[Federal Register Volume 61, Number 119 (Wednesday, June 19, 1996)]
[Notices]
[Pages 31201-31207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15575]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37309; International Series Release No. 993; File No.
600-29]
Self-Regulatory Organizations; Cedel Bank; Notice of Filing of
Application for Exemption From Registration as a Clearing Agency
June 12, 1996.
I. 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-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\ Cedel's application includes procedures and guidelines
for its proposed offering of clearance, settlement, and credit support
services for transactions in U.S. securities\5\ conducted by U.S.
entities. The Commission is publishing this notice to solicit comments
from interested persons.
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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 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'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. Sec. 78q-1.
\4\ 17 CFR 240.17Ab2-1.
\5\ The services will cover all types of U.S. equity, debt, and
government securities.
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II. Description of Cedel Operations
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. The securities that Cedel clears are fixed income bonds such
as Eurobonds, domestic and convertible bonds, money market instruments,
short and medium term notes, equities, and warrants.
[[Page 31202]]
From its inception, Cedel has provided delivery-versus-payment
(``DVP'') settlement for securities transactions.\6\ DVP settlement is
made possible by the legal environment for securities custody and
transfer in Luxembourg.\7\ Cedel is not a party to the securities
transactions in its clearance and settlement system.
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\6\ In 1994, Cedel settled over US$7 trillion worth of
securities at an average rate of US$30 billion each business day for
over 2,900 customers. At that time, over 60,000 instruments were
eligible for settlement in the Cedel system.
\7\ The Luxembourg legal framework provides for the finality of
settlements on Cedel's books and the fungibility of securities
deposited with Cedel.
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Liquidity facilities are negotiated with financial institutions to
permit Cedel to extend financing to customers to meet their settlement
requirements in local currencies. To enable it to extend such
financing, Cedel maintains a US$1 billion committed revolving credit
facility with a syndicate of major banks and a US$500 million
commercial paper facility. Cedel also has a US$1.8 billion letter of
credit guaranteeing transmissions across the bridge established between
Cedel and the Euroclear System (``Euroclear'').\8\ Cedel also has
approximately US$8 billion of uncommitted lines of credit available.\9\
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\8\ 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 the Euroclear
Operations Centre in Brussels. The Euroclear Cooperative is a
Belgian cooperative corporation whose participants include
international banks, brokers, and other securities professionals.
See infra note 11 and accompanying text.
\9\ In each of the thirty countries where Cedel has established
a settlement link to provide its customers with foreign currency
settlement capabilities, Cedel can access uncommitted lines of
credit with domestic lenders to facilitate foreign currency
settlement for its customers.
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Cedel's presettlement trade matching service, which has been
available since 1987, consists of a trade comparison system that allows
customers in both Cedel and Euroclear to compare their trade data.
Income 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.
Cedel operates two securities processing systems, overnight
settlement processing and daytime settlement processing.\10\ Overnight
processing is possible because of the most recent bridge agreement
established between Cedel and Euroclear which was implemented in
September 1993.\11\ The new 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.
Under the new bridge, 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.\12\
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\10\ 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.
\11\ 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. Under the terms of the original
bridge agreement, Euroclear was able to clear trades overnight,
having received the necessary data on counterparties from Cedel,
while Cedel had to settle the following day after receiving
counterparty data from Euroclear's overnight processing run. This
created a backlog of settlements for Cedel and a time-lag between
initiation of the delivery of securities and payment for them.
\12\ 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
settlements are reemployed to settle further transactions for same
day value. Therefore, for back-to-back transfers for equivalent
funds, customers may not need to pay because proceeds from sales are
used 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. 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. These 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 of 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. An external settlement is the
settlement of a transaction where one of the counterparties to a
transaction is not a Cedel customer or where a Cedel customer is
transferring securities that are not maintained by book-entry at Cedel.
Cedel also has developed links to accommodate customer settlements
of domestic government and corporate securities. These links are
accounts with domestic clearing agencies or bank custodians which have
access to domestic settlement system.
Transactions for settlement on a given day are matched at Cedal and
are settled if the delivering party has unencumbered securities
sufficient to make delivery \13\ and the receiving party has sufficient
cash and credit facilities to pay for the securities.\14\ 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. Because Cedal is not a party to the
securities transactions in its clearance and settlement system, Cedal
believes its operations are essentially devoid of settlement risk to
Cedel and therefore does not rely on a clearing fund or the resources
of its customers.
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\13\ The securities may be owned outright or borrowed.
\14\ 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.
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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 Cedal's
Customer Handbook ten days prior to the effective date of such
changes.\15\ 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 Cedal User Group or customer support personnel.
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\15\ Changes to the Cedel Customer Handbook are customarily
motivated by evolving market practice and procedure.
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B. Global Credit Support Service
One of the primary reasons for Cedal's request for exemption from
registration as a clearing agency is its proposed implementation of a
Global Credit Support Service (``GCSS'').\16\ GCSS is a book-entry,
real-time collateral management service for cross-border securities
collatealization. GCSS is intended to enable GCSS customers to reduce
the credit risk associated with their financial exposure to
conterparties by offering an efficient and safe means of monitoring
exposures and by
[[Page 31203]]
providing credit support for GCSS customers using a variety of
bilateral credit support legal arrangements. GCSS functions will
include the standard functions of an agent, such as exposure recording,
asset valuation and movement, safekeeping, and reporting. GCSS will
interpose itself as an operational agent but will not assume any
principal or decision-making role in the event of disputes between
parties.
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\16\ Cedel currently is running pilot tests on GCSS with a
limited number of institutions.
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The GCSS Fiduciary Agreement is the basic governing document for
participation in GCSS. Each counterparty will be required to have a
GCSS Fiduciary Agreement with Cedal in order to participate in GCSS.
Between the GCSS customer transferring assets as collateral and Cedal,
the GCSS Fiduciary Agreement will operate as a transfer of ownership of
securities to Cedal upon delivery to GCSS.
Each GCSS customer will establish the parameters of their bilateral
arrangements, which will be 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 in their dealings with
specific counterparties.
GCSS customers also will be able to establish a preference table to
rank in order which assets they would prefer to deliver when a delivery
is necessary and which assets they would prefer to receive in a return
situation. For each bilateral agreement, GCSS customers also will be
able to enter the number of days within which any credit support
shortfall must be covered by a counterparty.
All cash and securities in GCSS will be held in an omnibus account
within the Cedel core clearance and settlement system. Transfers into
and out of GCSS will be 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.\17\
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\17\ 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 will operate two main daily processing cycles to provide
credit support and 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. 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 basis on which GCSS will
compute credit support requirements for the period. Based on the size
of the net exposure and the terms of the bilateral agreement between
two GCSS customers, GCSS will move free of payment securities and/or
cash between the parties' accounts.
GCSS will report to each GCSS customer their available positions
(i.e., the customer's own securities and cash it has in system that are
not in use), the amounts delivered out, the amounts received, the
amounts ``on-transferred,'' \18\ new credit support amounts expected in
from counterparties, and new credit support amounts required.
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\18\ 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
take the securities outside of GCSS and enter into repurchase or
reverse repurchase agreements.
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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.
One of the more important services offered by GCSS allows customers
to reuse the securities held as credit support. As GCSS customers do
not have identical bilateral eligibility criteria, haircuts, and
preference tables, there is an opportunity for GCSS to facilitate the
most efficient use of available customer assets.
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 counterparties.
C. Securities Lending and Borrowing Services
Cedel also proposes to provide its securities lending and borrowing
service to U.S. entities. 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'' or
``case by case'' lenders or borrowers. 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. 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.
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.
Under this service, 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. 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. Borrowers are required to
deposit sufficient additional collateral as appropriate, and Cedel is
authorized to debit accounts of the borrower to the extent required to
maintain the required collateral coverage. Borrowers are expressly
permitted to substitute equivalent collateral for any collateral
previously delivered.
[[Page 31204]]
D. Credit Facilities
Cedel provides four main types of credit facilities to its
customers: pre-advices, technical overdraft facilities, tripartite
financing arrangements, and unconfirmed funds facilities. Customers can
obtain short term credit through the use of pre-advices. Under this
service, a customer will notify Cedel that funds will be credited to
its account on that day or the next day. Cedel will credit funds to the
customer's account on the basis of this pre-advice. A customer must be
previously approved to receive such an advance of funds with approval
based on the customer's paid-in capital. Cedel also establishes a
maximum pre-advice line of credit based on the customer's paid-in
capital and other factors that Cedel deems relevant. 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.
Cedel also can provide to customers a technical overdraft facility
(``TOF''). TOFs are short-term financing facilities used to facilitate
clearance of securities transactions against payment. Under the TOF
service, Cedel pays the selling customer in advance of receipt of
payment by the purchasing customer. Cedel accepts the securities from
the selling customer and delivers them into the purchasing customer's
account. To protect itself from market and credit risk, Cedel then
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 may
liquidate the customer's assets to satisfy the net debit position.\19\
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\19\ Under the TOF agreement between Cedel and its customers,
Cedel is granted a lien on all securities and other assets in a
participating customer's account with Cedel.
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Cedel also will act as collateral agent in specifically negotiated
tripartite financing arrangements (``TFA''), which provide longer term
financing for customers than pre-advices and TOFs. 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.
In addition to pre-advices, TOFs and TFAs, Cedel customers may be
able to use their unconfirmed funds facility (``UFF'') to finance
settlements. Use of a customer's UFF 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. 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
is covering 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.
III. Cedel's Request for Exemption
Cedel states that it operates to reduce the risks related to the
clearance and settlement process and to standardize that process to
facilitate secure and accurate cross-border securities settlement for
the benefit of all market participants. Cedel intends to offer GCSS in
order to provide a flexible and efficient means for counterparties to
agree upon marked-to-market credit exposures and in order to provide
appropriate credit support through securities and cash on deposit with
Cedel. As discussed more specifically below, Cedel believes an
exemption from clearing agency registration is appropriate.
A. Regulatory Comity and Legal Integrity
Cedel believes that deference should be granted to the existing
Luxembourg legal and regulatory framework which governs supervision of
Cedel by the Institut Monetaire Luxembourgeois (``IML'') and all Cedel
obligations to and relations with its customers. Cedel also believes
that Luxembourg law should govern all contractual arrangements with its
customers for clearing and settlement. Cedel believes that altering its
clearing and settlement arrangements from bilateral contractual
arrangements which appoint Cedel as agent and depository under
Luxembourg law to a self-regulatory entity which would require Cedel to
perform a regulatory function under the laws of the United States would
upset and complicate the existing legal structure of international
cross-border clearance and settlement and almost certainly prove
impractical.
B. International Enforceability
As a Luxembourg-based bank which conducts its activities pursuant
to Luxembourg law and serves international markets world-wide, Cedel
believes it is not and cannot become a self-regulatory organization as
required for a registered clearing agency under Section 17A of the
Exchange Act. Any rules promulgated by Cedel would have only
questionable application in the home markets of Cedel's international
customers outside the United States. However, Cedel believes that the
objectives of Section 17A are fulfilled by Cedel's existing structure
and operations. Cedel also believes that the contractual relationships
currently existing between Cedel and its customers, as governed by the
laws of Luxembourg, are effective and enforceable as a matter of
international commercial law.
C. Operational Capacity
Cedel believes it operates its clearing and settlement activities
according to the standards of international best practice and
continually strives to improve the integrity and reliability of its
systems and the quality of services provided to its customers. Because
Cedel is not a monopoly provider of services in any market, it is
subject to commercial and competitive discipline. As such, Cedel
believes that it substantially complies with all Commission standards
for clearing and settlement operations and that no additional benefits
are likely to accrue from the imposition of U.S. regulatory
requirements as a result of the registration of Cedel as a clearing
agency.
Cedel seeks to provide clearing and settlement services for U.S.
securities as it currently provides for the securities in thirty other
domestic markets. As a result, Cedel customers would have a single
interface into the U.S. clearance and settlement system, standardized
message formats, and regional customer support. Cedel believes that
these are all substantial benefits to Cedel customer institutions which
otherwise have no presence in the U.S. investment markets.
D. Public Interest and Protection of Investors
Cedel believes that acceptance of U.S. securities within the Cedel
system would contribute greatly to the secure and efficient cross-
border clearance and settlement of securities transactions and the
establishment of linkages among major national markets. In addition,
Cedel believes that settlement through
[[Page 31205]]
the Cedel system has increasing appeal as broker-dealers, institutional
investors, and custodians place greater emphasis on securities lending,
back-to-back transactions, and financing techniques such as repurchase
agreements and reverse repurchase agreements. As a clearance and
settlement system which conducts multi-currency settlement and which
has links to major domestic markets, Cedel believes it can efficiently
accommodate customer demands for sophisticated transaction processing.
Finally, Cedel believes its existing legal, regulatory, and
operational arrangements for clearance and settlement are rigorous and
well-understood and that uncertainty and confusion could result from
the imposition of U.S. legal and regulatory requirements which
potentially could be in conflict with Cedel's existing legal,
regulatory, and operational arrangements. Cedel believes that an
exemption from registration would preserve the certainty of those
existing arrangements while allowing Cedel to extend the benefits of
settlements in U.S. securities to its customers.
IV. Proposed Exemption
A. Statutory Standards
Section 17A of the Exchange Act directs the Commission to develop a
national clearance and settlement system through, among other things,
the registration and regulation of clearing agencies.\20\ In fostering
the development of a national clearance and settlement system generally
and in overseeing clearing agencies in particular, Section 17A
authorizes and directs the Commission to promote and facilitate certain
goals with due regard for the public interest, the protection of
investors, the safeguarding of securities and funds, and the
maintenance of fair competition among brokers, dealers, clearing
agencies, and transfer agents.\21\ Furthermore, Section 17A, as amended
by the Market Reform Act of 1990, directs the Commission to use its
authority to facilitate the establishment of linked or coordinated
facilities for clearance and settlement of transactions in securities,
securities options, contracts of sale for future delivery and options
thereon, and commodity options.\22\ In addition to the statutory
requirements of Section 17A, the Commission's Division of Market
Regulation (``Division'') has published standards based on Section 17A
for clearing agency registration.\23\
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\20\ 15 U.S.C. 78q-1.
\21\ 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).
\22\ Market Reform Act of 1990, Section 5, amending Section
17A(a)(2) of the Exchange Act, 15 U.S.C. 78q-1 (1990).
\23\ Securities Exchange Act Release No. 16900 (June 17, 1980),
45 FR 41920 (announcement of standards for the registration of
clearing agencies [``Standard Release'']). See, also, Securities
Exchange Act Release No. 20221 (September 23, 1983), 48 FR 45167
(omnibus order granting full 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).
See, also, Section 19 of the Exchange Act, 15 U.S.C. 78s, and
Rule 19b-4, 17 CFR 240.19b-4, setting forth certain procedural
requirements for registration and continuing Commission oversight of
clearing agencies and other self-regulatory organizations.
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Section 17A(b)(1) authorizes the Commission to exempt applicants
from some or all of the requirements of Section 17A if it finds such
exemptions are 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. Recently, the Commission
exercised for the first time its authority to exempt an applicant
entirely from registration as a clearing agency.\24\
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\24\ 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., order approving Government
Securities Clearing Corporation's (``GSCC''), temporary registration
as a clearing agency where the Commission temporarily exempted GSCC
from compliance with Section 17A(b)(3)(C). Securities Exchange Act
Release No. 25740 (May 24, 1988), 53 FR 19839.
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Generally, U.S. Treasuries are the preferred securities for use as
collateral in securing international credit obligations. Therefore,
Cedel believes it is essential that it be able to accept U.S. Treasury
securities in GCSS if it is to efficiently facilitate cross-border
collateralization. In part, it is the ``on-transfer'' of
rehypothecation of U.S. securities for U.S. entities in GCSS which
subjects Cedel to the 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. Treasury
securities 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. Treasury securities,
including repurchase agreement transactions, by Cedel's customers or
affiliates using Cedel's systems. However, under GCSS, all types of
U.S. securities will be accepted and the services provided by GCSS may
be interpreted as facilitating repurchase agreement transactions.
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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
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
includes the clearance and settlement of 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.
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In light of the foregoing, the Commission believes it is
appropriate for applicants requesting exemption from clearing agency
registration to meet standards substantially similar to those required
of registrants under Section 17A in order to assure that the
fundamental goals of the Exchange Act (e.g., safe and sound clearance
and settlement) will not be undermined. Therefore, the Commission
invites commenters to address whether granting Cedel's application for
exemption from clearing agency registration, subject to the specific
conditions which are set forth in detail below, would further the goals
of Section 17A.
B. Conditions
The Commission is proposing to impose two types of conditions on
Cedel in conjunction with the grant of any exemptive relief from
clearing agency registration. The first type will consist of certain
clearing and transactional volume limitations on
[[Page 31206]]
Cedel's processing of U.S. securities transactions involving U.S.
entities. The second type will consist of an arrangement with Cedel and
the IML which will give the Commission access to information necessary
to ascertain whether the volume limitations are being honored and
access to information relating to the default or near default of
certain Cedel customers.
1. Volume Limits
The Commission proposes to place a limit on the transactions in
U.S. securities conducted by U.S. entities that can be processed
through Cedel. This approach was adopted by the Commission in granting
the Clearing Corporation for Options and Securities (``CCOS'') an
exemption from clearing agency registration.\26\ In that exemptive
order, the Commission imposed 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 ninety day period. The CCOS
volume limits were designed to limit CCOS's activity to approximately
five percent or less of the average daily dollar value of transactions
in U.S. Treasuries and of repurchase agreements and reverse repurchase
agreements involving U.S. Treasuries.
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\26\ Supra note 24.
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Cedel has represented to the Commission that it cannot
differentiate between regular way trading and repurchase and reverse
repurchase agreements transactions in its clearance and settlement
system. Therefore, the Commission believes the most feasible volume
limit is an average daily volume of US$30 billion based upon the
aggregate volume for the previous twelve months to be measured each
quarter on a rolling quarterly basis. For purposes of calculating the
average daily volume, the following will be included: (1) All
settlements, both internal and external, within Cedel's clearance and
settlement system \27\ involving a U.S. customer or its affiliate \28\
and U.S. securities; (2) each movement of U.S. securities into the GCSS
system involving a U.S. customer or its affiliate; (3) each delivery of
U.S. securities involving a U.S. customer or its affiliate within the
GCSS system; and (4) each delivery of U.S. securities involving a U.S.
customer or its affiliate out of the GCSS system. However, the
Commission will only count the initial movement of collateral (the
``on-leg'') of each GCSS delivery or movement. The return of collateral
will not be included in the calculation of the volume limit.
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\27\ Supra Section II(A).
\28\ For purposes of calculating the volume limits and for
purposes of Commission access to information, ``affiliate'' shall
mean any entity directly or indirectly controlling, controlled by,
or under common control with a U.S. customer.
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The Commission believes the proposed volume limit is appropriate in
that it is large enough to allow Cedel to commence effecive operations
in clearing and settling U.S. securities transactions involving U.S.
entities and to allow the Commission to observe the effects of Cedel's
activities on the U.S. securities market and is sufficiently limited so
that the safety and soundness of the U.S. markets would not be
materially affected should Cedel experience 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. Cedel will not be permitted to exceed the US$30 billion
volume limit without either having the Commission modify its exemptive
order or registering as a clearing agency.
2. Commission Access to Information
To facilitate the monitoring of compliance with the proposed volume
limits, the proposed exemption would require Cedel to provide
information on a monthly basis regarding aggregate volume for all Cedel
customers for transactions in U.S. securities.\29\ Under the proposed
exemption, Cedel also would be 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. Cedel also would be required to respond to
a Commission request for information about a U.S. customer or its
affiliate about whom the Commission has financial solvency concerns.
The Commission will require a satisfactory Memorandum of Understanding
(``MOU'') with the IML, Luxembourg's banking and securities regulatory
authority, to facilitate the provision of information by Cedel to the
Commission. In addition to the above information, the Commission will
monitor Cedel through its review of information provided to the IML by
Cedel \30\ and its external auditors.\31\
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\29\ In its oversight of Cedel, the Commission does not
anticipate conducting on-site examinations. However, the Commission
understands that it will have the ability to observe Cedel
operations and to talk to Cedel personnel on-site.
\30\ 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.
\31\ Cedel's external auditors are required, among other things,
to review Cedel's accounting and risk management systems and to
assess the reliabiity of Cedel's periodic reports to the IML.
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The Commission seeks comment on the conditions, in particular the
volume limits and information sharing, which would be imposed on Cedel
as a condition of its obtaining an exemption from clearing agency
registration. Specifically, commenters are requested to address the
structure and the appropriate size of such limits. Commenters also are
requested to address the types of information which should be provided
to the Commission to help maintain the safety and soundness of the U.S.
securities markets. In addition, comments are sought on the types of
entities which should be deemed affiliates of members of U.S. clearing
agencies for purposes of the volume limitations and commission access
to information.
C. Fair Competition
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.\32\ Therefore,
the Commission must consider an applicant's likely effect on
competition and on the U.S. securities markets in its review of any
application for registration or exemption from registration as a
clearing agency.
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\32\ 15 U.S.C. 78q-(a)(2).
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Consistent with this approach, the Commission invites commenters to
address whether granting Cedel an exemption from registration would
result in increased competition, including greater access to the U.S.
securities market by foreign clearing agencies. Such competition may
result in the development of improved systems capabilities, new
services, and perhaps lower costs to market participants. The
Commission also invites commenters to address whether the proposal
would impose any burden on competition that is inappropriate under the
Exchange Act.
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing application by July 19, 1996. Such
written data, views, and arguments will be considered by the Commission
in
[[Page 31207]]
deciding whether to grant Cedel's request for exemption from
registration. 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 all
written comments will be available for inspection 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.\33\
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\33\ 17 CFR 200.30-3(a)(16).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-15575 Filed 6-18-96; 8:45 am]
BILLING CODE 8010-01-M