Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

News on regulatory oversight; insider trading, livings wills, manipulating interest rates.

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Image courtesy of DollarPhotoClub.com

Image courtesy of DollarPhotoClub.com

Interesting news from the financial world:

  • How NASDAQ watches for insider trading
  • Why bank regulators not disclosing the criteria for evaluating “living wills” causes more systemic financial risk
  • Enforcement efforts on two interest-rate manipulation fiascos

Here is how you get caught for trading on inside information

6/10 – Francine McKenna at MarketWatch – How NASDAQ watches for insider trading – Deep background on how NASDAQ monitors all the trading in the market for suspicious activity. They have a variety of tools and techniques to identify anomalies and drill down to eventually reach the individual trades.

They receive notices of possibly market moving information at least 10 minutes before it hits the market. They can then watch for unusual patterns. They can drill down to the brokerage firm where there is unusual activity and even drill down to the accounts behind the trades.

You really don’t want to do the insider trading thing. Odds on getting caught are high and rising.

Regulators to major banks: The test questions will stay secret even after you turn in your test

I previously discussed one of the major reasons 5 big banks failed their “living will” test is the regulators did not tell them the criteria on which they would be evaluated. Each bank that has been slammed with the label of bearing “systemic risk” is required to submit a plan on how they would wind down in the event of failure. The goal is to show their failure would not take down the entire financial system.

The author I cited earlier approves of not telling the banks how their plans will be evaluated.

Another author, writing at The Wall Street Journal, called on 6/10 for the regulators to Publish the Secret Rules for Banks’ Living Wills.

Article points out that if the banks don’t get a passing grade on their “living will” by 2018 the government can break them up under the authority of the Dodd-Frank Act.

The GAO estimates that American banks spend over $100 million including 1 million staff hours preparing their living wills. So failing the test is not due to a lack of effort.

The real reason for failure is the regulators, as mentioned in the earlier article, have not told the banks (or the investing public) what criteria will be used to evaluate those living wills.

The author points out several massive problems with not disclosing the rules.

First, federal regulations are required by law to be disclosed and allow time for public comment before they go into effect. That has not been done for the living will rules, which is a violation of law.

Second, if the market (meaning other banks, customers of the banks, and every investor in the country) is unable to assess whether the big banks which file bankruptcy could survive, there is a risk of a bank run if any of those banks start to get in trouble. That is the opposite of what the rules are supposed to be doing.

Third, lack of any visible rules would allow the regulators to change the rules in any way they wanted in any year.

Fourth, having failed to follow the law, any federal effort to disassemble one of the big banks would be vulnerable to having a court set aside the effort, since any action would be based on unlawful rules.

Followup on sundry bank fiascos

There is some news on consequences for manipulating ISDAfix and Libor.

5/25 – Wall Street Journal – Citibank to Pay $425 Million to Settle Benchmark Probes – Based on the article and my notes, Citibank is the first US bank to settle up for allegations it manipulated the ISDAfix benchmark. Barclays is the only overseas bank that has already settled.

The Citibank settlement includes $250M for the ISDAfix and another $175M to settle claims it manipulated Yen Libor and Euroyen Tibor.

Expect a bunch more settlements with CFTC. My notes show there have been $324M of settlements from private litigation with another five banks have been sued but not yet settled their cases.

My notes show $870M actual settlements thus far on ISDAfix.

6/2 – Department of Justice – Two Former Deutsche Bank Employees Indicted on Fraud Charges in Connection with Long-Running Manipulation of Libor – Two senior traders, one in London and one in New York were indicted on 11 felony counts.

Written by Jim Ulvog

June 14, 2016, 7:53 am at 7:53 am

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