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are substantially the same, or at least as favorable to the Branches, 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 SFTs 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 RBS,
the Branches, 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 RBS, the Branches, 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,

Motel Juer

Robert deV. Frierson
Deputy Secretary of the Board

cc: Michael Schussler, Esq.
Federal Reserve Bank of New York

See 12 U.S.C. § 371c-1(a)(1).


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with the Affiliated Broker-Dealer. This requirement should help ensure that each
transaction with the Branches is on market terms, that the Branches do not use
SFTs to finance the preexisting securities inventory of the Affiliated Broker-
Dealer, and that the affiliate serves only as a conduit through which the Branches
engage in SFTs with unaffiliated counterparties.

To enhance the ability of the Branches to promptly close out and
liquidate SFTs with the Affiliated Broker-Dealer in the event of the affiliate’s
insolvency, the SFTs between the Branches and the Affiliated Broker-Dealer must
be promptly collectable even in the case of bankruptcy by the Affiliated Broker-
Dealer.'” Moreover, 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 special discount window lending facility, the
Branches would be permitted under the exemption to hold these existing
transactions to maturity.

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

The Branches would continue to be subject to the market-terms
requirement of section 23B of the Federal Reserve Act.'! Section 23B requires that
the SFTs between the Branches and the Affiliated Broker-Dealer be on terms that

'° This protection applies to “securities contracts” under section 555 of the
Bankruptcy Code. If an SFT between a 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 U.S.C. § 371c-1; 12 CFR part 223, subpart F.


BOARD OF GOVERNORS

OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

October 12, 2007

Mr. Jay Levine

Head of RBS Global Banking
& Markets, North America

The Royal Bank of Scotland

101 Park Avenue

New York, New York 10178

Dear Mr. Levine:

This is in response to the request by The Royal Bank of Scotland plc
(“RBS”), Edinburgh, Scotland, for a temporary exemption from section 23A of the
Federal Reserve Act and the Board’s Regulation W.' The exemption would allow
RBS’s branches in New York, New York, and Greenwich, Connecticut
(“Branches”), to engage in certain securities financing transactions with their
affiliate, Greenwich Capital Markets, Inc. (“Affiliated Broker-Dealer”), also in
Greenwich, as described below.

The Branches propose to extend credit to market participants in need
of short-term liquidity to finance their holdings of certain residential and
commercial mortgage loans and mortgage-backed securities, asset-backed
securities, commercial paper, and other structured products (“Assets”). For
operational reasons, the Branches propose to channel these transactions through the
Affiliated Broker-Dealer. The transactions between the Branches 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”). For each of the
proposed SFTs, the Branches will at all times be overcollateralized; the extent of

' 12 U.S.C. § 371c; 12 CFR part 223.


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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
access to the federal safety net.’ The Board also has stated that it decided to apply

> 12 CFR 223.61(a).

3 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(b)(7) and 12 CFR 223.3(h).

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

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

67 Federal Register 76560 (Dec. 12, 2002).


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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 Branches and the Affiliated Broker-Dealer
would be covered transactions under section 23A and Regulation W. Because the
Branches propose to engage in SFTs with the Affiliated Broker-Dealer in amounts
that exceed the Branches’ quantitative limits under the statute and rule, RBS 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”), Bank of America
Corporation (“BofA”), and Deutsche Bank AG (“Deutsche Bank”).”

RBS has agreed to several conditions that will help ensure that it
engages in the proposed SFTs in a safe and sound manner. RBS is well capitalized
and has represented that it will limit its lending under this exemption to $10 billion,
which constitutes less than 30 percent of RBS’s total regulatory capital. RBS will,
as a condition of the exemption, also agree either to guarantee the obligations of
the Affiliated Broker-Dealer to the Branches in connection with the proposed SFTs
or to pledge to the Branches funds equal to 5 percent of the value of the Assets to
help ensure that the Branches do not incur losses in connection with the SFTs.

This commitment provides additional protection to the Branches in the event of the
insolvency of the Affiliated-Broker Dealer.

Each of the proposed SFTs will at all times be overcollateralized, the
Branches 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
substantially contemporaneous with and on the same terms as the Branch’s SFT

® 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); Patrick S. Antrim, Esq. (BofA); and
September 12, 2007, to Michael L. Kadish, Esq. (Deutsche Bank).