Capital-Money Market Instruments
June 1, 1989
Mr. Thomas R. Cassella
Vice President - Financial Responsibility
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
Dear Mr. Cassella:
The Department has received inquiries concerning the capital treatment for registered government securities broker/dealers holding proprietary positions in money market instruments issued or guaranteed by a parent or affiliate. It is our understanding that the Securities and Exchange Commission (SEC) staff views these positions as having no net value, if held longer than two business days, in the calculation of net capital under 17 CFR 240.15c3-1, the SEC's net capital rule. The Department of the Treasury's capital regulations implementing the Government Securities Act of 1986 (GSA) at 17 CFR 402.2(d) incorporate the SEC's calculation of net capital into the definition of liquid capital with certain modifications which are not relevant to this issue. We understand that your organization has also received similar inquiries on the appropriate capital treatment for these positions.
The staff of the SEC's Division of Market Regulation (Division) has released a no-action letter to SBCI Swiss Bank Corporation Investment Banking Inc. (SBCI), dated April 14, 1989, a copy of which is enclosed. The Division stated that it will not recommend enforcement action if a firm includes the market value of its parent/affiliate issued money market instruments in the computation of net capital provided the firm complies with certain described conditions. As noted at 17 CFR 400.2(d), the Department, in promulgating its regulations, incorporated various existing SEC regulations and their interpretations. The Treasury regulations recognize that, in the absence of a Departmental interpretation to the contrary, SEC interpretations (including no-action letters) of the referenced regulations “... shall be of the same effect as if the regulation being interpreted were solely the Commission's regulation.” The Department has not formally interpreted, as of this date, the provisions addressed in the SBCI no-action letter. Furthermore, since the position taken by the Division is not contrary to the Department's view, it is advising registered government securities broker/dealers that the requirements of 17 CFR 402.2(d) can be applied in a manner consistent with the enclosed no-action letter.
This letter will be made immediately available to the public.
Richard L. Gregg
Text of the SEC No-Action Letter to SBCI:
April 14, 1989
Donald P. Madden, Esq.
White & Case
1155 Avenue of the Americas
New York, New York 10036
Dear Mr. Madden:
This responds to your March 8, 1988 letter, on behalf of SBCI Swiss Bank Corporation Investment banking Inc. (“SBCI”), concerning the treatment of proprietary positions in nonconvertible debt securities issued or guaranteed by Swiss Bank Corporation, an affiliated entity, for purposes of the Net Capital Rule, Rule 15c3-1 under the Securities Exchange Act of 1934 (17 C.F.R. §240.15c3-1).
We understand the pertinent facts to be as follows: SBCI, a registered broker-dealer and New York Stock Exchange, Inc. member firm, conducts a general securities business. All of the capital stock of SBCI is owned by SBCI Holding, a Swiss corporation which is, in turn, wholly owned by Swiss Bank Corporation (the “Bank”), a Swiss bank headquartered in Basle, Switzerland. The Bank conducts a general banking business in New York City through its New York branch (the “New York Branch”), which is supervised and examined by the New York State Banking Department.
The New York Branch creates banker's acceptances and issues certificates of deposit and medium-term notes; it may issue other nonconvertible debt securities in the future. In addition, the Bank, from its Basle headquarters, guarantees commercial paper issued by a United States affiliated company for the purpose of financing current transactions in the Bank's international operations. SBCI expects that it will occasionally act as underwriter for these various types of debt issued by its affiliates. In addition to its activities as underwriter, SBCI expects to contribute to an orderly secondary market by bidding for and otherwise dealing in these instruments and may need to carry them for periods exceeding two business days.
SBCI intends to finance the total market value of any positions issued or guaranteed by its affiliate if it seeks to treat them as allowable assets for a period exceeding two business days, through loans from Swiss Bank Corporation. Moreover, Swiss Bank Corporation will furnish SBCI with an equity commitment guaranteeing that Swiss Bank Corporation will forgive the loans to SBCI by making (through SBCI Holding) an equity contribution to SBCI in an amount equal to any Swiss Bank Corporation liabilities (including affiliate commercial paper guaranteed by Swiss Bank Corporation) held by SBCI that Swiss Bank Corporation fails to redeem upon presentment for payment. SBCI Holding agrees to treat such forgiven loans as contributions to the equity capital of SBCI. Thus, upon Swiss Bank Corporation's failure to make proper timely payment for any instrument issued or guaranteed by it and held by SBCI, SBCI may cancel its loan from Swiss Bank Corporation in an amount equal to the face value of the instrument in default.
It is the position of the Division that proprietary positions in debt instruments issued by a parent or an affiliated entity will receive no net capital value if they are held by a related broker-dealer for more than two business days. However, based on the foregoing facts, the Division will raise no question nor recommend any action to the Commission if SBCI treats proprietary positions, held longer than two business days, consisting of certificates of deposit, bankers' acceptances, nonconvertible debt securities, and similar instruments issued by Swiss Bank Corporation or affiliates as allowable assets, under the following conditions: (i) Swiss Bank Corporation must finance the entire dollar market vaule of those positions; (ii) Swiss Bank Corporation must furnish SBCI with an equity commitment guaranteeing that Swiss Bank Corporation will forgive its loans to SBCI by making an equity contribution to SBCI in an amount equal to the market value of any instruments which are not redeemed when presented for payment; and (iii) the debt instruments must be exchangeable in complete satisfaction of the financing should Swiss Bank Corporation become insolvent, or alternatively, the financing must provide that the loans will not mature prior to the earlier of either: (a) the sale of the instruments by SBCI, or (b) the maturity or early redemption of the instruments. To the extent that the Division's letter to J.P. Morgan Securities, Inc., dated December 24, 1986, is inconsistent with this letter, the earlier letter should be disregarded.
You should understand that the position expressed herein is a staff position with respect to enforcement only and does not purport to express any legal conclusion on this matter. The Division's position is necessarily confined to the facts as you have represented herein; any material change may warrant a different result and should be brought to the attention of the Division.
If you have any further questions on this matter, please feel free to contact the undersigned.
Michael A. Macchiaroli
Division of Market Regulation
Securities and Exchange Commission