[Federal Register Volume 65, Number 232 (Friday, December 1, 2000)]
[Notices]
[Pages 75324-75326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30666]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43592; International Series Release No. 1235; File No. 
601-01]


Self-Regulatory Organizations; Morgan Guaranty Trust Company, 
Brussels Office, as Operator of the Euroclear System and Euroclear 
Bank, S.A.; Notice of Filing of Application To Modify an Existing 
Exemption From Clearing Agency Registration

November 17, 2000.

I. Introduction

    On September 21, 2000, Morgan Guaranty Trust Company of New York, 
Brussels office (``MGT-Brussels''), as operator of the Euroclear 
System,\1\ and Euroclear Bank, S.A., (``Euroclear Bank'') filed 
pursuant to Section 17A of the Securities Exchange Act of 1934 
(``Exchange Act'') \2\ and Rule 17Ab2-1 thereunder \3\ with the 
Securities and Exchange Commission (``Commission'') an application on 
Form CA-1 \4\ to modify MGT-Brussels' existing exemption from clearing 
agency registration (``Modification Application''). MGT-Brussels' 
current exemption allows it to perform, with certain limits, the 
functions of a clearing agency with respect to U.S. government and 
agency securities for its U.S. participants without registering as a 
clearing agency. The purpose of the Modification Application is to have 
Euroclear Bank substituted for MGT-Brussels as operator of the 
Euroclear System with respect to the Commission's exemption. The 
Commission is publishing this notice to solicit comment from interested 
persons.
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    \1\ MGT-Brussels presently operates the Euroclear System 
pursuant to an operating agreement with Euroclear Bank.
    \2\ 15 U.S.C. 78q-1.
    \3\ 17 CFR 240.17Ab2-1.
    \4\ Copies of the application for exemption are available for 
inspection and copying at the Commission's Public Reference Room.
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II. Background

A. 1998 Exemption Order

    On February 11, 1998, the Commission granted MGT-Brussels an 
exemption from registration as a clearing agency, subject to certain 
conditions, to the extent MGT-Brussels performs the functions of a 
clearing agency with respect to transactions involving U.S. government 
and agency securities for its U.S. participants (``1998 Exemption 
Order'').\5\ Specifically, the 1998 Exemption Order

[[Page 75325]]

permitted MGT-Brussels to provide clearance, settlement, and collateral 
management services for its U.S. participants' transactions in 
``eligible U.S. government securities'' which was defined as: (1) 
Fedwire-eligible U.S. government securities,\6\ (2) mortgage-backed 
pass through securities that are guaranteed by the Government National 
Mortgage Association (``GNMAs''), and (3) any collateralized mortgage 
obligation whose securities are Fedwire-eligible U.S. government 
securities or GNMA guaranteed mortgage-backed pass through securities 
and which are depository eligible securities.
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    \5\ Securities Exchange Act Release No. 39643 (February 11, 
1998), 63 FR 8232.
    \6\ As described in footnote 64 of the 1998 Exemption Order, 
U.S. government securities means ``U.S. government securities'' as 
defined in Section 3(a)(42) of the Exchange Act, 15 U.S.C. 
78c(a)(42), except that it shall not include any (i) foreign-
targeted U.S. government or agency securities or (ii) securities 
issued or guaranteed by the International Bank for Reconstruction 
and Development (i.e., the ``World Bank'') or any other similar 
international organization.
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    The 1998 Exemption Order imposed two conditions on MGT-Brussels' 
ability to provide clearance and settlement services.\7\ First, the 
average daily volume of eligible U.S. government securities that can be 
settled through MGT-Brussels for U.S. participants is limited to five 
percent of the total average daily dollar volume of the aggregate 
volume in eligible U.S. government securities.\8\ Second, the 1998 
Exemption Order allows the Commission access to a variety of 
information related to MGT-Brussels' role as operator of the Euroclear 
System.\9\
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    \7\ The conditions in the 1998 Exemption Order reflected the 
Commission's determination to take a gradual approach toward 
permitting an international, unregistered clearing organization to 
perform clearing agency functions for transactions involving U.S. 
government and agency securities for U.S. participants. 1998 
Exemption Order at 63 FR 8239.
    \8\ The scope of the 1998 Exemption Order is limited to U.S. 
eligible government securities and does not apply to other U.S. debt 
or equity securities. For a more complete description of the volume 
limit, refer to Section IV.C.2. of the 1998 Exemption Order at 63 FR 
8239.
    \9\ For a more complete description of the Commission's access 
to information refer to Section IV.C.3. of the 1998 Exemption Order 
at 63 FR 8240.
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B. Changeover From MGT-Brussels to Euroclear Bank

    On January 1, 2000, owners and operators decided that MGT-Brussels 
should be replaced by Euroclear Bank as operator of the Euroclear 
System. In May 2000, Euroclear Bank was created. On July 27, 2000 the 
Belgian Banking and Finance Commission (``CBF'') granted Euroclear Bank 
a Belgian banking license. MGT-Brussels will continue to operate the 
Euroclear System until the changeover, which is scheduled to occur on 
December 31, 2000. At the changeover, the business and related assets 
and liabilities of the Euroclear System will vest in and virtually all 
of the MGT-Brussels staff will be transferred to Euroclear Bank.
    As a result of the changeover, Euroclear Clearance System Public 
Limited Company (``Euroclear PLC'' ), a limited liability company 
organized under the laws of the United Kingdom, will own 59.5% of 
Euroclear Bank. Calar Investments, a wholly-owned subsidiary of 
Euroclear PLC, will own 35.5% of Euroclear Bank. The remaining five 
percent of Euroclear Bank will be owned by the former members of 
Euroclear Clearance System Societe Cooperative, the predecessor of 
Euroclear Bank.

III. Proposed Modification of the 1998 Exemption Order

    Euroclear Bank has requested modification of the 1998 Exemption 
Order by replacing MGT-Brussels with Euroclear Bank as operator of the 
Euroclear System. The 1998 Exemption Order provides that ``the 
Commission may modify by order the terms, scope, or conditions of MGT-
Brussels' 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'' \10\
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    \10\ 1998 Exemption Order at 63 FR 8240.
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    Euroclear Bank will operate the Euroclear System in the manner that 
MGT-Brussels currently operates the Euroclear System. Euroclear Bank 
will use the same personnel, operating systems, procedures, and risk 
management as MGT-Brussels currently uses. Euroclear Bank represents 
that it will substantially satisfy, just as MGT-Brussels currently 
does, each of the conditions for registration set forth in Section 
17A(b)(3) of the Exchange Act, that relate to ``safe and sound 
clearance and settlement'' in the U.S., which the Commission has 
identified in the 1998 Exemption Order as the fundamental goal of 
Section 17A. Accordingly, Euroclear Bank requests the identical 
exemption granted to MGT-Brussels. Therefore, the Modification 
Application does not seek to have any changes made to the ``Scope of 
the Exemption,'' as described in Section IV.C. of 1998 Exemption Order 
with respect to the conditions and limitations of the 1998 Exemption 
Order.
    As described in the 1998 Exemption Order, MGT-Brussels is a 
division of the foreign branch of a U.S. bank and accordingly is 
subject to the comprehensive supervision and regulation of the Federal 
Reserve Bank of New York.\11\ The Federal Reserve Bank of New York 
conducts annual on-site examinations in Brussels and otherwise 
regulates MGT-Brussels' operations, including its operation of the 
Euroclear System. Because there will be no similar U.S. regulation of 
Euroclear Bank, the Commission will require the execution of a 
satisfactory Memorandum of Understanding (``MOU'') with the CBF \12\ to 
facilitate the provision of information by Euroclear Bank to the 
Commission and to continue to facilitate the Commission's monitoring of 
the impact of Euroclear Bank's operation under this exemption.\13\
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    \11\ 1998 Exemption Order at 63 FR 8237.
    \12\ Euroclear Bank is subject to regulation by the CBF.
    \13\ Euroclear Bank also continues to agree to provide 
information to the Commission as described in the 1998 Exemption 
Order.
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    Section 17A(b)(1) of the Exchange Act authorizes the Commission to 
exempt applicants from some or all of the requirements of Section 17A 
if it finds such exemptions are 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.\14\ 
Therefore, the Commission invites commenters to address whether 
modifying the 1998 Exemption Order as requested by Euroclear Bank and 
as described above, subject to the continuation of the conditions and 
limitations set forth in that order, would further the goals of Section 
17A.
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    \14\ 15 U.S.C. 78q-1(b)(1).
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IV. Solicitation of Comment

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing application by December 22, 2000, 
including whether the exemption is consistent with the Exchange Act. 
Such written data, views, and arguments will be considered by the 
Commission in deciding whether to grant the Modification Application. 
Persons desiring to make written submissions should file six copies 
thereof with the Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. Reference should be made 
to File No. [601-01]. Copies of the application and all written 
comments will be available for inspection and copying at the 
Commission's Public Reference Room,

[[Page 75326]]

450 Fifth Street, NW., Washington, DC 20549.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority. \15\
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    \15\ 17 CFR 200.30-3(a)(16).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30666 Filed 11-30-00; 8:45 am]
BILLING CODE 8010-01-M