[Federal Register Volume 68, Number 238 (Thursday, December 11, 2003)]
[Proposed Rules]
[Pages 69059-69061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30485]


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DEPARTMENT OF THE TREASURY

17 CFR Part 403

RIN 1505-AA94


Government Securities Act Regulations: Protection of Customer 
Securities and Balances

AGENCY: Office of the Assistant Secretary for Financial Markets, 
Treasury.

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury (``Treasury,'' or ``We,'' or 
``Us'') is publishing for comment a proposed amendment to the customer 
protection rules in Sec.  403.4 of the regulations issued under the 
Government Securities Act of 1986 (``GSA''), as amended.\1\ This 
provision requires entities registered with the Securities and Exchange 
Commission (``SEC'') as specialized government securities brokers and 
dealers (``registered government securities brokers and dealers'') 
under section 15C(a)(2) of the Securities Exchange Act of 1934 (``the 
Exchange Act'')\2\ to comply with the requirements of the SEC customer 
protection rule (``SEC Rule 15c3-3'') with certain modifications. The 
SEC recently amended Rule 15c3-3 to allow for the expansion of 
collateral that general purpose brokers and dealers may pledge when 
borrowing securities from customers. This proposed amendment makes 
certain conforming technical changes to the GSA regulations that would 
similarly allow for the expansion of collateral that registered 
government securities brokers and dealers may pledge when borrowing 
fully paid or excess-margin securities from customers. The proposed 
amendment would allow Treasury to designate additional categories of 
collateral or make subsequent changes to collateral by issuing an 
order.
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    \1\ 15 U.S.C. 78o-5.
    \2\ 15 U.S.C. 78o-5(a)(2).

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DATES: Submit comments on or before January 12, 2004.

ADDRESSES: You may send hard copy comments to: Government Securities 
Regulations Staff, Bureau of the Public Debt, 999 E Street, NW., Room 
315, Washington, DC 20239-0001. You may also send us comments by e-mail 
at [email protected]. When sending comments by e-mail, please 
provide your full name and mailing address. You may download this 
proposed rule, and review the comments we receive, from the Bureau of 
the Public Debt's Web site at http://www.publicdebt.treas.gov. The 
proposed rule and comments will also be available for public inspection 
and copying at the Treasury Department Library, Room 1428, Main 
Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. 
To visit the library, call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Lee Grandy (Associate Director), 
Deidere Brewer (Government Securities Specialist), or Kevin Hawkins 
(Government Securities Specialist), Bureau of the Public Debt, 
Government Securities Regulations Staff, (202) 691-3632 or e-mail us at 
[email protected].

SUPPLEMENTARY INFORMATION: The implementing regulations Treasury issued 
in 1987 under the Government Securities Act of 1986\3\ adopted the 
SEC's customer protection rule at 17 CFR 240.15c3-3 with certain 
modifications.\4\ In adopting regulations to protect customer 
securities and balances, Treasury attempted to avoid duplicating 
existing regulations and to minimize the regulations' impact by using 
existing SEC standards with which many firms were already familiar. 
Currently, the GSA regulations maintain for registered government 
securities brokers and dealers the customer protection standards set 
out in the SEC rules for brokers and dealers when borrowing fully paid 
or excess-margin securities from customers. Section 403.4 of the GSA 
regulations requires registered government

[[Page 69060]]

securities brokers and dealers to comply with the requirements of SEC 
Rule 15c3-3 regarding reserves and custody of customer securities.
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    \3\ Pub. L. 99-571, 100 Stat. 3208 (1986).
    \4\ 52 FR 27910 (July 24, 1987).
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    On March 17, 2003, the SEC published a final amendment to Rule 
15c3-3 to allow, through the issuance of an SEC order, the expansion of 
collateral that brokers and dealers may pledge when borrowing fully 
paid or excess-margin securities from customers.\5\ Since an SEC order 
cannot be incorporated by reference to apply to registered government 
securities brokers and dealers, we are proposing a conforming technical 
change to Sec.  403.1\6\ and Sec.  403.4\7\ of the GSA regulations. The 
change would allow Treasury to expand the categories of permissible 
collateral by issuing an exemptive order. We believe the proposed 
amendment would continue to protect customer securities and balances 
while adding liquidity to the securities lending markets and lowering 
borrowing costs for registered government securities brokers and 
dealers. In this notice we first provide background on the rule and 
then describe the proposed changes.
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    \5\ 68 FR 12780 (March 17, 2003).
    \6\ 17 CFR 403.1.
    \7\ 17 CFR 403.4.
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I. Background

A. SEC Rule 15c3-3

    In 1972, the SEC adopted the customer protection rule, Rule 15c3-3, 
to protect customer funds held by brokers and dealers.\8\ At that time, 
securities brokers and dealers were required to pledge cash, U.S. 
Treasury bills and notes, or letters of credit as collateral when 
borrowing customer securities. In 1989, the SEC issued a no-action 
letter that expanded the categories of permissible collateral.\9\
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    \8\ 17 CFR 240.15c3-3.
    \9\ See Letter from Michael A. Macchiaroli, Assistant Director, 
Division of Market Regulation, SEC, to Frances R. Bermanzohn, Esq., 
Senior Vice President of the Public Securities Association (March 2, 
1989). The SEC no-action letter provided that under certain facts 
and circumstances, a broker or dealer could provide to a customer 
lender as the collateral in a government securities borrowing 
transaction any of the following: ``government securities'' as 
defined in section 3(a)(42)(A) and section 3(a)(42)(B) of the 
Exchange Act, and securities issued or guaranteed by the Federal 
Home Loan Mortgage Corporation, the Federal National Mortgage 
Association, the Student Loan Marketing Association, or the 
Financing Corporation.
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    On June 10, 2002, the SEC issued a proposed amendment to Rule 15c3-
3 to allow for expanding the categories of collateral brokers and 
dealers may pledge when borrowing fully paid or excess-margin 
securities from customers.\10\ Under the proposed amendment, the SEC 
could expand the collateral categories by issuing an SEC order. Prior 
to amending the customer protection rule, brokers and dealers that 
pledged fully paid or excess-margin customer securities were required 
to provide the lenders with collateral covering at a minimum the full 
amount of the securities loaned, and consisting exclusively of cash, 
U.S. Treasury bills and notes, or an irrevocable letter of credit 
issued by a bank. In the proposed amendment the SEC identified 
categories of collateral being considered for the SEC order. It also 
discussed certain conditions for the use of the identified types of 
collateral. The SEC received three favorable comment letters in 
response to its proposal.\11\
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    \10\ 67 FR 39642 (June 10, 2002).
    \11\ See supra note 10.
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    On March 17, 2003, the SEC issued a final amendment to Rule 15c3-3 
that was substantially the same as the proposed amendment.\12\ The 
amendment permits brokers and dealers to pledge additional categories 
of collateral pursuant to orders issued by the SEC. The preamble to the 
SEC's final amendment stated that the amended rule provides flexibility 
to ensure receipt of full collateral by customers while allowing for a 
wider range of permissible collateral, thereby adding liquidity to the 
securities lending markets and lowering borrowing costs for brokers and 
dealers.
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    \12\ See supra note 5.
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    On April 22, 2003, the SEC issued by order the list of permissible 
categories of collateral under Rule 15c3-3.\13\ The order expands 
permissible collateral when borrowing a customer's securities to: 
``government securities'' as defined in sections 3(a)(42)(A) and (B) of 
the Exchange Act; certain ``government securities'' meeting the 
definition in section 3(a)(42)(C) of the Exchange Act; securities 
issued or guaranteed by certain Multilateral Development banks; 
``mortgage related securities'' as defined in section 3(a)(41) of the 
Exchange Act; certain negotiable certificates of deposit and bankers 
acceptances; foreign sovereign debt securities; foreign currency; and 
certain corporate debt securities.
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    \13\ 68 FR 19864 (April 22, 2003).
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B. Government Securities Act Regulations

    When Treasury first issued the implementing regulations \14\ for 
the GSA \15\ in 1987, we considered the existing regulation of brokers 
and dealers registered with the SEC under section 15(b) of the Exchange 
Act in order to avoid overly burdensome or duplicative regulations. In 
that regard, the GSA regulations at 17 CFR Chapter IV incorporate, by 
reference, many of the SEC's rules regulating brokers and dealers 
including, with modifications, SEC Rule 15c3-3.
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    \14\ See supra note 4.
    \15\ See supra note 3.
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    Since the SEC does not have the authority to grant exemptions from 
section 15C or the rules and regulations thereunder,\16\ Treasury is 
issuing a proposed rule that is similar to the SEC's final rule.
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    \16\ 15 U.S.C. 78mm(b).
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    The amended rule would allow for expanding the categories of 
collateral designated as permissible through the issuance of a Treasury 
exemptive order. We believe the proposed amendment and order would 
increase liquidity in the securities lending markets and lower 
borrowing costs for registered government securities brokers and 
dealers.

II. Analysis

    Treasury is considering a more limited list of acceptable 
collateral for registered government securities brokers and dealers 
than the list the SEC provided in its order. Registered government 
securities brokers and dealers,\17\ as defined in the GSA regulations, 
may hold certain non-exempted securities for proprietary purposes. For 
example, registered government securities brokers and dealers can hold 
limited positions in foreign sovereign debt as investments; however, 
they cannot ``deal'' in such securities. We understand, from 
discussions with SEC staff, that if a registered government securities 
broker or dealer were to pledge such securities in a transaction with a 
customer, it could be viewed as ``dealing'' in such securities, which 
consequently could cause it to have to change its registration.
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    \17\ See 52 FR 5660 (February 25, 1987) and 17 CFR 400.3(o).
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    Therefore, after Treasury issues a final rule amendment, the 
categories of collateral we are considering designating as permissible 
by order include only exempted securities such as:
    1. ``Government securities'' as defined in Section 3(a)(42)(A) and 
(B) of the Exchange Act.
    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: (i) The Federal Home Loan Mortgage 
Corporation, (ii) the Federal National Mortgage Association, (iii) the 
Student Loan Marketing Association, or (iv) the Financing Corporation.

[[Page 69061]]

    3. Securities issued by, or guaranteed as to principal and interest 
by, the following Multilateral Development Banks--whose obligations are 
backed by the participating countries, including the U.S.: (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.
    The categories of permissible collateral would not include 
securities that have no principal component (e.g., STRIPS).
    We believe this proposed rule amendment would protect customers by 
ensuring their receipt of full collateral, while providing us with the 
flexibility to expand the categories of collateral that may be pledged 
by registered government securities brokers and dealers. In developing 
the proposed rules, we have consulted with the staff of the SEC.
    We welcome comments on this proposed rule, in particular whether 
this proposal meets the customer protection principles of Rule 15c3-3, 
as modified by Sec.  403.4 of the GSA regulations for these types of 
collateral.
    The rules on collateral discussed in this notice apply only in the 
context of the customer protection requirement in the GSA regulations 
as applied to registered government securities brokers and dealers. We 
note that it does not apply to U.S. Treasury Fiscal Service collateral 
programs governed by 31 CFR Part 380, Collateral Acceptability and 
Valuation.

III. Special Analysis

    This proposed amendment does not meet the criteria for a 
``significant regulatory action'' under Executive Order 12866.
    In addition, under the Regulatory Flexibility Act,\18\ we certify 
that the proposed amendments, if adopted, would not have a significant 
economic impact on a substantial number of small entities. Currently, 
there are no registered government securities brokers or dealers which 
would be considered ``small'' under the SEC's definition of ``small 
entity.''\19\ Accordingly, the number of small entities pledging 
customer securities when borrowing fully paid or excess-margin 
securities from customers is not significant. As a result, a regulatory 
flexibility analysis is not required.
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    \18\ 5 U.S.C. 601.
    \19\ 63 FR 37688, 37672 (July 13, 1998).
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    The proposed amendment to Sec.  403.4 of the GSA regulations would 
expand the range of collateral that registered government securities 
brokers and dealers may pledge when borrowing customer securities. 
Although the proposed rule amendment is technical in nature, it does 
not impose any additional burdens on such firms, but provides a broader 
list of collateral. The amendment should increase liquidity in the 
government securities market and lower borrowing costs for registered 
government securities brokers and dealers. The collections of 
information under the Government Securities Act regulations have 
previously been reviewed and approved by the Office of Management and 
Budget under control number 1535-0089.

List of Subjects in 17 CFR Part 403

    Banks, Banking, Brokers, Government Securities.

    For the reasons set out in the preamble, we propose that 17 CFR 
Part 403 be amended as follows:

PART 403--PROTECTION OF CUSTOMER SECURITIES AND BALANCES

    1. The authority citation for Part 403 continues to read as 
follows:

    Authority: Pub. L. 99-571, Sec.  101, 100 Stat. 3209; Pub. L. 
101-432, section 4(b) 104 Stat. 963; Pub. L. 103-202, sections 102, 
106, 107 Stat. 2344 (15 U.S.C. 78o-5(a)(5), (b)(1)(A), (b)(4)).

    2. Section 403.1 is revised to read as follows:


Sec.  403.1  Application of part to registered brokers and dealers.

    With respect to their activities in government securities, 
compliance by registered brokers or dealers with Sec.  240.8c-1 of this 
title (SEC Rule 8c-1), as modified by Sec.  403.2 (a), (b) and (c), 
with Sec.  240.15c2-1 of this title (SEC Rule 15c2-1), with Sec.  
240.15c3-2 of this title (SEC Rule 15c3-2), as modified by Sec.  403.3, 
and with Sec.  240.15c3-3 of this title (SEC Rule 15c3-3), as modified 
by Sec. Sec.  403.4 (a)-(d), (f)(2)-(3), (g)-(j), and (m), constitutes 
compliance with this part.
    3. Section 403.4 is amended by re-designating paragraphs (e) 
through (l) as paragraphs (f) through (m), respectively, and by adding 
new paragraph (e) to read as follows:


Sec.  403.4  Customer Protection--reserves and custody of securities.

* * * * *
    (e) For purposes of this section, Sec.  240.15c3-3(b)(3)(iii)(A) of 
this title is modified to read as follows:

    ``(A) Must provide to the lender upon the execution of the 
agreement, or by the close of the business day of the loan if the loan 
occurs subsequent to the execution of the agreement, collateral that 
fully secures the loan of securities, consisting exclusively of cash or 
United States Treasury bills or Treasury notes or an irrevocable letter 
of credit issued by a bank as defined in section 3(a)(6)(A)-(C) of the 
Act (15 U.S.C. 78c(a)(6)(A)-(C)) or such other collateral as the 
Secretary designates as permissible by order as consistent with the 
public interest, the protection of investors, and the purposes of the 
Act, after giving consideration to the collateral's liquidity, 
volatility, market depth and location, and the issuer's 
creditworthiness; and''

* * * * *

    Dated: December 3, 2003.
Brian C. Roseboro,
Assistant Secretary for Financial Markets.
[FR Doc. 03-30485 Filed 12-10-03; 8:45 am]
BILLING CODE 4810-39-P