Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices 9225

8See supra note 3.

9See Exchange Rules 902C(c), (d), and (e).

10 15 U.S.C. § 78s(b)(2) (1988).

11 17 CFR 200.30–3(a)(12).

1Cedel, socie ́te ́ anonyme (formerly the Centrale

de Livaison de Valeurs Mobilie`res) was established

in 1970. On January 1, 1995, Cedel, socie ́te ́

anonyme was converted into Cedel Bank to perform

lending, clearing, and settlement activities, and a

parent company, Cedel International, was created

into which Cedel transferred the nonbanking

subsidiaries. Cedel Bank is a wholly-owned

subsidiary of Cedel International. Cedel Bank is

licensed in Luxembourg both as a bank and as a

‘‘professionnel du secteur financier’’ (‘‘PSF’’) and is

under the supervision of the Institut Monetaire

Luxembourgeois (‘‘IML’’), Luxembourg’s banking

and securities regulatory authority. Cedel

International is licensed as a non-bank PSF and also

is under the supervision of the IML. The IML

establishes capital and liquidity requirements,

evaluates the financial condition and performance

of all Luxembourg financial institutions, conducts

on-site inspections, and monitors all financial

institutions and their controlling companies for

adherence to Luxembourg laws and regulations. On

April 24, 1996, the Federal Reserve Board granted

Cedel Bank’s request to establish a representative

office in New York.

2Copies of the application for exemption are

available for inspection and copying at the

Commission’s Public Reference Room.

3 15 U.S.C. 78q–1.

4 17 CFR 240.17Ab2–1.

5Securities Exchange Act Release No. 37309

(June 12, 1996), 61 FR 31201 (notice of filing of

application for exemption from registration as a

clearing agency) (‘‘Cedel Notice’’).

6Letters from John H. Huffstutler, Senior Vice

President and Chief Regulatory Counsel, Bank of

America National Trust and Savings Association

(July 17, 1996); Guillaume de Beaufort,

Administration Head, Paribas Capital Markets (July

18, 1996); Pierre Vermenouze, Senior Vice

President, Banque et Finance Internationales (July

17, 1996); Thomson Ng, Executive Director of

Operations, Fuji International Finance (HK) Limited

(July 18, 1996); John Macfarlane, Managing

Director, Salomon Brothers Inc (July 19, 1996);

Monroe R. Sonnenborn, Managing Director, Morgan

Stanley & Co. Incorporated (July 22, 1996); JeanMarie Grenet, Operations Head, and Jimmy Hew,

Deputy Operations Head, Paribas Merchant Banking

Asia Limited (July 23, 1996); Lo Kit-sang, Manager,

Sin Hua Bank Ltd. (July 22, 1996); Fan Jian Hua,

Manager, and Zhu Wen Xiang, Chief Dealer, The

Investment Company of The People’s Republic of

China (Singapore) Pte Ltd (July 26, 1996); Gilbert

Lee and Richard Yiu Tak Shing, Bannque Nationale

de Paris (July 29, 1996); and Augustine Chua,

Deputy Manager, Rapobank (August 1, 1996) to

Jonathan Katz, Secretary, Commission. These

comment letters for File No. 600–29 are available

for inspection and copying in the Commission’s

Public Reference Room.

furthers the objectives of Section 6(b)(5)

in particular in that it is designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of change, to foster

cooperation and coordination with

persons engaged in facilitating

transactions in securities, and to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The self-regulatory organization does

not believe that the proposed rule

change will impose any inappropriate

burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Comments were neither solicited nor

received with respect to the proposed

rule change.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

changes that are filed with the

Commission, and all written

communications relating to the

proposed rule changes between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. § 552, will be

available for inspection and copying at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filings also will be available for

inspection and copying at the principal

office of the Amex. All submissions

should refer to File No. SR–Amex–97–

05 and should be submitted by March

21, 1997.

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission finds that the

proposed rule change is consistent with

the Act and the rules and regulations

thereunder applicable to a national

securities exchange, and, in particular,

the requirements of Section 6(b)(5)

thereunder.

The Commission believes that it is

reasonable for de Jager & Company to be

released from liability for any damages,

claims, losses, or expenses related to the

accuracy or completeness of the Index

or caused by errors in the Index

calculation. The Commission notes that

de Jager & Company will not be

involved, except in the limited advisory

capacity described above, in the

calculation or maintenance of the Index.

The Commission finds good cause to

approve the proposal prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register in that this rule

filing is being filed in connection with

the Exchange’s proposal to list and trade

options on the Index, which has been

given summary effectiveness treatment

pursuant to Section 19(b)(3) of the Act.8

In addition, this proposal raises no new

issues as the Commission has

previously approved similar proposals

by the Amex to release various entities

from certain liability for damages

resulting from the use of their products

where these entities have no active role

in the trading and calculation of the

index value.9 Accordingly, the

Commission believes that it is

consistent with Sections 6(b)(5) and

19(b)(2) of the Act to approve the

proposed rule change on an accelerated

basis.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) 10 of the Act, that the

proposed rule change (File No. SR–

Amex–97–05) is hereby approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

[FR Doc. 97–5028 Filed 2–27–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38328; International Series

Release No. 1058; File No. 600–29]

Self-Regulatory Organizations; Cedel

Bank; Order Approving Application for

Exemption From Registration as a

Clearing Agency

February 24, 1997.

On August 31, 1995, Cedel Bank,

socie ́te ́ anonyme, Luxembourg

(‘‘Cedel’’) 1 filed with the Securities and

Exchange Commission (‘‘Commission’’)

an application on Form CA–1 2 for

exemption from registration as a

clearing agency pursuant to Section 17A

of the Securities Exchange Act of 1934

(‘‘Exchange Act’’) 3 and Rule 17Ab2–1

thereunder.4 Notice of Cedel’s

application was published in the

Federal Register on June 19, 1996.5

Eleven comment letters were received in

response to the notice of filing of the

Cedel application.6 This Order grants

Cedel’s application for exemption from

registration as a clearing agency to

permit Cedel to offer clearance,

settlement, and credit support services

to U.S. and non-U.S. entities for

transactions in U.S. government

securities subject to the conditions and

limitations that are set forth below.
9226 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices

7A more complete description of Cedel’s

clearance, settlement, and credit support services,

is contained in the Cedel Notice supra note 5.

8 In 1995, Cedel settled over US$10 trillion worth

of securities. At that time, over 75,000 instruments

were eligible for settlement in the Cedel system.

9The Luxembourg legal framework provides for

the finality of settlements on Cedel’s books and the

fungibility of securities deposited with Cedel.

10To enable it to extend such financing, Cedel

maintains a US$10 billion committed revolving

credit facility with a syndicate of major banks, a

US$500 million commercial paper facility and

approximately US$8 billion of uncommitted lines

of credit available. Cedel also has a US$1.8 billion

letter of credit guaranteeing transmissions across

the bridge established between Cedel and the

Euroclear System (‘‘Euroclear’’). In addition, Cedel

can access uncommitted lines of credit with

domestic lenders in each of the thirty countries

where Cedel has established a settlement link to

provide its customers with foreign currency

settlement capabilities.

11Similar to Cedel, Euroclear provides clearance

and settlement services for internationally traded

debt and equity securities. Euroclear is operated

under contract with the Euroclear Clearance

System, socie ́te ́ coope ́rative (‘‘Euroclear

Cooperative’’), by Morgan Guaranty Trust Company

of New York through its Euroclear Operations

Centre in Brussels. The Euroclear Cooperatives is a

Belgian cooperative corporation whose participants

include international banks, brokers, and other

securities professionals. See infra note 13.

12 Daytime and overnight settlement processing

are the same except that securities lending and

borrowing services are not available to customers

on an automatic basis in overnight settlement

processing.

13The electronic bridge enables trades to be

processed on a book-entry basis between Cedel and

Euroclear rather than by the physical delivery of

securities.

14Cedel’s chaining system allows securities to be

bought and sold many times during the day. Cedel’s

chaining program scans open transactions until all

cash and securities resulting from same-day

settlement are reemployed to settle further

transactions of same-day value. Therefore, back-toback transfers for equivalent funds may not create

net payment obligations because customers can use

proceeds from sales to settle purchases.

15An internal settlement is the settlement of a

transaction between two Cedel customers where the

securities being transferred are maintained by bookentry at Cedel. An external settlement is the

settlement of a transaction where one of the

counterparties to a transaction is not a Cedel (or

Euroclear) customers or where a Cedel customer is

transferring securities that are not maintained by

book-entry at Cedel.

16The securities may be owned outright or

borrowed.

17Acceptable cash and credit facilities for a

customer include cash in its account, pre-advices of

funds to be received that day, and any

predetermined borrowing capacity.

18Because Cedel does not interpose itself between

counterparties or otherwise guarantee settlement of

securities transactions in its clearance and

settlement system, Cedel believes its operations are

essentially devoid of settlement risk to Cedel and

therefore Cedel does not rely on a clearing fund or

the resources of its customers.

19 GCSS became operational on September 30,

1996 with four institutions, including Bank of

America, Banque Paribas, Dresdner Bank, and

Salomon Brothers.

20Each GCSS customer can establish the

parameters of their bilateral arrangements, which

are captured by GCSS. A pair of GCSS customers

generally will have one agreement although GCSS

can provide for multiple agreements. Each

agreement will define such things as the eligible

collateral, haircuts, rehypothecation authorization,

frequency of exposure entry and securities

valuation, and minimum transfer amounts. Eligible

collateral can be selected from any of the securities

or currencies accepted by Cedel. GCSS customers

also may establish counterparty-specific eligibility

tables to either restrict or broaden their eligibility

criteria and/or haircuts.

21There is no requirement that a GCSS customer

have an account at Cedel in order to utilize the

services provided by GCSS.

I. Description of Cedel’s Proposed

Services 7

A. Clearance and Settlement

Cedel currently offers to its customers

international clearance and settlement

of securities transactions in primary and

secondary markets, trade confirmation,

securities custody, and securities

lending services. Cedel processes fixed

income bonds such as Eurobonds,

domestic and convertible bonds, money

market instruments, short and medium

term notes, equities, and warrants.

Cedel provides delivery-versuspayment (‘‘DVP’’) settlement for

securities transactions.8 DVP settlement

is made possible by the legal

environment for securities custody and

transfer in Luxembourg.9 Liquidity

facilities are negotiated with financial

institutions to permit Cedel to extend

financing to customers to meet their

settlement requirements in local

currencies.10

Cedel’s presettlement trade matching

service consists of a trade comparison

system that allows customers in both

Cedel and Euroclear 11 to compare their

trade data. Incoming trade data is

compared in one of four daily matching

runs. Information on the status of a

transaction is made available to the

counterparties ninety minutes after

processing of the trade data for each

matching run.

Cedel operates two securities

processing systems, overnight

settlement processing and daytime

settlement processing.12 Overnight

processing is possible because of the

bridge agreement established between

Cedel and Euroclear.13 The bridge

agreement facilitates the two-way

exchange of counterparty data, enabling

both Cedel and Euroclear to settle

overnight and to provide early morning

position statements. With multiple

overnight processing, Cedel’s customers

can settle trades with Euroclear

participants for same day value.

Multiple overnight processing also

allows ‘‘chaining’’ of securities

transactions in and between Cedel and

Euroclear.14

Each settlement within the overnight

and daytime processing systems is

distinguished by whether it is an

‘‘internal’’ or ‘‘external’’ settlement at

Cedel.15 Settlement services are

performed at Cedel without notifying or

instructing its securities depositories.

Funds transfers necessary to settle

transactions may be made to or from an

account maintained at Cedel or to or

from one of its correspondent banks.

Because transfers or securities accepted

at both Euroclear and Cedel may be

settled and cleared through the bridge,

Cedel treats settlements between

customers of Cedel and Euroclear

involving such securities as internal.

Transactions for settlement on a given

day are matched at Cedel and are settled

if the delivering party has

unencumbered securities sufficient to

make delivery 16 and the receiving party

has sufficient cash and facilities to pay

for the securities.17 If either condition is

not met, the transaction will fail. If

securities are delivered against

uncollected or borrowed funds, a

collateral interest is taken in the

receiving participant’s securities

holding within the system to secure the

creditor.18

B. Global Credit Support Service

One of the primary reasons for Cedel’s

request for exemption from registration

as a clearing agency is the

implementation of the Global Credit

Support Service (‘‘GCSS’’).19 GCSS is a

book-entry, real-time collateral

management service for cross-border

securities collateralization. GCSS is

intended to enable GSCC customers to

reduce the credit risk associated with

their financial exposures to

counterparties by offering an efficient

and safe means of monitoring exposure

and by providing credit support for

GCSS customers using a variety of

bilateral credit support legal

arrangements.20 GCSS functions include

the standard functions of an agent, such

as exposure recording, asset valuation

and movement, safekeeping, and

reporting. GCSS interposes itself as an

operational agent but does not assume

any principal or decision-making role in

the event of disputes between parties.

All cash and securities in GCSS are

held in an omnibus account within the

Cedel core clearance and settlement

system. Transfers into and out of GCSS

are made by book-entry transfer of

securities from a GCSS customer’s

account or from a GCSS customer’s

correspondent account at Cedel to

GCSS’s omnibus account at Cedel.21

GCSS customers will inform GCSS of

the level of exposure from their net

counterparty positions to be covered by

GCSS. This exposure level will be the
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices 9227

22 GCSS will operate two main daily processing

cycles to provide credit support and to generate

reports. GCSS customers will select which of the

two cycles they will use. The cycle will provide

assessments of existing credit support and required

additional assets which counterparties may satisfy

in the next cycle or at the latest in the same cycle

on the next day.

23 GCSS customers will indicate in their GCSS

agreement whether they will permit counterparties

to reuse assets. If so permitted, counterparties may

then transfer within GCSS the securities they have

received as credit support (‘‘on-transfer’’) or remove

the securities from GCSS and enter into repurchase

or reverse repurchase agreements.

24 GCSS may notify a GCSS customer of the need

to bring more assets into the system to meet a

shortfall in the value of credit support assets at

GCSS. GCSS customers will be able to move assets

to their GCSS account in several ways: by

transferring eligible assets from a clearing and

settlement account in Cedel during the next

available Cedel processing cycle, by providing

GCSS with a power of attorney to transfer assets

from its clearing and settlement account at Cedel to

its GCSS omnibus account at Cedel, by entering into

a securities borrowing arrangement within a Cedel

clearing and settlement account to obtain a loan of

the required securities, or by moving eligible

securities over a cross-border link into Cedel.

25 In 1993, Cedel requested a no-action position

from the Division relating to Cedel’s providing

clearance, settlement, and other services to

participants in U.S. government securities. The

Division issued a no-action letter to Cedel on

September 15, 1993, stating that the staff of the

Division would not recommend to the Commission

that it take enforcement action if Cedel accepts U.S.

Treasury debt securities maintained in book-entry

form as collateral for certain obligations of Cedel’s

customers without registering as a clearing agency

pursuant to Section 17A of the Exchange Act. The

no-action letter did not extend to clearance and

settlement services for Cedel customers in U.S.

government securities. Letter regarding Cedel S.A.

(September 15, 1993).

Under Section 3(a)(23) of the Exchange Act, the

term ‘‘clearing agency’’ is defined to mean, among

other things, any person, such as a securities

depository, who permits or facilitates the settlement

of securities transactions or the hypothecation or

lending of securities without physical delivery of

securities certificates. Cedel’s proposal for the

implementation of GCSS places Cedel within the

scope of the activities of a clearing agency because

GCSS could be deemed to permit or facilitate the

hypothecation or lending of U.S. securities in a

book-entry environment. However, the activities of

GCSS are not the sole basis for considering Cedel’s

proposed activities to be those of a clearing agency.

Cedel’s proposal, which originally included the

clearance and settlement of all U.S. securities

involving U.S. entities, also places Cedel within the

definition of clearing agency for purposes of Section

17A of the Exchange Act. Although this Order

limits the exemptive relief sought by Cedel to U.S.

government securities and will not include all U.S.

equity and debt securities, the classification of

Cedel as a clearing agency for purposes of Section

17A is not affected.

26As either an automatic lender or automatic

borrower, a customer authorizes Cedel to lend or

borrow securities upon the identification of an

excess of securities in a lender’s account or an

insufficiency in a borrower’s account.

Automatic borrowings only may occur when

there is an adequate volume of eligible securities

available from a lender participating in the program

and the borrower is eligible to borrow under the

terms of the program.

27Case by case borrowings are handled by Cedel

in chronological sequence of receipt of instructions.

As a case by case lender or as a case by case

borrower, a customer is required to authorize each

loan or borrowing.

28Cedel effects loans and borrowings for

automatic lenders and automatic borrowers before

it effects loans and borrowings for case by case

lenders and case by case borrowers.

29The collateral, which can be qualifying

securities or cash, is blocked in the borrower’s

account by Cedel for the benefit of the guarantors.

Cedel monitors the collateral daily to ensure that

the collateral value of the securities or cash is at all

times greater than or equal to the market value of

the securities loaned plus an additional percentage

of the market value.

30Under the pre-advice service, a customer

notifies Cedel that funds will be received in the

customer’s account on that day or the next day. On

the basis of this pre-advice, Cedel will credit the

amount of funds to the customer’s account prior to

actual receipt up to the maximum pre-advice line

of credit established for the customer. During any

business day, Cedel will not advance an amount

that exceeds the amount of the line of credit or the

collateral value of qualifying securities held in the

customer’s account.

31Under the TOF service, Cedel pays the selling

customer in advance of receipt of payment by the

purchasing customer. To protect itself from market

and credit risk, Cedel blocks the securities in the

purchasing customer’s account to ensure that the

purchasing customer does not remove the securities

until it clears its net debit position. If the

purchasing customer fails to clear its net debit

position within forty-eight hours, Cedel can

liquidate the customer’s assets to satisfy the net

debit position. In addition, Cedel is granted a lien

on all securities and other assets in a participating

customer’s account with Cedel pursuant to a TOF

agreement between Cedel and its customer to cover

any additional losses which may be incurred.

basis on which GCSS will compute

credit support requirements for the

period.22 Based on the size of the net

exposure and the terms of the bilateral

agreement between two GCSS

customers, GCSS moves free of payment

securities and/or cash between the

parties’ accounts. GCSS reports to each

GCSS customer their available positions

(i.e., the customer’s own securities and

cash it has in the system that are not in

use), the amounts delivered out, the

amounts received, the amounts ‘‘ontransferred,’’ 23 new credit support

amounts expected in from

counterparties, and new credit support

amounts required.24

One of the more important services

offered by GCSS allows customers to

reuse the securities held as credit

support. For those GCSS customers

permitted by their counterparties to

reuse assets, GCSS will enable ‘‘ontransfer’’ of securities. GCSS will track

and value assets subjected to ontransfers and will keep records of the

original and all subsequent transferrers

and transferees of the asset. Where ontransfers are permitted, a position may

be subdivided and on-transferred to

multiple counterparites.

U.S. Treasury securities (‘‘U.S.

Treasuries’’) are the preferred securities

for use as collateral in securing

international credit obligations arising

from derivatives activities or otherwise.

Therefore, Cedel believes it is essential

that it be able to accept U.S. Treasuries

in GCSS if it is to efficiently facilitate

cross-border collateralization. In part, it

is the ‘‘on-transfer’’ or rehypothecation

of U.S. government securities by or for

U.S. entities in GCSS that subjects Cedel

to the clearing agency registration

requirements of Section 17A.25 As a

condition of the no-action position

provided to Cedel in 1993, Cedel agreed

not to act as an agent in facilitating

repurchase agreements between Cedel

customers and others with regard to

U.S. Treasuries and agreed that none of

the collateral services performed by

Cedel would be such that the services

could be interpreted as authorizing the

purchase and sale of U.S. Treasuries,

including repurchase agreement

transactions, by Cedel’s customers or

affiliates using Cedel’s systems.

C. Securities Lending and Borrowing

Services

Under Cedel’s lending and borrowing

service, all customers are required to act

as principal and Cedel’s role is to effect

the transfers for the lending or

borrowing transactions by book-entry

movement in the Cedel system and to

monitor the associated collateral.

Customers elect to participate as either

‘‘automatic’’ 26 or ‘‘case by case’’ 27

lenders or borrowers.28 A syndicate of

banks guarantees borrower performance

and each borrower is required to post

and maintain collateral sufficient to

secure the guarantee obligation of the

guarantor syndicate.29

D. Credit Facilities

Cedel provides four main types of

credit facilities to its customers: preadvices, technical overdraft facilities

(‘‘TOF’s’’), tripartite financing

arrangements (‘‘TFA’s’’), and

unconfirmed funds facilities (‘‘UFF’’).

Customers can obtain short term credit

through the use of pre-advices.30 TOFs

are short-term financing facilities used

to facilitate clearance of securities

transactions against payment.31 Cedel

also acts as collateral agent in

specifically negotiated TFAs, which

provide longer term financing for
9228 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices

32 Generally, the TFA is an agreement between

three parties, the borrower (Cedel customer), the

lender (the financing bank), and the collateral agent

(Cedel). Cedel may introduce lenders to borrowers

but does not play a substantial role in the

negotiations of TFAs. After a TFA has been

negotiated, Cedel acts solely as collateral agent

whereby Cedel determines the adequacy of and

monitors the pledged collateral which is blocked in

the borrowing customer’s account with Cedel. Cedel

bears no credit exposure with regard to TFAs.

33A customer’s UFF limit is dependent to a large

extent upon the financial standing of the

institution. The UFF also must be collateralized. By

blocking collateral against unconfirmed funds,

Cedel believes that it covers the contingent risk that

anticipated funds may not be received. As with

TOFs and TFAs, only the actual amount of credit

drawn under the UFF must be collateralized.

34Supra note 6.

35One commenter pointed out that the inclusion

of U.S. Treasuries in Cedel’s processing systems

would benefit U.S. banks in their management of

derivatives exposure because such banks could

utilize commonly held U.S. Treasuries in GCSS

rather than non-U.S. securities which would have

to be purchased by U.S. banks in the market. Letter

from John H. Huffstutler, Senior Vice President and

Chief Regulatory Counsel, Bank of America

National Trust and Savings Association, to Jonathan

Katz, Secretary, Commission (July 17, 1996).

36 15 U.S.C. 78q–1. Section 17A(a)(1) provides:

(1) The Congress finds that—

(A) The prompt and accurate clearance and

settlement of securities transactions, including the

transfer of record ownership and the safeguarding

of securities and funds related thereto, are

necessary for the protection of investors and

persons facilitating transactions by and acting on

behalf of investors.

(B) Inefficient procedures for clearance and

settlement impose unnecessary costs on investors

and persons facilitating transactions by and acting

on behalf of investors.

(C) New data processing and communications

techniques create the opportunity for more efficient,

effective, and safe procedures for clearance and

settlement.

(D) The linking of all clearance and settlement

facilities and the development of uniform standards

and procedures for clearance and settlement will

reduce unnecessary costs and increase the

protection of investors and persons facilitating

transactions by and acting on behalf of investors.

For legislative history concerning Section 17A,

see, e.g., Report of Senate Comm. on Housing and

Urban Affairs, Securities Acts Amendments of

1975: Report to Accompany S. 249, S. Rep. No. 75,

94th Cong., 1st Sess. 4 (1975); Conference Comm.

Report to Accompany S. 249, Joint Explanatory

Statement of Comm. of Conference, H.R. Rep. No.

229, 94th Cong., 1st Sess., 102 (1975).

37 ‘‘Clearing agency’’ is defined in Section

3(a)923) of the Exchange Act. 15 U.S.C. 78c(a)(23).

38 15 U.S.C. 78q–1(b)(3). See also Section 19 of

the Exchange Act, 15 U.S.C. 78s, and Rule 19b–4,

17 CFR 240.19b–4, setting forth procedural

requirements for registration and continuing

Commission oversight of clearing agencies and

other self-regulatory organizations.

39Securities Exchange Act Release No. 16900

(June 17, 1980), 45 FR 41920 (‘‘Standards Release’’).

See also, Securities Exchange Act Release No.

20221 (September 23, 1983), 48 FR 45167 (omnibus

order granting registration as clearing agencies to

The Depository Trust Company, Stock Clearing

Corporation of Philadelphia, Midwest Securities

Trust Company, The Options Clearing Corporation,

Midwest Clearing Corporation, Pacific Securities

Depository, National Securities Clearing

Corporation, and Philadelphia Depository Trust

Company).

40 15 U.S.C. 78q–1(b)(1).

41The first exemption from clearing agency

registration was granted in 1995. Clearing

Corporation for Options and Securities, Securities

Exchange Act Release No. 36573 (December 12,

1995), 60 FR 65076. The Commission has granted

temporary registrations that included exemptions

from specific Section 17A statutory requirements in

a manner designed to achieve the statutory goals of

Section 17A. In granting these temporary

registrations it was expected that the subject

clearing agencies would eventually apply for

permanent clearing agency registration. See, e.g.,

Securities Exchange Act Release No. 25740 (May

24, 1988), 53 FR 19839 (order approving

Government Securities Clearing Corporation’s

temporary registration as a clearing agency with a

temporary exemption from compliance with

Section 17A(b)(3)(C)).

customers than pre-advices and TOFs.32

Use of a customer’s UFF to finance

settlements is allowed only at Cedel’s

discretion. If a customer’s TOF or TFA

is insufficient to settle all securities

transactions on its account in a given

settlement processing, Cedel may permit

the customer to use its UFF for

settlement purposes.33

II. Comment Letters

The Commission received eleven

comment letters in response to the

notice of filing of the Cedel

application.34 All were favorable

towards granting Cedel an exemption

from registration as a clearing agency.

Each of the commenters discussed the

importance of allowing U.S. Treasuries

to be accepted into the Cedel system

and the utility of GCSS in providing an

efficient global credit risk management

tool for over-the-counter collateralized

derivatives activities. With regard to

Cedel’s proposal to offer clearance and

settlement services, commenters

pointed to the increased access to U.S.

markets and a standardization of

clearance and settlement formats that

would be afforded to Cedel’s customers

under the exemption. Commenters also

favored an exemption from registration

as a means to preserve the existing

commercial relationships that exist

among Cedel and its customers under

Luxembourg law.

Furthermore, commenters stressed

that because U.S. Treasuries are the

dominant and preferred class of

collateral for derivatives transactions,

inclusion of these securities in GCSS

will increase the effectiveness and

utilization of GCSS,35 which in turn

could reduce the exposure associated

with under- or non-collateralized

derivatives transactions conducted by

U.S. and non-U.S. entities. Commenters

believed that GCSS will solve many of

the legal complexities and will reduce

the legal uncertainties associated with

cross-border collateralization.

Commenters did not specifically discuss

the unique or additional benefits to be

derived from permitting Cedel to

provide securities processing services

for U.S. securities other than U.S.

Treasuries.

III. Discussion

A. Statutory Standards

Section 17A of the Exchange Act

directs the Commission to promote

Congressional objectives to facilitate the

development of a national clearance and

settlement system for securities

transactions.36 Registration of clearing

agencies 37 is a key element of the

regulation of clearing agencies in

promoting these statutory objectives.

Before granting registration to a clearing

agency, Section 17A(b)(3) of the

Exchange Act requires that the

Commission make a number of

determinations with respect to the

clearing agency’s organization, capacity,

and rules.38 The Commission has

published the standards applied by its

Division of Market Regulation in

evaluating applications for clearing

agency registration.39 These

requirements are designed to assure the

safety and soundness of the clearance

and settlement system.

Section 17A(b)(1), moreover, provides

that the Commission:

* * * may conditionally or

unconditionally exempt any clearing agency

or security or any class of clearing agencies

or securities from any provisions of [Section

17A] or the rules or regulations thereunder,

if the Commission finds that such exemption

is consistent with the public interest, the

protection of investors, and the purposes of

[Section 17A], including the prompt and

accurate clearance and settlement of

securities transactions and the safeguarding

of securities and funds.40

The Commission reviews every

application for exemption against the

standards for clearing agency

registration.41

B. Evaluation of Cedel’s Application for

Exemption

The Commission has evaluated

Cedel’s application and the comments

received under the above standards. In

this context, the Commission recognized

that certain organizational, operational,

and jurisdictional differences would

prevent Cedel from being able to comply

fully with all of the registration

provisions. The evaluation also is made

in the context of the conditions that the

Commission will include in the

exception granted in this Order.

1. Safeguarding of Securities and Funds

Sections 17A(b)(3)(A) and (F) of the

Exchange Act require a clearing agency

be organized and its rules be designed
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices 9229

42 15 U.S.C. 78q–1(b)(3)(A) and (F). Although

Cedel does not have ‘‘rules’’ that would be subject

to public comment and Commission review as

contemplated by Section 19 of the Exchange Act for

the purposes of governing the relationship between

itself and its customers, Cedal does have various

operating agreements which define the rights and

responsibilities of Cedel and its customers.

43Clearing agencies should have an audit

committee which selects or makes

recommendations to the Board of Directors of the

clearing agency regarding the selection of the

clearing agency’s external auditors. The Cedal audit

committee, among other things, makes such

recommendations to the Board of Directors and

reviews the nature and scope of work to be

performed by the external auditors and the results

of such work.

44Managers are requested to respond to any

irregularities within two weeks of receipt of the

audit report. All responses must include an action

plan. All unresolved audit items are regularly

monitored by internal audit staff until they are

closed and management is required to provide

regular updates to internal audit on the progress of

all open items.

45The IML exercised this authority in connection

with the 1995 reorganization of Cedel Bank and its

parent, Cedel International.

46Standards Release, supra note 39, 45 FR at

41925–26.

47 In addition, Cedel’s Credit Advisory Group,

Strategic Advisory Group, and User Advisory Group

advise the Cedel Board with specialized insight into

Cedel’s operations. The Credit Advisory Group

provides information to the processing of new

customers and the maintenance of appropriate

credit standards and controls. The Strategic

Advisory Group assists in developing corporate

strategy and planning. The User Advisory Group

provides feedback on Cedel services and customer

ratification important to setting internal service

priorities and assists in new product service and

development.

48These financial statements are required to be

provided to Cedel shareholders and customers

pursuant to Luxembourg law. The Standards

Release also states that unaudited quarterly

financial statements should be made available to

clearing agency participants upon request within

thirty days following the close of each fiscal

quarter. Cedel has represented to the Commission

that under local custom it is uncommon for

Luxembourg companies to prepare unaudited

quarterly financial statements for distribution to

shareholders. The Commission believes that

because Cedel will be reporting to its customers

according to local custom and otherwise satisfies

the provisions of the Standards Release that Cedel

substantially meets the requirements of the

Exchange Act. Some foreign issuers are already

relieved from certain Exchange Act requirements

concerning the reporting of financial information.

Cf. Exchange Act Rules 12g3–2 [17 CFR 240.12g3–

2], 13a–16 [17 CFR 240.13a–16], 15d–16 [17 CFR

240.15d–16] and Form 6–K [17 CFR 249.306]

(provisions which exempt certain foreign issuers

from Exchange Act financial reporting requirements

and instead permit such foreign issuers to provide

financial and other information to the Commission

in accordance with the local reporting requirements

of their home domicile).

49Supra note 39, 45 FR at 41929.

50Cedel maintains over US $400 million in

insurance to cover all risks related to its operations

and facilities.

51Supra, note 10.

to facilitate the prompt and accurate

clearance and settlement of securities

transactions for which it is responsible

and to safeguard securities and funds in

its custody or control or for which it is

responsible.42 The Commission believes

that Cedel substantially satisfies these

standards. Among other things, Cedel

has established an audit committee

which provides oversight of Cedel

operations, financial arrangements, and

performance, and acts as a link between

the external auditors and the Board of

Directors.43 Cedel also maintains an

internal audit department that, in

conjunction with its external auditors,

maintains an ongoing detailed audit

program for Cedel’s operations. Audit

reports are issued monthly to

appropriate levels of management with

a complete report to the chief executive

officer of Cedel.44 The internal audit

department is independent of line

functions and its chief audit reports

directly to the chief executive officer of

Cedel.

Interal accounting controls for Cedel

have been designed to provide

reasonable assurance that at a minimum

(i) transactions are executed in

accordance with proper authorization,

(ii) transactions are recorded as

necessary to permit the preparation of

conforming financial statements and to

maintain accountability for assets, (iii)

access to assets or systems for recording

interests in assets is restricted only to

those with specific authorization by

Cedel management, and (vi) recorded

asset inventories are compared with

actual asset inventories at regular

intervals and appropriate actions are

taken with respect to any differences.

The adequacy of internal accounting

controls is audited annually by Cedel’s

external auditors. In addition, the IML

has the authority to instruct the external

auditors to undertake reviews of any

further matters of particular interest.45

a. Organization and Processing

Capacity. A clearing agency must be

organized in a manner that effectively

establishes operational and audit

controls while fostering director

independence.46 Cedel’s Board of

Directors is kept apprised of Cedel’s

operations through its audit committee

as well as the chief auditor from the

independent internal audit

department.47 Together, Cedel’s audit

committee, internal audit department

and various internal advisory groups

provide Cedel’s Board with risk

assessment information and are

positioned to advise the Board of the

impact that new or expanded services

and volume may have on Cedel’s

processing capacity. Accordingly, the

Commission is satisfied that Cedel’s

organizational and processing capacity

substantially satisfies the requirements

of the Exchange Act as explained in the

Standards Release because Cedel’s

internal organizational structure is

reasonably designed to provide the

necessary flow of information to its

Board of Directors which should allow

the Board to oversee Cedel’s operations

and management’s performance to

assure the operational capability and

integrity of Cedel.

b. Financial Reports. According to the

Standards Release, clearing agency

participants that have made clearing

fund contributions or have money or

securities in the custody or control of a

clearing agency should receive timely,

audited annual financial statements.

Cedel has custody of customer funds

and securities. Cedel provides

customers and shareholders with annual

audited financial statements and

company reports. The financial

statements of Cedel and Cedel

International, its parent, are not

consolidated and are presented in

accordance with European Union and

Luxembourg regulatory requirements for

the preparation of financial

statements.48

c. Financial Risk Management. The

Standards Release states that a clearing

agency should establish a clearing fund

and promulgate rules to assure an

appropriate level of contributions in

accordance with, among other things,

the risks to which the clearing agency is

subject for the protection of clearing

agency participants and for the national

system for clearance and settlement.49

As discussed in Section I.B above,

Cedel provides DVP settlement for

securities transactions which are then

batched for evening or morning

processing depending upon when they

are received. Cedel utilizes credit

facilities to avoid transaction failures

but does not maintain a clearing fund.

Cedel does bear risk resulting from preadvices that are not subsequently

confirmed. Although according to Cedel

the number of pre-advice failures is

reportedly low, such failures could

become more prevalent during times of

market stress when the value of

collateral supporting Cedel’s credit

facilities could decline in excess of the

exposure created by the pre-advice

failure.

Cedel employs financial risk

management mechanisms, including its

capitalization, insurance,50 and

committed credit facilities,51 that

substantially reduce the risk of financial

loss by participants and Cedel.

Therefore, the Commission believes that

Cedel’s rules and procedures and the

methods by which Cedel safeguards the

financial security of its clearing
9230 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices

52According to Cedel’s constituency policy for

the Board of Directors, three directors must be

selected from North America, seven from Europe,

and three Asia.

53Specifically, under current admissions

procedures Cedel would not accept as customers

investment companies or insurance companies

regulated by state or federal authorities in the

United States.

54Cedel points out in its application that conflicts

of law and international comity issues would likely

arise in connection with Cedel’s operations where

U.S. legal and regulatory requirements differ from

those of Luxembourg. This situation could

undermine the certainty of Cedel’s operational

arrangements with both U.S. and non-U.S.

customers.

facilities and GCSS substantially

satisfies the requirements of the

Exchange Act.

2. Fair Representation

Section 17A(b)(3)(C) of the Exchange

Act requires that the rules of a clearing

agency provide for fair representation of

the clearing agency’s shareholders or

members and participants in the

selection of the clearing agency’s

directors and administration of the

clearing agency’s affairs. This section

contemplates that users of a clearing

agency have a significant voice in the

direction of the affairs of the clearing

agency.

Cedel is wholly-owned subsidiary of

Cedel International which is a privately

owned entity operated for the benefit of

its shareholders. Cedel’s Board of

Directors is the same as the Board of

Directors of Cedel International. Shares

of Cedel International are held by Cedel

customers and under the Cedel

International by-laws no shareholder is

permitted to own more than five percent

of Cedel International stock. Cedel

International shareholders elect Board

members by casting one vote for each

share held, and the ultimate

composition of the Board must reflect

each of the three major time zones

serviced by Cedel.52 Accordingly, the

Commission believes that the method in

which Cedel’s directors are selected and

the methods utilized for customer

participation adequately meets the

requirements of fair representation

under Section 17A(b)(3)(C) of the

Exchange Act.

3. Participation Standards

Section 17A(b)(3)(B) of the Exchange

Act enumerates certain categories of

persons that a clearing agency’s rules

must authorize as potentially eligible for

access to clearing agency membership

and services. Section 17A(b)(4)(B) of the

Exchange Act contemplates that a

registered clearing agency have financial

responsibility, operational capability,

experience, and competency standards

that are used to accept, deny, or

condition participation of any

participant or any category of

participants enumerated in Section

17A(b)(3)(B), but that these criteria may

not be used to unfairly discriminate

among applicants or participants. In

addition, the Exchange Act recognizes

that a clearing agency may discriminate

among persons in the admission to or

the use of the clearing agency if such

discrimination is based on standards of

financial responsibility, operational

capability, experience, and competence.

Under its current admissions policy,

Cedel will accept as customers financial

institutions that are regulated in their

home market by a financial regulatory

authority. Such institutions include

commercial and investment banks and

broker-dealers, but do not include

investment companies or insurance

companies.53 Cedel excludes

investment companies and insurance

companies because it believes that on an

international level these entities are not

subject to regulation comparable to

banks or broker-dealers, and that there

is great variance among nations.

However, investment companies,

insurance companies and other market

participants are afforded an opportunity

to participate in Cedel through accounts

with banks, broker-dealers, or

custodians that are Cedel customers. In

addition, under the general terms and

conditions applicable to its customers,

Cedel reserves the right to deny services

to any applicant without disclosing the

reasons of such denial to the applicant.

Although Cedel’s admissions policy is

relatively inclusive, it would not meet

the requirements of Section 17A(b)(3)(B)

of the Exchange Act with regard to

participants because the policy does not

provide for membership by all of the

enumerated categories of persons.

Nevertheless because commercial and

investment banks and broker dealers are

eligible for Cedel membership and

because Cedel has accepted a wide

range of customers based upon its

standards of financial responsibility,

operational capability, experience, and

competence, the Commission is satisfied

that Cedel’s participation standards are

acceptable in light of Cedel’s business

and legal context.

4. Dues, Fees, and Charges

Sections 17A(b)(3) (D) and (E) of the

Exchange Act provide for the equitable

allocation of reasonable dues, fees, and

other charges among clearing agency

participants and prohibits a clearing

agency from imposing or fixing prices

for services rendered by its participants.

Fees charged by Cedel are generally

usage-based and are priced in a

competitive environment with other

entities that offer international clearance

and settlement services. Cedel does not

impose any schedule of prices or fix

rates or other fees for services rendered

by its customers. Accordingly, the

Commission is satisfied that the method

by which Cedel provides for the

equitable allocation of reasonable dues,

fees, and other charges among its

customers and its prohibitions regarding

the fixing of prices of its customers

substantially satisfies the Exchange Act

requirements.

5. Capacity To Enforce Rules and To

Discipline Participants

Section 17A(b)(3)(A) of the Exchange

Act requires that a registered clearing

agency be so arranged and have the

capacity to enforce compliance by its

participants with its rules. Furthermore,

Sections 17A(b)(3) (G) and (H) require a

registered clearing agency to have in

place a system to discipline its

participants for violations of its rules

and that the procedures for applying

such rules be fair and equitable.

Cedel is organized as a bank under the

laws of Luxembourg and bilaterally

contracts with each of its customers to

provide clearance and settlement and

other securities services. Cedel is not a

self-regulatory organization within the

meaning of the Exchange Act. In

particular, Cedel does not have any

disciplinary authority over its customers

other than the commercial discipline of

refusing to provide services to those

customers that fail to satisfy the terms

of their contractual arrangements with

Cedel. Cedel contends that a selfregulatory structure as envisioned under

the Exchange Act is incompatible with

its current legal and business structure

under Luxembourg law. Specifically,

Cedel believes that it would be

compelled to alter its clearance and

settlement arrangements from its

present bilateral contractual agreements

with its customers and that such a

change would upset and complicate the

existing legal structure of international

cross-border clearance and settlement of

securities transactions. Moreover, Cedel

believes any rules it would promulgate

as a self-regulatory entity under U.S.

law would have questionable

application in the home markets of

Cedel’s international customers outside

of the United States.54

The Commission is sensitive to the

myriad of issues which could arise in

connection with requiring Cedel to

comply with the self-regulatory

structure and obligations of a registered

clearing agency. Through its review of

Cedel’s operational arrangements with
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices 9231

55 15 U.S.C. 78s(b)(1).

56Among other things, foreign sovereignty

considerations may limit the Commission’s ability

to carry out all of its regulatory functions outside

of the United States. Accordingly, the Commission

notes that it does not possess the same degree of

regulatory authority and control over an exempt

non-domestic clearing agency such as Cedel as the

Commission has with respect to a fully registered

clearing agency.

57The Commission is of the view that the

provision of clearance, settlement, and collateral

management services by a foreign clearing agency

for U.S. entities in U.S. debt and equity securities

raises issues that were not addressed sufficiently in

the Cedel Notice. Consequently, commenters may

not have focused on these issues. Therefore, the

Commission today is publishing a notice relating to

Cedel’s original proposal to solicit comments on the

specific issue as to the appropriate scope of an

exemption to permit Cedel to offer its securities

processing and collateral management services for

U.S. debt and equity securities in addition to

eligible U.S. government securities. Securities

Exchange Act Release No. 38329 (February 24,

1997).

58 ‘‘Government securities’’ is defined in Section

3(a)(42) of the Exchange Act, 15 U.S.C. 78c(a)(42).

Fedwire is a large-value transfer system operated by

the Federal Reserve Banks that supports the

electronic transfer of funds and the electronic

transfer of book-entry securities.

59 GNMAs, unlike other mortgage-backed

securities such as those guaranteed by the Federal

National Mortgage Association (‘‘FNMAs’’) and the

Federal Home Loan Mortgage Association

(‘‘FHLMCs’’), are issued in certificated form and

therefore cannot be transferred over Fedwire.

60 ‘‘Eligible U.S. government securities’’ also

includes any collateralized mortgage obligation

(‘‘CMO’’) whose underlying securities are Fedwire

eligible U.S. government securities or GNMA

guaranteed mortgage-backed pass through securities

and which are depository eligible securities.

its customers, the Commission is

satisfied that the goals of Sections

17A(b)(3) (G) and (H) requiring

registered clearing agencies to have in

place a system to discipline its

participants for violations of their rules

are substantially fulfilled under Cedel’s

current structure and by grant of the

exemption. For example, regarding the

Exchange Act requirement that

registered clearing agencies assure

participant compliance with the

clearing agencies’ rules and procedures,

Cedel has a strong financial incentive to

have its customers adhere to Cedel’s

financial and operational requirements.

Additionally, although Cedel does not

have formal disciplinary authority over

its customers, it can influence its

customers’ activities by its credit

extension, admissions, and termination

policies. Furthermore, if Cedel fails to

assure adequate compliance by its

customers with Cedel’s financial and

operational requirements or if Cedel or

its customers operate in a way that

endangers the safety and soundness of

U.S. markets or market participants, the

Commission can alter or withdraw

Cedel’s exemption. This is analogous to

the Commission’s authority to sanction

registered clearing agencies for failure to

assure compliance with rules of the

clearing agencies.

6. Filing of Proposed Rule Changes

Section 19(b) of the Exchange Act

requires registered clearing agencies to

file with the Commission copies of all

proposed amendments or additions to

the clearing agencies’ rules prior to

implementation of such rule changes.55

the Commission is vested with the

authority to approve or disapprove such

rule proposals in accordance with

Section 19(b) of the Exchange Act,

which includes a procedure to solicit

public comment on proposed rule

changes. Because Cedel will not be a

registered clearing agency, proposed

changes to its structure or operations

will not be subject to the Section 19(b)

process.

The relationship between Cedel and

each of its customers is governed by the

General Terms and Conditions

Agreement (‘‘Customer Agreement’’)

and the Cedel Customer Handbook

(‘‘Customer Handbook’’). Cedel must

notify the customer in writing of any

amendment to the Customer Agreement

and the effective date of the

amendment. Customers have the

opportunity to object to the amendment

in writing within ten business days of

receipt of the notice of amendment. If a

customer does not object in such a

manner, it is deemed to have accepted

the amendment. Similarly, customers

also are notified of changes to Cedel’s

Customer Handbook ten days prior to

the effective date of such changes. Any

objection to a change must be in writing

within ten business days of the receipt

of notice and must be brought to the

attention of the Cedel User Group or

customer support personnel.

While these procedures are not

consistent with the requirements and

obligations of registered clearing

agencies as self-regulatory entities as set

forth in the Standards Release and

Section 17A of the Exchange Act, the

self-regulatory role is not compatible

with Cedel’s current structure. In this

context, however, the Commission

believes that it is important that Cedel’s

customers receive notice of changes to

the Customer Agreement and Customer

Handbook, and are provided a

procedure to respond to such changes.

Also, as discussed below in Section III.C

of this Order, Cedel will be required to

provide the Commission with current

copies of its Customer Handbook and

Customer Agreement and to notify the

Commission of any changes thereto.

C. Scope of Exemption

This Order exempts Cedel from

registration as a clearing agency under

Section 17A of the Exchange Act subject

to conditions which the Commission

believes are necessary and appropriate

for Cedel’s present structure and

operation.56 The Commission believes

that such action is consistent with the

Exchange Act objective of promoting the

safety and soundness of the national

clearance and settlement system,

including the goals of fostering

cooperating and coordination among

persons engaged in the clearance and

settlement of securities transactions,

facilitating the prompt and accurate

clearance and settlement of securities

transactions, and protecting investors

and the public interest. The limitations

in the exemption reflect the

Commission’s determination to take a

gradual approach toward permitting an

international non-registered clearing

agency such as Cedel to provide

securities processing services in U.S.

government securities to U.S. market

participants. At the same time, the

exemption permits Cedel to provide

clearance, settlement, and collateral

management services to both U.S. and

non-U.S. customers.

1. Securities Covered by the Exemption

In its application for exemption,

Cedel requested that it be permitted to

provide clearance and settlement,

securities lending, and GCSS services

for transactions involving all U.S.

securities, including equity and debt

securities.57 As the comment letters

generally indicated, the ability to

provide clearance, settlement, and

collateral management services for

transactions involving U.S. Treasuries

appears to be the most critical element

of Cedel’s proposed services, especially

GCSS. In addition, at this time Cedel

has linkages with U.S. entities necessary

to provide services for transactions

involving U.S. government securities,

but has not yet developed the necessary

linkages that would enable it to provide

for clearance and settlement of all U.S.

debt and equity securities.

Based on these considerations, this

Order grants Cedel the authority to

provide clearance, settlement, and

collateral management services for (i)

Fedwire-eligible U.S. government

securities 58 and (ii) mortgage backed

pass-through securities that are

guaranteed by the Government National

Mortgage Association (‘‘GNMAs’’) 59

(collectively, ‘‘eligible U.S. government

securities’’).60 The Commission believes

that this limitation is necessary and

appropriate because it will facilitate

operation of the GCSS system and
9232 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices

61A similar approach was adopted by the

Commission in granting an exemption from clearing

agency registration to the Clearing Corporation for

Options and Securities (‘‘CCOS’’). That exemptive

order contained volume limitations of US$6 billion

net daily settlement for government securities and

US$24 billion for repurchase agreements and

reverse repurchase agreements transactions

calculated on an average daily basis over a 90 day

period. At that time, the CCOS volume limits were

designed to limit CCOS’s activity to approximately

5% of the average daily dollar value of transactions

in U.S. government securities and of repurchase

agreements and reverse repurchase agreements

involving U.S. government securities. See note 41

supra.

62Two commenters addressed the proposed

volume limitations. One commenter supported the

initial conditions proposed by the Commission but

urged that the Commission reassess from time to

time the transaction volume limitations. The

commenter believed that this would allow the

Commission the opportunity to monitor the

performance of Cedel while ensuring the

appropriateness of the levels at which those

limitations have been set. Letter from Monroe R.

Sonnenborn, Managing Director, Morgan Stanley &

Co. Incorporated, to Jonathan Katz, Secretary,

Commission (July 22, 1996). The other commenter

believed that the conditions relating to the volume

limitations and Commission access to information

to be ‘‘reasonable actions by the Commission for

achieving its objective of monitoring the safety and

soundness of U.S. securities markets.’’ Letter from

John Macfarlane, Managing Director, Salomon

Brothers Inc, to Jonathan Katz, Secretary,

Commission (July 19, 1996).

63For purposes of the determination of volume

limits, securities ‘‘processed through Cedel’’ means

a security that is utilized by GCSS, Cedel’s

clearance and settlement system, Cedel’s tripartite

repo service, or Cedel’s securities lending program.

The conditions and restrictions set forth in this

Order will not apply to Cedel for the processing of

transactions in eligible U.S. government securities

where both counterparties to the transaction are not

a U.S. customer or an affiliate. However, from the

information to be made available to the Commission

from Cedel and the IML, the Commission expects

to receive information regarding all transactions in

U.S. government securities processed by Cedel i.e.,

whether or not a U.S. counterparty is involved) and

will examine the effects such transactions may have

on U.S. markets and U.S. market participants.

64For purposes of this Order, ‘‘U.S. entity’’ shall

mean (i) any entity organized under the laws of the

United States or any state or subdivision thereof

that is registered or regulated pursuant to state or

federal banking or securities law and shall include,

without limitation, U.S. registered broker-dealers,

U.S. banks (as defined by Section 3(a)(6) of the

Exchange Act), and (ii) foreign branches of U.S.

banks or U.S. registered broker-dealers.

65For purposes of the unilateral understanding

with the IML discussed below, the term ‘‘material

adverse changes’’ refers to a default in settlement

for credit reasons in an account maintained by a

Cedel member, a liquidation of collateral posted by

permit Cedel to offer securities

processing services for very liquid U.S.

government securities, and will provide

Cedel with the opportunity to request

that the exemption be broadened when

it develops the necessary linkages and

facilities to provide securities

processing services for other U.S.

securities.

2. Volume Limits

The Commission is placing a limit on

the volume of eligible U.S. government

securities transacted by U.S. entities or

their affiliates processed through Cedel.

In the Cedel Notice, the Commission

proposed that the exemption include a

fixed volume limit of $30 billion per

day in U.S. securities transacted by U.S.

entities or their affiliates processed

through Cedel.61 However, based upon

the comment letters and further

examination of various methods of

calculating transaction volume, the

Commission has determined that a

flexible percentage based formula is

more appropriate.62

Specifically, the average daily volume

of eligible U.S. government securities

processed through Cedel 63 may not

exceed five percent of the total average

daily dollar value of the aggregate

volume in eligible U.S. government

securities. The total average daily dollar

value of eligible U.S. government

securities volume will be determined

semi-annually as the sum of (1) the

average daily transaction value of all

Fedwire eligible book-entry transfers

originated on Fedwire as provided to

the Commission by the Board of

Governors of the Federal Reserve

System, (2) the average daily value of all

compared trades, less the netted value

of all such compared trades, in eligible

U.S. government securities as provided

to the Commission by the Government

Securities Clearing Corporation, (3) the

average daily value of all compared

trades, less the netted value of all such

compared trades, plus the average daily

volume of all trade-for-trade

transactions (i.e., trades not included in

the netting system), in eligible

government securities as provided by

MBS Clearing Corporation, (4) the

average daily gross settlement value in

eligible U.S. government securities as

provided to the Commission by the

Participants Trust Company, and (5) the

average daily dollar value of compared

trades in eligible U.S. government

securities from any other source that the

Division deems appropriate to reflect

the aggregate volume in eligible U.S.

government securities.

Cedel’s average daily volume will be

the sum of the following amounts for

the previous twelve months as

determined on a rolling quarterly basis:

(1) All settlements, both internal and

external, within Cedel’s clearance and

settlement system involving a U.S.

customer or its affiliate and eligible U.S.

government securities; (2) each

movement of eligible U.S. government

securities into the GCSS system

involving a U.S. customer or its affiliate;

(3) each delivery of eligible U.S.

government securities involving a U.S.

customer or its affiliate within the GCSS

system; and (4) each delivery of eligible

U.S. government securities involving a

U.S. customer or its affiliate out of the

GCSS system. In the volume calculation,

only the initial movement of collateral

(the ‘‘on-leg’’) of such GCSS delivery or

movement will be included; the return

of collateral will not.

For purposes of calculating the

volume limit and for purposes of

Commission access to information,

‘‘affiliate’’ means any Cedel customer

having a relationship with a U.S.

entity,64 where the U.S. entity has an

arrangement on file at Cedel to prevent

a settlement default or credit default in

respect of such customer, or Cedel

knows that the U.S. entity has another

arrangement to prevent a settlement

default or credit default with respect to

such customer. In addition, the

Commission may specifically designate

Cedel customers that will be deemed

affiliates for purposes of calculating

Cedel’s volume and for information

access.

The Commission believes the volume

limit is appropriate in that it is large

enough to allow Cedel to conduct

effective operations in processing

eligible U.S. government securities

transactions involving U.S. entities or

their affiliates, and to allow the

Commission to observe the effects of

Cedel’s activities on the U.S.

government securities market, but is

sufficiently limited so that the safety

and soundness of the U.S. markets

should not be materially affected if

Cedel experiences financial or

operational difficulties. Either upon

Cedel’s request or by its own initiative,

the Commission may review whether

the current volume limit should be

modified.

3. Commission Access to Information

To facilitate the monitoring of the

impact of Cedel’s operation under this

exemption, including compliance with

the volume limit, this Order requires

Cedel to provide information on a

monthly basis regarding (i) the aggregate

volume of eligible U.S. government

securities transacted by U.S. entities or

their affiliates that are processed

through Cedel and (ii) the aggregate

volume for all Cedel customers for

transactions in eligible U.S. government

securities that are processed through

Cedel. Under the exemption, Cedel also

is required to notify the Commission

regarding material adverse changes in

any account maintained by Cedel for its

customers that are members or affiliates

of members of a U.S. registered clearing

agency.65 Cedel also is required to
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Notices 9233

a Cedel member in an account maintained by Cedel,

or a limitation imposed by Cedel on any credit line

of a Cedel member relating to any account

maintained by such member.

66 In addition, the Commission will be permitted

to observe Cedel operations and to talk to Cedel

personnel on-site if the Commission so requests.

67Cedel has represented to the Commission that

its obligations to provide information to the

Commission pursuant to this Order is not

dependent upon the prior approval of the IML.

68Cedel is required to submit to the IML monthly

balance sheets, foreign exchange position reports,

and liquidity ratios. Cedel also is required to submit

quarterly income statements and reports on large

exposures and on the maturity structure of Cedel’s

assets and liabilities. See also supra note 1.

69Cedel’s external auditors are required, among

other things, to review Cedel’s accounting and risk

management systems and to assess the reliability of

Cedel’s periodic reports to the IML.

70Cedel will be required to amend its application

for any proposed changes to its stated policies,

practices, or interpretations as that phrase is

defined in Rule 19b–4, 17 CFR 240.19b–4.

71The exemption provided by this Order is based

upon representations by Cedel, facts contained in

the Cedel application, and other information known

to the Commission regarding the substantive

aspects of Cedel’s proposal (collectively,

‘‘representations and facts’’). Any changes in the

representations or facts as presented to the

Commission may require a modification to the

exemption. Responsibility for compliance with all

applicable U.S. securities laws rests with Cedel and

its customers, as appropriate. Cedel also is advised

that this Order does not exempt Cedel from the antifraud or anti-manipulation provisions of the

Exchange Act or any of the rules promulgated

thereunder.

respond to a Commission request for

information about a U.S. customer or its

affiliate about whom the Commission

has financial solvency concerns.66 The

exemption also is contingent upon the

execution of a satisfactory unilateral

understanding between the Commission

and the IML, Luxembourg’s banking and

securities regulatory authority, to

facilitate the provision of information by

Cedel to the Commission.67 In addition

to the above information, the

Commission will monitor Cedel through

its review of information provided to

the IML by Cedel 68 and its external

auditors.69

In addition to the foregoing

arrangements for access to information,

Cedel will be required to file with the

Commission amendments to its

application for exemption on Form CA–

1 prior to the implementation of any

change in Cedel’s stated policies,

practices, or procedures that makes the

information contained in the original

Form CA–1 incomplete or inaccurate in

any material respect.70 This method of

notifying the Commission of proposed

changes at Cedel will assist the

Commission on its overall review and

understanding of Cedel and its

operations. In addition, Cedel will be

required to notify the Commission of

changes to the Customer Handbook and

Customer Agreement and will provide

the Commission with copies of the most

current Customer Agreement and

Customer Handbook and any

amendments or updates thereto. Cedel

also will provide the Commission with

copies of Cedel’s annual report of its

external auditor, and any other

document relating to an audit, survey,

or consultant’s review concerning

Cedel’s financial position, operations, or

internal control as the Commission may

reasonably request.

4. Modification of Exemption

The Commission may modify by order

the terms, scope, or conditions of

Cedel’s exemption from registration as a

clearing agency if the Commission

determines that such modification is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Exchange Act.71

Furthermore, the Commission may

limit, suspend, or revoke this exemption

if the Commission finds that Cedel has

violated or is unable to comply with any

of the provisions set forth in this Order

if such action is necessary or

appropriate in the public interest, for

the protection of investors, or otherwise

in furtherance of the purposes of the

Exchange Act for the protection of

investors and the public interest.

IV. Conclusion

The Commission finds that Cedel’s

application for exemption from

registration as a clearing agency meets

the standards and requirements deemed

appropriate for such an exemption

including those standards set forth

under Section 17A of the Exchange Act.

It is therefore ordered, pursuant to

Section 19(a)(1) of the Exchange Act,

that the application for exemption from

registration as a clearing agency filed by

Cedel Bank, socie ́te ́ anonyme (File No.

600–29) be, and hereby is, approved

subject to the conditions contained in

this Order.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–5027 Filed 2–27–97; 8:45 am]

BILLING CODE 8010–01–M

SOCIAL SECURITY ADMINISTRATION

Agency Information Collection

Activities: Submission for OMB

Review; Comment Request

The Social Security Administration

publishes a list of information collection

packages submitted to the Office of

Management and Budget (OMB) for

clearance in compliance with Public

Law 104–13 effective October 1, 1995,

The Paperwork Reduction Act of 1995.

The information collections listed below

have been submitted to OMB:

1. Physical Residual Functional

Capacity Assessment; Mental Residual

Functional Capacity Assessment—

0960–0431. The information collected

on forms SSA–4734–BK and SSA–4734

SUP is needed by the Social Security

Administration to assist in the

adjudication of disability claims

involving physical and/or mental

impairments. The forms assist the State

Disability Determination Services (DDS)

to evaluate impairment(s) by providing

a standardized data collection format to

present findings in a clear, concise and

consistent manner. The respondents are

State DDSs administering title II and

title XVI disability programs.

Number of Responses: 1,693,425.

Frequency of Response: 1.

Average Burden Per Response: 20

minutes.

Estimated Annual Burden: 564,475

hours.

2. Letter to Employer Requesting

Wage Information—0960–0138. The

information collected on form SSA–

L4201 is used by the Social Security

Administration to determine eligibility

and proper payment for Supplemental

Security Income (SSI) applicants/

recipients. The respondents are

employers of applicants for and

recipients of SSI payments.

Number of Respondents: 133,000.

Frequency of Response: 1.

Average Burden Per Response: 30

minutes.

Estimated Annual Burden: 66,500

hours.

3. State Agency Schedule for

Equipment Purchases for SSA Disability

Program—0960–0406. The information

collected on form SSA–871 is used by

the Social Security Administration to

budget and account for expenditures of

funds for equipment purchases by the

State Disability Determination Services

that administer the disability program.

The respondents are State Disability

Determination Services.

Number of Respondents: 54.

Frequency of Response: Annually.

Average Burden Per Response: 1 hour.

Estimated Annual Burden: 54 hours.

To receive a copy of the forms or

clearance packages, call the SSA

Reports Clearance Officer on (410) 965–

4125 or write to her at the address listed

below. Written comments and

recommendations regarding the

information collection(s) should be

directed within 30 days to the OMB