Enhancing financial stability

The sweeping overhaul of the US’s financial regulatory system that was signed into law in July last, will touch virtually every aspect of American financial markets. The October issue of the “Chicago Fed Letter” focuses on the various provisions in the “Dodd–Frank Wall Street Reform and Consumer Protection Act” that affect “financial market utilities,” critical behind-the-scenes institutions and arrangements that will ensure the smooth functioning of financial markets. Anna L. Paulson, vice president and senior financial economist, and Kirstin E. Wells, lead technical expert both from theat the Chicago Fed have authored this informative article.

Download this article HERE.

New Zealand central bank designates third settlement system

The Reserve Bank of New Zealand and the country’s Securities Commission has announced that the newly established “NZCDC Settlement System” has been declared a designated settlement system in terms of the Reserve Bank of New Zealand Act.

The Reserve Bank and Securities Commission are joint regulators of designated settlement systems. The NZCDC Settlement System is operated by New Zealand Clearing and Depository Corporation, a wholly-owned subsidiary of NZX Limited.

Reserve Bank Head of Prudential Supervision Toby Fiennes, and Securities Commission Chairman Jane Diplock said the designation gives statutory backing to the finality of settlement and netting of transactions through the system so that in the event of failure by a participant, transactions cannot be unwound. Designated settlement systems are subject to ongoing oversight by the Securities Commission and the Reserve Bank. However, it is not compulsory for settlement systems operating in New Zealand to be designated.

New Zealand has two existing designated settlement systems: the Reserve Bank’s Exchange Settlement Account System and the Continuous Linked Settlement System operated by CLS Bank International.

A settlement system will only be recommended for designation after a thorough assessment by the regulators, they said. The regulators assess, amongst other things, the clarity and legal certainty of the rules of a system, its financial soundness and risk management policies, and the capability and capacity of the operator.

"Ransomware" scam in Russia

Russian police have launched an investigation into a criminal gang that installed malicious "ransomware" programs on thousands of PCs and then forced victims to send SMS messages in order to unlock their PCs. According to local reports that scam may have netted Russian criminals millions of dollars.

Russian police seized computer equipment and detained a Russian "crime family" in connection with the crime. 10 people are expected to be charged. Tens of thousands victims affected by the scam live in Russia, Ukraine, Belarus and Moldova.

The scam ring worked this way: they used news sites to spread their malicious software, known as WinLock, which disables certain Windows components, rendering the PC unusable, and then displays pornographic images.

To unlock the code, victims must send SMS messages that cost between 300 rubles (US$9.72) and 1,000 rubles.

The scam is "very popular" in countries such as Russia at the moment, antivirus vendor Kaspersky Lab said in an e-mailed statement.

US cautions credit rating agencies

The US Securities and Exchange Commission (SEC) has issued a report cautioning credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.

The SEC’s Report of Investigation stems from an Enforcement Division inquiry into whether Moody’s Investors Service (MIS) – the credit rating business segment of Moody’s Corporation – violated the registration provisions or the antifraud provisions of the federal securities laws.

The Report says that because of uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct, the Commission declined to pursue a fraud enforcement action in this matter. The Report notes that the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act provided expressly that federal district courts have jurisdiction over SEC enforcement actions alleging violations of the antifraud provisions of the securities laws when conduct includes significant steps, or a foreseeable substantial effect, within the United States. The Report also notes that the Dodd-Frank Act amended the securities laws to require nationally recognized statistical rating organizations (NRSROs) to “establish, maintain, enforce, and document an effective internal control structure governing the implementation of and adherence to policies, procedures, and methodologies for determining credit ratings.”

“Investors rely upon statements that NRSROs make in their applications and reports submitted to the Commission, particularly those that describe how the NRSRO determines credit ratings,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “It is crucial that NRSROs take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings.”

According to the Report, an MIS analyst discovered in early 2007 that a computer coding error had upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for certain constant proportion debt obligation notes. Nevertheless, shortly thereafter during a meeting in Europe, an MIS rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact MIS’s business reputation.

MIS applied in June 2007 to be registered with the Commission as an NRSRO. The Report notes that the European rating committee’s self-serving consideration of non-credit related factors in support of the decision to maintain the credit ratings constituted conduct that was contrary to the MIS procedures used to determine credit ratings as described in the MIS application to the SEC.

In the Report of Investigation, the Commission makes clear that credit rating agencies registered with the SEC must implement and follow appropriate internal controls and procedures governing their determination of credit ratings, and must also take reasonable steps to ensure the accuracy of statements in applications or reports submitted to the SEC.

The Report cautions NRSROs that, when appropriate, the Commission will pursue antifraud enforcement actions against deceptive ratings conduct, including actions pursuant to the Dodd-Frank Act provisions regarding conduct that physically occurs outside the United States but involves significant steps or foreseeable effects within the US.

Under Section 21(a) of the Securities Exchange Act of 1934, the Commission may investigate violations of the federal securities laws and at its discretion “publish information concerning any such violations.” David Frohlich, Margaret Cain, Roger Paszamant, and Dean Conway conducted the SEC’s investigation. The Commission acknowledged the assistance and cooperation of foreign regulatory authorities in Europe in the investigation.

Internet in Africa - safest in the world

According to a report by the Internet security firm AVG 7 of the 10 safest countries in which to use the Internet are in Africa, with Sierra Leone rated the safest. AVG researchers have compiled a list of virus and malware attacks by country that have been detected by AVG security software, with data from more than 127 million computers in 144 countries to determine incidence rates of such attacks. Average incident rate for Sierra Leone was one attack for every 692 Web surfers.

Sierra Leone was followed by Niger with one in every 442 surfers likely to be attacked while online.

However, the figured should be considered in context of low Internet penetration in the African countries. AVG Chief Research Officer Roger Thompson wrote on his blog that the research should serve as a warning to those who are travelling to other countries with plans to use the Internet.

The Caucasus region was the most vulnerable for online attacks, while by country Turkey, Russia, Armenia and Azerbaijan have the highest rates of virus and malware attacks. The US ranked ninth with one in every 48 Web surfers at risk, while the UK was 30th with a rate of one in 63.

Mobile banking gathering steam in BRIC countries

Despite concerns over privacy and data security, consumers in Bric countries — Brazil, Russia, India and China — are increasingly using mobile phones for personal banking and retail transactions, according to a recent study by KPMG.

In India, 38 per cent of respondents said they have used mobile phones to shop from retailer’s site, while 43 per cent used it for banking transactions (a significant rise over the previous survey, 8 per cent and 3 per cent, respectively).

This is a global trend too. Globally, the percentage of respondents who have used their mobile devices for banking has more than doubled to 46 per cent from 19 per cent just 18 months ago. The percentage of people who have used a mobile phone to buy goods and services has risen from 10 per cent to 28 per cent.

Jehil Thakkar, executive director of KPMG in India, said, “Of those surveyed in India, 5 per cent of respondents conduct banking through a mobile device almost daily, while 10 per cent do so weekly. As many as 43 per cent of those surveyed said they have done banking through a mobile device at some point. This number is insignificant compared with our previous survey that used the data of 2008. These results clearly indicate that Indian consumers are embracing mobile banking rapidly.”

KPMG covered over 5,600 people across 22 countries for its Fourth Consumers & Convergence Report 2010, an annual survey that examines how consumers use technology.

The report found that respondents from Bric nations have demonstrated greater willingness to pay for both online and mobile content, including content such as news and information, compared with G7 or global users. The survey found they would also consider switching internet-service providers for exclusive content.

Sudden price drop triggers London circuit breakers

Circuit breakers on the London Stock Exchange kicked into action this week, halting trading in five stocks after a suspected 'fat finger' error led to a sudden drop in prices.

The London market operator moved to suspend trading in BT, Hays, Next, Northumbrian Water and United Utilities after wild swings in their stock prices on Tuesday afternoon.

The outbreak of volatility really scared the markets, leading to some talk that a hedge fund had imploded. Trading resumed after the suspended shares were auctioned and none of the stocks closed more than 1.3 pence higher or lower at the end of play.

Market insiders blamed a fat finger error, either from human input or automated trading failure.

Giles Nelson, CTO of Progress Software - a supplier of pre-trade risk systems - blames failings in broker front office controls.

"While it's commendable that the exchange detected and suspended trading in these stocks when the erroneous trades occurred, it should never have reached the exchange in the first place," he says. "You have to ask the question, how on earth did they make it past the member's pre-trade risk system, if such a system was even in place or existed?"