| For immediate release |
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The Federal Reserve Board today approved a notice by two U.S. and six Canadian banking organizations to acquire the voting shares of Multinet International Bank, New York City, a limited purpose trust company now in formation. Multinet would serve as a clearinghouse for multilateral netting of foreign exchange transactions conducted by its participants. The Board also approved the application by Multinet, a state-chartered institution, to become a member of the Federal Reserve System. Banking organizations making the request to acquire Multinet are The Chase Manhattan Corporation, New York City; First Chicago NBD Corporation, Chicago; Bank of Montreal, National Bank of Canada, and Royal Bank of Canada, all of Montreal; and The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, and The Toronto Dominion Bank, all of Toronto. A copy of the Board's Order is attached. |
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Bank of Montreal |
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Bank of Montreal, Montreal, Canada; The Bank of Nova Scotia, Toronto, Canada; Canadian Imperial Bank of Commerce, Toronto, Canada; The Chase Manhattan Corporation, New York, New York; First Chicago NBD Corporation, Chicago, Illinois; National Bank of Canada, Montreal, Canada; Royal Bank of Canada, Montreal, Canada; and The Toronto Dominion Bank, Toronto, Canada (collectively, "Notificants"), bank holding companies within the meaning of the Bank Holding Company Act ("BHC Act"), have requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. � 1843(c)(8)) and section 225.23 of the Board's Regulation Y (12 C.F.R. 225.23) each to acquire up to 13.3 percent of the voting shares of Multinet International Bank, New York, New York ("Multinet"). Notificants propose that Multinet, a de novo uninsured state licensed trust company, would serve as a clearinghouse for multilateral netting of foreign exchange transactions. Multinet would provide the proposed services to all qualifying participants worldwide. |
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In addition, Multinet has applied under section 9 of the Federal Reserve Act to become a member of the Federal Reserve System.1 As a state member bank, Multinet would have an account at the Federal Reserve Bank of New York ("Reserve Bank") and would use Federal Reserve System payment services to clear and settle U.S. dollar payments to and from the clearinghouse. Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (61 Federal Register 39,660 (1996)). The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act and section 9 of the Federal Reserve Act. Notificants are large commercial banking organizations headquartered in Canada and the United States. They engage directly and through subsidiaries in a broad range of banking and permissible nonbanking activities in the United States. |
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Proposed Activities
Multilateral netting would be achieved through the legal technique of novation and substitution, whereby Multinet would become the counterparty to each participant in every contract accepted for netting and would receive payments from and make payments to each participant in the proper currencies.4 Multinet would charge participants a fee for each trade that it cleared. As a member of the Federal Reserve System, Multinet would open an account with, and receive payment services from, the Reserve Bank. Multinet would have access to Fedwire to make and receive U.S. dollar payments, which, among other things, would be used to conduct U.S. dollar settlements and would have a book-entry securities account, which would be used to hold and manage U.S. Treasury securities pledged by participants as collateral.5 Multinet's key service provider would be International Clearing Systems, Inc. ("ICSI"), a wholly owned subsidiary of The Options Clearing Corporation ("Options Clearing"), both of Chicago, Illinois.6 ICSI would operate VALUNET�, a proprietary netting, settlement, and risk management software system developed and tested with the direction and support of Options Clearing and currently in use by ICSI to effect bilateral netting of foreign exchange contracts.7 In addition, two representatives of ICSI would serve on Multinet's 12-member board of directors, and one of ICSI's representatives also would serve on the board's executive committee and risk management committee.8 |
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Closely Related to Banking Analysis
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Proper Incident to Banking Analysis
In order to approve the proposal, the Board also must determine that the proposed activities are a proper incident to banking; that is, that the activity "can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."11 As part of its evaluation of these factors, the Board has carefully reviewed the financial and managerial resources of the Notificants and Multinet and the effect the proposed transaction would have on these resources. Based on all the facts of record, the financial and managerial12 resources of the Notificants and Multinet are consistent with approval of the proposal. The Board also has reviewed the proposal in light of its Policy Statement on Privately Operated Large-Dollar Multilateral Netting Systems ("Policy Statement").13 Multinet would take multiple steps to control the risks inherent in its operations, including imposing membership criteria on participants, evaluating all foreign exchange contracts before acceptance on the basis of several risk-related criteria, withholding payments due a defaulting participant, and using a line of credit secured by withheld payments and the securities pledged by participants to fund settlement payments when a participant defaults. To address the risk that financially weak institutions or institutions that lack experience in foreign exchange transactions would default or be unable to fulfill their obligations on a timely basis, Multinet would subject potential and active participants to stringent and objective membership requirements, including minimum requirements with respect to capital, credit rating, and experience in the foreign exchange dealer market.14 Applicants also would be required to complete successfully a trial period as a subscriber to Multinet's bilateral netting service.15 Multinet would continue to monitor the performance of participants after they became members. To address the risk to Multinet arising from the potential default of a qualified participant, Multinet would establish and continually update for each participant a series of exposure measurements and collateral requirements based on Multinet's expected loss if the participant failed to perform on any of its outstanding foreign exchange contracts. Each contract submitted would be evaluated to determine whether it would cause either party to the contract to exceed its exposure limits or collateral requirement. Contracts that would cause any of the exposure limits to be exceeded, or that required additional collateral that was not timely provided, would not be accepted for netting.16 Participants also would be required to contribute collateral to cover Multinet's estimated exposure to settlement losses in the clearinghouse as a whole and to the risk that a settlement agent might fail to deliver a currency under Multinet's multi-currency line of credit. Multinet also would monitor the risk profile of participants to identify possible future limit violations or the need to call for additional collateral.17 |
| Multinet proposes to establish several standard clearinghouse techniques
to control and allocate the risk associated with the failure by a participant to
settle on a timely basis its payment obligations on accepted foreign exchange
contracts. In general, if a participant failed to pay Multinet, Multinet would
withhold payments due the defaulting participant and use the withheld
payments, along with securities in the collateral pool, to secure an advance
under Multinet's line of credit in the currencies and in the amounts that the
defaulting participant failed to deliver. As currently structured, Multinet would
use the loan to pay the parties that performed their payment obligations to
the clearinghouse. In the event the collateral pool was drawn down,
participants would be required to replenish the pool by pledging additional
collateral. A participant's failure to make a required pledge would constitute a
default and enable Multinet to withhold settlement payments due that
participant, thereby providing additional collateral to the pool.18 Multinet
would minimize its operating risk through its reliance on the back-office
support staff of ICSI and the use of comprehensive disaster recovery facilities
and procedures.
The risk management policies and procedures that Multinet proposes to implement in providing foreign exchange clearinghouse services are consistent with the Board's Policy Statement. Based on all the facts of record, the Board finds that the risk management policies and procedures are consistent with approval of the proposal. The risk management techniques of Multinet also can reasonably be expected to produce notable public benefits by increasing the reliability of clearing and settlement in foreign exchange transactions. All participants would be subject to clearinghouse standards concerning their financial condition and operational capabilities, their volume of payments would be reduced, and the multi-party collateral, loss-sharing, and credit arrangements would ensure prompt payment to performing parties. Moreover, the proposal can reasonably be expected to increase competition in the provision of foreign exchange services. Multinet would be the first clearinghouse for multilateral netting of foreign exchange transactions in the United States and only the second such clearinghouse in operation worldwide. By increasing the availability of clearing and settlement services, these services should be available at lower cost and to a larger number of financial institutions and their customers. For these reasons, and in reliance on all the commitments made in connection with the proposal, the Board concludes that the proposal can reasonably be expected to produce public benefits that would outweigh the potential of the proposal for adverse effects, if any, under the proper incident to banking standard of section 4(c)(8) of the BHC Act. The Board also has considered the factors it is required to consider when reviewing an application to become a member bank under section 9 of the Federal Reserve Act. Multinet has provided the Board with several commitments intended to ensure that the Board would have adequate enforcement authority over Multinet as an uninsured state member bank.19 Based on all the facts of record, the Board finds that Multinet's application for membership is consistent with approval.20 |
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Conclusion
Based on all the facts of record, including all the commitments, stipulations, and representations made by the Notificants and Multinet, and subject to all the terms and conditions set forth in this order, the Board has determined that the notices and the application should be, and hereby are, approved. Approval of the notices and application is specifically conditioned on compliance by Notificants with the commitments and stipulations made in connection with the notices and application. The Board's determination also is subject to all the terms and conditions set forth in Regulation Y, including those in section 225.7 and 225.23(g) (12 C.F.R. 225.7 and 225.23(g)), and to the Board's authority to require such modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to ensure compliance with and to prevent evasion of the provisions of the BHC Act and the Board's regulations and orders thereunder. The Board's decision is specifically conditioned on compliance with all the commitments, stipulations, and representations made in the notices and application, including the commitments and conditions discussed in this order. The commitments, stipulations, representations, and conditions relied on in reaching this decision shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law. These activities shall not be commenced later than three months after the effective date of this order, unless such period is extended for good.cause by the Board or by the Federal Reserve Bank of Chicago or New York, pursuant to delegated authority. |
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By order of the Board of Governors,21 effective December 4, 1996.
Deputy Secretary of the Board |
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Footnotes 1 Multinet would not accept deposits and would not be insured by the Federal Deposit Insurance Corporation. On August 21, 1996, Multinet received an Organizational Certificate and conditional Authorization Certificate from the New York State Banking Department. The Authorization Certificate is conditioned on Multinet's becoming a member of the Federal Reserve System and addressing certain other organizational and operational matters. 2 Forward contracts would have a maturity of not more than two years. 3 Multinet also would provide bilateral netting services to subscribers outside the clearinghouse. Because Multinet would not be a party to those transactions, its assets and the collateral pledged by participants in the clearinghouse would not be at risk with respect to the transactions. Multinet has committed that it will not net or settle obligations created by or through any other bilateral or multilateral netting service without prior notice to the Federal Reserve System. 4 Operations are expected to begin in U.S. and Canadian dollars only, with transactions in other currencies to be added thereafter. Multinet has committed that it will not clear foreign exchange contracts in any additional currencies, and will not make any change in the overall currency liquidity limit or level of available credit facilities in any eligible currency, without prior notice to the Federal Reserve System. 5 Multinet has committed that it will not incur any overdrafts in its account at the Reserve Bank. 6 Options Clearing is a registered clearing agency that is owned by several U.S. stock and commodity exchanges and regulated by the Securities and Exchange Commission. Options Clearing is the largest clearinghouse for options contracts in the world, and has developed complex risk management and settlement techniques for the numerous products it clears. |
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7 ICSI staff would monitor participants' positions and submitted contracts for compliance with Multinet's policies and procedures, and, under the direction of Multinet staff, would make and receive all settlement payments. ICSI staff also would help to assess the operational capabilities of potential and active participants, train applicants in the use of VALUNET®, and provide participants with telephone support. 8 Nine of the 10 other members of the board of directors would be representatives of Notificants. The tenth member would be a representative of Multinet. 9 12 U.S.C. § 1843(c)(8). Regulation Y also provides that bank holding companies may engage in incidental activities that are necessary to carry on an activity that is closely related to banking. See 12 C.F.R. 225.21(a)(2). 10 Multinet would not be a bank, would not make loans or investments, and would not accept deposits other than of funds generated from trust activities that were not currently invested and were properly secured, and would satisfy the other limitations of Regulation Y with respect to trust company activities. See 12 C.F.R. 225.25(b)(3). Foreign exchange trading has been approved by the Board by order. See The Hongkong and Shanghai Banking Corporation, 75 Federal Reserve Bulletin 217 (1989); The Long-Term Credit Bank of Japan, Limited, 74 Federal Reserve Bulletin 573 (1988). Multinet also would provide data processing and transmission services pursuant to a written agreement, and would observe certain limitations on the facilities and hardware provided with its data processing and transmission services, as required by Regulation Y. See 12 C.F.R. 225.25(b)(7). 11 12 U.S.C. § 1843(c)(8). 12 Each of the Notificants would have a representative on the board of directors of Multinet, who may be an officer or director of the Notificant. Under the Depository Institution Management Interlocks Act (12 U.S.C. § 3201 et seq.) ("Interlocks Act") and the Board's Regulation L (12 C.F.R. Part 212), certain management interlocks between depository institutions or depository holding companies, as defined in the Interlocks Act, that are not affiliated for purposes of the Interlocks Act are prohibited. The general purpose of the Interlocks Act is to promote competition between depository institutions in the provision of credit to the general public. See H.R. Rep. No. 95-1383, at 14 (1978), reprinted in 1978 U.S.C.C.A.N. 9273, 9286. In view thereof, the Board previously has determined that a management interlock between a depository institution and a limited purpose trust company that does not have the power to accept deposits or make personal or commercial loans is not prohibited by the Interlocks Act. See Letter from General Counsel to Charles M. Thompson, Esq., dated July 13, 1994; Letter from General Counsel to Mr. John A. O'Conner, Jr., dated July 8, 1994. |
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13 See 59 Federal Register 67,534 (December 29, 1994). The Policy Statement also incorporates the minimum standards for multilateral netting systems set forth in the Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries. 14 Multinet has committed that it will not admit a foreign financial institution as a member of the clearinghouse without prior notice to the Federal Reserve System, unless the System has previously approved the admission to Multinet of the identical type of financial institution from the same foreign country. 15 All Notificants have successfully completed this trial period. 16 Contracts that were not accepted would remain bilateral contracts and would be settled outside Multinet. 17 Multinet's credit exposure on accepted forward contracts would be fully collateralized by U.S. government obligations, and additional collateral would be required to cover the potential volatility of the accepted forward contracts over five business days. Multinet also would be authorized to close out a participant's forward contracts in whole or in part to cover any collateral deficiencies resulting from changes in exchange rates or the value of the collateral or from the maturation of accepted forward contracts and the shift of collateral to the settlement collateral pool. Based on these collateral requirements, the Board has determined that Multinet's credit exposure on forward foreign exchange transactions would not be significant. 18 Multinet has committed that it will notify the Federal Reserve System of all proposed changes to its rules and user manual, and that it will provide the System with a copy of any final agreement or legal opinion related to its netting and settlement services and related collateral arrangements, or any amendment to such documents before using or acting in reliance on such documents or amendments thereto. 19 Multinet also has stipulated that it is subject to the supervisory, examination, and enforcement powers of the Board under the BHC Act as if it were a subsidiary of a bank holding company, and to the supervisory, examination, and enforcement powers of the Board under the Federal Deposit Insurance Act ("FDI Act") as if Multinet were an insured depository institution for which the Board is the appropriate Federal banking agency under the FDI Act. 20 See 12 U.S.C. § 322; 12 C.F.R. 208.5. 21 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley, Lindsey, Phillips, Yellen, and Meyer. |
1996 Orders on banking applications
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