BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, DC 20551

February 18, 2016

Ms. Lorraine E. Waller
Associate General Counsel
BMO Financial Group

111 West Monroe Street, 19E
Chicago, Illinois 60603

Mr. Andrew T. Karp

Deputy General Counsel
BMO Financial Group

111 West Monroe Street, 19E
Chicago, Illinois 60603

Dear Ms. Waller and Mr. Karp:

This letter is in response to your request, dated December 29, 2014, that the
Board permit Bank of Montreal (“BMO”), Toronto, Canada, to hold its ownership
interest in Moneris Solutions, Inc. (“Moneris U.S.”) outside of the intermediate holding
company (“IHC”) established by BMO for purposes of compliance with Regulation YY.
Alternatively, if the Board denies BMO’s request, BMO has requested an extension, until
July 1, 2017, to transfer its ownership interest in Moneris U.S. to its IHC.

Regulation YY requires a foreign banking organization with $50 billion or
more in total U.S. non-branch assets to establish an IHC and to transfer its ownership
interest in U.S. subsidiaries to the IHC.! Under Regulation YY, the Board may permit
the foreign banking organization to hold its interest in a U.S. subsidiary outside of its
THC if circumstances otherwise warrant an exception based on the foreign banking
organization’s activities, scope of operations, structure, or similar considerations. BMO

1 12 CFR 252.152. U.S. non-branch assets are measured as an average of the amount
reported for the four most recent consecutive quarters, as reported to the Board on the
FR Y-7Q.

2 12 CFR 252.153(c)(1)-(2).

www.federalreserve.gov


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is a foreign banking organization with $118.3 billion in total U.S. non-branch assets as of
June 30, 2015. Accordingly, BMO is required to establish an IHC under Regulation YY.

The subsidiary for which BMO requests an exemption, Moneris U.S., is the
USS. subsidiary of a 50-50 Canadian joint venture between BMO and Royal Bank of
Canada (“RBC”), Moneris Solutions Corporation (“Moneris JV”). Moneris JV operates
in the United States through Moneris U.S. and in Canada through Moneris JV and
Moneris Services Corporation. Moneris U.S. and Moneris JV engage in third-party
merchant acquiring and payment processing activities related to credit, debit, and prepaid
cards. Most of the employees of Moneris JV are located in Canada, and approximately
Hipercent of the revenues of Moneris JV derive from its operations in Canada.
However, the sales model of Moneris U.S. results in the booking off percent of the
assets of Moneris JV in the United States. Moneris U.S. represents less than percent
of BMO’s IHC pro-forma assets (as reported in BMO’s implementation plan, dated
December 29, 2014).

Absent an exemption, BMO represents that Moneris JV engages in
enterprise-wide risk management over Moneris U.S. BMO argues that transferring
Moneris U.S. to the IHC would impose significant costs on BMO and Moneris JV, shift
the focus away from operations, and put Moneris JV at a competitive disadvantage
relative to its competitors. BMO also argues that the revenues and assets of Moneris JV
are small relative to those of BMO and that Moneris JV has demonstrated sustained
financial independence and strength.

BMO represents that it has only two ways to comply with Regulation YY
with respect to Moneris U.S., both of which would be costly and inefficient. One
approach would involve Moneris JV transferring the interests in Moneris U.S. 50-50 to
BMO’s and RBC’s respective IMCs. BMO argues that this approach would split the
business into two separate organizational lines, would create inefficient and unproductive
structures and processes that would interfere with the ability to manage Moneris JV and
Moneris U.S. on an integrated North American basis as part of the Moneris JV risk-
management framework, and would require the creation of a number of management and
inter-company arrangements with corresponding implementation costs. BMO also argues
that implementation of this structure may generate a significant Canadian tax liability
unless a favorable ruling can be obtained from Canadian tax authorities.

As an alternative to this approach, BMO represents that BMO and RBC
could each transfer their 50 percent interest in Moneris JV to their respective IHCs,
which would result in the IHCs holding and managing a Canadian joint venture.
However, BMO argues that this approach would force a Canadian business
predominantly staffed by Canadian employees and managed out of Canada to report
through two U.S. holding companies, and that it would be impracticable and inefficient
from an enterprise perspective to require the entire Canadian operating business to report


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through the IHCs. BMO represents that the steps in the restructuring related to this
alternative approach would have significant tax consequences under Canadian tax law.

After consideration of all relevant facts, including BMO’s activities, scope
of operations, structure, and similar considerations, the Board has denied BMO’s request
to hold its ownership interest in Moneris U.S. outside of its IHC, but has granted BMO an
extension, until July 1, 2017, to complete the transfer.

As stated in the preamble to Regulation YY, the Board expected to permit a
foreign banking organization to hold its interest in a U.S. subsidiary outside of its IHC in
narrow circumstances. BMO and RBC each have a significant banking presence in the
United States, and both BMO and RBC must comply with the IHC requirement. BMO is
not prohibited by applicable home country law from transferring its interest in Moneris
U.S. to its IHC. Although BMO has identified costs and operational challenges that
would result from the Board’s determination not to grant the exemption requests, on the
whole, the financial stability benefits of the IHC outweigh the costs of the one-time
reorganization costs. As contemplated by Regulation YY, upon the transfer to the IHCs,
Moneris U.S. would be subject to capital, liquidity, and other enhanced prudential
standards set by the Federal Reserve for U.S. operations. Moneris U.S. also would be
subject to oversight by the U.S. risk committees and U.S. risk management frameworks
of BMO, which would ensure that BMO is able to manage Moneris U.S. as part of its
U.S. operations. In addition, granting the request would reduce the amount of regulatory
capital required in the United States for its U.S. operations. However, to ameliorate these
costs and to better enable BMO to address its regulatory compliance challenges relating
to Moneris U.S., the Board is granting BMO’s request for an extension, until July 1,
2017, to comply with the requirement.

For the reasons stated above, the Board has denied BMO’s request for an
exemption from Regulation YY’s requirement to transfer its ownership interest in
Moneris U.S. to its IHC and approved BMO’s request for an extension until July 1, 2017,
to complete the transfer.

Very truly yours,

(signed) Margeret MoCloskey Shanks

Margaret McCloskey Shanks
Deputy Secretary of the Board

cc: Ms. Paula S. Armstrong
Federal Reserve Bank of Chicago