Investments Archives - The Industry Spread

Australian Corporate Bond Company Pty Ltd pays $25,200 for Misleading Promotional Statements

February 12, 2019 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: ASIC, Australian Corporate Bond Company, ETP, exchange-traded product, Investment Commission Act, Investments, Misleading Promotional Statements, Regulatory Guide, risks, securities manager

Australian Corporate Bond Company Pty Ltd (ACBC) has paid $25,200 in penalties after ASIC issued two infringement notices for alleged misleading statements made in the promotion of Exchange Traded Bonds (XTBs) on its website between May to December 2017.

Following an investigation, ASIC was concerned that ACBC’s comparison of the key attributes of term deposits and XTBs represented an investment in XTBs as carrying an equivalent or substantially the same risk as investments in term deposits, while producing a higher return.

ASIC was concerned that the statements were misleading because the risks involved in an investment in XTBs are not equivalent to or substantially the same as an investment in a term deposit. For example, investments in a term deposit of up of $250,000, are protected by the Australian Government’s guarantee for Authorised Deposit Taking Institutions whereas investments in XTBs are not.

ACBC amended the promotional statements in response to ASIC’s concerns.

ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection laws. The payment of an infringement notice is not an admission of a contravention of the Australian Securities and Investment Commission Act 2001 consumer protection provisions.

Background

ACBC is the securities manager of the Australian Corporate Bond Trust and Theta Asset Management Ltd is the responsible entity. The two infringement notices were issued to ACBC on 7 December 2018 and paid by ACBC on 30 January 2019.

XTBs are a type of Exchange Traded Product (ETP) quoted on the ASX AQUA market. XTB securities are a unit in a trust that provides investors with economic exposure to the return of an underlying corporate bond issue on a fractionalised basis.

We encourage issuers to continually ensure that any advertising is consistent with Regulatory Guide 234. Advertisements that do not fairly represent the product, features and risks are misleading and/or deceptive, and ASIC will take appropriate action against this.

Download the infringement notices

Farmer Sentiment Improves Following USDA’s Second MFP Payment Announcement and Farm Bill Approval

February 11, 2019 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: Agricultural producers, Farm Bill Approval, Farmer Sentiment, Farmers, Investments, MFP Payment Announcement, professional development, USDA

Agricultural producers were more optimistic about the agricultural economy in January, but they remain concerned about farmland values, according to results from the January Purdue University/CME Group Ag Economy Barometer. The barometer, which is based on 400 survey responses from agricultural producers across the country, rebounded to a reading of 143 in January, a 16 point improvement from December.

“This survey provided us with the first opportunity to measure farmers’ sentiment following the announcement of USDA’s second round of Market Facilitation Program (MFP) payments and the passage of the 2018 Farm Bill,” said James Mintert, the barometer’s principal investigator and director of Purdue University’s Center for Commercial Agriculture. “It appears that these two announcements provided a significant boost to producer sentiment regarding both current and future economic conditions,” said Mintert.

In January, both of the barometer’s two sub-indices saw an uptick since December, with the Index of Current Conditions rising to 132 from 109 and the Index of Future Expectations rising to 148 from 135.

Increases were also seen in the Large Farm Investment Index, which measures whether producers feel this is a “good time” or a “bad time” to make large farm investments like machinery or buildings. Over the past few months, producers have been slowly expressing a more favorable view towards making large investments in their farming operations, with the index climbing 11 points from December and up 20 points from September, when the investment index bottomed out.

However, the same cannot be said for farmland values. According to the January survey, the percentage expecting higher farmland values over the next 12 months declined from 17 to 13 percent in December and, when asked to look ahead 5 years, producers expecting higher farmland values declined 2 points to 48 percent.

To better understand farmers’ planting intentions in 2019, the survey asked farmers who planted soybeans in 2018 what their plans are for 2019. Two-thirds of respondents said their soybean acreage will be the same as in 2018, but 25 percent of soybean producers said they intend to reduce their soybean acreage in 2019 compared to last year. Looking specifically at farmers who plan to reduce their soybean acreage in 2019, 58 percent of them said they will reduce acreage by more than 10 percent, while 42 percent said they would reduce acreage by 10 percent or less. This represented a shift in attitudes among soybean farmers from last fall. Back in November, among farmers that plan to reduce their soybean acreage, 69 percent of them said they planned to reduce their 2019 soybean acreage by more than 10 percent.

Lastly, when producers were asked about soybean futures, four out of ten respondents (43 percent) said they expect November 2019 soybean futures to fall below $8.50 sometime between mid-January and summer 2019. The negative perspective on soybean prices helps explain producers’ plans to reduce their 2019 soybean acreage.

Read the full January Ag Economy Barometer report at http://purdue.edu/agbarometer. This month’s report includes additional information about producer’s expectations for U.S. ag exports and their farm’s operating costs and whether their farm will have to carryover operating debt into 2019 from prior years. Each month Dr. Mintert also provides an in-depth analysis of the barometer. That video is also available at http://purdue.edu/agbarometer.

The Ag Economy Barometer, Index of Current Conditions and Index of Future Expectations are available on the Bloomberg Terminal under the following ticker symbols: AGECBARO, AGECCURC and AGECFTEX.

About the Purdue University Center for Commercial Agriculture
The Center for Commercial Agriculture was founded in 2011 to provide professional development and educational programs for farmers. Housed within Purdue University’s Department of Agricultural Economics, the center’s faculty and staff develop and execute research and educational programs that address the different needs of managing in today’s business environment.

FCA Warns Public of Investment Scams as Over £197 Million Reported Losses in 2018

February 7, 2019 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: Alvin Hall, bonds, Cryptocurrencies, FCA, FCA Register, FCA Warns Public, Forex, Investment Products, investment scams, Investments, Mark Steward, personal finance expert

Victims lost on average over £29,000 to investment scams in 2018
The most common scams reported involved investments in shares and bonds, forex and cryptocurrencies
54% of those who checked the FCA Warning List were contacted via online sources, up from 45% in 2017
Financial expert Alvin Hall put to the test in video scam challenge

The Financial Conduct Authority (FCA) is today warning investors to be vigilant to the threat posed by investment scammers, as data from Action Fraud reveals over £197 million1 of reported losses in 2018. Victims were scammed out of over £29,000 on average last year, as fraudsters employed increasingly sophisticated tactics to persuade victims to invest.

According to data from the FCA call centre, the most commonly reported scams involved investments in shares and bonds, forex and cryptocurrencies by firms that are not authorised by the FCA. Together they accounted for 85%2 of all suspected investment scams reported in 2018. People are warned to be particularly vigilant during the first quarter of the year, the peak investment season, as many look to invest before the tax year end.

Interestingly, the profile of investment scams is changing as more and more people are being targeted online, moving away from the traditional cold call. Fraudsters are now contacting people through emails, professional looking websites and social media channels, such as Facebook and Instagram. Last year 54% of those who did the right thing by checking the FCA Warning List had been contacted by potential fraudsters via online sources, up from 45% in 2017. The FCA Warning List is a tool that helps users to find out more about the risks associated with an investment, and search a list of firms the FCA knows are operating without its authorisation.

Though the contact methods used by fraudsters may vary, their tactics remain the same. We are working with financial expert and experienced investor Alvin Hall to educate the public on the most common tactics used by investment scammers. The FCA is urging people to be vigilant when making investment decisions, and to look out for these six warning signs.

Unexpected contact – Traditionally scammers cold-call but contact can also come from online sources e.g. email or social media, post, word of mouth or even in person at a seminar or exhibition.
Time pressure – They might offer you a bonus or discount if you invest before a set date or say the opportunity is only available for a short period.
Social proof – They may share fake reviews and claim other clients have invested or want in on the deal.
Unrealistic returns – Fraudsters often promise tempting returns that sound too good to be true, such as much better interest rates than elsewhere.
False authority – Using convincing literature and websites, claiming to be regulated, speaking with authority on investment products.
Flattery – Building a friendship with you to lull you into a false sense of security.

Alvin Hall, personal finance expert, who is supporting the campaign, said:
‘The amount lost last year to investment fraud is staggering, over £197 million according to Action Fraud.’
‘If my 30 years of experience in investment markets has taught me anything, it’s this – regardless of how confident you are about what you’re investing in, you should also be just as confident you know who you’re investing with. The FCA Warning List is a fantastic resource for smart investors to use to protect themselves from scams.’
‘Spotting an investment scam is increasingly challenging. To prove that point, my experience was put to the test when I was pitched three investment opportunities. Watch the video to see how I got on.’
Mark Steward, Executive Director of Enforcement and Market Oversight, FCA, said:
‘The first quarter of the year is a common time for people to make their financial plans for the year, including investments. But before you invest do your homework. Always check the FCA’s register to make sure you’re dealing with an authorised firm and use the contact details on our register, not the details the firm gives you, to avoid ‘clones’. Also check the FCA Warning List of firms to avoid. Remember, if in any doubt – don’t invest!’
‘Investment scams are becoming more and more sophisticated and fraudsters are using fake credentials to make themselves look legitimate. The FCA is working harder than ever to help protect the public against this threat. Last year we published over 360 warnings about potentially fraudulent firms. And we want to spread the message so we can all better protect ourselves from investment scams.’
Director of Action Fraud, Pauline Smith, said:
‘These statistics show that investment fraud is a major threat, with fraudsters doing everything they can to manipulate potential victims into making investments. Victims are often coerced or persuaded into parting with significant amounts of money and this can have a devastating impact on their wellbeing and finances.’
‘We are working with the FCA to raise awareness of investment fraud and would urge anyone who is considering in investing to check with the FCA before parting with their money.’
‘If you think you have been a victim of investment fraud, report it to Action Fraud.’

To reduce the chance of falling victim to investment fraud, the FCA advises consumers to, at the very least:

Reject unsolicited investment offers whether made online, on social media or over the phone.
Before investing, check the FCA Register to see if the firm or individual you are dealing with is authorised and check the FCA Warning List of firms to avoid.
Get impartial advice before investing.

The FCA’s ScamSmart campaign encourages those considering investing to check its dedicated website (www.fca.org.uk/scamsmart) for tips on how to avoid investment fraud. If you’ve lost money in a scam, contact Action Fraud on 0300 123 2040 or www.actionfraud.police.uk(link is external)

Findings From 30 June 2018 Financial Reports

January 30, 2019 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: accounting treatments, adjustments, ASIC, Financial Reports, Investments, market conditions, material changes, non-financial assets, Premier Investments Limited

ASIC today announced the results from a review of the 30 June 2018 financial reports of 215 listed and other public interest entities.

Arising from the review, ASIC has made inquiries of 55 entities on 79 matters, seeking explanations of accounting treatments.

Inquiries made by ASIC from reviews of the 30 June 2018 financial reports relate to the following matters:

Matter	Number of inquiries
Impairment and other asset values	28
Revenue recognition	18
Tax accounting	11
Consolidation accounting	4
Business combinations	3
Expense deferral	3
Other matters	12
Total	79

John Price, Commissioner, ASIC at the Risk Management Association
ASIC Commissioner John Price said: ‘ASIC’s concerns continue to relate to impairment of non-financial assets and inappropriate accounting treatments. Directors and auditors should focus on values of assets and accounting policy choices in preparing their December 2018 financial reports.’

ASIC issued Information Sheet 203 Impairment of non-financial assets: Materials for directors (INFO 203) in June 2015 to assist directors and audit committees in considering whether the value of non-financial assets, shown in the company’s financial report, continues to be supportable.

Our risk-based surveillance of public interest entities’ financial reports for reporting periods ended from 30 June 2010 to 31 December 2017, has led to material changes to 4% of the financial reports of public interest entities reviewed by ASIC. The main changes related to impairment of assets, revenue recognition and expense deferral.

Public announcements of material changes

From 1 July 2014, ASIC has publicly announced when a company makes material changes to information previously provided to the market following inquiries by ASIC. In addition to improving the level of market transparency, these announcements are intended to make directors and auditors of other companies more aware of ASIC’s concerns so that they might avoid similar issues.

Since the last release on findings in July 2018, ASIC has issued media releases in relation to changes by Kazakhstan Potash Corporation Limited (18-242MR) and Premier Investments Limited (18-310MR). The total adjustments to profit was approximately $40 million.

Enhanced audit reports

Auditors were required to issue enhanced audit reports for listed entity audits for 30 June 2017 that describe key audit matters requiring the most attention in the audit. ASIC continues to find that some key audit matters were described in general terms rather than being specific to the circumstances of the entity. In some cases, the audit procedures performed were not clearly described.

Background

Inquiries of individual entities will not necessarily lead to material restatements. Matters involving 13 of the entities have been concluded without any changes to their financial reporting.

ASIC generally does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.

More information about the findings from ASIC’s recent reviews of the financial reports of listed entities and of unlisted entities with larger numbers of users is provided below.

ASIC’s focus areas for 31 December 2018 financial reports highlight the need to focus on new requirements that can materially affect reported assets, liabilities and profits, and can be found in ASIC’s media release: 18-364MR.

Attachment to 19-014MR: Findings from 30 June 2018 financial reports

1. Asset values and impairment testing

ASIC continues to identify concerns regarding assessments of the recoverability of the carrying values of assets, including goodwill, exploration and evaluation expenditure, and property, plant and equipment.

Findings include:

(a) Reasonableness of cash flows and assumptions: There continue to be cases where the cash flows and assumptions used by entities in determining recoverable amounts are not reasonable or supportable having regard to matters such as historical cash flows, economic and market conditions, and funding costs.

In particular, we found cases where:

assumptions derived from external sources were not assessed for consistency and relevance; and
the entity’s forecast cash flows did not appear reasonable and had exceeded actual cash flows for a number of reporting periods.

(b) Determining the carrying amount of cash generating units: There are cases where entities appear to:

have identified cash generating units (CGUs) at too high a level despite cash inflows being largely independent, resulting in cash flows from one asset or part of the business being incorrectly used to support the carrying values of other assets;
have not include all assets that generate the cash inflows in the carrying amount of a CGU, such as inventories and trade receivables and tax balances; and
have incorrectly deducted liabilities from the carrying amount of a CGU.

(c) Use of fair value: We still see entities using discounted cash flow techniques to estimate fair value where the calculations are dependent on a large number of management inputs. Where it is not possible to reliably estimate the value that would be received to sell an asset in an orderly transaction between market participants, the entity may need to use the asset’s value in use as its recoverable amount.

(d) Impairment indicators: Some entities are not having sufficient regard to impairment indicators, such as significant adverse changes in market conditions, and reported net assets exceeding market capitalisation.

(e) Disclosures: We still find that there a number of entities not making necessary disclosure of:

sensitivity analysis where there is limited excess of an asset’s recoverable amount over the carrying amount and where a reasonably possible change in one or more assumptions could lead to impairment;
key assumptions, including discount rates and growth rates; and
for fair values, the valuation techniques and inputs used.

These disclosures are important to investors and other users of financial reports given the subjectivity of these calculations/assessments. They enable users to make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations.

This item includes matters arising from the finalisation of impairment matters identified in our reviews of 30 June 2017 and 31 December 2017 financial reports.

2. Revenue recognition

ASIC is following up 17 matters concerning the recognition of revenue, concerning the recognition of revenue on contracts that involve the provision of goods or services in the future, or multiple deliverables (i.e. both goods and services).

3. Tax accounting

ASIC is making inquiries of 10 entities concerning their accounting for income tax, including the adequacy of tax expense and whether it is probable that future taxable income will be sufficient to enable the recovery of deferred tax assets relating to tax losses.

4. Consolidation accounting

We have made enquiries of several entities on the non-consolidation of other entities, including an entity that has treated an apparent loan securitisation arrangement as off-balance sheet.

5. Business combinations

We have made enquiries of three entities in relation to business combinations. In one instance, the transactions have been treated as under common control which may not be appropriate.

6. Expense deferral

We have made enquiries of three entities to ascertain whether amounts deferred as assets should have been charged to the income statement as expenses. In one instance, costs incurred have been capitalised in anticipation of recovery under an insurance claim.

7. Estimates and accounting policy judgements

We observed instances where entities needed to improve the quality and completeness of disclosures in relation to estimation uncertainties, and significant judgments in applying accounting policies. The disclosure requirements are principle-based and should include all information necessary for investors and others to understand the judgements made and their effect. This may include key assumptions, reasons for judgements, alternative treatments, and appropriate quantification.

ASIC Cancels Retail OTC Derivative Issuer Berndale Capital Securities Licence and Bans Former Director

December 8, 2018 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: AFCA, AFS, AFS licensee, ASIC, Credit, financial services, Financial statements, Investments

ASIC has cancelled Melbourne based retail OTC derivative issuer, Berndale Capital Securities Pty Ltd’s (Berndale) Australian Financial Services (AFS) licence.

ASIC has also banned Stavro D’Amore, of Middle Park, Victoria, a former director of Berndale, from providing financial services for a period of six years. Mr D’Amore was the sole responsible manager and key person on the AFS licence.

Following an administrative hearing, ASIC found that Berndale:

failed to take reasonable steps to ensure that its representative complied with financial services laws;
failed to have adequate financial and human resources;
failed to maintain an appropriate internal dispute resolution system;
failed to provide financial services efficiently, honestly and fairly;
failed to comply with the client money reporting requirements;
failed to lodge annual financial statements, and audit reports; and
is likely to contravene its general obligations as an AFS licensee.

ASIC also found Mr D’Amore:

was involved in contraventions of financial services laws by Berndale;
is not adequately trained, or is not competent, to provide financial services; and
is likely to contravene a financial services law.
Cathie Armour – ASIC Commissioner

‘AFS licensees must ensure that they comply with their reporting, competence and resourcing obligations. If an AFS licensee chooses to allow other entities to operate under its license, ASIC expects that the licensee will ensure that the representatives are not providing unlicensed financial services and are properly monitored. ASIC will take decisive regulatory action to address this type of misconduct to prevent investor harm’, ASIC Commissioner Cathie Armour said.

To minimise the impact of the cancellation on past and current clients of Berndale, the cancellation will be subject to a specification that the AFS licence continues until 20 December 2018 for the purpose of finalising existing client trading accounts.

Further, Berndale’s AFS Licence continues until 23 May 2018 for the purpose of having a dispute resolution scheme in place to resolve any disputes with the Australian Financial Complaints Authority (AFCA); and to resolve any applicable compensation requirements including professional indemnity insurance.

Berndale and Mr D’Amore each has the right of review to the Administrative Appeals Tribunal in respect of ASIC’s decision.

Background

Berndale Capital Securities Pty Ltd: ACN 113 616 032

AFS Licence: 290108

The AFCA has replaced the Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal.

BCSC Releases Annual Report on Compliance

December 8, 2018 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: BCSC, Capital Markets, Investments, investors, predictive risk model, Risk, risk model, Securities Commission

Vancouver – The British Columbia Securities Commission (BCSC) is finding more deficiencies among portfolio managers, investment fund managers and exempt market dealers, as the commission becomes increasingly precise in choosing which firms to closely scrutinize.

In 2018, the BCSC conducted 23 compliance reviews and found 151 deficiencies, averaging 6.57 deficiencies per review, according to the Annual ComplianceReport Card issued today. That compares with 6.58 per review in 2017, 4.29 in 2016, and 4.64 in 2015.

The BCSC uses a predictive risk model in deciding which firms to review. The formula, adopted in 2013, identifies firms that would be most likely to have compliance problems, using data collected through previous compliance reviews as well as a risk questionnaire distributed every two years. The likelihood of compliance problems is one of several criteria used by the BCSC in deciding where to focus its energies.

“We are getting better each year in picking our spots,” said Mark Wang, the BCSC’s Director of Capital Markets Regulation. “Our predictive risk model gives us a good starting point. Then we use real-time knowledge of firms to fine-tune our examination decisions.”

Inadequate policies and procedures – including questionable risk management, outdated manuals, and weak cybersecurity policies and procedures – were the single most common category of deficiencies. Other common problems included inadequate disclosure, especially about the registrant-client relationship, and patchy efforts to ensure the suitability of investments for each client.

As a result of the compliance exams, the BCSC imposed extra restrictions on two firms, one of which decided to surrender its registration as a result. Two other firms chose to give up their registrations while still being examined.

The BCSC is increasingly referring the most egregious cases of non-compliance to its enforcement team for further investigation and possible penalties, including suspension or bans from the capital markets, as well as fines. In 2018, the BCSC opened investigations into four cases that began as compliance reviews.

“When we find lapses that are systemic or particularly harmful to investors, we won’t hesitate to use our powers of enforcement,” said Peter Brady, the BCSC’s Executive Director. “When warranted, we want to make such lapses a matter of public record, to deter such behaviour by other firms. Ultimately, we think that our compliance reviews and enforcement actions will drive the small portion of registrants that have not focused on compliance to bring their efforts in line with the vast majority of registrants that work hard to comply with all their obligations.”

GBST Launches Digital Platform Targeted At Wealth Managers

June 30, 2018 by Ricardo Esteves Leave a Comment Filed Under: Industry News Tagged: advisers, banks, brokerage houses, Brokers, Catalyst, digital platform, digital products, GBST, Investments, wealth managers

David Simpson, Head of EMEA at GBST

GBST, a technology solutions provider for brokers, banks, and wealth managers, has announced the launch of Catalyst, a digital platform targeted at new and existing wealth management and pensions clients as part of its wider technology upgrade programme.

The company founded as Star Systems in Australia and New Zealand in 1984 has invested significantly in research and development to come up with Catalyst. The platform enables the creation of modern digital products and solutions that seamlessly integrate with existing robust GBST systems.

Catalyst will also be replacing the current Composer Web platform in order to provide its highly-configurable solution that offers multi-device access, can be integrated into a client’s existing website and is fully customizable.

The digital platform provides advisers the ability to onboard and service their customers, with access to illustrations, applications, transfers, client management and document storage, all accessed, delivered, actioned and stored via a simple, secure online interface. End investors can also onboard and service their account, with access to their daily valuations, holdings and all documents relating to their investments on their desktop, tablet or phone.

Catalyst’s fully responsive design gives clients the ability to fully customize the user experience and integrate with leading web analytics and content management software. The platform allows for advisers and end investors to personalize their own dashboards.

David Simpson, Head of EMEA at GBST, commented:

“This is a really exciting development for GBST. Our clients and prospects are increasingly focussed on the digital customer experience to drive servicing costs down and deliver the overall experience that consumers demand today. Yet the real complexity of any digital project is the integration to the back-end platform, with around 80% of budgets consumed there rather than in delivering a world-class user experience. This latest development means our clients can reduce the cost of development and increase speed to market with our pre-integrated solution into the back-office and at the same time deliver a fully customized user experience.”

Kevin Okell, Director of Altus Consulting

“Importantly, the new platform is compatible with the latest industry standard architecture so for the first time we are able to integrate with non-GBST systems to provide a single view of the end-investor’s policies in the front-end portal. We recognize that not all our clients are in the position to migrate all policies on day one – most will typically move to a single policy administration platform over three to five years or retain other specialist systems. With our new platform technology, we can now support this transition period by aggregating the data from different legacy systems into a single, joined up experience for end-customers and advisers”, Simpson added.

Kevin Okell, Director of Altus Consulting, said: “Many of the challenges we see with big platform projects are really about the way they integrate with other systems. So it’s good to see the likes of GBST investing in this area to offer more granular integration options for their clients. With so much focus on digital we expect to see more platform providers extending their capabilities in this space which can only be good for the market”.

GBST’s clients include some of the largest, most influential institutions and brokerage houses, such as Westpac, Commonwealth Bank, ANZ, Haitong, NAB, and CMC Markets.

House Debates Derivatives

February 15, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: Capital Markets, CFTC, derivatives, Dodd/Frank, Financial Crisis, futures trading, Investments, market makers, securities

Dodd/Frank is not working when it comes to SWAPs.

That was the sharp and partisan message from Michigan Republican Congressman Bill Huizenga, who chairs the powerful Capital Markets, Securities, and Investments sub-committee of the House Financial Services Committee.

“Title 7 of the Dodd/Frank Act restructured the derivatives market to more closely resemble the market for listed securities and listed futures trading. The reforms included mandatory clearing for certain swaps and increased data disclosure meant to promote greater market liquidity and transparency. However, despite these well-intentioned reforms, Title 7 of the Dodd/Frank Act has resulted in a fragmented regulatory scheme of the derivatives market.

“Perhaps, the largest criticism of Title 7 is one outlined in the recent treasury report on capital markets. It’s the lack of clarity provided to the SEC and the CFTC on how they should propose and issue their rules. Title 7 bifurcated the regulatory jurisdiction over swaps. The CFTC oversees interest rate swaps, index, credit default swaps, foreign exchange swaps, certain types of equity swaps and other commodity swaps. The SEC oversees the security-based swaps market. While the CFTC has finalized their SWAPs rules, the SEC has yet to finalize their regulations for registration and regulation of security-based swap dealers, trade reporting, mandatory central clearing of standardized security based swaps and trade execution requirements. This incomplete and disjointed regulatory structure has resulted in discrepancies between the SEC and CFTC’s interpretation of Title 7 making it difficult for market participants to comply with these inconsistent regulations.”

Huizenga made the comments at a hearing his sub-committee held entitled: “Legislative Proposals for Derivatives.”

Title 7

Title 7 “creates a framework for the regulation of swap markets. Title VII grants the Commodity Futures Trading Commission (the “CFTC”) regulatory authority over swaps, except for security-based swaps, which are regulated by the Securities and Exchange Commission (the “SEC”). The CFTC and the SEC must also coordinate future swap-related rule making to ensure regulatory consistency across both organizations. Subject to limited exceptions, Title VII also requires certain swaps to be cleared by a clearinghouse and executed or an electronic execution facility and imposes registration requires on dealers and major participants, which are entities that engage in very large swap transactions that can significantly impact the health of the U.S. financial system,” according to text from the bill.

SWAPs

While the hearing was about derivatives, it was clear from both Republicans and Democrats that SWAPs were the derivative which both wanted to fight over.

A SWAP is “is an agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined by a random or uncertain variable, such as an interest rate, foreign exchange rate, equity price or commodity price,”according to the website Investopedia.

The US Treasury Department report noted that SWAPs account for 95% of all over the counter derivatives.

Any security traded over the counter has market makers and is done without a formal exchange.

While Republicans believe that- like with other aspects of Dodd/Frank- that Dodd/Frank imposed a burdensome and confusing regulatory scheme on the swap market, Democrats argue that- also as with the bill in general- that Dodd/Frank was a proper reaction to market excess.

Democrat Carolyn Maloney is from New York and she is the ranking member on the sub-committee.

She noted: “Derivatives played a central role in the financial crisis. They turned the losses in sub-prime mortgages in the US into a global financial crisis. (It) allowed financial institutions to take on excessive risk and created dangerous connections between financial institutions that spread and amplified risk across the entire financial system. It was derivatives that brought down AIG, a ninety year old company that was one of the largest financial institutions in the world. Tax-payers were forced to pay $180 billion to bail out and restructure AIG, which failed because of risky and unregulated gambling on credit default swaps.”

Credit Default SWAPs and the Financial Crisis

It is credit default swaps and their role in the 2008 financial crisis which looms as a large shadow over any debate on swap regulation.

Credit default swaps were originally created for lenders to hedge against widespread defaults in certain classes of loans. So, if a bank took on too many high-risk car loans, they might create a credit default swap to move some of that risk.

As Congresswoman Maloney noted, during real estate boom, this market was unregulated and operated akin to the wild west, with no rules.

Banks- rather than hedging with credit default swaps- began speculating on them.

Since much of the mortgages became toxic- or ones which the borrower could not pay back- banks lost billions and even trillions with these bets.

The Road Ahead

The legislative battle over swaps is only beginning. As Congressman Huizenga noted, many issues are still left to be resolved. Proposals heard at this hearing included to: “except swap transactions between affiliated entities from the swaps rules, excluding hedging swaps from the swap dealer de minimis threshold, and provide clarity regarding the de minimis exception.”

The de minimis threshold is the most any person or entity can trade in swaps before they are required to register as a swap dealer. Currently, the threshold is $8 billion and is scheduled to be reduced to $3 billion in December 2019.

Australian Corporate Bond Company Pty Ltd pays $25,200 for Misleading Promotional Statements

Background

Farmer Sentiment Improves Following USDA’s Second MFP Payment Announcement and Farm Bill Approval

FCA Warns Public of Investment Scams as Over £197 Million Reported Losses in 2018

Findings From 30 June 2018 Financial Reports

Public announcements of material changes

Enhanced audit reports

Background

Attachment to 19-014MR: Findings from 30 June 2018 financial reports

1. Asset values and impairment testing

2. Revenue recognition

3. Tax accounting

4. Consolidation accounting

5. Business combinations

6. Expense deferral

7. Estimates and accounting policy judgements

ASIC Cancels Retail OTC Derivative Issuer Berndale Capital Securities Licence and Bans Former Director

BCSC Releases Annual Report on Compliance

GBST Launches Digital Platform Targeted At Wealth Managers

House Debates Derivatives

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