The credit rating was cut to Aa2 by Moody’s Investors Service, which said the cost of shoring up the banking industry will eclipse government estimates. The euro fell and Spanish bond yields rose.
Spain will spend as much as 50 billion euros ($69 billion) shoring up savings banks, Moody’s forecast, more than double the 20 billion-euro price set by the government. The risks to government finances remain “skewed to the downside,” the company said in a statement today. The outlook is “negative,” suggesting more rating cuts are under consideration.
As Spain tries to convince investors that struggling savings banks won’t overburden its public finances, European leaders have set a March 25 deadline to approve a package of measures to end the sovereign debt crisis. The Bank of Spain is due to announce today the capital shortfalls of lenders.
“The crisis in the euro region is going to take a long time to resolve, and the rating downgrade of Spain is a reflection of that,” said John Stopford, head of fixed income at Investec Asset Management in London, which manages about $80 billion. “Any expectation that meetings in March are going to lead to a quick solution is a bit naïve.”
The gap between Spanish and German borrowing costs widened 9 basis points today to 231 basis points, the highest in five weeks as the yield on 10-year notes rose 3 basis points to 5.50 percent. The euro slid 0.6 percent to $1.3825 as of 7:18 a.m. in London.
Moody’s had put Spain’s rating on review on Dec. 15, after lowering its credit grade to Aa1 from Aaa in September. Fitch Ratings, which calls Spain AA+, changed the outlook to “negative” on March 4. Standard & Poor’s rates the nation AA, after stripping it of its top AAA grade in January 2009.
Capital Requirements
As part of its effort to regain investors’ confidence, the government tightened capital requirements for lenders on Feb. 18, setting core capital ratios of 8 percent for listed banks and 10 percent for lenders that don’t have shareholders and depend on wholesale funding.
Spain’s economy emerged from an almost two-year recession last year, before contracting again in the third quarter as the deepest austerity measures in at least three decades undermined the recovery. The government forecasts economic growth of 1.3 percent in 2011, even as the unemployment rate remains above 20 percent.
Spain is trying to cut the budget deficit to 6 percent of gross domestic product this year -- in line with France’s targeted shortfall -- from 9.2 percent last year when it was the third-largest in the euro region. While the central government beat its budget goal last year, regional administrations, which control health and education and employ half of public workers, overstepped their combined target, government data show.
The Bank of Spain will release its own report on banks' capital needs after markets close on Thursday.
The European Central Bank backed Spain's planned measures to shore up the sector, while Prime Minister Jose Luis Rodriguez Zapatero defended Spain's economic fundamentals as reasonable.
The government and central bank have forecast no more than 20 billion euros would be needed to recapitalise weak banks.
But Moody's said the overall cost was likely to be nearer 40-50 billion euros. In a more stressed scenario recapitalisation needs could even rise to around 110-120 billion euros, it said.
Ratings agency Fitch later estimated at 38 billion euros the shortfall in Spain's banking system in a base-case stress test it conducted separately.
Moody's still rates Spain as a high grade investment proposition. By way of comparison, the agency rates Portugal two notches lower and Greece far down with junk status
miércoles, 14 de diciembre de 2011
EDF Energy named most complained about energy provider - Financial News UK
Complaints to energy firm EDF have risen by 91 per cent in comparison to the same time last year, which has lead it to become the worst rated firm according to an industry league table.
Consumer Focus the company responsible for the compiled data, said that EDF’s current performance was ‘unacceptable’.
In the months from July to September the firm saw a 74 per cent increase, mainly due to the introduction of a new billing system.
The company admitted in August to overcharging 100,000 customers over £200,000, following a seven-year fault on the company’s automated telephone meter reading system.
An apology was issued by the firm, in which they said affected customers would be reimbursed and confirmed that the problem had been fixed.
A spokesman for EDF Energy said: “We are obviously disappointed that we have not been in a position to consistently deliver the high levels of service this year that we expect ourselves and that our customers have been used to”.
“We sincerely apologise to those customers who have experiences any problems during this temporary period and thank them for their patience”.
Adam Scorer, director of external affairs at Consumer Focus, said: “Complaints about EDF Energy over the summer have had a catastrophic impact on its ratings”.
“While system changes inevitably cause disruption to customers, this must be minimised. Its current complaints performance is unacceptable and the company must take further steps to tackle this”.
In the months from July to September complains across the industry rose by over 26 per cent, compared to the last three months.
The latest figures show a rise in complaints for five of the ‘big six’ energy suppliers: E.ON, EDF Energy, Npower, Scottish and Southern Energy and British Gas.
In the same period the only firm to see a drop in the number of complaints – falling by 9 per cent – was Scottish Power.
Suppliers: EDF Energy, Npower and E.ON have dropped a star in the league table rating, this quarter the industry average has fell from 4* to 3*.
Consumer Focus the company responsible for the compiled data, said that EDF’s current performance was ‘unacceptable’.
In the months from July to September the firm saw a 74 per cent increase, mainly due to the introduction of a new billing system.
The company admitted in August to overcharging 100,000 customers over £200,000, following a seven-year fault on the company’s automated telephone meter reading system.
An apology was issued by the firm, in which they said affected customers would be reimbursed and confirmed that the problem had been fixed.
A spokesman for EDF Energy said: “We are obviously disappointed that we have not been in a position to consistently deliver the high levels of service this year that we expect ourselves and that our customers have been used to”.
“We sincerely apologise to those customers who have experiences any problems during this temporary period and thank them for their patience”.
Adam Scorer, director of external affairs at Consumer Focus, said: “Complaints about EDF Energy over the summer have had a catastrophic impact on its ratings”.
“While system changes inevitably cause disruption to customers, this must be minimised. Its current complaints performance is unacceptable and the company must take further steps to tackle this”.
In the months from July to September complains across the industry rose by over 26 per cent, compared to the last three months.
The latest figures show a rise in complaints for five of the ‘big six’ energy suppliers: E.ON, EDF Energy, Npower, Scottish and Southern Energy and British Gas.
In the same period the only firm to see a drop in the number of complaints – falling by 9 per cent – was Scottish Power.
Suppliers: EDF Energy, Npower and E.ON have dropped a star in the league table rating, this quarter the industry average has fell from 4* to 3*.
Fears of European Contagion Has Investors Fleeing Risk - CNBC
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The moves were exacerbated by the year-end which has some investors looking to square positions and creates less liquid conditions in some markets.
“While everyone was sure a year-end rally would occur, it seems like everyone’s throwing in the towel,” said Daniel Greenhaus, chief global strategist at BTIG. "We're running out of time for a Santa rally. People are just not happy with the investing environment right now."
The euro made an important break below 1.30 Wednesday. Traders have been watching the single currency decline since European leaders ended last week's summit with no big framework for a solution to the debt crisis and no promise of one.
But perhaps the worse development for markets was the European Central Banks’s stated position that it would not be a major buyer of sovereign debt, which traders saw as a way to keep rates from rising further for struggling economies.
“Really what you have is the reversal of the spike, which was predicated on larger ECB purchases. The Federal Reserve is no closer to QE3, much to everyone’s chagrin, so the idea of more central bank intervention is not there to support gold prices,” said Greenhaus.
Oil and gold skidded both down about 5 percent. Gold was as low as $1,565 and below its 200-day moving average for the first time in three years. It finished the session at $1584.34, down $75.60 per ounce.
NYMEX crude lost $5.19 per barrel, ending the New York session at $94.95.
The Dow ended down 131 points at 11,823, and the S&P 500 fell 13 to 1211.
Risk assets, like commodities and stocks, have been tightly correlated to the euro. The correlation of stocks to the euro is more than 80 percent on a 60-day basis. According to Factor Advisors, oil and the euro had a realized three-month correlation of nearly 60 percent.
One of the big fears is that European sovereigns will be downgraded by rating agencies, which are reviewing them after the EU summit. “You’ve got a lot of guys running around with wild rumors,” said one stock trader.
A recurring rumor that France would be downgraded resurfaced and was knocked down by a French official.
“We should have been seeing good physical support for gold on the down side and that hasn’t been materializing,” said Suki Cooper, vice president and precious metals analyst at Barclays.
As markets fell in tandem, they also traded with their own specific concerns. Oil, for instance, slipped in part on a commitment from OPEC to produce about the same 30 million barrels per day in 2012 that it produces now.
There were also concerns in all markets that China’s economy will suffer a hard landing, slamming into a world economy already bracing for a European recession.
“It’s all about the euro. The inverse dollar play is back in action here,” said oil analyst John Kilduff of Again Capital.
“It’s really been a need for liquidity, a need for cash that’s weighed on prices,” she said.
Fed watchers did not expect any new word on QE3, or a third quantitative easing program, and those that expect more easing were not looking for the Fed to discuss it until next year. Yet, clearly some market participants were disappointed that the Fed did not move its discussion forward to its meeting Tuesday, after the disappointing response by European officials to their debt crisis.
“I don’t think anyone expected it to be implemented or announced yesterday. The consensus of the economists and Fed watching community was they’d have a discussion about their communications policy and the economy is doing a little better so they really wanted to have a quiet meeting. It was kind of one of those “if it it ain’t broke, don’t fix it” for the Fed’s approach,” said Robert Sinche, chief G10 currency strategist at RBS.
But, he notes, some investors clearly saw things differently after the the Fed’s statement gave no new promise of easing. “Everyone looked at the other stuff and said this is not good …the Fed was our last hope for a wink and a nod on liquidity and it didn’t come,” he said.
America's Best And Worst Banks - Forbes
The U.S. banking industry is slowly getting its footing after being on life support during much of the past three years ago. The FDIC’s 7,436 banks and savings institutions collectively earned $35 billion in the third quarter. It was the most profitable quarter since the three months ending in June 2007 (banks lost $38 billion in the fourth quarter of 2008).
Banks have cleaned up their balance sheets and increased their capital. The median risk-based capital ratio for the 100 largest banks is now 16% versus 14.3% two years ago. Bank failures are down to 90 so far this year after a combined 305 banks failed during the prior two years.
Yet, banks are far from out of the woods. Those 90 failures are more than the combined total between 1994 and 2007. The FDIC’s problem bank list has 844 names on it, down from 884 at the end of 2010, but up dramatically from 76 in 2007. The problems in Europe remain a great unknown and there is a fear that they could spread to the U.S. banks.
We turned to Charlottesville, Va. financial data provider SNL Financial to gauge the health of the biggest banks. SNL supplied data on eight metrics regarding the asset quality, capital adequacy and profitability of the 100 largest publicly traded banks and thrifts. The data is based on regulatory filings of banks and thrifts as of Dec. 1. The banks range in size from Beneficial Mutual Bancorp with $4.6 billion in assets to $2.3 trillion in assets JPMorgan Chase. SNL provides the data, but the rankings are done by Forbes.
Prosperity Bancshares ranks first in our third annual look at America’s best and worst banks. The bank, with $9.6 billion in assets, operates 176 branches in Texas with one-third located in the Houston area where the bank is based.
The Texas housing market did not experience the boom that places like Florida and California did and the downturn was subsequently much milder. Texas is one of the few states where home prices are currently higher than they were five years ago. The Texas economy was one of the last states to enter into a recession and one of the first states to emerge from it.
Prosperity took advantage of the economic downturn and acquired $3.6 billion in deposits and assets of Franklin Bank in 2008 when federal regulators closed Franklin’s doors.
Prosperity’s balance sheet matches Texas’ resilient economy as the bank’s non-performing loans as a percent of total loans (0.3%) and non-performing assets as a percent of total assets (0.2%) are among the lowest of any bank. The bank’s conservative nature is reflected in its ratio of reserves to non-performing loans which at 552% is tops among the 100 largest banks.
While other big banks were forced to cut their dividends during the banking crisis, Prosperity maintained its dividend and has raised the payout for 12 consecutive years. The stock is up 1% this year and currently trades at 1.2 times its book value.
Banks have cleaned up their balance sheets and increased their capital. The median risk-based capital ratio for the 100 largest banks is now 16% versus 14.3% two years ago. Bank failures are down to 90 so far this year after a combined 305 banks failed during the prior two years.
Yet, banks are far from out of the woods. Those 90 failures are more than the combined total between 1994 and 2007. The FDIC’s problem bank list has 844 names on it, down from 884 at the end of 2010, but up dramatically from 76 in 2007. The problems in Europe remain a great unknown and there is a fear that they could spread to the U.S. banks.
We turned to Charlottesville, Va. financial data provider SNL Financial to gauge the health of the biggest banks. SNL supplied data on eight metrics regarding the asset quality, capital adequacy and profitability of the 100 largest publicly traded banks and thrifts. The data is based on regulatory filings of banks and thrifts as of Dec. 1. The banks range in size from Beneficial Mutual Bancorp with $4.6 billion in assets to $2.3 trillion in assets JPMorgan Chase. SNL provides the data, but the rankings are done by Forbes.
Prosperity Bancshares ranks first in our third annual look at America’s best and worst banks. The bank, with $9.6 billion in assets, operates 176 branches in Texas with one-third located in the Houston area where the bank is based.
The Texas housing market did not experience the boom that places like Florida and California did and the downturn was subsequently much milder. Texas is one of the few states where home prices are currently higher than they were five years ago. The Texas economy was one of the last states to enter into a recession and one of the first states to emerge from it.
Prosperity took advantage of the economic downturn and acquired $3.6 billion in deposits and assets of Franklin Bank in 2008 when federal regulators closed Franklin’s doors.
Prosperity’s balance sheet matches Texas’ resilient economy as the bank’s non-performing loans as a percent of total loans (0.3%) and non-performing assets as a percent of total assets (0.2%) are among the lowest of any bank. The bank’s conservative nature is reflected in its ratio of reserves to non-performing loans which at 552% is tops among the 100 largest banks.
While other big banks were forced to cut their dividends during the banking crisis, Prosperity maintained its dividend and has raised the payout for 12 consecutive years. The stock is up 1% this year and currently trades at 1.2 times its book value.
Back ERHC Energy Inc. Reports Year End 2011 Financial Results - Marketwire
HOUSTON, TX--(Marketwire - December 14, 2011) - ERHC Energy Inc. (OTCBB: ERHE), a publicly traded American company with oil and gas assets in Sub-Saharan Africa, today announced its year-end results for fiscal 2011, which ended September 30, 2011.
As of September 30th, 2011, which is the end of ERHC's fiscal year, the Company had cash and cash equivalents and treasury bills totaling about $12,144,597, and virtually no debt.
During the 2011 fiscal year, ERHC's general and administrative expenses totaled $4,414,630, which represented a 14 percent decrease compared to fiscal 2010.
"2011 was another landmark year in the remarkable growth of ERHC," said President and CEO Peter Ntephe. "We successfully doubled the highly prospective exploration acreage under the Company's control and set in motion ERHC's evolution from a single-asset, deepwater-focused company to a multiple asset E&P player with onshore and offshore interests, which movement we expect to intensify in 2012."
ERHC holds oil and gas exploration interests in the Republic of Chad, the Sao Tome and Principe Exclusive Economic Zone (EEZ) and the Nigeria-Sao Tome and Principe Joint Development Zone (JDZ). In the Republic of Chad, ERHC has 100 percent of the interest in BDS 2008 and Manga. The Company has a 50 percent interest in Chari-Ouest Block 3. In the EEZ, ERHC holds 100 percent working interests in Blocks 4 and 11 with an option to acquire up to 15 percent working interests in two more Blocks. In the JDZ, ERHC holds working interests in Blocks 2, 3, 4, 5, 6 and 9.
ERHC has scheduled a conference call at 8:00 a.m. Central Time on Friday, December 16, 2011 to provide an update on company activities and discuss year-end financial results. Anyone interested in participating can access the call via phone or webcast.
By Phone: Dial 888-669-0676 (US & Canada) or 201-604-0467 (international) at least 10 minutes prior to the call. A telephone replay will be available through December 23, 2011 by dialing 888-632-8973 (US & Canada) or 201-499-0429 (international) and using the access code 50988289#.
By Webcast: Visit the ERHC Investor Center at http://erhc.com/investors/. Please log in at least 10 minutes in advance to register and download any necessary audio software. A replay of the audio webcast will be available shortly after the call.
As of September 30th, 2011, which is the end of ERHC's fiscal year, the Company had cash and cash equivalents and treasury bills totaling about $12,144,597, and virtually no debt.
During the 2011 fiscal year, ERHC's general and administrative expenses totaled $4,414,630, which represented a 14 percent decrease compared to fiscal 2010.
"2011 was another landmark year in the remarkable growth of ERHC," said President and CEO Peter Ntephe. "We successfully doubled the highly prospective exploration acreage under the Company's control and set in motion ERHC's evolution from a single-asset, deepwater-focused company to a multiple asset E&P player with onshore and offshore interests, which movement we expect to intensify in 2012."
ERHC holds oil and gas exploration interests in the Republic of Chad, the Sao Tome and Principe Exclusive Economic Zone (EEZ) and the Nigeria-Sao Tome and Principe Joint Development Zone (JDZ). In the Republic of Chad, ERHC has 100 percent of the interest in BDS 2008 and Manga. The Company has a 50 percent interest in Chari-Ouest Block 3. In the EEZ, ERHC holds 100 percent working interests in Blocks 4 and 11 with an option to acquire up to 15 percent working interests in two more Blocks. In the JDZ, ERHC holds working interests in Blocks 2, 3, 4, 5, 6 and 9.
ERHC has scheduled a conference call at 8:00 a.m. Central Time on Friday, December 16, 2011 to provide an update on company activities and discuss year-end financial results. Anyone interested in participating can access the call via phone or webcast.
By Phone: Dial 888-669-0676 (US & Canada) or 201-604-0467 (international) at least 10 minutes prior to the call. A telephone replay will be available through December 23, 2011 by dialing 888-632-8973 (US & Canada) or 201-499-0429 (international) and using the access code 50988289#.
By Webcast: Visit the ERHC Investor Center at http://erhc.com/investors/. Please log in at least 10 minutes in advance to register and download any necessary audio software. A replay of the audio webcast will be available shortly after the call.
MF Global puts harsh light on self-regulation - Yahoo Finance
WASHINGTON (Reuters) - Two weeks after MF Global's collapse, officials from the Commodity Futures Trading Commission briefed Senate staff on the brokerage firm's final days. When asked about reports that the brokerage firm had written checks that bounced when customers tried to cash them, the regulators had an admission that surprised the room: they didn't know about the bad checks.
"This seemed like something they should be aware of," a Senate staffer present at the meeting recalled. A CFTC spokesman declined to comment.
Customers still have no explanation of what happened to MF Global and some $1 billion missing from its customer accounts more than a month after the firm's failure. And regulators struggling to solve the mystery are now forced to play catch-up.
That's in part because over the past decade, as trading volume soared, federal regulators eased direct oversight of the industry and handed more regulatory powers to the major exchanges. Now, this self-policing arrangement is prompting concerns about the regulators' and the exchanges' ability to detect and deter suspicious conduct in the rapidly expanding marketplace.
A look at the recent history of self-regulation shows the government repeatedly raised concerns about the resources the major exchanges dedicate to market oversight, while the federal agency also experienced staff cutbacks and retreated from hands-on policing.
Both the federal regulators and the exchange where MF Global operated, the CME Group, maintain they did all they could in the run-up to MF Global's collapse. But calls are growing for a better system of auditing and enforcement to prevent similar crises in the future.
"I think we've gone too far in allowing the exchanges to be so self-regulatory that it's obfuscated the need for the cop to be on the beat all the time," says Bart Chilton, a Democratic commissioner on the CFTC.
Even the industry itself is acknowledging that there will need to be some changes. While defending the self-regulatory system, Dan Roth, president of the National Futures Association, said "we should be able to identify certain frailties of the current structure that will need to be addressed."
THE FUTURES POLICE
Self-regulation is the hallmark of the U.S. futures industry. Proponents argue that by placing oversight in the hands of the people who really understand the industry, the system benefits everyone. Critics point to the recent transformation of the exchange business, away from a non-profit cooperative model, as a reason the exchanges' commercial interests are overshadowing their market-oversight role.
Though it dates back to the middle of the 19th century, the self-regulatory nature of trading futures got a boost in 2000 with the passage of the Commodity Futures Modernization Act. The main thrust of the bill, signed into law by Bill Clinton in the waning days of his presidency, was to exempt the rapidly growing market for certain types of financial and energy derivatives and swaps from federal futures regulation.
The law was lobbied heavily by the financial industry, which argued that too many rules were hindering financial innovation and economic growth. But it became an easy target after the 2008 financial crisis, in which these types of complex financial products played a role. So lawmakers passed the Dodd-Frank financial-reform law, which pulled the swaps back under the federal regulatory umbrella and instructed the CFTC to write new rules to govern them.
Another, less-discussed, purpose of the 2000 deregulation effort was to limit the prescriptive powers of the CFTC and to give more freedom to the exchanges to set their own rules. The goal was "to provide regulatory relief to futures and options exchanges," James Newsome, who was the agency's chairman in 2001, said at the time. The overall U.S. futures and options industry grew nearly five-fold between 2000 and 2010 when 7.12 billion futures and options contracts were traded, according to Futures Industry Association.
Just as futures trading was exploding in volume, the federal agency was taking a step back from direct oversight of the markets both because of the 2000 deregulation and because of agency understaffing. For instance, when the CFTC in 2003 went after a futures trader allegedly operating a foreign currency boiler room, a court told the agency it had no jurisdiction.
Even in areas where the federal agency retained jurisdiction, direct oversight of the markets rested with the futures exchanges themselves. And those exchanges began ripping up their century-old business models and consolidating rapidly.
Ever since a group of brokers formed the Chicago Board of Trade in 1848, the exchange industry was organized into nonprofit cooperatives of brokers setting their own rules.
Technological and competitive pressures began building on the exchanges that forced more change. In 2000, the Chicago Mercantile Exchange shed its old cooperative structure and soon went public. It later bought the Chicago Board of Trade. And then the newly formed CME Group Inc. acquired the owner of New York's mercantile and commodities exchanges. That made CME Group a dominant U.S. exchange, and one of the largest in the world.
OVERSIGHT STAFF CUTS FLAGGED
As CME Group grew, federal regulators were relying on the exchange operator to be their eyes and ears on the ground. But in several recent assessments, the CFTC said that CME failed to adequately staff its oversight arm, while some of its fines lacked the necessary bite to scare repeat offenders. Combined with the rapid growth in trading volume and complexity of financial products, these staff cuts "could impair the effectiveness of an exchange's compliance program and impede enforcement," federal regulators warned in a 2010 audit of the company.
The flurry of mergers that swept the world of commodity exchanges was partly to blame for the alleged shortfalls, the regulators said.
"Prudence suggests that when exchanges merge, they should avoid substantial reductions in their combined compliance staff," federal regulators said in the 2010 audit, urging the company to add employees. In a follow-up audit a year later, the regulators criticized CME Group for the same alleged staffing shortfalls and noted the issue is "of particular concern because of the substantial share of the entire U.S. futures and options marketplace accounted for by the CME Group exchanges."
A CME official said that merger synergies "didn't reveal themselves quite as quickly" but noted that CME's exchanges have always conducted effective internal oversight. Since those audits, CME says it increased its market oversight staff to about 150 employees and has been increasingly relying on technology to keep tabs on the market amid large growth in the trading volume.
FINES A SLAP ON THE WRIST
In their recent audits, federal regulators also said that fine amounts for some types of trading-related violations "may be low enough that traders could view them as merely a cost of doing business." The regulators urged the CME Group to have a fine schedule that would penalize repeat offenders with progressively higher fines. The issue has prompted federal regulators to step in with their own penalties in cases where they thought the CME was merely slapping traders on the wrist.
Consider the track record of Edward Sarvey and David Sklena, two longtime Chicago Board of Trade brokers who traded U.S. government debt. By 2004, Sarvey had already drawn five penalties for trading violations, with exchange fines ranging from $100 to $25,000 and short bans from the trading floor. Sklena had been sanctioned twice, according to records from the National Futures Association.
In 2004, the two traders engaged in what amounted to insider trading on futures pegged to five-year Treasury notes, according to court documents. The trades netted Sarvey $357,000, while Sklena earned $1.65 million in a single morning. Their customers lost about $2 million, court documents say.
In 2007, the Chicago exchange fined Sarvey and Sklena $125,000 and $175,000 respectively, and banned them from trading for about two months. But federal regulators deemed the penalties insufficient and brought their own civil case against the pair in 2008. That complaint morphed into a federal criminal indictment. Sklena was found guilty of fraud last year and sentenced to five years in prison. Sarvey died before the trial. His former lawyer, John Legutki, says he is "surprised and saddened" by the escalation of the case from "relatively minor" exchange penalties to a full-blown criminal prosecution. "This all weighed on him very heavily," he says of Sarvey.
The case also weighed on federal futures regulators who say it is indicative of soft exchange penalties that fail to deter unscrupulous brokers. "It is not an isolated case," a CFTC official told Reuters. The agency declined to provide numbers on how many times it intervened to correct what it thought were insufficient exchange sanctions.
A CME official said that it was the exchange that first caught Sarvey and Sklena, and that the subsequent federal case was built on "all the good work that the exchange did." He said that "maybe with some exceptions, (federal regulators) find the fines and the penalties that we issue are appropriate." CME also says that the number of enforcement actions brought by its subsidiary exchanges grew from 83 in 2000 to 132 so far in 2011.
During his congressional testimony on MF Global's collapse on December 8, CME Group's executive chairman Terrence Duffy said one way to deter future abuses would be to have "stricter penalties." Duffy said the exchange had conducted its audits and spot checks of MF Global "at the highest professional level" and that the alleged misappropriation of customer funds by the firm was "disguised from all regulators."
In a common refrain, many market participants have accused CME Group of not doing enough to supervise large brokerages whose business and trading volume are key to the company's bottom line. "I've had more than one person say to me that all CME wants is volume, volume, volume, and they don't necessarily care about the integrity of the marketplace," says Jerod Leman, an account executive at Wellington Commodities, a Carmel, Ind.-based broker that works with farmers who lost money in the MF Global collapse. In 2010, CME reported that its average daily trading volume grew to 12.2 million contracts, up 19 percent from the year before.
"DON'T FIX WHAT AIN'T BROKE"
This is not new territory for commodity exchanges. A prominent farmer advocate in 1932 complained that the members of the Chicago Board of Trade "have set up a little government of their own, in which trials are held like a secret lodge," according to Jerry Markham's 2001 book "The Financial History of The United States."
Since those days, the futures business has grown to include hedge funds and other investors, large and small, trading at high volume and using increasingly esoteric financial products, which makes oversight more challenging.
For its part, CME argues it has an obvious self-interest in policing its trading floors because if traders lose faith in the integrity of the exchange, CME Group will lose business. In a 2006 hearing on the matter, CME's chief executive Craig Donohue dismissed assertions of a conflict between the company's profit-making and regulatory missions as "conjecture" and said "don't fix what ain't broke."
Ted Butler, a veteran silver trader, has been pushing Comex, the New York metals exchange owned by CME Group, to investigate allegations of price manipulation on the silver futures market by a handful of large brokerages. But, he says, the exchange hasn't shown much interest. "It is a continuing mystery how the conflicted CME could be responsible for any regulatory oversight given their inherent clear conflict of interest," Butler, who himself had drawn a CFTC sanction in the 1980s, wrote in a recent newsletter.
The federal agency is conducting its own investigation into the silver market, having found no evidence of wrongdoing in an earlier probe. A CME official declined to comment, citing the ongoing federal inquiry, with which the exchange is cooperating.
CME SIDING WITH BUSINESS
In a rapidly growing futures industry, CME Group often has to wade into policy debates between federal regulators and the businesses they oversee. In several of those debates, CME sided with the firms in opposing disclosure rules and trading curbs that could cut into those firms', and the CME's, bottom line.
The CME, for instance, opposed registration requirements for high-frequency traders. CFTC officials hoped the registration would force the traders, some based overseas, to disclose more about themselves and their trading software, and allow regulators to step in quickly in case of trouble that was seen in the so-called "flash crash" of 2010.
Because of the sheer volume and the number of transactions, high-frequency traders provide an attractive business to the exchange. CME Group balked at efforts to saddle them with additional requirements. A CME official says there's no uniform definition of what constitutes high-frequency trading, and that CME's internal systems already provide the exchange with "incredibly granular information that allows us to look at trading activity."
Last year, for instance, CME Group fined a high-frequency trader called Infinium Capital Management $850,000 for glitches in its algorithm that unleashed rapid-fire trading orders and caused a brief spike in oil prices.
UNDERFUNDING OVERSIGHT
Over the past decade, the federal agency has tried to address potential conflicts of interest within the exchanges by insisting they appoint independent directors to their boards and increase the funding and independence of their regulatory oversight committees.
"There was a concern about underfunding the regulatory function of the exchange," recalls Sharon Brown-Hruska who served as a CFTC commissioner between 2002 and 2006. Major exchanges going public only heightened concerns about self-regulation, she says.
CME Group, and other exchange operators, resisted what they saw as the federal agency's unwarranted meddling. But the CFTC prevailed and decreed the exchange boards should be more than one-third independent and that regulatory oversight committees should be properly funded.
Ever since the passage of the Dodd-Frank law, the CFTC has been consumed with writing new rules to prevent future abuses in the derivatives industry. As a result, the resources the agency can devote to enforcing the existing rules may have suffered.
"Unfortunately, in response to the financial crisis, the CFTC has been off on a series of tangents, proposing one regulation after another," Senator Pat Roberts, a Republican, said at a recent hearing. "Meanwhile, back at the ranch for the first time ever, we have a major problem.
The agency says it is being asked to effectively walk and chew gum at the same time, in an era when Congress is in no mood to increase the size of the federal government. CFTC now has about 700 employees, a 10% increase since the 1990s. In the same time period, the futures market has grown five-fold, CFTC Chairman Gary Gensler said in recent congressional testimony.
Two weeks after MF Global's bankruptcy, Congress denied the Obama administration's request for a CFTC budget increase despite the agency's insistence that it needs more money to do its job. "The CFTC just doesn't have the staffing and the resources to audit the brokerages," says a former senior agency official.
That means the CFTC will likely continue to rely on the exchanges to police themselves, although the agency may choose to take a closer look at the markets in some cases. Shortly after the MF Global bankruptcy, for instance, federal regulators said they would conduct a review of the major futures brokerages to make sure their customer accounts are intact.
"This seemed like something they should be aware of," a Senate staffer present at the meeting recalled. A CFTC spokesman declined to comment.
Customers still have no explanation of what happened to MF Global and some $1 billion missing from its customer accounts more than a month after the firm's failure. And regulators struggling to solve the mystery are now forced to play catch-up.
That's in part because over the past decade, as trading volume soared, federal regulators eased direct oversight of the industry and handed more regulatory powers to the major exchanges. Now, this self-policing arrangement is prompting concerns about the regulators' and the exchanges' ability to detect and deter suspicious conduct in the rapidly expanding marketplace.
A look at the recent history of self-regulation shows the government repeatedly raised concerns about the resources the major exchanges dedicate to market oversight, while the federal agency also experienced staff cutbacks and retreated from hands-on policing.
Both the federal regulators and the exchange where MF Global operated, the CME Group, maintain they did all they could in the run-up to MF Global's collapse. But calls are growing for a better system of auditing and enforcement to prevent similar crises in the future.
"I think we've gone too far in allowing the exchanges to be so self-regulatory that it's obfuscated the need for the cop to be on the beat all the time," says Bart Chilton, a Democratic commissioner on the CFTC.
Even the industry itself is acknowledging that there will need to be some changes. While defending the self-regulatory system, Dan Roth, president of the National Futures Association, said "we should be able to identify certain frailties of the current structure that will need to be addressed."
THE FUTURES POLICE
Self-regulation is the hallmark of the U.S. futures industry. Proponents argue that by placing oversight in the hands of the people who really understand the industry, the system benefits everyone. Critics point to the recent transformation of the exchange business, away from a non-profit cooperative model, as a reason the exchanges' commercial interests are overshadowing their market-oversight role.
Though it dates back to the middle of the 19th century, the self-regulatory nature of trading futures got a boost in 2000 with the passage of the Commodity Futures Modernization Act. The main thrust of the bill, signed into law by Bill Clinton in the waning days of his presidency, was to exempt the rapidly growing market for certain types of financial and energy derivatives and swaps from federal futures regulation.
The law was lobbied heavily by the financial industry, which argued that too many rules were hindering financial innovation and economic growth. But it became an easy target after the 2008 financial crisis, in which these types of complex financial products played a role. So lawmakers passed the Dodd-Frank financial-reform law, which pulled the swaps back under the federal regulatory umbrella and instructed the CFTC to write new rules to govern them.
Another, less-discussed, purpose of the 2000 deregulation effort was to limit the prescriptive powers of the CFTC and to give more freedom to the exchanges to set their own rules. The goal was "to provide regulatory relief to futures and options exchanges," James Newsome, who was the agency's chairman in 2001, said at the time. The overall U.S. futures and options industry grew nearly five-fold between 2000 and 2010 when 7.12 billion futures and options contracts were traded, according to Futures Industry Association.
Just as futures trading was exploding in volume, the federal agency was taking a step back from direct oversight of the markets both because of the 2000 deregulation and because of agency understaffing. For instance, when the CFTC in 2003 went after a futures trader allegedly operating a foreign currency boiler room, a court told the agency it had no jurisdiction.
Even in areas where the federal agency retained jurisdiction, direct oversight of the markets rested with the futures exchanges themselves. And those exchanges began ripping up their century-old business models and consolidating rapidly.
Ever since a group of brokers formed the Chicago Board of Trade in 1848, the exchange industry was organized into nonprofit cooperatives of brokers setting their own rules.
Technological and competitive pressures began building on the exchanges that forced more change. In 2000, the Chicago Mercantile Exchange shed its old cooperative structure and soon went public. It later bought the Chicago Board of Trade. And then the newly formed CME Group Inc. acquired the owner of New York's mercantile and commodities exchanges. That made CME Group a dominant U.S. exchange, and one of the largest in the world.
OVERSIGHT STAFF CUTS FLAGGED
As CME Group grew, federal regulators were relying on the exchange operator to be their eyes and ears on the ground. But in several recent assessments, the CFTC said that CME failed to adequately staff its oversight arm, while some of its fines lacked the necessary bite to scare repeat offenders. Combined with the rapid growth in trading volume and complexity of financial products, these staff cuts "could impair the effectiveness of an exchange's compliance program and impede enforcement," federal regulators warned in a 2010 audit of the company.
The flurry of mergers that swept the world of commodity exchanges was partly to blame for the alleged shortfalls, the regulators said.
"Prudence suggests that when exchanges merge, they should avoid substantial reductions in their combined compliance staff," federal regulators said in the 2010 audit, urging the company to add employees. In a follow-up audit a year later, the regulators criticized CME Group for the same alleged staffing shortfalls and noted the issue is "of particular concern because of the substantial share of the entire U.S. futures and options marketplace accounted for by the CME Group exchanges."
A CME official said that merger synergies "didn't reveal themselves quite as quickly" but noted that CME's exchanges have always conducted effective internal oversight. Since those audits, CME says it increased its market oversight staff to about 150 employees and has been increasingly relying on technology to keep tabs on the market amid large growth in the trading volume.
FINES A SLAP ON THE WRIST
In their recent audits, federal regulators also said that fine amounts for some types of trading-related violations "may be low enough that traders could view them as merely a cost of doing business." The regulators urged the CME Group to have a fine schedule that would penalize repeat offenders with progressively higher fines. The issue has prompted federal regulators to step in with their own penalties in cases where they thought the CME was merely slapping traders on the wrist.
Consider the track record of Edward Sarvey and David Sklena, two longtime Chicago Board of Trade brokers who traded U.S. government debt. By 2004, Sarvey had already drawn five penalties for trading violations, with exchange fines ranging from $100 to $25,000 and short bans from the trading floor. Sklena had been sanctioned twice, according to records from the National Futures Association.
In 2004, the two traders engaged in what amounted to insider trading on futures pegged to five-year Treasury notes, according to court documents. The trades netted Sarvey $357,000, while Sklena earned $1.65 million in a single morning. Their customers lost about $2 million, court documents say.
In 2007, the Chicago exchange fined Sarvey and Sklena $125,000 and $175,000 respectively, and banned them from trading for about two months. But federal regulators deemed the penalties insufficient and brought their own civil case against the pair in 2008. That complaint morphed into a federal criminal indictment. Sklena was found guilty of fraud last year and sentenced to five years in prison. Sarvey died before the trial. His former lawyer, John Legutki, says he is "surprised and saddened" by the escalation of the case from "relatively minor" exchange penalties to a full-blown criminal prosecution. "This all weighed on him very heavily," he says of Sarvey.
The case also weighed on federal futures regulators who say it is indicative of soft exchange penalties that fail to deter unscrupulous brokers. "It is not an isolated case," a CFTC official told Reuters. The agency declined to provide numbers on how many times it intervened to correct what it thought were insufficient exchange sanctions.
A CME official said that it was the exchange that first caught Sarvey and Sklena, and that the subsequent federal case was built on "all the good work that the exchange did." He said that "maybe with some exceptions, (federal regulators) find the fines and the penalties that we issue are appropriate." CME also says that the number of enforcement actions brought by its subsidiary exchanges grew from 83 in 2000 to 132 so far in 2011.
During his congressional testimony on MF Global's collapse on December 8, CME Group's executive chairman Terrence Duffy said one way to deter future abuses would be to have "stricter penalties." Duffy said the exchange had conducted its audits and spot checks of MF Global "at the highest professional level" and that the alleged misappropriation of customer funds by the firm was "disguised from all regulators."
In a common refrain, many market participants have accused CME Group of not doing enough to supervise large brokerages whose business and trading volume are key to the company's bottom line. "I've had more than one person say to me that all CME wants is volume, volume, volume, and they don't necessarily care about the integrity of the marketplace," says Jerod Leman, an account executive at Wellington Commodities, a Carmel, Ind.-based broker that works with farmers who lost money in the MF Global collapse. In 2010, CME reported that its average daily trading volume grew to 12.2 million contracts, up 19 percent from the year before.
"DON'T FIX WHAT AIN'T BROKE"
This is not new territory for commodity exchanges. A prominent farmer advocate in 1932 complained that the members of the Chicago Board of Trade "have set up a little government of their own, in which trials are held like a secret lodge," according to Jerry Markham's 2001 book "The Financial History of The United States."
Since those days, the futures business has grown to include hedge funds and other investors, large and small, trading at high volume and using increasingly esoteric financial products, which makes oversight more challenging.
For its part, CME argues it has an obvious self-interest in policing its trading floors because if traders lose faith in the integrity of the exchange, CME Group will lose business. In a 2006 hearing on the matter, CME's chief executive Craig Donohue dismissed assertions of a conflict between the company's profit-making and regulatory missions as "conjecture" and said "don't fix what ain't broke."
Ted Butler, a veteran silver trader, has been pushing Comex, the New York metals exchange owned by CME Group, to investigate allegations of price manipulation on the silver futures market by a handful of large brokerages. But, he says, the exchange hasn't shown much interest. "It is a continuing mystery how the conflicted CME could be responsible for any regulatory oversight given their inherent clear conflict of interest," Butler, who himself had drawn a CFTC sanction in the 1980s, wrote in a recent newsletter.
The federal agency is conducting its own investigation into the silver market, having found no evidence of wrongdoing in an earlier probe. A CME official declined to comment, citing the ongoing federal inquiry, with which the exchange is cooperating.
CME SIDING WITH BUSINESS
In a rapidly growing futures industry, CME Group often has to wade into policy debates between federal regulators and the businesses they oversee. In several of those debates, CME sided with the firms in opposing disclosure rules and trading curbs that could cut into those firms', and the CME's, bottom line.
The CME, for instance, opposed registration requirements for high-frequency traders. CFTC officials hoped the registration would force the traders, some based overseas, to disclose more about themselves and their trading software, and allow regulators to step in quickly in case of trouble that was seen in the so-called "flash crash" of 2010.
Because of the sheer volume and the number of transactions, high-frequency traders provide an attractive business to the exchange. CME Group balked at efforts to saddle them with additional requirements. A CME official says there's no uniform definition of what constitutes high-frequency trading, and that CME's internal systems already provide the exchange with "incredibly granular information that allows us to look at trading activity."
Last year, for instance, CME Group fined a high-frequency trader called Infinium Capital Management $850,000 for glitches in its algorithm that unleashed rapid-fire trading orders and caused a brief spike in oil prices.
UNDERFUNDING OVERSIGHT
Over the past decade, the federal agency has tried to address potential conflicts of interest within the exchanges by insisting they appoint independent directors to their boards and increase the funding and independence of their regulatory oversight committees.
"There was a concern about underfunding the regulatory function of the exchange," recalls Sharon Brown-Hruska who served as a CFTC commissioner between 2002 and 2006. Major exchanges going public only heightened concerns about self-regulation, she says.
CME Group, and other exchange operators, resisted what they saw as the federal agency's unwarranted meddling. But the CFTC prevailed and decreed the exchange boards should be more than one-third independent and that regulatory oversight committees should be properly funded.
Ever since the passage of the Dodd-Frank law, the CFTC has been consumed with writing new rules to prevent future abuses in the derivatives industry. As a result, the resources the agency can devote to enforcing the existing rules may have suffered.
"Unfortunately, in response to the financial crisis, the CFTC has been off on a series of tangents, proposing one regulation after another," Senator Pat Roberts, a Republican, said at a recent hearing. "Meanwhile, back at the ranch for the first time ever, we have a major problem.
The agency says it is being asked to effectively walk and chew gum at the same time, in an era when Congress is in no mood to increase the size of the federal government. CFTC now has about 700 employees, a 10% increase since the 1990s. In the same time period, the futures market has grown five-fold, CFTC Chairman Gary Gensler said in recent congressional testimony.
Two weeks after MF Global's bankruptcy, Congress denied the Obama administration's request for a CFTC budget increase despite the agency's insistence that it needs more money to do its job. "The CFTC just doesn't have the staffing and the resources to audit the brokerages," says a former senior agency official.
That means the CFTC will likely continue to rely on the exchanges to police themselves, although the agency may choose to take a closer look at the markets in some cases. Shortly after the MF Global bankruptcy, for instance, federal regulators said they would conduct a review of the major futures brokerages to make sure their customer accounts are intact.
Wall Street stacks up losses as global risks rise - Reuters
Investors are disappointed the European Central Bank is not buying more bonds of troubled European countries, a move that was widely seen as a requisite next step after leaders at last week's EU summit agreed to strengthen fiscal unity in the bloc.
With the euro zone debt crisis showing no signs of abating as Europe slides into recession, the outlook for the world economy is growing bleaker. The S&P 500 index has fallen more than 3 percent so far this week.
A 5 percent slump in oil prices hit energy stocks, with the S&P energy index .GSPE down nearly 3 percent. Chevron .CVX fell 3 percent and was the biggest loser on the Dow behind industrial machine maker Caterpillar (CAT.N). Shares of Caterpillar, whose global operations are sensitive to the economy, fell 4.4 percent to $87.
"There is a growing realization that the global economy is in jeopardy," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville, Tennessee. "Business is cooling everywhere. Right now, the U.S. appears to be operating in a vacuum, but that's not sustainable."
The S&P 500 .SPX fell below its 50-day moving average, signaling a breakdown of its recent trading range between that level and the 200-day moving average at the top end. The move has some analysts expecting further weakness.
Volume was moderate at 7.8 billion shares on the NYSE, Amex and Nasdaq, about 5 percent below the 200-day moving average -- a further sign of the difficulties traders and investors face in current market conditions.
"There could be a number reasons for it," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "Lack of confidence, people are tired of the moves."
December can be a volatile month, with traders closing books and everything from window-dressing ahead of the year-end to tax-loss selling contributing to swings in prices.
On NYSE about three shares fell for every one that rose.
The Dow Jones industrial average .DJI dropped 131.46 points, or 1.10 percent, to 11,823.48. The Standard & Poor's 500 Index .SPX fell 13.91 points, or 1.13 percent, to 1,211.82. The Nasdaq Composite Index .IXIC lost 39.96 points, or 1.55 percent, to 2,539.31.
The price of copper fell near a three-week low, the price of aluminum hit its lowest level in 17 months, and tin hit a three-month low. The S&P's materials sectors index .GSPM fell more than 1 percent. Shares of miner Cliffs Natural Resources (CLF.N) dropped 2.6 percent to $63.58.
Italy's borrowing costs rose to a euro-era record after an auction of five-year debt, while the euro fell to an 11-month low against the dollar.
Italy paid 6.47 percent to sell five-year paper just minutes after Berlin placed 4 billion euros ($5.2 billion) of two-year bonds at an average yield of just 0.29 percent - a sign of the extent that investors favor safety over returns.
U.S. stocks have been weighed down this week on fears that the agreement at last week's European Union summit did not go far enough to resolve the two-year-old debt crisis.
"The main issue right now is the complete, absolute failure of the European Union to come to any kind of solution. They're back to where they started from," said Jeffrey Sica, president and chief investment officer of SICA Wealth Management in Morristown, New Jersey.
"Borrowing costs are going to rise, and that's going to continue to put pressure on us. The summits they've had have taken us nowhere, and soon we're going to pay the price."
Gold dropped to its lowest level since early October as the weak euro and a shortage of dollar funding near the year-end prompted investors to sell aggressively. Commodity-related shares were further pressured by the stronger U.S. dollar.
The Arca Gold Bugs index .HUI, which measures the performance of 16 of the world's largest gold producers, fell 3 percent. Shares of Yamana Gold (AUY.N), the Canadian producer, was one of the biggest losers, down 5.8 percent to $13.98.
U.S. January crude fell $5.19, or 5.18 percent, to settle at $94.95 a barrel.
Shares of Chevron closed down $3.09 at $100.53. Federal prosecutors in the Brazilian state of Rio de Janeiro filed a lawsuit on Wednesday against Chevron and rig contractor Transocean over an oil spill off Brazil's coast last month, seeking 20 billion reais ($10.6 billion) in damages.
Investors were also disappointed the U.S. Federal Reserve made no mention of possible new stimulus measures after its Tuesday meeting.
Though a majority of economists polled by Reuters expected no more Fed action to boost the economy in the short term, another survey showed most primary dealers saw the central bank enacting some type of stimulus.
Technology shares sold off sharply. A number of companies in the industry and beyond have cut earnings outlooks over recent days, another sign of the fallout from a slowing economy. The latest was First Solar Inc (FSLR.O), a maker of solar power systems, which tumbled 21.4 percent to $33.45 after it cut its 2011 sales and profit forecast and said next year's profits would fall below Wall Street's view.
First Solar joins a list of companies, including Intel Corp (INTC.O), DuPont and Co (DD.N) and Texas Instruments Inc (TXN.N), which have cut their outlooks in recent days.
An index of home builder stocks .DJUSHB dropped 3.3 percent after the National Association of Realtors said data on sales of previously owned homes will be revised downward because of double counting.
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