[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Notices]
[Pages 9222-9224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5026]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38329; International Series Release No. 1059; File No. 
600-29]


Self-Regulatory Organizations; Cedel Bank, Notice of Filing To 
Amend Order Exempting Cedel Bank From Registration as a Clearing Agency

February 24, 1997.

Introduction

    On August 31, 1995, Cedel Bank, societe anonyme, Luxembourg 
(``Cedel'') \1\ filed with the Securities and Exchange Commission 
(``Commission'') an application on Form CA-2 \2\ for exemption from 
registration as a clearing agency pursuant to Section 17A of the 
Securities Exchange Act of 1934 (``Exchange Act'') \3\ and Rule 17Ab2-1 
thereunder.\4\ Notice of Cedel's application was published in the 
Federal Register on June 19, 1996.\5\ On February 24, 1997, the 
Commission granted Cedel's application for exemption from registration 
as a clearing agency to permit Cedel to offer clearance, settlement, 
and credit support services to U.S. entities for transactions in 
eligible U.S. government securities.\6\ The exemption is subject to 
certain conditions and limitations which are set forth in the Cedel 
exemption order.
---------------------------------------------------------------------------

    \1\ Cedel Bank is a wholly-owned subsidiary of Cedel 
International. On January 1, 1995, Cedel, which was established in 
1970, was converted into Cedel Bank to perform lending, clearing, 
and settlement activities, and a parent company, Cedel 
International, was created into which Cedel transferred the 
nonbanking subsidiaries. Cedel Bank is licensed in Luxembourg both 
as a bank and as a ``professionnel du secteur financier'' (``PSF'') 
and is under the supervision of the Institute Monetaire 
Luxembourgeois (``IML''), Luxembourg's banking and securities 
regulatory authority. Cedel International is licensed as a non-bank 
PSF and also is under the supervision of the IML. The IML 
establishes capital and liquidity requirements, evaluates the 
financial condition and performance of all Luxembourg financial 
institutions, conducts on-site inspections, and monitors all 
financial institutions and their controlling companies for adherence 
to Luxembourg laws and regulations. On April 24, 1996, the Federal 
Reserve Board granted Cedel's request to establish a representative 
office in New York.
    \2\ Copies of the application for exemption are available for 
inspection and copying at the Commission's Public Reference Room, in 
File No. 600-29.
    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ab2-1.
    \5\ Securities Exchange Act Release No. 37309 (June 12, 1996), 
61 FR 31201 (Notice of filing of application for exemption from 
registration as a clearing agency) (``Cedel notice'').
    \6\ Securities Exchange Act Release No. 38328 (February 24, 
1997), (order approving application for exemption from registration 
as a clearing agency) (``Cedel exemption order''). The definition of 
``eligible U.S. government securities'' is set forth in Section II 
of this notice.
---------------------------------------------------------------------------

    Contemporaneously with the granting of Cedel's limited exemption 
from registration as a clearing agency, the Commission is publishing 
this notice to solicit comments from interested persons on the specific 
issue of whether Cedel should be permitted, without registering as a 
clearing agency, to offer its securities processing and collateral 
management services to U.S. entities for U.S. debt and equity 
securities in addition to U.S. government securities. The Commission 
seeks comment on this issue because the Commission believes that the 
provision of clearance, settlement, and collateral management services 
by a non-U.S. clearing agency for U.S. entities in U.S. debt and equity 
securities raises issues that were not addressed sufficiently in the 
Cedel notice or the comments thereto.

II. Description of the Proposal

    As more fully described in the Cedel notice and the Cedel exemption 
order, Cedel offers to its customers international clearance and 
settlement, trade confirmation, securities custody, and securities 
lending services.\7\ Cedel also offers to its customers its Global 
Credit Support Service (``GCSS'') which is a book-entry, real-time 
collateral management service for cross-border securities 
collateralization.\8\ In its application for exemption, Cedel requested 
that it be permitted to provide clearance and settlement, securities 
lending, and GCSS services for transactions involving U.S. securities, 
including equity and debt securities.
---------------------------------------------------------------------------

    \7\ For a more detailed description of Cedel's clearance, 
settlement, and credit support services, see the Cedel notice, 61 FR 
at 31201-04.
    \8\ GCSS became operational on a limited basis on September 30, 
1996, with four institutions participating (Bank of America, Banque 
Paribas, Dresdner Bank, and Salomon Brothers). Pursuant to the Cedel 
exemption order, eligible U.S. government securities can be included 
in GCSS. However, the Cedel exemption order does not permit Cedel to 
provide securities processing services through GCSS or otherwise for 
other U.S. debt or equity securities transactions involving U.S. 
entities.
---------------------------------------------------------------------------

    The comment letters regarding the Cedel notice generally indicated 
that the ability to provide clearance, settlement, and collateral 
management services for transactions involving U.S. Treasury securities 
(``U.S. Treasuries'') appeared to be the most critical element of 
Cedel's proposed services. This is especially true for GCSS because 
U.S. Treasuries appear to be the preferred securities for use as 
collateral in securing international credit obligations. Commenters did 
not specifically discuss any unique or additional benefits to be

[[Page 9223]]

derived from permitting Cedel to provide securities processing services 
for U.S. equity and debt securities in addition to U.S. Treasuries, 
what types of equity and debt securities should be deemed to be ``U.S. 
debt and equity securities,'' or how the restrictions and conditions, 
such as volume limitations, should be applied with respect to such 
securities.
    The Cedel exemption order permits Cedel to provide clearance, 
settlement, and collateral management services for Fedwire-eligible 
U.S. government securities \9\ and mortgage backed pass-through 
securities that are guaranteed by the Government National Mortgage 
Association (``GNMAs'') \10\ (collectively, ``eligible U.S. government 
securities''),\11\ subject to certain limitations and conditions. Among 
other things, the Cedel exemption order limits the volume of eligible 
U.S. government securities that can be processed through Cedel and 
requires Cedel to provide the Commission with certain information to 
assist the Commission in ascertaining whether Cedel is in compliance 
with the terms of the exemption order, and information relating to the 
default or near default of certain Cedel customers or their 
affiliates.\12\
---------------------------------------------------------------------------

    \9\ ``Government securities'' is defined in Section 3(a)(42) of 
the Exchange Act, 15 U.S.C. 78c(a)(42). Fedwire is a large-value 
transfer system operated cooperatively by the twelve Federal Reserve 
Banks that supports the electronic transfer of funds and the 
electronic transfer of book-entry securities.
    \10\ GNMAs, unlike other mortgage-backed securities such as 
those guaranteed by the Federal National Mortgage Association 
(``FNMAs'') and the Federal Home Loan Mortgage Association 
(``FHLMCs''), are issued in certificated form and therefore cannot 
be transferred over Fedwire.
    \11\ ``Eligible U.S. government securities'' also includes any 
collateralized mortgage obligation (``CMO'') whose underlying 
securities are Fedwire-eligible U.S. government securities or GNMA 
guaranteed mortgage-backed pass-through securities and which are 
depository eligible securities in a U.S. registered clearing agency.
    \12\ As more fully described in the Cedel exemption order, for 
purposes of the volume limitation, securities ``processed through 
Cedel'' means a security that is processed in GCSS, Cedel's 
tripartite repo service, Cedel's securities lending program, or 
Cedel's clearance and settlement system. The inclusion of the volume 
limitation reflects the Commission's determination to take a gradual 
approach toward permitting an unregistered, non-U.S. clearing agency 
such as Cedel to provide securities processing services to U.S. 
market participants. In this regard, the Commission notes that the 
eligible U.S. government securities covered by the Cedel exemption 
order trade in a market characterized by the highest level of 
liquidity.
---------------------------------------------------------------------------

III. Proposed Modification of Exemption

A. Introduction

    The Commission is further considering Cedel's request to offer its 
securities processing and collateral management services to U.S. 
entities for U.S. debt and equity securities. Accordingly, the 
Commission seeks comment regarding the appropriateness of permitting an 
unregistered non-U.S. clearing agency such as Cedel to offer clearance 
and settlement and other securities processing services for U.S. debt 
and equity securities in transactions involving U.S. entities. If it is 
appropriate for a non-U.S. clearing agency to provide such services, 
the Commission also seeks comment on the types of U.S. debt and equity 
securities which Cedel should be permitted to process for U.S. 
entities. Furthermore, the Commission seeks comment on additional 
conditions, such as volume limits and the methods by which such limits 
should be calculated, that should be included in an exemption order.
1. Appropriateness
    The Commission seeks comment on whether an exemption from clearing 
agency registration under Section 17A of the Exchange Act is 
appropriate for a non-U.S. entity, and Cedel in particular, that 
performs clearance, settlement, and credit support services for 
transactions in U.S. debt and equity securities involving U.S. 
entities. The Commission anticipates that such an entity would 
substantially meet the standards established for the registration of 
clearing agencies \13\ but cannot fully comply with all of the 
registration provisions because of certain organizational, operational, 
and jurisdictional differences.
---------------------------------------------------------------------------

    \13\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41920. See also the Cedel exemption order, supra note 6.
---------------------------------------------------------------------------

    The Commission specifically requests comment on the manner in which 
an unregistered non-U.S. clearing agency may be integrated into the 
national clearance and settlement system for U.S. equity and debt 
securities, and whether such integration would pose any additional or 
unique risks to U.S. investors or to the national clearance and 
settlement system. In the event a non-U.S. clearing agency may pose 
such risks, commenters are invited to discuss risk management controls 
that should be required by or for such a clearing agency. The 
Commission anticipates that such risk management controls would include 
special collateralization requirements, waivers of immunity with regard 
to pledged collateral, and submission to the jurisdiction of U.S. 
courts for such non-U.S. entity.
2. Types of Classes of Securities
    If modification of Cedel's exemption order to include U.S. debt and 
equity securities is appropriate, the Commission seeks comment on the 
specific types and classes of such securities that may be encompassed 
by such an exemption. In particular, the Commission seeks comment as to 
factors to be considered in connection with such a determination. For 
example, should eligible securities be limited to those registered 
pursuant to Section 12 or Section 15(d) of the Exchange Act? Should the 
domicile of the issuer be a factor in such a determination? Should an 
exemption be limited only to those U.S. debt and equity securities for 
which there is a ``ready market'' or satisfy some liquidity standard? 
\14\ If so, how should a ready market or such liquidity standard be 
defined? \15\ Should covered securities be limited to those that are 
depository eligible at a U.S. registered clearing agency and, if so, 
should the exemption require an effective linkage between the U.S. and 
non-U.S. clearing agencies?
---------------------------------------------------------------------------

    \14\ See note 12, supra.
    \15\ For example, under the Commission's net capital rule, a 
ready market is defined to include (i) a recognized established 
securities market in which there exists independent bona fide offers 
to buy and sell so that a price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can 
be determined for a particular security almost instantaneously and 
where payment will be received in settlement of a sale at such price 
within a relatively short time conforming to trade custom, or (ii) 
where securities have been accepted as collateral for a loan by a 
bank as defined in section 3(a)(6) of the Securities Exchange Act of 
1934 and where the broker or dealer demonstrates to its examining 
authority that such securities adequately secure such loans. 17 CFR 
240.15c3-1(c)(11)(i) and (ii).
---------------------------------------------------------------------------

3. Volume Limitation and Other Conditions
    As discussed in the Cedel exemption order, the Commission believes 
that volume limitations on the amount of securities that may be 
processed through Cedel are necessary to limit any potential negative 
effects on the national clearance and settlement system. Accordingly, 
the Commission seeks comment on whether five percent or another 
proportion of some defined market would be an appropriate limit with 
respect to U.S. debt and equity securities.\16\ The Commission also 
seeks

[[Page 9224]]

comment on whether there should be a concentration limit whereby Cedel 
would be prohibited from reaching its entire volume limit for U.S. debt 
and equity securities by processing transactions involving the U.S. 
debt or equity securities of only one or a limited number of issuers.
---------------------------------------------------------------------------

    \16\ Pursuant to the Cedel exemption order, the average daily 
volume of eligible U.S. government securities processed through 
Cedel may not exceed 5% of the total average daily dollar value of 
the aggregate volume in eligible U.S. government securities. The 
total average daily dollar value of eligible U.S. government 
securities volume is derived from total daily value of securities 
activity through Fedwire, Government Securities Clearing 
Corporation, MBS Clearing Corporation, Participants Trust Company, 
and any other source that the Division of Market Regulation deems 
appropriate to reflect the aggregate volume in eligible U.S. 
government securities. Cedel's average daily volume is derived from 
the value of eligible U.S. government securities that are processed 
through Cedel involving a U.S. counterparty or its affiliate.
---------------------------------------------------------------------------

    The Commission invites commenters to discuss any other issues that 
may arise or restrictions that should be imposed in connection with any 
modification of Cedel's exemption order to permit Cedel to offer 
securities processing services for U.S. debt and equity securities that 
have not been discussed in this notice or adequately addressed in the 
Cedel exemption order.

B. Fair Competition

    As discussed in the Cedel notice, Section 17A of the Exchange Act 
requires the Commission in exercising its authority under that section 
to have due regard for the maintenance of fair competition among 
clearing agencies.\17\ Therefore, the Commission invites commenters to 
address what the likely effect on competition and on the U.S. 
securities markets would be if the Commission modifies Cedel's 
exemption from registration as a clearing agency to permit Cedel to 
process U.S. debt and equity securities transactions involving U.S. 
entities.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 781q-1(a)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing application by March 31, 1997. Such 
written data, views, and arguments will be considered by the Commission 
in deciding whether to expand Cedel's exemption from registration to 
include processing U.S. debt and equity securities. Persons desiring to 
make written submissions should file six copies thereof with the 
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Reference should be made to File No. 600-29. 
Copies of the application and copying at the Commission's Public 
Reference Room 450 Fifth Street, N.W., Washington, D.C. 20549.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(16).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5026 Filed 2-27-97; 8:45 am]
BILLING CODE 8010-01-M