the SFTs between the Branch and the Affiliated Broker-Dealer be on terms that are
substantially the same, or at least as favorable to the Branch, as those prevailing at
the time for comparable transactions with unaffiliated companies.’

For the reasons stated above, and in light of all the facts you have
presented, the securities financing transactions appear to be consistent with the
purposes of section 23A and in the public interest. Accordingly, the Director of
the Division of Banking Supervision and Regulation, pursuant to authority
delegated by the Board, and with the concurrence of the General Counsel, hereby
grants the requested exemption, subject to the indicated conditions and limits.

This determination is specifically conditioned on compliance by
Deutsche Bank, the Branch, and the Affiliated Broker-Dealer with all the
commitments and representations they made to the Board in connection with the
exemption request. These commitments and representations are deemed to be
conditions imposed in writing by the Board in connection with granting the request
and, as such, may be enforced in proceedings under applicable law. This
determination is based on the specific facts and circumstances of the transactions
described in your correspondence and this letter. Any material change in those
facts and circumstances or any failure by Deutsche Bank, the Branch, or the
Affiliated Broker-Dealer to observe any of its commitments or representations may
result in a different view or in a revocation of the exemption.

Sincerely yours,

[et deV. Jre_—

Robert deV. Frierson
Deputy Secretary of the Board

cc: Federal Reserve Bank of New York

? See 12 U.S.C. § 371c-1(a)(1).


affiliate serves only as a conduit through which the Branch engages in SFTs with
unaffiliated counterparties. To enhance the ability of the Branch to promptly close
out and liquidate SFTs with the Affiliated Broker-Dealer in the event of the
affiliate’s insolvency, the SFTs between the Branch and the Affiliated Broker-
Dealer must be promptly collectable even in the case of the bankruptcy of the
Affiliated Broker-Dealer.'°

Moreover, as noted above, this would be a temporary exemption. The
exemption would be available only for SFTs initiated during the period that the
Federal Reserve System’s special discount window lending facility is available.
For SFTs with a term that exceeds the life of the Federal Reserve System’s special
discount window lending facility, the Branch would be permitted under the
exemption to hold these existing transactions to maturity. Finally, as a condition of
the exemption,! : : a wholly
owned subsidiary of Deutsche Bank, will pledge to the Branch funds equal to
5 percent of the value of the Assets to help ensure that the Branch will not incur
losses in connection with the SFTs.

Granting the exemption described above would have significant
public benefits. First, the exemption would enable the Branch to provide a
substantial amount of liquidity to the markets for the Assets. Because of the
operational advantages to the Branch of using the Affiliated Broker-Dealer as its
conduit to convey funds to market participants, the exemption would allow the
Branch to provide the needed liquidity in the most rapid and cost-effective manner
possible for the Branch and the market participants.

The Branch would continue to be subject to the market-terms
requirement of section 23B of the Federal Reserve Act.'’ Section 23B requires that

° This protection applies to “securities contracts” under section 555 of the
Bankruptcy Code. If an SFT between the Branch and the Affiliated Broker-Dealer
qualifies as a securities contract under the Bankruptcy Code, the Branch’s ability to
liquidate the transaction in the event of the bankruptcy of the Affiliated Broker-
Dealer generally cannot be stayed, avoided, or otherwise limited by operation of
any provision of the Bankruptcy Code. See, e.g., 11 U.S.C. § 555.

" 12 US.C. § 371ce-1; 12 CFR part 223.


BOARD OF GOVERNORS

OF THE
FEOERAL RESERVE SYSTEM
WASHINGTON, B.C. 20551

ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

September 12, 2007

Michael L. Kadish, Esq.

Director and Senior Counsel

Legal Department

Deutsche Bank AG New York

60 Wall Street, Mail Stop: NYC60-3615
New York, New York 10005

Dear Mr. Kadish:

This is in response to the request by Deutsche Bank AG (“Deutsche
Bank”), Frankfurt, Germany, for a temporary exemption from section 23A of the
Federal Reserve Act and the Board’s Regulation W.’ The exemption would allow
Deutsche Bank’s New York branch (“Branch”) to engage in certain securities
financing transactions with its affiliate, Deutsche Bank Securities Inc. (“Affiliated
Broker-Dealer”), New York, New York, as described below.

The Branch proposes to extend credit to market participants in need of
short-term liquidity to finance their holdings of residential and commercial
mortgage loans, consumer and commercial loans, equipment financings, and other
related assets, as well as commercial paper, asset-backed securities, and other
structured products (“Assets”). For operational reasons, the Branch proposes to
channel these transactions through the Affiliated Broker-Dealer. The transactions
between the Branch and the Affiliated Broker-Dealer and the mirror transactions
between the Affiliated Broker-Dealer and the unaffiliated market participants
would take the form of either reverse repurchase agreements or securities
borrowing transactions (collectively, “securities financing transactions” or
“SFTs”). The transactions between the Affiliated Broker-Dealer and the Branch
will be on the same terms as the transactions between the Affiliated Broker-Dealer

1 12 U.S.C. § 371c; 12 CFR part 223.


and the unaffiliated market participants. For each of the proposed SFTs, the
Branch will be overcollateralized; the extent of this overcollateralization will vary
depending on the type of assets offered by the unaffiliated market participants as
collateral for the SFTs.

Sections 23A and 23B and Regulation W apply to transactions
between a U.S. branch of a foreign bank and a U.S. affiliate engaged in securities
underwriting, insurance underwriting, or merchant banking activities (an “FHC
affiliate”) in the same manner and to the same extent as if the branch were a
member bank.” Section 23A and Regulation W limit the aggregate amount of
“covered transactions” between a U.S. branch of a foreign bank and any FHC
affiliate to 10 percent of the foreign bank’s capital stock and surplus, and limit the
aggregate amount of covered transactions between a U.S. branch of a foreign bank
and all its FHC affiliates to 20 percent of the foreign bank’s capital stock and
surplus.’ “Covered transactions” include the purchase of assets by a U.S branch
from an FHC affiliate, the extension of credit by a U.S. branch to an FHC affiliate,
the issuance of a guarantee by a U.S. branch on behalf of an FHC affiliate, and
certain other transactions.‘ The statute and regulation also require a U.S. branch of
a foreign bank to secure its extensions of credit to, and guarantees on behalf of,
FHC affiliates with prescribed amounts of collateral.’

In addition, section 23A and Regulation W specifically authorize the
Board to exempt transactions or relationships from the requirements of the statute
and rule if the Board finds such an exemption to be in the public interest and
consistent with the purposes of section 23A.° The Board previously has indicated
that the twin purposes of section 23A are (i) to protect against a depository
institution suffering losses in transactions with affiliates; and (ii) to limit the ability
of an institution to transfer to its affiliates the subsidy arising from the institution’s

? 12 CFR 223.61(a).

> 12 U.S.C. § 371c(a)(1) and 12 CFR 223.11, 223.12, and 223.61(b)(1)(ii).
12 U.S.C. § 371c(bX(7) and 12 CFR 223.3(h).

> 12 U.S.C. § 371c(c); 12 CFR 223.14 and 223.61.

§ 12 U.S.C. § 371c(£)(2) and 12 CFR 223.43.

4


access to the federal safety net.’ The Board also has stated that it decided to apply
Regulation W to transactions between a U.S. branch of a foreign bank and its FHC
affiliates to preserve competitive equity between U.S. banks and foreign banks.*

The SFTs between the Branch and the Affiliated Broker-Dealer would
be covered transactions under section 23A and Regulation W. Because the Branch
proposes to engage in SFTs with the Affiliated Broker-Dealer in amounts that
exceed the Branch’s quantitative limits under the statute and rule, Deutsche Bank
must receive an exemption from the Board to engage in the proposed transactions.

A temporary, conditional exemption from section 23A and
Regulation W for the proposed SFTs would appear to be consistent with the
purposes of section 23A, in the public interest, and consistent with Board
precedent. The Board recently granted substantively identical exemptions to
Citigroup Inc. (“Citigroup”), JPMorgan Chase & Co. (“JPMC”), and Bank of
America Corporation (“BofA”).’

Deutsche Bank has agreed to several conditions that will help ensure
that it engages in the proposed SFTs in a safe and sound manner. Deutsche Bank
is well capitalized and has represented that it will limit its lending under this
exemption to $13 billion, which constitutes less than 30 percent of Deutsche
Bank’s total regulatory capital.

Each of the proposed SFTs will at all times be overcollateralized, the
Branch will mark to market the SFTs on a daily basis, and the SFTs will be subject
to daily margin-maintenance requirements. In addition, the Affiliated Broker-
Dealer must execute an SFT with an unaffiliated market participant that is
contemporaneous with and on the same terms as the Branch’s SFT with the
Affiliated Broker-Dealer. This requirement should help ensure that each
transaction with the Branch is on market terms, that the Branch does not use SFTs
to finance the securities inventory of the Affiliated Broker-Dealer, and that the

7 67 Federal Register 76560 (Dec. 12, 2002).
5 67 Federal Register 76560, 76598 (Dec. 12, 2002).

> See Board Letters dated August 20, 2007, to Carl Howard, Esq. (Citigroup);
Kathleen A. Juhase, Esq. (JPMC); and Patrick S. Antrim, Esq. (BofA).