Mr. Michael M. Wiseman
Sullivan & Cromwell
125 Broad Street
New York, New York 10004-2498

Dear Mr. Wiseman:

This is in response to your letter of April 10, 1997, requesting guidance on a the proposed reorganization of the New York Clearing House ("Clearing House"). I understand from your inquiry that Clearing House would be reorganized into a limited liability holding company ("Clearing House Holding Company"), and that Clearing House Holding Company would be indirectly owned by the same 10 large New York bank holding companies that are currently members of Clearing House. Each bank holding company would own 10 percent of Clearing House Holding Company's voting shares indirectly through a national or state member subsidiary bank.

The interbank payment operations of Clearing House would be conducted by CHIPCo, which would also be organized as a limited liability company. All of CHIPCo's class B stock, representing 1 percent of the voting shares, would be owned by Clearing House Holding Company, and all of CHIPCo's class A stock, representing 99 percent of the voting shares, would be owned by banking organizations participating in CHIPCo. You indicate that some of the class A shareholders would be foreign banks subject to the Bank Holding Company Act ("BHC Act"). In addition, you indicate that one or more operating subsidiaries, also organized as limited liability companies, may operate the small value payment systems (collectively, "SVPCo") currently operated by the Clearing House.

In light of these facts, you have requested guidance on whether the proposed investment in Clearing House Holding Company, CHIPCo, and SVPCo would be permissible for the state member banks involved and whether an application under the BHC Act would be required for the proposed investment by foreign banks in CHIPCo and SVPCo.

The information you have provided indicates that the proposed activities of Clearing House Holding Company, CHIPCo, and SVPCo are effectively limited to activities permissible for a state member bank. The state member banks also have the right to withdraw from Clearing House Holding Company, CHIPCo, and SVPCo if these entities engage in impermissible activities in the future, and the liability of each state member bank would be limited to the amount of its investment. In addition, the amount of the proposed investment in Clearing House Holding Company and its subsidiaries would be insufficient to require consolidation of the investment on the books of any of the shareholders, including the state member banks. The proposed activities of Clearing House Holding Company and its subsidiaries, moreover, are integrally related to the payment system activities of the state member bank participants.

Your letter also states that each foreign bank participant in CHIPCo is not expected to own more than 1 percent of the class A stock and that the investment would be a passive, noncontrolling investment. In addition, you indicate that each foreign bank participant would not own more than 5 percent of any class of stock for any SVPCo and that the investments also would be a passive and noncontrolling. There is no indication in your letter that the foreign bank participants are acting in concert in making the investments or that the investments would be considered as an entrepreneurial enterprise.¹ Instead, the foreign banks would acquire stock as a means to become participants in the clearing operations of CHIPCo and each SVPCo.

In light of the facts you have presented, and for the reasons discussed above, I conclude that the proposed investment in Clearing House Holding Company, CHIPCo, and SVPCo would be permissible for the state member banks involved and that the proposed investment in CHIPCo and SVPCo by the foreign banks involved would be permissible under section 4(c)(6) of the BHC Act. I also note that the bank holding companies that will own Clearing House Holding Company have been permissibly engaged for a number of years in the nonbanking activities of Clearing House, and that the proposal represents solely a reorganization of these activities into a new corporate structure. Accordingly, I conclude that the proposed transaction may be consummated without further action by the Federal Reserve System.

This opinion is limited solely to the transaction described above and does not authorize any other transaction. Any material change in the facts stated above should be communicated to Board staff. If you have any questions, please contact Bob Frierson (202/452-3711) of my staff.

Sincerely,

(signed) J. Virgil Mattingly

J. Virgil Mattingly

1. See 12 C.F.R. 225.137. Return to text