StanChart Settles, ECB, Knight ‘Dormant’ Loss: Compliance

Bloomberg: Standard Chartered Plc settled a New York money-laundering probe for $340 million a day before the bank was to appear at a hearing to defend its right to continue operating in the state. It still faces federal probes over allegations it helped Iran funnel money through the U.S.

As part of the agreement, the bank agreed to install an on- site monitor for at least two years who will report directly to state officials. New York regulators will also place examiners at the bank. As a result of the accord, announced yesterday by the state in an e-mailed release, the hearing that had been scheduled for today was adjourned.

On Aug. 6, Benjamin Lawsky, head of the New York Department of Financial Services, or DFS, issued an order accusing Standard Chartered (STAN) of helping Iran launder about $250 billion in violation of federal laws. One analyst estimated loss of the bank’s New York license could result in a 40 percent drop in earnings.

The settlement amount is the largest ever paid to an individual regulator as part of a money laundering accord. In June, ING Bank NV agreed to pay $619 million to settle similar allegations. That sum was split evenly between a $309.5 million payment to the federal government and an equal sum to the New York District Attorney’s office.

A person familiar with the New York state case said that Lawsky had sought as much as $700 million to settle his investigation. Yuki Finch, a spokeswoman for Standard Chartered in London, declined to immediately comment on the deal.

The resolution still leaves the London-based bank the subject of investigations by the U.S. Treasury, the Federal Reserve Bank, the Justice Department and the Manhattan District Attorney.

Compliance Policy

EU Banking Plans Call for ECB to Share Power, Documents Show

The U.K. is pressing for the European Central Bank to share power with national regulators as it takes over euro-area bank supervision, according to policy planning documents obtained by Bloomberg News.

The ECB should have a core set of central powers to oversee all banks in the 17-nation currency bloc while delegating some tasks to individual countries, under one option favored by the U.K. and European Union economic policy officials. The ECB supports a similar “light touch” approach that would leave day-to-day supervision for most banks in the hands of national authorities, according to the documents.

Another approach, backed by officials working on EU financial rules, would require the ECB to take major oversight decisions for all banks, the documents show. Officials opposed to this approach say it could compromise the central bank’s reputation and perceived independence, according to the documents, which include EU-level and U.K.-based analysis of the policy debate.

Euro-area leaders in June decided to create a common bank supervisor and beef up the ECB’s oversight role, in order to pave the way for direct bank bailouts from the currency area’s firewall fund. The European Commission, the EU’s regulatory arm, plans to offer a slate of proposals in September so bloc-wide bank supervision can start in 2013.

Compliance Action

Knight $440 Million Trading Loss Said Linked to Dormant Software

Knight Capital Group Inc. (KCG)’s $440 million trading loss stemmed from an old set of computer software that was inadvertently reactivated when a new program was installed, according to two people briefed on the matter.

Once triggered on Aug. 1, the dormant system started multiplying stock trades by one thousand, according to the people, who spoke anonymously because the firm hasn’t commented publicly on what caused the error. Knight’s staff looked through eight sets of software before determining what happened, the people said.

Knight, based in Jersey City, New Jersey, hasn’t explained in detail what caused the trading losses, which depleted its capital and led to a $400 million rescue that ceded most of the company to a group of investors led by Jefferies Group Inc. (JEF) The 45-minute delay in shutting down the malfunction has confused some securities professionals, who say that trading programs can typically be disabled instantly.

Chairman and Chief Executive Officer Thomas Joyce, 57, in an Aug. 2 interview with Bloomberg Television’s “Market Makers,” described the situation as “an infrastructure problem.” He said it was “more of a networking problem as opposed to using quantitative tools to trade.”

The company, whose market-making unit executes about 10 percent of U.S. share volume, will hire an outside adviser to investigate what led to the losses. Kara Fitzsimmons, a spokeswoman, said she couldn’t comment at this time.

Knight’s computers bombarded the market with unintended orders just after trading began on Aug. 1, causing volume to surge and prices to swing in dozens of securities. NYSE Euronext (NYX) canceled trades that were 30 percent or more away from the price at the start of trading, a decision that applied to six securities out of 140 that were reviewed.

The company was updating software in preparation for an NYSE plan aimed at luring more individual investors to the exchange, Joyce said in the Aug. 2 interview, without offering details. The Big Board’s so-called retail liquidity program, designed to attract smaller investors by giving them superior prices, was being implemented that day.

Rules formalizing the treatment of erroneous trades were adopted amid criticism by investors after exchanges and the Financial Industry Regulatory Authority voided transactions totaling 5.6 million shares in the market crash of May 6, 2010. Regulators added guidelines governing when sales or purchases of stock could be canceled after market makers said confusion about which trades would stand prevented them from acting.

Knight lost the market value after the computer malfunction bombarded the market with unintended orders that exchanges declined to cancel. The refusal to let Knight out this time shows that brokers face increasing risks from technology errors after regulators toughened rules following the so-called flash crash two years ago.

The May 2010 flash crash inaugurated reforms aimed at reducing the discretion exchanges have to cancel trades.

Wells Fargo Pays $6.5 Million to Resolve SEC Broker Claims

Wells Fargo & Co. (WFC) will pay more than $6.5 million to resolve U.S. Securities and Exchange Commission claims that a brokerage unit and former employee sold complex securities without disclosing risks to investors.

The brokerage now known as Wells Fargo Securities improperly sold asset-backed commercial paper structured with mortgage-backed securities and collateralized debt obligations to municipalities, non-profits and other customers during 2007, the SEC said yesterday in a statement announcing the settled administrative proceeding. The San Francisco-based bank didn’t get sufficient information about the securities and relied almost exclusively on credit ratings, the SEC said.

Wells Fargo, which resolved the SEC’s claims without admitting or denying wrongdoing, will pay $65,000 in disgorgement and $16,751.96 in interest in addition to a $6.5 million fine, the SEC said.

“These issues occurred more than five years ago and pertain to a part of the firm that was completely revamped,” Ancel Martinez, a Wells Fargo spokesman, said in an e-mail. “We are pleased to put this matter behind us.”

Shawn Patrick McMurtry, a former Wells Fargo Securities vice president who left the company in June, will pay a $25,000 penalty and received a six-month suspension, the SEC said.

A phone message left at a listing for McMurtry in St. Paul, Minnesota, wasn’t immediately returned.

Belgian Banks May Be Forced to Go Beyond Basel III, L’Echo Says

The National Bank of Belgium may require the nation’s banks to hold more capital than required under international rules agreed on by the Basel Committee on Banking Supervision, L’Echo reported, without saying how it obtained the information.

The central bank will seek information from lenders this month on how they plan to meet the new international standards, known as Basel III, according to the newspaper.

The Basel rules, to be phased in beginning in 2013, would more than triple the amount of core capital lenders must hold compared to previous international standards.

L’Echo didn’t say how large the extra requirements for Belgian banks would be.

Courts

EU’s Highest Court Fixes ESM Irish Case Hearing Date for Oct. 23

The European Union’s highest court set the date for oral arguments in a case about the European Stability Mechanism for Oct. 23, according to lawmaker Thomas Pringle, who is challenging Ireland’s ratification of laws on the ESM, the euro area’s future permanent bailout fund.

Ireland’s Supreme Court sought the EU Court of Justice’s view on questions including whether the ESM is compatible with EU treaties and if a decision by EU governments on March 25 to amend a treaty to provide for the ESM is valid.

Parties’ written arguments are to be submitted by Sept. 14, according to an e-mailed statement yesterday by Pringle’s lawyer, Joe Noonan.

The establishment of the 500 billion-euro ($617 billion) ESM is on hold pending a decision byGermany’s highest court. The ruling by the Federal Constitutional Court is due Sept. 12.

The case is C-370/12 Pending Case, Pringle.

reporter on this story: Carla Main in New Jersey