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Thursday, 21 August 2014

Memo from Japan regulators: Insider trading is OK

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The FSA doesn’t give a stuff, argues IFR editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

SORRY TO BANG on about the Nomura case again, but sometimes I despair. A lot of people have told me over the years that insider trading in Japan is rife and being caught is seen as a slightly inconvenient occupational hazard. I always took such comments with a pinch of salt, but it’s clear that in light of the penalty handed out to Nomura on Friday, the regulators do indeed turn a blind eye and don’t really give a stuff.

If Nomura group CEO Kenichi Watanabe and COO Takumi Shibata – both Nomura lifers who joined the firm in the mid-1970s – had felt the firm’s flagrant breaches of insider trading laws were serious enough to quit, you’ve got to wonder why the country’s Financial Services Agency didn’t go to town and make an example of the firm in order to create a deterrent for others.

But no: they basically gave a signal that it’s OK to break the law by issuing Nomura with nothing more than a business improvement order – the same as was handed out to SMBC Nikko – an order based on a recommendation from the Securities and Exchange Surveillance Commission.

So to-date, no trading suspensions, no real sanctions. And don’t forget that the firm has admitted that the three insider trading breaches already identified (Mizuho, Inpex and Tepco) are unlikely to be isolated episodes.

In its statement, Nomura feebly pointed to the improvement measures it had already announced on June 29, including strengthening the management of corporate-related information, improving personnel management systems and – this one is a classic – ensuring business ethics. Oh yeah, and new CEO Koji Nagai has committed to rebuild Nomura from the ground up. So that’s OK then.

The business improvement order commits the firm to “thoroughly implement and firmly establish the preventative measures described in the internal investigation report; regularly report the status of the implementation of the preventative measures; and regularly review the effectiveness of the preventative measures and report the findings of the reviews. Oh, and if any inadequacies are identified, to report their causes and improvement plans.

Memo

To:             All financial market participants

From:         Japanese regulators

Carry on breaking the law, do your best to avoid getting caught, but don’t worry; if you do, we won’t do anything to disadvantage you too much.

WAS ANYONE REALLY surprised that ECB president Mario Draghi didn’t open the floodgates on Thursday and commence open-market operations to hoover up Spanish and Italian government bonds? Sometimes, the market can be surprising in its naivety. I’d stood by slightly open-mouthed at the comments coming out of market professionals and at the price action of the past week and a half.

Reactions to the ECB meeting were initially pretty brutal at the long-end, but in saying that the ECB may start buying bonds again but with strict conditionality and on the basis that Spain or Italy would have to formally request assistance, I’m not sure what else Draghi could or should have said, especially with the Bundesbank staring into his back. Ditto his stance on non-standard measures (ie, not neutralising the money it creates to buy bonds aka QE).

New CEO Koji Nagai has committed to rebuild Nomura from the ground up. So that’s OK then

Intervention was never going to come this week or next. And it was never going to come in isolation of the EU rescue apparatus. Nothing that Draghi said contradicted his “we’ll do whatever it takes to preserve the euro” comments. Saying the new bond-buying programme would be different in scope to the old Securities Markets Programme implied he would back up his words with actions. And pointing to a focus on the short end of the curve did cause front yields to remain stable as 10s backed up.

THE CONSENSUS FOR bond buying is September, the same time as an expected cut in the ECB refi rate to 50bp and a potential move to negative rates on deposits. Market commentators moaned that Draghi had simply batted the problem back to the politicians. But, again, he has been consistent in saying governments had to sort their own problems out and that this wasn’t the job of the ECB.

It’s worth noting that neither Mario Monti nor Mariano Rajoy were anything other than totally non-committal at their meeting on whether they would request assistance. The markets should be aiming their angst and frustration at the leaders rather than the ECB.

Synthetic credit markets were broadly wider in early European trading on Friday, although the moves lacked conviction. Ahead of the ECB meeting, the market had traded up on vain expectations that the ECB would kick off its bond-buying straight away.

The iTraxx Main had moved into an intraday tight of 151bp shortly after the ECB press conference began, the tightest since early May. The Crossover had traded down at 595bp, the lowest since the end of March, while the Senior Financials had traded below 240bp for the first time in three months. Using the cover of disappointment at Draghi’s comments, profit-taking forced the market to give back two-thirds of the gains seen since the previous week; Spain 10s were back near 7.4%.

I’m not sure Draghi should necessarily have challenged the might of the markets by saying it was pointless to bet against the euro, but if nothing else he’s just created a wonderful game of chicken. Who am I betting on? For once, I’m keeping my mouth shut.

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