotiators assembling a giant
financial regulation bill diluted a measure Tuesday that would have
upended how Wall Street assesses risk.Lawmakers agreed to remove a
proposal that would have ended the ability of financial institutions to
choose the firms that rate the risk of their investment products.Instead,
negotiators altered the bill to require that the Securities and
Exchange Commission, after a two-year study, set up a system for
assigning credit rating agencies in a way that avoids conflicts of
interest with issuers or underwriters of financial products.The
new proposal changes a provision approved 64-35 in the Senate last month
that would have required an independent board to assign ratings firms
to assess the risks of new financial products. That requirement,
proposed by Sen. Al Franken, D-Minn., would replace a long-standing
practice whereby banks select and pay ratings agencies to rate their new
offerings.Critics of the current system argue that the
relationship between financial firms and the credit agencies creates
conflicts of interest and that the agencies overrate risky investments
that fueled the financial crisis.During negotiations to merge
House and Senate versions of the financial regulation legislation, House
Democrats on Monday proposed striking Franken's provision in exchange
for a study by the SEC.Eager not to alienate Franken, Senate
Banking Committee Chairman Christopher Dodd insisted that the SEC give
"thorough consideration" to the plan passed in the Senate."Today's
compromise is not everything we wanted, but it's a major step in the
right direction," Franken said. "The language agreed on by the
conference committee means more time and more study than I think is
necessary, but it also means definite action will be taken."The
proposed study was the most significant adjustment to the legislation
Tuesday as the House-Senate conference committee worked methodically
through the bill section by section.Separately Tuesday, House
Democrats on the panel asked to expand a proposal in the Senate that
would require a one-time audit of the Federal Reserve's emergency
lending during the months surrounding the financial meltdown in fall
2008.The House, which passed a tougher audit measure, wants to
add other Fed transactions to the scope of the audit. The Senate will
consider that request Wednesday.House Democrats also want to
strike a Senate provision that would require a presidential appointment
for the president of the Federal Reserve Bank of New York. Instead, the
House Democrats are recommending that bankers who sit on the Fed's
regional bank boards have no say on presidents of the regional boards.


nice work green lantern this is very useful stuff!


Batman



Posts: 481
Join date: 2009-08-06
Age: 22
Location: NYC


Subject: Volcker Rule Under Attack as Lawmakers Seek Loophole Thu Jun 24, 2010 1:46 am
Senate negotiators will probably offer changes today to the financial overhaul bill to soften the Volcker rule by allowing banks to sponsor hedge funds and invest their own money, within limits, alongside that of clients. The compromise, designed to win the support of at least three Republican senators, comes as lawmakers struggle to reach agreement on financial reform this week. To appease Democrats in favor of stronger regulation, negotiators also plan to make it harder for regulators to undermine the rule, according to lobbyists and congressional aides involved in the discussions.

“There’s pressure from both sides to toughen and to soften the Volcker rule, and politics is the art of compromise,” said Lawrence Kaplan, an attorney at Paul Hastings Janofsky & Walker LLP in Washington. “Running a hedge fund wasn’t the problem, and this way they’re saying all of it wasn’t bad, you just can’t use too much of your capital on it. Politics is the art of saying ‘we made it tougher’ without making it really tough.” As approved by the Senate last month, the Volcker rule, named after former Federal Reserve Chairman Paul Volcker, would ban U.S. banks from trading with their own capital and running hedge funds. It has been the target of last-minute lobbying by banks including Bank of New York Mellon Corp. and State Street Corp. The two banks are concerned that their asset-management activities would be curtailed, since many of their funds could be considered hedge funds although they don’t engage in risky bets, people familiar with the banks’ arguments said.

‘Wide Net’

Scott Brown, the Massachusetts senator who was among four Republicans voting in favor of the Senate bill, is pushing for changes that would benefit Boston-based State Street and BNY Mellon, those people say. The efforts to exempt the custodian banks and their asset-management units would also help Goldman Sachs Group Inc. and JPMorgan Chase & Co., the people say. “The proposed Volcker rule casts an unnecessarily wide net,” BNY Mellon said in an e-mailed statement. “It would prohibit traditional activities that our clients expect from us and create a competitive disadvantage relative to other less regulated asset managers.” President Barack Obama introduced the rule in January with Volcker standing beside him. Because it was after the House had already passed its version of financial reform, the rule was included in the Senate package only, guided through the chamber by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.

Levin, Merkley

Senators Carl Levin of Michigan and Jeff Merkley of Oregon, also Democrats, proposed an amendment that would eliminate some wiggle room for regulators to soften the ban. While the amendment didn’t make it into the Senate bill, parts of it will be included in the changes Senate negotiators offer today, Dodd told reporters yesterday. House negotiators yesterday released their offer to their Senate counterparts that didn’t include changes to the Volcker language in the bill. Bank lobbyists are also pushing to let firms invest a limited amount -- 2 percent to 5 percent of their capital -- in hedge funds or private-equity funds. Levin and Merkley oppose this so-called de minimis investment option, according to the people familiar with the negotiations. The current version of the Volcker rule bans “sponsoring” of hedge funds and private-equity funds. Sponsoring is defined as “serving as a general partner, managing member or trustee.” Banks cannot appoint a majority of a fund’s directors or managers and cannot give their name to it. “I hope and anticipate that Congress will negotiate a strong bill,” Volcker said in an e-mailed message, declining to comment on the ongoing talks and prospects for the rule.

Citigroup, JPMorgan

Even in its current form, the Volcker rule could be interpreted as allowing banks to keep running their hedge funds as long as they divest their stakes, according to some lobbyists and congressional staffers. That understanding has led some banks to expand their businesses. Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, people with direct knowledge of the plan said last week. JPMorgan, the second-largest U.S. bank by assets, operates the world’s biggest hedge fund, according to the 2009 rankings of AR magazine, an industry trade publication. The New York- based firm’s hedge funds had $50 billion of assets under management as of Jan. 1, the magazine reported in March. Goldman Sachs’s hedge funds, which ranked ninth on the list, had $21 billion.


Batman



Posts: 481
Join date: 2009-08-06
Age: 22
Location: NYC


Subject: Financial Reform Bill Set For Final Vote Mon Jun 28, 2010 5:32 pm
HFN:

After a 20-hour negotiating session, the Senate and House gave birth to the biggest changes in the country's financial system since the Great Depression. President Obama praised Congress' efforts. "Our economic growth and prosperity depend on a strong, robust financial sector, and I will continue to do what I can to foster and support a dynamic private sector," Obama said in a statement. "But we've all seen what happens when there's inadequate oversight and insufficient transparency on Wall Street."

The proposed bill now goes to the two Congressional chambers for a final vote. The biggest change for hedge funds and private equity is the new registration requirements for funds with more than $150 million in assets. Alternative investment firms will also be subject to more regulatory oversight. A late compromise excepted venture capital firms from registration requirements. Among the provisions that were closely watched by Wall Street was the so-called Volcker rule which restricts much of the wheeling-dealing of bank proprietary desks. But in a possible boon to the private investment world, banks will still be permitted to own small stakes in hedge fund and private equity firms.

Despite the almost certain passage of the Volcker rule, some of the world's biggest banks have recently upped their stakes in alternatives. Citigroup is raising $3.25 billion for its hedge fund and private equity arms, while JPMorgan Chase was reportedly in talks acquire Brazilian alternative investment fund manager Gavea Investimentos. Other provisions of the financial reform bill include a liquidation process for financial institutions in the "too big to fail" category, a new consumer protection regulator and the requirement that most derivatives be traded on exchanges.


Batman



Posts: 481
Join date: 2009-08-06
Age: 22
Location: NYC


Subject: Finance-Overhaul Clears Senate Hurdle, Moves to Final Action Thu Jul 15, 2010 5:20 pm
July 15 (Bloomberg)--The U.S. Senate voted today to clear the path for final action on the financial-regulation bill, the last step before passage of the biggest rewrite of Wall Street rules since the Great Depression. The Senate voted 60-38 to limit debate and allow the legislation to move ahead. Lawmakers said the final vote on the bill would come soon after 2 p.m. today Washington time. The Senate’s approval would send the bill to President Barack Obama to be signed into law. “This is a major undertaking, one that is historic in its proportions, that is an attempt to set in place the structure that will allow us to minimize problems in the future,” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat who helped write the bill, said today on the Senate floor.

Senate passage would represent a victory for Obama, who proposed the regulatory overhaul in response to the 2008 financial crisis that led the U.S. to provide $700 billion in bailout funds for companies including New York-based insurer American International Group Inc. The House of Representatives approved the bill on June 30. A majority of Republicans voted to block final consideration. Republicans say the bill doesn’t go far enough to prevent future taxpayer-funded bailouts of Wall Street firms and creates a new bureaucracy by setting up a consumer financial protection bureau at the Federal Reserve. Senator Richard Shelby, the banking committee’s top Republican, called the bill a “2,300-page legislative monster.”

Vast Bureaucracies’

“It creates vast new bureaucracies with little accountability and seriously, I believe, undermines the competitiveness of the American economy,” Shelby of Alabama said. Democrats secured the 60 votes needed to move to a final vote after Republican Senators Scott Brown of Massachusetts and Olympia Snowe and Susan Collins of Maine announced this week they would vote for the bill. Unlike the procedural vote, final approval requires only a simple majority. The bill, based on a package of reforms Obama unveiled in June 2009, would set up a mechanism for liquidating failing financial firms whose collapse would roil markets and a council of financial regulators to police firms for systemic risk to the economy. It also strengthens oversight of executive compensation and derivatives, contracts whose value is derived from stocks, bonds, loans, currencies and commodities.


Snapman



Posts: 522
Join date: 2009-06-25
Age: 22
Location: New York City


Subject: Re: Regulation Thu Jul 15, 2010 7:25 pm
Batman wrote:
July 15 (Bloomberg)--The U.S. Senate voted today to clear the path for final action on the financial-regulation bill, the last step before passage of the biggest rewrite of Wall Street rules since the Great Depression. The Senate voted 60-38 to limit debate and allow the legislation to move ahead. Lawmakers said the final vote on the bill would come soon after 2 p.m. today Washington time. The Senate’s approval would send the bill to President Barack Obama to be signed into law. “This is a major undertaking, one that is historic in its proportions, that is an attempt to set in place the structure that will allow us to minimize problems in the future,” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat who helped write the bill, said today on the Senate floor.

Senate passage would represent a victory for Obama, who proposed the regulatory overhaul in response to the 2008 financial crisis that led the U.S. to provide $700 billion in bailout funds for companies including New York-based insurer American International Group Inc. The House of Representatives approved the bill on June 30. A majority of Republicans voted to block final consideration. Republicans say the bill doesn’t go far enough to prevent future taxpayer-funded bailouts of Wall Street firms and creates a new bureaucracy by setting up a consumer financial protection bureau at the Federal Reserve. Senator Richard Shelby, the banking committee’s top Republican, called the bill a “2,300-page legislative monster.”

Vast Bureaucracies’

“It creates vast new bureaucracies with little accountability and seriously, I believe, undermines the competitiveness of the American economy,” Shelby of Alabama said. Democrats secured the 60 votes needed to move to a final vote after Republican Senators Scott Brown of Massachusetts and Olympia Snowe and Susan Collins of Maine announced this week they would vote for the bill. Unlike the procedural vote, final approval requires only a simple majority. The bill, based on a package of reforms Obama unveiled in June 2009, would set up a mechanism for liquidating failing financial firms whose collapse would roil markets and a council of financial regulators to police firms for systemic risk to the economy. It also strengthens oversight of executive compensation and derivatives, contracts whose value is derived from stocks, bonds, loans, currencies and commodities.


Congrats obama mama, looks like we gonna get taxed more for funding more inefficient bureaus. Btw has anyone posted the 2011 taxes? once bush tax cuts expire we gonna get hit with much higher taxes *sigh

the pains of growing up

Citi Examining Hedge Fund Options
Citigroup reportedly is trying to figure out how to deploy its proprietary traders in light of the newly passed Dodd-Frank financial reform bill.

The financial reform bill limits the amount of proprietary trading a bank can do to 3% of its Tier 1 assets.

One scenario Citi is considering is to move proprietary traders into units that effectively would be startup hedge fund firms, according to a Bloomberg report.

Also under consideration is moving Citi proprietary traders to client accounts, Bloomberg said.

Under the new law, banks can seed hedge fund and private equity firms, but those stakes have to be redeemed later by outside investors.

Earlier this year, Citi sold its $4 billion hedge fund business to SkyBridge Capital as well as some of its private equity businesses.

JPMorgan, on the other hand, was said to be in talks with Brazilian hedge fund firm Gavea Investimentos.

Go to Bloomberg article

Guest Article: An Operational Due Diligence Checklist
One of the many consequences of the Madoff fraud, and pending financial regulation, is an increased focus by investors on hedge fund operational risk. Although operational due diligence has always been a concern, prudent investors now demand verification not only of the existence of assets, but the soundness of a hedge fund's infrastructure.

Operational issues were once estimated to be responsible for more than 50% of hedge fund losses (Capco 2003, re-quoted Edhec 2004). But these are losses you can control. Just as an investor's business plan drives the choice of fund strategy, and individual integrity and performance drives the choice of fund manager, early and regular due diligence into the quality of a fund's operational structure can prevent or mitigate future headaches.

Not surprisingly, the trend today is the larger the investor, the more intense the due diligence process and comprehensive the questions. Well-run investment management companies want to ensure hedge fund managers have solid responses. A strong operational infrastructure, managed by an independent third party, can also help mitigate operational risk. Increased transparency is a key benefit, both about the manager adhering to agreed investment principles, and in reporting.

The 30% increase in due diligence requests GlobeOp received from investors between 2008 and 2009 has held steady in the first half of 2010. The number of and detail in questions asked continues to rise. Pricing, asset verification and payment wire controls are key concerns, along with an increased demand for supporting data. In addition, on-site investor visits to GlobeOp facilities doubled in the last 18 months to June 2010.

Influenced by media debate, industry conferences and regulatory discussions, investors simply won't accept a sales pitch when meeting with a fund administrator. Investors want to see and understand the technology and processes, meet the people responsible for the control points, and discuss the checks and balances that assure the administrator is fully independent.

To confirm the administration process works effectively, investors should conduct personal, demanding and thorough due diligence in the following operational areas:

1. Read all legal documents. Make sure there is no conflict between the terms of the private placement memorandum (PPM) and other documents.

2. Conduct personal, detailed due diligence on all counterparties, including prime brokers, derivatives counterparties and the administrator. Check the creditworthiness of the administrator.

3. An authorized written valuation policy should be available for review.

The next points relate specifically to administration due diligence. In today's "Trust and Verify" environment, a "yes" answer should also be substantiated.

4. Is the administrator truly independent, free of conflict created by other trading, lending or custody activity?

5. Is technology a source of innovation and target of continuous investment? The market will continue to require robust, scalable new solutions.

6. Are processes subject to a controlled environment? Is real-time transparency accessible to investors and administrator management? Ask for a demonstration.

7. Is there a clear program to develop domain experience and scale in the administrator's human resource pool?

8. Visit off-shore teams and operations. Ensure they are all integral and adding value to operations.

9. Ask for a personal presentation of the SAS 70 Type ll audit. This should cover the entire year and include all the services, controls and offices the investor and fund manager require.

Investors are focused on avoiding the pitfalls of the past. Due diligence has evolved from a "tick-the-box" exercise to thorough and regular checks on hedge fund administrators and counterparties such as prime brokers and custodians. Operational risk management is now front of mind for investors, and that's a very good place for it to stay.

Vernon Barback is the president and chief operating officer of GlobeOp Financial Services, a financial technology specialist providing automated, integrated middle-and back-office, administration and risk reporting services to hedge funds and asset management firms. Prior to joining GlobeOp in 2004, Mr. Barback was global head of operations and technology at Citigroup Asset Management.

The views expressed in this guest article do not necessarily reflect the views of HedgeFund.net.

Copyright © GlobeOp Financial Services

Published on Hedgeweek (http://www.hedgeweek.com)
Home > Crisis brings new focus for service providers
Crisis brings new focus for service providers

By mkitchen
Created 15/11/2010 - 17:14

By Simon Gray – The financial crisis and economic downturn of the past three years have brought fundamental changes for managers of hedge funds and other alternative investments, but also for their service providers such as administrators and custodians. A mix of changing demands from investors and increased regulatory oversight of the industry is putting pressure on providers, not least to product more detailed, frequent and up-to-date information and to demonstrate their capability to act as a backstop against mismanagement or outright fraud.

In Luxembourg these developments are taking place against a backdrop of pressure on the industry to keep costs down – an issue for most fund services jurisdictions, but one that has been sharpened by the adverse economic conditions and the less than stellar returns achieved by many hedge funds – and other alternative asset classes – since the onset of the crisis.

And perversely there is also pressure from some fund promoters for greater speed in the regulatory approval process, an understandable priority for managers with opportunistic investment ideas but one that appears to run counter to the general trend in favour of more rigorous scrutiny and oversight of investment vehicles and the firms that provides services to them.

In some respects the crisis has brought the industry back to basics, according to Keith Hale, global head of transfer agency at software provider Multifonds. “It’s focused a lot more attention on the fundamentals of the fund industry, things like regulation and risk management, which were less prominent concerns three years ago,” he says. “Then the attitude seemed to be ‘the more exotic the fund, the better’, without levels of risk and operational control to match. Fast-forward three years, and investors are far more concerned about the risk profile of the fund, the identity of the administrator processing it, and what their balance sheet and technology infrastructure look like.

“Whereas in the past asset managers were mainly concerned about being exotic and creative, today they realise the need to offer funds, whether mutual or hedge, in a controlled way and with an appropriate level of risk. Administrators are keen to offer their fund manager clients more middle office outsourcing services because investors want to see third-party oversight over what the managers are doing, in the wake of scandals such as Madoff.”

That is pushing fund administrators to impose their own demands, Hale argues. “Administrators need more operationally efficient platforms to cater for the widest possible range of jurisdictions and funds at the lowest possible cost,” he says. “Whereas before the crisis they were more focused on getting new mandates up and running quickly, now attitudes are much more pragmatic and sophisticated about operational cost and risk. This is reflected in the need for software that caters to the need for control within the industry but that enables managers, especially in the alternative space, to react quickly to change.”

But the background of managers may still result in different priorities. “New hedge fund managers might have started life as a group of prop traders who came up with a hedge fund strategy to offer to ultra high net worth investors,” Hale says. “They might not be used to the level of infrastructure of a traditional institutional buy-side asset manager, preferring fairly light, fast-moving, easier-to-change infrastructure that enables them to be highly reactive. Traditional asset managers and administrators may be more risk-averse in terms of their technology platform.”

For a provider like Multifonds, “you have to be proactive rather than reactive and speed to market is key. The challenge in serving administrators and their own alternative manager clients is making sure the systems can respond fast. We aim to react quickly to our customers’ needs. For example, there are a number of areas that are not necessarily core to our traditional processing systems, such as customised reporting. We have to enable our customers to support these needs quickly by providing flexible tools as part of our architecture.”

Another important development Hale sees is the blending of institutional and alternative fund services into a single offering. “Now it’s all just fund services,” he says. “That indicates that the alternative and institutional industries are coming together and the institutionalisation of systems and processes reflects that. Customers are expecting more robustness in the development, testing and roll-out of the functionality, although there will always be pressure to do things quickly and respond, for instance, to the latest performance fee and equalisation methodologies.”

Bradford Rowley, a senior business analyst at Pacific Fund Systems, provider of the PFS-Paxus fund accounting system, notes that in today’s market many service providers are carrying out operations across an extensive global network covering multiple time zones, and that they need technology to match. “They require the ability to work from a central database across multiple global locations,” he says. “Rather than having a different infrastructure for each office, they want an infrastructure shared globally, using a common set of standards, database and approach across all their offices.”

One of those providers to adopt a global operating model is Citi. “One reason we built and deployed a global operating model last year was that, especially with all the uncertainty in the marketplace, fund managers may take a wait-and-see approach, but administrators can’t afford to do that,” says Marion Mulvey,head of alternative investment administration services for Europe, the Middle Eastand Africa at Citi Global Transaction Services.

“A lot of this is technology-driven, and things like that don’t happen overnight. One of the benefits of a larger player, especially the handful of truly global players like Citi, is our ability to invest in the technology and prepare. And while certain new features and requirements are coming in with the latest fund regulations, in reality the need for transparency has been around for a long time.

“Once you build a global standardised platform and all your systems are in sync, across the world you utilise the same processes, and your team is organised around the same roles and operating models and principles. It allows for a more simplified and streamlined ability to address new regulatory requirements through a single change to a single application deployed literally worldwide.”

Another aspect of technology, data security – a hot topic throughout the global financial world – is especially important in Luxembourg because of the legal implications of the country’s confidentiality rules. “To obtain an administrator licence you need to be able to show the regulatory authority that the client data will remain confidential,” Rowley says. “We have an encryption process that encrypts all the underlying data and any correspondence to protect data against being stolen. Without a valid password or cipher key, the data is completely illegible.”

As Europe’s largest fund services centre, Luxembourg appears well placed to benefit from the evolution of the service provider industry as a result of changing regulation as well as the impact of technology costs. José-Benjamin Longrée, until recently managing director of Caceis Bank Luxembourg, notes that with a third of the EUR150bn in total assets under fund administration in the grand duchy consisting of alternative investments, the group has taken steps to organise its global fund business accordingly.

“A lot of players have strategies to offshore or ‘nearshore’ various operations, and are looking at what part of the value chain they put in Luxembourg and what part should be outside,” he says. “Caceis has centralised independent valuation of derivatives and departments for processing derivative instruments in Luxembourg on behalf of other branches or subsidiaries. It is a centre of excellence for the group. Other groups have also realised they need their centre of expertise close to the main centre of alternative investment funds.”

That’s not to say that smaller players are necessarily being squeezed out of the fund administration market. “We are seeing more and more new entrants, especially in the fund accounting sector,” says Deloitte & Touche audit partner Johnny Yip. “In addition, some Luxembourg-based institutions are opening up specialist hedge fund desks, and there is a lot of interest in Newcits business.”

Nina Kleinbongartz, product manager for alternative investments in Europe at Citi Global Transaction Services, adds: “There will always be niche or boutique fund administrators targeting particular strategies or small and start-up funds. Currently we don’t see a great trend toward consolidation among fund administrators. On the contrary, Luxembourg is a good place for niche providers.”

However, she cautions that the environment for such niche firms will become more complicated when the EU Directive on Alternative Investment Fund Managers comes into force in 2013, bringing with it increased liability on the part of the depositary bank for losses suffered by investors through a tightening of the obligation to make restitutions of fund assets to the manager or to investors.

“Niche providers will have to team up with a depositary bank when the directive comes into force because often they do not offer in-house custody services, whereas Citi is well placed to provide these services higher up the value chain,” Kleinbongartz says. “Fund managers are especially are looking for service providers with deep pockets, while investors prefer brand names to small boutiques. However, if the latter can partner on the custody and depositary bank side, that could be a good business model.”

That may not preclude consolidation on the depositary bank side, she adds, and Longrée agrees that further developments in the regulatory environment for custody providers, including the AIFM Directive, could offer a big advantage to global institutions. “If the depositary effectively becomes insurer of the fund, that will be a huge advantage for players – there are only a very few of them – that have a giant footprint all over the world,” he says. “It will be a big advantage to be able to offer their clients a guarantee because they have their own sub-custodian network.”

He warns that these provisions may make investment in emerging markets more difficult and expensive because of the potential liability incurred through outsourced sub-custody arrangements. “At the end of the day, as long as you use first-class counterparties in Europe and North America, the impact might not be that huge,” he says. “But you will have to find other arrangements that may be more costly when you invest in certain geographical regions or sectors. If responsibility for sub-custodians is really strict, it will be very expensive for funds investing in these areas.

“To become the insurer of an economic structure is completely different from being a service provider essentially focusing on operational risk. You will have to calculate things in a different way, and there may be consequences for depositaries’ capital adequacy requirements. Even big providers with deep pockets will have to get insured in turn. With investment funds you are very quickly at a level of economic liability for the assets that is big for anyone in the world.”

The potential for increased costs of the new regulatory arrangements in Europe are an additional concern for a Luxembourg industry that has always needed to keep a close eye on its competitiveness in relation to rival centres. However, members of the industry point out that Luxembourg’s ability to attract to its workforce skilled individuals from neighbouring areas of Belgium, France and Germany has long been a brake on salary inflation. Beyond that, they say, you pay for what you get.

“Luxembourg is not cheap, but it depends whether you want to drive a Mercedes or an Opel Corsa,” says Mariusz Baranowski, the former managing director of Custom House Fund Services (Luxembourg). “You can’t buy a Mercedes for the price of a Corsa. Managers and investors continue to come to Luxembourg even if it’s a bit more expensive for many reasons, starting with the quality of service providers.

“In Luxembourg, you have numerous top-class lawyers, custodians, auditors and fund administrators within a couple of square kilometres. In half a day you can establish good relationships and be sure that your fund will be formed and administered to the highest possible standard. That’s not so easy elsewhere. In addition, Luxembourg is a jurisdiction with experience, which has been through many crises and other developments over the years. It is because of its experience and expertise that Luxembourg has the ability to reinvent itself.”

Baranowski adds that the crisis has made competition within the marketplace keener. “Once a manager might have gone to a lawyer to set up its fund and just paid whatever fee they quoted,” he says. “Now they would go to four or five different firms.” There is greater flexibility in other areas, too. “For example, office rental prices have not gone up at all, and it’s much easier to talk to property managers. When business was booming for years on end, people saw no reason to negotiate, whether on office space or salaries, but now that’s all changed.”

Longrée argues that cost levels are not dissimilar to those in Dublin, where many of Luxembourg’s fund service providers also have operations. “We are very much on the same path, with different advantages and disadvantages that at the end of the day lead to the same kind of cost structure,” he says.

“The fund industry is at maturity, and you have a certain number of people that may not necessarily be the cheapest on the market, but that’s in part because groups are putting more and more value-added services in Luxembourg. But ultimately a number of comparative surveys have made clear that Luxembourg is in a good position compared with many European countries.”

Quality and attention to detail may also have something to do with the complaints that can occasionally be heard from fund promoters that the process of gaining approval for new funds is not as fast as in rival centres. The industry regulator, the Financial Services Supervisory Authority (CSSF), has said it is looking at ways to reduce delays, but some analysts say there is still work to do. “We may never be as fast as the British Virgin Islands or Cayman, but we are working hard to improve our speed,” says Yip. “Our benchmark should be Ireland.”

Baranowski notes: “We are a victim of our own success. You can see it as a negative, but at the same time it shows that proper due diligence is being done at the set-up stage, and that once it’s up and running the structure works. You might be able to buy off-the-shelf holding companies, but in the fund industry you need to take time and ensure every aspect is properly thought through, to avoid having to rewrite all the offering documents a couple of months later.”

Longrée believes that the sheer variety of funds using the SIF regime is a factor. “The problem is that there are not just two or three categories of SIF – there are as many categories as there are SIFs,” he says. “That helps explain why in certain cases they go through very quickly and in others they go a little slower.

“Caceis’s recent experience with the CSSF has been very good, but it’s always the people who are not satisfied with a particular case that are vocal. But I wouldn’t say it is worse that in the past. The CSSF is doing pretty well and I’m convinced they will take the necessary steps in the future to ensure they have sufficient resources.”

Baranowski concurs: “Because Luxembourg is in fashion, the SIF law is extremely successful, there is some redomiciliation taking place, and the regulator is understaffed, they don’t have enough people. Now the CSSF has started to poach people from the industry, so people who used to work in fund administration are turning up working for the regulator.”

Click here [1] to download a copy of the Hedgeweek Luxembourg Hedge Fund Services 2010 special report

Special Reports
Copyright © 2009 Hedgemedia Ltd. All Rights Reserved
Source URL: http://www.hedgeweek.com/2010/11/15/67668/crisis-brings-new-focus-service-providers
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HF industry gets more and more expensive... as it becomes more and more institutionalized.


Obama Still Wants Tax Breaks Gone
President Barack Obama said Friday that he will continue pursuing the nixing of corporate tax breaks rather than just support budget cuts to secure Republican support in raising the country's current $14.3 trillion debt ceiling.

Obama, in a press conference, said he would not back $2.4 trillion in cuts proposed by Republicans in exchange for their votes on the debt ceiling issue unless eliminating tax breaks were still on the table.

"The notion that we would be doing that and not asking anything from the wealthiest among us, or not closing corporate loopholes, that doesn't seem like a serious plan," Obama said.

Republicans are pushing a plan by Senate Republican leader Mitch McConnell for cuts equal to the $2.4 trillion amount raise in the debt ceiling they are seeking in three installments over the next year. They have scheduled a vote on the plan for next week, which also includes capping expenditures and a balanced budget amendment.

Obama for the past few weeks has been adamant in calling for the ending of corporate tax breaks as a way to generate revenue to offset any budget cuts. Republican leadership has opposed getting rid of corporate loopholes.

Among those corporate loopholes being proposed for closing is eliminating a loophole that allows hedge fund and private equity managers to pay only a 15% capital-gains rate on their earnings. Instead of the 15%, hedge fund and private equity managers would pay income tax rates of up to 35%.

Democrats have estimated closing about 30 tax loopholes would contribute over $480 billion in new tax revenue in the next five years.

The Democratic stance on loopholes has gained favor with the public as indicated by several polls in the past week that supported closing loopholes as well as ending tax cuts and raising taxes on the wealthy.

The U.S. Treasury has warned the debt ceiling has to be raised by Aug. 2 in order for the government to not be in default.