Thursday, April 30, 2015

Fed Funds, Bernake's Response To Taylor's Rebuke, GDP, China's Looming RE Battle & Pay Vs. Performance


A summary of federal regulatory actions and government announcements for investors on Wednesday, April 29, 2015:

In perhaps the biggest news of the day, which turned into a non-event, the FOMC released a statement from its March meeting. It reads, "economic growth slowed during the winter months, in part reflecting transitory factors." It goes on to say, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate." So it appears the Fed is making no changes, but this was the same thing Yellen said at the last statement and then a few days later proceeded to spin a more progressive stance in a speech at the San Francisco Fed. This isn't over. Can't wait to see those minutes.

Ben Bernake published an interesting post today titled The Taylor Rule: A benchmark for monetary policy? In it he disagrees with John Taylor's public assertions that the Fed has not followed the rule. "The rule", as created by Stanford economist John Taylor himself, is intended to "describe the interest rate decisions of the Federal Reserve's Federal Open Market Committee (FOMC)." Taylor criticized the US for its policies at a recent IMF conference in which Bernake participated and this is what Bernake had to say in response.

The Bureau of Economic Analysis (BEA) announced that real GDP increased .2% in the first quarter of 2015. Many are saying this is the reason the FOMC statement was so conservative as GDP increased 2.2 percent in the fourth quarter. The largest decrease was in personal consumption which is ironic considering the decline in energy prices. That said, it isn't surprising that demand dropped off after the fourth quarter. The real question is where GDP goes from here.

The International Monetary Fund (IMF) published a fascinating working paper about China's residential real estate sector. It suggests that the sector has been softening since 2014 which is creating a buildup of inventory in may cities. The paper provides scenarios of demand and supply as well as the adjustment needed to work against an oversupply.  In other words, China may be on the verge of a housing crisis without some sort of central bank intervention. "Smaller cities, as well as those in the Northeast region, face more challenging demand-supply dynamics. The key will be to allow the adjustment to take place, while avoiding a too sharp of an economic slowdown."

The IMF also published a working paper that hits a little closer to home entitled Financial Crisis, US Unconventional Monetary Policy and International Spillovers. "We study", said the authors, "the impact of the US quantitative easing (QE) on both the emerging and advanced economies." The answer is interesting and ultimately, as to be expected, varied. "The heterogeneous effects from US QE measures indicate unevenly distributed benefits and costs."

SEC Chair Mary Jo White made a statement at an open meeting regarding two proposals to be added to the Dodd-Frank Act. The first rule has to do with cross-border swap rules; the second has to do with pay versus performance and the need for companies to disclose the relationship "between compensation actually paid to executives and company financial performance." White is known for being pro regulation and there are no surprises here. She ends the statement with a request that shareholders, companies, and other interested parties weigh in on the proposed rules as well so this will not be a closed ruling. Commissioner Luis A. Aguilar gave a statement as well and, for the most part, is in agreement with White. Not surprisingly, Commissioner Daniel M. Gallagher gave a dissenting opinion, which is consistent with his views against increased regulation.

A federal court ordered James Harvey Mason to pay a civil penalty and restitution totaling $5.5 million for commodity pool fraud. The U.S. Commodity Futures Trading Commission (CFTC) won the order against Mason of Graham, North Carolina, imposing a $1.67 million civil monetary penalty and restitution of $3.88 million in connection with forex commodity pool fraud. Mason purportedly raised over $5 million from over 500 investors. This is just one of many cases the CFTC has tried this year dealing with commodity pool fraud.

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Wednesday, April 29, 2015

Ex-Evercore Banker & Girlfriend Charged, IMF on Islamic Banking, Bank Profitability, and a $600K Payday For Whistleblower

A summary of federal regulatory actions and government announcements for investors on Tuesday, April 28, 2015:  

The SEC won an order against Frank Perkins Hixon, Jr., former employee of Evercore Partners Inc.(NYSE: EVR) his father and former girlfriend. The order gave the SEC the right to disgorge $920K and another $1.2M in restitution to his employer. He used material nonpublic information learned from his job to make trades under his father, Frank P. Hixon, Sr., and former girlfriend, Destiny Robinson's, account. Inside trades were made on Westway Group, Inc. (NASDAQ:WWAY), Titanium Metals Corporation (formerly NYSE: TIE), and Evercore Partners, Inc. The judgment also ordered him to pay a civil penalty of $682,500. Hixon Jr., or "Perk" as he was known on the street, was already sentenced to 30 months in prison followed by three years of supervised release. 

The International Monetary Fund published a working paper entitled Is Islamic Banking Good for Growth? The paper suggests there's a direct relationship between Islamic banking development and economic growth. Of course it also makes me wonder if a working paper entitled Is Christian Banking Good For Growth or Is Judeo Banking Good For Growth would be considered appropriate, but I digress. That said, the paper makes an interesting point about the rise of Islamic Banking.

SeekingAlpha published the paper Is Bank Profitability Linked To Fed Funds? which shows a clear link between an increase in the fed funds rate (IOER) and bank profitability. In 2008, the Fed started paying interest on reserves and excess reserves. Today, the rate for both is .25%, but it will probably go up this year. If the FOMC sets the fed funds rate to 3% over the next 5 years it will pay $156 billion to banks in interest. In this piece I look at how much banks stand to profit from this lending arrangement.

The Securities and Exchange Commission (SEC) announced that it would be giving $600,000 to a whistleblower, the maximum award payment allowed in connection with charges against Paradigm Capital Management, Inc. According to the announcement, the whistleblower "suffered unique hardships, including retaliation, as a result of reporting to the Commission." Paradigm was also charged with retaliation. To date, the SEC has awarded 17 whistleblowers over $50 million.
Upcoming Events & Meetings:

The U.S. Commodity Futures Trading Commission (CFTC) announced a public meeting of the Global Markets Advisory Committee (GMAC) on May 14 at CFTC’s headquarters from 2 pm to 5:30pm. The focus of the meeting will be on issues "related to assessing clearinghouse safeguards and the CFTC’s proposal on the cross-border application of its margin requirements for uncleared swaps." Two panels have been created to address issues. The meeting is open to the public and seating is available on a first-come, first-served basis. You can also listen to the meeting via conference call: 1-866-844-9416, Code: CFTC. Location: CFTC Headquarters lobby-level Hearing Room, 1155 21st Street, NW, Washington, DC 20581. 

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Tuesday, April 28, 2015

Monday, April 27, 2015 Recap: Credit Detail, More CFTC Charges, Puzzling Low T-Yields, and the Fed Testifies Before The Senate

A summary of federal regulatory actions and government announcements for investors on Friday, April 24, 2015: 
The New York Fed  announced it would publish detail on credit at the community level on May 4. The release will be in the form of interactive maps across the U.S. The profiles will provide an indication on the credit status of the nation down to the community level.
The U.S. Commodity Futures Trading Commission (CFTC) filed charges against My Global Leverage, LLC (MGL) and its owner Toney Blondo Eggleston, of Newport Coast, California. The charges allege that Eggleston engaged in illegal "off-exchange transactions in precious metals with retail customers on a leveraged, margined, or financed basis." Employees solicited retail customers by telephone. Over the time period in question, ~12 customers paid $786,000 each to MGL. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, these transactions -- leveraged, margined, or financed transactions -- are considered illegal unless they result in "actual delivery of metal within 28 days". To read the full charge click the link above.

In a similar case, the CFTC also charged Inter-Global Currency & Precious Metals, LLC (IGCPM) of Pompano Beach, Florida, and its owner Stavros Papastavrou, of Delray Beach, Florida.The order calls for restitution in the amount of $447,342, and "permanently bans IGCPM and Papastavrou from registering, trading, soliciting, and engaging in other CFTC-regulated activities." 
The Office of Financial Research (OFC) published another interesting paper entitled The Puzzle of Low U.S. Treasury Yields. The authors compared historical yields in long-term bonds and found that the persistence of low long-term yields could lead to "excessive borrowing or investor risk-taking."
Source: Bloomberg L.P., Federal Reserve Bank of New York
Finally, Mark E. Van Der Weide, Deputy Director of the Division of Banking Supervision and Regulation testified on behalf of the Federal Reserve before the U.S. Senate. He spoke with others from the Federal Insurance Office (FIO) of the U.S. Treasury, the National  Association of Insurance Commissioners (NAIC), and the independent insurance member of the Financial Stability Oversight Council (FSOC) about the current regulatory work around international and domestic insurance. 
Upcoming Events
On Wednesday, April 29, there will be an open meeting at 10am at SEC Headquarters, followed by a closed meeting at 12pm. 

On Thursday, April 30, at 2pm SEC Chair Mary Jo White will give the keynote remarks at the 35th Annual Ray Garrett Corporate and Securities Law Institute. Keith Higgins, Director, Division of Corporation Finance, and Shelley Parratt, Deputy Director, Division of Corporation Finance, will also participate.

Location: Northwestern University School of Law, Thorne Auditorium, 375 East Chicago Ave., Chicago

Contact: Peter Skrabacz, 312-503-4213, peter.skrabacz@law.northwestern.edu

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Saturday, April 25, 2015

New Federal Reserve Auditor, Inventories Up, CEI Same, Insider Trading, Fair Fund Delays & Alizadeh's Grand Jury Indictment

A summary of federal regulatory actions and government announcements for investors on Friday, April 24, 2015: 
Clive W. Blackwood was named executive vice president and general auditor by the Federal Reserve Bank of New York. Blackwood will take office June 1, 2015. Blackwood will be responsible for conducting internal audits at the New York Fed and reporting to the Board of Directors about the nature of the audits. He will also liaison between the Office of the Inspector General of the Board of Governors of the Federal Reserve System as well as the Government Accountability Office. Read the full story by clicking the link above.


The US Department of Commerce announced that March unfilled orders were unchanged, but inventories were up 0.1%. The report also said that overall shipments were up 1.1% and that capital good shipments were up as well at .6%. New orders for manufactured durable goods are up 4% to $240.2b. Excluding transportation, however, new orders were down .2%. What's the takeaway -- transportation is hot, but if you follow me you already knew that.
  
The SEC charged Frank Perkins Hixon, Jr., a 56 year-old resident of New York, with insider trading. From October 1985 through February 2014 Hixon worked as an investment banker for various firms specializing in the mining, metals, and materials industries. He is accused of leaking insider information and had been sentenced to 30 months of prison followed by three years of supervised release.  He was also fined $100,000, ordered to pay $710,000 in criminal forfeiture and $1.2 million in restitution to former employers. Hixon has already paid these amounts in full. Perhaps crime does pay.

The SEC announced charges against Veros Partners, Inc. for engaging in two fraudulent farm loan offerings. Included in the charges are the firm's president, Matthew D. Haab, and two associates, attorney Jeffrey B. Risinger and Tobin J. Senefeld. The SEC alleges that a Ponzi scheme was created to make payments to investors. The three used the scheme to raise ~$15 million from 80 investors, most of whom were Veros' clients. The SEC has obtained a temporary restraining order and emergency asset freeze. 

The SEC requested a third extension of time for both Credit Suisse disbursement funds due to complications in determining who the funds should be disbursed to. The SEC has already won an order for harmed investors granting over $100 million, but has yet to disburse those funds. The request has been granted and the SEC has been given until June 6. Why is this so hard?

The New York Fed announced the Indexes of Coincident Economic Indicators (CEI) for March. The index shows "economic activity expanding at a strong, but decelerating pace in New York City, growing at a moderate pace in New York State, but declining slightly in New Jersey." In other words, the same thing it showed last month. Here's February's CEI.
Source: New York Federal Reserve Bank
And, here's March's CEI:
Source: New York Federal Reserve Bank

Northern California developer and escrow agent indicted in multimillion dollar commercial loan fraud scheme. A federal grand jury indictment was made against Abolghasseni “Abe” Alizadeh, age 56, and Mary Sue Weaver, age 62, for various counts of "mail, wire and bank fraud in connection with schemes to defraud lenders in large commercial real estate transactions between mid-2004 and April 2008". Alizadeh used to a be a principal partner in Kobra Properties, a company that was once valued at $1b. Properties included "dozens of Jack in the Box, TGI Fridays, Sonic Burger, Qudoba Mexican Grills and other restaurants in the region". The indictment alleges that the two used altered purchase contracts to engage in a scheme to apply for loans at inflated amounts.  

Week in review:

Federal Reserve Board Hires New Auditor, Clive W. Blackwood

Perhaps in answer to a growing conservative call for an audit of the Federal Reserve, Clive W. Blackwood was named executive vice president and general auditor by the Federal Reserve Bank of New York.  

Blackwood will take office June 1, 2015 and will be responsible for conducting internal audits at the New York Fed. He was hired by, and will be reporting directly to, the Board of Directors about the nature of the audits. He will also liaison between the Office of the Inspector General of the Board of Governors of the Federal Reserve System as well as the Government Accountability Office.

“Clive has distinguished himself as an auditor and a leader both at the New York Fed and across the System and he will be a great general auditor,” said William C. Dudley, president and chief executive officer of the New York Fed.

Blackwood holds a bachelor's of science degree in accounting from NYU and is a Certified Internal Auditor, Certified Information Systems Auditor, Certified Financial Services Auditor and a Certified Bank Auditor. He has worked in various capacities at the Federal Reserve for 10 years. Prior to that he worked as an audit director at American Express and auditor at KPMG.

Friday, April 24, 2015

GDP, Deutsche Bank, Community Banks, Repos, and the Treasury Gets New Blood

A summary of government activity that impacts investors from Thursday, April 21, 2015:
The Bureau of Economic Analysis (BEA) released a breakout of GDP by industry. Overall, GDP increased 2.2 percent. Finance and insurance decreased 7.7 percent. The graph below provides a breakout by real GDP by sector.
Source: Bureau of Economic Analysis (BEA)
Seven years ago a Libor investigation began at the CFTC which spread to other financial regulatory agencies and culminated in a net settlement of $2.5 billion in penalties by Deutsche Bank. This is a continuation in a line of cases which started at Barclays and UBS -- together they show a culture of collusive behavior that is hard for most to get their heads around, but one New York Times article does a good job. Click the link above to read the full story.

Maryann F. Hunter, Deputy Director of the Division of Banking Supervision and Regulation with the Fed testified about the status of community bank regulations before the Subcommittee on Financial Institutions. She discussed the Federal Reserve's approach to regulating community banks, coordination among other bank agencies and the resulting changes that are happening in the regulatory framework.  

Doreen R. Eberley, Director of the Division of Risk Management Supervision at the Federal Deposit Insurance Corporation (FDIC) also gave her testimony on community banks. "As the primary federal regulator for the majority of community banks, the FDIC has a particular interest in understanding the challenges and opportunities they face," Eberley stated, largely in favor of the current framework.

The Office of Financial Research published a brief entitled Repo and Securities Lending: Improving Transparency with Better Data. The paper looks at the extent to which the 2008 financial crisis was caused by the lack of liquidity in the repo and money markets.

Brodi L. Fontenot, the nominee for Chief Financial Officer of the Treasury testified before the Senate Finance Committee. For the past five years Fontenot has served at the Department of Transportation as Deputy Assistant Secretary for Management and Budget in the office of the Chief Financial Officer. For the past three months he's worked at the Department of the Treasury as the Assistant Secretary for Management. 

Anne Elizabeth Wall, the nominee for Deputy Under Secretary of the Treasury also testified before the Senate Finance Committee. She joined the White House Office of Legislative Affairs as Special Assistant to the President for Legislative Affairs and then served as Deputy Assistant to the President for Legislative Affairs and Senate Liaison.

Events/Meetings

Thursday, April 30, 2015

2 p.m. ET (1 p.m. CT): SEC Chair Mary Jo White will give keynote remarks at the 35th Annual Ray Garrett Corporate and Securities Law Institute. Keith Higgins, Director, Division of Corporation Finance, will participate in a “Conversation with the Director.” Shelley Parratt, Deputy Director, Division of Corporation Finance, will participate in a panel focusing on disclosure and capital raising.

Event Location: Northwestern University School of Law, Thorne Auditorium, 375 East Chicago Ave., Chicago

Contact: Peter Skrabacz, 312-503-4213, peter.skrabacz@law.northwestern.edu

#EXIM2015, Obama's PPPs, Goldman Sachs In The "Dark", $1.5M Payday, Massad Speaks, and Yellen Stabilizes

A summary of government activity that impacts investors from Tuesday, April 21, 2015:
On Wednesday the Export-Import Bank named Siemens as the Renewable Exporter of the Year, primarily in honor of Earth Day. This was also "day one" of the bank’s Annual Conference in Washington, DC. Early in the year the Ex-Im Bank helped Siemens export wind turbines manufactured in Hutchinson, Kansas and Fort Madison, Iowa, to Peru. The deal also represented Ex-Im Bank's first renewable energy deal in Peru which simultaneously supported 400 jobs in Kansas and Iowa, according to the bank's estimates. #EXIM2015.

A white paper was published by the Treasury about President Obama's newly launched Build Investment Initiative (BAII). The goal of the initiative is to increase public-private partnerships (PPPs) thereby "spurring growth".  Congress is still sitting on the Presidents $478 billion proposal to increase funding for infrastructure projects so Obama created BAII as an alternative way to spur growth through private sector help/funds. This paper has some interesting implications for the public finance sector -- expect an in depth analysis coming soon.

The SEC charged a real estate investment firm owned by a Goldman Sachs private equity firm has agreed to pay $640K to settle charges related to eight missing filings. W2007 Grace Acquisition I Inc., a real estate investment firm, is accused of going “dark” in November 2007, and failing to file reports. “When companies cease disclosures to the public and go dark, they must ensure that they accurately count their holders of record, so that investors are not deprived of information they are entitled to under the law.” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. 

Compliance Pays: Employee Awarded ~$1.5M For Helping SEC With Its Case Today, the Securities and Exchange Commission (SEC) announced that it would award $1.4 million to $1.6 million to a compliance professional that provided information about an open enforcement action for a company they work for. The compliance officer is said to have had a "reasonable basis" on which to base his/her actions. The identity of the officer was kept confidential. Here's a quote from the release:
When investors or the market could suffer substantial financial harm, our rules permit compliance officers to receive an award for reporting misconduct to the SEC. This compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it. -Andrew Ceresney, Director of the SEC’s Division of Enforcement. 
Chairman Timothy Massad spoke before the DerivOps North America 2015 conference. He used the speech as an opportunity to provide an update on where the CFTC stands with regard to certain initiatives in the new regulatory framework. In so doing he discusses trading issues, error trades, uncleared swaps, and confirmation data.

New post on SeekingAlpha: Does Yellen Care More About Economic Growth Or Market Stability? You may be under the perception that the Fed wants to grow the economy, but ideally, the Fed just wants to stabilize it. A paper in American Banker recently questioned whether or not stable markets come at a price. In this article I looked at the real reason why Yellen is driving a rate increase, dissenting opinions, and what "stability" may cost us.

Thursday, April 23, 2015

CFTC Asks Congress For The Right To Self Fund By Charging Fees

Last week leaders at the Commodity Futures Trading Commission (CFTC) were invited to provide testimony before Congress on the reauthorization of the CFTC. At the heart of the issue as to whether or not reauthorization should occur is funding, but the backdrop is political. Advocates of the Dodd-Frank bill and other financial regulatory measures herald the CFTC for the work it's doing, while others, those that oppose financial regulation would rather see it defunct.

CFTC Commissioner Sharon Y. Bowen was among those that provided testimony and she gave no illusions about her views on the subject. She believes the CFTC is indispensable as a financial regulatory leg and believes the current mandate, while critical to the markets, is not doable.

"First," Bowen starts out, "I would like to express my gratitude to our extremely hard-working staff. Despite suffering from significant funding and resource constraints and the massive new mission of regulating and policing the swaps market, their performance has been exemplary. I remain impressed with their invaluable expertise and professional commitment to fulfilling our vastly increased Congressional mandate."

"Second," Bowen continues, "that while our staff can accomplish a great deal with limited resources, the agency desperately needs additional funding and staff to carry out our mission of regulating and protecting the swaps and futures markets."

In a nutshell, Bowen's argument is that Congress has increased the responsibilities of the CFTC without increasing the budget proportionately.
While some of us may disagree about the state of systemic risks to the swaps and futures markets or the wisdom of particular Dodd-Frank requirements, I hope we can all agree on this: the Commodity Futures Trading Commission should be reauthorized. Its role in overseeing the derivatives market is critical to protecting global financial stability and the U.S. economy and thus assuring the American people that their voices and interests are being heard.
What Bowen is up against isn't doubt that the agencies staff is "the best". She's up against a political machine that can only be for or against financial regulation, which puts the CFTC in a difficult position. What Bowen and the rest of the Committee must do is pick away at the two primary arguments against financial regulation: 1) it impedes capital formation 2) it costs too much for a nation in debt.
 
In terms of capital formation, Bowen makes it clear what the CFTC has accomplished. She also reminds the audience that it was Congress that gave the CFTC increased power due to the Great Recession. In fact, the last time Congress reauthorized the CFTC was in August 2008, just 9 months into the recession. In other words, the nation, at least in part, blamed the recession on the lack of regulatory oversight in the derivatives market.

Bowen then offers the following self-funding solution as a way to get around the associated need to request additional funding from Congress:
Much has been said about the topic of funding of course, but I believe a little more discussion is needed. Frankly, I believe it would be prudent to establish some kind of mechanism that allows the Commission to self-fund. We are grateful for the $35 million increase in appropriations we received in last December’s legislation to fund the government, which raised our annual budget from $215 million in fiscal year 2014 to $250 million for fiscal year 2015. However, that $35 million is a drop in the bucket considering the scope of our mission to regulate the swaps and futures markets.
Who can argue with self-funded, but where will the funds come from. The answer to this was less apparent.
...if there was some way in this reauthorization to allow the CFTC to set fees on registrants or a de minimis fee on some trades, as the SEC is empowered to do, that would be extremely helpful.
She goes on to say,
Allowing the CFTC to fund itself via the collection of extremely small fees from industry would effectively be allowing the industry to pay a de minimis amount of money to receive substantially faster service. Such a funding rubric would have the added benefit of no longer asking American taxpayers to directly foot the bill of setting regulations on the swaps and futures markets. I know that bills have been introduced during the last few Congresses that grant us some kind of fee-setting authority, and I think the Wall Street Accountability Through Sustainable Funding Act introduced by Reps. DeLauro, Welch, and Courtney last Congress is the best one I’ve seen to date.
What Bowen is suggesting is the authority to set a fee, which has evidently already made its way into several bills, on all trades, or only fees on trades with higher risks, or even annual fees for registrants.

In 2015, the CFTC budget is $250 million, an increase of $104 million since 2009. That's $250 million to regulate a $430 trillion market. "To use the language of finance," Bowen says, "the government is currently making an investment that is leveraging one dollar of regulatory funding for every $1,720,000 of the swaps and futures markets."

In May 2009, the CFTC had 500 people; in 2014 it had 647, an increase of 29%; despite a 6% cut in staffing levels over the past two years. Over the same time period the Commission brought in more than $6 billion in fees and penalties. It would seem an easy answer to the self-funding mechanism is to simply take a larger percentage of every order/judgement made in-house instead of taking a fee from the entire industry -- let the violators pay for the service.

Wednesday, April 22, 2015

More Regulation For Large Banks, Youth Savings, Piwowar's Speech, Flash Crash Culprit, the OFAC & FNRG Halted

A summary of government activity that impacts investors from Tuesday, April 21, 2015:
The FDIC seeks input on new recordkeeping standards for certain FDIC-insured institutions with a "large" number of deposit accounts. Large is defined as more than 2 million deposit accounts. The goal is to find a better way for the FDIC to know real-time account balances which is often difficult for larger banks. "If a bank with a large number of deposit accounts were to fail with little prior warning, additional measures may be needed to ensure the rapid application of deposit insurance limits to all deposit accounts." To read more click the link above.

The FDIC announced Phase II of the Youth Savings Pilot Program which seeks to "identify and highlight promising approaches to offering financial education tied to the opening of safe, low-cost savings accounts to school-aged children." Phase I included institutions currently working with schools or nonprofit organizations. Phase II, which was kicked off yesterday, will include institutions beginning or expanding youth savings account programs.

Commission Michael S. Piwowar gave a speech at the University of South Carolina and UNC - Charlotte 4th Annual Fixed Income Conference. He used the speech to discuss the need for continued research and regulation of the fixed income world, especially as it related to liquidity. "While the Commission to date has dedicated relatively limited resources and attention to fixed income markets," Piwowar says, "the same cannot be said about the academic community." He goes on to advocate for more research on liquidity and market transparency for the fixed income market.

In perhaps the biggest international story for the day, the CFTC charged and arrested U.K. Resident Navinder Singh Sarao and His Company Nav Sarao Futures Limited PLC with price manipulation and spoofing in connection with the May 6, 2010 market crash aka the "Flash Crash". The complaint alleges that Sarao manipulated the E-mini S&P 500 near month futures contract (E-mini S&P). To read the full order click on the link above or look on the cover of any major newspaper.

Treasury’s Office of Foreign Assets Control (OFAC) Acting Director John E. Smith testified before the Senate Agriculture Committee regarding the Cuban Assets Control Regulations and the " implications for agricultural trade with Cuba". Smith discussed key regulatory amendments made by OFAC to implement the changes. "The recent changes are intended to create opportunities for increased agricultural exports to Cuba, among other benefits to U.S. businesses," Smith said. 

The SEC halted trading of ForceField Energy Inc (NASDAQ: FNRG) alleging inaccurate reporting. The suspension will be in effect until May 4. "Questions have also arisen," said the order, "concerning potential manipulative activity of FNRG’s stock, including transactions between February 25 and April 2, 2015 and the funding of those transactions." To read the full order click the link above. 

SeekingAlpha published one of our articles this morning titled Fed Funds Blueprint: The Engineering Of 2015's Rate Hike. The article discusses how the FOMC is going to use the IOER  and the O/N reverse repo rate to raise fed funds. 
Shows where fed funds is supposed to fall in relation to the IOER and ON Repo. Source: Author's calculations.

Events & Meetings
What: Free Webcast - Compliance Self-Assessment Tool for Government Entities
When: May 14, 2015; 2 p.m. (Eastern)

How: Register for this event. Attendees will learn about:
  • Awareness of potential compliance issues
  • Understanding the most common tax issues
  • Identifying legal requirements that apply to public employers
  • Recognizing unique federal income, social security and Medicare taxes and public retirement system obligation
_____________________________________________________________

Compliance Pays: Employee Awarded ~$1.5M For Helping SEC With Its Case

Today, the Securities and Exchange Commission (SEC) announced that it would award $1.4 million to $1.6 million to a compliance professional that provided information about an open enforcement action for a company they work for.

The compliance officer is said to have had a "reasonable basis" on which to base his/her actions. The identity of the officer was kept confidential. Here's a quote from the release:
When investors or the market could suffer substantial financial harm, our rules permit compliance officers to receive an award for reporting misconduct to the SEC. This compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it. -Andrew Ceresney, Director of the SEC’s Division of Enforcement. 
The legislation which made these awards possible was included in the Dodd-Frank Act signed in 2008. The money given to whistleblowers is included in the judgement and is not money taken away from the disbursement or fair fund established for harmed investors.

Since 2011, the program has paid over $50 million in reward funds. Just this year, the SEC won its first case against a company for penalizing employees for talking to the SEC -- you can read more about that case here.

To view a list of open enforcement actions visit the "Office of the Whistleblower" website.

Tuesday, April 21, 2015

Treasury Auctions, FX Ponzi, BlackRock Fail, Dudley's Fed Speech, and the FFER

A summary of federal actions and announcements of importance to investors on 4/20/2015:

Yesterday the Federal Reserve approved the merger of Chemical Financial Corporation and Lake Michigan Financial Corporation. The approval allows Chemical Financial to acquire its subsidiaries including The Bank of Holland and The Bank of Northern Michigan. It also allows Chemical Financial and Lake Michigan Financial to establish and operate branches at the locations of the main offices and branches of The Bank of Holland and The Bank of Northern Michigan.  
  
The New York Federal Reserve published a paper entitled Intermediaries as Information Aggregators: An Application to U.S. Treasury Auction by Nina Boyarchenko, David O. Lucca, and Laura Veldkam. The paper looks at the benefits of financial intermediation -- risk diversification, liquidity, and borrower screen. These benefits do not apply to the auctions held by the U.S. Treasury. Still, most  investors purchase Treasuries through an intermediary rather than directly. It goes on to suggest that the reason investors continue to use intermediaries is for their ability to provide information -- to be information aggregators. This increases the risk to the Treasury which begs the question: Is there an optimal number of intermediaries the Treasury should be working with? 

The CFTC charged Florida resident Dorian A. Garcia in association with a Forex Ponzi Scheme. Garcia's companies, DG Wealth Management, Macroquantum Capital LLC, and UKUSA Currency Fund LP are being charged as well. Garcia is accused of steeling $2.5 million from invested funds by customers. The CFTC will seek "restitution, disgorgement of ill-gotten gains, civil monetary penalties, trading and registration bans, and a permanent injunction against further violations of federal commodities laws, as charged."

The Securities and Exchange Commission (SEC) charged BlackRock Advisors, LLC (NYSE: BLK) with failing to disclose a conflict of interest. The company has agreed to pay a mere $12 million to settle the charges. Of course this is just a drop in the bucket for the New York based investment management firm. As the world's largest asset manager it manages over $4.6 trillion in assets. The order claims that Daniel J. Rice III was managing accounts at BlackRock when he founded Rice Energy (NYSE: RICE) based in Pittsburgh. Rice invested approximately $50 million in the company and then formed a joint venture with coal producer Alpha Natural Resources Inc. (NYSE:ANR), based in Abingdon, Va. Alpha Natural Resources soon became one of the largest holdings of BlackRock's Energy & Resources Portfolio, which also happens to be Rice's largest managed fund. The conflicts of interest here abound. 

In the post Credit Supply and the Housing Boom,
the fundamental factor behind that boom was an increase in the supply of mortgage credit, which was brought about by securitization and shadow banking, along with a surge in capital inflows from abroad....
an expansion in credit supply was the fundamental driver of the surge in household debt and that borrowing against the increased value of real estate accounts for a significant fraction of this build-up in debt.
This may not seem like much a revelation, but it's taken 7 years for the Fed to distance themselves in leadership and program enough to be able to scrutinize itself. This paper does a fine job of doing just that, but begs the question: why didn't the Fed figure it all out sooner. An article I wrote a few days ago entitled Is The FOMC Too Reliant On Macro-Economic Principles? looks into this question. 

William C. Dudley gave a speech entitled The U.S. Monetary Policy Outlook and its Global Implications. Dudley is President and Chief Executive Officer at the Fed. The speech was given at the Bloomberg Americas Monetary Summit in New York City. Look for an analysis of this speech coming soon from us.

The feds funds effective rate is up, running at .13% for 6 days now, up from a YTD average of .12%.  

Events/Meetings

Thursday, April 23, 2015

12 p.m., (9 a.m. PT)

Jina Choi, Director, San Francisco Regional Office, will be a panelist at the Securities Litigation and Enforcement 2015 Update.

Location: The City Club of San Francisco, 155 Sansome St., San Francisco

Contact: Lynn Glasser, 973-278-8830, lynnglasser@sandpiperpartners.com

Friday, April 24, 2015

9:15 a.m.

Andrew Ceresney, Director, Division of Enforcement, will be a panelist at the Practising Law Institute’s Enforcement 2015: Perspectives from Government Agencies.

Location: PLI New York Center, 1177 Avenue of the Americas, New York

Contact: media@pli.edu
Ex-Im Bank’s Annual Conference - Don't forget about the Ex-Im Bank’s Annual Conference at the Omni Shoreham Hotel in Washington, DC from April 23-24 For more information please contact Capital Meeting Planning via email: Registrar@cmpinc.net or by phone: 703.536.4992

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