| For immediate release |
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The Federal Reserve Board today announced its approval of the notice filed by Stichting Prioriteit ABN AMRO Holding, Stichting Administratiekantoor ABN AMRO Holding, ABN AMRO Holding N.V., and ABN AMRO Bank N.V., all of Amsterdam, The Netherlands, to acquire all of the voting shares of ChiCorp, Inc., Chicago, Illinois, and thereby engage in a variety of nonbanking activities, including underwriting and dealing in all types of debt and equity on a limited basis, and certain other securities- and derivatives-related activities. Attached is the Board's Order relating to this action. |
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Stichting Prioriteit ABN AMRO Holding |
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Stichting Prioriteit ABN AMRO Holding, Stichting Administratiekantoor ABN AMRO Holding, ABN AMRO Holding N.V., and ABN AMRO Bank N.V., all of Amsterdam, The Netherlands (collectively, "Notificants"), bank holding companies within the meaning of the Bank Holding Company ("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) to acquire all the voting securities of ChiCorp Inc., Chicago, Illinois ("ChiCorp"), and thereby engage in a wide range of nonbanking activities, including securities- and derivatives-related activities. Notificants have applied to engage in the following nonbanking activities throughout the United States, and propose to provide the following services worldwide:
Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (61 Federal Register 41,413 (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. Stichting Prioriteit ABN AMRO Holding, with total consolidated assets of $339.4 billion,1 is the largest commercial banking organization in the Netherlands. Notificants control seven depository institutions in Illinois and one commercial bank in New York. ABN AMRO Bank N.V. also operates branches in Boston, Massachusetts; Chicago, Illinois; New York, New York; Pittsburgh, Pennsylvania; and Seattle, Washington; and agencies in Atlanta, Georgia; Miami, Florida; Houston, Texas; and Los Angeles and San Francisco, California. ChiCorp and its principal subsidiary, The Chicago Corporation, Chicago, Illinois ("TCC"), engage worldwide in a wide range of investment advisory, securities underwriting, and futures-related activities. Notificants propose to merge TCC with and into Notificants' existing section 20 subsidiary, ABN AMRO Securities (USA) Inc., Chicago, Illinois ("Company").2 TCC and Company are, and Company will continue to be, broker-dealers registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (15 U.S.C. � 78a et seq.) and a member of the National Association of Securities Dealers ("NASD"). In addition, TCC is, and Company would become, registered as an FCM and CTA with the Commodity Futures Trading Commission ("CFTC") under the Commodity Exchange Act (7 U.S.C. � 1 et seq.) and a member of the National Futures Association ("NFA"). Accordingly, Company will be subject to the recordkeeping and reporting obligations, fiduciary standards, and other requirements of the Securities Exchange Act, the Commodity Exchange Act, the SEC, CFTC, NASD and NFA. Activities Previously Approved by the Board
Activities Approved by Regulation
Bank-Ineligible Underwriting and Dealing Activities
The Board also has determined that the conduct of these securities underwriting and dealing activities is consistent with section 20 of the Glass-Steagall Act (12 U.S.C. § 377), provided that the company engaged in the underwriting and dealing activities derives no more than 10 percent of its total gross revenue from underwriting and dealing in bank-ineligible securities over any two-year period.6 Notificants have committed that Company will conduct its underwriting and dealing activities in bank-ineligible securities subject to the 10-percent revenue test.7 Private Placement and "Riskless Principal" Activities
"Riskless principal" is the term used in the securities business to refer to a transaction in which a broker-dealer, after receiving an order to buy (or sell) a security for a customer, purchases (or sells) the security for its own account to offset a contemporaneous sale to (or purchase from) the customer.8 Riskless principal transactions are understood in the industry to include only transactions in the secondary market. Thus, Company would not act as a riskless principal in selling bank-ineligible securities at the order of a customer that is the issuer of the securities to be sold, or in any transaction where Company has a contractual agreement to place the securities as agent of the issuer. Company also would not act as a riskless principal in any transaction involving a bank-ineligible security for which it or an affiliate makes a market. The Board has determined that, subject to the limitations established by the Board in prior orders, the proposed private placement and riskless principal activities are so closely related to banking as to be a proper incident thereto within the meaning of section 4(c)(8) of the BHC Act.9 The Board also has determined that acting as agent in the private placement of securities, and purchasing and selling securities on the order of investors as a riskless principal, do not constitute underwriting and dealing in securities for purposes of section 20 of the Glass-Steagall Act, and that revenue derived from these activities is not subject to the 10-percent revenue limitation on bank-ineligible securities underwriting and dealing.10 Notificants have committed that Company will conduct its private placement activities using the same methods and procedures and subject to the same prudential limitations as those established by the Board in Bankers Trust and J.P. Morgan,11 including the comprehensive framework of restrictions imposed by the Board in connection with underwriting and dealing in bank-ineligible securities, which were designed to avoid potential conflicts of interests, unsound banking practices, and other adverse effects.12 Notificants also have committed that Company will conduct its riskless principal activities subject to the limitations previously established by the Board.13 General Partnership Activities
Precious Metal and Foreign Exchange Activities
Additional FCM and CTA Activities
The Board previously has determined that Company's proposed futures-related execution, clearing and advisory activities, including its proposed clearing-only activities, are so closely related to banking as to be proper incidents thereto, provided that the activities are conducted in conformity with certain limitations and conditions designed to, inter alia, ensure that the activities are consistent with safe and sound banking practices and mitigate potential conflicts of interests.26 Notificants have committed that Company will conduct these additional FCM and advisory activities in accordance with the limitations established by the Board in previous cases.27 Notificants also propose that Company provide clearing-only services to, and serve as the primary clearing firm for, certain professional floor traders on the KCBOT and MGE with respect to the futures contracts and options on futures contracts traded on such exchanges.28 The Board previously has determined that providing clearing services with respect to exchange-traded securities, options, futures, and options on futures contracts is closely related to banking within the meaning of section 4(c)(8) of the BHC Act.29 In 1991, however, the Board denied an application by Notificants to engage de novo in providing the proposed services to market makers and other professional floor traders dealing for their own accounts.30 The Board's decision in the 1991 ABN AMRO Order was based on the Board's conclusion that, at the time of the application, the applicants had not sufficiently demonstrated that the potential public benefit of the proposed activity outweighed the financial risks associated with serving as the primary clearing firm for professional floor traders.31 In the 1991 ABN AMRO Order, the Board recognized that a company serving as the primary clearing firm for professional floor traders may be exposed to significant financial risks because the company generally would not have the ability to reject an executed trade presented to it for clearance, even where the company believes the trade presents unacceptable risks in light of market conditions or the traders' financial position. The Board also noted that, at the time of the application, the applicants lacked appropriate operational systems to track and manage the intra-day risks arising from the trading activities of the floor traders. This lack of a mechanism to monitor intra-day trading activities presented the possibility that a professional floor trader could incur substantial losses through the trading of options or futures contracts, which the applicants would be obligated to clear and guarantee, before the applicants could act to mitigate their credit risk exposure. Since 1991, the Board and bank holding companies have gained substantial experience with the conduct, methods, procedures, and regulation of clearing-only activities. Also, the Board has authorized bank holding companies to provide clearing-only services with respect to futures contracts and options on futures contracts for customers other than professional floor traders, subject to certain conditions designed to assure that the bank holding companies have the ability to manage the attendant financial risks.32 In particular, the bank holding companies agreed to provide the clearing-only services pursuant to "give-up" agreements that provide the bank holding companies the right to refuse to accept for clearance any customer trade that the bank holding company deems unsuitable in light of market conditions or a customer's financial situation or objective.33 In addition, the bank holding companies agreed to establish procedures to monitor the intra-day trading activities and risk exposure of their clearing-only customers. The facts of record in this case indicate that TCC has, and Company will have, sufficient risk management policies, procedures, and systems to permit Notificants and Company to adequately monitor and control the risks, including the intra-day risks, associated with Company's proposal to serve as the primary clearing firm for a limited number of professional floor traders on the KCBOT and MGE.34 Specifically, TCC establishes trading, credit, margin, and exposure limits for each professional floor trader for which it serves as the primary clearing firm.35 Adherence to these limits is monitored on an intra-day basis by experienced TCC personnel who are physically present on the floor of the KCBOT and MGE.36 These TCC personnel visually monitor the trading activities of floor traders on the exchanges and review trades submitted by the floor traders for clearance.37 If a TCC employee determines that a floor trader is exceeding the limits established by TCC, or is otherwise engaged in questionable trading activities, the employee has the ability to limit or halt the floor trader's activities, require the floor trader to post additional margin, partially or entirely liquidate the floor trader's positions, or immediately revoke the floor traders membership on the exchange.38 The managers of TCC's operations on the KCBOT and MGE also personally guarantee TCC against any losses that TCC may incur from serving as the primary clearing firm for floor traders on the exchanges, which provides such personnel with an incentive to closely monitor the trading activities of the floor traders. Notificants have stated that Company will install an on-line risk management system that will provide personnel in Chicago, Kansas City, and Minneapolis with intra-day data on the trading activities of professional floor traders on the KCBOT and MGE, and that will permit such personnel to analyze Company's exposure to such trading activities on an intra-day basis. The Board notes that the type of risk management systems necessary to appropriately manage the risks arising from a particular activity necessarily depends on the scope and nature of the proposed activity. Company proposes to serve as the primary clearing firm for a limited number of professional floor traders on two exchanges. These exchanges have relatively small trading areas and volumes, which permits personnel on the floors of the exchanges to monitor trading activity on the exchanges. The Federal Reserve Bank of Chicago ("Reserve Bank") conducted an on-site review of the operational and managerial infrastructure maintained by TCC in Chicago, Kansas City, and Minneapolis to monitor and control the financial risks associated with TCC's primary clearing activities on the KCBOT and MGE. Based on this review and other facts of record, the Board concludes that TCC has the managerial and operational resources and systems adequately to monitor and control the financial risks arising from its role as primary clearing firm on the KCBOT and MGE. The record in this case also indicates that Notificants' proposal to assume the clearing-only activities of ChiCorp on the KCBOT and MGE, within the framework discussed in this order, can reasonably be expected to produce public benefits that outweigh possible adverse effects. The Board notes that the KCBOT and MGE are small exchanges with relatively low transaction volumes, and that ChiCorp serves as the primary clearing firm for a significant percentage of the professional floor traders on such exchanges. Notificants' proposal would permit Company to continue providing primary clearing services to the professional floor traders on the KCBOT and MGE that are currently customers of TCC. In light of all the facts of record, including the limited nature of Company's proposed clearing-only activities for professional floor traders, the commitments provided by Notificants, and the operational and managerial systems that Company will have in place to monitor and control the risks arising from the proposed activities, the Board has concluded that the credit and other risk considerations associated with the proposed clearing-only activities for professional floor traders on the KCBOT and the MGE are consistent with approval of this notice and that, therefore, the proposed activity is a proper incident to banking within the meaning of section 4(c)(8) of the BHC Act.39 Brokerage Services With Respect to Forward Contracts Based on
Certain Financial and Nonfinancial Commodities
Bank holding companies are permitted to act as a broker in the execution and clearance of futures contracts and options on futures contracts based on financial and nonfinancial commodities.42 As noted above, the forward contracts that Company proposes to broker would be based on the same financial and nonfinancial commodities that underlie futures contracts that bank holding companies are permitted to broker as an FCM. Bank holding companies also are permitted to broker forward contracts on foreign exchange and arrange swap transactions that are based on nonfinancial commodities or indices of nonfinancial commodities.43 Accordingly, the Board has concluded that acting as a broker for forward contracts based on those financial and nonfinancial commodities that underlie an exchange-traded futures contract is a permissible activity for bank holding companies under section 4(c)(8) of the BHC Act.44
Other Considerations
In connection with this proposal, the Reserve Bank has reviewed the operational and managerial infrastructure of Company, including its computer, audit, and accounting systems and internal risk management procedures and controls, with respect to the proposed underwriting and dealing in debt and equity securities, and has determined that Company has established an adequate operational and managerial infrastructure to ensure compliance with the requirements of the Section 20 Orders. The Reserve Bank also has reviewed the operational and managerial infrastructure of ChiCorp with respect to its provision of clearing-only services to locals on the KCBOT and MGE, including the policies, procedures, and systems that ChiCorp has, and that Company will have, in place to monitor and control the financial risks associated with such activities. On the basis of the Reserve Bank's review, and all the facts of record, the Board concludes that financial and managerial considerations are consistent with approval of this proposal.48 Consummation of the proposal can reasonably be expected to provide added convenience and services to Notificants' customers by offering them an expanded range of products and services. Notificants also have stated that consummation of the proposal would give ChiCorp access to Notificants' worldwide customer base and contacts and would permit ChiCorp and Company to compete more effectively in the market for securities- and futures-related services. There are numerous providers of the proposed nonbanking services and, therefore, consummation of the proposal would not significantly decrease competition in any relevant market. The Board also believes that the conduct of the proposed activities within the framework established in this order, prior orders, and Regulation Y is not likely to result in significantly adverse effects, such as undue concentration of resources, decreased or unfair competition, or unsound banking practices. Accordingly, and for the reasons set forth in this order and in the Section 20 Orders, the Board has concluded that Notificants' proposal to engage in the proposed activities is consistent with the Glass-Steagall Act, and that the proposed activities are so closely related to banking as to be proper incidents thereto within the meaning of section 4(c)(8) of the BHC Act, provided that Notificants limit Company's activities as specified in this order and the Section 20 Orders, as modified by the Modification Orders.49 On the basis of all the facts of record, the Board has determined to, and hereby does, approve this notice subject to all the terms and conditions discussed in this order and in the Section 20 Orders, as modified by the Modification Orders. The Board's approval of this proposal extends only to activities conducted within the limitations of those orders and this order, including the Board's reservation of authority to establish additional limitations to ensure that Company's activities are consistent with safety and soundness, avoiding conflicts of interests, and other relevant considerations under the BHC Act. Underwriting and dealing in any manner other than as approved in this order and the Section 20 Orders, as modified by the Modification Orders, is not authorized for Company. The Board's determination also is subject to all the terms and conditions set forth in Regulation Y, including those in sections 225.7 and 225.23(g) (12 C.F.R. 225.7 and 225.23(g)), and to the Board's authority to require modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to assure compliance with and to prevent evasion of the provisions of the BHC Act and the Board's regulations and orders issued thereunder. The Board's decision is specifically conditioned on Notificants' compliance with all the commitments made in connection with this notice, including the commitments discussed in this order and the conditions set forth in the Board regulations and orders noted above. The commitments and conditions shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decisions, and may be enforced in proceedings under applicable law. This transaction shall not be consummated later than three months after the effective date of this order unless such period is extended for good cause by the Board or the Reserve Bank, acting pursuant to delegated authority. |
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By order of the Board of Governors,50 effective December 11, 1996.
Deputy Secretary of the Board |
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Footnotes 1 Asset and ranking data are as of December 31, 1995, and use exchange rates then in effect. 2 See Stichting Prioriteit ABN AMRO Holding, 81 Federal Reserve Bulletin 182 (1995). 3 See 12 C.F.R. 225.25(b)(1), (4), (5), (7), (15), (18) and (19). As part of its securities brokerage activities, Company would provide execution-only and clearing-only services with respect to securities to institutional customers. Company will provide clearing-only services with respect to securities only if Company has the ability and the right to reject a trade given to Company for clearance for any reason. As discussed further below, the Board has separately considered Notificants' requests to provide clearing-only services to professional floor traders and with respect to options on securities. 4 See Canadian Imperial Bank of Commerce, et al., 76 Federal Reserve Bulletin 158 (1990); J.P. Morgan & Co. Incorporated, et al., 75 Federal Reserve Bulletin 192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board of Governors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir. 1990); Citicorp, et al., 73 Federal Reserve Bulletin 473 (1987), aff'd sub nom. Securities Industry Ass'n v. Board of Governors of the Federal Reserve System, 839 F.2d 47 (2d Cir. 1988), cert. denied, 486 U.S. 1059 (1988); as modified by Review of Restrictions on Director, Officer and Employee Interlocks, Cross-Marketing Activities, and the Purchase and Sale of Financial Assets Between a Section 20 Subsidiary and an Affiliated Bank or Thrift, 82 Federal Reserve Bulletin __ (1996) (Order dated October 30, 1996) (collectively, "Section 20 Orders"). 5 To address potential conflicts of interests arising from Company's conduct of full-service brokerage activities along with underwriting and dealing in bank-ineligible securities, Notificants have committed that Company will inform its full-service brokerage customers at the commencement of the relationship that, as a general matter, Company may be a principal or may be engaged in underwriting with respect to, or may purchase from an affiliate, those securities for which brokerage and advisory services are provided. In addition, at the time any brokerage order is taken, the customer will be informed (usually orally) whether Company is acting as agent or principal with respect to a security. Confirmations sent to customers also will state whether Company is acting as agent or principal. See PNC Financial Corp., 75 Federal Reserve Bulletin 396 (1989). 6 See Section 20 Orders. Compliance with the 10-percent revenue limitation shall be calculated in accordance with the method stated in the Section 20 Orders, as modified by the Order Approving Modifications to the Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989); the Order Approving Modifications to the Section 20 Orders, 79 Federal Reserve Bulletin 226 (1993); the Supplement to Order Approving Modifications to Section 20 Orders, 79 Federal Reserve Bulletin 360 (1993); and 10 Percent Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing Securities, 82 Federal Reserve Bulletin __ (1996) (Order dated September 11, 1996) (collectively, "Modification Orders"). The Board notes that Notificants have not adopted the Board's alternative indexed-revenue test to measure compliance with the 10-percent limitation on bank-ineligible securities activities, and, absent such election, Notificants will continue to employ the Board's original 10-percent revenue test. 7 The Board also notes that Company may engage in activities that are necessary incidents to the proposed underwriting and dealing activities, provided that they are treated as part of the bank-ineligible securities activities, unless Company has received specific approval under section 4(c)(8) of the BHC Act to conduct the activities independently. Until such approval is obtained, any revenues from the incidental activities must be counted as ineligible revenues subject to the 10-percent revenue limitation. 8 See SEC Rule 10b-10(a)(8)(i) (17 C.F.R. 240.10b-10(a)(8)(i)). The Board notes that Company, as a registered broker-dealer, must conduct its riskless principal activities in accordance with the customer disclosure and other requirements of the federal securities laws. 9 See J.P. Morgan & Company Incorporated, 76 Federal Reserve Bulletin 26 (1990) ("J.P. Morgan"); Bankers Trust New York Corporation, 75 Federal Reserve Bulletin 829 (1989) ("Bankers Trust"). 10 See Bankers Trust. 11 Among the prudential limitations discussed more fully in Bankers Trust and J.P. Morgan are that Company will not privately place open-end investment company securities or securities of investment companies that are advised by Notificants or any of their affiliates. In addition, Company will make no general solicitation or general advertising for securities it places. 12 Notificants have indicated that Company may purchase, for its own account, a portion of the securities that it privately places. Notificants have committed that if Company purchases for its own account any securities that it privately places, Company will treat all revenue derived from the placement transaction as bank-ineligible revenue subject to the 10-percent limitation. Company also proposes to act as principal or agent in the resale of privately placed securities through transactions that would be exempt from registration under the Securities Act of 1933, such as, for example, resales to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. Notificants have committed that, if Company acts as principal with respect to any portion of such an unregistered resale transaction, Company will treat the revenue derived from the entire transaction as part of Company's bank-ineligible revenues subject to the 10-percent revenue limitation. 13 See The Bank of New York Company, Inc., 82 Federal Reserve Bulletin 748 (1996). Neither Company nor its affiliates will hold themselves out as making a market in the bank-ineligible securities that Company buys and sells as riskless principal, or enter quotes for specific bank-ineligible securities in any dealer quotation system in connection with Company's riskless principal transactions, except that Company and its affiliates may enter bid or ask quotations, or publish "offering wanted" or "bid wanted" notices on trading systems other than NASDAQ or an exchange, if Company or the affiliate does not enter price quotations on different sides of the market for a particular security for two business days. In other words, Company or its affiliate must wait at least two business days after entering a "bid" quote on a security before entering an "ask" quote on the same security and vice versa. Company will not act as riskless principal for registered investment company securities or for any securities of investment companies that are advised by Notificants or its affiliates. In addition, because Company proposes to provide riskless principal services in combination with investment advisory services, Company will conduct its riskless principal activities in accordance with the limitations established by the Board for the full-service brokerage activities of bank holding companies. See 12 C.F.R. 225.25(b)(15)(ii). 14 The Partnerships would not register as investment companies under the Investment Company Act of 1940 (15 U.S.C. § 80a-1 et seq.). Each Partnership would be limited to not more than 100 investors. As general partner, Notificants may provide certain administrative and advisory services to the partnership, including monitoring the development of the limited partnerships' investments in the portfolio companies, issuing reports to limited partners, administering cash flow, and distributing dividends. 15 See Meridian Bancorp, Inc., 80 Federal Reserve Bulletin 736 (1994) ("Meridian"). 16 See Meridian. The Partnerships will not invest in futures contracts or options on futures contracts on any financial or nonfinancial commodity, or knowingly acquire debt securities that are in default at the time of acquisition, without prior approval from the Federal Reserve System. In addition, Notificants have committed that they will consolidate the Partnerships with other subsidiaries of Notificant for purposes of calculating Notificants' capital adequacy whenever such information is required to be presented to the Board of Governors. In consolidating the capital ratios, Notificants will exclude the limited partners' investments and an equal amount of assets from the numerator and denominator, respectively. 17 Notificants also have committed that the Partnerships will not control more than 25 percent of the total equity, including subordinated debt, of any issuer without prior Board approval. In furtherance of the commitments, Notificants have committed that they will monitor, on a system-wide basis, the holdings of the Partnerships and all other entities controlled by Notificants. 18 Company also proposes to serve as investment adviser with discretionary voting authority for several trusts established for pension fund customers that invest in banks and bank holding companies ("Bank Trusts"). Notificants must obtain the Board's approval under the BHC Act before Notificants acquire in the aggregate control of more than 5 percent of the voting shares of any bank or bank holding company. In this regard, Notificants have committed that, in the event that shares held by the Bank Trusts would cause the aggregate holdings of the Bank Trusts, Notificants and any Partnership to exceed 5 percent of any class of voting securities of a bank or bank holding company, Company will irrevocably transfer the voting rights associated with the securities held by the Bank Trusts to an unaffiliated corporate trustee. 19 See The Bessemer Group, Incorporated, 82 Federal Reserve Bulletin 569 (1996) (palladium coin and bullion); Swiss Bank Corporation, 81 Federal Reserve Bulletin 185 (1995) (platinum coin and bullion); Midland Bank PLC, 76 Federal Reserve Bulletin 860 (1990) (gold and silver bullion and coin). Company may engage in metal assaying, storage and transport activities as an incident to its precious metal trading activities. See Westpac Banking Corporation, 73 Federal Reserve Bulletin 61 (1987). 20 The Long-Term Credit Bank of Japan, Limited, 79 Federal Reserve Bulletin 347 (1993) ("LTCB"). 21 See LTCB. Company's foreign exchange-related advisory services will be limited to discussions regarding current market conditions, and will not be provided on a separate fee basis. In addition, Company will not recommend that a customer purchase or sell particular foreign exchange instruments or contracts. 22 Company proposes to provide FCM and related advisory services with respect to certain futures contracts and options on futures contracts that are based on indices that track estimated losses to the insurance industry from catastrophic events. Notificants have stated that Company's execution and advisory services with respect to such contracts will not require Company to register as an insurance agent or broker in any state. 23 Notificants have committed that Company would provide these services in accordance with the limitations previously established by the Board. See Northern Trust Corporation, 79 Federal Reserve Bulletin 723 (1993) ("Northern Trust"); Bank of Montreal, 79 Federal Reserve Bulletin 1049 (1993) ("Bank of Montreal"); and J.P. Morgan & Co. Incorporated, 80 Federal Reserve Bulletin 151 (1994) ("1994 J.P. Morgan Order"). 24 For purposes of determining whether an individual meets the $1 million net worth requirement for an institutional customer in Regulation Y, Notificants will consider a parent's net worth to include accounts of the parent's minor children if the parent has discretionary authority over the account or the selection of the account's investment manager. Furthermore, Notificants will consider a grantor trust to be an institutional customer if (i) the grantor is the trustee or fiduciary of the trust with discretionary authority over the trust's assets, and (ii) the net worth of the grantor, including grantor trusts over which it retains discretionary authority, exceeds $1 million. 25 Notificants have stated that all non-institutional commercial hedger customers would be engaged, or affiliated with a commercial enterprise engaged, in producing, manufacturing, processing or merchandising products or providing services related to the commodities underlying the futures and options on futures contracts in which the customer trades. In addition, such customers would not be engaged in executing their own trades on the floors of commodity exchanges. Notificants have committed that Company will: (i) require its non-institutional commercial hedger customers to state in writing that they would engage in "bona fide hedging transactions" as defined by the CFTC (see 17 C.F.R. 1.3(z)); (ii) establish an initial credit review process to determine whether the proposed hedging activities of a non-institutional commercial hedger customer were appropriate in light of the customer's net worth and business activities; (iii) not permit a non-institutional commercial hedger customer to trade in any commodities other than those that the customer would trade to hedge risks that arise from its commercial activities; and (iv) establish a system to detect any unauthorized trading activity by a non-institutional commercial hedger customer. See Societe Generale, 81 Federal Reserve Bulletin 880 (1995) ("Societe Generale"). 26 See Northern Trust (clearing-only services for financial futures and maintenance of omnibus accounts); Bank of Montreal (execution and clearing and clearing-only services for nonfinancial futures); 1994 J.P. Morgan Order (execution and advisory services on nonfinancial futures); Banque Nationale de Paris, 81 Federal Reserve Bulletin 386 (1995) ("BNP") (discretionary portfolio management services for financial futures); CS Holding, 81 Federal Reserve Bulletin 803 (1995) ("CS Holding") (discretionary portfolio management services for non-financial futures); Societe Generale (financial and nonfinancial futures execution, clearing-only, and advisory services for non-institutional commercial hedger customers). Because non-institutional commercial hedger customers have special expertise in commodity-related transactions, the Board previously has noted that such customers are capable of detecting conflicts of interest or advice that is motivated by the bank holding company's self-interest, and are unlikely to rely unduly on commodity-related investment advice provided by a bank holding company. See Societe Generale. 27 Company also proposes to provide clearing-only services to unaffiliated customers with respect to options on securities. Options on securities are treated as securities for purposes of the federal securities laws, and the Board has treated options on securities as securities for purposes of the Glass-Steagall Act. See 15 U.S.C. § 77b(1), § 78c(a)(10); Swiss Bank Corporation, 82 Federal Reserve Bulletin 685 (1996). The Board previously has determined that providing clearing services with respect to exchange-traded securities, options, futures, and options on futures contracts is closely related to banking within the meaning of section 4(c)(8) of the BHC Act. See Stichting Prioriteit ABN AMRO Holding, 77 Federal Reserve Bulletin 189 (1991) ("1991 AMRO Order"); BNP; Northern Trust. Company will provide clearing-only services with respect to options on securities only to institutional customers and pursuant to agreements that permit Company the right to review and reject any trade presented to it for clearance for any reason. These commitments are similar to those relied on by the Board in previous cases in which the Board determined that providing clearing-only services with respect to exchange-traded futures and options on futures is a proper incident to banking within the meaning of section 4(c)(8) of the BHC Act. See Northern Trust; Bank of Montreal. 28 ChiCorp currently serves as the primary clearing firm for 17 professional floor traders on the KCBOT and 34 professional floor traders on the MGE. Because the number of professional floor traders on these exchanges may vary over time depending on trading volume and other factors, Notificants have requested authority for Company to act as the primary clearing firm for up to 20 professional floor traders on the MGE and 40 professional floor traders on the MGE. 29 See 1991 ABN AMRO Order; BNP; and Northern Trust. 30 See 1991 ABN AMRO Order. 31 A primary clearing firm is obligated to accept and clear all trades submitted by a professional floor trader, even if the trade was initially presented to, and rejected by, another clearing firm. Once a primary clearing firm clears a trade for a professional floor trader, the firm becomes obligated to settle the trade in the event of a default by the professional floor trader. Particular exchanges may refer to companies serving as a primary clearing firm by different titles. For example, the Chicago Mercantile Exchange refers to firms providing primary clearing services as qualifying clearing firms. 32 See Northern Trust; Bank of Montreal. 33 The Board also noted that the rules of the applicable exchanges provided the bank holding companies with sufficient time to review an executed trade before determining whether to accept the trade for clearance. 34 The Board received comments supporting Notificants' proposal to provide clearing-only activities for professional floor traders from The Options Clearing Corporation, the Board of Trade Clearing Corporation, and the Chicago Board of Trade ("Commenters"). The Commenters asserted that approval of the proposal would increase competition in the futures markets and would not result in adverse effects in light of the risk management systems that are utilized by major futures exchanges and their clearing members. 35 Notificants have stated that Company will adopt the risk management policies, procedures, and systems used by TCC in connection with its primary clearing activities. 36 TCC has four risk management employees who monitor trading on the KCBOT, and three risk management employees who monitor trading at the MGE. 37 Trades on the KCBOT and MGE are not electronically submitted to the clearing firm or the exchange. Instead, trading cards for each trade are submitted by each professional floor trader to its clearing firm, which enters the trade into the exchange's clearing system. Both the KCBOT and the MGE require that TCC collect the trading cards from each floor trader at least once during each half hour period, thereby providing TCC personnel with an opportunity to review the intra-day trading activities of floor traders. KCBOT rules also require that TCC enter all collected trades into the exchange's on-line clearing system within 45 minutes of the end of the half-hour period during which the trades were collected. The KCBOT's on-line clearing system also permits TCC to monitor the trading activities of floor traders, both individually and in the aggregate, on an intra-day basis, and allows TCC to identify any potentially unmatched trades. Although the MGE does not operate an on-line clearing system, TCC personnel maintain tally sheets that are updated every 30 minutes and that reflect all trades submitted by each professional floor trader throughout the day. 38 TCC risk management personnel in Chicago also electronically receive trade information four times a day from the KCBOT and at the end of the day from the MGE. Reports based on such data are prepared by risk management personnel and reviewed daily by officers in Chicago, Kansas City, and Minneapolis. 39 The Board notes that it has requested comment on whether the list of permissible activities in Regulation Y should be amended to permit bank holding companies to provide clearing-only services to professional floor traders. See 61 Federal Register 47,242, 47,254 (Sept. 6, 1996) ("Regulation Y Proposal"). The Board will consider whether to amend Regulation Y to permit bank holding companies in general to provide clearing-only services to professional floor traders at the time it considers the proposed amendments to Regulation Y. The Board also has proposed in its revision of Regulation Y to modify the conditions that govern certain other activities that TCC currently conducts without restriction. Notificants have committed that, during the one-year period following consummation of the proposal, Company will engage in these activities in accordance with the limitations set forth in the Regulation Y Proposal and, thereafter, will conduct these activities subject to the conditions adopted by the Board in Regulation Y, as then in effect. 40 Because Company will act only as a broker, Company will not itself be required to take physical delivery of the nonfinancial commodities underlying the forward contracts that it arranges under any circumstances. 41 Exchange-traded futures contracts may be based on a wide variety of commodities, including precious metals, oil, cocoa or wool. Banking regulators have not expressly permitted banks to engage in the proposed activity. See OCC Interp. Ltr. No. 494, reprinted in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CC) at ¶ 83,083 (Dec. 20, 1989). 42 See Bank of Montreal, 79 Federal Reserve Bulletin 1049 (1993). 43 See 12 C.F.R. 225.25(b)(17); Swiss Bank Corporation, 81 Federal Reserve Bulletin 185 (1995). 44 See Bank of Montreal, 79 Federal Reserve Bulletin 1049 (1993); Swiss Bank Corporation, 81 Federal Reserve Bulletin 185 (1995). 45 12 U.S.C. § 1843(c)(8). 46 See 12 C.F.R. 225.24; see also The Fuji Bank, Limited, 75 Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73 Federal Reserve Bulletin 155 (1987). 47 The Board notes that, as a registered broker-dealer, Company must comply with the SEC's net capital rule. See 15 C.F.R. 240.15c3-1. 48 The Board received a comment from an anonymous source contending that ChiCorp has no minorities or women in senior management positions and requesting that the Board deny the proposal on this basis. The Equal Employment Opportunity Commission ("EEOC") has jurisdiction to investigate and determine whether companies are in compliance with federal equal employment laws. The Board has noted that unsubstantiated allegations of improper actions under a statute administered by another federal agency are beyond the scope of the Board's review under the factors specified in the BHC Act. On the other hand, substantiated improper actions may be considered by the Board in light of all the facts of record of an application under the factors in the BHC Act or in the context of the Board's general supervisory authority over bank holding companies. See Norwest Corporation, 82 Federal Reserve Bulletin 580, 582 (1996). The Board has referred the comment to the EEOC. 49 ChiCorp's subsidiary, ChiCorp Insurance Agency, engages in the sale as agent of insurance products, including annuities, in Illinois. Notificants propose to transfer these activities to a subsidiary of Notificants' thrift subsidiary, LaSalle Bank, F.S.B. ("LaSalle Bank"), Chicago, Illinois, upon consummation of this proposal. The Board has determined that LaSalle Bank is a Qualified Savings Association within the meaning of section 4(i)(3) of the BHC Act and is, therefore, entitled to engage in these types of insurance agency activities in Illinois. See Stichting Prioriteit ABN AMRO Holding, 78 Federal Reserve Bulletin 296 (1992). 50 Voting for this action: Chairman Greenspan and Governors Kelley, Phillips, Yellen, and Meyer. Absent and not voting: Vice Chair Rivlin and Governor Lindsey. |
1996 Orders on banking applications
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