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

Dear Mr. Wiseman:

This is in response to your letter of October 31, 1997, requesting guidance on the proposed acquisition of Multinet International Bank, New York, New York ("Multinet"), by CLS Services Ltd., London, England ("CLSSL"). Multinet is an uninsured state licensed trust company that is a member of the Federal Reserve System and serves as a clearinghouse for multilateral netting of foreign exchange transactions among qualifying financial institutions. The Board has previously determined that the activities of Multinet are closely related to banking for purposes of the Bank Holding Company Act ("BHC Act"), and various companies have received Board approval under section 4 of the BHC Act to own in excess of 5 percent of the voting securities of Multinet.¹ Multinet is not a bank within the meaning of the BHC Act, and the Board has not approved its acquisition as a bank by any person under section 3 of the BHC Act.

We understand from your letter that CLSSL is an organization distinct from Multinet that was organized by a group of major international banks to serve as a vehicle for developing methods to reduce foreign exchange settlement risk. CLSSL now proposes to acquire Multinet as a preliminary step in the establishment of a continuous linked settlement system for foreign exchange transactions. The specific role of Multinet within the proposed settlement system, however, has not been finalized.

As part of the proposal, CLSSL also would acquire Exchange Clearing House Limited, London, England ("ECHO"), a company also established to provide foreign exchange netting services. ECHO is not a member of the Federal Reserve System and you have represented that ECHO does not operate in the United States.

On consummation of the proposal, shareholders of CLSSL would include bank holding companies registered under the BHC Act and foreign banks and bank holding companies that are subject to the BHC Act (collectively, "U.S. Shareholders").² You have requested guidance regarding whether any of the U.S. Shareholders would be required to file an application under section 4 of the BHC Act in connection with the ownership or acquisition of voting securities of CLSSL after its acquisition of Multinet and ECHO.

[Three sentences deleted.] It is anticipated that CLSSL would have 36 shareholders at the time of consummation of the proposal and that additional financial institutions would become shareholders thereafter. Each Class A shareholder, therefore, would hold less than 5 percent of the voting securities of CLSSL.³ [Three sentences deleted.]⁴

In light of the facts you have presented, and for the reasons discussed above, the proposed investment by U.S. Shareholders in CLSSL appears to be permissible under section 4(c)(6) of the BHC Act. On this basis, the U.S. Shareholders would not be required to obtain Board approval under section 4 of the BHC Act prior to acquiring shares of CLSSL.⁵

This opinion is limited solely to the transaction described above and does not authorize any other transaction. This determination also does not address any application that Multinet, ECHO, CLSSL, or any other subsidiary of CLSSL may be required to file under the Bank Merger Act. Any material change in the facts stated above or as described in your letter of October 31, including any material change in the documents executed in connection with the transaction described above from the documents you have submitted in draft from, may require this opinion to be reconsidered, and should be communicated immediately to Board staff. If you have any questions concerning this matter, please contact Gordon Miller (202/452-2534) of the Board's Legal Division.

Sincerely,

(Signed) J. Virgil Mattingly

J. Virgil Mattingly

cc: John S. Cassidy,
      Federal Reserve Bank of New York

1. See Bank of Montreal, 83 Federal Reserve Bulletin 127 (1997) ("Multinet Order"). Return to text

2. The BHC Act is applicable under section 8 of the International Banking Act of 1978, 12 U.S.C. § 3106, to foreign banks that maintain a branch or agency in the United States or that control a commercial lending company organized under state law. Return to text

3. In your letter, you acknowledge that a banking organization subject to section 4 of the BHC Act that holds shares of CLSSL through more than one subsidiary must aggregate all such holdings for purposes of complying with the BHC Act.Return to text

4. [Sentence deleted.] In the event that any such provision is adopted, Board staff should be consulted immediately to determine whether this change may require any bank holding company to obtain Board approval under the BHC Act. As noted above, the Board has already determined that the proposed activities of Multinet are permissible activities for a bank holding company under section 4(c)(8) of the BHC Act, but has made no such determination with respect to the activities of CLSSL, ECHO, or any other subsidiary of CLSSL.Return to text

5. This determination assumes that the activities of Multinet are as described in the Multinet Order, and does not address any requirements under section 3 of the BHC Act in the event that Multinet, ECHO, CLSSL, or any other subsidiary of CLSSL were determined to be a bank within the meaning of the BHC Act. Return to text