[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