[Federal Register Volume 68, Number 77 (Tuesday, April 22, 2003)]
[Notices]
[Pages 19864-19865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9845]


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SECURITIES AND EXCHANGE COMMISSION

[Securities Exchange Act of 1934: Release No. 47683 and International 
Series Release No. 1268]


Order Regarding the Collateral Broker-Dealers Must Pledge When 
Borrowing Customer Securities

April 16, 2003.
    Section 36 of the Securities Exchange Act of 1934 (``Exchange 
Act'') authorizes the Securities and Exchange Commission 
(``Commission''), by rule, regulation, or order, to conditionally or 
unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions from any 
provision or provisions of the Exchange Act or any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.
    By this Order, the Commission will allow broker-dealers that borrow 
fully-paid \1\ and excess margin \2\ securities from customers to 
pledge a wider range of collateral than is currently permitted under 
paragraph (b)(3) of rule 15c3-3 (17 CFR 240.15c3-3). Most of the 
categories of permissible collateral added by this Order were selected 
based on their high quality and liquidity. The remaining categories, 
certain sovereign debt securities and foreign currencies, are being 
added because they may be pledged only when borrowing non-equity 
securities issued by entities (including the sovereign entity) from the 
same sovereign jurisdiction or denominated in the same currency, 
respectively. In these cases, market declines affecting the pledged 
collateral should be expected to have a related affect on the borrowed 
securities. By adding only highly liquid collateral or, with respect to 
two categories, collateral that is restricted in its use, the Order is 
consistent with the objectives of paragraph (b)(3) of rule 15c3-3, 
which is designed to ensure borrowings from customers remain fully 
collateralized.
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    \1\ As defined in rule 15c3-3, ``fully paid'' securities are 
securities carried by a broker-dealer for which the customer has 
paid the full purchase price in cash. 17 CFR 240.15c3-3(a)(3).
    \2\ As defined in rule 15c3-3, ``excess margin'' securities are 
securities carried by a broker-dealer that have a market value in 
excess of 140% of the amount the customer owes the broker-dealer. 17 
CFR 240.15c3-3(a)(5).
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    The Commission took into account several considerations in deciding 
whether to provide this exemptive relief and designate additional 
categories of permissible collateral. For example, the Commission 
considered whether the risks of customer losses associated with 
permitting a new category of collateral were sufficiently small 
relative to the benefits the additional kinds of collateral will 
provide. Those benefits include adding liquidity to the securities 
lending markets and lowering borrowing costs for broker-dealers. In 
issuing this Order, the Commission is drawing on its experience in 
assessing the liquidity of markets in a variety of contexts including, 
for example, the net capital requirements for broker-dealers.
    The rule currently requires that the collateral provided by a 
broker-dealer fully collateralize its obligation to a customer, and 
that the value of the loaned securities and the collateral be marked to 
market on a daily basis to meet this requirement. The Order requires, 
in addition to the rule's requirements, over-collateralization when the 
collateral is denominated in a different currency than the borrowed 
securities. The daily marking to market and over-collateralization 
should serve to buffer fluctuations in value.
    The Commission finds that this exemption is appropriate in the 
public interest, and consistent with the protection of investors. The 
exemption will add liquidity to the securities lending markets and 
lower borrowing costs while maintaining the customer protection 
objectives of rule 15c3-3.
    Accordingly, it is ordered, pursuant to section 36 of the Exchange 
Act, that, broker-dealers may pledge, in accordance with all applicable 
conditions set forth below and in paragraph (b)(3) of rule 15c3-3, the 
following types of collateral (in addition to those permitted under 
paragraph (b)(3) of rule 15c3-3) when borrowing fully paid and excess 
margin securities from customers:\3\
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    \3\ All prior staff interpretations and no-action positions 
concerning the types of collateral that may be pledged under 
paragraph (b)(3) of rule 15c3-3 are herewith withdrawn.
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    1. ``Government securities'' as defined in section 3(a)(42)(A) and 
(B) of the Exchange Act may be pledged when borrowing any securities.
    2. ``Government securities'' as defined in section 3(a)(42)(C) of 
the Exchange Act issued or guaranteed as to principal or interest by 
the following corporations may be pledged when borrowing any

[[Page 19865]]

securities: (i) The Federal Home Loan Mortgage Corporation, (ii) the 
Federal National Mortgage Association, (iii) the Student Loan Marketing 
Association, and (iv) the Financing Corporation.
    3. Securities issued by, or guaranteed as to principal and interest 
by, the following Multilateral Development Banks--the obligations of 
which are backed by the participating countries, including the U.S.--
may be pledged when borrowing any securities: (i) The International 
Bank for Reconstruction and Development, (ii) the Inter-American 
Development Bank, (iii) the Asian Development Bank, (iv) the African 
Development Bank, (v) the European Bank for Reconstruction and 
Development, and (vi) the International Finance Corporation.
    4. Mortgage-backed securities meeting the definition of a 
``mortgage related security'' set forth in section 3(a)(41) of the 
Exchange Act may be pledged when borrowing any securities.
    5. Negotiable certificates of deposit and bankers acceptances 
issued by a ``bank'' as that term is defined in section 3(a)(6) of the 
Exchange Act, and which are payable in the United States and deemed to 
have a ``ready market'' as that term is defined in 17 CFR 240.15c3-1 
(``rule 15c3-1''),\4\ may be pledged when borrowing any securities.
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    \4\ Certificates of deposit and bankers acceptances are deemed 
to have a ``ready market'' under rule 15c3-1 if, among other things, 
they are issued by a bank as defined in section 3(a)(6) of the 
Exchange Act that is (i) subject to supervision by a federal banking 
authority, and (ii) rated investment grade by at least two 
nationally recognized statistical rating organizations or, if not so 
rated, has shareholders' equity of at least $400 million.
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    6. Foreign sovereign debt securities may be pledged when borrowing 
any securities, provided that, (i) at least one nationally recognized 
statistical rating organization (``NRSRO'') has rated in one of its two 
highest rating categories either the issue, the issuer or guarantor, or 
other outstanding unsecured long-term debt securities issued or 
guaranteed by the issuer or guarantor; and (ii) if the securities 
pledged are denominated in a different currency than those borrowed,\5\ 
the broker-dealer shall provide collateral in an amount that exceeds 
the minimum collateralization requirement in paragraph (b)(3) of rule 
15c3-3 (100%) by 1% when the collateral is denominated in the Euro, 
British pound, Swiss franc, Canadian dollar or Japanese yen, or by 5% 
when it is denominated in another currency.
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    \5\ For the purposes of this Order, equity securities will be 
deemed to be denominated in the currency of the jurisdiction in 
which the issuer of such securities has its principal place of 
business.
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    7. Foreign sovereign debt securities that do not meet the NRSRO 
rating condition set forth in item 6 above may be pledged only when 
borrowing non-equity securities issued by a person organized or 
incorporated in the same jurisdiction (including other debt securities 
issued by the foreign sovereign); provided that, if such foreign 
sovereign debt securities have been assigned a rating lower than the 
securities borrowed, such foreign sovereign debt securities must be 
rated in one of the four highest rating categories by at least one 
NRSRO. If the securities pledged are denominated in a different 
currency than those borrowed, the broker-dealer shall provide 
collateral in an amount that exceeds the minimum collateralization 
requirement in paragraph (b)(3) of rule 15c3-3 by 1% when the 
collateral is denominated in the Euro, British pound, Swiss franc, 
Canadian dollar or Japanese yen, or by 5% when it is denominated in 
another currency.
    8. The Euro, British pound, Swiss franc, Canadian dollar or 
Japanese yen may be pledged when borrowing any securities, provided 
that, when the securities borrowed are denominated in a different 
currency than that pledged, the broker-dealer shall provide collateral 
in an amount that exceeds the minimum collateralization requirement in 
paragraph (b)(3) of rule 15c3-3 by 1%. Any other foreign currency may 
be pledged when borrowing any non-equity securities denominated in the 
same currency.
    9. Non-governmental debt securities may be pledged when borrowing 
any securities, provided that, in the relevant cash market they are not 
traded flat or in default as to principal or interest, and are rated in 
one of the two highest rating categories by at least one NRSRO. If such 
securities are not denominated in U.S. dollars or in the currency of 
the securities being borrowed, the broker-dealer shall provide 
collateral in an amount that exceeds the minimum collateralization 
requirement in paragraph (b)(3) of rule 15c3-3 by 1% when the 
securities pledged are denominated in the Euro, British pound, Swiss 
franc, Canadian dollar or Japanese yen, or by 5% when they are 
denominated in any other currency.
    The categories of permissible collateral identified above do not 
include securities that (i) have no principal component, or (ii) accrue 
interest at the time of the pledge at a stated rate equal to or greater 
than 100% per annum (expressed as a percentage of the actual principal 
amount of the security).
    Broker-dealers pledging any of the securities set forth above must, 
in addition to satisfying the notice requirements already contained in 
paragraph (b)(3) of rule 15c3-3, include in the written agreement with 
the customer a notice that some of the securities being provided by the 
borrower as collateral under the agreement may not be guaranteed by the 
United States.

    By the Commission.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9845 Filed 4-21-03; 8:45 am]
BILLING CODE 8010-01-P