[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Notices]
[Pages 9225-9233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5027]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38328; International Series Release No. 1058; File No. 
600-29]


Self-Regulatory Organizations; Cedel Bank; Order Approving 
Application for Exemption From Registration as a Clearing Agency

February 24, 1997.
    On August 31, 1995, Cedel Bank, societe anonyme, Luxembourg 
(``Cedel'') \1\ filed with the Securities and Exchange Commission 
(``Commission'') an application on Form CA-1 \2\ for exemption from 
registration as a clearing agency pursuant to Section 17A of the 
Securities Exchange Act of 1934 (``Exchange Act'') \3\ and Rule 17Ab2-1 
thereunder.\4\ Notice of Cedel's application was published in the 
Federal Register on June 19, 1996.\5\ Eleven comment letters were 
received in response to the notice of filing of the Cedel 
application.\6\ This Order grants Cedel's application for exemption 
from registration as a clearing agency to permit Cedel to offer 
clearance, settlement, and credit support services to U.S. and non-U.S. 
entities for transactions in U.S. government securities subject to the 
conditions and limitations that are set forth below.
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    \1\ Cedel, societe anonyme (formerly the Centrale de Livaison de 
Valeurs Mobilieres) was established in 1970. On January 1, 1995, 
Cedel, societe anonyme was converted into Cedel Bank to perform 
lending, clearing, and settlement activities, and a parent company, 
Cedel International, was created into which Cedel transferred the 
nonbanking subsidiaries. Cedel Bank is a wholly-owned subsidiary of 
Cedel International. Cedel Bank is licensed in Luxembourg both as a 
bank and as a ``professionnel du secteur financier'' (``PSF'') and 
is under the supervision of the Institut Monetaire Luxembourgeois 
(``IML''), Luxembourg's banking and securities regulatory authority. 
Cedel International is licensed as a non-bank PSF and also is under 
the supervision of the IML. The IML establishes capital and 
liquidity requirements, evaluates the financial condition and 
performance of all Luxembourg financial institutions, conducts on-
site inspections, and monitors all financial institutions and their 
controlling companies for adherence to Luxembourg laws and 
regulations. On April 24, 1996, the Federal Reserve Board granted 
Cedel Bank's request to establish a representative office in New 
York.
    \2\ Copies of the application for exemption are available for 
inspection and copying at the Commission's Public Reference Room.
    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ab2-1.
    \5\ Securities Exchange Act Release No. 37309 (June 12, 1996), 
61 FR 31201 (notice of filing of application for exemption from 
registration as a clearing agency) (``Cedel Notice'').
    \6\ Letters from John H. Huffstutler, Senior Vice President and 
Chief Regulatory Counsel, Bank of America National Trust and Savings 
Association (July 17, 1996); Guillaume de Beaufort, Administration 
Head, Paribas Capital Markets (July 18, 1996); Pierre Vermenouze, 
Senior Vice President, Banque et Finance Internationales (July 17, 
1996); Thomson Ng, Executive Director of Operations, Fuji 
International Finance (HK) Limited (July 18, 1996); John Macfarlane, 
Managing Director, Salomon Brothers Inc (July 19, 1996); Monroe R. 
Sonnenborn, Managing Director, Morgan Stanley & Co. Incorporated 
(July 22, 1996); Jean-Marie Grenet, Operations Head, and Jimmy Hew, 
Deputy Operations Head, Paribas Merchant Banking Asia Limited (July 
23, 1996); Lo Kit-sang, Manager, Sin Hua Bank Ltd. (July 22, 1996); 
Fan Jian Hua, Manager, and Zhu Wen Xiang, Chief Dealer, The 
Investment Company of The People's Republic of China (Singapore) Pte 
Ltd (July 26, 1996); Gilbert Lee and Richard Yiu Tak Shing, Bannque 
Nationale de Paris (July 29, 1996); and Augustine Chua, Deputy 
Manager, Rapobank (August 1, 1996) to Jonathan Katz, Secretary, 
Commission. These comment letters for File No. 600-29 are available 
for inspection and copying in the Commission's Public Reference 
Room.

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[[Page 9226]]

I. Description of Cedel's Proposed Services \7\

A. Clearance and Settlement

    Cedel currently  offers to its customers international clearance 
and settlement of securities transactions in primary and secondary 
markets, trade confirmation, securities custody, and securities lending 
services. Cedel processes fixed income bonds such as Eurobonds, 
domestic and convertible bonds, money market instruments, short and 
medium term notes, equities, and warrants.
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    \7\ A more complete description of Cedel's clearance, 
settlement, and credit support services, is contained in the Cedel 
Notice supra note 5.
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    Cedel provides delivery-versus-payment (``DVP'') settlement for 
securities transactions.\8\ DVP settlement is made possible by the 
legal environment for securities custody and transfer in Luxembourg.\9\ 
Liquidity facilities are negotiated with financial institutions to 
permit Cedel to extend financing to customers to meet their settlement 
requirements in local currencies.\10\
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    \8\ In 1995, Cedel settled over US$10 trillion worth of 
securities. At that time, over 75,000 instruments were eligible for 
settlement in the Cedel system.
    \9\ The Luxembourg legal framework provides for the finality of 
settlements on Cedel's books and the fungibility of securities 
deposited with Cedel.
    \10\ To enable it to extend such financing, Cedel maintains a 
US$10 billion committed revolving credit facility with a syndicate 
of major banks, a US$500 million commercial paper facility and 
approximately US$8 billion of uncommitted lines of credit available. 
Cedel also has a US$1.8 billion letter of credit guaranteeing 
transmissions across the bridge established between Cedel and the 
Euroclear System (``Euroclear''). In addition, Cedel can access 
uncommitted lines of credit with domestic lenders in each of the 
thirty countries where Cedel has established a settlement link to 
provide its customers with foreign currency settlement capabilities.
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    Cedel's presettlement trade matching service consists of a trade 
comparison system that allows customers in both Cedel and Euroclear 
\11\ to compare their trade data. Incoming trade data is compared in 
one of four daily matching runs. Information on the status of a 
transaction is made available to the counterparties ninety minutes 
after processing of the trade data for each matching run.
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    \11\ Similar to Cedel, Euroclear provides clearance and 
settlement services for internationally traded debt and equity 
securities. Euroclear is operated under contract with the Euroclear 
Clearance System, societe cooperative (``Euroclear Cooperative''), 
by Morgan Guaranty Trust Company of New York through its Euroclear 
Operations Centre in Brussels. The Euroclear Cooperatives is a 
Belgian cooperative corporation whose participants include 
international banks, brokers, and other securities professionals. 
See infra note 13.
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    Cedel operates two securities processing systems, overnight 
settlement processing and daytime settlement processing.\12\ Overnight 
processing is possible because of the bridge agreement established 
between Cedel and Euroclear.\13\ The bridge agreement facilitates the 
two-way exchange of counterparty data, enabling both Cedel and 
Euroclear to settle overnight and to provide early morning position 
statements. With multiple overnight processing, Cedel's customers can 
settle trades with Euroclear participants for same day value. Multiple 
overnight processing also allows ``chaining'' of securities 
transactions in and between Cedel and Euroclear.\14\
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    \12\ Daytime and overnight settlement processing are the same 
except that securities lending and borrowing services are not 
available to customers on an automatic basis in overnight settlement 
processing.
    \13\ The electronic bridge enables trades to be processed on a 
book-entry basis between Cedel and Euroclear rather than by the 
physical delivery of securities.
    \14\ Cedel's chaining system allows securities to be bought and 
sold many times during the day. Cedel's chaining program scans open 
transactions until all cash and securities resulting from same-day 
settlement are reemployed to settle further transactions of same-day 
value. Therefore, back-to-back transfers for equivalent funds may 
not create net payment obligations because customers can use 
proceeds from sales to settle purchases.
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    Each settlement within the overnight and daytime processing systems 
is distinguished by whether it is an ``internal'' or ``external'' 
settlement at Cedel.\15\ Settlement services are performed at Cedel 
without notifying or instructing its securities depositories. Funds 
transfers necessary to settle transactions may be made to or from an 
account maintained at Cedel or to or from one of its correspondent 
banks. Because transfers or securities accepted at both Euroclear and 
Cedel may be settled and cleared through the bridge, Cedel treats 
settlements between customers of Cedel and Euroclear involving such 
securities as internal.
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    \15\ An internal settlement is the settlement of a transaction 
between two Cedel customers where the securities being transferred 
are maintained by book-entry at Cedel. An external settlement is the 
settlement of a transaction where one of the counterparties to a 
transaction is not a Cedel (or Euroclear) customers or where a Cedel 
customer is transferring securities that are not maintained by book-
entry at Cedel.
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    Transactions for settlement on a given day are matched at Cedel and 
are settled if the delivering party has unencumbered securities 
sufficient to make delivery \16\ and the receiving party has sufficient 
cash and facilities to pay for the securities.\17\ If either condition 
is not met, the transaction will fail. If securities are delivered 
against uncollected or borrowed funds, a collateral interest is taken 
in the receiving participant's securities holding within the system to 
secure the creditor.\18\
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    \16\ The securities may be owned outright or borrowed.
    \17\Acceptable cash and credit facilities for a customer include 
cash in its account, pre-advices of funds to be received that day, 
and any predetermined borrowing capacity.
    \18\ Because Cedel does not interpose itself between 
counterparties or otherwise guarantee settlement of securities 
transactions in its clearance and settlement system, Cedel believes 
its operations are essentially devoid of settlement risk to Cedel 
and therefore Cedel does not rely on a clearing fund or the 
resources of its customers.
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B. Global Credit Support Service

    One of the primary reasons for Cedel's request for exemption from 
registration as a clearing agency is the implementation of the Global 
Credit Support Service (``GCSS'').\19\ GCSS is a book-entry, real-time 
collateral management service for cross-border securities 
collateralization. GCSS is intended to enable GSCC customers to reduce 
the credit risk associated with their financial exposures to 
counterparties by offering an efficient and safe means of monitoring 
exposure and by providing credit support for GCSS customers using a 
variety of bilateral credit support legal arrangements.\20\ GCSS 
functions include the standard functions of an agent, such as exposure 
recording, asset valuation and movement, safekeeping, and reporting. 
GCSS interposes itself as an operational agent but does not assume any 
principal or decision-making role in the event of disputes between 
parties.
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    \19\ GCSS became operational on September 30, 1996 with four 
institutions, including Bank of America, Banque Paribas, Dresdner 
Bank, and Salomon Brothers.
    \20\ Each GCSS customer can establish the parameters of their 
bilateral arrangements, which are captured by GCSS. A pair of GCSS 
customers generally will have one agreement although GCSS can 
provide for multiple agreements. Each agreement will define such 
things as the eligible collateral, haircuts, rehypothecation 
authorization, frequency of exposure entry and securities valuation, 
and minimum transfer amounts. Eligible collateral can be selected 
from any of the securities or currencies accepted by Cedel. GCSS 
customers also may establish counterparty-specific eligibility 
tables to either restrict or broaden their eligibility criteria and/
or haircuts.
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    All cash and securities in GCSS are held in an omnibus account 
within the Cedel core clearance and settlement system. Transfers into 
and out of GCSS are made by book-entry transfer of securities from a 
GCSS customer's account or from a GCSS customer's correspondent account 
at Cedel to GCSS's omnibus account at Cedel.\21\
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    \21\ There is no requirement that a GCSS customer have an 
account at Cedel in order to utilize the services provided by GCSS.
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    GCSS customers will inform GCSS of the level of exposure from their 
net counterparty positions to be covered by GCSS. This exposure level 
will be the

[[Page 9227]]

basis on which GCSS will compute credit support requirements for the 
period.\22\ Based on the size of the net exposure and the terms of the 
bilateral agreement between two GCSS customers, GCSS moves free of 
payment securities and/or cash between the parties' accounts. GCSS 
reports to each GCSS customer their available positions (i.e., the 
customer's own securities and cash it has in the system that are not in 
use), the amounts delivered out, the amounts received, the amounts 
``on-transferred,'' \23\ new credit support amounts expected in from 
counterparties, and new credit support amounts required.\24\
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    \22\ GCSS will operate two main daily processing cycles to 
provide credit support and to generate reports. GCSS customers will 
select which of the two cycles they will use. The cycle will provide 
assessments of existing credit support and required additional 
assets which counterparties may satisfy in the next cycle or at the 
latest in the same cycle on the next day.
    \23\ GCSS customers will indicate in their GCSS agreement 
whether they will permit counterparties to reuse assets. If so 
permitted, counterparties may then transfer within GCSS the 
securities they have received as credit support (``on-transfer'') or 
remove the securities from GCSS and enter into repurchase or reverse 
repurchase agreements.
    \24\ GCSS may notify a GCSS customer of the need to bring more 
assets into the system to meet a shortfall in the value of credit 
support assets at GCSS. GCSS customers will be able to move assets 
to their GCSS account in several ways: by transferring eligible 
assets from a clearing and settlement account in Cedel during the 
next available Cedel processing cycle, by providing GCSS with a 
power of attorney to transfer assets from its clearing and 
settlement account at Cedel to its GCSS omnibus account at Cedel, by 
entering into a securities borrowing arrangement within a Cedel 
clearing and settlement account to obtain a loan of the required 
securities, or by moving eligible securities over a cross-border 
link into Cedel.
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    One of the more important services offered by GCSS allows customers 
to reuse the securities held as credit support. For those GCSS 
customers permitted by their counterparties to reuse assets, GCSS will 
enable ``on-transfer'' of securities. GCSS will track and value assets 
subjected to on-transfers and will keep records of the original and all 
subsequent transferrers and transferees of the asset. Where on-
transfers are permitted, a position may be subdivided and on-
transferred to multiple counterparites.
    U.S. Treasury securities (``U.S. Treasuries'') are the preferred 
securities for use as collateral in securing international credit 
obligations arising from derivatives activities or otherwise. 
Therefore, Cedel believes it is essential that it be able to accept 
U.S. Treasuries in GCSS if it is to efficiently facilitate cross-border 
collateralization. In part, it is the ``on-transfer'' or 
rehypothecation of U.S. government securities by or for U.S. entities 
in GCSS that subjects Cedel to the clearing agency registration 
requirements of Section 17A.\25\ As a condition of the no-action 
position provided to Cedel in 1993, Cedel agreed not to act as an agent 
in facilitating repurchase agreements between Cedel customers and 
others with regard to U.S. Treasuries and agreed that none of the 
collateral services performed by Cedel would be such that the services 
could be interpreted as authorizing the purchase and sale of U.S. 
Treasuries, including repurchase agreement transactions, by Cedel's 
customers or affiliates using Cedel's systems.
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    \25\ In 1993, Cedel requested a no-action position from the 
Division relating to Cedel's providing clearance, settlement, and 
other services to participants in U.S. government securities. The 
Division issued a no-action letter to Cedel on September 15, 1993, 
stating that the staff of the Division would not recommend to the 
Commission that it take enforcement action if Cedel accepts U.S. 
Treasury debt securities maintained in book-entry form as collateral 
for certain obligations of Cedel's customers without registering as 
a clearing agency pursuant to Section 17A of the Exchange Act. The 
no-action letter did not extend to clearance and settlement services 
for Cedel customers in U.S. government securities. Letter regarding 
Cedel S.A. (September 15, 1993).
    Under Section 3(a)(23) of the Exchange Act, the term ``clearing 
agency'' is defined to mean, among other things, any person, such as 
a securities depository, who permits or facilitates the settlement 
of securities transactions or the hypothecation or lending of 
securities without physical delivery of securities certificates. 
Cedel's proposal for the implementation of GCSS places Cedel within 
the scope of the activities of a clearing agency because GCSS could 
be deemed to permit or facilitate the hypothecation or lending of 
U.S. securities in a book-entry environment. However, the activities 
of GCSS are not the sole basis for considering Cedel's proposed 
activities to be those of a clearing agency. Cedel's proposal, which 
originally included the clearance and settlement of all U.S. 
securities involving U.S. entities, also places Cedel within the 
definition of clearing agency for purposes of Section 17A of the 
Exchange Act. Although this Order limits the exemptive relief sought 
by Cedel to U.S. government securities and will not include all U.S. 
equity and debt securities, the classification of Cedel as a 
clearing agency for purposes of Section 17A is not affected.
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C. Securities Lending and Borrowing Services

    Under Cedel's lending and borrowing service, all customers are 
required to act as principal and Cedel's role is to effect the 
transfers for the lending or borrowing transactions by book-entry 
movement in the Cedel system and to monitor the associated collateral. 
Customers elect to participate as either ``automatic'' \26\ or ``case 
by case'' \27\ lenders or borrowers.\28\ A syndicate of banks 
guarantees borrower performance and each borrower is required to post 
and maintain collateral sufficient to secure the guarantee obligation 
of the guarantor syndicate.\29\
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    \26\ As either an automatic lender or automatic borrower, a 
customer authorizes Cedel to lend or borrow securities upon the 
identification of an excess of securities in a lender's account or 
an insufficiency in a borrower's account.
    Automatic borrowings only may occur when there is an adequate 
volume of eligible securities available from a lender participating 
in the program and the borrower is eligible to borrow under the 
terms of the program.
    \27\ Case by case borrowings are handled by Cedel in 
chronological sequence of receipt of instructions. As a case by case 
lender or as a case by case borrower, a customer is required to 
authorize each loan or borrowing.
    \28\ Cedel effects loans and borrowings for automatic lenders 
and automatic borrowers before it effects loans and borrowings for 
case by case lenders and case by case borrowers.
    \29\ The collateral, which can be qualifying securities or cash, 
is blocked in the borrower's account by Cedel for the benefit of the 
guarantors. Cedel monitors the collateral daily to ensure that the 
collateral value of the securities or cash is at all times greater 
than or equal to the market value of the securities loaned plus an 
additional percentage of the market value.
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D. Credit Facilities

    Cedel provides four main types of credit facilities to its 
customers: pre-advices, technical overdraft facilities (``TOF's''), 
tripartite financing arrangements (``TFA's''), and unconfirmed funds 
facilities (``UFF''). Customers can obtain short term credit through 
the use of pre-advices.\30\ TOFs are short-term financing facilities 
used to facilitate clearance of securities transactions against 
payment.\31\ Cedel also acts as collateral agent in specifically 
negotiated TFAs, which provide longer term financing for

[[Page 9228]]

customers than pre-advices and TOFs.\32\ Use of a customer's UFF to 
finance settlements is allowed only at Cedel's discretion. If a 
customer's TOF or TFA is insufficient to settle all securities 
transactions on its account in a given settlement processing, Cedel may 
permit the customer to use its UFF for settlement purposes.\33\
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    \30\ Under the pre-advice service, a customer notifies Cedel 
that funds will be received in the customer's account on that day or 
the next day. On the basis of this pre-advice, Cedel will credit the 
amount of funds to the customer's account prior to actual receipt up 
to the maximum pre-advice line of credit established for the 
customer. During any business day, Cedel will not advance an amount 
that exceeds the amount of the line of credit or the collateral 
value of qualifying securities held in the customer's account.
    \31\ Under the TOF service, Cedel pays the selling customer in 
advance of receipt of payment by the purchasing customer. To protect 
itself from market and credit risk, Cedel blocks the securities in 
the purchasing customer's account to ensure that the purchasing 
customer does not remove the securities until it clears its net 
debit position. If the purchasing customer fails to clear its net 
debit position within forty-eight hours, Cedel can liquidate the 
customer's assets to satisfy the net debit position. In addition, 
Cedel is granted a lien on all securities and other assets in a 
participating customer's account with Cedel pursuant to a TOF 
agreement between Cedel and its customer to cover any additional 
losses which may be incurred.
    \32\ Generally, the TFA is an agreement between three parties, 
the borrower (Cedel customer), the lender (the financing bank), and 
the collateral agent (Cedel). Cedel may introduce lenders to 
borrowers but does not play a substantial role in the negotiations 
of TFAs. After a TFA has been negotiated, Cedel acts solely as 
collateral agent whereby Cedel determines the adequacy of and 
monitors the pledged collateral which is blocked in the borrowing 
customer's account with Cedel. Cedel bears no credit exposure with 
regard to TFAs.
    \33\ A customer's UFF limit is dependent to a large extent upon 
the financial standing of the institution. The UFF also must be 
collateralized. By blocking collateral against unconfirmed funds, 
Cedel believes that it covers the contingent risk that anticipated 
funds may not be received. As with TOFs and TFAs, only the actual 
amount of credit drawn under the UFF must be collateralized.
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II. Comment Letters

    The Commission received eleven comment letters in response to the 
notice of filing of the Cedel application.\34\ All were favorable 
towards granting Cedel an exemption from registration as a clearing 
agency. Each of the commenters discussed the importance of allowing 
U.S. Treasuries to be accepted into the Cedel system and the utility of 
GCSS in providing an efficient global credit risk management tool for 
over-the-counter collateralized derivatives activities. With regard to 
Cedel's proposal to offer clearance and settlement services, commenters 
pointed to the increased access to U.S. markets and a standardization 
of clearance and settlement formats that would be afforded to Cedel's 
customers under the exemption. Commenters also favored an exemption 
from registration as a means to preserve the existing commercial 
relationships that exist among Cedel and its customers under Luxembourg 
law.
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    \34\ Supra note 6.
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    Furthermore, commenters stressed that because U.S. Treasuries are 
the dominant and preferred class of collateral for derivatives 
transactions, inclusion of these securities in GCSS will increase the 
effectiveness and utilization of GCSS,\35\ which in turn could reduce 
the exposure associated with under- or non-collateralized derivatives 
transactions conducted by U.S. and non-U.S. entities. Commenters 
believed that GCSS will solve many of the legal complexities and will 
reduce the legal uncertainties associated with cross-border 
collateralization. Commenters did not specifically discuss the unique 
or additional benefits to be derived from permitting Cedel to provide 
securities processing services for U.S. securities other than U.S. 
Treasuries.
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    \35\ One commenter pointed out that the inclusion of U.S. 
Treasuries in Cedel's processing systems would benefit U.S. banks in 
their management of derivatives exposure because such banks could 
utilize commonly held U.S. Treasuries in GCSS rather than non-U.S. 
securities which would have to be purchased by U.S. banks in the 
market. Letter from John H. Huffstutler, Senior Vice President and 
Chief Regulatory Counsel, Bank of America National Trust and Savings 
Association, to Jonathan Katz, Secretary, Commission (July 17, 
1996).
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III. Discussion

A. Statutory Standards

    Section 17A of the Exchange Act directs the Commission to promote 
Congressional objectives to facilitate the development of a national 
clearance and settlement system for securities transactions.\36\ 
Registration of clearing agencies \37\ is a key element of the 
regulation of clearing agencies in promoting these statutory 
objectives. Before granting registration to a clearing agency, Section 
17A(b)(3) of the Exchange Act requires that the Commission make a 
number of determinations with respect to the clearing agency's 
organization, capacity, and rules.\38\ The Commission has published the 
standards applied by its Division of Market Regulation in evaluating 
applications for clearing agency registration.\39\ These requirements 
are designed to assure the safety and soundness of the clearance and 
settlement system.
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    \36\ 15 U.S.C. 78q-1. Section 17A(a)(1) provides:
    (1) The Congress finds that--
    (A) The prompt and accurate clearance and settlement of 
securities transactions, including the transfer of record ownership 
and the safeguarding of securities and funds related thereto, are 
necessary for the protection of investors and persons facilitating 
transactions by and acting on behalf of investors.
    (B) Inefficient procedures for clearance and settlement impose 
unnecessary costs on investors and persons facilitating transactions 
by and acting on behalf of investors.
    (C) New data processing and communications techniques create the 
opportunity for more efficient, effective, and safe procedures for 
clearance and settlement.
    (D) The linking of all clearance and settlement facilities and 
the development of uniform standards and procedures for clearance 
and settlement will reduce unnecessary costs and increase the 
protection of investors and persons facilitating transactions by and 
acting on behalf of investors.
    For legislative history concerning Section 17A, see, e.g., 
Report of Senate Comm. on Housing and Urban Affairs, Securities Acts 
Amendments of 1975: Report to Accompany S. 249, S. Rep. No. 75, 94th 
Cong., 1st Sess. 4 (1975); Conference Comm. Report to Accompany S. 
249, Joint Explanatory Statement of Comm. of Conference, H.R. Rep. 
No. 229, 94th Cong., 1st Sess., 102 (1975).
    \37\ ``Clearing agency'' is defined in Section 3(a)923) of the 
Exchange Act. 15 U.S.C. 78c(a)(23).
    \38\ 15 U.S.C. 78q-1(b)(3). See also Section 19 of the Exchange 
Act, 15 U.S.C. 78s, and Rule 19b-4, 17 CFR 240.19b-4, setting forth 
procedural requirements for registration and continuing Commission 
oversight of clearing agencies and other self-regulatory 
organizations.
    \39\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41920 (``Standards Release''). See also, Securities Exchange 
Act Release No. 20221 (September 23, 1983), 48 FR 45167 (omnibus 
order granting registration as clearing agencies to The Depository 
Trust Company, Stock Clearing Corporation of Philadelphia, Midwest 
Securities Trust Company, The Options Clearing Corporation, Midwest 
Clearing Corporation, Pacific Securities Depository, National 
Securities Clearing Corporation, and Philadelphia Depository Trust 
Company).
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    Section 17A(b)(1), moreover, provides that the Commission:

    * * * may conditionally or unconditionally exempt any clearing 
agency or security or any class of clearing agencies or securities 
from any provisions of [Section 17A] or the rules or regulations 
thereunder, if the Commission finds that such exemption is 
consistent with the public interest, the protection of investors, 
and the purposes of [Section 17A], including the prompt and accurate 
clearance and settlement of securities transactions and the 
safeguarding of securities and funds.\40\
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    \40\ 15 U.S.C. 78q-1(b)(1).

    The Commission reviews every application for exemption against the 
standards for clearing agency registration.\41\
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    \41\ The first exemption from clearing agency registration was 
granted in 1995. Clearing Corporation for Options and Securities, 
Securities Exchange Act Release No. 36573 (December 12, 1995), 60 FR 
65076. The Commission has granted temporary registrations that 
included exemptions from specific Section 17A statutory requirements 
in a manner designed to achieve the statutory goals of Section 17A. 
In granting these temporary registrations it was expected that the 
subject clearing agencies would eventually apply for permanent 
clearing agency registration. See, e.g., Securities Exchange Act 
Release No. 25740 (May 24, 1988), 53 FR 19839 (order approving 
Government Securities Clearing Corporation's temporary registration 
as a clearing agency with a temporary exemption from compliance with 
Section 17A(b)(3)(C)).
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B. Evaluation of Cedel's Application for Exemption

    The Commission has evaluated Cedel's application and the comments 
received under the above standards. In this context, the Commission 
recognized that certain organizational, operational, and jurisdictional 
differences would prevent Cedel from being able to comply fully with 
all of the registration provisions. The evaluation also is made in the 
context of the conditions that the Commission will include in the 
exception granted in this Order.
1. Safeguarding of Securities and Funds
    Sections 17A(b)(3)(A) and (F) of the Exchange Act require a 
clearing agency be organized and its rules be designed

[[Page 9229]]

to facilitate the prompt and accurate clearance and settlement of 
securities transactions for which it is responsible and to safeguard 
securities and funds in its custody or control or for which it is 
responsible.\42\ The Commission believes that Cedel substantially 
satisfies these standards. Among other things, Cedel has established an 
audit committee which provides oversight of Cedel operations, financial 
arrangements, and performance, and acts as a link between the external 
auditors and the Board of Directors.\43\ Cedel also maintains an 
internal audit department that, in conjunction with its external 
auditors, maintains an ongoing detailed audit program for Cedel's 
operations. Audit reports are issued monthly to appropriate levels of 
management with a complete report to the chief executive officer of 
Cedel.\44\ The internal audit department is independent of line 
functions and its chief audit reports directly to the chief executive 
officer of Cedel.
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    \42\ 15 U.S.C. 78q-1(b)(3)(A) and (F). Although Cedel does not 
have ``rules'' that would be subject to public comment and 
Commission review as contemplated by Section 19 of the Exchange Act 
for the purposes of governing the relationship between itself and 
its customers, Cedal does have various operating agreements which 
define the rights and responsibilities of Cedel and its customers.
    \43\ Clearing agencies should have an audit committee which 
selects or makes recommendations to the Board of Directors of the 
clearing agency regarding the selection of the clearing agency's 
external auditors. The Cedal audit committee, among other things, 
makes such recommendations to the Board of Directors and reviews the 
nature and scope of work to be performed by the external auditors 
and the results of such work.
    \44\ Managers are requested to respond to any irregularities 
within two weeks of receipt of the audit report. All responses must 
include an action plan. All unresolved audit items are regularly 
monitored by internal audit staff until they are closed and 
management is required to provide regular updates to internal audit 
on the progress of all open items.
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    Interal accounting controls for Cedel have been designed to provide 
reasonable assurance that at a minimum (i) transactions are executed in 
accordance with proper authorization, (ii) transactions are recorded as 
necessary to permit the preparation of conforming financial statements 
and to maintain accountability for assets, (iii) access to assets or 
systems for recording interests in assets is restricted only to those 
with specific authorization by Cedel management, and (vi) recorded 
asset inventories are compared with actual asset inventories at regular 
intervals and appropriate actions are taken with respect to any 
differences. The adequacy of internal accounting controls is audited 
annually by Cedel's external auditors. In addition, the IML has the 
authority to instruct the external auditors to undertake reviews of any 
further matters of particular interest.\45\
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    \45\ The IML exercised this authority in connection with the 
1995 reorganization of Cedel Bank and its parent, Cedel 
International.
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    a. Organization and Processing Capacity. A clearing agency must be 
organized in a manner that effectively establishes operational and 
audit controls while fostering director independence.\46\ Cedel's Board 
of Directors is kept apprised of Cedel's operations through its audit 
committee as well as the chief auditor from the independent internal 
audit department.\47\ Together, Cedel's audit committee, internal audit 
department and various internal advisory groups provide Cedel's Board 
with risk assessment information and are positioned to advise the Board 
of the impact that new or expanded services and volume may have on 
Cedel's processing capacity. Accordingly, the Commission is satisfied 
that Cedel's organizational and processing capacity substantially 
satisfies the requirements of the Exchange Act as explained in the 
Standards Release because Cedel's internal organizational structure is 
reasonably designed to provide the necessary flow of information to its 
Board of Directors which should allow the Board to oversee Cedel's 
operations and management's performance to assure the operational 
capability and integrity of Cedel.
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    \46\ Standards Release, supra note 39, 45 FR at 41925-26.
    \47\ In addition, Cedel's Credit Advisory Group, Strategic 
Advisory Group, and User Advisory Group advise the Cedel Board with 
specialized insight into Cedel's operations. The Credit Advisory 
Group provides information to the processing of new customers and 
the maintenance of appropriate credit standards and controls. The 
Strategic Advisory Group assists in developing corporate strategy 
and planning. The User Advisory Group provides feedback on Cedel 
services and customer ratification important to setting internal 
service priorities and assists in new product service and 
development.
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    b. Financial Reports. According to the Standards Release, clearing 
agency participants that have made clearing fund contributions or have 
money or securities in the custody or control of a clearing agency 
should receive timely, audited annual financial statements. Cedel has 
custody of customer funds and securities. Cedel provides customers and 
shareholders with annual audited financial statements and company 
reports. The financial statements of Cedel and Cedel International, its 
parent, are not consolidated and are presented in accordance with 
European Union and Luxembourg regulatory requirements for the 
preparation of financial statements.\48\
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    \48\ These financial statements are required to be provided to 
Cedel shareholders and customers pursuant to Luxembourg law. The 
Standards Release also states that unaudited quarterly financial 
statements should be made available to clearing agency participants 
upon request within thirty days following the close of each fiscal 
quarter. Cedel has represented to the Commission that under local 
custom it is uncommon for Luxembourg companies to prepare unaudited 
quarterly financial statements for distribution to shareholders. The 
Commission believes that because Cedel will be reporting to its 
customers according to local custom and otherwise satisfies the 
provisions of the Standards Release that Cedel substantially meets 
the requirements of the Exchange Act. Some foreign issuers are 
already relieved from certain Exchange Act requirements concerning 
the reporting of financial information. Cf. Exchange Act Rules 12g3-
2 [17 CFR 240.12g3-2], 13a-16 [17 CFR 240.13a-16], 15d-16 [17 CFR 
240.15d-16] and Form 6-K [17 CFR 249.306] (provisions which exempt 
certain foreign issuers from Exchange Act financial reporting 
requirements and instead permit such foreign issuers to provide 
financial and other information to the Commission in accordance with 
the local reporting requirements of their home domicile).
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    c. Financial Risk Management. The Standards Release states that a 
clearing agency should establish a clearing fund and promulgate rules 
to assure an appropriate level of contributions in accordance with, 
among other things, the risks to which the clearing agency is subject 
for the protection of clearing agency participants and for the national 
system for clearance and settlement.\49\
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    \49\ Supra note 39, 45 FR at 41929.
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    As discussed in Section I.B above, Cedel provides DVP settlement 
for securities transactions which are then batched for evening or 
morning processing depending upon when they are received. Cedel 
utilizes credit facilities to avoid transaction failures but does not 
maintain a clearing fund. Cedel does bear risk resulting from pre-
advices that are not subsequently confirmed. Although according to 
Cedel the number of pre-advice failures is reportedly low, such 
failures could become more prevalent during times of market stress when 
the value of collateral supporting Cedel's credit facilities could 
decline in excess of the exposure created by the pre-advice failure.
    Cedel employs financial risk management mechanisms, including its 
capitalization, insurance,\50\ and committed credit facilities,\51\ 
that substantially reduce the risk of financial loss by participants 
and Cedel. Therefore, the Commission believes that Cedel's rules and 
procedures and the methods by which Cedel safeguards the financial 
security of its clearing

[[Page 9230]]

facilities and GCSS substantially satisfies the requirements of the 
Exchange Act.
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    \50\ Cedel maintains over US $400 million in insurance to cover 
all risks related to its operations and facilities.
    \51\ Supra, note 10.
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2. Fair Representation
    Section 17A(b)(3)(C) of the Exchange Act requires that the rules of 
a clearing agency provide for fair representation of the clearing 
agency's shareholders or members and participants in the selection of 
the clearing agency's directors and administration of the clearing 
agency's affairs. This section contemplates that users of a clearing 
agency have a significant voice in the direction of the affairs of the 
clearing agency.
    Cedel is wholly-owned subsidiary of Cedel International which is a 
privately owned entity operated for the benefit of its shareholders. 
Cedel's Board of Directors is the same as the Board of Directors of 
Cedel International. Shares of Cedel International are held by Cedel 
customers and under the Cedel International by-laws no shareholder is 
permitted to own more than five percent of Cedel International stock. 
Cedel International shareholders elect Board members by casting one 
vote for each share held, and the ultimate composition of the Board 
must reflect each of the three major time zones serviced by Cedel.\52\ 
Accordingly, the Commission believes that the method in which Cedel's 
directors are selected and the methods utilized for customer 
participation adequately meets the requirements of fair representation 
under Section 17A(b)(3)(C) of the Exchange Act.
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    \52\ According to Cedel's constituency policy for the Board of 
Directors, three directors must be selected from North America, 
seven from Europe, and three Asia.
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3. Participation Standards
    Section 17A(b)(3)(B) of the Exchange Act enumerates certain 
categories of persons that a clearing agency's rules must authorize as 
potentially eligible for access to clearing agency membership and 
services. Section 17A(b)(4)(B) of the Exchange Act contemplates that a 
registered clearing agency have financial responsibility, operational 
capability, experience, and competency standards that are used to 
accept, deny, or condition participation of any participant or any 
category of participants enumerated in Section 17A(b)(3)(B), but that 
these criteria may not be used to unfairly discriminate among 
applicants or participants. In addition, the Exchange Act recognizes 
that a clearing agency may discriminate among persons in the admission 
to or the use of the clearing agency if such discrimination is based on 
standards of financial responsibility, operational capability, 
experience, and competence.
    Under its current admissions policy, Cedel will accept as customers 
financial institutions that are regulated in their home market by a 
financial regulatory authority. Such institutions include commercial 
and investment banks and broker-dealers, but do not include investment 
companies or insurance companies.\53\ Cedel excludes investment 
companies and insurance companies because it believes that on an 
international level these entities are not subject to regulation 
comparable to banks or broker-dealers, and that there is great variance 
among nations. However, investment companies, insurance companies and 
other market participants are afforded an opportunity to participate in 
Cedel through accounts with banks, broker-dealers, or custodians that 
are Cedel customers. In addition, under the general terms and 
conditions applicable to its customers, Cedel reserves the right to 
deny services to any applicant without disclosing the reasons of such 
denial to the applicant.
---------------------------------------------------------------------------

    \53\ Specifically, under current admissions procedures Cedel 
would not accept as customers investment companies or insurance 
companies regulated by state or federal authorities in the United 
States.
---------------------------------------------------------------------------

    Although Cedel's admissions policy is relatively inclusive, it 
would not meet the requirements of Section 17A(b)(3)(B) of the Exchange 
Act with regard to participants because the policy does not provide for 
membership by all of the enumerated categories of persons. Nevertheless 
because commercial and investment banks and broker dealers are eligible 
for Cedel membership and because Cedel has accepted a wide range of 
customers based upon its standards of financial responsibility, 
operational capability, experience, and competence, the Commission is 
satisfied that Cedel's participation standards are acceptable in light 
of Cedel's business and legal context.
4. Dues, Fees, and Charges
    Sections 17A(b)(3) (D) and (E) of the Exchange Act provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
clearing agency participants and prohibits a clearing agency from 
imposing or fixing prices for services rendered by its participants. 
Fees charged by Cedel are generally usage-based and are priced in a 
competitive environment with other entities that offer international 
clearance and settlement services. Cedel does not impose any schedule 
of prices or fix rates or other fees for services rendered by its 
customers. Accordingly, the Commission is satisfied that the method by 
which Cedel provides for the equitable allocation of reasonable dues, 
fees, and other charges among its customers and its prohibitions 
regarding the fixing of prices of its customers substantially satisfies 
the Exchange Act requirements.
5. Capacity To Enforce Rules and To Discipline Participants
    Section 17A(b)(3)(A) of the Exchange Act requires that a registered 
clearing agency be so arranged and have the capacity to enforce 
compliance by its participants with its rules. Furthermore, Sections 
17A(b)(3) (G) and (H) require a registered clearing agency to have in 
place a system to discipline its participants for violations of its 
rules and that the procedures for applying such rules be fair and 
equitable.
    Cedel is organized as a bank under the laws of Luxembourg and 
bilaterally contracts with each of its customers to provide clearance 
and settlement and other securities services. Cedel is not a self-
regulatory organization within the meaning of the Exchange Act. In 
particular, Cedel does not have any disciplinary authority over its 
customers other than the commercial discipline of refusing to provide 
services to those customers that fail to satisfy the terms of their 
contractual arrangements with Cedel. Cedel contends that a self-
regulatory structure as envisioned under the Exchange Act is 
incompatible with its current legal and business structure under 
Luxembourg law. Specifically, Cedel believes that it would be compelled 
to alter its clearance and settlement arrangements from its present 
bilateral contractual agreements with its customers and that such a 
change would upset and complicate the existing legal structure of 
international cross-border clearance and settlement of securities 
transactions. Moreover, Cedel believes any rules it would promulgate as 
a self-regulatory entity under U.S. law would have questionable 
application in the home markets of Cedel's international customers 
outside of the United States.\54\
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    \54\ Cedel points out in its application that conflicts of law 
and international comity issues would likely arise in connection 
with Cedel's operations where U.S. legal and regulatory requirements 
differ from those of Luxembourg. This situation could undermine the 
certainty of Cedel's operational arrangements with both U.S. and 
non-U.S. customers.
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    The Commission is sensitive to the myriad of issues which could 
arise in connection with requiring Cedel to comply with the self-
regulatory structure and obligations of a registered clearing agency. 
Through its review of Cedel's operational arrangements with

[[Page 9231]]

its customers, the Commission is satisfied that the goals of Sections 
17A(b)(3) (G) and (H) requiring registered clearing agencies to have in 
place a system to discipline its participants for violations of their 
rules are substantially fulfilled under Cedel's current structure and 
by grant of the exemption. For example, regarding the Exchange Act 
requirement that registered clearing agencies assure participant 
compliance with the clearing agencies' rules and procedures, Cedel has 
a strong financial incentive to have its customers adhere to Cedel's 
financial and operational requirements. Additionally, although Cedel 
does not have formal disciplinary authority over its customers, it can 
influence its customers' activities by its credit extension, 
admissions, and termination policies. Furthermore, if Cedel fails to 
assure adequate compliance by its customers with Cedel's financial and 
operational requirements or if Cedel or its customers operate in a way 
that endangers the safety and soundness of U.S. markets or market 
participants, the Commission can alter or withdraw Cedel's exemption. 
This is analogous to the Commission's authority to sanction registered 
clearing agencies for failure to assure compliance with rules of the 
clearing agencies.
6. Filing of Proposed Rule Changes
    Section 19(b) of the Exchange Act requires registered clearing 
agencies to file with the Commission copies of all proposed amendments 
or additions to the clearing agencies' rules prior to implementation of 
such rule changes.\55\ the Commission is vested with the authority to 
approve or disapprove such rule proposals in accordance with Section 
19(b) of the Exchange Act, which includes a procedure to solicit public 
comment on proposed rule changes. Because Cedel will not be a 
registered clearing agency, proposed changes to its structure or 
operations will not be subject to the Section 19(b) process.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78s(b)(1).
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    The relationship between Cedel and each of its customers is 
governed by the General Terms and Conditions Agreement (``Customer 
Agreement'') and the Cedel Customer Handbook (``Customer Handbook''). 
Cedel must notify the customer in writing of any amendment to the 
Customer Agreement and the effective date of the amendment. Customers 
have the opportunity to object to the amendment in writing within ten 
business days of receipt of the notice of amendment. If a customer does 
not object in such a manner, it is deemed to have accepted the 
amendment. Similarly, customers also are notified of changes to Cedel's 
Customer Handbook ten days prior to the effective date of such changes. 
Any objection to a change must be in writing within ten business days 
of the receipt of notice and must be brought to the attention of the 
Cedel User Group or customer support personnel.
    While these procedures are not consistent with the requirements and 
obligations of registered clearing agencies as self-regulatory entities 
as set forth in the Standards Release and Section 17A of the Exchange 
Act, the self-regulatory role is not compatible with Cedel's current 
structure. In this context, however, the Commission believes that it is 
important that Cedel's customers receive notice of changes to the 
Customer Agreement and Customer Handbook, and are provided a procedure 
to respond to such changes. Also, as discussed below in Section III.C 
of this Order, Cedel will be required to provide the Commission with 
current copies of its Customer Handbook and Customer Agreement and to 
notify the Commission of any changes thereto.

C. Scope of Exemption

    This Order exempts Cedel from registration as a clearing agency 
under Section 17A of the Exchange Act subject to conditions which the 
Commission believes are necessary and appropriate for Cedel's present 
structure and operation.\56\ The Commission believes that such action 
is consistent with the Exchange Act objective of promoting the safety 
and soundness of the national clearance and settlement system, 
including the goals of fostering cooperating and coordination among 
persons engaged in the clearance and settlement of securities 
transactions, facilitating the prompt and accurate clearance and 
settlement of securities transactions, and protecting investors and the 
public interest. The limitations in the exemption reflect the 
Commission's determination to take a gradual approach toward permitting 
an international non-registered clearing agency such as Cedel to 
provide securities processing services in U.S. government securities to 
U.S. market participants. At the same time, the exemption permits Cedel 
to provide clearance, settlement, and collateral management services to 
both U.S. and non-U.S. customers.
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    \56\ Among other things, foreign sovereignty considerations may 
limit the Commission's ability to carry out all of its regulatory 
functions outside of the United States. Accordingly, the Commission 
notes that it does not possess the same degree of regulatory 
authority and control over an exempt non-domestic clearing agency 
such as Cedel as the Commission has with respect to a fully 
registered clearing agency.
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1. Securities Covered by the Exemption

    In its application for exemption, Cedel requested that it be 
permitted to provide clearance and settlement, securities lending, and 
GCSS services for transactions involving all U.S. securities, including 
equity and debt securities.\57\ As the comment letters generally 
indicated, the ability to provide clearance, settlement, and collateral 
management services for transactions involving U.S. Treasuries appears 
to be the most critical element of Cedel's proposed services, 
especially GCSS. In addition, at this time Cedel has linkages with U.S. 
entities necessary to provide services for transactions involving U.S. 
government securities, but has not yet developed the necessary linkages 
that would enable it to provide for clearance and settlement of all 
U.S. debt and equity securities.
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    \57\ The Commission is of the view that the provision of 
clearance, settlement, and collateral management services by a 
foreign clearing agency for U.S. entities in U.S. debt and equity 
securities raises issues that were not addressed sufficiently in the 
Cedel Notice. Consequently, commenters may not have focused on these 
issues. Therefore, the Commission today is publishing a notice 
relating to Cedel's original proposal to solicit comments on the 
specific issue as to the appropriate scope of an exemption to permit 
Cedel to offer its securities processing and collateral management 
services for U.S. debt and equity securities in addition to eligible 
U.S. government securities. Securities Exchange Act Release No. 
38329 (February 24, 1997).
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    Based on these considerations, this Order grants Cedel the 
authority to provide clearance, settlement, and collateral management 
services for (i) Fedwire-eligible U.S. government securities \58\ and 
(ii) mortgage backed pass-through securities that are guaranteed by the 
Government National Mortgage Association (``GNMAs'') \59\ 
(collectively, ``eligible U.S. government securities'').\60\ The 
Commission believes that this limitation is necessary and appropriate 
because it will facilitate operation of the GCSS system and

[[Page 9232]]

permit Cedel to offer securities processing services for very liquid 
U.S. government securities, and will provide Cedel with the opportunity 
to request that the exemption be broadened when it develops the 
necessary linkages and facilities to provide securities processing 
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services for other U.S. securities.

    \58\ ``Government securities'' is defined in Section 3(a)(42) of 
the Exchange Act, 15 U.S.C. 78c(a)(42). Fedwire is a large-value 
transfer system operated by the Federal Reserve Banks that supports 
the electronic transfer of funds and the electronic transfer of 
book-entry securities.
    \59\ GNMAs, unlike other mortgage-backed securities such as 
those guaranteed by the Federal National Mortgage Association 
(``FNMAs'') and the Federal Home Loan Mortgage Association 
(``FHLMCs''), are issued in certificated form and therefore cannot 
be transferred over Fedwire.
    \60\ ``Eligible U.S. government securities'' also includes any 
collateralized mortgage obligation (``CMO'') whose underlying 
securities are Fedwire eligible U.S. government securities or GNMA 
guaranteed mortgage-backed pass through securities and which are 
depository eligible securities.
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2. Volume Limits

    The Commission is placing a limit on the volume of eligible U.S. 
government securities transacted by U.S. entities or their affiliates 
processed through Cedel. In the Cedel Notice, the Commission proposed 
that the exemption include a fixed volume limit of $30 billion per day 
in U.S. securities transacted by U.S. entities or their affiliates 
processed through Cedel.\61\ However, based upon the comment letters 
and further examination of various methods of calculating transaction 
volume, the Commission has determined that a flexible percentage based 
formula is more appropriate.\62\
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    \61\ A similar approach was adopted by the Commission in 
granting an exemption from clearing agency registration to the 
Clearing Corporation for Options and Securities (``CCOS''). That 
exemptive order contained volume limitations of US$6 billion net 
daily settlement for government securities and US$24 billion for 
repurchase agreements and reverse repurchase agreements transactions 
calculated on an average daily basis over a 90 day period. At that 
time, the CCOS volume limits were designed to limit CCOS's activity 
to approximately 5% of the average daily dollar value of 
transactions in U.S. government securities and of repurchase 
agreements and reverse repurchase agreements involving U.S. 
government securities. See note 41 supra.
    \62\ Two commenters addressed the proposed volume limitations. 
One commenter supported the initial conditions proposed by the 
Commission but urged that the Commission reassess from time to time 
the transaction volume limitations. The commenter believed that this 
would allow the Commission the opportunity to monitor the 
performance of Cedel while ensuring the appropriateness of the 
levels at which those limitations have been set. Letter from Monroe 
R. Sonnenborn, Managing Director, Morgan Stanley & Co. Incorporated, 
to Jonathan Katz, Secretary, Commission (July 22, 1996). The other 
commenter believed that the conditions relating to the volume 
limitations and Commission access to information to be ``reasonable 
actions by the Commission for achieving its objective of monitoring 
the safety and soundness of U.S. securities markets.'' Letter from 
John Macfarlane, Managing Director, Salomon Brothers Inc, to 
Jonathan Katz, Secretary, Commission (July 19, 1996).
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    Specifically, the average daily volume of eligible U.S. government 
securities processed through Cedel 63 may not exceed five percent 
of the total average daily dollar value of the aggregate volume in 
eligible U.S. government securities. The total average daily dollar 
value of eligible U.S. government securities volume will be determined 
semi-annually as the sum of (1) the average daily transaction value of 
all Fedwire eligible book-entry transfers originated on Fedwire as 
provided to the Commission by the Board of Governors of the Federal 
Reserve System, (2) the average daily value of all compared trades, 
less the netted value of all such compared trades, in eligible U.S. 
government securities as provided to the Commission by the Government 
Securities Clearing Corporation, (3) the average daily value of all 
compared trades, less the netted value of all such compared trades, 
plus the average daily volume of all trade-for-trade transactions 
(i.e., trades not included in the netting system), in eligible 
government securities as provided by MBS Clearing Corporation, (4) the 
average daily gross settlement value in eligible U.S. government 
securities as provided to the Commission by the Participants Trust 
Company, and (5) the average daily dollar value of compared trades in 
eligible U.S. government securities from any other source that the 
Division deems appropriate to reflect the aggregate volume in eligible 
U.S. government securities.
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    \63\ For purposes of the determination of volume limits, 
securities ``processed through Cedel'' means a security that is 
utilized by GCSS, Cedel's clearance and settlement system, Cedel's 
tripartite repo service, or Cedel's securities lending program.
    The conditions and restrictions set forth in this Order will not 
apply to Cedel for the processing of transactions in eligible U.S. 
government securities where both counterparties to the transaction 
are not a U.S. customer or an affiliate. However, from the 
information to be made available to the Commission from Cedel and 
the IML, the Commission expects to receive information regarding all 
transactions in U.S. government securities processed by Cedel i.e., 
whether or not a U.S. counterparty is involved) and will examine the 
effects such transactions may have on U.S. markets and U.S. market 
participants.
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    Cedel's average daily volume will be the sum of the following 
amounts for the previous twelve months as determined on a rolling 
quarterly basis: (1) All settlements, both internal and external, 
within Cedel's clearance and settlement system involving a U.S. 
customer or its affiliate and eligible U.S. government securities; (2) 
each movement of eligible U.S. government securities into the GCSS 
system involving a U.S. customer or its affiliate; (3) each delivery of 
eligible U.S. government securities involving a U.S. customer or its 
affiliate within the GCSS system; and (4) each delivery of eligible 
U.S. government securities involving a U.S. customer or its affiliate 
out of the GCSS system. In the volume calculation, only the initial 
movement of collateral (the ``on-leg'') of such GCSS delivery or 
movement will be included; the return of collateral will not.
    For purposes of calculating the volume limit and for purposes of 
Commission access to information, ``affiliate'' means any Cedel 
customer having a relationship with a U.S. entity,\64\ where the U.S. 
entity has an arrangement on file at Cedel to prevent a settlement 
default or credit default in respect of such customer, or Cedel knows 
that the U.S. entity has another arrangement to prevent a settlement 
default or credit default with respect to such customer. In addition, 
the Commission may specifically designate Cedel customers that will be 
deemed affiliates for purposes of calculating Cedel's volume and for 
information access.
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    \64\ For purposes of this Order, ``U.S. entity'' shall mean (i) 
any entity organized under the laws of the United States or any 
state or subdivision thereof that is registered or regulated 
pursuant to state or federal banking or securities law and shall 
include, without limitation, U.S. registered broker-dealers, U.S. 
banks (as defined by Section 3(a)(6) of the Exchange Act), and (ii) 
foreign branches of U.S. banks or U.S. registered broker-dealers.
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    The Commission believes the volume limit is appropriate in that it 
is large enough to allow Cedel to conduct effective operations in 
processing eligible U.S. government securities transactions involving 
U.S. entities or their affiliates, and to allow the Commission to 
observe the effects of Cedel's activities on the U.S. government 
securities market, but is sufficiently limited so that the safety and 
soundness of the U.S. markets should not be materially affected if 
Cedel experiences financial or operational difficulties. Either upon 
Cedel's request or by its own initiative, the Commission may review 
whether the current volume limit should be modified.
3. Commission Access to Information
    To facilitate the monitoring of the impact of Cedel's operation 
under this exemption, including compliance with the volume limit, this 
Order requires Cedel to provide information on a monthly basis 
regarding (i) the aggregate volume of eligible U.S. government 
securities transacted by U.S. entities or their affiliates that are 
processed through Cedel and (ii) the aggregate volume for all Cedel 
customers for transactions in eligible U.S. government securities that 
are processed through Cedel. Under the exemption, Cedel also is 
required to notify the Commission regarding material adverse changes in 
any account maintained by Cedel for its customers that are members or 
affiliates of members of a U.S. registered clearing agency.\65\ Cedel 
also is required to

[[Page 9233]]

respond to a Commission request for information about a U.S. customer 
or its affiliate about whom the Commission has financial solvency 
concerns.\66\ The exemption also is contingent upon the execution of a 
satisfactory unilateral understanding between the Commission and the 
IML, Luxembourg's banking and securities regulatory authority, to 
facilitate the provision of information by Cedel to the Commission.\67\ 
In addition to the above information, the Commission will monitor Cedel 
through its review of information provided to the IML by Cedel \68\ and 
its external auditors.\69\
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    \65\ For purposes of the unilateral understanding with the IML 
discussed below, the term ``material adverse changes'' refers to a 
default in settlement for credit reasons in an account maintained by 
a Cedel member, a liquidation of collateral posted by a Cedel member 
in an account maintained by Cedel, or a limitation imposed by Cedel 
on any credit line of a Cedel member relating to any account 
maintained by such member.
    \66\ In addition, the Commission will be permitted to observe 
Cedel operations and to talk to Cedel personnel on-site if the 
Commission so requests.
    \67\ Cedel has represented to the Commission that its 
obligations to provide information to the Commission pursuant to 
this Order is not dependent upon the prior approval of the IML.
    \68\ Cedel is required to submit to the IML monthly balance 
sheets, foreign exchange position reports, and liquidity ratios. 
Cedel also is required to submit quarterly income statements and 
reports on large exposures and on the maturity structure of Cedel's 
assets and liabilities. See also supra note 1.
    \69\ Cedel's external auditors are required, among other things, 
to review Cedel's accounting and risk management systems and to 
assess the reliability of Cedel's periodic reports to the IML.
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    In addition to the foregoing arrangements for access to 
information, Cedel will be required to file with the Commission 
amendments to its application for exemption on Form CA-1 prior to the 
implementation of any change in Cedel's stated policies, practices, or 
procedures that makes the information contained in the original Form 
CA-1 incomplete or inaccurate in any material respect.\70\ This method 
of notifying the Commission of proposed changes at Cedel will assist 
the Commission on its overall review and understanding of Cedel and its 
operations. In addition, Cedel will be required to notify the 
Commission of changes to the Customer Handbook and Customer Agreement 
and will provide the Commission with copies of the most current 
Customer Agreement and Customer Handbook and any amendments or updates 
thereto. Cedel also will provide the Commission with copies of Cedel's 
annual report of its external auditor, and any other document relating 
to an audit, survey, or consultant's review concerning Cedel's 
financial position, operations, or internal control as the Commission 
may reasonably request.
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    \70\ Cedel will be required to amend its application for any 
proposed changes to its stated policies, practices, or 
interpretations as that phrase is defined in Rule 19b-4, 17 CFR 
240.19b-4.
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4. Modification of Exemption
    The Commission may modify by order the terms, scope, or conditions 
of Cedel's exemption from registration as a clearing agency if the 
Commission determines that such modification is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Exchange Act.\71\ 
Furthermore, the Commission may limit, suspend, or revoke this 
exemption if the Commission finds that Cedel has violated or is unable 
to comply with any of the provisions set forth in this Order if such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Exchange Act for the protection of investors and the public 
interest.
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    \71\ The exemption provided by this Order is based upon 
representations by Cedel, facts contained in the Cedel application, 
and other information known to the Commission regarding the 
substantive aspects of Cedel's proposal (collectively, 
``representations and facts''). Any changes in the representations 
or facts as presented to the Commission may require a modification 
to the exemption. Responsibility for compliance with all applicable 
U.S. securities laws rests with Cedel and its customers, as 
appropriate. Cedel also is advised that this Order does not exempt 
Cedel from the anti-fraud or anti-manipulation provisions of the 
Exchange Act or any of the rules promulgated thereunder.
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IV. Conclusion

    The Commission finds that Cedel's application for exemption from 
registration as a clearing agency meets the standards and requirements 
deemed appropriate for such an exemption including those standards set 
forth under Section 17A of the Exchange Act.
    It is therefore ordered, pursuant to Section 19(a)(1) of the 
Exchange Act, that the application for exemption from registration as a 
clearing agency filed by Cedel Bank, societe anonyme (File No. 600-29) 
be, and hereby is, approved subject to the conditions contained in this 
Order.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5027 Filed 2-27-97; 8:45 am]
BILLING CODE 8010-01-M