[Federal Register Volume 59, Number 36 (Wednesday, February 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3974]
[[Page Unknown]]
[Federal Register: February 23, 1994]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
Swiss Bank Corporation; Application to Engage in Certain
Nonbanking Activities
Swiss Bank Corporation, Basel, Switzerland (Applicant), has applied
pursuant to section 4(c)(8) of the Bank Holding Company Act (12 U.S.C.
1843(c)(8)) (BHC Act) and Sec. 225.23 of the Board's Regulation Y (12
CFR 225.23), through its wholly owned subsidiary, SBC Government
Securities, Inc., New York, New York (Company), to acquire
substantially all the assets and certain of the liabilities of O'Connor
& Associates, Chicago, Illinois (OCA), and to engage in the following
nonbanking activities:\1\
---------------------------------------------------------------------------
\1\ Applicant's proposal involves, inter alia, the consolidation
into Company of certain activities currently conducted by OCA and
two of Applicant's wholly owned subsidiaries, SBC Derivatives, Inc.,
Chicago, Illinois (SBC Derivatives), and SBCI Swiss Bank Corporation
Investment Banking Inc., New York, New York (SBCI). In connection
with, and substantially contemporaneously with, this transaction,
OCA proposes to acquire certain assets and liabilities of K K &
Company, New York, New York (KK). Company, a primary dealer in
government securities, currently engages in (i) underwriting and
dealing in obligations of the United States and other obligations
that state member banks of the Federal Reserve System are authorized
to underwrite and deal in, pursuant to Sec. 225.25(b)(16) of
Regulation Y, and (ii) trading in futures, options, and options on
futures with respect to certain bank-eligible securities and money
market instruments. See Swiss Bank Corporation, 77 Federal Reserve
Bulletin 759 (1991). OCA engages in trading, for its own account,
debt and equity securities, options on debt and equity securities,
and options on stock, bond, and commodity indexes. SBC Derivatives
currently engages in foreign exchange options trading for its own
account. See Swiss Bank Corporation, 77 Federal Reserve Bulletin 126
(1990). SBCI currently engages in various nonbanking activities,
including underwriting and dealing in corporate debt and equity
securities. KK currently engages in executing securities
transactions for third party customers.
The activities of Company and SBC Derivatives are conducted
pursuant to section 4(c)(8) of the BHC Act. Applicant controls SBCI
pursuant to the grandfather provisions of section 8(c) of the
International Banking Act of 1978 (12 U.S.C. 3106(c)). SBCI would
cease to exist upon consummation of this proposal, and Applicant's
grandfather rights relating to SBCI would thereby terminate.
---------------------------------------------------------------------------
1. Underwriting and dealing in, to a limited extent, all types of
debt and equity securities (other than securities issued by open-end
investment companies), including sovereign debt securities, municipal
revenue bonds, mortgage-related securities, consumer receivable-related
securities, commercial paper, corporate debt securities, convertible
debt securities, debt securities issued by a trust or other vehicle
secured by or representing interests in debt obligations, preferred
stock, common stock, American Depositary Receipts, other direct and
indirect equity ownership interests in corporations and other entities,
and options on debt and equity securities;\2\
---------------------------------------------------------------------------
\2\ Applicant also proposes that Company engage in certain
activities which Applicant maintains are incidental to these
proposed underwriting and dealing activities, including engaging in
bonds borrowed and other securities lending transactions.
---------------------------------------------------------------------------
2. Providing discount brokerage services, engaging in related
securities credit activities, and conducting activities incidental
thereto such as offering custodial services, individual retirement
accounts, and cash management services, pursuant to Sec.
225.25(b)(15)(i) of Regulation Y;
3. Providing full-service brokerage services, i.e., the discount
brokerage activities specified in paragraph 2, above, in combination
with investment advisory services permissible under Sec. 225.25(b)(4)
of Regulation Y, pursuant to Sec. 225.25(b)(15)(ii) of Regulation Y;
4. Acting as agent in the private placement of all types of
securities, including providing related advisory services;
5. Purchasing and selling all types of securities as a ``riskless
principal'' on the order of customers;
6. Providing various types of investment and financial advisory
services, including providing financial and transaction advice
regarding the structuring and arranging of swaps and similar
transactions (including swap derivative products) relating to interest
rates, currency rates, and economic and financial indexes, and similar
transactions, pursuant to Sec. 225.25(b)(4) of Regulation Y;
7. Trading for its own account in futures, options, and options on
futures with respect to certificates of deposit and other money market
instruments eligible for investment by national banks;
8. Trading for its own account in futures, options, and options on
futures with respect to commodity prices and stock, bond, and commodity
indexes;\3\
---------------------------------------------------------------------------
\3\ The specific contracts to be traded by Company for its own
account in conducting the activities described in paragraphs 7 and 8
are listed either (i) in SR Letter No. 93-27 (FIS) (May 21, 1993),
or (ii) in Appendix A attached hereto. Applicant also expects that
Company will engage, in the over-the-counter market, in options
transactions based on the underlying prices, indexes, and
instruments for the contracts referred to in the preceding sentence.
---------------------------------------------------------------------------
9. Engaging in the following activities with respect to swaps and
swap derivative products:\4\
---------------------------------------------------------------------------
\4\ For this purpose, the term ``swap derivative products''
means caps, floors, collars, and options on swaps, caps, floors, and
collars.
---------------------------------------------------------------------------
(A) Intermediating in the international swap markets by acting as
originator and principal for interest rate swap and currency swap
transactions;
(B) Acting as originator and principal with respect to swap
derivative products relating to interest rate swap and currency swap
transactions;
(C) Acting as agent or broker with respect to interest rate swap
and currency swap transactions and swap derivative products relating
thereto;
(D) Intermediating in the international swap markets by acting as
originator and principal for commodity price swap transactions and swap
transactions linked to stock and/or bond indexes or to a hybrid of
interest rates and such indexes;
(E) Acting as originator and principal with respect to swap
derivative products relating to the swap transactions described in
subparagraph (D), above; and
(F) Acting as agent or broker with respect to the swap transactions
and swap derivative products described in subparagraphs (D) and (E),
above.
10. Acting as a futures commission merchant (FCM) for nonaffiliated
persons in the execution and clearance on major commodity exchanges of
futures contracts and options on futures contracts based on bullion,
foreign exchange, government securities, certificates of deposit and
other money market instruments that a bank may buy or sell in the cash
market for its own account, pursuant to Sec. 225.25(b)(18) of
Regulation Y;\5\
---------------------------------------------------------------------------
\5\ Applicant has proposed that both Company and SBC Derivatives
engage in the activities listed in paragraphs 10 through 13.
Applicant has stated that SBC Derivatives may execute trades that
will be given-up at a customer's request to an unaffiliated FCM for
clearance, and that SBC Derivatives may also engage in clearing-only
activities. Company may conduct the proposed FCM activities through
omnibus customer trading accounts.
---------------------------------------------------------------------------
11. Providing investment advice with respect to the purchase and
sale of futures contracts and options on futures contracts described in
paragraph 10, above, pursuant to Sec. 225.25(b)(19) of Regulation Y;
12. Acting as a FCM for nonaffiliated persons in the execution and
clearance on major commodity exchanges of futures contracts and options
on futures contracts based on commodity prices, bonds, and stock and
bond indexes;\6\
---------------------------------------------------------------------------
\6\ The specific contracts with respect to which Company and SBC
Derivatives will conduct the activities described in paragraphs 12
and 13 are listed either (i) in SR Letter No. 93-27 (FIS) (May 21,
1993), or (ii) in Appendix A attached hereto.
---------------------------------------------------------------------------
13. Providing investment advice with respect to the purchase and
sale of futures contracts and options on futures contracts described in
paragraph 12, above;
14. Trading for its own account in gold and silver bullion, bars,
rounds, and coins;
15. Trading for its own account in platinum coin and bullion;
16. Trading for its own account in foreign exchange spot, forward,
futures, options, and options on futures transactions; and
17. Making, acquiring, or servicing loans or other extensions of
credit for its own account or for the account of third parties,
pursuant to Sec. 225.25(b)(1) of Regulation Y.
Applicant seeks approval to conduct the proposed activities
throughout the United States, and plans to conduct the activities on a
world-wide basis.
Closely Related to Banking Standard
Section 4(c)(8) of the BHC Act provides that a bank holding company
may, with Board approval, engage in any activity ``which the Board
after due notice and opportunity for hearing has determined (by order
or regulation) to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.'' In determining
whether a proposed activity is closely related to banking for purposes
of the BHC Act, the Board considers, inter alia, the matters set forth
in National Courier Association v. Board of Governors of the Federal
Reserve System, 516 F.2d 1229 (D.C. Cir. 1975). These considerations
are
(1) Whether banks generally have in fact provided the proposed
services,
(2) Whether banks generally provide services that are operationally
or functionally so similar to the proposed services as to equip them
particularly well to provide the proposed services, and
(3) Whether banks generally provide services that are so integrally
related to the proposed services as to require their provision in a
specialized form. See 516 F.2d at 1237. In addition, the Board may
consider any other basis that may demonstrate that the activity has a
reasonable or close relationship to banking or managing or controlling
banks. Board Statement Regarding Regulation Y, 49 FR 806 (1984).
Applicant states that the Board previously has determined by
regulation that certain of the proposed activities, when conducted
within the limitations established by the Board in its regulations and
in related interpretations and orders, are closely related to banking
for purposes of section 4(c)(8) of the BHC Act. See 12 CFR 225.25(b)(1)
(making, acquiring, and servicing loans and other extensions of
credit); 12 CFR 225.25(b)(4) and (15) (certain investment and financial
advisory services and discount and full-service brokerage activities);
and 12 CFR 225.25(b)(18) and (19) (certain FCM services and related
advisory activities).
Applicant also maintains that the Board previously has determined
by order that several of the other proposed activities, when conducted
within the limitations established by the Board in its previous orders,
are closely related to banking, and, where applicable, consistent with
section 20 of the Glass-Steagall Act (12 U.S.C. 377). See, e.g., J.P.
Morgan & Co. Incorporated, et al., 75 Federal Reserve Bulletin 192
(1989), aff'd sub nom. Securities Industries Ass'n v. Board of
Governors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir. 1990),
Order Approving Modifications to the Section 20 Orders, 75 Federal
Reserve Bulletin 751 (1989), Canadian Imperial Bank of Commerce, et
al., 76 Federal Reserve Bulletin 158 (1990), Order Approving
Modifications to the Section 20 Orders, 79 Federal Reserve Bulletin 226
(1993), and Supplement to Order Approving Modifications to Section 20
Orders, 79 Federal Reserve Bulletin 360 (1993) (underwriting and
dealing activities); Bankers Trust New York Corporation, 75 Federal
Reserve Bulletin 829 (1989) (private placement and riskless principal
activities); Swiss Bank Corporation, 77 Federal Reserve Bulletin 759
(1991) (trading for own account in futures, options, and options on
futures contracts based on U.S. government securities and certain money
market instruments); The Sanwa Bank, Limited, 77 Federal Reserve
Bulletin 64 (1990) (intermediation, origination, principal, agent, and
brokerage activities related to interest rate swap and currency swap
transactions and swap derivative products related thereto); Midland
Bank, PLC, 76 Federal Reserve Bulletin 860 (1990) (trading for own
account in gold and silver bullion, bars, rounds, and coins); The Long-
Term Credit Bank of Japan, Limited, 74 Federal Reserve Bulletin 573
(1988) (trading for own account in foreign exchange); and The Long-Term
Credit Bank of Japan, Limited, 79 Federal Reserve Bulletin 347 (1993)
(trading for own account in foreign exchange forward, futures, options,
and options on futures transactions). See also SR Letter No. 93-27
(FIS) (May 21, 1993) (listing various futures, options, and options on
futures contracts previously approved by order or regulation for FCM
services and related advisory activities).
Applicant maintains that Company will conduct the foregoing,
previously approved activities in conformity with the conditions and
limitations established by the Board in prior cases.
Applicant further states that the Board has not previously
approved, as closely related to banking within the meaning of the BHC
Act, some or all of the activities described in paragraphs 7, 8, 9(D),
9(E), 9(F), 12, 13, and 15, above. Applicant maintains, however, that
all of these proposed activities are closely related to banking.
With respect to the proposal for Company to trade for its own
account in various futures, options, and options on futures
transactions based on certificates of deposit and other money market
instruments eligible for investment by national banks, Applicant
maintains that the Board has previously determined that trading in
derivative instruments which represent the right to purchase or sell
bank-eligible securities is closely related to banking. See Swiss Bank
Corporation, 77 Federal Reserve Bulletin 759 (1991) (approving such
trading for instruments based on U.S. government securities and certain
money market instruments).
Applicant also proposes that Company trade for its own account, for
purposes other than hedging, in futures, options, and options on
futures contracts based on commodity prices and stock, bond, and
commodity indexes. With respect to this aspect of the proposal,
Applicant maintains that the New York State Banking Department (NYSBD)
and the Office of the Comptroller of the Currency (OCC) have permitted
banks under their respective jurisdictions to engage in these
activities, subject to certain limitations. In this regard, Applicant
also states that over-the-counter options contracts entered into by
Company would represent a form of financial intermediation of the type
in which banks have traditionally engaged. Applicant also maintains
that Company's portfolio-wide hedging methodology is consistent with
the limitations the NYSBD and the OCC have placed upon trading in
exchange-traded derivative instruments. Applicant also argues, inter
alia, that Company needs to be able to trade in these contracts in
order to manage commodity-based risks that may arise from its dealing
in securities of issuers with commodity price exposure.
With respect to the swap-related activities that have not
previously been determined to be closely related to banking, Applicant
states that the NYSBD and the OCC have permitted banks under their
respective jurisdictions to engage in commodity-based swap activities,
and that the NYSBD has permitted banks to offer swaps linked to
financial or economic indexes. Applicant also states that the Board has
recognized, in an interpretation of the Board's Regulation H, that
banks are engaged as principal or broker in swap transactions based on
commodity prices, stock and bond indexes, and hybrids of such indexes
and interest rates. See 12 CFR 208.128. In addition, Applicant
maintains that these types of swap transactions, like interest rate and
currency swaps, are a form of the financial intermediation services
traditionally offered by banks.
Applicant also proposes that Company and SBC Derivatives engage in
FCM activities and provide related advisory services with respect to
futures contracts and options on futures contracts based on commodity
prices, bonds, and stock and bond indexes. Applicant states that the
Board has previously determined by order that offering FCM and related
advisory services with respect to certain futures contracts and options
on futures contracts based on bonds and stock and bond indexes is an
activity closely related to banking. See generally SR Letter No. 93-27
(FIS) (May 21, 1993) (listing various futures, options, and options on
futures contracts previously approved by order or regulation for FCM
services and related advisory activities). Applicant maintains that the
bond- and index-based futures contracts and options on futures
contracts in this proposal which have not previously been approved by
the Board are substantially similar to those which have been so
approved. With respect to the proposed instruments based on commodity
prices, Applicant states that the OCC has permitted national banks to
execute and clear such contracts. Applicant also maintains that the
reasons justifying Company's trading in such contracts for its own
account should apply equally to Company's and SBC Derivatives' engaging
in execution, clearance, and advisory activities with respect to such
contracts. Applicant further states that providing these services with
respect to commodity-based contracts is functionally equivalent to
providing such services with respect to financial futures and options
on futures contracts. Applicant also notes that the clearing function
of an FCM is a form of extending credit, a primary banking function.
With respect to its proposal that Company trade for its own account
in platinum coin and bullion, Applicant states that the NYSBD and the
OCC have approved this activity for banks under their respective
jurisdictions. Applicant also maintains that the Board has approved
under section 4(c)(8) of the BHC Act the purchase and sale of platinum
coins, under limited circumstances. See Standard Chartered PLC, 76
Federal Reserve Bulletin 681 (1990). Applicant also states that the
Board has approved, under Regulation K (12 CFR part 211), trading in
platinum by bank holding company subsidiaries located outside the
United States. See J.P. Morgan & Co. Incorporated, 76 Federal Reserve
Bulletin 552 (1990).
Proper Incident to Banking Standard
In order to approve the proposal, the Board must determine that the
proposed activities to be conducted by Company ``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.'' 12 U.S.C. 1843(c)(8).
Applicant believes that the proposal will produce public benefits
that outweigh any potential adverse effects. In particular, Applicant
maintains that the proposal will enhance competition and enable Company
to offer its customers a broader range of products. In addition,
Applicant states that the proposed activities will not result in
adverse effects such as an undue concentration of resources, decreased
or unfair competition, conflicts of interest, or unsound banking
practices.
In publishing the proposal for comment, the Board does not take a
position on issues raised by the proposal. Notice of the proposal is
published solely in order to seek the views of interested persons on
the issues presented by the application, and does not represent a
determination by the Board that the proposal meets or is likely to meet
the standards of the BHC Act.
Any comments or requests for hearing should be submitted in writing
and received by William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, Washington, D.C. 20551, not later than March
14, 1994. Any request for a hearing on this application must, as
required by Sec. 262.3(e) of the Board's Rules of Procedure (12 CFR
262.3(e)), be accompanied by a statement of the reasons why a written
presentation would not suffice in lieu of a hearing, identifying
specifically any questions of fact that are in dispute, summarizing the
evidence that would be presented at a hearing, and indicating how the
party commenting would be aggrieved by approval of the proposal. This
application may be inspected at the offices of the Board of Governors
or the Federal Reserve Bank of New York.
Board of Governors of the Federal Reserve System, February 15,
1994.
Jennifer J. Johnson,
Associate Secretary of the Board.
Appendix A
Chicago Mercantile Exchange
FT-SE 100 Share Index Futures, and options thereon
Standard & Poor's Midcap 400 Index Futures, and options thereon
Russell 2000 Stock Price Index Futures, and options thereon
British Pound Rolling Spot Futures, and options thereon
Commodity Exchange, Inc.
Eurotop 100 Index Futures, and options thereon
Mercado de Futuros Financieros, S.A.
Spanish Peseta/Deutsche Mark Futures
Spanish Peseta/U.S. Dollar Futures
Mibor '90 Futures
Mibor '90 Options
Montreal Stock Exchange
One-Month Canadian Bankers' Acceptance Futures
Three-Month Canadian Bankers' Acceptance Futures
London International Financial Futures Exchange
Spanish Government Bond (Bonos) Futures
Three-Month Eurolira Interest Rate Futures
Italian Government Bond (BTP) Futures, and options thereon
New York Mercantile Exchange
Light Sweet Crude Oil Futures, and options thereon
New York Harbor Unleaded Gasoline Futures, and options thereon
Heating Oil Futures, and options thereon
Natural Gas Futures, and options thereon
[FR Doc. 94-3974 Filed 2-22-94; 8:45 am]
BILLING CODE 6210-01-F