[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Notices]
[Pages 9225-9233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5027]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38328; International Series Release No. 1058; File No.
600-29]
Self-Regulatory Organizations; Cedel Bank; Order Approving
Application for Exemption From Registration as a Clearing Agency
February 24, 1997.
On August 31, 1995, Cedel Bank, societe anonyme, Luxembourg
(``Cedel'') \1\ filed with the Securities and Exchange Commission
(``Commission'') an application on Form CA-1 \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\ Eleven comment letters were
received in response to the notice of filing of the Cedel
application.\6\ This Order grants 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. and non-U.S.
entities for transactions in U.S. government securities subject to the
conditions and limitations that are set forth below.
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\1\ Cedel, societe anonyme (formerly the Centrale de Livaison de
Valeurs Mobilieres) was established in 1970. On January 1, 1995,
Cedel, societe anonyme 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 a wholly-owned subsidiary of
Cedel International. 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 Institut 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 Bank'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.
\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\ Letters from John H. Huffstutler, Senior Vice President and
Chief Regulatory Counsel, Bank of America National Trust and Savings
Association (July 17, 1996); Guillaume de Beaufort, Administration
Head, Paribas Capital Markets (July 18, 1996); Pierre Vermenouze,
Senior Vice President, Banque et Finance Internationales (July 17,
1996); Thomson Ng, Executive Director of Operations, Fuji
International Finance (HK) Limited (July 18, 1996); John Macfarlane,
Managing Director, Salomon Brothers Inc (July 19, 1996); Monroe R.
Sonnenborn, Managing Director, Morgan Stanley & Co. Incorporated
(July 22, 1996); Jean-Marie Grenet, Operations Head, and Jimmy Hew,
Deputy Operations Head, Paribas Merchant Banking Asia Limited (July
23, 1996); Lo Kit-sang, Manager, Sin Hua Bank Ltd. (July 22, 1996);
Fan Jian Hua, Manager, and Zhu Wen Xiang, Chief Dealer, The
Investment Company of The People's Republic of China (Singapore) Pte
Ltd (July 26, 1996); Gilbert Lee and Richard Yiu Tak Shing, Bannque
Nationale de Paris (July 29, 1996); and Augustine Chua, Deputy
Manager, Rapobank (August 1, 1996) to Jonathan Katz, Secretary,
Commission. These comment letters for File No. 600-29 are available
for inspection and copying in the Commission's Public Reference
Room.
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[[Page 9226]]
I. Description of Cedel's Proposed Services \7\
A. Clearance and Settlement
Cedel currently offers to its customers international clearance
and settlement of securities transactions in primary and secondary
markets, trade confirmation, securities custody, and securities lending
services. Cedel processes fixed income bonds such as Eurobonds,
domestic and convertible bonds, money market instruments, short and
medium term notes, equities, and warrants.
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\7\ A more complete description of Cedel's clearance,
settlement, and credit support services, is contained in the Cedel
Notice supra note 5.
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Cedel provides delivery-versus-payment (``DVP'') settlement for
securities transactions.\8\ DVP settlement is made possible by the
legal environment for securities custody and transfer in Luxembourg.\9\
Liquidity facilities are negotiated with financial institutions to
permit Cedel to extend financing to customers to meet their settlement
requirements in local currencies.\10\
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\8\ In 1995, Cedel settled over US$10 trillion worth of
securities. At that time, over 75,000 instruments were eligible for
settlement in the Cedel system.
\9\ The Luxembourg legal framework provides for the finality of
settlements on Cedel's books and the fungibility of securities
deposited with Cedel.
\10\ To enable it to extend such financing, Cedel maintains a
US$10 billion committed revolving credit facility with a syndicate
of major banks, a US$500 million commercial paper facility and
approximately US$8 billion of uncommitted lines of credit available.
Cedel also has a US$1.8 billion letter of credit guaranteeing
transmissions across the bridge established between Cedel and the
Euroclear System (``Euroclear''). In addition, Cedel can access
uncommitted lines of credit with domestic lenders in each of the
thirty countries where Cedel has established a settlement link to
provide its customers with foreign currency settlement capabilities.
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Cedel's presettlement trade matching service consists of a trade
comparison system that allows customers in both Cedel and Euroclear
\11\ to compare their trade data. Incoming trade data is compared in
one of four daily matching runs. Information on the status of a
transaction is made available to the counterparties ninety minutes
after processing of the trade data for each matching run.
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\11\ Similar to Cedel, Euroclear provides clearance and
settlement services for internationally traded debt and equity
securities. Euroclear is operated under contract with the Euroclear
Clearance System, societe cooperative (``Euroclear Cooperative''),
by Morgan Guaranty Trust Company of New York through its Euroclear
Operations Centre in Brussels. The Euroclear Cooperatives is a
Belgian cooperative corporation whose participants include
international banks, brokers, and other securities professionals.
See infra note 13.
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Cedel operates two securities processing systems, overnight
settlement processing and daytime settlement processing.\12\ Overnight
processing is possible because of the bridge agreement established
between Cedel and Euroclear.\13\ The bridge agreement facilitates the
two-way exchange of counterparty data, enabling both Cedel and
Euroclear to settle overnight and to provide early morning position
statements. With multiple overnight processing, Cedel's customers can
settle trades with Euroclear participants for same day value. Multiple
overnight processing also allows ``chaining'' of securities
transactions in and between Cedel and Euroclear.\14\
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\12\ Daytime and overnight settlement processing are the same
except that securities lending and borrowing services are not
available to customers on an automatic basis in overnight settlement
processing.
\13\ The electronic bridge enables trades to be processed on a
book-entry basis between Cedel and Euroclear rather than by the
physical delivery of securities.
\14\ Cedel's chaining system allows securities to be bought and
sold many times during the day. Cedel's chaining program scans open
transactions until all cash and securities resulting from same-day
settlement are reemployed to settle further transactions of same-day
value. Therefore, back-to-back transfers for equivalent funds may
not create net payment obligations because customers can use
proceeds from sales to settle purchases.
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Each settlement within the overnight and daytime processing systems
is distinguished by whether it is an ``internal'' or ``external''
settlement at Cedel.\15\ Settlement services are performed at Cedel
without notifying or instructing its securities depositories. Funds
transfers necessary to settle transactions may be made to or from an
account maintained at Cedel or to or from one of its correspondent
banks. Because transfers or securities accepted at both Euroclear and
Cedel may be settled and cleared through the bridge, Cedel treats
settlements between customers of Cedel and Euroclear involving such
securities as internal.
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\15\ An internal settlement is the settlement of a transaction
between two Cedel customers where the securities being transferred
are maintained by book-entry at Cedel. An external settlement is the
settlement of a transaction where one of the counterparties to a
transaction is not a Cedel (or Euroclear) customers or where a Cedel
customer is transferring securities that are not maintained by book-
entry at Cedel.
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Transactions for settlement on a given day are matched at Cedel and
are settled if the delivering party has unencumbered securities
sufficient to make delivery \16\ and the receiving party has sufficient
cash and facilities to pay for the securities.\17\ If either condition
is not met, the transaction will fail. If securities are delivered
against uncollected or borrowed funds, a collateral interest is taken
in the receiving participant's securities holding within the system to
secure the creditor.\18\
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\16\ The securities may be owned outright or borrowed.
\17\Acceptable cash and credit facilities for a customer include
cash in its account, pre-advices of funds to be received that day,
and any predetermined borrowing capacity.
\18\ Because Cedel does not interpose itself between
counterparties or otherwise guarantee settlement of securities
transactions in its clearance and settlement system, Cedel believes
its operations are essentially devoid of settlement risk to Cedel
and therefore Cedel does not rely on a clearing fund or the
resources of its customers.
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B. Global Credit Support Service
One of the primary reasons for Cedel's request for exemption from
registration as a clearing agency is the implementation of the Global
Credit Support Service (``GCSS'').\19\ GCSS is a book-entry, real-time
collateral management service for cross-border securities
collateralization. GCSS is intended to enable GSCC customers to reduce
the credit risk associated with their financial exposures to
counterparties by offering an efficient and safe means of monitoring
exposure and by providing credit support for GCSS customers using a
variety of bilateral credit support legal arrangements.\20\ GCSS
functions include the standard functions of an agent, such as exposure
recording, asset valuation and movement, safekeeping, and reporting.
GCSS interposes itself as an operational agent but does not assume any
principal or decision-making role in the event of disputes between
parties.
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\19\ GCSS became operational on September 30, 1996 with four
institutions, including Bank of America, Banque Paribas, Dresdner
Bank, and Salomon Brothers.
\20\ Each GCSS customer can establish the parameters of their
bilateral arrangements, which are captured by GCSS. A pair of GCSS
customers generally will have one agreement although GCSS can
provide for multiple agreements. Each agreement will define such
things as the eligible collateral, haircuts, rehypothecation
authorization, frequency of exposure entry and securities valuation,
and minimum transfer amounts. Eligible collateral can be selected
from any of the securities or currencies accepted by Cedel. GCSS
customers also may establish counterparty-specific eligibility
tables to either restrict or broaden their eligibility criteria and/
or haircuts.
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All cash and securities in GCSS are held in an omnibus account
within the Cedel core clearance and settlement system. Transfers into
and out of GCSS are made by book-entry transfer of securities from a
GCSS customer's account or from a GCSS customer's correspondent account
at Cedel to GCSS's omnibus account at Cedel.\21\
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\21\ There is no requirement that a GCSS customer have an
account at Cedel in order to utilize the services provided by GCSS.
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GCSS customers will inform GCSS of the level of exposure from their
net counterparty positions to be covered by GCSS. This exposure level
will be the
[[Page 9227]]
basis on which GCSS will compute credit support requirements for the
period.\22\ Based on the size of the net exposure and the terms of the
bilateral agreement between two GCSS customers, GCSS moves free of
payment securities and/or cash between the parties' accounts. GCSS
reports to each GCSS customer their available positions (i.e., the
customer's own securities and cash it has in the system that are not in
use), the amounts delivered out, the amounts received, the amounts
``on-transferred,'' \23\ new credit support amounts expected in from
counterparties, and new credit support amounts required.\24\
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\22\ GCSS will operate two main daily processing cycles to
provide credit support and to generate reports. GCSS customers will
select which of the two cycles they will use. The cycle will provide
assessments of existing credit support and required additional
assets which counterparties may satisfy in the next cycle or at the
latest in the same cycle on the next day.
\23\ GCSS customers will indicate in their GCSS agreement
whether they will permit counterparties to reuse assets. If so
permitted, counterparties may then transfer within GCSS the
securities they have received as credit support (``on-transfer'') or
remove the securities from GCSS and enter into repurchase or reverse
repurchase agreements.
\24\ GCSS may notify a GCSS customer of the need to bring more
assets into the system to meet a shortfall in the value of credit
support assets at GCSS. GCSS customers will be able to move assets
to their GCSS account in several ways: by transferring eligible
assets from a clearing and settlement account in Cedel during the
next available Cedel processing cycle, by providing GCSS with a
power of attorney to transfer assets from its clearing and
settlement account at Cedel to its GCSS omnibus account at Cedel, by
entering into a securities borrowing arrangement within a Cedel
clearing and settlement account to obtain a loan of the required
securities, or by moving eligible securities over a cross-border
link into Cedel.
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One of the more important services offered by GCSS allows customers
to reuse the securities held as credit support. For those GCSS
customers permitted by their counterparties to reuse assets, GCSS will
enable ``on-transfer'' of securities. GCSS will track and value assets
subjected to on-transfers and will keep records of the original and all
subsequent transferrers and transferees of the asset. Where on-
transfers are permitted, a position may be subdivided and on-
transferred to multiple counterparites.
U.S. Treasury securities (``U.S. Treasuries'') are the preferred
securities for use as collateral in securing international credit
obligations arising from derivatives activities or otherwise.
Therefore, Cedel believes it is essential that it be able to accept
U.S. Treasuries in GCSS if it is to efficiently facilitate cross-border
collateralization. In part, it is the ``on-transfer'' or
rehypothecation of U.S. government securities by or for U.S. entities
in GCSS that subjects Cedel to the clearing agency registration
requirements of Section 17A.\25\ As a condition of the no-action
position provided to Cedel in 1993, Cedel agreed not to act as an agent
in facilitating repurchase agreements between Cedel customers and
others with regard to U.S. Treasuries and agreed that none of the
collateral services performed by Cedel would be such that the services
could be interpreted as authorizing the purchase and sale of U.S.
Treasuries, including repurchase agreement transactions, by Cedel's
customers or affiliates using Cedel's systems.
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\25\ In 1993, Cedel requested a no-action position from the
Division relating to Cedel's providing clearance, settlement, and
other services to participants in U.S. government securities. The
Division issued a no-action letter to Cedel on September 15, 1993,
stating that the staff of the Division would not recommend to the
Commission that it take enforcement action if Cedel accepts U.S.
Treasury debt securities maintained in book-entry form as collateral
for certain obligations of Cedel's customers without registering as
a clearing agency pursuant to Section 17A of the Exchange Act. The
no-action letter did not extend to clearance and settlement services
for Cedel customers in U.S. government securities. Letter regarding
Cedel S.A. (September 15, 1993).
Under Section 3(a)(23) of the Exchange Act, the term ``clearing
agency'' is defined to mean, among other things, any person, such as
a securities depository, who permits or facilitates the settlement
of securities transactions or the hypothecation or lending of
securities without physical delivery of securities certificates.
Cedel's proposal for the implementation of GCSS places Cedel within
the scope of the activities of a clearing agency because GCSS could
be deemed to permit or facilitate the hypothecation or lending of
U.S. securities in a book-entry environment. However, the activities
of GCSS are not the sole basis for considering Cedel's proposed
activities to be those of a clearing agency. Cedel's proposal, which
originally included the clearance and settlement of all U.S.
securities involving U.S. entities, also places Cedel within the
definition of clearing agency for purposes of Section 17A of the
Exchange Act. Although this Order limits the exemptive relief sought
by Cedel to U.S. government securities and will not include all U.S.
equity and debt securities, the classification of Cedel as a
clearing agency for purposes of Section 17A is not affected.
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C. Securities Lending and Borrowing Services
Under Cedel's lending and borrowing service, all customers are
required to act as principal and Cedel's role is to effect the
transfers for the lending or borrowing transactions by book-entry
movement in the Cedel system and to monitor the associated collateral.
Customers elect to participate as either ``automatic'' \26\ or ``case
by case'' \27\ lenders or borrowers.\28\ A syndicate of banks
guarantees borrower performance and each borrower is required to post
and maintain collateral sufficient to secure the guarantee obligation
of the guarantor syndicate.\29\
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\26\ As either an automatic lender or automatic borrower, a
customer authorizes Cedel to lend or borrow securities upon the
identification of an excess of securities in a lender's account or
an insufficiency in a borrower's account.
Automatic borrowings only may occur when there is an adequate
volume of eligible securities available from a lender participating
in the program and the borrower is eligible to borrow under the
terms of the program.
\27\ Case by case borrowings are handled by Cedel in
chronological sequence of receipt of instructions. As a case by case
lender or as a case by case borrower, a customer is required to
authorize each loan or borrowing.
\28\ Cedel effects loans and borrowings for automatic lenders
and automatic borrowers before it effects loans and borrowings for
case by case lenders and case by case borrowers.
\29\ The collateral, which can be qualifying securities or cash,
is blocked in the borrower's account by Cedel for the benefit of the
guarantors. Cedel monitors the collateral daily to ensure that the
collateral value of the securities or cash is at all times greater
than or equal to the market value of the securities loaned plus an
additional percentage of the market value.
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D. Credit Facilities
Cedel provides four main types of credit facilities to its
customers: pre-advices, technical overdraft facilities (``TOF's''),
tripartite financing arrangements (``TFA's''), and unconfirmed funds
facilities (``UFF''). Customers can obtain short term credit through
the use of pre-advices.\30\ TOFs are short-term financing facilities
used to facilitate clearance of securities transactions against
payment.\31\ Cedel also acts as collateral agent in specifically
negotiated TFAs, which provide longer term financing for
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customers than pre-advices and TOFs.\32\ Use of a customer's UFF to
finance settlements is allowed only at Cedel's discretion. If a
customer's TOF or TFA is insufficient to settle all securities
transactions on its account in a given settlement processing, Cedel may
permit the customer to use its UFF for settlement purposes.\33\
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\30\ Under the pre-advice service, a customer notifies Cedel
that funds will be received in the customer's account on that day or
the next day. On the basis of this pre-advice, Cedel will credit the
amount of funds to the customer's account prior to actual receipt up
to the maximum pre-advice line of credit established for the
customer. During any business day, Cedel will not advance an amount
that exceeds the amount of the line of credit or the collateral
value of qualifying securities held in the customer's account.
\31\ Under the TOF service, Cedel pays the selling customer in
advance of receipt of payment by the purchasing customer. To protect
itself from market and credit risk, Cedel blocks the securities in
the purchasing customer's account to ensure that the purchasing
customer does not remove the securities until it clears its net
debit position. If the purchasing customer fails to clear its net
debit position within forty-eight hours, Cedel can liquidate the
customer's assets to satisfy the net debit position. In addition,
Cedel is granted a lien on all securities and other assets in a
participating customer's account with Cedel pursuant to a TOF
agreement between Cedel and its customer to cover any additional
losses which may be incurred.
\32\ Generally, the TFA is an agreement between three parties,
the borrower (Cedel customer), the lender (the financing bank), and
the collateral agent (Cedel). Cedel may introduce lenders to
borrowers but does not play a substantial role in the negotiations
of TFAs. After a TFA has been negotiated, Cedel acts solely as
collateral agent whereby Cedel determines the adequacy of and
monitors the pledged collateral which is blocked in the borrowing
customer's account with Cedel. Cedel bears no credit exposure with
regard to TFAs.
\33\ A customer's UFF limit is dependent to a large extent upon
the financial standing of the institution. The UFF also must be
collateralized. By blocking collateral against unconfirmed funds,
Cedel believes that it covers the contingent risk that anticipated
funds may not be received. As with TOFs and TFAs, only the actual
amount of credit drawn under the UFF must be collateralized.
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II. Comment Letters
The Commission received eleven comment letters in response to the
notice of filing of the Cedel application.\34\ All were favorable
towards granting Cedel an exemption from registration as a clearing
agency. Each of the commenters discussed the importance of allowing
U.S. Treasuries to be accepted into the Cedel system and the utility of
GCSS in providing an efficient global credit risk management tool for
over-the-counter collateralized derivatives activities. With regard to
Cedel's proposal to offer clearance and settlement services, commenters
pointed to the increased access to U.S. markets and a standardization
of clearance and settlement formats that would be afforded to Cedel's
customers under the exemption. Commenters also favored an exemption
from registration as a means to preserve the existing commercial
relationships that exist among Cedel and its customers under Luxembourg
law.
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\34\ Supra note 6.
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Furthermore, commenters stressed that because U.S. Treasuries are
the dominant and preferred class of collateral for derivatives
transactions, inclusion of these securities in GCSS will increase the
effectiveness and utilization of GCSS,\35\ which in turn could reduce
the exposure associated with under- or non-collateralized derivatives
transactions conducted by U.S. and non-U.S. entities. Commenters
believed that GCSS will solve many of the legal complexities and will
reduce the legal uncertainties associated with cross-border
collateralization. Commenters did not specifically discuss the unique
or additional benefits to be derived from permitting Cedel to provide
securities processing services for U.S. securities other than U.S.
Treasuries.
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\35\ One commenter pointed out that the inclusion of U.S.
Treasuries in Cedel's processing systems would benefit U.S. banks in
their management of derivatives exposure because such banks could
utilize commonly held U.S. Treasuries in GCSS rather than non-U.S.
securities which would have to be purchased by U.S. banks in the
market. Letter from John H. Huffstutler, Senior Vice President and
Chief Regulatory Counsel, Bank of America National Trust and Savings
Association, to Jonathan Katz, Secretary, Commission (July 17,
1996).
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III. Discussion
A. Statutory Standards
Section 17A of the Exchange Act directs the Commission to promote
Congressional objectives to facilitate the development of a national
clearance and settlement system for securities transactions.\36\
Registration of clearing agencies \37\ is a key element of the
regulation of clearing agencies in promoting these statutory
objectives. Before granting registration to a clearing agency, Section
17A(b)(3) of the Exchange Act requires that the Commission make a
number of determinations with respect to the clearing agency's
organization, capacity, and rules.\38\ The Commission has published the
standards applied by its Division of Market Regulation in evaluating
applications for clearing agency registration.\39\ These requirements
are designed to assure the safety and soundness of the clearance and
settlement system.
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\36\ 15 U.S.C. 78q-1. Section 17A(a)(1) provides:
(1) The Congress finds that--
(A) The prompt and accurate clearance and settlement of
securities transactions, including the transfer of record ownership
and the safeguarding of securities and funds related thereto, are
necessary for the protection of investors and persons facilitating
transactions by and acting on behalf of investors.
(B) Inefficient procedures for clearance and settlement impose
unnecessary costs on investors and persons facilitating transactions
by and acting on behalf of investors.
(C) New data processing and communications techniques create the
opportunity for more efficient, effective, and safe procedures for
clearance and settlement.
(D) The linking of all clearance and settlement facilities and
the development of uniform standards and procedures for clearance
and settlement will reduce unnecessary costs and increase the
protection of investors and persons facilitating transactions by and
acting on behalf of investors.
For legislative history concerning Section 17A, see, e.g.,
Report of Senate Comm. on Housing and Urban Affairs, Securities Acts
Amendments of 1975: Report to Accompany S. 249, S. Rep. No. 75, 94th
Cong., 1st Sess. 4 (1975); Conference Comm. Report to Accompany S.
249, Joint Explanatory Statement of Comm. of Conference, H.R. Rep.
No. 229, 94th Cong., 1st Sess., 102 (1975).
\37\ ``Clearing agency'' is defined in Section 3(a)923) of the
Exchange Act. 15 U.S.C. 78c(a)(23).
\38\ 15 U.S.C. 78q-1(b)(3). See also Section 19 of the Exchange
Act, 15 U.S.C. 78s, and Rule 19b-4, 17 CFR 240.19b-4, setting forth
procedural requirements for registration and continuing Commission
oversight of clearing agencies and other self-regulatory
organizations.
\39\ Securities Exchange Act Release No. 16900 (June 17, 1980),
45 FR 41920 (``Standards Release''). See also, Securities Exchange
Act Release No. 20221 (September 23, 1983), 48 FR 45167 (omnibus
order granting registration as clearing agencies to The Depository
Trust Company, Stock Clearing Corporation of Philadelphia, Midwest
Securities Trust Company, The Options Clearing Corporation, Midwest
Clearing Corporation, Pacific Securities Depository, National
Securities Clearing Corporation, and Philadelphia Depository Trust
Company).
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Section 17A(b)(1), moreover, provides that the Commission:
* * * may conditionally or unconditionally exempt any clearing
agency or security or any class of clearing agencies or securities
from any provisions of [Section 17A] or the rules or regulations
thereunder, if the Commission finds that such exemption is
consistent with the public interest, the protection of investors,
and the purposes of [Section 17A], including the prompt and accurate
clearance and settlement of securities transactions and the
safeguarding of securities and funds.\40\
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\40\ 15 U.S.C. 78q-1(b)(1).
The Commission reviews every application for exemption against the
standards for clearing agency registration.\41\
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\41\ The first exemption from clearing agency registration was
granted in 1995. Clearing Corporation for Options and Securities,
Securities Exchange Act Release No. 36573 (December 12, 1995), 60 FR
65076. The Commission has granted temporary registrations that
included exemptions from specific Section 17A statutory requirements
in a manner designed to achieve the statutory goals of Section 17A.
In granting these temporary registrations it was expected that the
subject clearing agencies would eventually apply for permanent
clearing agency registration. See, e.g., Securities Exchange Act
Release No. 25740 (May 24, 1988), 53 FR 19839 (order approving
Government Securities Clearing Corporation's temporary registration
as a clearing agency with a temporary exemption from compliance with
Section 17A(b)(3)(C)).
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B. Evaluation of Cedel's Application for Exemption
The Commission has evaluated Cedel's application and the comments
received under the above standards. In this context, the Commission
recognized that certain organizational, operational, and jurisdictional
differences would prevent Cedel from being able to comply fully with
all of the registration provisions. The evaluation also is made in the
context of the conditions that the Commission will include in the
exception granted in this Order.
1. Safeguarding of Securities and Funds
Sections 17A(b)(3)(A) and (F) of the Exchange Act require a
clearing agency be organized and its rules be designed
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to facilitate the prompt and accurate clearance and settlement of
securities transactions for which it is responsible and to safeguard
securities and funds in its custody or control or for which it is
responsible.\42\ The Commission believes that Cedel substantially
satisfies these standards. Among other things, Cedel has established an
audit committee which provides oversight of Cedel operations, financial
arrangements, and performance, and acts as a link between the external
auditors and the Board of Directors.\43\ Cedel also maintains an
internal audit department that, in conjunction with its external
auditors, maintains an ongoing detailed audit program for Cedel's
operations. Audit reports are issued monthly to appropriate levels of
management with a complete report to the chief executive officer of
Cedel.\44\ The internal audit department is independent of line
functions and its chief audit reports directly to the chief executive
officer of Cedel.
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\42\ 15 U.S.C. 78q-1(b)(3)(A) and (F). Although Cedel does not
have ``rules'' that would be subject to public comment and
Commission review as contemplated by Section 19 of the Exchange Act
for the purposes of governing the relationship between itself and
its customers, Cedal does have various operating agreements which
define the rights and responsibilities of Cedel and its customers.
\43\ Clearing agencies should have an audit committee which
selects or makes recommendations to the Board of Directors of the
clearing agency regarding the selection of the clearing agency's
external auditors. The Cedal audit committee, among other things,
makes such recommendations to the Board of Directors and reviews the
nature and scope of work to be performed by the external auditors
and the results of such work.
\44\ Managers are requested to respond to any irregularities
within two weeks of receipt of the audit report. All responses must
include an action plan. All unresolved audit items are regularly
monitored by internal audit staff until they are closed and
management is required to provide regular updates to internal audit
on the progress of all open items.
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Interal accounting controls for Cedel have been designed to provide
reasonable assurance that at a minimum (i) transactions are executed in
accordance with proper authorization, (ii) transactions are recorded as
necessary to permit the preparation of conforming financial statements
and to maintain accountability for assets, (iii) access to assets or
systems for recording interests in assets is restricted only to those
with specific authorization by Cedel management, and (vi) recorded
asset inventories are compared with actual asset inventories at regular
intervals and appropriate actions are taken with respect to any
differences. The adequacy of internal accounting controls is audited
annually by Cedel's external auditors. In addition, the IML has the
authority to instruct the external auditors to undertake reviews of any
further matters of particular interest.\45\
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\45\ The IML exercised this authority in connection with the
1995 reorganization of Cedel Bank and its parent, Cedel
International.
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a. Organization and Processing Capacity. A clearing agency must be
organized in a manner that effectively establishes operational and
audit controls while fostering director independence.\46\ Cedel's Board
of Directors is kept apprised of Cedel's operations through its audit
committee as well as the chief auditor from the independent internal
audit department.\47\ Together, Cedel's audit committee, internal audit
department and various internal advisory groups provide Cedel's Board
with risk assessment information and are positioned to advise the Board
of the impact that new or expanded services and volume may have on
Cedel's processing capacity. Accordingly, the Commission is satisfied
that Cedel's organizational and processing capacity substantially
satisfies the requirements of the Exchange Act as explained in the
Standards Release because Cedel's internal organizational structure is
reasonably designed to provide the necessary flow of information to its
Board of Directors which should allow the Board to oversee Cedel's
operations and management's performance to assure the operational
capability and integrity of Cedel.
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\46\ Standards Release, supra note 39, 45 FR at 41925-26.
\47\ In addition, Cedel's Credit Advisory Group, Strategic
Advisory Group, and User Advisory Group advise the Cedel Board with
specialized insight into Cedel's operations. The Credit Advisory
Group provides information to the processing of new customers and
the maintenance of appropriate credit standards and controls. The
Strategic Advisory Group assists in developing corporate strategy
and planning. The User Advisory Group provides feedback on Cedel
services and customer ratification important to setting internal
service priorities and assists in new product service and
development.
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b. Financial Reports. According to the Standards Release, clearing
agency participants that have made clearing fund contributions or have
money or securities in the custody or control of a clearing agency
should receive timely, audited annual financial statements. Cedel has
custody of customer funds and securities. Cedel provides customers and
shareholders with annual audited financial statements and company
reports. The financial statements of Cedel and Cedel International, its
parent, are not consolidated and are presented in accordance with
European Union and Luxembourg regulatory requirements for the
preparation of financial statements.\48\
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\48\ These financial statements are required to be provided to
Cedel shareholders and customers pursuant to Luxembourg law. The
Standards Release also states that unaudited quarterly financial
statements should be made available to clearing agency participants
upon request within thirty days following the close of each fiscal
quarter. Cedel has represented to the Commission that under local
custom it is uncommon for Luxembourg companies to prepare unaudited
quarterly financial statements for distribution to shareholders. The
Commission believes that because Cedel will be reporting to its
customers according to local custom and otherwise satisfies the
provisions of the Standards Release that Cedel substantially meets
the requirements of the Exchange Act. Some foreign issuers are
already relieved from certain Exchange Act requirements concerning
the reporting of financial information. Cf. Exchange Act Rules 12g3-
2 [17 CFR 240.12g3-2], 13a-16 [17 CFR 240.13a-16], 15d-16 [17 CFR
240.15d-16] and Form 6-K [17 CFR 249.306] (provisions which exempt
certain foreign issuers from Exchange Act financial reporting
requirements and instead permit such foreign issuers to provide
financial and other information to the Commission in accordance with
the local reporting requirements of their home domicile).
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c. Financial Risk Management. The Standards Release states that a
clearing agency should establish a clearing fund and promulgate rules
to assure an appropriate level of contributions in accordance with,
among other things, the risks to which the clearing agency is subject
for the protection of clearing agency participants and for the national
system for clearance and settlement.\49\
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\49\ Supra note 39, 45 FR at 41929.
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As discussed in Section I.B above, Cedel provides DVP settlement
for securities transactions which are then batched for evening or
morning processing depending upon when they are received. Cedel
utilizes credit facilities to avoid transaction failures but does not
maintain a clearing fund. Cedel does bear risk resulting from pre-
advices that are not subsequently confirmed. Although according to
Cedel the number of pre-advice failures is reportedly low, such
failures could become more prevalent during times of market stress when
the value of collateral supporting Cedel's credit facilities could
decline in excess of the exposure created by the pre-advice failure.
Cedel employs financial risk management mechanisms, including its
capitalization, insurance,\50\ and committed credit facilities,\51\
that substantially reduce the risk of financial loss by participants
and Cedel. Therefore, the Commission believes that Cedel's rules and
procedures and the methods by which Cedel safeguards the financial
security of its clearing
[[Page 9230]]
facilities and GCSS substantially satisfies the requirements of the
Exchange Act.
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\50\ Cedel maintains over US $400 million in insurance to cover
all risks related to its operations and facilities.
\51\ Supra, note 10.
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2. Fair Representation
Section 17A(b)(3)(C) of the Exchange Act requires that the rules of
a clearing agency provide for fair representation of the clearing
agency's shareholders or members and participants in the selection of
the clearing agency's directors and administration of the clearing
agency's affairs. This section contemplates that users of a clearing
agency have a significant voice in the direction of the affairs of the
clearing agency.
Cedel is wholly-owned subsidiary of Cedel International which is a
privately owned entity operated for the benefit of its shareholders.
Cedel's Board of Directors is the same as the Board of Directors of
Cedel International. Shares of Cedel International are held by Cedel
customers and under the Cedel International by-laws no shareholder is
permitted to own more than five percent of Cedel International stock.
Cedel International shareholders elect Board members by casting one
vote for each share held, and the ultimate composition of the Board
must reflect each of the three major time zones serviced by Cedel.\52\
Accordingly, the Commission believes that the method in which Cedel's
directors are selected and the methods utilized for customer
participation adequately meets the requirements of fair representation
under Section 17A(b)(3)(C) of the Exchange Act.
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\52\ According to Cedel's constituency policy for the Board of
Directors, three directors must be selected from North America,
seven from Europe, and three Asia.
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3. Participation Standards
Section 17A(b)(3)(B) of the Exchange Act enumerates certain
categories of persons that a clearing agency's rules must authorize as
potentially eligible for access to clearing agency membership and
services. Section 17A(b)(4)(B) of the Exchange Act contemplates that a
registered clearing agency have financial responsibility, operational
capability, experience, and competency standards that are used to
accept, deny, or condition participation of any participant or any
category of participants enumerated in Section 17A(b)(3)(B), but that
these criteria may not be used to unfairly discriminate among
applicants or participants. In addition, the Exchange Act recognizes
that a clearing agency may discriminate among persons in the admission
to or the use of the clearing agency if such discrimination is based on
standards of financial responsibility, operational capability,
experience, and competence.
Under its current admissions policy, Cedel will accept as customers
financial institutions that are regulated in their home market by a
financial regulatory authority. Such institutions include commercial
and investment banks and broker-dealers, but do not include investment
companies or insurance companies.\53\ Cedel excludes investment
companies and insurance companies because it believes that on an
international level these entities are not subject to regulation
comparable to banks or broker-dealers, and that there is great variance
among nations. However, investment companies, insurance companies and
other market participants are afforded an opportunity to participate in
Cedel through accounts with banks, broker-dealers, or custodians that
are Cedel customers. In addition, under the general terms and
conditions applicable to its customers, Cedel reserves the right to
deny services to any applicant without disclosing the reasons of such
denial to the applicant.
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\53\ Specifically, under current admissions procedures Cedel
would not accept as customers investment companies or insurance
companies regulated by state or federal authorities in the United
States.
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Although Cedel's admissions policy is relatively inclusive, it
would not meet the requirements of Section 17A(b)(3)(B) of the Exchange
Act with regard to participants because the policy does not provide for
membership by all of the enumerated categories of persons. Nevertheless
because commercial and investment banks and broker dealers are eligible
for Cedel membership and because Cedel has accepted a wide range of
customers based upon its standards of financial responsibility,
operational capability, experience, and competence, the Commission is
satisfied that Cedel's participation standards are acceptable in light
of Cedel's business and legal context.
4. Dues, Fees, and Charges
Sections 17A(b)(3) (D) and (E) of the Exchange Act provide for the
equitable allocation of reasonable dues, fees, and other charges among
clearing agency participants and prohibits a clearing agency from
imposing or fixing prices for services rendered by its participants.
Fees charged by Cedel are generally usage-based and are priced in a
competitive environment with other entities that offer international
clearance and settlement services. Cedel does not impose any schedule
of prices or fix rates or other fees for services rendered by its
customers. Accordingly, the Commission is satisfied that the method by
which Cedel provides for the equitable allocation of reasonable dues,
fees, and other charges among its customers and its prohibitions
regarding the fixing of prices of its customers substantially satisfies
the Exchange Act requirements.
5. Capacity To Enforce Rules and To Discipline Participants
Section 17A(b)(3)(A) of the Exchange Act requires that a registered
clearing agency be so arranged and have the capacity to enforce
compliance by its participants with its rules. Furthermore, Sections
17A(b)(3) (G) and (H) require a registered clearing agency to have in
place a system to discipline its participants for violations of its
rules and that the procedures for applying such rules be fair and
equitable.
Cedel is organized as a bank under the laws of Luxembourg and
bilaterally contracts with each of its customers to provide clearance
and settlement and other securities services. Cedel is not a self-
regulatory organization within the meaning of the Exchange Act. In
particular, Cedel does not have any disciplinary authority over its
customers other than the commercial discipline of refusing to provide
services to those customers that fail to satisfy the terms of their
contractual arrangements with Cedel. Cedel contends that a self-
regulatory structure as envisioned under the Exchange Act is
incompatible with its current legal and business structure under
Luxembourg law. Specifically, Cedel believes that it would be compelled
to alter its clearance and settlement arrangements from its present
bilateral contractual agreements with its customers and that such a
change would upset and complicate the existing legal structure of
international cross-border clearance and settlement of securities
transactions. Moreover, Cedel believes any rules it would promulgate as
a self-regulatory entity under U.S. law would have questionable
application in the home markets of Cedel's international customers
outside of the United States.\54\
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\54\ Cedel points out in its application that conflicts of law
and international comity issues would likely arise in connection
with Cedel's operations where U.S. legal and regulatory requirements
differ from those of Luxembourg. This situation could undermine the
certainty of Cedel's operational arrangements with both U.S. and
non-U.S. customers.
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The Commission is sensitive to the myriad of issues which could
arise in connection with requiring Cedel to comply with the self-
regulatory structure and obligations of a registered clearing agency.
Through its review of Cedel's operational arrangements with
[[Page 9231]]
its customers, the Commission is satisfied that the goals of Sections
17A(b)(3) (G) and (H) requiring registered clearing agencies to have in
place a system to discipline its participants for violations of their
rules are substantially fulfilled under Cedel's current structure and
by grant of the exemption. For example, regarding the Exchange Act
requirement that registered clearing agencies assure participant
compliance with the clearing agencies' rules and procedures, Cedel has
a strong financial incentive to have its customers adhere to Cedel's
financial and operational requirements. Additionally, although Cedel
does not have formal disciplinary authority over its customers, it can
influence its customers' activities by its credit extension,
admissions, and termination policies. Furthermore, if Cedel fails to
assure adequate compliance by its customers with Cedel's financial and
operational requirements or if Cedel or its customers operate in a way
that endangers the safety and soundness of U.S. markets or market
participants, the Commission can alter or withdraw Cedel's exemption.
This is analogous to the Commission's authority to sanction registered
clearing agencies for failure to assure compliance with rules of the
clearing agencies.
6. Filing of Proposed Rule Changes
Section 19(b) of the Exchange Act requires registered clearing
agencies to file with the Commission copies of all proposed amendments
or additions to the clearing agencies' rules prior to implementation of
such rule changes.\55\ the Commission is vested with the authority to
approve or disapprove such rule proposals in accordance with Section
19(b) of the Exchange Act, which includes a procedure to solicit public
comment on proposed rule changes. Because Cedel will not be a
registered clearing agency, proposed changes to its structure or
operations will not be subject to the Section 19(b) process.
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\55\ 15 U.S.C. 78s(b)(1).
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The relationship between Cedel and each of its customers is
governed by the General Terms and Conditions Agreement (``Customer
Agreement'') and the Cedel Customer Handbook (``Customer Handbook'').
Cedel must notify the customer in writing of any amendment to the
Customer Agreement and the effective date of the amendment. Customers
have the opportunity to object to the amendment in writing within ten
business days of receipt of the notice of amendment. If a customer does
not object in such a manner, it is deemed to have accepted the
amendment. Similarly, customers also are notified of changes to Cedel's
Customer Handbook ten days prior to the effective date of such changes.
Any objection to a change must be in writing within ten business days
of the receipt of notice and must be brought to the attention of the
Cedel User Group or customer support personnel.
While these procedures are not consistent with the requirements and
obligations of registered clearing agencies as self-regulatory entities
as set forth in the Standards Release and Section 17A of the Exchange
Act, the self-regulatory role is not compatible with Cedel's current
structure. In this context, however, the Commission believes that it is
important that Cedel's customers receive notice of changes to the
Customer Agreement and Customer Handbook, and are provided a procedure
to respond to such changes. Also, as discussed below in Section III.C
of this Order, Cedel will be required to provide the Commission with
current copies of its Customer Handbook and Customer Agreement and to
notify the Commission of any changes thereto.
C. Scope of Exemption
This Order exempts Cedel from registration as a clearing agency
under Section 17A of the Exchange Act subject to conditions which the
Commission believes are necessary and appropriate for Cedel's present
structure and operation.\56\ The Commission believes that such action
is consistent with the Exchange Act objective of promoting the safety
and soundness of the national clearance and settlement system,
including the goals of fostering cooperating and coordination among
persons engaged in the clearance and settlement of securities
transactions, facilitating the prompt and accurate clearance and
settlement of securities transactions, and protecting investors and the
public interest. The limitations in the exemption reflect the
Commission's determination to take a gradual approach toward permitting
an international non-registered clearing agency such as Cedel to
provide securities processing services in U.S. government securities to
U.S. market participants. At the same time, the exemption permits Cedel
to provide clearance, settlement, and collateral management services to
both U.S. and non-U.S. customers.
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\56\ Among other things, foreign sovereignty considerations may
limit the Commission's ability to carry out all of its regulatory
functions outside of the United States. Accordingly, the Commission
notes that it does not possess the same degree of regulatory
authority and control over an exempt non-domestic clearing agency
such as Cedel as the Commission has with respect to a fully
registered clearing agency.
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1. Securities Covered by the Exemption
In its application for exemption, Cedel requested that it be
permitted to provide clearance and settlement, securities lending, and
GCSS services for transactions involving all U.S. securities, including
equity and debt securities.\57\ As the comment letters generally
indicated, the ability to provide clearance, settlement, and collateral
management services for transactions involving U.S. Treasuries appears
to be the most critical element of Cedel's proposed services,
especially GCSS. In addition, at this time Cedel has linkages with U.S.
entities necessary to provide services for transactions involving U.S.
government securities, but has not yet developed the necessary linkages
that would enable it to provide for clearance and settlement of all
U.S. debt and equity securities.
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\57\ The Commission is of the view that the provision of
clearance, settlement, and collateral management services by a
foreign clearing agency for U.S. entities in U.S. debt and equity
securities raises issues that were not addressed sufficiently in the
Cedel Notice. Consequently, commenters may not have focused on these
issues. Therefore, the Commission today is publishing a notice
relating to Cedel's original proposal to solicit comments on the
specific issue as to the appropriate scope of an exemption to permit
Cedel to offer its securities processing and collateral management
services for U.S. debt and equity securities in addition to eligible
U.S. government securities. Securities Exchange Act Release No.
38329 (February 24, 1997).
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Based on these considerations, this Order grants Cedel the
authority to provide clearance, settlement, and collateral management
services for (i) Fedwire-eligible U.S. government securities \58\ and
(ii) mortgage backed pass-through securities that are guaranteed by the
Government National Mortgage Association (``GNMAs'') \59\
(collectively, ``eligible U.S. government securities'').\60\ The
Commission believes that this limitation is necessary and appropriate
because it will facilitate operation of the GCSS system and
[[Page 9232]]
permit Cedel to offer securities processing services for very liquid
U.S. government securities, and will provide Cedel with the opportunity
to request that the exemption be broadened when it develops the
necessary linkages and facilities to provide securities processing
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services for other U.S. securities.
\58\ ``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 by the Federal Reserve Banks that supports
the electronic transfer of funds and the electronic transfer of
book-entry securities.
\59\ 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.
\60\ ``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.
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2. Volume Limits
The Commission is placing a limit on the volume of eligible U.S.
government securities transacted by U.S. entities or their affiliates
processed through Cedel. In the Cedel Notice, the Commission proposed
that the exemption include a fixed volume limit of $30 billion per day
in U.S. securities transacted by U.S. entities or their affiliates
processed through Cedel.\61\ However, based upon the comment letters
and further examination of various methods of calculating transaction
volume, the Commission has determined that a flexible percentage based
formula is more appropriate.\62\
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\61\ A similar approach was adopted by the Commission in
granting an exemption from clearing agency registration to the
Clearing Corporation for Options and Securities (``CCOS''). That
exemptive order contained volume limitations of US$6 billion net
daily settlement for government securities and US$24 billion for
repurchase agreements and reverse repurchase agreements transactions
calculated on an average daily basis over a 90 day period. At that
time, the CCOS volume limits were designed to limit CCOS's activity
to approximately 5% of the average daily dollar value of
transactions in U.S. government securities and of repurchase
agreements and reverse repurchase agreements involving U.S.
government securities. See note 41 supra.
\62\ Two commenters addressed the proposed volume limitations.
One commenter supported the initial conditions proposed by the
Commission but urged that the Commission reassess from time to time
the transaction volume limitations. The commenter believed that this
would allow the Commission the opportunity to monitor the
performance of Cedel while ensuring the appropriateness of the
levels at which those limitations have been set. Letter from Monroe
R. Sonnenborn, Managing Director, Morgan Stanley & Co. Incorporated,
to Jonathan Katz, Secretary, Commission (July 22, 1996). The other
commenter believed that the conditions relating to the volume
limitations and Commission access to information to be ``reasonable
actions by the Commission for achieving its objective of monitoring
the safety and soundness of U.S. securities markets.'' Letter from
John Macfarlane, Managing Director, Salomon Brothers Inc, to
Jonathan Katz, Secretary, Commission (July 19, 1996).
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Specifically, the average daily volume of eligible U.S. government
securities processed through Cedel 63 may not exceed five percent
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 will be determined
semi-annually as the sum of (1) the average daily transaction value of
all Fedwire eligible book-entry transfers originated on Fedwire as
provided to the Commission by the Board of Governors of the Federal
Reserve System, (2) the average daily value of all compared trades,
less the netted value of all such compared trades, in eligible U.S.
government securities as provided to the Commission by the Government
Securities Clearing Corporation, (3) the average daily value of all
compared trades, less the netted value of all such compared trades,
plus the average daily volume of all trade-for-trade transactions
(i.e., trades not included in the netting system), in eligible
government securities as provided by MBS Clearing Corporation, (4) the
average daily gross settlement value in eligible U.S. government
securities as provided to the Commission by the Participants Trust
Company, and (5) the average daily dollar value of compared trades in
eligible U.S. government securities from any other source that the
Division deems appropriate to reflect the aggregate volume in eligible
U.S. government securities.
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\63\ For purposes of the determination of volume limits,
securities ``processed through Cedel'' means a security that is
utilized by GCSS, Cedel's clearance and settlement system, Cedel's
tripartite repo service, or Cedel's securities lending program.
The conditions and restrictions set forth in this Order will not
apply to Cedel for the processing of transactions in eligible U.S.
government securities where both counterparties to the transaction
are not a U.S. customer or an affiliate. However, from the
information to be made available to the Commission from Cedel and
the IML, the Commission expects to receive information regarding all
transactions in U.S. government securities processed by Cedel i.e.,
whether or not a U.S. counterparty is involved) and will examine the
effects such transactions may have on U.S. markets and U.S. market
participants.
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Cedel's average daily volume will be the sum of the following
amounts for the previous twelve months as determined on a rolling
quarterly basis: (1) All settlements, both internal and external,
within Cedel's clearance and settlement system involving a U.S.
customer or its affiliate and eligible U.S. government securities; (2)
each movement of eligible U.S. government securities into the GCSS
system involving a U.S. customer or its affiliate; (3) each delivery of
eligible U.S. government securities involving a U.S. customer or its
affiliate within the GCSS system; and (4) each delivery of eligible
U.S. government securities involving a U.S. customer or its affiliate
out of the GCSS system. In the volume calculation, only the initial
movement of collateral (the ``on-leg'') of such GCSS delivery or
movement will be included; the return of collateral will not.
For purposes of calculating the volume limit and for purposes of
Commission access to information, ``affiliate'' means any Cedel
customer having a relationship with a U.S. entity,\64\ where the U.S.
entity has an arrangement on file at Cedel to prevent a settlement
default or credit default in respect of such customer, or Cedel knows
that the U.S. entity has another arrangement to prevent a settlement
default or credit default with respect to such customer. In addition,
the Commission may specifically designate Cedel customers that will be
deemed affiliates for purposes of calculating Cedel's volume and for
information access.
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\64\ For purposes of this Order, ``U.S. entity'' shall mean (i)
any entity organized under the laws of the United States or any
state or subdivision thereof that is registered or regulated
pursuant to state or federal banking or securities law and shall
include, without limitation, U.S. registered broker-dealers, U.S.
banks (as defined by Section 3(a)(6) of the Exchange Act), and (ii)
foreign branches of U.S. banks or U.S. registered broker-dealers.
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The Commission believes the volume limit is appropriate in that it
is large enough to allow Cedel to conduct effective operations in
processing eligible U.S. government securities transactions involving
U.S. entities or their affiliates, and to allow the Commission to
observe the effects of Cedel's activities on the U.S. government
securities market, but is sufficiently limited so that the safety and
soundness of the U.S. markets should not be materially affected if
Cedel experiences financial or operational difficulties. Either upon
Cedel's request or by its own initiative, the Commission may review
whether the current volume limit should be modified.
3. Commission Access to Information
To facilitate the monitoring of the impact of Cedel's operation
under this exemption, including compliance with the volume limit, this
Order requires Cedel to provide information on a monthly basis
regarding (i) the aggregate volume of eligible U.S. government
securities transacted by U.S. entities or their affiliates that are
processed through Cedel and (ii) the aggregate volume for all Cedel
customers for transactions in eligible U.S. government securities that
are processed through Cedel. Under the exemption, Cedel also is
required to notify the Commission regarding material adverse changes in
any account maintained by Cedel for its customers that are members or
affiliates of members of a U.S. registered clearing agency.\65\ Cedel
also is required to
[[Page 9233]]
respond to a Commission request for information about a U.S. customer
or its affiliate about whom the Commission has financial solvency
concerns.\66\ The exemption also is contingent upon the execution of a
satisfactory unilateral understanding between the Commission and the
IML, Luxembourg's banking and securities regulatory authority, to
facilitate the provision of information by Cedel to the Commission.\67\
In addition to the above information, the Commission will monitor Cedel
through its review of information provided to the IML by Cedel \68\ and
its external auditors.\69\
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\65\ For purposes of the unilateral understanding with the IML
discussed below, the term ``material adverse changes'' refers to a
default in settlement for credit reasons in an account maintained by
a Cedel member, a liquidation of collateral posted by a Cedel member
in an account maintained by Cedel, or a limitation imposed by Cedel
on any credit line of a Cedel member relating to any account
maintained by such member.
\66\ In addition, the Commission will be permitted to observe
Cedel operations and to talk to Cedel personnel on-site if the
Commission so requests.
\67\ Cedel has represented to the Commission that its
obligations to provide information to the Commission pursuant to
this Order is not dependent upon the prior approval of the IML.
\68\ Cedel is required to submit to the IML monthly balance
sheets, foreign exchange position reports, and liquidity ratios.
Cedel also is required to submit quarterly income statements and
reports on large exposures and on the maturity structure of Cedel's
assets and liabilities. See also supra note 1.
\69\ Cedel's external auditors are required, among other things,
to review Cedel's accounting and risk management systems and to
assess the reliability of Cedel's periodic reports to the IML.
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In addition to the foregoing arrangements for access to
information, Cedel will be required to file with the Commission
amendments to its application for exemption on Form CA-1 prior to the
implementation of any change in Cedel's stated policies, practices, or
procedures that makes the information contained in the original Form
CA-1 incomplete or inaccurate in any material respect.\70\ This method
of notifying the Commission of proposed changes at Cedel will assist
the Commission on its overall review and understanding of Cedel and its
operations. In addition, Cedel will be required to notify the
Commission of changes to the Customer Handbook and Customer Agreement
and will provide the Commission with copies of the most current
Customer Agreement and Customer Handbook and any amendments or updates
thereto. Cedel also will provide the Commission with copies of Cedel's
annual report of its external auditor, and any other document relating
to an audit, survey, or consultant's review concerning Cedel's
financial position, operations, or internal control as the Commission
may reasonably request.
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\70\ Cedel will be required to amend its application for any
proposed changes to its stated policies, practices, or
interpretations as that phrase is defined in Rule 19b-4, 17 CFR
240.19b-4.
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4. Modification of Exemption
The Commission may modify by order the terms, scope, or conditions
of Cedel's exemption from registration as a clearing agency if the
Commission determines that such modification is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Exchange Act.\71\
Furthermore, the Commission may limit, suspend, or revoke this
exemption if the Commission finds that Cedel has violated or is unable
to comply with any of the provisions set forth in this Order if such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Exchange Act for the protection of investors and the public
interest.
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\71\ The exemption provided by this Order is based upon
representations by Cedel, facts contained in the Cedel application,
and other information known to the Commission regarding the
substantive aspects of Cedel's proposal (collectively,
``representations and facts''). Any changes in the representations
or facts as presented to the Commission may require a modification
to the exemption. Responsibility for compliance with all applicable
U.S. securities laws rests with Cedel and its customers, as
appropriate. Cedel also is advised that this Order does not exempt
Cedel from the anti-fraud or anti-manipulation provisions of the
Exchange Act or any of the rules promulgated thereunder.
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IV. Conclusion
The Commission finds that Cedel's application for exemption from
registration as a clearing agency meets the standards and requirements
deemed appropriate for such an exemption including those standards set
forth under Section 17A of the Exchange Act.
It is therefore ordered, pursuant to Section 19(a)(1) of the
Exchange Act, that the application for exemption from registration as a
clearing agency filed by Cedel Bank, societe anonyme (File No. 600-29)
be, and hereby is, approved subject to the conditions contained in this
Order.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5027 Filed 2-27-97; 8:45 am]
BILLING CODE 8010-01-M
