

[Federal Register: May 31, 2006 (Volume 71, Number 104)]
[Notices]               
[Page 30969-30971]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31my06-148]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53851; International Series Release No. 1296; File No. 
600-29]

 
Clearstream Banking, S.A.; Notice of Filing of Application To 
Continue an Existing Exemption From Clearing Agency Registration

May 23, 2006.

I. Introduction

    On April 12, 2005, Clearstream Banking, S.A. (``Clearstream''), 
successor in name to Cedel Bank, societe anonyme, Luxembourg 
(``Cedel''), filed with the Securities and Exchange Commission 
(``Commission'') pursuant to section 17A of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 17Ab2-1 thereunder \2\ and on March 15, 
2006 amended, an amendment to its Form CA-1 to reflect changes in its 
ownership structure that resulted from the acquisition of Clearstream's 
parent company, Cedel International, S.A. (``Cedel International''), by 
Deutsche Brse AG (``DBAG''). The purpose of the amendment is to seek 
Commission approval to continue Clearstream's current exemption from 
clearing agency registration pursuant to which Clearstream provides, 
subject to certain conditions, clearance and settlement services for 
U.S. government securities for its U.S. participants. The Commission is 
publishing this notice to solicit comment from interested persons as to 
whether Clearstream continues to satisfy the requirements of its 
exemption from clearing agency registration.
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    \1\ 15 U.S.C. 78q-1.
    \2\ 17 CFR 240.17Ab2-1.
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II. Background

A. The 1997 Exemptive Order

    On February 24, 1997, the Commission granted Cedel a conditional 
exemption from registration as a clearing agency to enable Cedel to 
perform certain functions of a clearing agency with respect to 
transactions involving U.S. government securities and its U.S. 
participants (``1997 Exemptive Order'').\3\ Specifically, the 1997 
Exemptive Order permitted Cedel to provide clearance, settlement, and 
collateral management services to U.S. and non-U.S. entities for 
transactions in the following U.S. government securities: \4\ (1) 
Fedwire-eligible U.S. government securities \5\ and (2) mortgage-backed 
pass-through securities that are guaranteed by the Government National 
Mortgage Association (collectively, ``Eligible U.S. Government 
Securities'').\6\
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    \3\ Securities Exchange Act Release No. 38328 (February 24, 
1997), 62 FR 9225 (February 28, 1997).
    \4\ ``Government securities'' is defined in section 3(a)(42) of 
the Act, 15 U.S.C. 78c(a)(42).
    \5\ Fedwire is a large-value transfer system operated by the 
Board of Governors of the Federal Reserve System that supports the 
electronic transfer of funds and the electronic transfer of book-
entry securities. 1997 Exemptive Order at 62 FR 9231 n.58.
    \6\ 1997 Exemptive Order at 62 FR 9231.
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    The 1997 Exemptive Order also imposed two conditions on Cedel's 
ability to provide clearance and settlement services for Eligible U.S.

[[Page 30970]]

Government Securities.\7\ First, the average daily volume of Eligible 
U.S. Government Securities processed at Cedel for U.S. participants was 
limited to five percent of the total average daily dollar value of the 
aggregate volume in eligible U.S. government securities.\8\ Second, the 
1997 Exemptive Order required Cedel to provide the Commission access to 
a variety of information related to Cedel's clearance and settlement 
operations.\9\
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    \7\ The conditions in the 1997 Exemptive Order reflected the 
Commission's determination to take a gradual approach toward 
permitting an international non-registered clearing agency such as 
Clearsteam to provide securities processing services in U.S. 
government securities to U.S. market participants. 1997 Exemptive 
Order at 62 FR 9231.
    \8\ The scope of the 1997 Exemptive Order is limited to Eligible 
U.S. Government Securities and does not apply to other debt or 
equity securities. For a more complete description of the volume 
limit, refer to Section III.C.2. of the 1997 Exemptive Order at 62 
FR 9232.
    \9\ For a more complete description of the Commission's access 
to information, refer to Section III.C.3. of the 1997 Exemptive 
Order at 62 FR 9232.
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B. Acquisition by DBAG

    When the Commission issued the 1997 Exemptive Order, Cedel was a 
wholly-owned subsidiary of Cedel International, a privately owned 
entity. Between 1999 and 2002, Clearstream International was 
created,\10\ Cedel was renamed to Clearstream,\11\ and DBAG acquired 
Cedel International.\12\ As a result of this acquisition, DBAG 
indirectly owns Clearstream through its ownership of Clearstream 
International.\13\ Throughout all these mergers, acquisitions, and name 
changes, Clearstream has remained functionally and legally the same 
entity as was Cedel.\14\
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    \10\ Clearstream International is the successor to New Cedel 
International, a company formed in 1999 in connection with DBAG's 
initial investment in Cedel International.
    \11\ Clearstream is a wholly owned subsidiary of Clearstream 
International.
    \12\ The regulatory bodies in Germany, Luxembourg, and the 
United Kingdom did not object to the acquisition of Cedel 
International by DBAG.
    \13\ Although DBAG exercises voting control over Clearstream 
International and Clearstream, certain protections have been 
implemented in order to allow Clearstream's participants to maintain 
influence over Clearstream's policies and procedures.
    \14\ For example, Clearstream's clearance and settlement 
activities are the same as those provided by Cedel, and 
Clearstream's regulator, the Institut Monetaire Luxembourgeois, is 
the same as it was for Cedel.
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III. Continued Compliance With the Exemptive Order

    The 1997 Exemptive Order provides that the Commission may modify by 
order the terms, scope, or conditions of the 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 Act.\15\ The Commission may also limit, suspend, or 
revoke this exemption if the Commission finds that Clearstream has 
violated or is unable to comply with any of the provisions set forth in 
the 1997 Exemptive 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 Act for the protection of investors 
and the public interest.
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    \15\ 1997 Exemptive Order at 62 FR 9233.
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    The 1997 Exemptive Order was based upon representations and facts 
contained in Cedel's Form CA-1 and other information known to the 
Commission regarding the substantive aspects of Cedel's application, 
including the ownership structure and corporate governance. As a 
result, changes in the representations and facts as then existed and 
were presented to the Commission require a modification to the 1997 
Exemptive Order. Specifically, where Cedel was user-owned and its 
participants had direct representation on the board of directors, 
Clearstream is essentially owned by a single entity (i.e., DBAG) that 
facilitates user participation through board advisory committees. The 
Commission believes that it is now appropriate to seek comment on 
whether continuation of Clearstream's existing exemption from clearing 
agency registration is appropriate.\16\
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    \16\ Prior to DBAG's acquisition of Cedel International, 
Clearstream notified the Commission as required by the terms of the 
1997 Exemptive Order. Because Clearstream was the same legal entity 
with Cedel with just a change of name, the 1997 Exemptive Order was 
not amended prior to changes in ownership structure. In contrast, 
when Euroclear Bank replaced Morgan Guaranty Trust Company as the 
operator of the Euroclear System a new legal entity was formed. In 
that situation, Euroclear's order granting it an exemption from 
clearing agency registration was modified prior to the change in 
ownership structure. Securities Exchange Act Release No. 39643 
(February 11, 1998), 63 FR 8232 (February 18, 1998), modified in 
Securities Exchange Act Release No. 43775 (December 28, 2000), 66 FR 
819 (January 4, 2001) (``Modified Euroclear Exemptive Order'').
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    Clearstream's operating structure is the same as Cedel's. 
Clearstream has represented that it uses substantially the same 
personnel, operating systems, procedures, and risk management as did 
Cedel.\17\ Clearstream has represented that it will continue to 
substantially satisfy, as Cedel represented, each of the conditions for 
registration set forth in section 17A(b)(3) of the Act that relate to 
the ``safe and sound clearance and settlement'' in the U.S., which the 
Commission identified in the 1997 Exemptive Order as the fundamental 
goal of Section 17A.\18\ Accordingly, Clearstream requests the 
Commission continue the terms and conditions granted to Cedel in the 
1997 Exemptive Order. Clearstream does not seek to have any changes 
made to the ``Scope of the Exemption,'' as set forth in Section III.C. 
of the 1997 Exemptive Order with respect to the conditions and 
limitations of the 1997 Exemptive Order.
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    \17\ For example, the collateral management service discussed in 
the 1997 Exemptive Order was known as Global Credit Support Service 
(``GCSS''). GCSS was updated in 1998 and was renamed Tripartite 
Collateral Management Service (``TCMS''). Like GCSS, TCMS is a book-
entry, real-time collateral management service for cross-border 
securities collateralization.
    \18\ 1997 Exemptive Order at 62 FR 9231.
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    Clearstream's governance and management structures have been 
revised to reflect the acquisition by DBAG.\19\ Prior to DBAG's 
acquisition, Cedel and Cedel International were privately owned by 
their shareholders and shared the same boards of directors. As 
structured today, Clearstream's four directors are also directors of 
Clearstream International, which has twenty-one directors on its board. 
DBAG nominates and elects all directors.
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    \19\ Clearstream International and Clearstream have delegated 
management to a single management group known as Group Executive 
Management (``GEM''). The GEM is composed of four individuals who 
currently serve as Clearstream's board of directors, as well as one 
additional person.
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    Clearstream's governance structure includes two advisory groups. 
The User Advisory Group and Credit Advisory Group are both populated by 
participants, financial institutions, and service providers and provide 
Clearstream users with a forum to discuss changes to Clearstream's 
products, services, credit standards, and controls.\20\ These two 
groups are designed to ensure that a broad range of Clearstream's users 
are given a voice in the governance of Clearstream.
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    \20\ The interests represented in these groups include issuers, 
securities information providers, trading firms, financial 
institutions, and entities providing clearing, settlement, and 
custody services.
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    Section 17A(b)(3)(C) of the 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.\21\ That section contemplates that users of a 
clearing agency will have a significant voice in the direction of the 
affairs of the clearing agency. Clearstream believes that the current 
governance and management structure, though different

[[Page 30971]]

from Cedel's, satisfies the requirements of section 17A(b)(3)(C) 
because Clearstream provides for participant participation in 
management through the two advisory groups.
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    \21\ 15 U.S.C. 78q-1(b)(3)(C).
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    Section 17A(b)(1) of the 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.\22\ Therefore, the 
Commission invites commenters to address whether continuing the 1997 
Exemptive Order as requested by Clearstream and as described above, 
subject to the continuation of the conditions and limitations set forth 
in that order, would further the goals of and would remain consistent 
with section 17A. In particular, the Commission seeks comment on 
whether the revised governance structure, including the addition of 
advisory committees, such as the User Advisory Group and the Credit 
Advisory Group, in lieu of directors elected by system participants, 
continues to meet the requirements of fair representation under section 
17A(b)(3)(C) of the Act. Additionally, the Commission invites comments 
on amending the 1997 Exemptive Order to permit Clearstream to file 
volume information on a quarterly basis with the Commission rather than 
on a monthly basis.\23\
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    \22\ 15 U.S.C. 78q-1(b)(1).
    \23\ The 1997 Exemptive Order directs Clearstream to file 
monthly volume information with the Commission. The Commission is 
considering amending the 1997 Exemptive Order to permit Clearstream 
to file volume reports on a quarterly basis. See Modified Euroclear 
Exemptive Order (directing Euroclear Bank to file quarterly volume 
reports with the Commission).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the application 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
) or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number 600-29 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number 600-29. This file number 
should be included on the subject line if e-mail is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 

Copies of the submission, all subsequent amendments, all written 
statements with respect to the application that are filed with the 
Commission, and all written communications relating to the application 
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 Section, 100 F Street, NE., Washington, DC 20549. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number 600-29 and should be submitted 
on or before June 21, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(16).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-8320 Filed 5-30-06; 8:45 am]

BILLING CODE 8010-01-P
