[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Notices]
[Pages 9222-9224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5026]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38329; International Series Release No. 1059; File No.
600-29]
Self-Regulatory Organizations; Cedel Bank, Notice of Filing To
Amend Order Exempting Cedel Bank From Registration as a Clearing Agency
February 24, 1997.
Introduction
On August 31, 1995, Cedel Bank, societe anonyme, Luxembourg
(``Cedel'') \1\ filed with the Securities and Exchange Commission
(``Commission'') an application on Form CA-2 \2\ for exemption from
registration as a clearing agency pursuant to Section 17A of the
Securities Exchange Act of 1934 (``Exchange Act'') \3\ and Rule 17Ab2-1
thereunder.\4\ Notice of Cedel's application was published in the
Federal Register on June 19, 1996.\5\ On February 24, 1997, the
Commission granted Cedel's application for exemption from registration
as a clearing agency to permit Cedel to offer clearance, settlement,
and credit support services to U.S. entities for transactions in
eligible U.S. government securities.\6\ The exemption is subject to
certain conditions and limitations which are set forth in the Cedel
exemption order.
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\1\ Cedel Bank is a wholly-owned subsidiary of Cedel
International. On January 1, 1995, Cedel, which was established in
1970, was converted into Cedel Bank to perform lending, clearing,
and settlement activities, and a parent company, Cedel
International, was created into which Cedel transferred the
nonbanking subsidiaries. Cedel Bank is licensed in Luxembourg both
as a bank and as a ``professionnel du secteur financier'' (``PSF'')
and is under the supervision of the Institute Monetaire
Luxembourgeois (``IML''), Luxembourg's banking and securities
regulatory authority. Cedel International is licensed as a non-bank
PSF and also is under the supervision of the IML. The IML
establishes capital and liquidity requirements, evaluates the
financial condition and performance of all Luxembourg financial
institutions, conducts on-site inspections, and monitors all
financial institutions and their controlling companies for adherence
to Luxembourg laws and regulations. On April 24, 1996, the Federal
Reserve Board granted Cedel's request to establish a representative
office in New York.
\2\ Copies of the application for exemption are available for
inspection and copying at the Commission's Public Reference Room, in
File No. 600-29.
\3\ 15 U.S.C. 78q-1.
\4\ 17 CFR 240.17Ab2-1.
\5\ Securities Exchange Act Release No. 37309 (June 12, 1996),
61 FR 31201 (Notice of filing of application for exemption from
registration as a clearing agency) (``Cedel notice'').
\6\ Securities Exchange Act Release No. 38328 (February 24,
1997), (order approving application for exemption from registration
as a clearing agency) (``Cedel exemption order''). The definition of
``eligible U.S. government securities'' is set forth in Section II
of this notice.
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Contemporaneously with the granting of Cedel's limited exemption
from registration as a clearing agency, the Commission is publishing
this notice to solicit comments from interested persons on the specific
issue of whether Cedel should be permitted, without registering as a
clearing agency, to offer its securities processing and collateral
management services to U.S. entities for U.S. debt and equity
securities in addition to U.S. government securities. The Commission
seeks comment on this issue because the Commission believes that the
provision of clearance, settlement, and collateral management services
by a non-U.S. clearing agency for U.S. entities in U.S. debt and equity
securities raises issues that were not addressed sufficiently in the
Cedel notice or the comments thereto.
II. Description of the Proposal
As more fully described in the Cedel notice and the Cedel exemption
order, Cedel offers to its customers international clearance and
settlement, trade confirmation, securities custody, and securities
lending services.\7\ Cedel also offers to its customers its Global
Credit Support Service (``GCSS'') which is a book-entry, real-time
collateral management service for cross-border securities
collateralization.\8\ In its application for exemption, Cedel requested
that it be permitted to provide clearance and settlement, securities
lending, and GCSS services for transactions involving U.S. securities,
including equity and debt securities.
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\7\ For a more detailed description of Cedel's clearance,
settlement, and credit support services, see the Cedel notice, 61 FR
at 31201-04.
\8\ GCSS became operational on a limited basis on September 30,
1996, with four institutions participating (Bank of America, Banque
Paribas, Dresdner Bank, and Salomon Brothers). Pursuant to the Cedel
exemption order, eligible U.S. government securities can be included
in GCSS. However, the Cedel exemption order does not permit Cedel to
provide securities processing services through GCSS or otherwise for
other U.S. debt or equity securities transactions involving U.S.
entities.
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The comment letters regarding the Cedel notice generally indicated
that the ability to provide clearance, settlement, and collateral
management services for transactions involving U.S. Treasury securities
(``U.S. Treasuries'') appeared to be the most critical element of
Cedel's proposed services. This is especially true for GCSS because
U.S. Treasuries appear to be the preferred securities for use as
collateral in securing international credit obligations. Commenters did
not specifically discuss any unique or additional benefits to be
[[Page 9223]]
derived from permitting Cedel to provide securities processing services
for U.S. equity and debt securities in addition to U.S. Treasuries,
what types of equity and debt securities should be deemed to be ``U.S.
debt and equity securities,'' or how the restrictions and conditions,
such as volume limitations, should be applied with respect to such
securities.
The Cedel exemption order permits Cedel to provide clearance,
settlement, and collateral management services for Fedwire-eligible
U.S. government securities \9\ and mortgage backed pass-through
securities that are guaranteed by the Government National Mortgage
Association (``GNMAs'') \10\ (collectively, ``eligible U.S. government
securities''),\11\ subject to certain limitations and conditions. Among
other things, the Cedel exemption order limits the volume of eligible
U.S. government securities that can be processed through Cedel and
requires Cedel to provide the Commission with certain information to
assist the Commission in ascertaining whether Cedel is in compliance
with the terms of the exemption order, and information relating to the
default or near default of certain Cedel customers or their
affiliates.\12\
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\9\ ``Government securities'' is defined in Section 3(a)(42) of
the Exchange Act, 15 U.S.C. 78c(a)(42). Fedwire is a large-value
transfer system operated cooperatively by the twelve Federal Reserve
Banks that supports the electronic transfer of funds and the
electronic transfer of book-entry securities.
\10\ GNMAs, unlike other mortgage-backed securities such as
those guaranteed by the Federal National Mortgage Association
(``FNMAs'') and the Federal Home Loan Mortgage Association
(``FHLMCs''), are issued in certificated form and therefore cannot
be transferred over Fedwire.
\11\ ``Eligible U.S. government securities'' also includes any
collateralized mortgage obligation (``CMO'') whose underlying
securities are Fedwire-eligible U.S. government securities or GNMA
guaranteed mortgage-backed pass-through securities and which are
depository eligible securities in a U.S. registered clearing agency.
\12\ As more fully described in the Cedel exemption order, for
purposes of the volume limitation, securities ``processed through
Cedel'' means a security that is processed in GCSS, Cedel's
tripartite repo service, Cedel's securities lending program, or
Cedel's clearance and settlement system. The inclusion of the volume
limitation reflects the Commission's determination to take a gradual
approach toward permitting an unregistered, non-U.S. clearing agency
such as Cedel to provide securities processing services to U.S.
market participants. In this regard, the Commission notes that the
eligible U.S. government securities covered by the Cedel exemption
order trade in a market characterized by the highest level of
liquidity.
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III. Proposed Modification of Exemption
A. Introduction
The Commission is further considering Cedel's request to offer its
securities processing and collateral management services to U.S.
entities for U.S. debt and equity securities. Accordingly, the
Commission seeks comment regarding the appropriateness of permitting an
unregistered non-U.S. clearing agency such as Cedel to offer clearance
and settlement and other securities processing services for U.S. debt
and equity securities in transactions involving U.S. entities. If it is
appropriate for a non-U.S. clearing agency to provide such services,
the Commission also seeks comment on the types of U.S. debt and equity
securities which Cedel should be permitted to process for U.S.
entities. Furthermore, the Commission seeks comment on additional
conditions, such as volume limits and the methods by which such limits
should be calculated, that should be included in an exemption order.
1. Appropriateness
The Commission seeks comment on whether an exemption from clearing
agency registration under Section 17A of the Exchange Act is
appropriate for a non-U.S. entity, and Cedel in particular, that
performs clearance, settlement, and credit support services for
transactions in U.S. debt and equity securities involving U.S.
entities. The Commission anticipates that such an entity would
substantially meet the standards established for the registration of
clearing agencies \13\ but cannot fully comply with all of the
registration provisions because of certain organizational, operational,
and jurisdictional differences.
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\13\ Securities Exchange Act Release No. 16900 (June 17, 1980),
45 FR 41920. See also the Cedel exemption order, supra note 6.
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The Commission specifically requests comment on the manner in which
an unregistered non-U.S. clearing agency may be integrated into the
national clearance and settlement system for U.S. equity and debt
securities, and whether such integration would pose any additional or
unique risks to U.S. investors or to the national clearance and
settlement system. In the event a non-U.S. clearing agency may pose
such risks, commenters are invited to discuss risk management controls
that should be required by or for such a clearing agency. The
Commission anticipates that such risk management controls would include
special collateralization requirements, waivers of immunity with regard
to pledged collateral, and submission to the jurisdiction of U.S.
courts for such non-U.S. entity.
2. Types of Classes of Securities
If modification of Cedel's exemption order to include U.S. debt and
equity securities is appropriate, the Commission seeks comment on the
specific types and classes of such securities that may be encompassed
by such an exemption. In particular, the Commission seeks comment as to
factors to be considered in connection with such a determination. For
example, should eligible securities be limited to those registered
pursuant to Section 12 or Section 15(d) of the Exchange Act? Should the
domicile of the issuer be a factor in such a determination? Should an
exemption be limited only to those U.S. debt and equity securities for
which there is a ``ready market'' or satisfy some liquidity standard?
\14\ If so, how should a ready market or such liquidity standard be
defined? \15\ Should covered securities be limited to those that are
depository eligible at a U.S. registered clearing agency and, if so,
should the exemption require an effective linkage between the U.S. and
non-U.S. clearing agencies?
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\14\ See note 12, supra.
\15\ For example, under the Commission's net capital rule, a
ready market is defined to include (i) a recognized established
securities market in which there exists independent bona fide offers
to buy and sell so that a price reasonably related to the last sales
price or current bona fide competitive bid and offer quotations can
be determined for a particular security almost instantaneously and
where payment will be received in settlement of a sale at such price
within a relatively short time conforming to trade custom, or (ii)
where securities have been accepted as collateral for a loan by a
bank as defined in section 3(a)(6) of the Securities Exchange Act of
1934 and where the broker or dealer demonstrates to its examining
authority that such securities adequately secure such loans. 17 CFR
240.15c3-1(c)(11)(i) and (ii).
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3. Volume Limitation and Other Conditions
As discussed in the Cedel exemption order, the Commission believes
that volume limitations on the amount of securities that may be
processed through Cedel are necessary to limit any potential negative
effects on the national clearance and settlement system. Accordingly,
the Commission seeks comment on whether five percent or another
proportion of some defined market would be an appropriate limit with
respect to U.S. debt and equity securities.\16\ The Commission also
seeks
[[Page 9224]]
comment on whether there should be a concentration limit whereby Cedel
would be prohibited from reaching its entire volume limit for U.S. debt
and equity securities by processing transactions involving the U.S.
debt or equity securities of only one or a limited number of issuers.
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\16\ Pursuant to the Cedel exemption order, the average daily
volume of eligible U.S. government securities processed through
Cedel may not exceed 5% of the total average daily dollar value of
the aggregate volume in eligible U.S. government securities. The
total average daily dollar value of eligible U.S. government
securities volume is derived from total daily value of securities
activity through Fedwire, Government Securities Clearing
Corporation, MBS Clearing Corporation, Participants Trust Company,
and any other source that the Division of Market Regulation deems
appropriate to reflect the aggregate volume in eligible U.S.
government securities. Cedel's average daily volume is derived from
the value of eligible U.S. government securities that are processed
through Cedel involving a U.S. counterparty or its affiliate.
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The Commission invites commenters to discuss any other issues that
may arise or restrictions that should be imposed in connection with any
modification of Cedel's exemption order to permit Cedel to offer
securities processing services for U.S. debt and equity securities that
have not been discussed in this notice or adequately addressed in the
Cedel exemption order.
B. Fair Competition
As discussed in the Cedel notice, Section 17A of the Exchange Act
requires the Commission in exercising its authority under that section
to have due regard for the maintenance of fair competition among
clearing agencies.\17\ Therefore, the Commission invites commenters to
address what the likely effect on competition and on the U.S.
securities markets would be if the Commission modifies Cedel's
exemption from registration as a clearing agency to permit Cedel to
process U.S. debt and equity securities transactions involving U.S.
entities.
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\17\ 15 U.S.C. 781q-1(a)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing application by March 31, 1997. Such
written data, views, and arguments will be considered by the Commission
in deciding whether to expand Cedel's exemption from registration to
include processing U.S. debt and equity securities. Persons desiring to
make written submissions should file six copies thereof with the
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Reference should be made to File No. 600-29.
Copies of the application and copying at the Commission's Public
Reference Room 450 Fifth Street, N.W., Washington, D.C. 20549.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(16).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5026 Filed 2-27-97; 8:45 am]
BILLING CODE 8010-01-M
