Federal Register / Vol. 61, No. 119 / Wednesday, June 19, 1996 / Notices 31201

1Although purchases and sales between affiliated

persons generally are prohibited by section 17(a) of

the Act, rule 17a–8 provides an exemption for

certain purchases and sales among investment

companies that are affiliated persons of each other

solely by reason of having a common investment

adviser, common directors, and/or common

officers.

1Cedel Bank is a wholly-owned subsidiary of

Cedel International. On January 1, 1995, Cedel,

which was established in 1970, 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 licensed in Luxembourg both as a bank and as

a ‘‘professı ́onnel 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’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.

5The services will cover all types of U.S. equity,

debt, and government securities.

SUMMARY OF APPLICATION: Applicant

requests an order declaring that it has

ceased to be an investment company.

FILING DATES: The application was filed

on May 10, 1996.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the SEC orders a hearing.

Interested persons may request a

hearing by writing to the SEC’s

Secretary and serving applicant with a

copy of the request, personally or by

mail. Hearing requests should be

received by the SEC by 5:30 p.m. on July

8, 1996, and should be accompanied by

proof of service on the applicant, in the

form of an affidavit or, for lawyers, a

certificate of service. Hearing requests

should state the nature of the writer’s

interest, the reason for the request, and

the issues contested. Persons may

request notification of a hearing by

writing to the SEC’s Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Applicant, 700 Central Avenue, St.

Petersburg, Florida 33701.

FOR FURTHER INFORMATION CONTACT:

Diana L. Titus, Paralegal Specialist, at

(202) 942–0584, or Alison E. Baur,

Branch Chief, at (202) 942–0564

(Division of Investment Management,

Office of Investment Company

Regulation).

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application

may be obtained for a fee from the SEC’s

Public Reference Branch.

Applicant’s Representations

1. Applicant is a closed-end

diversified management investment

company organized as a Maryland

corporation. On March 27, 1990,

applicant registered under the Act and

filed a registration statement on Form

N–2 pursuant to section 8(b) of the Act

and under the Securities Act of 1933 to

register shares of applicant’s common

stock. The registration statement was

declared effective on May 23, 1990 and

the initial public offering of applicant’s

shares commenced on that date.

2. On December 5, 1995, applicant’s

Board of Directors approved a plan of

reorganization providing for a transfer of

all or substantially all of applicant’s

assets in exchange for Class I shares of

Franklin Global Utilities Fund

(‘‘Franklin Global’’), a series of Franklin

Strategic Series. In accordance with rule

17a–8 under the Act, which governs

mergers of certain affiliated investment

companies, the board determined that

the reorganization was in the best

interests of applicant and that the

interests of applicant’s existing

shareholders would not be diluted as a

result of the reorganization.1

3. On December 19, 1995, applicant

filed proxy materials with the SEC. On

or about January 19, 1996, proxy

materials were sent to shareholders. At

a meeting held on February 20, 1996,

the reorganization was apporved by

applicant’s shareholders.

4. On March 29, 1996, Franklin Global

acquired all or substantially all of the

assets of applicant in exchange in Class

I shares of Franklin Global and the

assumption by Franklin Global of

certain identifiable liabilities of

applicant. The number of full and

fractional shares of Franklin Global that

was issued to applicant’s shareholders

was determined on the basis of the

relative net asset values per share and

the aggregate net assets of Franklin

Global and applicant as of the close of

business on the New York Stock

Exchange on that date.

5. Expenses incurred in connection

with the reorganization were

approximately $72,537. Applicant, its

adviser, Templeton Global Advisors

Limited, Franklin Global, and its

adviser, Franklin Advisors, Inc. shared

these expenses equally. No brokerage

commissions were paid to transfer

ownership of portfolio securities by

applicant to Franklin Global.

6. Applicant has no remaining assets,

debts, or liabilities, and has no

securityholders.

7. Applicant is not a party to any

litigation or administrative proceeding.

Applicant is not now engaged, and does

not propose to engage, in any business

activities other than those necessary for

the winding up of its affairs.

8. Applicant intends to file a

certificate of dissolution in accordance

with Maryland laws.

For the SEC, by the Division of Investment

Management, under delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–15577 Filed 6–18–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37309; International Series

Release No. 993; File No. 600–29]

Self-Regulatory Organizations; Cedel

Bank; Notice of Filing of Application

for Exemption From Registration as a

Clearing Agency

June 12, 1996.

I. Introduction

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–12 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 Cedel’s application

includes procedures and guidelines for

its proposed offering of clearance,

settlement, and credit support services

for transactions in U.S. securities 5

conducted by U.S. entities. The

Commission is publishing this notice to

solicit comments from interested

persons.

II. Description of Cedel Operations

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. The securities that

Cedel clears are fixed income bonds

such as Eurobonds, domestic and

convertible bonds, money market

instruments, short and medium term

notes, equities, and warrants.
31202 Federal Register / Vol. 61, No. 119 / Wednesday, June 19, 1996 / Notices

6 In 1994, Cedel settled over US$7 trillion worth

of securities at an average rate of US$30 billion each

business day for over 2,900 customers. At that time,

over 60,000 instruments were eligible for settlement

in the Cedel system.

7The Luxembourg legal framework provides for

the finality of settlements on Cedel’s books and the

fungibility of securities deposited with Cedel.

8Similar 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 the Euroclear Operations

Centre in Brussels. The Euroclear Cooperative is a

Belgian cooperative corporation whose participants

include international banks, brokers, and other

securities professionals. See infra note 11 and

accompanying text.

9 In each of the thirty countries where Cedel has

established a settlement link to provide its

customers with foreign currency settlement

capabilities, Cedel can access uncommitted lines of

credit with domestic lenders to facilitate foreign

currency settlement for its customers.

10 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.

11The electronic bridge enables trades to be

processed on a book-entry basis between Cedel and

Euroclear rather than by the physical delivery of

securities. Under the terms of the original bridge

agreement, Euroclear was able to clear trades

overnight, having received the necessary data on

counterparties from Cedel, while Cedel had to settle

the following day after receiving counterparty data

from Euroclear’s overnight processing run. This

created a backlog of settlements for Cedel and a

time-lag between initiation of the delivery of

securities and payment for them.

12Cedel’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

settlements are reemployed to settle further

transactions for same day value. Therefore, for backto-back transfers for equivalent funds, customers

may not need to pay because proceeds from sales

are used to settle purchases.

13The securities may be owned outright or

borrowed.

14Acceptable 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.

15Changes to the Cedel Customer Handbook are

customarily motivated by evolving market practice

and procedure.

16Cedel currently is running pilot tests on GCSS

with a limited number of institutions.

From its inception, Cedel has

provided delivery-versus-payment

(‘‘DVP’’) settlement for securities

transactions.6 DVP settlement is made

possible by the legal environment for

securities custody and transfer in

Luxembourg.7 Cedel is not a party to the

securities transactions in its clearance

and settlement system.

Liquidity facilities are negotiated with

financial institutions to permit Cedel to

extend financing to customers to meet

their settlement requirements in local

currencies. To enable it to extend such

financing, Cedel maintains a US$1

billion committed revolving credit

facility with a syndicate of major banks

and a US$500 million commercial paper

facility. Cedel also has a US$1.8 billion

letter of credit guaranteeing

transmissions across the bridge

established between Cedel and the

Euroclear System (‘‘Euroclear’’).8 Cedel

also has approximately US$8 billion of

uncommitted lines of credit available.9

Cedel’s presettlement trade matching

service, which has been available since

1987, consists of a trade comparison

system that allows customers in both

Cedel and Euroclear to compare their

trade data. Income 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.10 Overnight

processing is possible because of the

most recent bridge agreement

established between Cedel and

Euroclear which was implemented in

September 1993.11 The new 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. Under the new

bridge, 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.12

Each settlement within the overnight

and daytime processing systems is

distinguished by whether it is an

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

Cedel. An internal settlement is the

settlement of a transaction between two

Cedel customers where the securities

being transferred are maintained by

book-entry at Cedel. These 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 of 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. An

external settlement is the settlement of

a transaction where one of the

counterparties to a transaction is not a

Cedel customer or where a Cedel

customer is transferring securities that

are not maintained by book-entry at

Cedel.

Cedel also has developed links to

accommodate customer settlements of

domestic government and corporate

securities. These links are accounts with

domestic clearing agencies or bank

custodians which have access to

domestic settlement system.

Transactions for settlement on a given

day are matched at Cedal and are settled

if the delivering party has

unencumbered securities sufficient to

make delivery 13 and the receiving party

has sufficient cash and credit facilities

to pay for the securities.14 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. Because Cedal is not a party to

the securities transactions in its

clearance and settlement system, Cedal

believes its operations are essentially

devoid of settlement risk to Cedel and

therefore does not rely on a clearing

fund or the resources of its customers.

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 Cedal’s

Customer Handbook ten days prior to

the effective date of such changes.15

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 Cedal User Group or

customer support personnel.

B. Global Credit Support Service

One of the primary reasons for Cedal’s

request for exemption from registration

as a clearing agency is its proposed

implementation of a Global Credit

Support Service (‘‘GCSS’’).16 GCSS is a

book-entry, real-time collateral

management service for cross-border

securities collatealization. GCSS is

intended to enable GCSS customers to

reduce the credit risk associated with

their financial exposure to conterparties

by offering an efficient and safe means

of monitoring exposures and by
Federal Register / Vol. 61, No. 119 / Wednesday, June 19, 1996 / Notices 31203

17There is no requirement that a GCSS customer

have an account at Cedel in order to utilize the

services provided by GCSS.

18 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 take

the securities outside of GCSS and enter into

repurchase or reverse repurchase agreements.

providing credit support for GCSS

customers using a variety of bilateral

credit support legal arrangements. GCSS

functions will include the standard

functions of an agent, such as exposure

recording, asset valuation and

movement, safekeeping, and reporting.

GCSS will interpose itself as an

operational agent but will not assume

any principal or decision-making role in

the event of disputes between parties.

The GCSS Fiduciary Agreement is the

basic governing document for

participation in GCSS. Each

counterparty will be required to have a

GCSS Fiduciary Agreement with Cedal

in order to participate in GCSS. Between

the GCSS customer transferring assets as

collateral and Cedal, the GCSS

Fiduciary Agreement will operate as a

transfer of ownership of securities to

Cedal upon delivery to GCSS.

Each GCSS customer will establish

the parameters of their bilateral

arrangements, which will be 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 in their dealings

with specific counterparties.

GCSS customers also will be able to

establish a preference table to rank in

order which assets they would prefer to

deliver when a delivery is necessary and

which assets they would prefer to

receive in a return situation. For each

bilateral agreement, GCSS customers

also will be able to enter the number of

days within which any credit support

shortfall must be covered by a

counterparty.

All cash and securities in GCSS will

be held in an omnibus account within

the Cedel core clearance and settlement

system. Transfers into and out of GCSS

will be 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.17

GCSS will operate two main daily

processing cycles to provide credit

support and 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. 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 basis on

which GCSS will compute credit

support requirements for the period.

Based on the size of the net exposure

and the terms of the bilateral agreement

between two GCSS customers, GCSS

will move free of payment securities

and/or cash between the parties’

accounts.

GCSS will report to each GCSS

customer their available positions (i.e.,

the customer’s own securities and cash

it has in system that are not in use), the

amounts delivered out, the amounts

received, the amounts ‘‘ontransferred,’’ 18 new credit support

amounts expected in from

counterparties, and new credit support

amounts required.

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.

One of the more important services

offered by GCSS allows customers to

reuse the securities held as credit

support. As GCSS customers do not

have identical bilateral eligibility

criteria, haircuts, and preference tables,

there is an opportunity for GCSS to

facilitate the most efficient use of

available customer assets.

For those GCSS customers permitted

by their counterparties to reuse assets,

GCSS will enable ‘‘on-transfer’’ of

securities. GCSS will track and value

assets subjected to on-transfers and will

keep records of the original and all

subsequent transferrers and transferees

of the asset. Where on-transfers are

permitted, a position may be subdivided

and on-transferred to multiple

counterparties.

C. Securities Lending and Borrowing

Services

Cedel also proposes to provide its

securities lending and borrowing service

to U.S. entities. 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’’ or ‘‘case by case’’

lenders or borrowers. As 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. Case 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. Cedel 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.

Under this service, 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. The 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. Borrowers are required to deposit

sufficient additional collateral as

appropriate, and Cedel is authorized to

debit accounts of the borrower to the

extent required to maintain the required

collateral coverage. Borrowers are

expressly permitted to substitute

equivalent collateral for any collateral

previously delivered.
31204 Federal Register / Vol. 61, No. 119 / Wednesday, June 19, 1996 / Notices

19Under the TOF agreement between Cedel and

its customers, Cedel is granted a lien on all

securities and other assets in a participating

customer’s account with Cedel.

D. Credit Facilities

Cedel provides four main types of

credit facilities to its customers: preadvices, technical overdraft facilities,

tripartite financing arrangements, and

unconfirmed funds facilities. Customers

can obtain short term credit through the

use of pre-advices. Under this service, a

customer will notify Cedel that funds

will be credited to its account on that

day or the next day. Cedel will credit

funds to the customer’s account on the

basis of this pre-advice. A customer

must be previously approved to receive

such an advance of funds with approval

based on the customer’s paid-in capital.

Cedel also establishes a maximum preadvice line of credit based on the

customer’s paid-in capital and other

factors that Cedel deems relevant.

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.

Cedel also can provide to customers a

technical overdraft facility (‘‘TOF’’).

TOFs are short-term financing facilities

used to facilitate clearance of securities

transactions against payment. Under the

TOF service, Cedel pays the selling

customer in advance of receipt of

payment by the purchasing customer.

Cedel accepts the securities from the

selling customer and delivers them into

the purchasing customer’s account. To

protect itself from market and credit

risk, Cedel then 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 may liquidate the customer’s

assets to satisfy the net debit position.19

Cedel also will act as collateral agent

in specifically negotiated tripartite

financing arrangements (‘‘TFA’’), which

provide longer term financing for

customers than pre-advices and TOFs.

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.

In addition to pre-advices, TOFs and

TFAs, Cedel customers may be able to

use their unconfirmed funds facility

(‘‘UFF’’) to finance settlements. Use of a

customer’s UFF 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. A 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 is

covering 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.

III. Cedel’s Request for Exemption

Cedel states that it operates to reduce

the risks related to the clearance and

settlement process and to standardize

that process to facilitate secure and

accurate cross-border securities

settlement for the benefit of all market

participants. Cedel intends to offer

GCSS in order to provide a flexible and

efficient means for counterparties to

agree upon marked-to-market credit

exposures and in order to provide

appropriate credit support through

securities and cash on deposit with

Cedel. As discussed more specifically

below, Cedel believes an exemption

from clearing agency registration is

appropriate.

A. Regulatory Comity and Legal Integrity

Cedel believes that deference should

be granted to the existing Luxembourg

legal and regulatory framework which

governs supervision of Cedel by the

Institut Monetaire Luxembourgeois

(‘‘IML’’) and all Cedel obligations to and

relations with its customers. Cedel also

believes that Luxembourg law should

govern all contractual arrangements

with its customers for clearing and

settlement. Cedel believes that altering

its clearing and settlement arrangements

from bilateral contractual arrangements

which appoint Cedel as agent and

depository under Luxembourg law to a

self-regulatory entity which would

require Cedel to perform a regulatory

function under the laws of the United

States would upset and complicate the

existing legal structure of international

cross-border clearance and settlement

and almost certainly prove impractical.

B. International Enforceability

As a Luxembourg-based bank which

conducts its activities pursuant to

Luxembourg law and serves

international markets world-wide, Cedel

believes it is not and cannot become a

self-regulatory organization as required

for a registered clearing agency under

Section 17A of the Exchange Act. Any

rules promulgated by Cedel would have

only questionable application in the

home markets of Cedel’s international

customers outside the United States.

However, Cedel believes that the

objectives of Section 17A are fulfilled by

Cedel’s existing structure and

operations. Cedel also believes that the

contractual relationships currently

existing between Cedel and its

customers, as governed by the laws of

Luxembourg, are effective and

enforceable as a matter of international

commercial law.

C. Operational Capacity

Cedel believes it operates its clearing

and settlement activities according to

the standards of international best

practice and continually strives to

improve the integrity and reliability of

its systems and the quality of services

provided to its customers. Because

Cedel is not a monopoly provider of

services in any market, it is subject to

commercial and competitive discipline.

As such, Cedel believes that it

substantially complies with all

Commission standards for clearing and

settlement operations and that no

additional benefits are likely to accrue

from the imposition of U.S. regulatory

requirements as a result of the

registration of Cedel as a clearing

agency.

Cedel seeks to provide clearing and

settlement services for U.S. securities as

it currently provides for the securities in

thirty other domestic markets. As a

result, Cedel customers would have a

single interface into the U.S. clearance

and settlement system, standardized

message formats, and regional customer

support. Cedel believes that these are all

substantial benefits to Cedel customer

institutions which otherwise have no

presence in the U.S. investment

markets.

D. Public Interest and Protection of

Investors

Cedel believes that acceptance of U.S.

securities within the Cedel system

would contribute greatly to the secure

and efficient cross-border clearance and

settlement of securities transactions and

the establishment of linkages among

major national markets. In addition,

Cedel believes that settlement through
Federal Register / Vol. 61, No. 119 / Wednesday, June 19, 1996 / Notices 31205

20 15 U.S.C. 78q–1.

21For 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).

22Market Reform Act of 1990, Section 5,

amending Section 17A(a)(2) of the Exchange Act, 15

U.S.C. 78q–1 (1990).

23Securities Exchange Act Release No. 16900

(June 17, 1980), 45 FR 41920 (announcement of

standards for the registration of clearing agencies

[‘‘Standard Release’’]). See, also, Securities

Exchange Act Release No. 20221 (September 23,

1983), 48 FR 45167 (omnibus order granting full

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).

See, also, Section 19 of the Exchange Act, 15

U.S.C. 78s, and Rule 19b–4, 17 CFR 240.19b–4,

setting forth certain procedural requirements for

registration and continuing Commission oversight

of clearing agencies and other self-regulatory

organizations.

24Clearing 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., order approving Government

Securities Clearing Corporation’s (‘‘GSCC’’),

temporary registration as a clearing agency where

the Commission temporarily exempted GSCC from

compliance with Section 17A(b)(3)(C). Securities

Exchange Act Release No. 25740 (May 24, 1988), 53

FR 19839.

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 securities in a bookentry 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 includes the clearance and

settlement of 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.

the Cedel system has increasing appeal

as broker-dealers, institutional

investors, and custodians place greater

emphasis on securities lending, back-toback transactions, and financing

techniques such as repurchase

agreements and reverse repurchase

agreements. As a clearance and

settlement system which conducts

multi-currency settlement and which

has links to major domestic markets,

Cedel believes it can efficiently

accommodate customer demands for

sophisticated transaction processing.

Finally, Cedel believes its existing

legal, regulatory, and operational

arrangements for clearance and

settlement are rigorous and wellunderstood and that uncertainty and

confusion could result from the

imposition of U.S. legal and regulatory

requirements which potentially could

be in conflict with Cedel’s existing legal,

regulatory, and operational

arrangements. Cedel believes that an

exemption from registration would

preserve the certainty of those existing

arrangements while allowing Cedel to

extend the benefits of settlements in

U.S. securities to its customers.

IV. Proposed Exemption

A. Statutory Standards

Section 17A of the Exchange Act

directs the Commission to develop a

national clearance and settlement

system through, among other things, the

registration and regulation of clearing

agencies.20 In fostering the development

of a national clearance and settlement

system generally and in overseeing

clearing agencies in particular, Section

17A authorizes and directs the

Commission to promote and facilitate

certain goals with due regard for the

public interest, the protection of

investors, the safeguarding of securities

and funds, and the maintenance of fair

competition among brokers, dealers,

clearing agencies, and transfer agents.21

Furthermore, Section 17A, as amended

by the Market Reform Act of 1990,

directs the Commission to use its

authority to facilitate the establishment

of linked or coordinated facilities for

clearance and settlement of transactions

in securities, securities options,

contracts of sale for future delivery and

options thereon, and commodity

options.22 In addition to the statutory

requirements of Section 17A, the

Commission’s Division of Market

Regulation (‘‘Division’’) has published

standards based on Section 17A for

clearing agency registration.23

Section 17A(b)(1) 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.

Recently, the Commission exercised for

the first time its authority to exempt an

applicant entirely from registration as a

clearing agency.24

Generally, U.S. Treasuries are the

preferred securities for use as collateral

in securing international credit

obligations. Therefore, Cedel believes it

is essential that it be able to accept U.S.

Treasury securities in GCSS if it is to

efficiently facilitate cross-border

collateralization. In part, it is the ‘‘ontransfer’’ of rehypothecation of U.S.

securities for U.S. entities in GCSS

which subjects Cedel to the 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. Treasury securities 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. Treasury securities, including

repurchase agreement transactions, by

Cedel’s customers or affiliates using

Cedel’s systems. However, under GCSS,

all types of U.S. securities will be

accepted and the services provided by

GCSS may be interpreted as facilitating

repurchase agreement transactions.

In light of the foregoing, the

Commission believes it is appropriate

for applicants requesting exemption

from clearing agency registration to

meet standards substantially similar to

those required of registrants under

Section 17A in order to assure that the

fundamental goals of the Exchange Act

(e.g., safe and sound clearance and

settlement) will not be undermined.

Therefore, the Commission invites

commenters to address whether granting

Cedel’s application for exemption from

clearing agency registration, subject to

the specific conditions which are set

forth in detail below, would further the

goals of Section 17A.

B. Conditions

The Commission is proposing to

impose two types of conditions on

Cedel in conjunction with the grant of

any exemptive relief from clearing

agency registration. The first type will

consist of certain clearing and

transactional volume limitations on
31206 Federal Register / Vol. 61, No. 119 / Wednesday, June 19, 1996 / Notices

26Supra note 24.

27Supra Section II(A).

28For purposes of calculating the volume limits

and for purposes of Commission access to

information, ‘‘affiliate’’ shall mean any entity

directly or indirectly controlling, controlled by, or

under common control with a U.S. customer.

29 In its oversight of Cedel, the Commission does

not anticipate conducting on-site examinations.

However, the Commission understands that it will

have the ability to observe Cedel operations and to

talk to Cedel personnel on-site.

30Cedel 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.

31Cedel’s external auditors are required, among

other things, to review Cedel’s accounting and risk

management systems and to assess the reliabiity of

Cedel’s periodic reports to the IML.

32 15 U.S.C. 78q–(a)(2).

Cedel’s processing of U.S. securities

transactions involving U.S. entities. The

second type will consist of an

arrangement with Cedel and the IML

which will give the Commission access

to information necessary to ascertain

whether the volume limitations are

being honored and access to information

relating to the default or near default of

certain Cedel customers.

1. Volume Limits

The Commission proposes to place a

limit on the transactions in U.S.

securities conducted by U.S. entities

that can be processed through Cedel.

This approach was adopted by the

Commission in granting the Clearing

Corporation for Options and Securities

(‘‘CCOS’’) an exemption from clearing

agency registration.26 In that exemptive

order, the Commission imposed 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 ninety day

period. The CCOS volume limits were

designed to limit CCOS’s activity to

approximately five percent or less of the

average daily dollar value of

transactions in U.S. Treasuries and of

repurchase agreements and reverse

repurchase agreements involving U.S.

Treasuries.

Cedel has represented to the

Commission that it cannot differentiate

between regular way trading and

repurchase and reverse repurchase

agreements transactions in its clearance

and settlement system. Therefore, the

Commission believes the most feasible

volume limit is an average daily volume

of US$30 billion based upon the

aggregate volume for the previous

twelve months to be measured each

quarter on a rolling quarterly basis. For

purposes of calculating the average

daily volume, the following will be

included: (1) All settlements, both

internal and external, within Cedel’s

clearance and settlement system 27

involving a U.S. customer or its

affiliate 28 and U.S. securities; (2) each

movement of U.S. securities into the

GCSS system involving a U.S. customer

or its affiliate; (3) each delivery of U.S.

securities involving a U.S. customer or

its affiliate within the GCSS system; and

(4) each delivery of U.S. securities

involving a U.S. customer or its affiliate

out of the GCSS system. However, the

Commission will only count the initial

movement of collateral (the ‘‘on-leg’’) of

each GCSS delivery or movement. The

return of collateral will not be included

in the calculation of the volume limit.

The Commission believes the

proposed volume limit is appropriate in

that it is large enough to allow Cedel to

commence effecive operations in

clearing and settling U.S. securities

transactions involving U.S. entities and

to allow the Commission to observe the

effects of Cedel’s activities on the U.S.

securities market and is sufficiently

limited so that the safety and soundness

of the U.S. markets would not be

materially affected should Cedel

experience 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. Cedel will not

be permitted to exceed the US$30

billion volume limit without either

having the Commission modify its

exemptive order or registering as a

clearing agency.

2. Commission Access to Information

To facilitate the monitoring of

compliance with the proposed volume

limits, the proposed exemption would

require Cedel to provide information on

a monthly basis regarding aggregate

volume for all Cedel customers for

transactions in U.S. securities.29 Under

the proposed exemption, Cedel also

would be 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. Cedel also

would be required to respond to a

Commission request for information

about a U.S. customer or its affiliate

about whom the Commission has

financial solvency concerns. The

Commission will require a satisfactory

Memorandum of Understanding

(‘‘MOU’’) with the IML, Luxembourg’s

banking and securities regulatory

authority, to facilitate the provision of

information by Cedel to the

Commission. In addition to the above

information, the Commission will

monitor Cedel through its review of

information provided to the IML by

Cedel 30 and its external auditors.31

The Commission seeks comment on

the conditions, in particular the volume

limits and information sharing, which

would be imposed on Cedel as a

condition of its obtaining an exemption

from clearing agency registration.

Specifically, commenters are requested

to address the structure and the

appropriate size of such limits.

Commenters also are requested to

address the types of information which

should be provided to the Commission

to help maintain the safety and

soundness of the U.S. securities

markets. In addition, comments are

sought on the types of entities which

should be deemed affiliates of members

of U.S. clearing agencies for purposes of

the volume limitations and commission

access to information.

C. Fair Competition

Section 17A of the Exchange Act

requires the Commission, in exercising

its authority under that section, to have

due regard for the maintenance of fair

competition among clearing agencies.32

Therefore, the Commission must

consider an applicant’s likely effect on

competition and on the U.S. securities

markets in its review of any application

for registration or exemption from

registration as a clearing agency.

Consistent with this approach, the

Commission invites commenters to

address whether granting Cedel an

exemption from registration would

result in increased competition,

including greater access to the U.S.

securities market by foreign clearing

agencies. Such competition may result

in the development of improved

systems capabilities, new services, and

perhaps lower costs to market

participants. The Commission also

invites commenters to address whether

the proposal would impose any burden

on competition that is inappropriate

under the Exchange Act.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing

application by July 19, 1996. Such

written data, views, and arguments will

be considered by the Commission in
Federal Register / Vol. 61, No. 119 / Wednesday, June 19, 1996 / Notices 31207

33 17 CFR 200.30–3(a)(16).

deciding whether to grant Cedel’s

request for exemption from registration.

Persons desiring to make written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Reference should be made to File No.

600–29. Copies of the application and

all written comments will be available

for inspection and copying at the

Commission’s Public Reference Room,

450 Fifth Street, N.W., Washington, D.C.

20549.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.33

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–15575 Filed 6–18–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37304; File No. SR–MSRB–

96–5]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of a Proposed Rule Change by the

Municipal Securities Rulemaking

Board Relating to Preservation of

Records

June 11, 1996.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on June 4, 1996, the

Municipal Securities Rulemaking Board

(‘‘Board’’ or ‘‘MSRB’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) a proposed

rule change (SR–MSRB–96–5). The

proposed rule change is described in

Items I and II below, which Items have

been prepared by the Board. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Board is proposing to amend rule

G–9, on preservation of records. The

proposed rule change would require

that brokers, dealers and municipal

securities dealers (collectively,

‘‘dealers’’) retain the records required by

rule G–8(a)(xv) for a period of three

years. The Board requests that the

Commission set the effective date for the

proposed rule for 30 days after filing.

II. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

In its filing with the Commission, the

Board included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The texts of these

statements may be examined at the

places specified in Item IV below. The

Board has prepared summaries, set forth

in Section (A), (B), and (C) below, of the

most significant aspects of such

statements.

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

Among other things, Board rule G–36

requires that, with certain exceptions,

each dealer acting as an underwriter in

a primary offering of municipal

securities submit a copy of the final

official statement, if one is prepared, to

the Board. Underwriters also are

required to send advance refunding

documents to the Board if an offering of

municipal securities ‘‘advance refunds’’

an outstanding issue of municipal

securities.

Rule G–8(a)(xv) requires that dealers

maintain a record of sending to the

Board, Forms G–36(O/S) and G–

36(ARD) and the corresponding

required documentation. Rule G–9, on

preservation of records, currently does

not state a time period for preservation

of these records.

The proposed amendment to rule G–

9 would require that dealers retain the

records required by rule G–8(a)(xv) for

a period of three years. This three-year

period would coincide with the record

retention requirement for the

documentation supporting proof of

delivery of official statements to

purchasers of new issues securities as

required by rule G–32 on disclosures in

connection with new issues.

The Board believes the proposed rule

change is consistent with Section

15B(b)(2)(G) of the Act, which requires,

in pertinent part, that the Board’s rules:

prescribe records to be made and kept by

municipal securities brokers and municipal

securities dealers and the periods for which

such records shall be preserved.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The Board does not believe that the

proposed rule change will impose any

burden on competition not necessary or

appropriate in furtherance of the

purposes of the Act.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the foregoing proposed rule

change: (i) does not significantly affect

the protection of investors or the public

interest; (ii) does not impose any

significant burden on competition; (iii)

was provided to the Commission for its

review at least five days prior to the

filing date; and (iv) does not become

operative for thirty (30) days from the

date of its filing, the Board has

submitted this proposed rule change to

become effective pursuant to Section

19(b)(3)(A) of the Act and Rule 19b–

4(e)(6) thereunder. In particular, the

Board believes that the proposed rule

change qualifies as a ‘‘non-controversial

filing’’ in that the proposed amendment

does not significantly affect the

protection of investors or the public

interest and does not impose any

significant burden on competition. At

any time within sixty days of the filing

of the proposed rule change, the

Commission may summarily abrogate

such rule change if it appears to the

Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purpose of the Act.

IV. 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, NW.,

Washington, DC 20549. Copies of the

submissions, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change 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 in

the Commission’s Public Reference

Room. Copies of the filing will also be

available for inspection and copying at

the Board’s principal offices. All

submissions should refer to File No.