Full text of Federal Reserve Bank of New York Circulars : 10158. Proposed Treasury Regulations Regarding Government Securities Broker or Dealer Activities

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FEDERAL RESERVE BANK
OF NEW YORK

Fiscal Agent of the United States

[

Circular No. 10158 "|
March 3, 1987

PROPOSED TREASURY REGULATIONS REGARDING
GOVERNMENT SECURITIES BROKER OR DEALER ACTIVITIES
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:

The following is quoted from the text of a statement issued by the Treasury Department:
The Treasury Department has released proposed regulations under the Government Securities Act
of 1986. The regulations, which for the first time would establish a system of identification and regula­
tion of entities that deal solely in Government securities and other exempted securities, has been pub­
lished in the Federal Register for 30 days of public comment. Under the Government Securities Act,
temporary regulations must take effect on May 26, 1987, and final regulations on July 25, 1987. The
proposed regulations affect all brokers and dealers in Government securities, including those newly re­
quired to register under the Government Securities Act, registered broker-dealers, and some financial
institutions.
The proposed regulations include a financial responsibility requirement for currently unregulated
Government securities brokers and dealers that is based on the capital adequacy guidelines issued in
May, 1985 by the Federal Reserve Bank of New York. SEC-registered broker-dealers and financial
institutions would not be subject to any additional capital requirement. The proposal also would require
newly registered Government securities brokers and dealers to follow SEC rules concerning possession
or control of customer securities, recordkeeping and reporting, with modifications designed to enhance
the knowledge and protection of all parties to repurchase transactions. Many of the repurchase agree­
ment modifications would also apply to Government securities brokers or dealers that are registered
broker-dealers or financial institutions. The proposal also includes regulations concerning the custodial
holdings of Government securities by banks and other depository institutions.
Enclosed — for depository institutions in this District — is the complete text of the proposed
Treasury regulations referred to in our Circular No. 10157, dated March 2, 1987, which has been
reprinted from the Federal Register of February 25; copies will be furnished to others upon request
directed to the Circulars Division of this Bank (Tel. No. 212-720-5215 or 5216). Comments on the
proposal should be submitted by March 27, 1987, and may be sent directly to the Treasury, as set
forth in the Federal Register notice.
Questions regarding this matter may be directed, at this Bank, to Don N. Ringsmuth, Associate
General Counsel (Tel. No. 212-720-5007) or to Barbara L. Walter, Assistant Vice President
(Tel. No. 212-720-5481).
E. G erald C orrigan ,

President.

Wednesday

February 25, 1987

(Part ¥

P®p)®rtm(irot ©f te© Triasary
Securities and! Exchange
Commission
PidteraB Reserve System

17 6FFI Ch. IV
Government Securities Act @ If®®;
1/
Implementing Regulations; Proposed Rule
1? ©FIR Parts 24® ©cud] 249
Government S®eupitS@s Act © 1©SS;
I?
Pr@p®s®^! Rule mtel Pr©p©t@d3 F}®wfel©© ©
i?
F©ra B®
Financial Institutions Aciouf) si©
©©¥®pffBro®nt Securities ®r@k@r© ®p
Government S®©yritfe© ©niter®; ^© tte

[Enc. Cir. No. 10158]

5660

Federal Register / Vol. 52, No. .36-37 / Wednesday, February 25, 1987 / Proposed Rules

DEPAfTOEMT OF THE TREASURY
Office of tfa® Assistant Secretary
(Domestic Finance)
17 CFR Ch. fi¥
Government Securities Act of 1986;
implementing Regulations

A©emcy: Office of the Assistant

Secretary (Domestic Finance), Treasury.
&€Y!©k3: Proposed rule.

SUMMARY: The Department of the
Treasury is issuing proposed regulations
as required by the Government
Securities Act of 1986 (the “Government
Securities Act” or “GSA”). The GSA
requires the Secretary of the Treasury
(the “Secretary”) to adopt rules and
regulations concerning the financial
responsibility, protection of investor
securities and funds, recordkeeping,
reporting and audit of brokers and
dealers in government securities. The
GSA also requires the Secretary to
adopt regulations relating to the custody
of government securities held by
financial institutions that are not
government securities brokers or
dealers. The proposed regulations are
designed to enhance the protection of
investors in government securities while
maintaining a fair, honest and liquid
market in such securities. Subchapter A
of the proposed regulations covers
government securities brokers and
dealers. Subchapter B of the proposed
regulations deals with custody of
government securities by financial
institutions.
DATES: Comments must be submitted on
or before March 27,1987. No extensions
of time for comment will be provided.
addresses : Send comments to: The
Government Securities Regulations
Project, Department of the Treasury,
Room 4417, Main Treasury Building,
Washington, DC 20220.
Copies of all written comments will be
available for public inspection and
copying from 9:00 A.M. to 5:30 P.M. at
the Treasury Department Library, Room
5030, Main Treasury Building,
Washington, DC 20220.
FOR FURTHER INFORMATION CONTACT:

Ellen Seidman (Special Assistant to the
Under Secretary), Room 4414, Main
Treasury Building, Washington, DC
20220, (202) 566-2278.
For information concerning financial
responsibility (capital) and Form G 405,
contact: Norman Carleton (Assistant
Director, Office of Government Finance
& Market Analysis), Room 3044, Main
Treasury Building, Washington, D.G.
20220, (202) 566-2330.

For information concerning
possession or control of securities,
contact: Virginia Rutledge (Senior
Attorney for Finance), Room 2025, Main
Treasury Building, Washington, DC
20220, (202) 535-4890.
SUPPLEMENTARY INFORMATION:

I. Background
The GSA establishes, for the first
time, a federal system for regulation of
brokers and dealers who transact
business exclusively in government
securities, or a government securities
business combined with business in
exempted securities and/or futures and
other commodity interests regulated by
the Commodity Futures Trading
Commission (“CFTC”). The Secretary of
the Treasury is to adopt rules and
regulations concerning the Financial
responsibility, protection of investor
securities and balances, recordkeeping,
reporting and audit of government
securities brokers and dealers.1
Previously unregulated government
securities brokers and dealers must also
register with the Securities and
Exchange Commission (the “SEC" or
“Commission”) and join a selfregulatory organization.1 Enforcement of
2
the Secretary’s regulations will be
carried out by the SEC and the
appropriate self-regulatory
organizations.3 The GSA also provides
for regulation of all other brokers and
dealers in government securities, all of
whom must notify their principal
regulatory agency of their status as
government securities brokers or
dealers.4 Enforcement of the regulations
1 Section 15C(b) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-5(b)]. All citations to the
Securities Exchange Act (hereinafter the "Act”) will
refer to the section of the Act followed by the
parallel citation to the United States Code in
brackets. Title I of the CSA, which provides for
regulation of government securities brokers and
dealers, amends the Act, in part by adding Section
15C.
2 Section 15C(a)(l)(A), (e) [15 U.S.C. 78o5(a)(1)(A), (e)]. Currently unregulated entities that
believe they are government securities brokers or
dealers are urged to contact the appropriate selfregulatory organization, in most cases the National
Association of Securities Dealers (“NASD”), for
membership information, as soon as possible. The
NASD has informed the Department that it will only
be able to guarantee completion of membership
processing before the July 25,1987 deadline for
entities that submit complete applications prior to
April 15,1987.
3 Sections 15C(c)(l), 19(g)(1) [15 U.S.C. 78o-5(c)
(1), 78s). The Act also contains criminal penalties
enforced by the Department of Justice. Section 32
[15 U.S.C. 78ffJ.
4 Section 15C(a)(l)(B), (b) [15 U.S.C. 78o5(a)(1)(B), (b)J.

for such entities will be carried out by
the appropriate regulatory agencies.5

The purpose of such registration and
regulation is to enhance the protection
of investors in government securities by
establishing and enforcing appropriate
financial responsibility and custodial
standards for government securities
brokers and dealers. At the same time,
the standards must respect and protect
the integrity, liquidity and efficiency of
the world’s largest securities market,
which is vital to the effective
implementation of fiscal and monetary
policy in the United States.6

In adopting regulations concerning
those entities that are already regulated,
such as brokers and dealers registered
under sections 15 or 15B of the
Securities Exchange Act of 1934 (the
“Act”) and financial institutions, the
Secretary of the Treasury is to take into
consideration already existing
regulation with a view toward
preventing overly burdensome or
duplicative regulation.7
The proposed regulations constitute
the Secretary’s response to these
mandates. The GSA requires that the
regulations become effective as
temporary regulations on May 26,1987,
and as final regulations on July 25,1987.
All government securities brokers and
dealers must register or give notice by
July 25,1987, and must be in compliance
with the regulations that will become
final on that date.8 Because of the short
timetable both for developing the
regulations and meeting their
requirements, no extensions of time for
comment will be granted and it is
extremely important that all those
potentially affected by the regulations
6 Generally, the appropriate regulatory agency,
for a financial institution is that institution’s federal
supervisory agency and is the SEC for all others,
including brokers and dealers registered with the
SEC under sections 15 or 15B of the Act. Section
3(a)(34)(G) [15 U.S.C. 78c(a)(34)(C)].
8 Government Securities Act of 1986, Pub. L. 99571, Section 1,100 Stat. 3208 (1986) (hereinafter cited
as GSA).
7 Section 15C(b)(3l(C) [15 U.S.C. 78o-5(b)(3)(C)J;
132 Cong. Rec. H9251 (Oct. 6,1986).
0 GSA, supra note 6, section 402. In general, the
regulations are proposed to be effective July 25,
1987. However, because of the difficulties of
achieving compliance with several of the
regulations in the maximum of 15 days that will be
available between the date for publication of the
temporary regulations and June 10,1987, the date on
which entities must file registration applications
with the SEC in order to assure registration before
July 25. several of the regulations, in particular Part
402 relating to financial responsibility, will not
become fully effective until October 25,1987.
Previously unregulated government securities
brokers and dealers are reminded that, in addition
to the regulations to be promulgated under the GSA,
they are subject to the provisions of sections 10(b),
15(c)(1), 17(f)(1) and 17(f)(2) of the Act and the
regulations promulgated by the SEC thereunder.

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
take the opportunity provided by this
publication to analyze and comment
upon the proposals, and also to prepare
for implementation.9
In developing the proposed
regulations, the Treasury has consulted
extensively with the SF.G and the
federal supervisory agencies for
financial institutions, and with the
Federal Reserve Bank of New York
(“FRBNY’’), which has developed and
published a voluntary capital adequacy
guideline for brokers and dealers in
government securities. The Department
has met with twenty-three brokers or
dealers in government securities,
regulated and unregulated, large and
small, financial institutions and others,
and talked with a number of additional
brokers and dealers by telephone. We
have met with the relevant selfregulatory organizations, the National
Association of Securities Dealers and
the New York Stock Exchange. We have
also met with trade associations,
professional organizations (such as the
American Institute of Certified Public
Accountants), and with individual
professionals serving government
securities brokers and dealers. We have
also been in touch with representatives
of investors, including governmental
entities and savings and loan
associations. We have received written
comments and suggestions from some of
those with whom we met and from
others.
As a result of this consultation and
the Department’s analysis, the
Department has reached several
conclusions concerning the
Commission’s existing regulations under
sections 15 and 17 of the Act. First, the
Department believes that in large part
the existing SEC regulations that
correspond to the statutory mandate of
the Secretary work effectively to protect
customers and insure financial integrity
of brokers and dealers. In addition,
almost all of the entities other than
financial institutions that will be
affected by the proposed regulations are
familiar with many of the appropriate
regulations under sections 15 and 17,
either by virtue of their affiliation with a
registered broker or dealer or a
registered municipal securities dealer or
because the principals in the firm or
8 Currently unregulated persons (including
subsidiaries and affiliates of financial institutions)
and registered brokers or dealers uncertain of their
status as government securities brokers or dealers
are urged to contact the Office of the Chief Counsel
Division of Market Regulation. Mail Stop 5-1.
Securities and Exchange Commission. 450 5tb
Street, NW., Washington. DC 20549, as soon as
possible. Financial institutions uncertain of their
status should contact their appropriate regulatory
agency.

5661

“incidental” to the futures business. A
CFTC-registered entity conducting only
“incidental" government securities
activities will not be considered a
government securities broker or
dealer.13 Entities whose activities go
beyond the “incidental” are required to
register with the SEC and to become a
member of a self-regulatory organization
as defined in the Act. The SEC is
scheduled to publish soon a proposed
regulation defining the term “incidental”
with respect to CFTC-registered entities.
Based on the information available to it.
the Department believes that the SEC
regulation effectively removes from
regulation as government securities
brokers or dealers a very large number
of futures commission merchants
(“FCM’s") and other CFTC-registered
entities who limit their activities in the
cash government securities market to
those that are incidental to their futuresrelated business.
During the development period for
these proposed regulations, the
Department received a number of
informal requests to exercise its
exemptive authority to exempt FCM’s
and other CFTC-registered entities who
transact business in government
securities from, in particular, the
registration and financial responsibility
requirements of the Act and related
regulations. The Department recognizes
the potential for duplicative regulation
of entities already subject to substantial
federal regulation. However, the
Department has not included such
exemptions in the proposed rales at this
time because (i) we believe that the SEC
proposed regulation will eliminate the
problem for all but true government
securities brokers and dealers; (ii) the
statutory decision to treat the CFTC
differently than the SEC and the
financial institution regulatory agencies
suggests that, at least with respect to
registration, the Department has limited
authority to allow CFTC registration to
substitute for SEC registration; and (iii)
we have not yet been able to gather
sufficient information concerning the
activities, capital positions, unregulated
government securities accounts for
customers etc., of entities whose
government securities business goes
beyond the “incidental” to determine
whether exemptions would be
consistent with the protection of
investors and the public interest
The Department specifically invites
10 Federal Reserve Bank of New York, Capital
comments concerning modified
Adequacy Guideline for U.S. Government Securities requirements forFCM s and other
Dealers, May 20,1085.

professionals who service them are
familiar with these regulations.
Furthermore, many of these entities
currently are in compliance with the
SEC’s regulations. Finally, with a few
exceptions, the Department has
concluded that regulations currently
applicable to financial institutions that
are government securities brokers and
dealers also effectively meet the
purposes of the GSA,
As a result of these conclusions, the
proposed regulations, in all areas except
financial responsibility, largely adopt
existing regulations under sections 15
and 17 of the Act by reference, with
limited modifications. Compliance by
registered brokers or dealers with rules
under sections 15 and 17 will, in general,
be deemed compliance with these rules.
With limited modifications, compliance
by government securities brokers and
dealers that are financial institutions
with existing regulations will also be
deemed compliance with these
regulations. In this way, the Department
intends to enable newly registered
entities to rely on SEC interpretations of
the rules, which are in general wellknown to the industry and essential to
effective enforcement of the rules. The
Department is working with the other
regulatory agencies to encourage them
to adopt the modifications proposed in
these regulations so that in time there
will be only one applicable set of
regulations for each entity.
In the area of financial responsibility,
however, the Department determined
that the capital adequacy model
designed by the FRBNY,8 1which
10*
effectively recognizes certain types of
risks as well as risk-mitigating hedging
techniques is, with modifications, better
suited for brokers and dealers solely in
government securities, other exempted
securities, and CFTC-regulated
commodity interests than SEC Rule
1 5 C 3 - 1 .11 The Department is working
with the SEC toward development of a
uniform rule that would allow the
Treasury to accept compliance with
Rule 15c3-l by presently unregulated
government securities brokers and
dealers as compliance with the Treasury
rule.
Regulations relating to CFTGregulated entities. The A ct requires that
the SEC, in consultation with the CFTC,
determine what government securities
activities of a CFTC-registered entity are
11 Section 240.15c3-l. Unless otherwise stated, all
references to existing rules of the Commission are
to sections of Title 17 of the Code of Federal
Regulations.

18 Sections 3(a)[43)(B) (government securities
brokers), 3(a)(44)(D) (government securities dealers)
[15 U.S.C. 78c(a)(43)(B5, (a)(44)(D)];

5662

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

CFTC-registered entities that are
government securities brokers or
dealers. In particular, we request
consideration, by those entities who
would not be removed from regulation
through the SEC definitional rule, of {i} a
financial responsibility requirement
under which such an entity would be
required to meet the higher of the
CFTC’s capital rule or the rule proposed
in § 402.2;13 (ii) a financial
responsibility requirement under which
such an entity would be required to
meet the higher of the CFTC’s capital
rule or the SEC’s capital rale; and (iii) a
possession or control rale that would
exempt from the rales proposed in part
403 securities that were in customer
segregation accounts pursuant to 17 CFR
I. 20-1.30. In commenting on these and
other suggestions, commenters should
consider whether the suggested rales
would accurately and appropriately
reflect risk and adequately protect
investors.
II. Sectlon-by-Section Analysis of
Proposed Regulations

A. Part 400. Rules of General
Application
1. Section 400.1. This section notes the

requirements of the Act, as amended by
the CSA, for regulation, registration and
notice of status. It sets forth the
principle that, unless otherwise
specifically provided, all regulations
apply to all government securities
brokers and dealers, both those who
must register and those who must give
notice of their status as government
securities brokers or dealers to the
appropriate regulatory agency.
Exemptions are provided in individual
parts or sections of the regulations for
registered brokers or dealers and
financial institutions where applicable.
The section also states the registration
and notice requirements of the Act and
cross-references the appropriate
regulations providing for registration
and notice.
2. Section 400.2. This section specifies
the Office of the Deputy Assistant
Secretary (Federal Finance) as the office
within Treasury responsible for the
regulations, and directs correspondence,
including correspondence concerning
exemptions, to that office. The section
notes that the appropriate regulatory
agencies (the SEC and the financial
institution supervisory agencies) and the
self-regulatory organizations are
An FCM that is also a broker-dealer is
currently required to meet the higher of the CFTC or
SEC capital adequacy rule. 17 CFR 1.17. If such an
entity were also a government securities broker or
dealer, this proposal would not require
consideration by the entity of the § 402.2 rule.

responsible for enforcement of the
regulations.
3. Section 400.3. This section sets out
definitions that are applicable, except
where otherwise explicitly provided,
throughout the proposed regulations.
Definitions contained in SEC rules
referenced in the proposed regulations
are applicable unless otherwise
explicitly provided. These definitions
are also used in this preamble.
(a) “Act” means the Securities
Exchange Act of 1934, including
amendments enacted as part of the
GSA.
(b) “Appropriate regulatory agency”
has the meaning set out in Section
3(a)(34)(G) of the Act, and in general
means the Comptroller of the Currency,
the Board of Governors of the Federal
Reserve System, the Federal Deposit
Insurance Corporation and the Federal
Home Loan Bank Board for commercial
banks and thrift institutions that are
federally chartered or insured and
certain foreign and District of Columbia
financial institutions, and the SEC for all
others. In particular, the appropriate
regulatory agency for state chartered
non-federally insured commercial banks
and thrift institutions and for credit
unions is the SEC.
(c) “Commission" or “SEC" means the
Securities and Exchange Commission.
(d) “Designated examining authority”
and “Examining Authority” mean, for a
registered government securities broker
or dealer that belongs to only one selfregulatory organization, that
organization, and for a registered
government securities broker or dealer
that belongs to more than one seifregulatory organization, the one
designated by the Commission under
section 17(d) of the Act.
(e) “Financial institution” has the
meaning set out in section 3(a)(46) of the
Act. It includes both commercial banks
and thrift institutions, both federal and
state chartered. It does not include
credit unions or subsidiaries or affiliates
of banks and thrifts.
(f) "Government securities broker”
has the meaning set out in section
3(a)(43) of the Act. As used in the
proposed regulations, the term (together
with the term “government securities
dealer”) represents the broadest
classification of persons subject to the
regulations. With the exceptions noted
in section 3(a)(43) of the Act, the term
includes registered broker-dealers and
financial institutions that effect
transactions in government securities
for the account of others as well as
registered government securities
brokers.

(g) “Government securities dealer”
has the meaning set out in section
3(a)(44) of the Act. As vised in the
proposed regulations, the term (together
with the term "government securities
broker") represents the broadest
classification of persons subject to the
regulations. With the exceptions noted
in section 3(a)(44) of the Act, the term
includes registered broker-dealers and
financial institutions that are engaged in
the business of buying and selling
government securities for their own
account, through a broker or otherwise,
as well as registered government
securities dealers.
(h) “Government securities” has the
meaning set out in section 3(a)(42) of the
Act. It includes securities issued or
guaranteed by the Treasury or by
federal agencies (including the
Government National Mortgage
Association), and also securities
(including equity securities) issued or
guaranteed by certain governmentrelated corporations such as the Federal
National Mortgage Association, the
Federal Home Loan Mortgage
Corporation, the Student Loan
Marketing Association and the Farm
Credit System. (Readers are cautioned
this list is not exclusive and that new
organizations may be formed whose
securities would also be covered by this
definition.) The term also includes
certain off-exchange options, puts, calls,
straddles and similar privileges on other
types of government securities. In
general, securities that were "exempted
securities” under section 3(a)(12) of the
Act (prior to enactment of the GSA)
because of their connection with the
United States, are “government
securities.”
(i) “Reqistered broker or dealer”
means a firm that is registered with the
SEC under sections 15 or -15B of the Act
and that is also a government securities
broker or dealer.
(j) “Registered government securities
broker or dealer” means a firm that
effects transactions solely in
government securities, other exempted
securities (not including municipal
securities) and/or futures and other
commodity interests regulated by the
CFTC, and is registered pursuant to
section 15C(a)(l)(A) of the Act. This
term does not include registered brokers
or dealers or financial institutions.
(k) “Secretary” means the Secretary of
the Treasury.
(l) "Treasury” or “Department” means
the Department of the Treasury.
4. Section 400.4. This section requires
every officer, director or manager of a
government securities broker or dealer
that is a financial institution not exempt

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
from these regulations under Part 401 of
the proposed regulations, who is directly
engaged 14 in the management,
supervision or performance of any
activities of the financial institution as a
government securities broker or dealer,
as well as salespersons and traders
(together “associated persons”), to file
with the financial institution and keep
current a disclosure form. The form will
enable the financial institution and the
appropriate regulatory agencies to
determine whether such person is
subject to a statutory disqualification as
provided in section 15C(c) of the Act.
Persons who already have on file with
their financial institution a current Form
U-4 (which is required for persons
associated with a registered broker or
dealer) or a Form MSD-4 (which is
required for associated persons of a
bank municipal securities dealer) need
not file a new form.
The rule requires the financial
institution to verify the information on
the form and to file the form with the
appropriate regulatory agency. Initially
this procedure will be part of the
notification required by section
15C(a)(l)(B)(i) of the Act. The
requirements of this section do not
apply to persons associated with
financial institutions that are exempt
from registration as provided in Part 401
of the proposed regulations. This section
also requires the financial institution to
file with its appropriate regulatory
agency a notification of the termination
of association with the government
securities business of the financial
institution of an associated person.
The requirements in section 400.4
mirror existing requirements concerning
bank municipal securities dealers and
are designed to increase the integrity of
the entire industry by reducing the
ability of persons subject to statutory
disqualification to become affiliated
with other government securities
brokers or dealers, including financial
institutions. The Department anticipates
that the self-regulatory organizations
will impose similar requirements on
persons associated with registered
government securities brokers and
dealers and on registered government
securities brokers and dealers.15*By
8
1

53S3

transactions (a group the Department
believes is coincident with brokers of
federal funds) should be exempt from
regulation as government securities
brokers so long as they operate on a
fully disclosed basis to both principals
in all such transactions.
1. Section 401.1. There are thousands
of organizations that handle
transactions in United States Savings
Bonds (“savings bonds”), whether in
their capacities as qualified issuing or
paying agents or in providing services to
customers or employees by forwarding
requested transactions to qualified
issuing or paying agents or the Treasury.
For many of these organizations, savings
bond transactions are the only type of
government securities transactions they
handle. However, it is possible that
under a broad interpretation of the
definition of government securities
broker in section 3(a)(43) of the Act,
some or all of these organizations might
be considered government securities
brokers. The Treasury is therefore
proposing, pursuant to its exemptive
authority, that if an organization’s
activities are limited to savings bond
transactions and any other activity
exempt as provided in Part 401, and it
would otherwise be considered a
government securities broker, such
organization shall be exempt from the
requirements of sections 15C (a), (b) and
(d) of the Act and the regulations
thereunder.
Savings bonds offer terms and
conditions that protect investors from
risk. Savings bonds are not transferable
and therefore are not eligible for trading
or for pledging as collateral.
Additionally, most savings bond
B. Part 401. Exemptions
transactions are handled by
Under section 15C(a)(4) of the Act, the organizations that have qualified to act
Secretary may exempt any government as savings bond issuing and paying
securities broker, government securities agents pursuant to 31 CFR Part 317 and
31 CFR Part 321. These agents are
dealer or class of such brokers and
governed by those regulations and by
dealers from any provision of section
the terms and conditions of the
15C (a), (b) and (d) of the Act or the
application-agreements executed by
regulations issued under those
them at the time of qualification. The
subsections. Any exemption must be
remaining organizations that handle
consistent with public interest, the
protection of investors and the purposes savings bond transactions are not
qualified savings bond agents but may,
of the GSA. Commenters are asked to
consider whether exemptions other than as a service to customers or to
employees participating in a payroll
those proposed are necessary or
savings plan, forward applications or
desirable and to provide information
14 Directors and senior officers of the financial
other savings bond transactions to an
institution who may from time to time set broad
responding to the statutory standards
policy guidelines affecting the financial institution
authorized issuing or paying agent or the
for exemption. In particular, comments
as a whole that are not, directly related to the
Treasury. In the case of organizations
are particularly requested on whether
conduct of the financial institution's government
that only forward savings bond
an exemption for entities whose
securities business are not considered to be
transactions, the Treasury has
“directly engaged" in the government securities
government securities business is
business of the financial institution.
determined that sufficient customer
limited to brokering repurchase
18 With respect to registered government
protection exists because of the limited
securities brokers and dealers who are currently
involvement of these organizations and
registered with the CFTO, the Department is hopeful organizations for the futures industry to work
the terms and conditions of the bonds
that it will be possible for the self-regulatory
together to minimize the paperwork burden
organizations under the Act and the self-regulatory attendant on registration.
themselves.
virtue of the exemption for those who
already have filed the U-4, U-5, MSD-4
or MSD-5 forms, and the simplicity of
the forms (no information is required
relating to professional qualifications),
the Department anticipates that the
burden imposed by this section will be
minimal.
5. Section 400.5. This section requires
registered government securities brokers
and dealers and registered brokers or
dealers who are also government
securities brokers or dealers to update
and keep current with the SEC
information on their registration
application and notice forms,
respectively. Section 400.5 also requires
similar updating of notices filed by
financial institutions that are
government securities brokers and
dealers.
6. Section 400.6. This section requires
government securities brokers and
dealers that are financial institutions
(and that are not exempt from notice
requirements pursuant to Part 401 of the
proposed regulations) to file with their
appropriate regulatory agency a notice
of termination of such status. The notice
is required by section 15C(a)(l)(B)(i) of
the Act and is similar to the withdrawal
requirements imposed on registered
brokers and dealers and on bank
municipal securities dealers. The
withdrawal would become effective 60
days after filing, unless disciplinary
action concerning the entity filing the
notice had started prior to the date on
which the notice was filed. Enforcement
actions may, of course, be instituted
after that time arising out of occurrences
prior to the expiration of the 60 day
period.

1§(M

fe d e r a l jLsgkte /.¥© !. 52, No. 36-37 / Wednesday^ February 25, 1987 /"Proposed Rules

It should be noted that the,
purchases securities itself On original
recordkeeping requirements of Part 404' issue and resells them to customers.
3. Sections 401.3 and 401.4. These
- do not apply to the savings bond
sections exempt from Sections 15C (a)
transactions of any government
(b) and (d) of the Act and the regulations
securities broker or dealer. The
thereunder, financial institutions that
Treasury does not consider that any
engage in certain limited types of
other parts of these regulations are applicable to savings bond transactions. transactions in government securities
2. Section 401.2. This section provides which, under traditional interpretations
or
an exemption lor depository institutions of the definitions of “broker”as
“dealer," might qualify them
that submit tenders or subscriptions for government securities brokers or
purchase on original issue of U.S.
dealers. For the reasons set forth below,
Treasury securities for the account of
the Department has determined that, for
customers. A depository institution
these types of transactions, regulation of
engaging only in such transactions and
institution as a
other activities exempted by Part 401 of a financialbroker or dealer government
securities
is not
the proposed regulations, would be
necessary for the Protection of investors
exempt from the provisions of section
or to achieve the other purposes of the
15G (a), (b), and (d) of the Act, and the
GSA as long as the institution complies
regulations thereunder.
with Part 450 of these regulations
Under the terms of Treasury securities relating to custody of government
auctions, commercial banks and certain securities held for customers.
other depository institutions may submit
Throughout the consideration of the
a tender for the account of a customer,
GSA Congress cited estimates of the
provided the customer is identified as
total number of secondary government
the purchaser on the tender form.
securities dealers in the range of 200 to
Generally, payment for the securities
500 firms, including registered brokers
also will be handled through the
and dealers.1 The Department has been
institution submitting the tender.
informed by the federal financial
Furthermore, the securities purchased
institution regulatory agencies that a
may continue to be held by the customer very large percentage of the financial
through that same institution. Hie
institutions in the country engage in the
Department has, concluded that where a types of transactions involving
depository institution submits tenders
government securities that are
for customers, facilitates payment, and
described below, primarily on a
,perhaps maintains the purchased
customer accommodation basis.
securities in a purely custodial capacity, Without an exemption for these
the customer will be adequately
activities, the total number of
protected solong. as the- depository
government securities brokers and
institution complies with the regulations dealers subject to registration or notice
for custodial depository institutions- set requirements would reach well into the
forth in Part 450 of the proposed
thousands. The Department believes this
regulations.
would not be consistent with the intent
Therefore, the Department proposes to of Congress.
exempt depository institutions whose
(a) Section 401.3, relating to brokerage
only involvement in government
securities transactions is the submission activities
Although the government securities
of tenders for customers and any other
activity exempt from the regulations as market is primarily a dealer market,
many financial institutions effect
provided in Part 401. The exemption is
brokerage transactions as an
conditioned on the depository
accommodation for customers. Sections
institution’s agreement to comply with
401.1 and 401.2 of these'regulations
Part 450 of the proposed regulations
would exempt financial institutions
concerning possession or control of
whose brokerage activities are confined
government, securities held for
to transactions in United States savings
customers, thereby obviating a technical bonds or submission of tenders for the
legal argument that a financial
account of customers in auctions for
institution that is a government
U.S. Treasury securities. The
securities broker or dealer but is exempt
believes
under this part is not required to comply Department includingthat financial
institutions,
federal credit
with the regulations under Title II of the unions,17 effecting a modest number of
GSA. The exemption of this section is
intended to apply only as long as the
18 See, e.g., S. Rep. No. S3-428, 89th Gong., 2d
- depository institution submits tenders
Sees. 4 &n.5 (1938}; H R. Rep. No. 99-258,99th
and facilitates payment solely as agent , Cong., 1st Sess. 13-14 a n.12 (1985).
for the.identified customer. It would not
17 Federal credit unions have extremely-limited
apply to a depository institution, that •
brokerage powers, which are further restricted by

other brokerage transactions or effecting
such transactions on a fully disclosed
basis are, through existing supervision
and the requirements of Part 450 of these
regulations, adequately regulated to
protect investors and do not need to be
regulated as government securities
brokers. Financial institutions engaged
in more than 500 brokerage transactions
in government securities per year (other
than those involving savings bonds or
purchases of U.S. Treasury securities on
original issue for the account of
customers, but including networking
transactions), unless all such
transactions not exempt under | § 401.1
or 401.2 are carried on through a
“networking” arrangement involving a
government securities broker or dealer
not exempt under this Part, are not
exempt, from regulation as a government
securities broker.
(b) Section 401.4, relating to dealer
activities limited to repurchase
transactions and a limited number of
reverse repurchase transactions.
A significant number of financial
institutions engage in repurchase
transactions in which securities held by
the Institution are sold, subject to
repurchase, to entities other than
registered brokers or dealers or
government securities brokers or
dealers. Financial institutions engage in
such transactions to increase yields on
their investment portfolios and in so
doing to provide customers with a
secured, more flexible alternative to
certificates of deposit. The transactions
are subject to the uniform supervisory
policy on repurchase agreements
adopted by all the federal financial
supervisory agencies.18 Although that
policy is written mainly to protect
financial institutions engaging in
repurchase transactions as buyers
rather than sellers of securities, the
policy states, among other things, that
banks should obtain written agreements,
conforming confirmations identifying
specific securities and appropriate
margin, and should mark to market term
agreements. In addition, of course, the
financial institutions engaging in these
transactions are subject to governmental*
8
1
their supervisory agency, the National Credit Union
Administration (“NCUA”), to acting only on a
network basis. See NCUA Interpretive Ruling and
Policy Statement 85-1 (Nov. 14,1985). The
Department invites comments on whether similar
supervisory safeguards are in place for statechartered credit unions.
18 See Office of the Comptroller of the Currency,
BC 210, Oct. 31,1985; Federal Deposit Insurance
Corporation, BL-43-85, Nov. 1,1985; 5QFR 49784
(Dec. 4,1985, Board.of Governors of the Federal
Reserve System); 50 FR 44940 (Dec. 6,1985, Federal
Home Loan Bank Board proposed rule).

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
supervision. Many financial institutions resale miqht constitute government
also do a small number of reverse
securities dealer activities under
traditional interpretations of the term
repurchase transactions as an
accommodation to customers.
“dealer.” 19 However, both sides to the
Under traditional interpretations of
transaction are subject to federal
the term “dealer,” such transactions, if
supervision,20 and the Department has
regarded as sales and purchases, could concluded that the additional burden
make the financial institution a dealer.
that would be placed on corporate credit
For the reasons stated above, the
unions whose transactions are so
Department believes such treatment is
limited is unnecessary for the protection
inappropriate and unnecessary in the
of the natural person credit union
public interest, and therefore is
investors.
The exemption is available only on
proposing the exemption in this section
the condition that the credit union
for financial institutions whose only
agrees to comply with the terms of Part
government securities dealer activities
450 of the regulations, relating to
are repurchase transactions and a
custody of government securities by
limited number of reverse repurchase
depository institutions, including credit
transactions. However, since the
financial institution could be regarded
unions.
as a government securities dealer,
although an exempt one, the exemption C. Part 402. Financial Responsibility
The capital adequacy rule of these
is available only on the condition that
the financial institution agree to comply proposed regulations effectively would
with the custody requirements proposed apply only to currently unregulated
government securities brokers and
as Part 450 of these regulations, which
dealers. The general rule, based oh the
are applicable to financial institutions
capital adequacy guideline
that are not government securities
recommended by the FRBNY,21 is that a
brokers or dealers. This section also
government securities broker’s or
exempts, as fully supervised, financial
dealer’s liquid capital shall equal or
institutions whose only government
exceed 120 percent of total haircuts, the
securities dealer activities are in a
measure of risk of a government
fiduciary capacity, an exemption
provided to banks in Section 3(a)(44) of securities broker’s or dealer's securities
holdings and related financings.
the Act.
1. Section 402.1. The section of the
A financial institution engaging in
proposed rule would in effect exempt
more traditional dealer activities, such
government securities brokers and
as purchasing or selling other
government securities, as principal, from dealers that are directly subject to the
or to customers, participating in a selling capital requirements of another
appropriate regulatory agency from the
group or underwriting government
requirements of this rule. Consequently,
securities, carrying a dealer inventory
government securities brokers and
and quoting a market in government
dealers which are financial institutions
securities, advertising itself as a
or registered brokers or dealers are not
government securities dealer, or
subject to the capital requirements of
otherwise holding itself out as a
government securities dealer, would not this rule if they are subject to the capital
requirements contained in the other
be covered by this exemption.
4. Section 401.5. This section exempts appropriate federal regulatory
corporate credit unions that are
framework. This exemption avoids the
generally subject to examination by the imposition on adequately regulated
National Credit Union Administration
entities of potentially conflicting and
(“NCUA”) from sections 15C (a), (b),
unduly burdensome regulations in the
and (d) of the Act and the regulations
financial responsibility area. It is noted,
thereunder if their only government
however, that the exemption is not
securities dealer activities are the
available to subsidiaries or affiliates of
purchase or sale, subject to resale or
financial institutions or of registered*
2
1
repurchase, of government securities to
other such credit unions and other
18 The natural person credit union counterparty in
activities exempted by Part 401.
this situation is an investor and is not a government
securities dealer.
Corporate credit unions, whose
•- *° Although Some corporate
members are credit unions composed of neither federally chartered norcredit unions are all
federally insured,
natural persons, provide a valuable
existing corporate credit unions are members of the
service to such members and other
National Credit Union Administration Central
natural person credit unions by !
Liquidity Facility and are subject to the NCUA’s
authority to prescribe certain rules and regulations.
providing secured liquidity through
12 U.S.C. 1795f(b)(3). In practice, the NCUA
repurchase agreements involving
examines all corporate credit unions yearly.
government securities. The corporate
81 The Federal Reserve Bank of New York,
credit union’s sales and purchases of
Capital Adequacy Guideline for U.S. Government
securities subject to repurchase and
Securities Dealers (May 20,1985).

5665

brokers or dealers, which are not
necessarily subject to independent,
overlapping capital requirements and
where recourse to the parent would not
necessarily be available.
Although the Department believes
that SEC Rule 15c3-l 22 does not
provide as accurate an assessment of
risk for firms that transact business in
government securities (alone or in
combination with exempted securities
and/or CFTC-related commodity
interests) as the FRBNY guideline
methodology, experience has shown it
to be appropriate for entities with a
general securities business. In making
this assessment, the Department
assumes that the SEC will adopt many
of its recently proposed modifications to
Rule 15c3-l concerning repurchase and
reverse repurchase agreement deficits.22
Banks and bank holding companies
that are subject to the supervision of the
Federal Reserve Board, Comptroller of
the Currency, and Federal Deposit
Insurance Corporation are, in general,
required to maintain a ratio of primary
capital to total assets of 5.5 percent and
a minimum ratio of total capital to total
assets of 0.0 percent.24 Thrift
institutions insured by the Federal
Savings and Loan Insurance Corporation
or the Federal Deposit Insurance
Corporation are also subject to
minimum net-worth requirements.28
It is the understanding of the
Department that the bank capital
requirements, which are designed for
other purposes, when applied to a
normal mix of government securities
dealer activities, would be significantly
higher than those proposed to be
required of registered government
securities brokers and dealers. Recently,
the three bank regulatory agencies and
the Bank of England published for
comment a risk-based capital
framework.26 No specific risk-based
capital ratio has been proposed at the
present time, however, and there may
also be some modifications to the riskbased capital structure. Accordingly, it
is too early to make a judgment as to the
effect of the new proposed risk-based
capital requirements on a government
securities dealer operation. The
Department will monitor this situation*
6
4
8
88 Section 240.15c3-l.
88 Exchange Act Release No. 34-23802, 51FR
32658 (Sept 15,1988).
84 See 12 CFR Part 225 Appendix A (Board of
Governors of Federal Reserve System); 12 GFR 3.8
(Comptroller of the Currency); 12 CFR 325.3 (FederalDeposit Insurance Corporation).
86 See 12 CFR 583.13.
86 See news release of the Comptroller of the
Currency, Federal Deposit Insurance Corporation
and Federal Reserve Board dated January 8,1988;

S8®i

Federal E^gistes' / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

and will continue to evaluate the
financial institution exemption in the
light of any changed financial institution
capital requirements.
Although it is unclear whether the
thrift institution capital requirements
would also exceed those required under
this part for a thrift institution (and not a
subsidiary or affiliate) that was a
government securities broker or dealer,
the Department believes that few, if any,
thrift institutions will not be exempt
under Part 401. Since all financial
institutions are closely supervised and
their capital levels receive the close
attention of their supervisory agencies,
an exemption from the capital
requirements being proposed in these
regulations is believed warranted. The
Department specifically requests
comments with respect to the thrift
institution exemption, and particularly
requests factual information concerning
thrift institutions that believe that, under
the proposed regulations, they are
government securities brokers or dealers
not exempt under Part 401.
Government securities brokers that
come within the definition of
government securities interdealer
brokers are allowed to elect to follow
the requirements of a provision similar
to the municipal securities broker’s
broker rule of SEC Rule 15c3-l 27 rather
than the capital rule of § 402.2 of the
proposed regulations. The Department is
considering whether this or another
special rule should apply to interdealer
brokers who also serve customers other
than dealers, and welcomes comments
and suggestions on this point.
The capital rale will be effective July
25,1987, except that, for a three month
period, newly registered government
securities brokers and dealers will be
required only to have and maintain
liquid capital (before deduction of any
haircuts) of $50,000, except that the
minimum for introducing brokers will be
$5,000. This delay is necessary to give
new registrants an opportunity to put in
place the systems needed for the haircut
calculations required by the rule while
at the same time requiring such firms to
have some cushion of capital to protect
investors.
2. Section 402.2. While many of the
basic concepts underlying the proposed
rale are the same as those contained in
the SEC’s Rule 15c3-l, the proposed rule
is tailored for participants in the
government securities market. The basic
standard set out in the proposed rule is
that liquid capital, defined to be equal to
the SEC concept of tentative net capital
with one modification for futures
37 Section 240.15c3-l{aM«).

contracts, must exceed measured risk
(total haircuts) by at least 20 percent.
In comparison to Rule 15c3-l, the
proposed rale eliminates the need to .
determine aggregate indebtedness.
However, the Department recognizes
that some government securities dealers
and brokers may find the haircut
calculations of the proposed rule
complex. Consideration was given to
allowing registered government
securities brokers and dealers the option
of meeting the requirements of Rule
15c3-l rather than the requirements
contained in the proposed rule.28 For
the reasons stated below, the
Department believes that option is
inappropriate for entities transacting
business solely in government and other
exempted securities.
For firms without a broad range of
diversified activities but rather
concentrated in the government
securities market, the haircut calculation
of the proposed rule is a more accurate
measure of risk than the haircut
calculations of the SEC rale.
The ratio requirement of the proposed
rule, liquid capital to risk, is a simpler
concept and more appropriate to these
firms.
The haircut factors of the proposed
rale are based on recent market
conditions and will be revised as market
conditions change. This not only holds
for the factors applying to net positions,
but also for the factors that permit a
reduction in measured risk for offsetting
positions in the same maturity sector or
across different sectors. Consequently,
the haircut factors are proposed to be a
more current risk measurement than the
SEC factors, which are not designed to
be updated with any frequency.
The proposed haircut methodology
also provides a more accurate system
for recognizing the reduced risk of
hedged positions than the SEC
methodology, which in some cases is
more generous and in other cases less
generous than the proposed rale. Also,
the inclusion of financings, mainly
repurchase and reverse repurchase
agreements, into the total haircut
calculation in the proposed rale is a
recognition of the importance of a major
financing technique in the market and a
recognition that term repurchase and
reverse repurchase agreements can
serve to offset the risk in the position
being financed.
Linking capital requirements to
aggregate indebtedness or aggregate
debit items as computed in accordance
with the Formula for Determination of3
8
38 Firms that wish to follow Rule 15c3-l in effect
have that option by registering with the SEC as a
broker-dealer under Section 15.

Reserve Requirements for Brokers and
Dealers (Exhibit A to Rule 15c3-3) 29
may not be appropriate in all cases for
specialized firms. The activities of
government securities brokers and
dealers may generate very little
aggregate indebtedness or aggregate
debit items. Consequently, the
Department believes that the direct link
between liquid capital and measured
risk of the proposed rale serves better to
focus a government securities broker’s
or dealer’s attention on the amount of
liquid capital needed in order to
undertake pradentially a given level of
risk.

Comparison to the FRBNY Guideline.

The proposed rule differs in two
principal ways, which are related, from
the FRBNY’s capital adequacy guideline.
The definition of liquid capital has been
modified, and one category of haircut
has been eliminated.
The FRBNY defined liquid capital to
be net capital before haircuts on
securities positions (line 3640 of SEC
Form X-17A-5 or FOCUS Report) with
two adjustments-—
omission of
proprietary charges on commodities
(line 3600) and the deduction for reverse
repurchase agreement deficits (included
in line 3612, “Other Charges and/or
Deductions”). These adjustments were
required because the FRBNY included
haircuts on futures and forward
positions and haircuts for credit
exposure to counterparties. The
proposed rule retains the omission of
proprietary charges on commodities,
since, as in the FRBNY methodology,
haircuts on futures and forward
positions are included in the calculation
of total haircuts.
The proposed rule, however, does not
omit the deduction for reverse
repurchase agreement deficits because,
unlike the FRBNY guideline, it does not
include a "customer exposure haircut.”
Rather, the Department decided to
retain the SEC capital charge for
unsecured receivables.30 In some cases,
the FRBNY included both the SEC
capital charge and a haircut for
unsecured receivables. In order to keep
the concept of liquid capital close to the
SEC concept of tentative net capital, the8
88 Section 240.15c3-3a. Under SEC rules,
aggregate indebtedness may not be greater than 15
times the amount of “net capital,” the determination
of which includes all securities haircuts and other
deductions. For broker-dealers electing the
alternative net capital requirement of Rule 15c3~l,
net capital must be the greater of $100,000 or 2
percent of aggregate debit-items in the Reserve
Formula. Electing the alternative has the effect of
increasing the amount of funds a broker-dealer is
required to maintain in a “Special Reserve Account
for the Exclusive Benefit of Customers."
80 Section 240.15c3-l(c)(iv)(B).

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

5667

choice was made to retain all SEC
included in the Treasury market risk
to the product of a concentration of
capital charges and deductions used to credit haircut factor of 25 percent and
haircut calculation.-35
determine tentative net capital, except
the amount by which the net credit
For positions in instruments and
for the charge related to “commodities.” exposure to a single counterparty is in
inventory not described above, such as
To avoid inclusion in the proposed rule excess of 45 percent of the government
most Eurobonds and foreign currency,
of both haircuts and capital charges on security broker’s or dealer’s liquid
the SEC haircut factors and
unsecured receivables, the customer
capital. Net credit exposure is the dollar methodology are used. The calculation
exposure haircut of the guideline was
amount of funds or securities at risk to
is called the “other securities haircut.”
eliminated. Commenters are invited to
the government securities broker or
The sum- of the Treasury market risk
address the decision to retain the SEC
dealer in the event the counterparty
haircut and the other securities haircut
deductions for unsecured receivables
defaults less the dollar amount at risk to is the market risk haircut.'
and reverse repurchase agreement
the counterparty in the event the
(i) Treasury M arket Risk. H aircut .36
deficits and consequently not to include government securities broker or dealer
(A) Introduction . The Treasury market
the customer exposure haircut of the
were to default. There is no
risk haircut methodology of the..
concentration of credit haircut for
FRBNY guideline. The proposed rule
proposed, rale quantifies risk by placing
also'clarifies that the deduction for aged exposure to the government securities
ail positions into one of twelve
fail to deliver contracts is based on the broker or dealer’s principal clearing
categories and-applying three different
haircut factors of this proposed rule.
bank(s) or principal clearing broker(s).
types of haircut factors—{1} net position
The credit volatility haircut is
SEC Repurchase Agreem ent Proposal.
haircut factors, (2) offset haircut factors,
The recent SEC proposals with respect
assessed on high quality money market and (3) hedging disallowance haircut
to repurchase agreements and reverse
instruments which are not U.S.
positions grouped in the
repurchase agreements sa have
government or agency issues and mature factors—to Net position haircut factors
categories.
implications for this proposed capital
in more than 45 days and futures,
adequacy rule that commenters are
forwards and options thereon. A credit reflect the price volatility of debt , the
instruments; offset haircut factors,
invited to address. Specifically, are the haircut volatility factor, set at 0.15
imperfection inherent
proposed increase in the capital charge percent (0.0015), is applied to the larger within a category and in any hedge price
the
of the gross long position or gross short volatility in that category; range of
for reverse repurchase agreement
and hedging
position in these instruments to
deficits and the new capital charge for
disallowance haircut, factors, the risk
calculate this credit volatility haircut.
repurchase agreement deficits
inherent in hedges across categories. In
(b) M arket Risk® 3 Portfolios of
appropriateand should they be applied
addition, the imperfection of hedging
government securities are subject to
to government securities brokers and
with futures and options is captured
changes in value due to market
dealers subject to the-proposed rule?
with a single futures
Also, is it appropriate to include in this fluctuations. This is termed market risk. factor of 20 percent and options offset
For.instruments, that meet the
capital rule (in a fashion similar to the
Section 402.2(f)(1) o f the proposed rale
definition of "Treasury market risk
SEC proposal) an increase in required
defines the twelve categories in which
instrument” in § 402.2(e), a Treasury
capital when a government securities
market risk haircut is calculated. These Treasury market risk instruments are
dealer receives margin in connection
placed in order to calculate the Treasury
with a reverse repurchase agreement in dollar-denominated- instruments are
most government securities, zero-coupon market, risk haircut The first ten
excess of 105 percent of the contract
categories are defined .in-terms of
receipts or certificates based oh
value of the. agreement, or should
periods of time, either to maturity of the
marketable Treasury notes or bonds,
provisions relating to such “excess”
instrument or to the next scheduled .
short-term certificates of deposit,
margin he included in § 403.4 of the
interest rate adjustment in the case of:
proposed rule, relating to possession or bankers acceptances, and high quality
those instruments whose rates change
control of customer securities?
short-term commercial paper. Futures,
periodically. The last two of these ten
Calculation o f R isk Level. The
forwards and options on the above
proposed rule quantifies the risk to the
instruments and on time deposits whose categories are for zero-coupon
instruments with terms to maturity of
portfolios of government securities
changes in yield are closely correlated
:ten years or more. Shorter-term zerobrokers and dealers according to a
with that of certificates of deposit are
series of haircut factors. The two major included in the definition.3* Options on coupon instruments are included in the
first eight categories according to
types of risk that are measured are
futures on the debt instruments listed
different time period criteria than for
credit risk and market risk. The sum of
are also Treasury market risk
conventional coupon securities. The
the credit risk haircut and the market
instruments. Excluded from the
reason for this is the greater price
risk haircut equals total haircuts or
definition are mortgage-backed
volatility of zero-coupon instruments
measured risk. Total haircuts are then
government securities that do not pass
compared to liquid capital to determine through to each security holder on a pro than conventional coupon instruments
capital adequacy. Appendix A to this
of the same maturity. The final two
rata basis a distribution based on the
preamble is a detailed example of the
monthly payments and prepayments of categories are for fixed-rate and
calculation of capital adequacy under
principal and interest on the underlying adjustable-rate mortgage-backed
the proposed rule.
pool of mortgage collateral less fees and securities that are Treasury market risk
(a) Credit Risk. The credit risk
instruments. These categories are the
expenses. Consequently, government
haircut 32 is the sum of two haircuts
same as those in the FRBNY guideline.
securities that are collateralized
used to quantify credit risk—a
mortgage obligations, real estate
Section 402.2(f)(2) shows the schedule
concentration of credit haircut and a
mortgage investment conduits, and
of net position and offset haircut factors
credit volatility haircut. The
stripped mortgage in obligations are not for the twelve categories. Section
concentration of credit haircut is equal
31 Exchange Act Release Wo. $4-23802, St FI
32058 (Sept. 15,1989).
83 See § 402.2(g)(1) of the proposed rale.

88 The market risk haircut calculation i®found in
Appendix A t©the proposed rule, § 402.2a.
3<s In particular. Eurodollar futures are included in
the definition of Treasury market risk instrument

88 These securities are included in the total
haircuts calculation using SEC haircut factors.
$ 402.2a(b) of the proposed rule.
sa" § €©2.2a(al of the proposed rale.
Sss

Federal Eegfeteir / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
402.2(f)(3) shows the category pair
hedging disallowance haircut factors
and indicates those category pairs for
which a reduction in total haircuts is
allowed through recognition of the
reduction in risk due to cross category
hedging.37
37 The net position haircut factors are based on
the market risk implicit in price volatility as it
relates to changes in yields. The sensitivity of prices
to yield changes varies with the maturity of a
security and the level of yields. Thus the grouping of
securities, except for mortgage-backed securities, is
related to maturity.
Yield volatility was measured by the observed
week-to-week changes in yields, using a benchmark
security in each category. Treasury's constant
maturity yield series and a comparable series for
zero-coupon instruments based on Treasury
securities were employed for the first ten categories.
Based on data for 1988, a yield change was derived
for each category that would encompass
approximately 99 percent of expected weekly yield
changes. For mortgage-backed securities, volatility
was measured directly from data on prices and
compared with the price volatility of Treasury
securities.
To measure price volatility in the non-mortgagebacked securities categories, benchmark securities
were derived that generally correspond to the
Treasury original-issue maturities. In the shortest
category, there is no Treasury original-issue
maturity, thus a 1-month constant maturity series
was used. In the 1.5 to 3.5 year category, where
there are two original-issue maturities, the data
employed were the average of the 2-year and the 3year data. In the 3.5 to 7.5 year category, where
there are three original-issue maturities, the 5-year
data were used. The data for the 30-year maturity
were used for the 15-30 year category. Zero-coupon
maturities were mapped into coupon categories of
similar duration. A price for each hypothetical
benchmark security was determined using average
coupon data and average yield data for coupon
instruments and average yield data for zero-coupon
instruments for 1988. The price was then
recomputed using the average yield plus the yield
change that has been described above for each
category. For each category, the difference in these
two prices as a percent of the original (benchmark)
price, when rounded is the net position haircut
factor. When multiplied by the dollar net position,
the result is the dollar value of potential risk
exposure.
The offset haircut factors for each category are
based on the difference in the price elasticity with
respect to yield of the benchmark security and a
hypothetical security with a maturity set at the
beginning point of the maturity range of the
category. This difference in elasticity is divided by
the elasticity of the benchmark security, to which a
constant of five percent (0.05) is added to account
for changes in the shape of the yield curve and for
securities that trade off the curve. The net position
haircut factor multiplied by the number calculated
above is the offset haircut factor for the category.
Hedging across maturity classes can reduce total
risk. As the distance between maturity classes
increases, however, the risk associated with the
variability of the yield curve increases. Thus in the
calculation of risk, the haircut on a net long position
in one maturity category does not offset one for one
the haircut for a net short position in another
category. The hedging disallowance haircut factor
determines what percent of the offset that is not
permitted. The factors, which are found at
I 402.2(f)(3) of the proposed rule, were derived by
examining the correlations (R2) between yield
changes in different maturity categories using 198®
data. Hedging is permitted only if yield changes in
the two categories are sufficiently well correlated.
To compute the factor, the amount by which the

Schedules A through E, similar to
those in the guideline, are presented in
Appendix A to the rule and can be used
to calculate haircuts and the liquid
capital to total haircut ratio.38
The haircut factors have been updated
to reflect recent market conditions,
while retaining the same twelve haircut
categories as in the FRBNY guideline for
security positions. The Department
tentatively plans to review these haircut
factors at six month intervals and plans
to change them with appropriate notice
if warranted by changed market
conditions. Also, the mapping of zerocoupon instruments into the maturity
categories may change. Gommenters are
invited to address this aspect of the
proposal
Gommenters are also asked to
address whether the calculation of risk
ivith respect to options and futures is
adequate. The proposed rule follows the
FRBNY guideline in this area, but the
Department recognizes that a more
sophisticated treatment is possible.
However, a better measure of risk in this
area would substantially complicate the
calculation for government securities
brokers and dealers. This increased
complexity does not appear to be
commensurate with the resulting
increase in the accuracy of the risk
measurement.
(B) Calculation of the Treasury
M arket R isk H aircut.39*The three
haircut factors are used to calculate four
different haircuts: the governments
offset portion haircut, the futures and
options offset haircut, the hedging
disallowance haircut, and the residual
net position haircut. The sum of these
four haircuts is the dollar measure of
market risk captured by the Treasury
market risk haircut. In the process of
calculating the haircuts, some interim
haircuts must be calculated. These
interim haircuts, unlike the final four
haircuts used to determine the Treasury
market risk haircut, may be positive or
movements in yields in one category do not
correspond to movements in another category was
determined. Another 10 percent was added to
reflect the imperfections inherent in any hedge. The
results were rounded and grouped into three classes
determined by the percent of the hedge being
disallowed.
38 Schedules A through E are included in
Appendix A to the proposed capital rule, § 402.2a,
not necessarily as a required form that would be
used in computing haircuts, but rather as a
convenient reference in the computation of haircuts.
The SEC or designated examining authority may, at
its discretion, require adherence by the government
securities broker or dealer to these schedules or to
substantially similar forms. The Department
requests comments on the utility of these forms and
in particular invites suggestions for improving
Schedule E.
30 See Appendix A to this preamble for a detailed
example of this calculation.

negative numbers. The final four
haircuts are always positive or zero.

(/) N et Im m ediate Position Interim
H aircuts and Governm ents O ffset
Portion H aircu t 40 The net immediate

position interim haircuts, which are used
in the determination of the residual net
position haircut, and the governments
offset portion haircut are calculated for
each category by applying net position
and offset haircut factors to immediate
positions in Treasury market risk
instruments and financings.
The gross long (gross short) immediate
position for each category is the sum of
the market values of each long (short)
immediate position in Treasury market
risk instruments that are placed in the
category and the value of financings that
provide securities (cash) .to the
government securities broker or dealer.
Long and short immediate positions in
Treasury market risk instruments are
the net long or short position in such an
instrument as of the trade date (as long
as the time between trade date and
settlement date is not longer than five
business days or 30 calendar days in the
case of mortgage-backed securities).
Also, certain net long and short whenissued positions are included as long
and short immediate positions in
Treasury market risk instruments. With
respect to these when-issued positions
in Treasury notes and bonds,
commenters are requested to address
whether the rule should specifically set
out a valuation methodology for such
positions between announcement and
auction date, i.e., before a coupon rate
has been set on the Treasury note or
bond, and to suggest an appropriate
methodology if one is considered
necessary.
Most financings, excluding
subordinated debt, are included in the
gross long and gross short immediate
positions. The dominant forms of
financing in the government market are
repurchase agreements, which provide
funds to government securities brokers
and dealers, and reverse repurchase
agreements, which provide securities.
Securities lending and borrowing are
included if such borrowing or Sending is
in effect secured by cash collateral.
Financings are included in each
category at contract value and
according to the term to maturity or time
to the next scheduled interest rate
adjustment. The underlying securities
are not relevant to the placement of the
financing in a category. Reverse
repurchase agreements and other
arrangements to borrow securities
against cash collateral are considered
40 See § § 4Q2.2a(a) (1), (2) of the proposed rule.

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
long positions, while repurchase
agreements and other arrangements to
borrow funds are considered short
positions.
Gross long and gross short immediate
positions, including financings, that are
placed in Category A (under 45 days)
will not contribute to the calculation of
total haircuts, since there is no haircut
on these positions.
The appropriate net position haircut
factor is applied to the net position
(gross long position minus gross short
position) in each of the twelve
categories. This determines the net
immediate position interim haircut for
each category. (In order to perform the
hedging calculation between categories
described below, the sign convention is
that net immediate position interim
haircuts on net long positions are
positive, and on net short positions,
negative.)
The offset haircut factor is applied to
the smaller of the gross long or gross
short immediate position in each
category to create the governments
offset portion haircut. Since offset
haircuts cannot be netted, they are all
positive. The sum of the offset haircuts
for each category is the total
governments offset portion haircut.

(//) Futures and Options O ffset
H aircut and Aggregate Interim
Haircuts.41 The calculation of offset

haircuts on futures and forward
contracts is different from that on
immediate positions. The haircuts on
these contracts are calculated
separately from the haircuts on
immediate positions and then these
futures and forward haircuts along with
haircuts on options (also calculated
separately as described below) are
consolidated with the net immediate
position interim haircuts on immediate
positions by category. Schedule D can
be used for this consolidation.
To calculate the futures and options
offset haircut, interim haircuts on gross
long and gross short futures and forward
positions are determined by using the
net position haircut factors that
correspond to the term to maturity of the
deliverable security at the time of the
maturity of the futures or forward
contract, which is henceforth referred to
as the maturity of the underlying
security. (In the case of a cash
settlement contract, the term to maturity
of the security or investment on which
the cash settlement price is based would
be used.) For example, the applicable
haircut factor for futures contracts on
three-month Treasury bills would be the
net position haircut for Category B (4541 See § 402.2a{a){3) of the proposed rule.

135 days). However, for purposes of
combining these haircuts with the net
immediate position interimhaircuts on
immediate positions, the haircut is
placed in the maturity category
corresponding to the sum of the
remaining time to maturity of the futures
contract and the maturity of the
underlying security. For example, the
interim haircut on a three-month
Treasury bill futures contract with four
months remaining to delivery would be
placed in Category C (4.5-9 months),
though the haircut was determined by
the net position haircut factor for
Category B.
As a practical matter, this shifting of
maturity categories will usually be
relevant only to futures and forward
contracts on short-term instruments. It
will, of course, not be relevant to
contracts on mortgage-backed
securities.
The gross futures or forward interim
haircut 42 is the product of the
applicable haircut factor and the value
of the futures or forward position which
corresponds to the current market price
of such contract. For example, a futures
price of 95 on the 20-year bond futures
contract on $100,000 par value would
produce a value of $95,000. The interim
haircuts on long futures and forwards
are positive, and on short futures and
forwards, negative.
Gross options interim haircuts 43 are
the lesser of (1) the market value of the
option or (2) the net immediate position
interim haircut on the underlying cash
instrument or gross futures interim
haircut on the underlying futures
contract Gross options interim haircuts
on purchased calls and Sold puts are
positive, while the interim haircuts on
sold calls and purchased puts are
negative. The gross options interim
haircut is entered in the category in
which the underlying instrument would
be entered.
Net immediate position interim
haircuts are combined with gross option
and futures and forward interim haircuts
in the same category (the categories in
which these haircuts are placed is
described above) to form positive and
negative aggregate interim haircuts. In
each category, the sum of positive
interim haircuts equals the positive
aggregate interim haircut, and the sum
of negative interim haircuts equals the
negative aggregate interim haircut. An
offset haircut factor of 20 percent is
applied to the smaller of die absolute
values of the positive and negative*
8
4
4* See §§ 402.2a(a)(3)(i)(A). 402.2a(a)(3)(ii){A) of
the proposed rule.
48 See §5402.2a{a){3)(l){B), 402,2a{a){3)(ii)(B) of
the proposed rule.

5669

aggregate interim haircuts in each
category. The sum of these resulting
offset haircuts for all the categories is
the total futures and options offset
haircut.
{Hi) Hedging D isallow ance
H aircuts.44 To calculate these haircuts,
residual position interim haircuts must
be determined for each category. If there
are no futures and options positions, the
residual position interim haircut for each
category is equal to the net immediate
position interim haircut described in the
section on the government offset portion
haircut. If there are futures or options
positions, then the positive and negative
aggregate interim haircuts for each
category are summed to calculate the
residual position interim haircut. This
interim haircut may be a positive or
negative number.
The risk reduction inherent in hedges
between categories where the price
volatility is reasonably well correlated
is reflected by netting the residual net
position interim haircuts in these
category pairs. Each time two residual
position interim haircuts are netted, a
hedging disallowance is determined.
The sum of these hedging disallowances
is the total hedging disallowance
haircut.
Section 402.2(f)(2) of the rule shows
the category pairs where such netting is
allowed and the applicable hedging
disallowance haircut factor for these
category pairs. Schedule E can be used
to calculate the hedging disallowance
haircut
Hedging disallowance haircuts are
first calculated for residual position
interim haircuts in those category pairs
where the hedging disallowance haircut
factor is smallest. For each such pair,
the hedging disallowance haircut factor
is applied to the smaller of the absolute
values of the two residual position
interim haircuts. The resulting hedging
disallowance haircuts are positive. The
sum of the two residual position interim
haircuts is called a net residual position
interim haircut and may be positive or
negative.
Net residual position interim haircuts
may be paired with other residual
position interim haircuts or net residual
position interim haircuts. For this
purpose, net residual position interim
haircuts as described above are
considered to be in the category of the
larger in absolute value of the two
interim haircuts that were netted to
produce it and a net residual position
interim haircut of zero is placed in the
other category. Of course, as before,
such netting is only permitted for certain
44 See 1 402.2a(a)(4} at the proposed rule.

Fecteal Sfogister / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
category, pairs. Note that each time two
interim haircuts are netted, the total
hedging disallowance haircut increases,
while the total residual net position
haircut, described below, decreases.
After all possible netting has been
recognized for category pairs with the
smallest hedging disallowance haircut
factors, the same procedure is applied
for haircuts in category pairs with higher
hedging disallowance haircut factors.
Once all possible (net) residual position
interim haircuts have been netted, then
all the hedging disallowance haircuts
from each netting described above are
summed to produce the total hedging
disallowance haircut.
(iV) Residual Net Position Haircut.*6
The absolute values of the (net) residual
position interim haircuts remaining for
each category after the netting described
above are summed to produce the total
residual net position haircut
(ii) Other Securities Haircut.*6 For
inventory and securities that are not
Treasury market risk instruments for the
purpose of the Treasury market risk
haircut calculation, SEC haircut factors
are used. If a position in a Treasury
market risk instrument is part of a hedge
with an instrument that is not a
Treasury market risk instrument, it is
permissible to exclude this position from
the Treasury market risk haircut
calculation and include it in the other
securities haircut calculation if such
inclusion serves to reduce the other
securities haircut., The value of the.
position taken out of the Treasury
market risk haircut calculation and
placed in the other securities calculation
may not be larger than the position that
is being offset in the SEC framework.

agreements and in similar
transactions.”49
The SEC has promulgated a number of
rules designed to protect customer funds
and securities held by registered brokers
and dealers. The primary customer
protection rules are Rules 15c3-2 and
15c3-3.508Rule 15c3-3 requires that
3
*
1
brokers and dealers immediately obtain
possession or control of all fully paid
customer securities as well as margin
securities in excess of a certain
specified amount. An important function
of the possession or control requirement
is to assure that such customer
securities are maintained free of all liens
and encumbrances. The rule also
requires that customers’ free credit
balances and certain other amounts
owing to customers are set aside by a
broker or dealer in a special reserve
account. In addition, Rule 15c3-2
provides that a broker or dealer may not
use customer free credit balances unless
the customer receives regular
statements indicating the amount owed
to the customer and notifying the
customer that the funds are not
segregated from funds of the broker or
dealer and may be used in its business.
These rules have two primary
purposes: to protect customer assets in
the event a firm requires liquidation and
to prevent unwarranted expansion of a
firm’s business through the use of
customer funds and securities. The rules
have been viewed by the SEC as an
effective means of customer protection.
In additi®n, many registered brokers and
dealers that effect transactions in
government securities have indicated
that from their perspective the rules are
generally both workable and effective.
Debt-Equity Requirements and
The Department has examined
Prohibition on Withdrawal of Capital.*1 rules in detail and has concluded these
The proposed rule provides for minimum the SEC rules, with mostly minor that
debt-equity requirements and
modifications, will be equally effective
prohibitions against withdrawal of
to provide protection of customer assets
capital for government securities
in the government securities market. As
brokers and dealers. These proposed
a result, the Department proposes, as a
requirements largely reflect the
general matter, to require compliance
requirements of paragraphs (d) and (e)
with Rule 15c3-3 and certain related
of SEC Rule 15c3-l.*
48
rules. Certain proposed modifications to
D. Part 403. Protection of Customer
these rules are described in the sectionSecurities and Balances
by-section analysis of Part 403. With the
exception of certain proposed
The Act requires the Secretary to
promulgate rules to provide safeguards requirements for control of securities
subject to hold-in-custody repurchase
with respect to “the acceptance of
custody and use of customers, securities, agreements, the modifications provide
language necessary to apply the SEC
the carrying and use of customers,
rules in the context of the government
deposits or credit balances, and the
securities market.
transfer and control of government
The Department notes that Rule 15c3securities subject to repurchase
3 establishes certain time frames in
which a broker or dealer must reduce
48 See § 402.2a(a}(5) of the proposed rule.
48 See | 402.2a(b) of the proposed rule.
87 See § | 402.2 (h), (i) of the proposed rule.
80 Section 240.15c3-l (d), (e).

88 Section 15C(h)(l)(s) (15 U.S.C. 78o-5(b)(l)(A)J.
80 Sections 240.15C3-2, .15c3-3.

securities to possession or control, such
as the requirement in paragraph (d)(2) to
take action on securities shown as
“failed to receive” more than 30
calendar days.51 Although responses to
inquiries by the Department did not
suggest any significant abuse, some of
these time frames for buying in
securities to cover shortfalls may be
longer than necessary, particularly in
the case of transactions in book-entry
securities. Comments are requested on
whether the time frames should be
shortened with respect to some or all
classes of securities. Commenters are
also requested to suggest any other
modifications to Rule 15c3-3 not
included in the proposed rule that would
be appropriate in the context of the
government securities market.
The Department has also considered
whether it would be appropriate for the
rule governing buy-ins to cover
securities shortfalls to provide that a
broker or dealer may buy in a substitute
security, such as Treasury bills of the
appropriate market value. The
Department has not adopted this
approach because it appears that it
could undermine the basic rationale of
the rule and because it raises at least
two problems. The most important one
is that the bills or other substitute
securities would need to he viewed as
belonging to a specific customer whose
securities position had not been covered
in order to accomplish customer
protection in the event of liquidation of
the broker or dealer. The Department is
not certain this could be accomplished
in these regulations. Second, it would
appear that a substitution should not be
permitted unless it is explicitly
permitted under the terms of the
agreement between the dealer or broker
and its customer. If a right of
substitution is agreed to, then it would
not appear necessary to include
additional language in the rule.
The Department also invites
comments on whether “reverse
repurchase surplus”—the amount by
which the market value of securities
purchased by a broker or dealer in a
repurchase transaction exceeds the
funds transferred—should be considered
a credit item in the reserve calculation
under Exhibit A of Rule 15c3-3.52 In its
recent proposal concerning repurchase
transactions,53 the SEC noted that
81 Section 240.15c3-3(d)(2).
83 Section 240.15c3-3a.
83 Exchange Act Release No. 34-23602,51FR
32858 (Sept. 15,1086).

Federal Register / Vol. 52, No. 36-37 / Wednesday, February .25, 1937 / Proposed Rules
"some broker-dealers create leverage by
obtaining the use of funds through
matched repurchase agreements,” and. .
proposed an increase in required.capital
to take this into account. The
Department notes that reverse
repurchase surplus does not. create
additional risk, to the broker or dealer,
but that it creates a liability to a
counterparty which might more
appropriately be accounted for in the
Rule 15c3-3 reserve. Comments are .
requested' on which treatment, if any, is
appropriate.
Finally, the Department notes that
Part 403 deals with aspects of
transactions in the government
securities market that may also be
affected by other proposed rules that
have been published for comment by
various agencies. The SRC’s recently
proposed: amendments to rule 15c3-3
impose certain requirements with
respect to securities,that are the subject
of repurchase transactions.84 On
November 28,..1986, the Treasury
published for public comment a revised
proposed rule governing the transfer of
interest in.Treasury book-entry
securities.88 Finally,’on December 16,
198@,_the Board of Governors of the
Federal Reserve System published for
comment a proposal to reduce payment
system risk that arises in connection
with, among other things, transactions in
book-entry securities.* 8Commenters are
867
0
asked to give particular consideration to
the interaction of all these proposals ■
with the proposed rules set forth below
in both Part 403,and Part 450, which
contain .the rules applicable to custody
of government securities held for
customers by financial institutions.
1. Section 403,1. This section provides
that registered brokers and dealers
effecting transactions in government .
securities must comply with Rules 8e-l,
15c2-t, and 15c3-2 and with Rule 15c33 57 as modified by § 403.4 below. The
modifications (discussed in detail in
connection with § 403.4) relate primarily
to repurchase and reverse repurchase
transactions, and are based on the
SRC’s recent proposal in this area, noted
above. If amendments to-the SRC rules
substantially similar to those in the
| 403.4 modifications are adopted prior
to the adoption of the final Treasury •
rules,,the Department intends to revise
§ 403.1 to provide that compliance with
the. SEC rule constitutes compliance
with this.part.
2. Sections 403.2 and 403.3. These
sections provide that every registered
so ibid.
; 88 51JFR 43027 (Nov. 28,1083).
.. 86 51 FR 45048 (Dec. 18,1836). .
87-Sections 24Q.8c-l, .15c2-l, .15c3-2, .15c3-3,

mn

government securities broker or dealer- Repurchase agreements may be for a
specified term or for overnight
must comply with the SEC rules
investment only. Repurchase
governing hypothecation of customer
securities and the use of free credit
transactions may also provide
balances.
investment for an indefinite period by
3. Section 403.4. This section sets forth permitting the participant to elect each
the basic rule that, except as otherwise day whether to continue the repurchase
provided in Section 403.1, every
transaction or terminate it.
government securities broker or dealer
Typically, a repurchase agreement
must comply with Rule 15c3-3, as
will be structured in one of three ways.
modified by paragraphs (a) through (i) of The agreement may require that the
this section; paragraphs (j) and (k) are
securities be delivered to the
technical modifications applicable only or the purchaser’s designated purchaser
custodial
to registered government securities
bank. An alternative arrangement is for
brokers and dealers.
and third party
(a) This paragraph states that the term the seller, the buyer,bank)ato enter into a
(usually a custodial
"broker or dealer" in Rule 15c3-3 .
tripartite agreement
which the
includes government securities brokers, third party agrees to underthe securities
hold
and dealers., .
subject of the repurchase
(b) -(d.) Rule !5c3-3 defines "fully paid that are thefor the benefit of both
agreement
securities,” "margin securities,” and
parties. The third alternative is that the
"excess margin securities”';in terms of
seller of the securities may retain
the requirements of the accounts in .
and earmark
. which they must be carried, as set out in. control of. the securities,as securities
them on its'own.; books
Regulation T of the. Board of Governors subject to: a specific repurchaseof the Federal Reserve System.88 More
transaction. Under this arrangement, the
general definitions are included here
because the provisions of Regulation T. seller usually will also instruct its
are not always applicable to government clearing, bank to segregate the securities
securities. The definitions set forth here subject to repurchase from the securities
are intended to describe the. commonly in the dealer’s clearing account.
understood meanings of the terms "fully However, the clearing bank will not
necessarily be advised of the identity of
paid securities,” “margin securities,”
and "excess margin securities,” without the buyer of specific repo securities, and
the securities will be subject only to the
reference to the specific accounts in
control of the seller and its clearing
which the securities may be carried.
;
Comments are requested on whether, in bank.
the government securities market, 140
Experience over the last'several years
percent of a customer’s total debit
has indicated that this last type of
balances is the appropriate cut-off
repurchase transaction, commonly
between margin and excess margin
referred to as a “hold in custody” or
securities. Under the SEC rales, a
"letter” repurchase agreement
registered broker or dealer is permitted represents the-greatest potential for loss
to treat securities with a market value of on the part of the investors since the
up to 140 percent of'a customer’s debit
securities purchased remain in the
balances as margin securities because
control of the seller. Many of the
ordinarily a'bank financing the purchase investors that experienced significant
of such securities will lend only 75
losses in the failures of two government
percent of their market value. With
securities dealers, Bevill, Bresler &
respect to government securities,
Schulman, Inc. (“BBS”) andR.S.M.
lending at a higher loan to market value Government Securities, Inc. (“ESM”),
ratio is common.
had entered into hold in custody
(e) This paragraph provides a specific repurchase transactions with these
rale for control of securities subject to a entities, and it.is the investor losses in
repurchase agreement. Repurchase
these cases that provided the impetus
agreements represent a substantial
for passage of the GSA.
portion of the daily activity of the
At the same time, as is. recognized in
government securities market and
the legislative history of GSA,
provide a significant financial and cash requiring actual deli.verythe all
of
management tool for both investors and
government securities dealers.59
The parties to a repurchase transaction may
8012 CFR Part 220.
8B A repurchase agreement is a transaction in
which the owner of securities agrees to sell them to
another and to repurchase them on a specified date
at a specified price. Although the transactions
generally are documented as the sale and
repurchase of securities, economically the
transaction has characteristics of a secured loan.

characterize and account for the transaction in
either of these ways. In the discussion that follows,
the parties to a transaction will be referred to as the
seller and buyer for ease of reference. The use of
these terms does not reflect a determination on the
part of the Department that for all purposes and in
all contexts repurchase transactions must b®
characterized as sales and repurchases and not as
secured loans.

i

wm

Federal Register / Vol. 52, No. 38-37 / Wednesday, February 25, 1987 / Proposed Rules

securities subject to repurchase could
h aves significant detrimental impact on
the liquidity of the market. For example,
the Senate Committee Report80
indicates that the Committee concluded
that a physical delivery requirement for
overnight repurchase agreements in
securities guaranteed by the
Government National Mortgage
Association {“GNMA”) might have
adverse consequences on the efficiency
and liquidity of the government
securities market, and that such a
requirement would also be impractical
for other certificated government
securities. With respect to. other
repurchase agreements, the Committee
expressed the expectation, that the
Secretary would adopt rules requiring
physical delivery of the securities to a
customer only after .a determination that
less expensive alternatives, such as
segregation of customers’ securities and
procedures for credit analysis, and
review of counterparties, would not
effectuate the purposes of the Act, and
that Such a requirement is feasible and
justifiable given the need to protect the
liquidity of the government securities.
market.11 The House Committee
8
Report 62 states that requiring the
physical transfer of securities involved
in repurchase transactions would impair
market efficiency, but that requirements
for segregating and designating
securities, for particular investors would
help.prevent fraud as well as .
inadvertent errors that may occur.®s
Many of .the .entities that, enter into
hold in custody repurchase agreements
are large institutional investors that are
sufficiently- sophisticated and informed
to make a reasonable assessment of the
risks and benefits of a-given transaction
and a careful evaluation of the
creditworthiness and stability of theircounterparty. For these investors and for
the dealers with whom they enter into
these transactions, the hold in custody
repurchase agreement provides a
convenient and flexible method of
financial and cash management. The
Department believes that these
investors should continue to have the
opportunity to make the judgment that
the convenience and flexibility provided
outweigh any -potential risk of loss.
Nevertheless, -the Department has also
concluded that to provide adequate
protection to the smaller, possibly less
sophisticated investors, it is .necessary
to establish certain requirements-for the*
8
0
80 S. Rep. No. 89-420,89th Coiifri 2d Bess. (1980).
01 Ibid, at 10n.34.
08 H.R. Rep. No. 89-250, §®tfe Cong., 1st Bess.
(1985).
es Ibid, at 10-17.

control of securities subject to hold in
custody repurchase agreements.84
fust prior to the enactment of the
GSA, the SEC proposed amendments to
several of its financial responsibility
and customer protection rules that
would deal explicitly with securities
■ subject to repurchase agreements.85 In
particular, the proposed SEC rule .
generally would require possession or
control of securities that are the subject
of a hold in custody repurchase
agreement. However, for repurchase
agreements with a contract price of
$1,000,000 or greater, possession or
control is not required during the .trading
day. The effect, of this exception is to
permit securities that .are the subject of
a hold in custody repurchase agreement
to be commingled with the dealer’s own
securities during the day and to be used
to facilitate deliveries of securities to
third parties if necessary. Under the
proposed SEC rules, the securities would
be resegregated from the dealer’s own
securities at the end of the trading day.
Since most repurchase agreements give
the dealer the right to substitute
collateral, the securities that are
segregated each night for a given
repurchase transaction may differ from
day to day.
The intraday use of securities subject
to term hold in custody repurchase
agreements appears to be a common
practice in the government securities
market, and those commenting on the
SEC proposal have urged that to
eliminate completely the capability of
using such securities for deliveries and
resubstituting collateral could seriously
diminish the efficiency of the market.
The amount of securities that may be
committed to term repurchase
agreements during any one day may be
substantial. To require that these
securities be monitored during the day,
transaction-by-transaction, and that
individual instructions to move
securities to the dealer’s account to
facilitate a delivery and to substitute
other securities that are acceptable
collateral for that transaction, may
require real-time operational
capabilities that, at the present time,
might slow a dealer’s daily trading
activities and increase costs to
unacceptable levels. The proposed SEC
rule is designed to allow sufficient
flexibility in this area, but at the same
Similar requirements for securities that ar® ths
subject of triparty repurchase transactions or
repurchase transactions involving actual delivery to
the buyer are unnecessary because those
transactions are structured to assure recognition of
the buyer's interest in the securities and to eliminate
control by the seller.
06 Exchange Act Release No. 34-23802,51FR
32850 (Sept. 15,1980).

time provide adequate protection for the
smaller investors who may not fully
understand the operational practices of
their dealer/counterparties and who
therefore cannot make a reasonable
assessment of the risks and benefits of a
given transaction.
The Department generally agrees with
the SEC approach and believes that, if
certain requirements are met, the
sophisticated investor should still be
able to enter into hold in custody
repurchase transactions in which the
subject securities may not be segregated
at ail times. The Department further
agrees with the SEC that, for the smaller
investor, full protection must be
afforded by requiring possession or
control of the securities subject to
repurchase at all times. However, the .
Department has chosen to vary its
proposed rule from, the SEC proposal in
two significant respects. As noted
above, in the event the SEC finally
adopts a rule substantially similar to the
Treasury rule as proposed, the
Department contemplates exempting
registered brokers or dealers from the
Treasury rule and working with the SEC
to resolve any variations in the two
rules.
First, the Department has raised the
cut-off for round-the-clock segregation
from the $1 million proposed by the SEC
to $5 million. Based on inquiries and on
the size of some of the transactions
involved in the BBS and ESM failures,
the Department concluded that $1
million was too low a number to
reasonably assure protection of all the
less-informed investors.
The Department intends .the dollar amount cut-off to refer to the aggregate
contract price of all outstanding
repurchase agreements between a
particular buyer and a particular broker
or dealer. Comments are specifically
invited on both the dollar limit itself and
on any operational or definitional
problems, such as the difficulty of
ascertaining the aggregate contract
amount for a given, buyer and of defining
what constitutes a single buyer, that
may arise from permitting application of
the limit to the aggregate amount of
repurchase agreements between a seller
and buyer.
The second way in which the
Treasury’s proposed rule varies from the
SEC rule relates to the repurchase
agreement itself. Instead of adopting the
more general requirement proposed by
the SEC of disclosure of the rights and
liabilities of the parties to the :
agreement, the Department proposes
that repurchase agreements must be
written and must contain specific .
consent language if the securities may

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
not be segregated at all times. The
Department has chosen to require
written repurchase agreements and to
specify the required consent language
for several reasons.
First, the rights and liabilities of
parties to a repurchase agreement is an
unsettled area of law. Therefore, the
disclosure requirement would require
brokers and dealers to reach specific
legal conclusions in an area in which the
law itself is unclear. Second, the
Department believes that any language
included in a repurchase agreement
should be explicit enough to put the less
sophisticated investor on notice of the
potential risks involved in the hold in
custody repurchase transaction. Finally,
in the Department’s view, the practice of
customarily making use of repurchase
agreement securities held in custody to
accomplish other deliveries committed
to by a dealer as part of its ordinary
trading activities is inconsistent with the
fact that rights in the securities, whether
as a sale or as a secured loan, have been
conveyed to the repurchase agreement
counterparty, unless that counterparty
has consented to such use. The
Department does not believe that
retaining the right to substitute
securities, as is done in most repurchase
agreements, should be regarded as
explicit enough to constitute consent by
a counterparty to daily commingling and
use of the securities for which it has
paid.
For all of the foregoing reasons, the
Department proposes to require that a
repurchase agreement be written and
that the dealer maintain possession or
control of securities subject to
repurchase at all times unless, for
aggregate repurchase transactions of $5
million or more, the buyer has consented
to intraday commingling with the
dealer’s securities and certain other
provisions. Compliance with the
requirement for a written repurchase
agreement may be met by use of a
written master repurchase agreement
under which the parties to the
agreement may initiate a series of
distinct repurchase transactions. It
should be noted that the rule requires
inclusion of the specific wording set
forth in § 403.4(e)(4)(iii)(A)(i) and (//). In
these provisions, the term “seller” is
used to refer to the broker or dealer that
agrees to sell and subsequently
repurchase securities under a
repurchase agreement. This word was
chosen because of its use in the
standard master repurchase agreement
of the Public Securities Association
(“PSA") which the Department believes
has gained wide acceptance in the
government securities market. If a

different term is used to indicate the
initial seller of securities under a
specific repurchase agreement, then that
term may be substituted for the word
“seller.” Otherwise, the repurchase
agreement should include the precise
wording set out in the rule.
The Department also proposes to
require that the securities that are the
subject of a repurchase agreement be
confirmed in writing at initiation of the
transaction and with each substitution.
By requiring full-time possession or
control of securities subject to a
repurchase agreement where the
aggregate transactions with a
counterparty are under $5 million, the
Department does not intend to prohibit
substitutions of collateral that die
counterparty may agree to pursuant to
the terms of the repurchase agreement.
However, the Department recognizes
that because of operational constraints,
substitutions that are intended to be
simultaneous may not be completed
until the end of the day. Therefore, for
transactions with less sophisticated
investors, the proposed rule also
requires that whenever the aggregate
repurchase transactions with a single
counterparty are under $5 million,
substitutions of securities may be made
only with the prior agreement of the
counterparty. It is noted that the PSA
standard master repurchase agreement
provides that substitutions of collateral
are subject to the agreement Of and
acceptance by the counterparty. The
proposed provision is included to ensure
that a similar provision is included in all
repurchase agreements involving
transactions aggregating less than $5
million and to make clear that
agreement to a specific substitution
must be obtained prior to taking any
steps toward substitution of securities.
The Department also proposes that
the repurchase agreement contain a
disclosure Concerning coverage under
the Securities Investor Protection Act of
1970.66 Under SIPA, customers of all
brokers or dealers registered with the
SEC under Section 15 of the Act are
eligible for coverage by the Securities
Investor Protection Corporation
(“SIPC”) of losses up to $500,000 in the
event of the bankruptcy of such broker
or dealer. However, government
securities brokers and dealers registered
under Section 15C of the Act may not
become members of SIPC and their
customers would not be eligible for SIPC
coverage. Furthermore, SIPC has taken
the position that the provisions of SIPA
do not protect the counterparty of any8
*
88 Securities Investor Protection Act of 1970, Pub.
L. 91-598,84 Stat. 1838, as amended (codified at 15
U.S.C. 78aaa-eee).

5673

broker or dealer under a repurchase
agreement. For these reasons, the
Department proposes that, for all hold in
custody repurchase transactions, the
repurchase agreement must disclose that
there may not be protection under SIPA,
and that to the extent SIPA is at all
applicable, the protection is limited to
$ ,o.
500 bo
It should be noted that for purposes
of control of securities that are the
subject of a repurchase agreement,
acceptable control locations are limited
to those described in paragraphs (c)(1),
(c)(5), and (c)(6) of Rule 15c3-3 and to
the additional clearing bank control,
location described iri paragraph (f) of
this rule. Comments are specifically
requested on whether additional control
locations are appropriate or necessary.
(f) This section adds a new paragraph
to that portion of Rule 15c3-3 that
describes acceptable control
locations.87 This new paragraph
describes an account maintained at a
clearing bank as a permissible control
location for a dealer so long as (1) the
account does not include proprietary
securities of the dealer, and (2) the
clearing bank expressly agrees in its
clearing agreement with the dealer that
securities in the designated account are
not subject to any lien or claim of the
clearing bank.
A significant proportion of all
outstanding government securities are
held in uncertificated form and transfers
of such securities are accomplished by
means of book-entries on the books of
Federal Reserve Banks or financial
intermediaries. A substantial number of
such securities are held by or through
dealers that maintain the securities
through banks that provide clearing
services to the dealers including
extensions of credit to finance dealer
positions.
Because Rule 15c3-3 was drafted for a
somewhat different environment, where
securities are issued in certificated form,
the language of Rule 15c3-3 does not
clearly apply to securities that are
issued in book-entry form only.
Furthermore, none of the control
locations described in the rule clearly
relate to the segregation accounts
maintained by dealers at clearing banks.
The Department understands that the
SEC has interpreted the Rule to be
applicable in this situation but
concluded that it would be useful to
include a specific provision covering this
arrangement to avoid unnecessary
confusion. The Department also
requests comments as to whether
additional control locations not6
7
67 § 240.15c3-3(c).

SS74

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

specified in the SEC rule would be
appropriate or suitable in the context of
the government securities market.
(g) If a bank is unable or unwilling to
comply with an instruction of the broker
or dealer to move securities into the
segregated account, the broker or dealer
must give an “early warning notice” as
described in § 405.5. Such a notice was
considered appropriate because a
refusal of a bank to segregate securities
is likely to be an indication of a
situation similar to a “material
inadequacy” as described in | 240.17a5(g)(3).
(h) Rule 15c3-3 provides that nothing
contained in the Rule shall be construed
as affecting the absolute right of a
customer to receive the physical
delivery of certificates for fully-paid
securities or certain margin securities.*
98
This provision has been modified to
include the comparable right of a
customer to direct the disposition of a
security held in book-entry
(certificateless) form. All new U.S.
Treasury bonds and notes issued after
July 1986 are available only in bookentry form. U.S. Treasury bills have
been available in exclusively book-entry
form since 1977. This provision does not
preclude the customer from agreeing in
writing to restrictions on its right to
dispose of securities.
(i) This paragraph provides that the
provision of Rule 15c3-3 69 requiring
buy-in of securities after 10 days to
complete a sell order of a customer
(other than a short sale) applies to
government securities. The application
of this rule to government securities
applies to registered brokers and dealers
as well as registered government
securities brokers and dealers.
(j) This paragraph conforms Rule
15c3-3 to | 402.2 of these regulations to
allow government securities brokers and
dealers that have liquid capital that
exceeds by a specified amount the liquid
capital required under Part 402 and that
hold small amounts of customer funds to
make the required reserve computations
monthly rather than weekly.
(k) This paragraph conforms a portion
of the reserve calculation to the net
capital rules in § 402.2 of these
regulations.
4. Section 403.5. This section sets forth
the rules for custody of customer
securities that are applicable to
government securities brokers or dealers
that are financial institutions. As a
general rule, these financial institutions
are directed to comply with Part 450
with respect to custody of securities
68 § 240.15c3-3(l).
98§ Z40.15c3-3(m).

held for customers or counterparties. For
securities that are held for others by the
financial institution in its capacity as a
government securities broker or dealer,
certain additional requirements are
imposed that generally parallel the
requirements of SEC Rule 15c3-3.
For example, a financial institution
that is a government securities broker or
dealer and that engages in repurchase
transactions is required to comply with
provisions that parallel the requirements
of § 403.3(e) described above. In
addition, the financial institution is
required to make daily determinations
of the amount of shortfall, if any, of
securities required to be in its
possession or control and to take steps
to obtain securities to cover a shortfall.
Section 403.5 does not, however, contain
any provisions similar to the
requirements of SEC Rule 15c3-2
concerning use of customer funds or
SEC Rule 15c3-3 concerning a special
reserve bank account for holding
customer balances. Rule 15c3-2, by its
terms, does not apply to supervised
banking institutions and the Department
concluded that the exemption should be
extended to all supervised financial
institutions that are government
securities brokers or dealers.
Furthermore, because financial
institutions generally maintain customer
funds as a fundamental part of their
business, and because they are
supervised in large part to protect their
deposits, the Department concluded that
it would serve no useful investor
protection purpose to impose the added
requirement of Rule 15c3-3(e) to require
a financial institution to establish a
special account for customer funds at
another financial institution.
A separate rule was drafted for
financial institutions that are
government securities brokers or dealers
primarily because neither financial
institutions nor their regulatory agencies
are familiar with Rule 15c3-3. However,
the proposed rule is intended to parallel
the relevant requirements of Rule 15c33. Although the requirements of the
proposed rule are stated in less detail
than is found in Rule 15c3-3, it is
anticipated that its enforcement by the
financial institutions supervisory
agencies will follow, in practical effect,
the Commission’s rule.

E. Part 404. Recordkeeping

Section 15C(b)(l)(C) of the Act
requires the Secretary to propose and
adopt rules that require government
securities brokers and dealers to make,
keep current and preserve records
. relating to the operation of their
businesses. Part 404 of these regulations
responds to that requirement. The

proposed rules qenerally adopt
analogous rules of the SEC, Rules 17a-3,
17a-4,17a-7 and 17a-13.70
1. Section 404.1. This section provides
that, for government securities brokers
and dealers that are registered brokers
or dealers, compliance with applicable
SEC rules, with certain modifications
pertaining to books and records
concerning repurchase and reverse
repurchase agreements, will constitute
compliance with Part 404. Specifically,
registered brokers and dealers (as well
as registered government securities
brokers and dealers, see § 404.2 below)
would be required to: (i) maintain a
separate ledger reflecting assets and
liabilities resulting from repurchase and
reverse repurchase transactions, (ii)
record separately on their securities
records those securities subject to
repurchase and reverse repurchase
agreements, and (iii) maintain copies of
confirmations they send out with regard
to repurchase and reverse repurchase
agreements.
These additional recordkeeping
requirements will ensure that all
repurchase and reverse repurchase
agreements are properly reflected,
thereby ensuring accountability for the
cash and securities involved in such
transactions. The additional records
required are the records specified in
recent proposed amendments to the SEC
rules.71 Comments provided to the SEC
on these provisions of the SEC proposal
were almost unanimously favorable,
with many commenters indicating that
they already comply as a matter of good
business practice. If the amendments to
the SEC rules are adopted prior to the
adoption of the final Treasury rule,
§ 404.1 will be modified to reflect the
adoption of the amendments.
2. Sections 404.2 and 404.3. Under
these sections, registered government
securities brokers and dealers are
required to make, keep current and
preserve the types of records required
by SEC rules 17a-3,17a-4 and 17a~7,72
with limited modifications relating to the
different financial responsibility rules
applicable to registered government
securities brokers and dealers. In
addition, registered government
securities brokers and dealers would be
required to maintain the books and
records pertaining to repurchase and
reverse repurchase agreements that are
described above.
The Department proposes adoption of
the SEC rules with modifications
because those rules are well understood
70 §§ 240.17a-3, ,17a-4, .17a-7, .17a-13.
71 Exchange Act Release No. 34-23002, 5t FR
32658 (Sept. 15.1980).
72 §§ 240.17a-3, .17a-4, .17a-7.

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
by many government securities brokers another set of recordkeeping
and dealers, the audit community and
requirements would be unduly
the self-regulatory organizations. During burdensome and would not promote the
the consultation process prior to
purposes of the Act. Compliance with
issuance of these proposed rules, the
the recordkeeping requirements of the
Department found that many currently
bank supervisory agencies and
unregulated government securities
maintenance and preservation of
brokers and dealers are affiliated with
records on securities positions and
registered brokers or dealers that must
associated persons will protect
comply with the SEC rules, or with
investors and is consistent with the
registered municipal securities dealers
public interest.
that must comply with similar rules.
4. Section 404.5. This section requires
These communities generally favored
registered government securities brokers
adoption of recordkeeping and record
and dealers to comply with SEC Rule
preservation rules that follow the SEC
17a-13,76 requiring a quarterly count of
rules.
all securities, verification of securities
3. Section 404.4. This section provides records and comparison of the count
that financial institutions that are
and records. Although the count portion
government securities brokers and
of the rule is written in terms of physical
dealers subject to specified
securities,
recordkeeping rules of their appropriate accountingthe portion relating to
for securities not in a
regulatory agency,73 are exempt from
dealer’s possession requires the
the recordkeeping and preservation
of a count
requirements of Part 404, except for two equivalent The rule is of book-entry
securities.
types of books and records. Specifically, check on the accuracyan important
of a firm’s
such financial institutions w'ould be
operations and recordkeeping and as
required to maintain records pertaining such is an important aspect of investor
to securities positions and to associated protection.
persons of such financial institution.74
5. Section 404.6. This section requires
Both types of records are already
financial institutions that are
required of bank municipal securities
securities brokers or dealers
dealers.75 Position records are essential governmentannual counts of book-entry
to conduct
if a dealer is accurately to keep track of and definitive government securities
its holdings and their locations, and are held for customers and to verify and
the key to any assessment by an
reconcile records.
institutions
appropriate regulatory agency of the risk hold securities for Financial of customer
a variety
of a dealer operation within a financial purposes, frequently transferring
institution. Maintenance of associated
person records is needed to protect the customer securities held by virtue of the
dealer function to the safekeeping and
integrity of the market in government
trust departments. Trust department
securities by enabling financial
securities are, by state and federal
institutions and their regulators to locate and examination policy, required law
persons whose past activities make their periodically to be reconciled to customer
participation in the market as brokers or accounts.77
dealers questionable and to take
Proposed Part 450 of these regulations
appropriate action with respect to such
would impose periodic count and
persons.
related requirements for custodial
This partial exemption from the
holdings of government securities by
recordkeeping and record retention
financial institutions that are not
requirements recognizes that these
financial institutions are already subject government securities brokers or
dealers. This rule requires financial
to federal supervision, which explicitly
institutions that are government
includes recordkeeping requirements
securities brokers or dealers not exempt
relating to securities activities.
from regulation pursuant to Part 401, to
Requiring these institutions to follow
count, reconcile and verify annually all
government securities held for
73 See 12 CFR Part 12 (Office of the Comptroller
customers outside of trust departments.
of the Currency); 12 CFR Part 208 (Board of
The count of book-entry securities and
Governors of the Federal Reserve System); 12 CFR
Part 344 (Federal Deposit Insurance Corporation).
of definitive securities not in the
Section 404.4 provides that such regulations are to
financial institution’s possession
be complied with without regard to the exemptions be accomplished by verifying the should
therein for transactions in U.S. government or
financial institution’s records with those
federal agency obligations, 12 CFR 12.7(a), 12 CFR
2Q8.8(k)(6)(i), 12 CFR 344.7(a).
of the depositories, depository
74 See discussion of records concerning
institutions or Federal Reserve Bank
associated persons at § 400.4 above.
75 See Municipal Securities Rulemaking Board
Rule G-8; Office of the Comptroller of the Currency,
Comptroller’s Handbook for National Bank
Examiners, | 204.1, at 6 (August 1S85).

78 Section 240.17a-13.
77 See, e.g.. Comptroller’s Handbook for National
Trust Examiners, § 401.4.

5875

that hold securities accounts for the
financial institution.

F. Part 405. Reporting and Audit
Requirements.

The reporting and audit regulation
generally follows the provisions of SEC
Rule3 17a-5,17a-8 and 17a-ll.78*
Registered government securities
brokers and dealers that clear
transactions or carry customer accounts
will be required to file monthly reports
similar to Part I of the current SEC
FOCUS report (Form X-17a-5, § 249.817
of this title] demonstrating compliance
with capital adequacy requirements. All
registered government securities brokers
and dealers will be required to file
quarterly reports containing unaudited
financial statements, and an annual
report certified by an independent
public accountant. The accountant’s
report is to include, among other things,
schedules concerning liquid capital and
customer reserve requirements and a
report on internal accounting controls,
including any material inadequacies in
those controls. Financial institutions
that are government securities brokers
or dealers will, with one exception, be
exempt from reporting requirements
being imposed on nonfinancial
government securities brokers and
dealers.
1. Section 405.1. Compliance with
Rules 17a~5,17a~3 and 17a-ll by
registered brokers and dealers who are
also government securities brokers and
dealers will constitute compliance with
the reporting and audit regulations.
Since registered brokers or dealers will
continue to be required to determine net
capital according to SEC Rule 15c3-i,73
additional reporting and audit
requirements are not necessary.
The Department has determined that
the additional burden that would be
created by requiring financial institution
government securities brokers and
dealers to comply with additional
reporting requirements is unnecessary.
Financial institutions are subject to
regular capital reporting requirements,80
and are also subject to regular
examination by supervisory agencies.
Moreover, the Department proposes to
exempt financial institution government
securities brokers and dealers from the
capital adequacy requirements of Part
402 of these regulations.81 Government
78 Sections 240.17a-5, .17a-8, .17a-ll.
78 Section 240.15c3-l, § 402.1 of the proposed
regulation.
80 See, e.g., 12 U.S.C. 181, relating to call reports,
and regulations thereunder.
81 See I 402.1(c) of the proposed regulations.

5678

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

(c) All registered government
securities brokers and dealers must file
audited annual financial statements
certified by an independent public
accountant;
(d) Registered government securities
brokers and dealers other than
introducing brokers must send investors
an annual audited statement of financial
condition (including a footnote
concerning capital adequacy and a
statement that audited financial
statements and any audit report
commenting on material inadequacies
are available for inspection), and an
unaudited statement as of the date six
months from the date of the audited
statement;
(e) Registered government securities
brokers and dealers must engage an
independent public accountant to
conduct an annual audit of the
registered government securities broker
or dealer, and must file a statement
concerning such engagement, and, if
applicable, the termination of the
engagement and replacement of
auditors;
(f) Annual financial statements must
be audited by an independent public
accountant according to generally
accepted auditing principles;
(g) The audit must be sufficient to
enable the auditor to comment on
material inadequacies, if any, in the
accounting system, internal accounting
controls, procedures for safeguarding
securities, and in obtaining and
maintaining possession or control of
customer securities; and
(h) Material inadequacies must be
reported within 24 hours of the time the
auditor notifies the chief financial
officer of the condition.
The proposed regulation provides that
the SEC may declare effective a plan by
a self-regulatory organization under
which filings may be made with the
designated examining authority rather
than the Commission. The Department
anticipates that the Commission will
approve such plans.
3. Section 405.3. This rule provides
that registered government securities
brokers and dealers must comply with
SEC Rule 17a-ll, 80 concerning early
warning to the Commission and
designated examining authorities of
capital difficulties. The rule, as
modified, provides that if a registered
government securities broker’s or
dealer’s liquid capital falls below the
required level established in § 402.2 of
02 Section 240.17a-8.
the regulations, the firm shall give notice
83 Section 240.17a-5.
to the Commission and the appropriate
84 Section 15C(b)(l)(B) [15 U.S.C. 78o-5(b)(l)(B)].
self-regulatory organization of that fact

securities brokers and dealers that are
financial institutions will be subject to
the proposed regulation concerning
reporting of foreign currency
transactions, as are registered brokers
and dealers under SEC Rule 17a-8.82
The section provides that all
requirements of the part, except the
reporting requirements, will become
effective on July 25,1987. Therefore, for
example, registered government
securities brokers and dealers will be
required to have engaged an
independent public accountant by that
date. The monthly reporting requirement
is delayed until the first month within
which a firm becomes subject to the
capital adequacy requirements, which
under this proposal will be October,
1987. Registered government securities
brokers and dealers will be required to
fiie unaudited quarterly reports for the
quarter ending September 30,1987, and
will be required to file quarterly reports
on the appropriate form starting with the
quarter within which they first become
subject to the capital adequacy rules,
which under this proposal will be the
quarter ending December 31,1987.
2. Section 405.2. This section
establishes the requirements for
financial reporting by and audit of
registered government securities brokers
and dealers. It provides that, with
limited modifications, registered
government securities brokers and
dealers must comply with SEC Rule 17a5.83 The Department’s discussions with
the SEC, the self-regulatory
organizations, government securities
brokers and dealers, and
representatives of the accounting
profession, all indicated that these
requirements are appropriate to meet
the purposes of the Act and feasible to
implement without excessive burden.
The requirement for annual certified
financial statements is statutory.84
The major provisions of Rule 17a-5, as
modified, are:
(a) Registered government securities
brokers and dealers that clear
transactions or carry customer accounts
must file monthly Part I of Form G405 85*(§ 449.5 of this chapter), showing
liquid capital and total haircuts
calculations;
(b) All registered government
securities brokers and dealers must file
quarterly Part II or Part IIA of Form G405, consisting largely of unaudited
financial statements;

88 The version of the SEC FOCUS Report
applicable to registered government securities
brokers and dealers.

86 Section 240.17a-ll.

on the day it occurs. Within 24 hours,
the registered government securities
broker or dealer must also file a Part II
or IIA of Form G-405.
In addition, if liquid capital falls
below 150 percent of total haircuts,
determined in accordance with § 402.2
of the regulation, the registered
government securities broker or dealer
is required to file Part II or Part IIA
monthly until liquid capital stays above
the 150 percent level for three
consecutive months. The purpose of this
regulation, in coordination with other
early warning regulations that the selfregulatory organizations are expected to
adopt, is to allow the registered
government securities broker or dealer
and the enforcement authorities an
opportunity to alter the firm’s business
practices to bring it back into
compliance, and to protect customers,
without requiring a shut-down or
complete liquidation of the firm's
business.
Section 405.3 also requires notice to
the Commission and the appropriate
self-regulatory organization of failure to
keep the books and records required by
§ 404.2 of the regulations or upon
discovery or notification by an
independent public accountant of a
material inadequacy, as defined in Rule
17a-5(g).87
4. Section 405.4. This section requires
registered government securities brokers
and dealers and government securities
brokers and dealers that are financial
institutions to comply with the
requirements of 31 CFR Part 103,
concerning currency and foreign
transactions. The effect of this
requirement, which parallels Rule 17a8 88 for registered brokers or dealers, is
that the regulations are enforceable
under the Act as well as under the
Currency and Foreign Transactions
Reporting Act (the Bank Secrecy Act).89

G. Part 450. Custodial Holdings of
Government Securities by Depository
Institutions

Part 450 sets out regulations
applicable to depository institutions that
hold government securities for customer
accounts, whether directly or through
correspondent banks, trust companies,
Federal Reserve Banks, or other
custodial arrangements, but do not fall
within the definition of a government
securities broker or dealer. These
regulations provide custody,
recordkeeping, and other requirements
87 Section 240.17a-5(g).
88 Section 240.17a-8.
08 Pub. L. No. 91-508, Title D. 84 Stat. Ilia as
amended (31 U.S.C. 5311-23).

ssmssSSSE

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1887 / Proposed Rules

applicable to government securities held
for customers, including those
purchased or sold subject to resale or
repurchase. Depository institutions that
are exempt from the requirements of
Section 15C of the Act under Part 401 of
these regulations, as well as certain
depository institutions that are
government securities brokers or dealers
(see § 403.5) would also be subject to the
Part 450 regulations.
Depository institutions often provide
custody or safekeeping services
involving the purchase of government
securities for a customer. Depending on
the size and geographic location of the
depository institution, these securities
may be held in a custody account
maintained at a correspondent bank for
the depository institution. If the
securities are issued only in book-entry
form, then the depository institution or
its correspondent will generally
maintain such securities in. a securities
account on the books of a Federal
Reserve Bank.
There currently is no explicit
regulatory or supervisory framework
governing the practices of depository
institutions providing custodial or
safekeeping services for customers
except where securities are held in a
fiduciary capacity. Without such
standards, there is the potential for
inadvertent or other actions that can
harm customers. The development and
increasing use of certain types of
transactions involving these securities,
such as due bills, suggests the potential
for problems may be increasing. The
GSA therefore mandates promulgation
of more explicit standards of conduct
which will help the supervisory agencies
assure that all institutions conform to
good business practices in this area. The
Department believes that the proposed
regulations largely codify existing
practices of responsible financial
institutions.
1. Section 450.1. This section states
that the Part 450 regulations apply to all
depository institutions that hold
government securities for customers,
including in particular those who are
exempt from regulation as government
securities brokers or dealers under Part
401 of the proposed regulations. Unlike
the regulations under subchapter A, the
regulations under part 450 apply to
credit unions.
2. Section 450.2. This section defines
the terms “appropriate regulatory
agency,” “customer,” “depository
institution,” “fiduciary capacity” and
“government securities” for the
purposes of this subchapter. The
definition of appropriate regulatory
agency makes explicit the statutory
determination that, except in the case of

federally-chartered or federally-insured
credit unions for which the NCUA is the
appropriate regulatory agency, where
another agency is not explicitly
designated in section 3(a)(34)(G) of the
Act, the SEC is the appropriate
regulatory agency. This would be the
case with respect to state- chartered ncnfederally insured banks, thrift
institutions, and credit unions.
References to the NCUA in Title II of the
GSA as an agency whose standards
might substitute for the Secretary’s
make it clear that, for the purposes of
Title II, NCUA was meant to be
considered an appropriate regulatory
agency. The definition also reflects the
fact that the Federal Home Loan Bank
Board will act on behalf of the Federal
Savings and Loan Insurance
Corporation,
The customer definition is meant to
ensure that repurchase agreement
counterparties that are investors, rather
than brokers or dealers, are protected
by the provisions of this part. The
definition of fiduciary capacity, which in
essence requires that the depository
institution have the power to exercise
discretion, is substantially the same as
the definition of “fiduciary” in 12 CFR
9.1, concerning fiduciary powers of
national banks. The definition of
“government securities" notes that, for
purposes of Part 459, off-exchange puts,
calls, straddles, options or privileges on
government securities are not
themselves government securities.
3. Section 450.3. This section provides
an exemption from the regulations of
Part 450 for government securities held
in a fiduciary capacity by certain
depository institutions or in a trust
department in such an institution. The
GSA provides that, prior to adopting
regulations under Title II, the Secretary
shall determine whether the rules and
standards of the appropriate regulatory
agencies and the National Credit Union
Administration Board adequately
protect government securities held for
customers by depository institutions
subject to their jurisdiction. The
Department was not able to make such
a determination with regard to custodial
holdings generally. As described below,
however, it appears that holdings of
government securities in a fiduciary
capacity by depository institutions are
adequately regulated by depository
institutions subject to the supervision of
certain of the appropriate regulatory
agencies. This determination does not
extend to the rules and standards of the
National Credit Union Administration
Board, since credit unions generally do
not exercise trust powers, and the Board
does not generally regulate fiduciary
activities.

5077

Based on the information provided by
the appropriate regulatory agencies and
on the Department’s own analysis, the
Department has determined that
holdings of government securities in a
fiduciary capacity by depository
institutions under the regulatory
jurisdiction, of the appropriate regulatory
agencies are adequately regulated.80
Such depository institutions are
generally subject either to state or
federal laws and regulations governing
the safekeeping of fiduciary assets. They
are also subject to examination
procedures that generally require (i)
review of the institution's systems and
procedures to ensure that assets are
adequately protected; (ii) review of
applicable laws, regulations, and
fiduciary principles governing the
safeguarding of assets; (iii) review of the
institution’s accounting system to insure
that records are accurate and reliable;
and (iv) review of the adequacy of the
institution’s audit program. Accordingly,
such depository institutions are exempt
from | 450.4 with regard to their
fiduciary holdings of government
securities, provided they adhere to the
applicable requirements imposed by
their appropriate regulatory agencies.
This exemption also extends to holdings
of government securities for customers
in a custodial, capacity by such
depository institutions, as long as such
holdings are within the trust department
and the depository institution agrees,
with respect to such custodial holdings,
to adhere to the rules applicable to
securities held in a fiduciary capacity.
The Department does not anticipate
that subsequent modifications of the
applicable rules and standards will
make this exemption inappropriate.
However, the Department expects the
regulatory agencies to inform the
Department of any material revisions of
such rules and standards.
4. Section 450.4. Section 450.4 sets out
basic requirements for custodial
holdings of government securities by
depository institutions. The most
fundamental of these safeguards, set out9
0
90 Letter from A. David Meadows, Associate
Director, Division of Bank Supervision, Federal
Deposit Insurance Corporation to William J.
Bremner, Deputy Assistant Secretary (Federal
Finance), Treasury Department (Jan. 28,1987); Letter
from Owen Carney, Director, Investment Securities
Division, Office of the Comptroller of the Currency
to William J. Bremner (Jan. 17,1987): Letter from
Robert S. Piotkin, Assistant Director, Division of
Banking Supervision and Regulation, Board of
Governors of the Federal Reserve System to
William J. Bremner (Jan. 18.19871; Letter from
Robert S. Piotkin to Mary Ann Cadziala, Assistant
General Counsel (Banking &Finance). Treasury
Department (Dec. 22,1988); Memorandum from
Owen Carney to Mary Ann Cadziala (Nov. 28.
1988).

5878

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

at §§ 450.4(a) and (b), are the
requirements that customers’ securities
be kept separate from those of the
depository institution, that the
depository institution maintain
possession or control of customers’
securities and that customers’ securities
be kept free of all liens unless expressly
agreed to in writing by the customer.
This requirement applies both to
securities maintained in definitive
(physical) form and securities
maintained in book-entry form. In the
case of physical securities, this might be
accomplished by safekeeping in a
separate part of the depository
institution’s vault or by delivery to
another institution. In the case of bookentry securities, a depository institution
would need to maintain on its own
records separate securities accounts for
each customer, on the one hand, and
separate accounts for securities owned
by the depository institution on the
other. Similar account separation would
also be necessary for each level in any
chain of correspondent relationships
through which government securities are
being maintained. Where government
securities are being maintained for
customers at a Federal Reserve Bank, a
correspondent bank or other custodian,
the depository institution would need to
instruct such entity to maintain
possession or control of such securities
free of any charge, lien, or claim of any
kind in favor of the correspondent or
other custodian or any persons claiming
through them. To the extent it has
received such an instruction, the
correspondent bank or other custodian
would be required to comply with Part
450 with respect to its custody of those
securities held for customers of the
depository institution, as well as
securities held directly for customers of
the correspondent.
Section 450.4(c) imposes a number of
recordkeeping requirements on
depository institutions holding securities
for customers. Correspondent banks and
other custodians of both proprietary
government securities of a depository
institution as well as government
securities belonging to customers of that
depository institution could comply with
these requirements by maintaining
separate sets of records, one reflecting
securities held for the depository
institution’s own account and another
reflecting securities held for the account
of the depository institution’s customers.
The depository institution would be
responsible for maintaining records
identifying the interests of each
customer in the securities so held.
Section 450.4(d) requires periodic
counts of government securities held for

customers in both physical and book
entry form. For definitive securities not
in the possession of the depository
institution and for all book-entry
securities, the count would be
accomplished by verifying the
depository institution’s records with
those of the custodial entities on whose
books the depository institution has a
securities account. Such entities include
depositories, correspondent banks, and
Federal Reserve Banks.
The frequency of the required counts
should be determined by the scope of
the depository institution’s custodial
operations, the volume of its holdings,
and the frequency of delivery and
receipt of cash or securities. For
example, a small bank holding
government securities for a few
relatively inactive customers might
conduct annual counts. On the other
hand, a bank that safekeeps government
securities for active traders might need
to conduct counts weekly or more
frequently.
The requirements set forth in § 450.4
are similar to, but less burdensome than,
the requirements imposed on trust
departments through the regulatory and
examination process. Compliance with
these requirements should not add
significantly to the cost of providing
custodial services.
III. E xecu tive O rder 12231; R egulatory
F lexib ility Act; B urden on C om petition

Section 402 of the GSA requires that
these proposed regulations be published
within 120 days of the date of enactment
of that act.91*Therefore, the
9
Department’s opportunity to determine
the effect of these proposed regulations
on the economy, on small entities and
on competition, has been very limited.
However, based on discussions with
government securities brokers and
dealers, including those currently
subject to federal regulation and those
that are not, it is the Department’s view
that the proposed regulations will not
impose any significant cost on those
affected or affect the economy in a
manner other than that explicitly
required by the GSA. In addition, the
Department believes that the proposed
regulations will not have an
unnecessary or inappropriate
differential impact on classes of
government securities brokers or dealers
such as to create a burden on
competition.
In particular, the Department believes
the following decisions minimize the
regulatory burden to that required by
the statute:
91 GSA, supra note 0. | 402.

(a) To limit any additional burden on
registered brokers or dealers by
deeming compliance with existing rules
under Section 15 of the Act to be
compliance with the proposed rules,
with modifications related solely to
anticipation of the SEC’s proposed
rulemaking concerning repurchase
agreements;92
(b) To minimize additional burdens on
financial institutions by (1) providing
exemptions for activities deemed not to
be within the contemplation of the
statute and (2) largely accepting
compliance with existing financial
institution regulation as compliance
with the proposed rules;
(c) To adopt in large part the
possession or control, reporting and
audit regulations of the SEC, with which
many currently unregulated government
securities brokers and dealers are
familiar;
(d) To adopt in large part the
recordkeeping regulation of the SEC,
with which many currently unregulated
government securities brokers and
dealers are familiar and, in many cases,
already in compliance; and
(e) To treat dealers in all types of
government securities similarly and, in
particular, not to distinguish between
U.S. Treasury and agency securities
(except for certain mortgage backed
securities in which principal and interest
do not flow through to all holders on a
pro rata basis) for purposes of market
risk haircuts in the capital adequacy
requirement.
In addition, the Department believes
that the impact of these regulations will
be minimized because a large number of
potential registrants do not hold
customer securities and/or funds.
Finally, Florida’s recently enacted
requirement that government securities
brokers and dealers in that state register
with the Commission under section 15 of
the Act,93 as well as information
obtained from entities thought to be
unregistered government securities
brokers and dealers, suggest that many
of these entities are registering under
section 15 or are merging government
securities operations into already
registered brokers or dealers. Once an
entity has registered under section 15,
the proposed regulations will have
minimal additional impact.
Accordingly, the Department has
concluded that the proposed regulations
do not constitute a major regulation for
purposes of Executive Order 12291 and
that a regulatory impact analysis is not
92 Exchange Act Release No. 23602, 51FR 32658
(Sept. 15,1986).
99 Fla. Stat. § 517.12(16) (Supp. 1980).

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
required. Similarly, it is hereby certified
that the proposed regulations, if
adopted, will not have a significant
economic impact on a substantial
number of small entities. However, the
Department invites comments on these
determinations, particularly with respect
to the following:
(a) What entities will be affected by
the proposed regulations, and what
compliance costs will be incurred?
Commenters should consider the
statutory requirements and distinguish
among the sections of the proposed
regulations, particularly distinguishing
between the cost of being required to
have additional capital (if that would be
the result of compliance with the capital
adequacy requirement) and the cost of
developing and implementing systems to
comply with the regulations.
(b) What will be the effect on the
integrity, efficiency and liquidity of the
government securities market of
requiring government securities brokers
and dealers to maintain effective
possession or control of customer
securities? In particular, comments are
invited on the requirements in proposed
I 403.4 that repurchase agreements be
entered into only pursuant to written
agreement and that brokers or dealers
maintain intraday control of securities
that are the subject of term repurchase
transactions of under $5,000,000 per
customer.
(c) Will a substantial number of small
entities be affected by the regulations,
and if so to what extent? Commenters
should consider not only the potential
regulatory burden on small entities that
are government securities brokers or
dealers but also the potential benefits to
small investors that may arise from the
proposed regulations.
(d) Will the proposed regulations have
differential impacts on classes of
governm ent securities brokers or dealers
such that they would have an
unnecessary or inappropriate burden on
competition?
(e) Does the format of the regulations,
using cross-references to SEC
regulations for most rules applicable to
registered government securities brokers
and dealers and thereby adopting all
SEC interpretations, enhance the ability
of firms, particularly those already
familiar with SEC rules, to comply?
If, on the basis of comments received
and further investigation by the
Department, the Department determines
that the regulations constitute a major
rule or are likely to have a significant
economic impact on a substantial
number of small entities, the Department

will prepare and make available the
required Regulatory Impact or
Regulatory Flexibility Analysis.
The collection of information
requirements contained in this proposed
rule have been submitted to the Office
of Management and Budget pursuant to
section 3504(h) of the Paperwork
Reduction Act (44 U.S.C. 3504(h)).
Comments on these requirements should
be sent to the Office of Information and
Regulatory Affairs, Office of
Management and Budget, Attention
Desk Officer for the Department of the
Treasury, Washington, D.C. 20503, and

5S79

to the Department of the Treasury at the
address previously specified.

Appendix A—Example of Capital
Computation
Example (1). On October 31,1980 firm A’s
proprietary position contains a long position
of Treasury notes due November 15,1991
with a market value of $20 million and a short
position of Treasury notes due October 15,
1990 with a market value of $30 million. The
firm would enter these holdings on schedule
B,1 “Calculation of Net Immediate Positions
in Securities and Financings", in row F (3.5—
7-5 year maturity category for conventional
securities) as follows:

S chedule B.—C alculation o f N et Immediate P ositions
F inancings

in S ecurities and

[In millions of dollars]
Securities
positions

Financings
Maturity category

Long Short
(+ )
(-)

F 3.5-7.5 yr. (3-5.5 yr.)..

Long Short
(+ )
(-)
+ 2 0

Column No......................

1

Total securities
and financing
positions

-3 0
4

3

2

(+ )
+ 2 0

(1+ 3)
5

Offset
portions
(+ )

(-)
-3 0
(2+ 4)

+ 2 0

Net
immediate
positions
(+ /-)
-1 0

(5+6)
7

6

8

1987 with a market value of $50 million. This
where the net immediate position is the sum
of the positive and negative entries under
bill position has been financed by a $50
“Securities and Financing Positions’*and the million repurchase agreement terminating on
offset portion is the lesser of the absolute
August 14,1987. The firm would enter these
values of the positive and negative entries
holdings on schedule B, “Calculation of Net
under “Securities and Financing Positions."
Immediate Positions in Securities and
Example (2). On October 31,1986 firm A’s
Financings”, in row D (9-18 month maturity
proprietary position contains, in addition to
category for conventional securities) as
the positions given in Example 1, a long
follows:
position of Treasury bills due September 3,
S chedule B.—C alculation of N et Immediate P ositions in S ecurities and
F inancings
[In millions of dollars]
Financings
Maturity category

Long Short
(+ )
(-)

D 9-18 mn......................
Column No......................

-5 0
1

2

Securities
positions
Long Short
(-)
(+ )
+50
3

where the net immediate position is the sum
of the positive and negative entries under
“Securities and Financing Positions” and the
offset portion is the lesser of the absolute
values of the positive and negative entries
under “Securities and Financing Positions.”
Example (3). On October 31,1980 firm A’s
proprietary position contains, in addition to
the positions given in Examples 1 and 2, a
long position in commercial paper which has
received a rating in one of their three highest

4

Total securities
and financing
positions
(+ )

(-)

+50
d+3)
5

-5 0
(2+ 4)

Offset
portions
(+ )

6

Net
immediate
positions
(+ /->

+ 50

0

(5+6)
7

8

categories from two nationally recognized
statistical rating organizations and has a
market value of $70 million, and a long
position in a Eurodollar certificate of deposit
with a market value of $80 million. The
commercial paper matures on January 30,
1987, and the Eurodollar CD matures on
1Because Schedule A can only be filled out after
the haircut calculations are completed, it is located
in the last of these examples.

5680

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

February 13,1987. The firm’s proprietary
position also contains short positions in a
Treasury bill maturing on November 28,1986
with a market value of $100 million, a
domestic negotiable certificate of deposit
maturing on March 31,1987 with a market
value of $90 million, and commercial paper
which has not received a rating in one of
their three highest categories from at least
two nationally recognized statistical rating
S c h e d u l e B.— C a lc u l a t io n

of

values of the positive and negative entries
under “Securities and Financing Positions.”
The $40 million position in commercial paper
which is not rated in one of their three
highest categories by at least two rating
agencies is not entered on this schedule
because it is not a qualified money market
instrument. The haircut on this position
should be calculated as specified by the
Security and Exchange Commission’s Rule
15c3-l and entered on Schedule A under
“Other securities (use SEC factors).”
Example (4). On October 31,1986 firm A’s
proprietary position contains, in addition to
the positions given in Examples 1 and 3, long
positions in a coupon stripped from a U.S.
Treasury bond through the STRIPS program
and due November 15,1995 with a market
value of $50 million, and a coupon physically
stripped from a Treasury security in bearer
form due November 15,1988 with a market
value of $15 million. It also contains a short
position in a receipt based on a single coupon
or principal payment from a Treasury
security. The payment is due on November
15, 2001 and has a market value of $45
million. The firm would enter these holdings
of zero-coupon securities on schedule B,
“Calculation of Net Immediate Positions in
Securities and Financings”, in rows H, E, and
I (9-12 year, 1.5-3 year, and 12-21 year
maturity categories for zero-coupon
instruments), respectively, as follows:

organizations. This commercial paper has a
market value of $40 million and matures on
May 15,1987. The firm would enter the
holdings of the Treasury bill, the highly-rated
commercial paper, and the domestic and
Eurodollar CDs on Schedule B, "Calculation
of Net Immediate Positions in Securities and
Financings", in rows A, B, and C (0-44 day,
45-134 day, and 135 day-9 month maturity
categories for conventional securities), as
follows:

N e t Im m e d ia t e P o s it io n s
F in a n c in g s

S e c u r it ie s

in

and

On millions of dollars]
Financings
Maturity category

Long Short
(+ )
(-}

A 0-44 days...................
B 45-134 days...............
C 135 days-9 mn............
Column No.....................

Securities
positions
Long Short
(-)
(+ )

Total securities
and financing
positions
(+ )

-1 0 0

0

-1 0 0

0

-1 0 0

0

0

0

-9 0
(2+ 4)

0

+ 150
-9 0
(5+ 6)

-9 0
2

3

where the net immediate position is the sum
of the positive and negative entries under

(-)

Net
immediate
positions
(+ /-)

+ 150

+150

1
1

Offset
portions
(+ )

4

(1+ 3)
5

6

7

8

“Securities and Financing Positions” and the
offset portion is the lesser of the absolute

S c h e d u l e B.— C a lc u la tio n

of

N e t I m m e d ia t e Po s it io n s

in

S e c u r it ie s

and

F in a n c in g s

[In millions of dollars]
Financings
Maturity category

Long
(+ )

Short
(-)

Long
(+ )

E 1.5-3.5 yr. (1.5-3 yr.).................................................. .
H 15-30 yr. (9-12 yr.)................................... ...................
1 ( 1 2 - 2 1 yr.)..................................... ............................. .

Short
(-)

(+ )

+ 15
+50

1

4

3

2

proprietary position contains, in addition to
the positions given in Examples 1 through 4, a
long position in FNMA mortgage-backed
securities with a market value of $30 million,
and a short position in GNMA I adjustable
rate mortgage-backed securities with a
market value of $20 million. The firm would

S c h e d u l e B.— C a lc u la tio n

of

Offset
portions (+ )

(-)

+ 15
+50

0

0

0

0

0

-4 5
(2+ 4)

0

-4 5

Column No........................................................................

where the net immediate position is the sum
of the positive and negative entries under
“Securities and Financing Positions” and the
offset portion is the lesser of the absolute
values of the positive and negative entries
under “Securities and Financing Positions."
Example (5). On October 31,1988 firm A’s

Total securities and
financing positions

Securities
positions

N e t Im m e d ia t e Po s it io n s

in

(1+ 3)
5

7

6

Net
immediate
positions
(+ /-)
+15
+50
-4 5
(5+ 6)
8

enter these holdings of mortgage-backed
securities on schedule B, “Calculation of Net
Immediate Positions in Securities and
Financings”, in the rows marked MB and AR
(the categories for mortgage-backed and
adjustable rate mortgage-backed securities),
respectively, as follows:

S e c u r it ie s

and

F in a n c in g s

[In millions of dollars]
Financings
Maturity category

MB mortgage"backed......................................................
AR adjustable rate mortgage backed.............................

Long
(+ )

Short
(-)

Total securities and
financing positions

Securities
positions
Long
(+ )

Short
(-)

(+ )

(-)

+30

+ 30
-2 0

Offset
portions ( + )

0

(1+ 3)

0
-2 0

(2+ 4)

Net
immediate
positions
< + /-)

0

+30

0

-2 0

(5+ 6)

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules_____ 5681
S c h e d u l e B — C a lc u l a t io n

of

N e t Im m e d ia t e P o s it io n s

in

S e c u r it ie s

and

F in a n c in g s — C ontinued

[In millions of dollars]
Financings
Maturity category

Long
<+)

Column No........................................................................

where the net immediate position is the sum
of the positive and negative entries under
“Securities and Financing Positions” and the
offset portion is the lesser of the absolute
values of the positive and negative entries
under “Securities and Financing Positions.”
Example (6). On October 31,1986 firm A’s
proprietary position contains, in addition to

Total securities and
financing positions

Securities
positions

Short
(-)

Long
(+ )

5

4

the positions given in Examples 1 through 5, a
short position in the Treasury bond due
November 15,1998 with a market value of $30
million. The firm has partially financed the
short position by borrowing $25 million of the
bonds (market value). The borrowing
arrangement will terminate on April 30,1987.
The firm would enter this short position and

S c h e d u l e B.— C a lc u l a t io n

of

N e t I m m e d ia t e Po s it io n s

in

(-)

(+ )

3

2

1

Short
(-)

Offset
portions (+ )

Net
immediate
positions
(+ /-)
©

7

6

its financing on schedule B, “Calculation of
Net Immediate Positions in Securities and
Financings”, in rows G and C (7.5-15 year
and 4.5-9 month maturity categories for
conventional securities), respectively, as
follows:

S e c u r it ie s

and

F in a n c in g s

[In millions of dollars]
Financings
Maturity category

V-

C 135 days-9 mn.............................................................
G 7.5-15
(5.5-9 yr.)....................................................

Long
(+ )

Securities
positions

Short

Long

(-)

Total securities and
financing positions

Short
(-)

<+)

+25

(-)

<+)

-9 0
-3 0

Offset
portions (+ )

d+3)
5

where the net immediate position is the sum immediate position interim haircuts and the
government’s offset portion haircuts on the
of the positive and negative entries under
“Securities and Financing Positions” and the positions given in Examples 1 through 6, the
offset portions and the net immediate
offset portion is the lesser of the absolute
positions are carried to Schedule C and
values of the positive and negative entries
entered in columns 7 and 8 in their respective
under “Securities and Financing Positions."
The government’s offset
The financing in category C is combined with maturity categories. determined by taking the
portion haircuts are
the short position entered in category C in
percentage of the government’s offset
Example 3 to calculate the net immediate
portions given by the corresponding
position of —$65 million.
government’s offset portion factor. The
government’s offset portion haircut for
Schedule C
Example (7). To calculate the net
Sc h e d u l e C.— G o v e r n m e n t ’s O ff s e t P o r t io n

and

0

-9 0
-3 0
(2+4)
6

0

4

3

2

1

+25

Net
immediate
positions
( + /'- )
-6 5
-3 0
(5+6)
8

+25

7

maturity category C is $25 million x
0.08%=$0.02 million, or $20 thousand. The net
immediate position interim haircuts are
determined by taking the percentage of the
net immediate positions indicated by the
corresponding net immediate position factor.
The net immediate position interim haricut
for maturity category C is —$65 million X
0.20% = —$0.13 million, or —$130 thousand.
The completed Schedule C, “Governments
Portion and Net Immediate Position Interim
Haircuts Calculation," read as follows:

N e t Im m e d ia t e Po s it io n In t e r im H a ir c u t s C a l c u l a t io n

[Dollar amounts in millions]
Government’s offset portions
Maturity category

A 0-44 days........................................................................................
B 45-134 days...................................................................................

C 135 days-9 mn................................................................................
9-18 mn........................................................... ..............................
E 1.5-3.5 yr. (1.5-3 yr.)......................................................................
F 3.5-7.5 yr. (3-5.5 yr.)......................................................................
G 7.5-15 yr. (5.5-9 yr.).......................................................................
H 15-30 yr. (9-12 yr.).........................................................................
I (1 2 - 2 1 yr.).........................................................................................
J (over 21 yr.).....................................................................................

D

Amounts
(+ )

Factors
(percent)

0

None
0.05
0.08

Haircuts
(+ )

Net immediate positions
Amounts
(+ /-)

Factors
(percent)

0 .0 0 0 0

-1 0 0

None

0 .0 0 0 0

0 .1 2

Interim
haircuts
(+ /-)
0 .0 0 0 0

$0 . 0 2 0 0

+ 150
-6 5

0 .2 0

0 .1 0 0 0

0

0.45

0 .0 0 0 0

0 .0 0 0 0

+ 15

1 .1 0

0.0900

-1 0

2 .2 0

0 .0 0 0 0

0

0.50
0.45
0.90
1.55
1.50

0 .0 0 0 0

-3 0
+50
-4 5

0

2 .1 0

0 .0 0 0 0

0

3.30
5.00
7.75
11.25

+0.1650
- 0 .2 2 0 0
-0.99 00
+2.5000
-3.48 75

0

$25
50
0
20
0
0

0 .0 0 0 0

0 .2 0

+$0.1800
-0.13 00

0 .0 0 0 0

5682

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

S c h e d u l e C.— G o v e r n m e n t ’s O ff set Po r t io n

and

N e t Im m e d ia t e Po s it io n In t e r im H a ir c u t s CALCULATioN— Continued

[Dollar amounts in millions]
Net immediate positions

Government’s offset portions
Maturity category

Factors
(percent)

Amounts
(+ )

MB mortgage-backed security...........................................................
AR adjustable rate mortgage-backed security.................................

Haircuts
(+ )

0

of

3.30

-2 0

1 .1 0

+0.9900
- 0 .2 2 0 0

11

12

0 .2 1 0 0

Column No..........................................................................................

S c h e d u l e D.— C o n s o l id a t io n

+30

0 .0 0 0 0

Total Government’s offset portion haircut........................................

Schedule D
Example (8). On October 31,1986 firm A’s
proprietary position contains, in addition to
the immediate positions given in Examples 1
through 6, a short position in forward
contracts in GNMA I mortgage-backed
securities with a market value of $5 million.

Interim
haircuts
(+ /-)

0 .0 0 0 0

0.90
0.50

0

Factors
(percent)

Amounts
(+ /->

7

9

8

10

This haircut is then entered on Schedule D,
“Consolidation of Net Immediate Position
Interim Haircuts with Gross Futures and
Options Interim Haircuts,” in the row marked
MB (the category for mortgage-backed
securities), as follows:

The forward contracts mature January 15,
1987. The gross futures and forward interim
haircut would be calculated by taking the
negative of 3.30% (the net position haircut
factor for mortgage-backed securities) of the
market value of the position, $5 million x
3.30% = $0.1650 million, or —$165 thousand.

N et Im m e d ia t e Po s it io n In t e r im H a ir c u t s W it h G r o s s F u t u r e s
H a ir c u t s

and

O p t io n s In t e r im

[Dollar amounts in millions]
Net
immediate
position
interim
haircuts
(+ /-)

Maturity category

MB mortgage backed securities......................
Column No.......................................................

where the positive aggregate interim haircut
is the sum of all positive net immediate
position, gross futures and forward, and gross
options interim haircuts in category MB, and
the negative aggregate interim haircut is the
sum of all negative net immediate position,
gross futures and forward, and gross options
interim haircuts in category MB. The futures
and options offset portion (column 19) is the
smaller of the absolute values and the
positive and negative aggregate interim
haircuts, and the residual position interim
haircut (column 20) is the sum of the positive
S c h e d u l e D.— C o n s o l id a t io n

of

Gross interim haircuts
Futures and forward
(-)

(+ )

+$990.0
13

12

Futures and
options
offset
portions (+ )

Options
(+ )

-$1 65 .0
14

Aggregate interim
haircuts
(+ )

(-)

15

16

and negative aggregate interim haircuts. The
net immediate position interim haircut is
carried over from column 12 of Schedule C.
Example (9). On October 31.1986 firm A’s
proprietary position contains, in addition to
the positions given in Examples 1 through 8, a
long position of 25 futures contracts on
Treasury bills with a closing price of 94.88.
The futures contracts mature in March 1987.
The market value of the 25 contracts is $24.68
million. The gross futures and forward
interim haircut is calculated by taking 0.12%
(the net position haircut factor for maturity

$990.0
17

(-)

$165.0
19

-$1 65 .0
18

Residual
position
interim
haircuts
(+ /-)
+$825.0
20

category B, 45-135 days) of the market value
of the position, $24.68 million X 0.12%=
$.0296 million, or $29.6 thousand. Since the
sum of the remaining time to maturity of the
futures contract and the maturity of the
underlying security is about 7.5 months, this
haircut is entered in row C (4.5-9 month
maturity category for conventional securities)
of Schedule D, “Consolidation of Net
Immediate Position Interim Haircuts with
Gross Futures and Options Interim Haircuts,”
as follows:

N e t Im m e d ia t e P o s it io n I n t e r im H a ir c u t s W it h G r o s s F u t u r e s
H a ir c u t s

and

O p t io n s In t e r im

[Dollar amounts in millions]

Maturity category

C 135 days-9 mn..............................................
Column N..........................................................

Net
immediate
position
interim
haircuts
(+ /-)
-$1 30 .0
12

Gross interim haircuts
Futures and forward
(+ )
+$29.6
13

(-)

Options
(+ )

14

Aggregate interim
haircuts

15

(4-)

(-)

16

+$29.6
17

(-)

-$1 39 .0
18

Futures and
options
offset
portions (+ )

$29.6
19

Residual
position
interim
haircuts
(+ /-)
-$1 00 .4
20

Federal Register / Vol. 52, No. 36-57 / Wednesday* February 25, 1987 / Proposed Rules_____ 5683
where the positive aggregate interim haircut
is the sum of all positive net immediate
position, gross futures and forward, and gross
options interim haircuts in category C, and
the negative aggregate interim haircut is the
sum of ail negative net immediate position,
gross futures and forward, and gross options
interim haircuts in category C. The futures
and options offset portion (column 19) is the
smaller of the absolute values and the
positive and negative aggregate interim
haircuts, and the residual position interim
haircut (column 20) is the sum of the positive
and negative aggregate interim haircuts. The
net immediate position interim haircut is
carried over from column 12 of Schedule C.
Example (10). On October 31,1988 firm A’s
proprietary position contains, in addition to
the positions given in Examples 1 through 9,
25 purchased put option contracts on
Treasury bill futures. The options expire in
March 1987 and have an exercise price of
94.75. The closing premium on these options

for October 31 is $0.19. The interim haircut on
a purchased put is the lesser of the market
value of the option contracts or the gross
futures and forward interim haircut on the
underlying bill futures contracts. The market
value of the option contracts is found by
multiplying the premium per $100 par value
times the total par value of the underlying
futures contracts, ($0.19/$100) X $25 million
= $0,475 million, or $47.5 thousand. The gross
futures and forward interim haircut on the
underlying futures contract was calculated in
Example 9 to be $29.6 thousand. The interim
haircut on these purchased puts is equal to
the negative of the lesser of these two values,
—$29.6 thousand. This haircut is entered as
follows on Schedule D, “Consolidation of Net
Immediate Position Interim Haircuts with
Gross Futures and Options Interim Haircuts,”
in row C (4.5-9 month maturity category for
conventional securities) as were the
underlying bill futures contracts:

S c h e d u le D.— C o n s o l id a t io n o f N e t Im m e d ia t e Po s it io n In t e r im H a ir c u t s
G r o s s F u t u r e s a n d O p t io n s In t e r im H a ir c u t s

w it h

[In thousands of dollars]

Maturity
category

Net
immedi­
ate
position
interim
haircuts
(+ /-)

Gross interim haircuts
Futures &
forward
(+ )

C 135 days-9
mn.................. -1 3 0 .0 +29.6
Column No.........
13
12

(-)

14

Aggregate
interim haircuts

Options

(+ )

15

where the positive aggregate interim haircut
is the sum of all positive net immediate
position, gross futures and forward, and gross
options interim haircuts in category C, and
the negative aggregate interim haircut is the
sum of all negative net immediate position,
gross futures and forward, and gross options
interim haircut in category C. The futures and
options offset portion (column 19) is the
smaller of the absolute values of the positive
and negative aggregate interim haircuts, and
the residual position interim haircut (column
20) is the sum of the positive, and negative
aggregate interim haircuts. The net immediate
position interim haircut is carried over from
column 12 of Schedule C.
Example (11). On October 31,1986 firm A’s
proprietary position contains, in addition to
the positions given in Examples 1 through 10,
40 purchased call option contracts on
Treasury bonds due May 2016. The call
options expire in December 1987 and have an
exercise price of $94. The cash price of the
bond is $95.78125. The closing premium on
these options for October 31 is $2.18 (in

(-)

(+ )

Futures
options
offset
portions

Residual
position
interim
haircuts

(+ )

(+ /-)

(-)

-2 9 .6 +29.6 -1 5 9 .6
17
16
18

29.6
19

-1 3 0 .0
20

64ths). The interim haircut on a purchased
call is the lesser of the market value of the
option contracts or the net immediate
position interim haircut on the underlying
bonds. The market value of the option
contracts is found by multiplying the
premium per $100 par value of the bond times
the total par value of the underlying bonds
($2.28125/$100) X $4 million = $0.09125
million, or $91,250 thousand. The net
immediate position interim haircut on the
underlying bonds is found by taking 5.00%
(the net position haircut factor for maturity
category H, 15-30 years for conventional
securities) of the market value of the position,
5.00% X 40 X $95.78125/$100 = $191.8
thousand. The interim haircut on these
purchased calls is equal to the lesser of these
two values, $91.3 thousand. This haircut is
entered on Schedule D, “Consolidation of Net
Immediate Position Interim Haircuts with
Gross Futures and Options Interim Haircuts,"
in row H (15-30 year maturity category for
conventional securities), as follows:

Federal Registeir / ¥ol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

5S84

S c h e d u l e D.— C o n s o l id a t io n o f N e t Im m e d ia t e Po s it io n In t e r im H a ir c u t s
G r o s s F u t u r e s a n d O p tio n s I n t e r im H a ir c u t s

w it h

[In thousands of dollars]

Maturity
category

Net
Gross interim haircuts
immediate
ruiures a
position
upuons
interim
forward
haircuts
(+ )
(-)
(+ /-)
(+ ) ( - )

H 15-30 yr. (91 2 yr.)............ +2,500.0
Column No........
12

13

14

S c h e d u le D.— Co n s o l id a t io n o f N et
Im m e d ia t e Po s it io n I n t e r im H a ir c u t s
W it h G r o s s F u t u r e s a n d O p tio n s
In t e r im H a ir c u t s
[In thousands of dollars]

A 0-44 days.................
B 45-134 days............
C 135 days-9 mn........
D 9-18 mn.................
E 1 .5-3.5 yr. (1.5-3
y r )............................
3.5-7.S yr. (3-5.5
y r )............................
7.5-15 yr (5.5-9
y r )............................
H 15-30 yr. (9-12 yr.)..
I ( 1 2 - 2 1 yr.)..................
J (over 21 yr.)..............
MB mortgage-backed
security....................

F
G

(+)

(-)

Futures &
options
offset
portions
(+ )

Residual
position
interim
haircuts
(+ /-)

S c h e d u l e E — C a lc u l a t io n o f H e d g in g
D is a ll o w a n c e H a ir c u t s W h e n N e t ­
t in g H a ir c u t s A c r o s s C a t e g o r ie s
[In thousands of dollars]
20

+ 91.3
15

where the positive aggregate interim haircut
is the sum of all positive net immediate
position, gross futures and forward, and gross
options interim haircuts in category H, and
the negative aggregate interim haircut is the
sum of all negative net immediate position,
gross futures and forward, and gross options
interim haircuts in category H. The futures
and options offset portion (column 19) is the
smaller of the absolute values of the positive
and negative aggregate interim haircuts, and
the resideual position interim haircut (column
20) is the sum of the positive and negative
aggregate interim haircuts. The net immediate
position interim haircut is carried over from
column 12 of Schedule C.
Example (12). To calculate the total futures
and options offset haircut, the futures and
options offset haircut factor of 20 per cent is
multiplied by the sum of all the futures and
options offset portions, which have been
entered in column 19. This calculation would
be entered on Schedule D, “Consolidation of
Net Immediate Position Interim Haircuts with
Gross Futures and Options Interim Haircuts,"
as follows:

Maturity category

Aggregate
interim haircuts

category of Schedule E, “Calculation of
Hedging Disallowance Haircuts When
Netting Haircuts Across Categories,” as
follows:

Futures &
options
offset
portions
(+ )

Residual
position
interim
haircuts
(+ /-)

0 .0

0 .0

29.6

+ 180.0
-1 3 0 .0

0 .0

0 .0

0 .0

0 .0

+ 165.0

0 .0

-

2 2 0 .0

0 .0

-9 9 0 .0
+2,591.3
-3,487.5

0 .0

0 .0

0 .0
0 .0

165.0

+825.0

16

+2,591.3
17

0 .0

18

0 .0

19

20

S c h e d u l e D.— C o n s o l id a t io n o f N e t
Im m e d ia t e P o s it io n In t e r im H a ir c u t s
W it h G r o s s F u t u r e s a n d O p t io n s
In t e r im H a ir c u t s — Continued
[In thousands of dollars]

Maturity category

AR adjustable rate
mortgage-backed....
Total futures
and options
offset
portion...........
Factor (percent)..........
Total futures
and options
offset
haircut...........
Column No...................

Futures &
options
offset
portions
(+ )

0 .0

Residual
position
interim
haircuts
(+ /-)

-

Maturity
category

% disallowance

Hedging
disallow­
ance
haircuts
(+ )

E 1 .5-3.5
yr. (1.5-3
+ 165.0
y r ) ............
F 3.S-7.5
yr. (3-5.5
yr. (3-5.5
- 2 2 0 .0
yr) ............
G 7.5-15 yr.
(5.9-9 yr.)..
-9 9 0 .0
H 15-30 yr.
(9-12 yr.)... +2,591.3
Column No...
20

Net
residual
position
interim
haircuts
(+ /-)

33.0

0 .0

0 .0

-5 5 .0

198.0
0 .0

0 .0

+ 1,601.3
22

21

2 2 0 .0

194.6
X20

38.92
19

Residual
position
interim
haircuts
(+ /-)

+2,591.3

20,

Schedule E
Example (13). [i] Schedule E is used to
calculate the hedging disallowance haircuts,
the net residual position interim haircuts, the
total hedging disallowance haircut, and the
residual net position haircut. The residual
position interim haircut for each category is
carried forward from Schedule D, column 20
to Schedule E, column 20. For firm A’s
positions given in Examples 1 through 11,
categories E and F, with residual position
interim haircuts of +$165.0 thousand and
—$220.0 thousand, are first offset, leaving a
net residual position interim haircut of
—$55.0 thousand (+$165.0 thousand +
—$220.0 thousand) in category F and a
hedging disallowance haircut of $33.0
thousand in category E (20% X $165.0
thousand = $33.0 thousand). The second
offset is between categories G and H, with
residual position interim haircuts of —$990.0
thousand and +$2,591.3 thousand, leaving a
net residual position interim haircut of
+$1,601.3 thousand in category H and a
hedging disallowance haircut of $198
thousand in category G. The result of these
calculations would be recorded in rows E. F,
G, and H of the 20 per cent disallowance

[ii] With completion of offsetting of
category pairs between which 20% hedging
disallowance is permitted, categories
between which 30% hedging disallowance is
permitted are offset. Of the permissible
category pairings at the 30% disallowance
level, only categories B and C contain
residual position interim haircuts or net
residual position interim haricuts which canbe offset. Category B’s residual interim
position haircut of +$180 thousand is offset
against category C’s residual position interim
haircut of —$130 thousand, leaving a net
residual position interim haircut of +$50
thousand in category B and a hedging
disallowance haircut of $39 thousand in
category C. The results of this calculation
would be shown in rows B and C of Schedule
E, “Calculation of Hedging Disallowance
Haircuts when Netting Haircuts across
Categories,” as follows:
S c h e d u l e E.— C a lc u l a t io n o f H e d g in g
D is a ll o w a n c e H a ir c u t s W h e n N e t ­
t in g H a ir c u t s A c r o s s C a t e g o r ie s
[In thousands of dollars]
20

Maturity
category

B 45-134
days..............
C 135 days-9
mn.................

% disallowance

Residual
position Hedging
interim disallow­
ance
haircuts
haircuts
(+ /-)
(+ )

Net
residual
position
interim
haircuts
(+ /-)

+ 180.0

0 .0

+50.0

-1 3 0 .0

39.0

0 .0

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
S c h e d u l e E.— C a lc u l a t io n o f H ed g in g
D is a ll o w a n c e H a ir c u t s W h en N e t ­
tin g H a ir c u t s A c r o s s C a t e g o r ie s —

Continued
tin thousands of dollars]
20

Maturity
category

Column No........

% disallowance

Residual
position Hedging
interim disallow­
ance
haircuts
haircuts
(+ /-)
(+ )
20

23

Net
residual
position
interim
haircuts
< + /-)
24

[iii] Of the permissible category pairings at
the 40% disallowance level, categories F and
ME contain residual position interim haricuts

or net residual position interim haircuts
which can be offset. Category F’s net residual
interim position haircut of —$55 thousand is
offset against category MB’s residual position
interim haircut of +$825 thousand, leaving a
net residual position interim haircut of +$770
thousand in category MB and a hedging
disallowance haircut of $22 thousand in
category F. The second offset at the 40% level
is between categories H and I, where the net
residual position interim haircut of +$1,601.3
thousand in category H is offset against the
residual position interim haircut of —$3,487.5
thousand in category I, leaving a net residual
position interim haircut of —$1,886.2
thousand in category I and a hedging
disallowance haircut of $640.5 thousand in
category H. The results of these calculations
would be shown in rows F, H, I, and MB of
Schedule E, “Calculation of Hedging
Disallowance Haircuts When Netting
Haircuts Across Categories,” as follows:

S c h e d u l e E.— C a lc u la tio n o f H ed g in g D is a ll o w a n c e H a ir c u t s W hen N e tt in g
H a ir c u t s A c r o s s C a t e g o r ie s

5685

S c h e d u le
E.— C alc ulatio n
of
H edgin g D isa llo w a n c e H a ir c u ts
W hen N ettin g H a ir c u t s A c r o ss
C a t e g o r ie s — Continued
[In thousands of dollars]

AR adjustable rate
mortgage-backed........
Total hedging
disallowance
haircut...............

Quali­
fied
netting
interim
haircuts

(+ )

Maturity category

Hedging
disallow­
ance
haircuts

(+ )

0 .0

932.5

Residual net position
haircut..........................
Column No......................

2 2 0 .0

2,926.2
27

28

[In thousands of dollars]
%
disallow­
ance—Net
Position
Interim
Haircuts
(+ /-)
20

Residual
position
interim
haircuts
(+ /-)

40% disallowance

Schedule A

Example (14). On Schedule A, haircuts
from Schedules C through E and liquid
capital are entered, and the capital-torisk ratio is calculated. On October 31,
1986, Firm A has total ownership equity
F 3.5-7.S yr. (3-5.5 yrs.)..................
-5 5 .0
0.0 of $10,185.8 thousand and subordinated
H 15-30 yr. (9-12 yr.)......................
+ 2,591.3
+ 1,601.3
0.0 liabilities of $2,000.0 thousand, of which
640.5
I(
yr.)...........'............................
-3,487.5
0.0
- ,
0.0
$800.3 thousand are non-allowable, or
MB mortgage backed security.........
+825.0
0.0
+770.0
0.0
illiquid, assets. These amounts with
Column No........................................
25
26
various deductions and credits give firm
A liquid capital of $11,335.7 thousand.
[iv] Calculation of the total hedging
S c h e d u le
E.— C alc ulatio n
of
With one of its customers, who is not
disallowance haircut and the residual net
H edging D isa llo w a n c e H a ir c u ts
firm A’s principal clearing bank or
position haircut is shown in Schedule E in the
clearing broker, firm A has a net credit
W hen N e ttin g H a ir c u t s A c r o s s
iast two columns, “Hedging Disallowance
exposure of $1,780.4 thousand. This is in
C a te g o r ies — Continued
Haircuts” and “Qualified Netting Interim
excess of 15 percent of firm A’s liquid
Haircuts,” where the hedging disallowance
[In thousands of dollars]
capital of $11,335.7 thousand, so a
haircut and the qualified netting interim
concentration of credit haircut of $20
haircut for each category are entered as
Quali­
thousand is found by multiplying the
Hedging
follows:
fied
disallow­
excess, $80 thousand, by 25 percent. A
netting
Maturity category
S c h e d u le
E.— C a lc ulatio n
of
ance
interim
credit volatility haircut of $225 thousand
haircuts
H edging D isa llo w a n c e H a ir c u ts
haircuts
is found by multiplying the larger of the
W hen N ettin g H a ir c u t s Ac r o s s
qualifying long or short money market
(+ )
(+ )
C a teg o r ies
positions, $150 million, by 0.15 percent.
0.0
D 9-18 m n......................
0.0
0.0 Since the $40 million commercial paper
E 1.5-3.5 yr.....................
33.0
[In thousands of dollars]
position is rated in one of the four
(1.5-3 yr.)
0.0 highest rating categories by two
F 3.S-7.5 yr.....................
Quali­
Hedging
nationally recognized statistical rating
(3-5.5 yr.)
fied
disallow­
Maturity category
0.0 organizations, it has a haircut of 2% x
198.0
netting
G 7.5-15 yr.....................
ance
interim
(5.5-9 yr.)
$40 million=$800 thousand according to
haircuts
haircuts
0.0 SEC Rule 15c3-l. The haircuts and the
640.5
H 15-30 y r......................
(9-12 yr.)
elements making up liquid capital are
(+ )
(+ )
,
0.0
I(
yr.).....................
A 0-44 days....................
0.0 entered on Schedule A, “Liquid Capital
0.0
J (over 21 yr.).................
B 45-134 days.................
Requirement Summary Computation,”
50.0
MB mortgage-backed
C 135 days-9 mn.............
39.0
770.0
0.0
as follows:
security........................
Maturity category

2 2 0 .0

Hedging
disallowance
haircuts (+)•

Net residual
position
interim
haircuts
(+ /-)

2 2 .0

1 2 -2 1

1 8 8 6 .2

20

22

2 2 .0

1 2 -2 1

0 .0

0 .0

0 .0

0 .0

1 8 8 6 .2

5886

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

S chedule A — Liquid Capital R e ­
quirement S ummary C omputa ­
tion

[In thousands of dollars]

1. Liquid capital1 .............................
2. Haircuts on security and financing positions including contractual commitments:
a. Total governments offset
portion haircut (Schedule C)....
b. Total futures and options
offset haircut (Schedule D)......
c. Total hedging disallowance
haircut (Schedule E).................
d. Residual net position haircut
(Schedule E).............................
e. Other securities haircut (use
SEC factors).............................
3. Haircuts on credit exposure:
a. Concentration of credit haircut.................................. ...........
b. Credit volatility haircut.............
4. Total haircuts (lines 2 + 3 ) ...........
5. Capital-to-risk ratio (line 1/line
4) ..................................................

11,335.7

2 1 0 .0

38.9
932.5
2,926.2
800.0

2 0 .0

225.0
5,152.6
2 .2 :1

1 Identical to the amount reported on line
3640 of the Report on Finances and Oper­
ations of Government Securities Brokers and
Dealers, Form G-405.

A completed set of the remaining
schedules, using,firm A’s positions from
the examples above, follows.
BILUNG CODE 4E10-25-K1

Schedule B

Financings
Long 2/ Short
“FT

Offset
Portions
(*)
0
0
+25
+50
0
+20
0
0
0

Net
Immediate
Positions
(+/->
-100
+150
-65
0
+15
-10
-30
+50
-45

A
0-44 days
45-134 days
B
C
-6-25
135 days9 months
D
-50
9-18 months
E
1.5-3.5 years
(1.5-3 years)
F
F
3.5-7.5 years
(3-5.5 years)
G
G 7.5-15 years
(5.5-9 years)
H
H 15-30 years
(9-12 years)
I
1 (12-21 years)
J
J (21 years and
over)
+30
0
0
+30
+30
M
B
MB mortg age-backed
-20
0
-20
0
-20
AR
adjustable rate
AR
mortgage-backed
4
5
6
8#
1
2
3
n
Colura NiMtber
(Note 1)
(1+3)
(2+4)
(5+6)
# Carry forward to Schedule C.
Note Is The o ffset portion (Column 7) is the smaller of Colusrarss 5 and 6.
Xf The categories are designated in Sec. 402.2(f)(1). A category contains a ll securities with m aturities greater
than or equal to the lower of the designated maturities* but less than the higher, Maturity designations in par­
entheses refer to m aturities of zero-coupon instruments to be placed in that category. In categories A* B* C*
and 0* sero-coupon instruments are to be treated in the same manner as a ll other instruments. A half year (.5) is :
always considered to be 6 months.
2/ Long financings are financings which provide securities to a broker or dealer? short financings are those which
provide funds.
A
B
C
D
E

Federal Register / Vol. 52, No. 36-37 / W ednesday, February 25,1987 / Proposed Rules

Maturity
Category 1/

Calculation of Net Immediate Positions in
Securities and Financings
($ millions)
Securities Positions Total Securities and
2/ Long
Short Financing Positions
{+)
(-)
(-)
(+)
0
-100
-100
+150
0
+150
-90
+25
-90
+50
-50
+50
+15
+15
0
-30
+20
-30
+20
0
-30
-30
+50
+50
0
-45
0
-45

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25,1987 / Proposed Rules

5688

Schedule C

Maturity
Category 1/
A
B
C

Governments Offset Portion and Net Immediate
Position Interim Haircuts Calculation
millions) *
V
Net Irrroediate Positions
Governments Offset Portion
Interim
$ Amounts Factors Haircuts $ Amounts Factors Haircuts
(+/-)
(+)
(+/-)
~ r+ r“

0-44 days
45-134 days
135 days9 months
D
9-18 months
E
1.5-3.5 years
(1.5-3 years)
F
3.5-7.5 years
(3-5.5 years)
G
7.5-15 years
(5.5-9 years)
H
15-30 years
(9-12 years)
I
(12-21 years)
(21 years and
J
over)
MB mortgage-backed
m
adjustable rate
mortgage-backed
Total Governments O ffset
Column Number

0
0
25

None
0.0005
0.0008

0.0000
0.0000
0.0200

-100
■ {■ 150
-65

None
0.0012
0.0020

0.0000
+0.1800
-0.1300

50
0

0.0020
0.0050

0.1000
0.0000

0
+15

0.0045
0.0110

0.0000
+0.1650

20

0.0045

0.0900

-10

0.0220

-0.2200

0

0.0090

0.0000

-30

0.0330

-0.9900

0

0.0155

0.0000

+50

0.0500

+2.5000

0
0

0.0150
0.0210

0.0000
0.0000

-45
0

0.0775
0.1125

-3.4875
0.0000

0
0

0.0090
0.0050

0.0000
0.0000

+30
-20

0.0330
0.0110

+0.9900
-0.2200

Portion Haircut $ 0.2100
11
12##
7
10#
8
9
(8x11)
(Note 1)
(7x9)
(Note 1)
# Carry to Schedule A* line 2a
## Carry forward to Schedule D (or Schedule E, if no forwards,
futures* or options).
Note 1s From Schedule B.
V The categories are designated in Sec. 402.2(f)(1). A category contains
a ll securities with m aturities greater than or equal to the lower of the
designated m aturities, but less than the higher. Maturity designations in
parentheses refer to m aturities of zero-coupon instruments to be placed
in the category. In categories A, B, C, and D, zero-coupon instruments are
to be treated in the same manner as a ll other instruments. A half year (.5)
is always considered to be 6 months.

Schedule D
C o n so lid atio n o f Net Immediate P o sitio n Interim H aircuts
w ith G ross Futures and O ptions Interim H aircu ts______
($ th ou san ds)
Net Inm ediate
G ross Interim H aircu ts
P o sitio n Interim Futures &
A ggregate Interim
H aircu ts
Forward
O ptions
H aircu ts
( + /-)
TH
FT
<+)
(-)
FJ
FT-

B 45-134 days
C 135 d a y s9 months
D 9-18 months
E 1 .5 -3 .5 y ea rs
(1 .5 -3 y ea rs)
F 3 .5 -7 .5 y ea rs
(3 -5 .5 y ea rs)
G 7 .5 -1 5 y ea rs
(5 .5 -9 y ea rs)
H 15-30 y ea rs
(9 -1 2 y ea rs)
I (12-21 y ea rs)
J (21 y ea rs and
over)
MB m ortgage-backed
AR a d ju sta b le ra te
m ortgage-backed

+180.0
-1 3 0 .0

Futures & O ptions R esidual P o sitio n
O ffse t P o rtio n s 2 / Interim H aircu ts
"1+T ~
-----------f+ T T
+180.0
-1 3 0 .0

B
C

0 .0
+165.0

0 .0
+165.0

D
E

-2 2 0 .0

-2 2 0 .0

F

-9 9 0 .0

-9 9 0 .0

G

+ 2 ,5 9 1 .3

H

-3 ,4 8 7 .5
0 .0

I
J

+ 29.6

-2 9 .6

+2500.0

+ 91.3

+ 29.6

+2591.3

-1 5 9 .6

0 .0

2 9 .6

0 .0

-3 4 8 7 .5
0 .0
+ 990.0
-2 2 0 .0

-1 6 5 .0

99 0.0

-1 6 5 .0

165.0

T otal Futures and O ptions O ffs e t P ortion : $ 194.6
x20%
Factor:
T o ta l F utures and O ptions O ffse t H aircut : $ 38.92
Colurrai Number
#
##
N ote Is
N ote 2:
J/

12
(N ote 1)

13

14

15

16

17

18

19
(N ote 2)

+825.0 MB
-2 2 0 .0 AR

#
20# I

Carry to Schedule A, l in e 2b.
Carry forward to Schedule E.
Frcan Schedule C.
Column 19 i s th e sm a ller o f colum ns 17 and 18.
The c a te g o r ie s a re d esig n a ted in S ec. 4 0 2 . 2 ( f ) ( 1 ) . A ca teg o ry co n ta in s a l l s e c u r it ie s w ith m a tu r itie s g rea ter
than or equal to th e low er o f th e d esig n a ted m a tu r itie s , but l e s s than th e h ig h er. M aturity d esig n a tio n s in
p a ren th eses r e fe r to m a tu r itie s o f zero-coupon instru m ents to be p laced in th e ca teg o ry . In c a te g o r ie s A, B,
C, and D, zero-coupon instrum ents a re to be tr e a te d in th e same manner a s a l l o th er in stru m en ts. A h a lf year
i s alw ays con sid ered to be 6 m onths.
2 / The t o t a l fu tu r e s and o p tio n s h a ircu t i s c a lc u la te d fra n th e t o t a l o f column 19,

Federal Register / Vol. 52, No. 36-37 / W ednesday, February 25,1987 / Proposed Rules _________5689

M aturity
C ategory 1 /

Schedule E

BILLING CODE 4810-25-C

Federal Register / V ol. 52, No, 36-37 / W ednesday, February 25,1087 / Proposed Rules

Calculation of Hedging Disallowance Haircuts
when Netting Haircuts Across Categories
1/
thousands)
30% Disallowance
40% Disallowance
20% Disallowance
Net
Net
Net
Residual Hedging Residual Hedging Residual Hedging Residual Hedging Qualified
Position Disallow­ Position Disallow­ Position Disallow­ Position Disallow­ Netting '
Interim ance
Interim ance
Interim
Interim ance
Interim ance
Maturity
Haircuts Haircuts Haircuts Haircuts Haircuts Haircuts Haircuts Haircuts Haircuts
Category 2/
(+/-)
(+/-)
(+) '
(+)
(+)
““FT” (+/-)
<+> ■■
-<+/-)
B
+50.0
0.0
0 .0
58.0
B 45-134 days
+180.0
0 .0
39.0
0.0
C
39.0
-130.0
C 135 days9 months
0 .0
D
0 .0
0 .0
D 9-18 months
0 .0
33.0
0.0
E
33.®
+165.0
E 1.5-3.5 years
(1.5-3 years)
22.0
0 .0
22.0
0 .0
F
0 .0
-55.0
-220.0
F 3.5-7.5 years
(3-5.5 years)
198.0
0.0
G
0.0
198.0
-990.0
G 7.5-15 years
(5.5-9 years)
640.5
0 .0
640.5
0 .0
e
0.0 +1,601.3
+2,591.3
H 15-30 years
(9-12 years)
0 .0
0 .0
-1,886.2
1,886.2
i
I (12-21 years) -1,487.5
0 .0
0 .0
j
0.0
J (21 years and
over)
0.®
+770.0
0 .0
770.0 M
B
MB mortgage-backed +825.0
0 .0
220.0 AR
AR adjustable rate -220.0
mortgage-backed
Total Hedging Disallowance Haireuts$ 932.5
Residual Net Position Haircuts$ 2,926.2
22
23
24
21
25
26
27#
20
Oolura Nutter
280#
(Note 2)
(Note 2)
(Note 2) (Note 3)
(Note 1)
# Column 27 carries forward to Schedule A, line 2c.
## Column 28 to ta l carries forward to Schedule A, line 2d.
Note Is From Schedule D Cor Schedule C, if no forwards, futures, or options) o
Note 2s Net of two offsetting haircuts of paired maturity categories,,
Note 3s For every entry in column 20 there should be an entry in either column 27 or 28 (but never both).
]_ / See Sec 402.2(f)(3) for category pair hedging disallowance haircut factors.
2/ The categories are designated.in Sec. 402.2(f)(1). A category contains a ll securities with m aturities greater
than or equal to the lower of the designated m aturities, but less than the higher. Maturity designations in
parentheses refer to m aturities of zero-coupon instruments to be placed in the category. In categories A,
B, C, sod D, zero-coupon instruments are to be treated in the same manner as a ll other instruments. A half
year (.5) is always considered to be S months.

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
List of subjects in 17 CFR Chapter IV
Accounting, Accountants, Banks,
banking, Brokers, Credit unions,
Dealers, Federal home loan banks,
Government securities, Government
securities brokers and dealers,
Investments, National banks, Savings
and loan associations, Securities.
For the reasons set out in the
preamble, Chapter IV of Title 17, Code
of Federal Regulations, is proposed to
be added as set forth below.

authorizes the whole or partial
exemption of classes from rules under
section 15C or the application of
different standards to different classes.
(2) Although the appropriate
regulatory agencies, as defined in
§ 400.3, and the self-regulatory
organizations, as defined in section
3(a)(26) of the Act (15 U.S.C. 78c(a)(26)),
have enforcement responsibility under
section 15C of the Act, Treasury is
responsible for interpretation and
amendment of the regulations under this
chapter (with the exception of Forms GFIN and G-FINW, § § 449.1 and 449.2 of
this chapter, which are the
responsibility of the Board of Governors
of the Federal Reserve System).
(c) Correspondence with the Treasury
concerning the regulations, including
any request for exemption, should be
directed to the Deputy Assistant
Secretary (Federal Finance), Department
of the Treasury, Main Treasury Building,
Washington, D.C. 20220. Both the
envelope and the document should
prominently state “Government
Securities Act Request”. Three copies
should be provided of lengthy
documents and exhibits.
§ 400.3 0@isTiS2S@na
Unless otherwise explicitly provided,
in this subchapter:
(a) "Act” means the Securities
Exchange Act of 1934 (48 Stat. 881,15
U.S.C. chapter 2B, as amended):
(b) "Appropriate regulatory agency”
has the meaning set out in section
3(a)(34)(G) of the Act (15 U.S.C.
78c(a)(34)(G)}, except that the
appropriate regulatory agency for an
entity insured by the Federal Savings
and Loan Insurance Corporation is in all
cases the Federal Home Loan Bank
Board, and, with respect to a financial
institution for which an appropriate
§ 400.2 Office responsible for regulations;
regulatory agency is not explicitly
filing of requests for exemptions, for
designated, the appropriate regulatory
interpretations and of other materials.
(a) The regulations in this chapter are agency is the SEC;
(c) “Commission” or “SEC” means the
promulgated by the Assistant Secretary
Securities and Exchange Commission;
(Domestic Finance) pursuant to a
(d) “Designated examining authority”
delegation of authority from the
and “Examining Authority” means: (1)
Secretary of the Treasury. The office
In the case of a registered government
responsible for the regulations is the
Office of the Deputy Assistant Secretary securities broker or dealer that belongs
to only one self-regulatory organization,
(Federal Finance).
(b) (1) Section 15C(a)(4) of the Act (15 such self-regulatory organization, and
(2) in the case of a registered
U.S.C. 78o-5(a}(4)) authorizes the
government securities broker or dealer
Secretary to exempt any government
that belongs to more than one selfsecurities broker or dealer or class
regulatory organization, the selfthereof from the requirements of
registration or regulations promulgated regulatory organization designated by
the Commission pursuant to section
under section 15C. In addition, section
15C(b)(3) of the Act (15 U.S.C.
17(d) of the Act (15 U.S.C. 78q(d)) as the
entity with responsibility for examining
78o5(b)(3)) provides for classification,
by the Secretary, of government
such registered government securities
broker or dealer;
securities brokers or dealers and

balances, recordkeeping and reporting
of brokers and dealers in government
securities. Those regulations constitute
subchapter A of this chapter. Unless
otherwise explicitly provided, all
regulations in this subchapter apply to
all government securities brokers or
dealers, including registered brokers or
dealers and financial institutions.
(b) Section 15C(a)(l)(A) of the Act (15
U.S.C. 78o-5(a)(l)(A)) requires all
government securities brokers and
government securities dealers, except
CHAPTER V—iREGULATIONS SLJW TOE
0ER
those who are brokers or dealers
GOVERNMENT SECURITIES ACT ©F 1986
registered pursuant to section 15 or
section 15B of the Act or financial
SUBCHAPTER A—REGULATIONS UNDER
institutions, to register with the
SECTION 15C OF THE SECURITIES
Securities and Exchange Commissiion
EXCHANGE ACT OF 1934
(“Commission”). Regulations concerning
Part
registration are at § 240.15Ca2-l et seq.
400— Rules of General Application
of this title. The Commission is
401— -Exemptions
responsible for the interpretation of the
402— Financial Responsibility
403— Protection of Customer Securities definitions of government securities
broker and government securities dealer
and Balances
404— Recordkeeping and Preservation of and of the regulations at § 24Q.15Ca2~l
et seq.
Records
(c) Section 15C(a)(l)(B)(i) of the Act
405— Reports and Audit
(15 U.S.C. 78o-5(a)(l)(B)(i)) requires all
449— Forms, Section 15c of the
government securities brokers or dealers
Securities Exchange Act of 1934
that are also registered brokers or
SUBCHAPTER B—REGULATIONS UNDER
dealers to notify the Commission of their
TITLE ISOF THE GOVERNMENT
status as government securities brokers
SECURITIES ACT OF 1986
or dealers. Regulations concerning
Part
are at
450— Custodial Holdings of Government noticeSection § 240.15Cal-l of this title.
(d)
15C(a)(l)(B)(i) of the Act
Securities by Depository Institutions
also requires all government securities
SUBCHAPTER A—REGULATIONS UNDER
brokers or dealers that are financial
SECTION 15C OF THE SECURITIES
institutions to notify the appropriate
EXCHANGE ACT OF 1934
regulatory agency, as defined in section
3(a)(34)(G) of the Act (15 U.S.C.
(PART 400—RULES @F GENERAL
78c(a)(34)(G)), of their status as
APPLICATION
government securities brokers or
dealers. The form of notice, Form G-FIN,
Sec.
400.1 Scope of regulations.
is at § 449.1 of this chapter. Forms are
400.2 Office responsible for regulations;
available from the appropriate
filing of requests for exemptions, for
regulatory agency.
8

interpretations, and of other materials.
400.3 Definitions.
400.4 Information concerning associated

persons of financial institutions that are
government securities brokers or dealers.
400.5 Amendments to application for
registration and to notice of status as a
government securities broker or dealer.
400.6 Notice of withdrawal from business as
a government securities broker or dealer
by a financial institution.
Authority: Sec. 101, Pub. L. 99-571,100 Stat.
3209 (15 U.S.C. 780-5).
§460.1. Se@p® ©f regulation©.

(a) Title I of the Government
Securities Act of 1986 (Pub. L. 99-571,
100 Stat. 3208) amends the Securities
Exchange Act of 1934 (48 Stat. 881-905;
15 U.S.C. chapter 2B) (“Act”) by adding
section 15C, authorizing the Secretary of
the Treasury to promulgate regulations
concerning the finanical responsibility,
protection of customer securities and

5691

5892

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

(e) “Financial institution” has the
meaning set out in section 3(a)(46) of the
Act (15 U.S.C. 78c(a)(46)), and such term
explicitly does not include a subsidiary
or affiliate of an institution described in
such section;
(f) “Government securities broker”
has the meaning set out in section
3(a)(43) of the Act (15 U.S.C. 78c(a)(43)),
and explicitly includes not only
registered government securities
brokers, but also registered brokers and
financial institutions;
(g) “Government securities dealer”
has the meaning set out in section
3(a)(44) of the Act (15 U.S.C. 78c(a)(44)),
and explicitly includes not only
registered government securities
dealers, but also registered dealers and
financial institutions;
(h) “Government securities” has the
meaning set out in section 3(a)(42) of the
Act (15 U.S.C. 78c(a)(42));
(i) “Registered broker or dealer”
means a broker or dealer registered
pursuant to section 15 or section 15B of
the Act (15 U.S.C. 78o, 78o~4));
(j) “Registered government securities
broker or dealer” means a government
securities broker or dealer registered
pursuant to section 15C(a)(l)(A) of the
Act (15 U.S.C. 78o-5(a)(l)(A));
(k) “Secretary” means the Secretary of
the Treasury; and
(l) “Treasury” or “Department” means
the Department of the Treasury.
§ 400.4 information eoneemSng
associated persons of financial institutions
that are government securities brokers or
dealers.

(a) Every associated person of a
financial institution that is a government
securities broker or dealer that is not
exempt pursuant to Part 401 of this
chapter shall file with such financial
institution a completed Form G-FIN-4
(§ 449.4 of this chapter) unless such
person has on file with such financial
institution a completed and current
Form U-4 (promulgated by a selfregulatory organization) or Form MSD-4
(as required for associated persons of
bank municipal securities dealers).
(b) To the extent any information
furnished by an associated person
pursuant to paragraph (a) of this section
(including information on a Form U-4 or
Form MSD-4) is or becomes materially
inaccurate or incomplete, such
associated person shall promptly furnish
in writing to such financial institution, in
a form acceptable to the appropriate
regulatory agency for such financial
institution, a statement correcting such
information.
(c) For the purpose of verifying the
information furnished by an associated
person pursuant to paragraph (a) of this

rule, every government securities broker
or dealer that is a financial institution
shall make inquiry of all other
employers of such associated person
during the immediately preceding three
years concerning the accuracy and
completeness of such information.
(d) Every government securities
broker or dealer that is a financial
institution not exempt from this section
pursuant to Part 401 of this chapter
shall:
(1) Obtain and, within 10 days
thereafter, file with the appropriate
regulatory agency, in a form acceptable
to such appropriate regulatory agency,
the information required by paragraphs
(a) and (b) of this section; and
(2) File with the appropriate
regulatory agency within 30 days after
the termination of the status of an
individual as an associated person a
Form G-FIN-5 (§ 449.4 of this chapter),
unless the financial institution is
required to and has filed a Form U-5 or
Form MSD-5 with respect to such
person.
(e) (1) For the purposes of this part,
“associated person” means a person:
(1) Directly engaged in any of the
following activities in either a
supervisory or non-supervisory capacity:
(A) Underwriting, trading or sales of
government securities;
(B) Financial advisory or consultant
services for issuers in connection with
the issuance of government securities;
(C) Research or investment advice,
other than general economic information
or advice, with respect to government
securities in connection with the
activities described in paragraphs
(e)(l)i(A) and (e)(l)i(B) of this section;
(D) Activities other than those
specifically mentioned which involve
communication, directly or indirectly,
with public investors in government
securities in connection with the
activities described in paragraphs
(e)(1)(A) and (e)(1)(B) of this section; or
(ii) Directly engaged in the following
activities in a supervisory capacity:
(A) Processing and clearance
activities with respect to government
securities;
(B) Maintenance of records involving
any of the activities described in this
paragraph (e)(1).
(2) Directors and senior officers of the
financial institution who may from time
to time set broad policy guidelines
affecting the financial institution as a
whole that are not directly related to the
conduct of the financial institution’s
government securities business are not
considered to be “directly engaged” in
the activities described in this
paragraph (e).

(f) Every notice and form filed
pursuant to this section shall constitute
a "report” within the meaning of
sections 15,15C and 32(a) of the Act (15
U.S.C. 78o, 78o-5, 78ff(a)).
§ 400.5 Amendments to application for
registration and to notice of status as a
§©vernment securities broker or dealer.

(a) (1) If the information contained in
any application for registration as a
government securities broker or dealer
(other than the statements required by
§ 250.15Ca2-2 of this title) or in any
amendment thereto, becomes inaccurate
for any reason, the registered
government securities broker or dealer
shall file within 30 days thereafter an
amendment on Form BD (§ 249.501 of
this title) correcting such information, in
accordance with the instructions
provided therein.
(2) If the information contained in any
notice of status as a government
securities broker or dealer filed by a
registered broker or dealer, or in any
amendment thereto, becomes inaccurate
for any reason, the registered broker or
dealer shall file within 30 days an
amendment on Form BD (§ 249.501 of
this title) correcting such information, in
accordance with the instructions
provided therein.
(b) If the information contained in any
notice of status as a government
securities broker or dealer filed by a
financial institution, or any amendment
thereto, becomes inaccurate for any
reason, the financial institution shall file
within 30 days an amendment on Form
G-FIN (§ 449.1 of this chapter)
correcting such information, in
accordance with the instructions
provided therein.
(c) Every amendment filed pursuant to
this section shall constitute a “report”
within the meaning of sections 15,15C
and 32(a) of the Act (15 U.S.C. 78o, 78o5, 78ff(a)).
§ 400.6 Notice of withdrawal from
business as a government securities broker
or dealer by a financial institution.

(a) Whenever a financial institution
that is a government securities broker or
dealer that is not exempt from the notice
requirements of § 400.5 pursuant to Part
401 of this chapter, ceases to act as a
government securities broker or dealer,
it shall file with the appropriate
regulatory agency notice of such
cessation on Form G-FINW (§ 449.2 of
this chapter) in accordance with the
instructions contained therein.
(b) Except as provided in paragraph
(c) of this section, a notice that a
financial institution has ceased to act as
a government securities broker or dealer
shall become effective for all purposes

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
on the 60th day after the filing thereof
with the appropriate regulatory agency
or within such shorter period of time as
the appropriate regulatory agency
determines.
(c) If the notice described in
paragraph (a) of this section is filed with
the appropriate regulatory agency any
time after the date of the issuance of a
notice or order by the appropriate
regulatory agency instituting
proceedings pursuant to section
15C(c)(2)(A) of the Act (15 U.S.C. § 78o5(c)(2)(A)) to censure, suspend, limit, or
bar from acting as a government
securities broker or government
securities dealer the entity filing such
notice, or if the appropriate regulatory
agency has instituted any action against
the entity filing such notice pursuant to
section 15C(2)(B) of the Act (15 U.S.C.
§ 78o—
5(c)(2)(B)), the notice shall
become effective pursuant to paragraph
(b) of this section at such time and upon
such terms and conditions as the
appropriate regulatory agency deems
necessary to appropriate in the public
interest for the protection of investors.
(d) Every notice filed pursuant to this
section shall constitute a “report” within
the meaning of sections 15,15C and
32(a) of the Act (15 U.S.C. 78o, 78o-5,
78ff(a)).

5693

qualified issuing or paying agents or the of the Act (15 U.S.C. 78o-5(a), (b), (d))
and the regulations of this subchapter,
Treasury and whose transactions in
unless it acts as a government securities
government securities are limited to
broker by:
these transactions and such other
activities that are exempted by the
(1) Holding itself out as a government
regulations under this subchapter, shall securities broker or interdealer broker;
be exempt from the provisions of section or
(ii) Actively soliciting purchases or
15C(a), (b) and (d) of the Act (15 U.S.C.
sales of government securities on an
78o-5(a), (b), (d)) and the regulatios of
this subchapter. For the purposes of this agency basis;
(2) A financial institution shall not be
section, the term “United States Savings
Bond” means any savings-type security regarded as acting as a government
offered by the Treasury, including all
securities broker within the meaning of
series of the United States Savings
this section if it:
Bonds, United States Savings Notes and
(i) Effects fewer than 500 government
United States Savings Stamps.
securities brokerage transactions (other
than transactions described in § § 401.1
§ 401.1 Exemption for depository
or 401.2) per year; or
institutions that submit fenders for the
(ii) Effects all such transactions (other
account of customers for purchase on
than transactions described in §§ 401.1
original issue of United States Treasury
securities.
or 401.2) pursuant to a contractual or
other arrangement with a government
(a) Subject to the requirements of
securities broker or dealer that is
paragraph (b) of this section, a
registered pursuant to section
depository institution that submits
tenders or subscriptions for purchase on 15C(a)(l)(A) of the Act (15 U.S.C. 78ooriginal issue of United States Treasury 5(a)(1)(A)) or that has filed notice of its
status as a government securities broker
securities for the account of customers
or dealer pursuant to section
on a fully disclosed basis, whose
15C(a)(l)(B) of the Act (15 U.S.C. 78otransactions in government securities
5(a)(1)(B)) (the “transacting government
are limited to such transactions and
securities broker or dealer”) under
such other activities as have been
which the transacting government
exempted by regulation under this
securities broker or dealer will offer
subchapter shall be exempt from the
provisions of section 15C(a), (b) and (d) securities services on or off the premises
PART 401—EXEMPTIONS
of the financial institution, provided
of the Act (15 U.S.C. 78o-5(a), (b), (d))
Sec.
that:
and the regulations of this subchapter.
401.1 Exemption for organizations handling
(b) The exemption described in
(A) The transacting government
transactions in United States Savings
paragraph (a) of this section is available securities broker or dealer is clearly
Bonds.
only to a depository institution that
identified as the person performing the
401.2 Exemption for depository institutions
agrees to comply with the regulations of securities services;
that submit tenders for the account of
customers for purchase on original issue Part 450 of this chapter concerning
(B) Financial institution employees
custodial holdings of government
of United States Treasury securities.
perform only clerical and ministerial
securities.
401.3 Exemption for financial institutions
functions in connection with government
that are engaged in limited government
(c) For the purposes of this section,
securities
securities brokerage activities.
“depository institution” has the meaning employeestransactions unless such (as
are associated persons
401.4 Exemption for financial institutions
stated in clauses (i) through (vi) of
defined in § 400.4(e) of this chapter) or
whose government securities dealer
section
registered representatives of the
activities consist only of repurchase and Reserve19(b)(1)(A) of the Federal (i)Act (12 U.S.C. 461 (b)(1) (A)
transacting government securities
limited reverse repurchase transactions.
401.5 Exemption for corporate credit unions (vi)) and also includes a foreign bank, an broker or dealer;
transacting limited government securities agency or branch of a foreign bank and
(C) Financial institution employees do
a commercial lending company owned
business with other credit unions.
Authority: Sec. 101, Pub. L. 99-571,100 Stat. or controlled by a foreign bank (as such not receive compensation for other
government securities activities
terms are defined in the International
3209 (15 U.S.C. 78o-5(a)(4)).
than clerical or ministerial functions
Banking Act of 1978, Pub. L. 95-369, 92
unless such employees are associated
§ 401.1 Exemption for organizations
Stat. 607).
persons (as defined in § 400.4(e) of this
handling transactions in United States
Savings ®@nds.
chapter) or registered representatives of
§ 401.3 Exemption for tfSnaneia! institution©
that are engaged in limited government
the transacting government securities
An organization that handles United
securities brokerage activities.
broker or dealer; and
States Savings Bond transactions,
(a)(1) Subject to the requirements of
including a qualified issuing or paying
(D) Such services are provided on a
paragraph (b) of this section, a financial basis in which all customers are fully
agent or an organization that
accommodates customers or employees institution shall be exempt from the
disclosed to the transacting government
by forwarding requested transactions to provisions of Sections 15C(a), (b) and (d) securities broker or dealer.

5804

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25; 1987 / Proposed Rules

(b) The exemption described in
paragraph (a) of this section is available
only to a financial institution that agrees
to comply with the regulations of Part
450 of this chapter concerning custodial
holdings of government securities for
customers.
(c) For the purposes of this section,
“financial institution” includes a federal
credit union, as defined in 12 U.S.C.
1752(1).
§ 401.4 Exemption for financial institutions
whose government securities dealer
activities consist only ©f repurchase and
limited reverse repurchase transactions.

(a) Subject to the requirements of
paragraph (b) of this section, a financial
institution shall be exempt from the
provisions of sections 15C (a), (b), and
(d) of the Act (15 U.S.C. 78o-5 (a), (b),
(d)) and the regulations of this
subchapter if its government securities
dealer activities are limited to:
(1) Sales or purchases in a fiduciary
capacity;
(2) The sale and subsequent
repurchase of government securities
pursuant to a repurchase agreement;
(3) Not more than 500 transactions per
year involving the purchase and
subsequent resale of government
securities pursuant to a reverse
repurchase agreement;
(4) Such other activities as have been
exempted by regulation under this
subchapter.
(b) The exemption described in
paragraph (a) of this section is available
only to a financial institution that agrees
to comply with the regulations of Part
450 of this chapter concerning custodial
holdings of government securities for
customers.
§ 401.5 Exemption for corpora!© credit
unions transacting limited government
securities Cosines® with ©titer credit
unions.

union as defined in 12 U.S.C. 1752(7), or
(iii) a member of the National Credit
Union Administration Central Liquidity
Facility.
(b) The exemption described in
paragraph (a) of this section is available
only to a credit union that agrees to
comply with the regulations of Part 450
of this chapter concerning custodial
holdings of government securities.
m U T 402—FINANCIAL
RESPONSIBILITY

Sec.

402.1 Application of part to registered
brokers and dealers and financial
institutions; effective date.
402.2 Capital requirements for registered
government securities brokers and
dealers.
402.2a Appendix A—Calculation of market
risk haircut for purposes of | 402.2(g)(2).
402.2b [Reserved]
402.2c Appendix C—Modification of
| 240.15c3-lc of this title, relating to
consolidated calculations of capital, for
purposes of § 402.2.
402.2d Appendix D—Modification of
| 240.15c3-ld of this title, relating to
satisfactory subordination agreements,
for purposes of § 402.2.
Authority: Sec. 101, Pub. L 99-571,100 Stat.
3209 (15 U.S.C. 78o-5(b)(l)(A), (b)(2)).
§ 402.1 MppIIeatto© @ part to registered
?
brokers and dealers and financial
institutions; effective date.

(a) Application of part. This part
applies to all government securities
brokers and dealers, except as
otherwise provided herein.
(b) Registered brokers or dealers. This
part does not apply to a registered
broker or dealer that is subject to
§ 240.15c3-l of this title (SEC Rule 15c31).

(c) Financial institutions. This part
does not apply to a government
(a) (1) Subject to the requirements of securities broker or dealer that is a
paragraph (b) of this section, a corporate financial institution and that is subject
to the rules and regulations of its
credit union shall be exempt from the
provisions of section 15C (a), (b) and (d) appropriate regulatory agency
concerning capital requirements.
of the Act (15 U.S.C. 78o-5 (a), (b), (d))
(d) Government securities interdealer
and the regulations thereunder if its
brokers. (1) A government securities
government securities dealer activities
interdealer broker, as defined in
are limited to the sale and subsequent
paragraph (d)(2) of this section, may
repurchase and the purchase and
elect not to be subject to the limitations
subsequent resale, each pursuant to a
of this Part 402 but rather to be subject
repurchase or reverse repurchase
to the requirements of § 240.15c3-l of
agreement, of government securities to
this title (SEC Rule 15c3-l) except
other credit unions and such other
paragraph (c)(2)(ix) thereof, and
activities as have been exempted by
paragraphs (d)(3), (4), and (5) of this
regulation under this Part.
section by filing such election in writing
(2) For the purposes of this section,
“corporate credit union” means a credit with its designated examining authority.
union whose membership consists
A government securities interdealer
primarily of other credit unions and that broker may not revoke such election
is (i) a federal credit union as defined in without the written consent of its
designated examining authority.
12 U.S.C. 1752(1), (ii) an insured credit

(2) “Government securities interdealer
broker” means a government securities
broker which acts exclusively as an
undisclosed agent in the purchase or
sale of government securities for a
registered broker or dealer or
government securities broker or dealer
not exempt pursuant to Part 401 of this
chapter, which has no “customers” as
defined in § 240.15c3-l of this title and
which does not have or maintain any
government securities in its proprietary
or other accounts.
(3) In order to qualify to operate under
this paragraph (d), a government
securities interdealer broker shall at all
times have and maintain net capital, as
defined in § 240.15c3-l(c)(2) of this title,
of not less than $1,000,000.
(4) For purposes of this paragraph (d),
a government securities interdealer
broker shall deduct from net worth Vi of
1% of the contract value of each
government securities failed-to-deliver
contract which is outstanding 5 business
days on longer. Such deduction shall be
increased by any excess of the contract
price of the failed-to-deliver over the
market value of the underlying security.
(5) For purposes of this paragraph (d),
a government securities interdealer
broker may exclude from its aggregate
indebtedness computation indebtedness
adequately collateralized by
government securities outstanding for
not more than one business day and
offset by government securities failed to
deliver of the same issue and quantity.
In no event may a government securities
interdealer broker exclude any
overnight bank loan attributable to the
same government securities failed-todeliver contract for more than one
business day. A government securities
interdealer broker need not deduct from
net worth the amount by which the
market value of securities failed to
receive outstanding longer than thirty
(30) calendar days exceeds the contract
value of those failed to receive as
required by § 24Q.15c3-l(c)(2)(iv)(E) of
this title.
(6) On the application of the
government securities interdealer
broker, the designated examining
authority may extend the periods of time
in this paragraph (d) if it determines that
the extension is warranted because of
exceptional circumstances and that the
government securities interdealer broker
is acting in good faith.
(e) The Department may, upon written
application, exempt from the provisions
of this part, either unconditionally or on
specified terms and conditions, any
registered government securities broker
or dealer who satisfies the Department
that, because of the special nature of its

Federal Register / VoL 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
business, its financial position, and the
safeguards it has established for the
protection of customers’ funds and
securities, it is not necessary in the
public inierest or for the protection of
investors to subject such government
securities broker or dealer to the
provisions of this part.
(f) Effective Date. This part shall be
effective July 25,1987, provided
however, that until October 25,1987,
registered government securities brokers
and dealers need not comply with
§ 402.2(a)-(c) as long as:
(1) A registered government securities
broker or dealer that acts solely as an
introducing broker within the meaning
of | 240.15c3-l(a)(2) of this title has and
maintains liquid capital, as defined in
§ 402.2(d), in an amount of not less than
$5,000; and
(2) Any other registered government
securities broker or dealer has and
maintains liquid capital, as defined in
§ 402.2(d), in an amount of not less than
$50,000.
§ 402.2 Capstan requirements for
registered government securities
and dealers.

adjustments to net worth set forth in
i 240.15c3-la and § 240.15c3-lb of this
title (Appendices A and B to SEC Rule
15c3-l) are omitted.
(e) Treasury market risk instruments.
(1) For purposes of this part, the term
"Treasury market risk instrument”
means the following dollar-denominated
securities, debt instruments, and
derivative instruments:
(i) Government securities, except
equity securities and those mortgagebacked securities described in
paragraph (e)(2) of this section;
(ii) Zero-coupon receipts or
certificates based on marketable
Treasury notes or bonds;
(iii) Certificates of deposit of less than
one year to maturity;
(iv) Bankers acceptances;
(v) Commercial paper of less than one
year to maturity rated in one of the three
highest categories by at least two
nationally recognized statistical rating
organizations;

5695

(vi) Futures, forwards, and options on
Treasury market risk instruments
described in paragraphs (e)(l)(i)-(v) of
this section or on time deposits whose
changes in yield are closely correlated
with the Treasury market risk
instruments described in paragraph
(e)(1)(iii) of this section, settled on a
cash or delivery basis;
(vii) Options on those futures
contracts described in paragraph
(e)(l)(vi) of this section, settled on a
cash or delivery basis; and
(2) “Treasury market risk instrument”
does not include mortgage-backed
securities that do not pass through to
each security holder on a pro rata basis
a distribution based on the monthly
payments and prepayments of principal
and interest on the underlying pool of
mortgage collateral less fees and
expenses.
(f)(1) Haircut categories. For purposes
of this part, the applicable categories
within which non-zero-coupon and zerocoupon Treasury market risk
instruments are classified are:

brokers

(a) General rule. No government
securities broker or dealer shall permit
its liquid capital to be below an amount
equal to 120 percent of total haircuts as
defined in paragraph (g) of this section.
(b) Minimum liquid capital.
Notwithstanding the provisions of
paragraph (a) of this section, a
government securities broker or dealer
shall have and maintain liquid capital in
an amount not less than $25,000, after
deducting total haircuts as defined in
paragraph (g) of this section.
(c) Minimum liquid capital for
introducing brokers. Notwithstanding
the provisions of paragraphs (a) and (b)
of this section, a government securities
broker or dealer that acts solely as an
introducing broker within the meaning
of § 240.15c3-l(a)(2) of this title, shall
maintain liquid capital in an amount not
less than $5,000, after deducting total
haircuts as defined in paragraph (g) of
this section.
(d) Liquid capital. “Liquid capital”
means net capital as defined in
§ 240.15c3-l)c)(2) of this title with the
following modifications:
(1) The percentages used to calculate
the deductions for failed to deliver
contracts when the underlying
instrument is a Treasury market risk
instrument as defined in paragraph (e)
of this section are the appropriate
haircut factors specified in paragraph
(f)(2) of this section; and
(2) The deductions from net worth
required by § § 240.15c3-l(c)(2)(vi) and
(c)(2)(viii) of this title and the

H...
I....
J ....
MB.,

Term or type for rron-zero-coupon
instruments

Term for zero-coupon instruments

Less than 45 days...............................................
At least 45 days but less than 135 days......... ;
At least 135 days but less than 9 months.......
At least 9 months but less than 1 year, 6
months.
At least 1 year, 6 months but less than 3
years, 6 months.
At least 3 years, 6 months but less than 7
years, 6 months.
At least 7 years, 6 months but less than 15
years.
15 years and over................................................

Category

Less than 45 days.
At least 45 days but less than 135 days.
At least 135 days but less than 9 months
At least 9 months but less than 1 year, 6
months.
At least 1 year, 6 months but less than 3
years.
At least 3 years but less than 5 years, 8
months.
At least 5 years, 6 months but less than 9
years.
At least 9 years, but less than 12 years.
At least 12 years but less than 21 years.
21 years and over.

All fixed rate mortgage-backed securities that
are Treasury market risk instruments.
All adjustable rate mortgage-backed securi­
ties that are Treasury market risk instru­
ments.

(2) Haircut factors. For purposes of
this part, the applicable net position and
offset haircut factors to be used in the
calculation of the Treasury market risk
haircut are as follows:
Haircut factors
Category

A......................................................
B......................................................
C .............................. .......................
D......................................................
E ......................................................
F ......................................................
G ............................................... .....
H......................................................
1.......................................................
J ......................................................
MB..................................................
AR...................................................

Net position
haircuts
(percent)

0 12
0.20
0.45
1.10
2 20
3.30
500
7 75
11.25
3.30
1.10

(3) Category pair hedging
disallowance haircut factors. For

purposes of this part, the applicable
category pair hedging disallowance
haircut factors to be used in the
calculation of the Treasury market risk
haircut are as follows:

Offsets
(percent)

0 05
0.08
0.20
0 50
0 45
0.90
1.55
1 50
2.10
0.90
0.50

(g) Total haircuts. "Total haircuts”
equals the sum of the credit risk haircut
and the market risk haircut.

5S9S

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

(1) Credit risk haircut The “credit risk
haircut” equals the sum of the total
concentration of credit haircut and the
credit volatility haircut.
(1) Total concentration of credit
haircut. The “total concentration of
credit haircut” equals the sum of the
concentration of credit haircuts taken
for all counterparties, except for
counterparties that are principal
clearing banks or principal clearing
brokers, of the government securities
broker or dealer.
(A) Concentration of credit haircut
The “concentration of credit haircut”
equals the product of a concentration of
credit haircut factor of 25 percent the
amount by which the net credit
exposure to a single counterparty,
except a counterparty that is a principal
clearing bank or principal clearing
broker of the government securities
broker or dealer, is in excess of 15
percent of the government securities
broker’s or dealer’s liquid capital.
(B) Net credit exposure. For purposes
of this part, the “net credit exposure”
equals the dollar amount of funds or
debt instruments, other securities, and
other inventory at risk to the
government securities broker or dealer
in the event of the counterparty’s
default, less the amount of funds or debt
instruments, other securities, and other
inventory risk to the counterparty in the
event of the government securities
broker’s or dealer’s default.
(ii) Credit volatility haircut The
"credit volatility haircut” equals the
product of a credit volatility haircut
factor of 0.15 percent and the dollar
amount of the larger of the gross long
position or gross short position in those
Treasury market risk instruments
described in paragraphs (e)(1) (iii), (iv)
and (v) of this section that have a term
to maturity greater than 45 days, and
futures, forwards and options thereon,
settled on a cash or delivery basis.
(2) Market risk haircut. The “market
risk haircut” equals the sum of the
Treasury market risk haircut and the
other securities haircut, calculated in
accordance with the provisions of
Appendix A of this section, § 402.2a.
(h) Debt-equity requirements. No
government securities broker or dealer
shall permit the total of outstanding
principal amounts of its satisfactory
subordination agreements as defined in
| 240.15c3-ld of this title (Appendix D
to SEC Rule 15c3-l) modified as
provided in Appendix D to this section,
| 4Q2.2d, to exceed the allowable levels
set forth in § 240.15c3-l(d) of this title.
(i) Limitation on withdrawal of equity
capital. No equity capital of the
government securities broker or dealer
or a subsidiary or affiliate consolidated

pursuant to § 240.15c3-lc of this title
(Appendix C to SEC Rule 15c3-l)
modified as provided in Appendix C to
this section, § 402.2c, may be withdrawn
by action of a stockholder or partner, or
by redemption or purchase of shares of
stock by any of the consolidated entities
or through the payment of dividends or
any similar distribution, nor may any
unsecured advance or loan be made to a
stockholder, partner, sole proprietor or
employee if, after giving effect thereto
and to any other such withdrawals,
advances or loans and any Payments of
Payment Obligations (as defined in
§ 240.15c3-ld of this title, Appendix D to
SEC Rule 15c3-l, modified as provided
in Appendix D to this section, | 402.2d)
under satisfactory subordination
agreements which are scheduled to
occur within six months following such
withdrawal, advance or loan, either:
(1) The ratio of liquid capital to total
haircuts, determined as provided in
§ 402.2, would be less than 150 percent;
or
(2) Liquid capital minus total haircuts
would be less than 120 percent of the
minimum capital required by § 402.2(b)
or § 402.2(c) as applicable; or
(3) In the case of any government
securities broker or dealer included in
such consolidation, the total outstanding
principal amounts of satisfactory
subordination agreements of the
government securities broker or dealer
(other than such agreements which
qualify as equity under § 240.15c3-l(d)
of this title) would exceed 70% of the
debt-equity total as defind in Such
§ 240.15c3-l(d).
The term equity capital includes
capital contributions by partners, par or
stated value of capital stock, paid-in
capital in excess of par, retained
earnings or other capital accounts. The
term equity capital does not include
securities accounts of partners and
balances in limited partners’ capital
accounts in excess of their stated capital
contributions. This provision shall not
preclude a government securities broker
or dealer from making required tax
payments or preclude the payment to
partners of reasonable compensation.
(j) Modification of appendices to
§ 240.15c3-l of this Title. For purposes
of this part, Appendix C to Rule 15c3-l
(§ 24Q.15c3-lc of this title), relating to
Consolidated Computations of Net
Capital, is modified as provided in
Appendix C to this section (f 402.2c),
and Appendix D to Rule 15c3-l
(§ 240.15c3-ld of this title), relating to
Satisfactory Subordination Agreements,
is modified as provided in Appendix D
to this section (§ 4G2.2d).

§ 402.2a Appendix A—Calculation of
market risk haircut for purposes of

§ 402.2(g)(2).
The market risk haircut is the sum of
the Treasury market risk haircut and the
other securities haircut, calculated as
follows.
(a) Treasury market risk haircut The
"Treasury market risk haircut” equals
the sum of the total governments offset
portion haircut, the total futures and
options offset haircut, the total hedging
disallowance haircut, and the residual
net position haircut, calculated with
respect to financings and positions in
Treasury market risk instruments,
except to the extent that a permissible
election is made pursuant to paragraph
(b)(1) of this section to include qualified
positions in the calculation of the other
securities haircut.
(1) Total governments offset portion
haircut The “total governments offset
portion haircut” equals the sum of the
governments offset portion haircuts
calculated for each category in
§ 402.2(f)(1). The “governments offset
portion haircuts” equal, for each
category in § 402.2(f)(1), the product of
the offset haircut factor for that category
set out in § 402.2(f)(2) and the smaller of
the gross long immediate position or
gross short immediate position for that
category. Schedules B and C of this
Appendix can be used to make this
calculation.
(i)(A) The “gross long immediate
position” for purposes of this part
equals, for each category except
categories MB and AR in § 402.2(f)(1),
the sum of the market values of each
long immediate position in Treasury
market risk instruments with a term to
maturity (or, in the case of a floating
rate note, the time to the next scheduled
interest rate adjustment or the term to
maturity, whichever is less)
corresponding to such category, the
contract values of each reverse
repurchase agreement with a term to
maturity or time to the next scheduled
interest rate adjustment, whichever is
less, corresponding to that category, and
the values of the cash collateral of each
security borrowing with a term to
maturity or time to next scheduled
interest rate adjustment, whichever is
less, corresponding to such category.
(B) In the case of category MB, the
“gross long immediate position” equals
the sum of the market values of all long
immediate positions in fixed rate
mortgage-backed securities which are
Treasury market risk instruments.
(C) In the case of category AR, the
"gross long immediate position” equals
the sum of the market values of all long
immediate positions in adjustable rate

Federal Hegtster / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
mortgage-backed securities which are
Treasury market risk instruments.
(ii) (A) The "gross short immediate
position” for purposes of this section
equals, for each category except
categories MB and AR in § 402.2(f)(1),
the sum of the market values of each
short immediate position in Treasury
market risk instruments with a term to
maturity (or, in the case of a floating
rate note, the time to the next scheduled
interest rate adjustment or the term to
maturity, whichever is less)
corresponding to such category, and the
values of funds received from each
financing transaction (including
repurchase agreements, securities
lending secured by cash collateral, and
bank loans, but excluding subordinated
debt which meets the requirements of
§ 240.15c3-ld of this title modified as
provided in § 402.2d) with a term to
maturity or time to the next scheduled
interest rate adjustment, whichever is
less, corresponding to that category.
(B) In the case of category MB, the
"gross short immediate position” equals
the sum of the market values of all short
immediate positions in fixed rate
mortgage-backed securities which are
Treasury market risk instruments.
(C) In the case of category AR, the
“gross short immediate position” equals
the sum of the market values of all short
immediate positions in adjustable rate
mortgage-backed securities which are
Treasury market risk instruments.
(iii) The term “long immediate
position” in a Treasury market risk
instrument means, for purposes of this
part:
(A) The net long position in a
Treasury market risk instrument as of
the trade date, except when the
settlement date, in the case of a
Treasury market risk instrument except
a mortgage-backed security, is
scheduled more than five business days
in the future, and, in the case of a
mortgage-backed security, more than
thirty calendar days in the future;
(B) The net long when-issued position
in a marketable U.S. Treasury security
between announcement and issue date;
and
(C) The net long when-issued position
in a government agency or a government
sponsored agency debt security between
release date and issue date.
(iv) The term "short immediate,
position” on a Treasury market risk
instrument means, for purposes of this
part:
(A) The net short position in a
Treasury market risk instrument as of
the trade date, except when the
settlement date, in the case of a
Treasury market risk instrument except
a mortgage-backed security, is

scheduled more than five business days
in the future, and, in the case of a
mortgage-backed security, more than
thirty calendar days in the future;
(B) The net short when-issued position
in a marketable U.S. Treasury security
between announcement and issue date;
and
(C) The net short when-issued
position in a government agency dr a
government sponsored agency debt
security between release date and issue
date.
(2) Net immediate position interim
haircut. The “net immediate position
interim haircut” equals, for each
category in § 402.2(f)(1), the product of
the net position haircut factor for that
category and the sum of the gross long
immediate position and the gross short
immediate position for that category. For
purposes of this part, a gross long
immediate position shall be a positive
number and a gross short immediate
position shall be a negative number.
Schedules B and G to this Appendix can
be used to make this calculation.
(3) Total futures and options offset
haircut. The "total futures and options
offset haircut” equals the sum of the
futures and options offset haircuts
calculated for each category in
§ 402.2(f)(1). The “futures and options
offset haircut” equals, for each category
in § 402.2(f)(1), the product of a futures
and options offset factor of 20 percent
and the smaller of the absolute values of
the positive and negative aggregate
interim haircuts for that category.
Schedule D to tins Appendix can be
used to make this calculation.
(i) Positive aggregate interim haircut.
The “positive aggregate interim haircut”
equals, for each category in § 402.2(f)(1),
the sum of a positive net immediate
position interim haircut (see paragraph
(a)(2) of this Appendix), the gross long
futures and forward interim haircut, and
the positive gross options interim
haircut for that category. Schedule D to
this Appendix can be used to make this
calculation.
(A) Gross long futures and forward
interim haircut. The “gross long futures
and forward interim haircut” equals, for
each category in § 402.2(f)(1), the sum of
the interim haircuts on each long futures
position and long forward position
placed, in the case of a futures or
forward contract on Treasury market
risk instruments except mortgagebacked securities, in the category
corresponding to the sum of the term to
maturity of the contract and the term to
maturity of the underlying instrument at
the time of the maturity of the contract
or, in the case of a futures or forward
contract on Treasury market risk
mortgage-backed securities, the category

5897

corresponding to the type of Treasury
market risk mortgage-backed security.
(1) For purposes of this part, the
"interim haircut on each long futures
position and each long forward
position” is the product of the net
position haircut factor for the category
corresponding to, in the case of a futures
or forward contract on Treasury market
risk instruments except mortgagebacked securities, the maturity of the
underlying instrument at the time of the
maturity of the contract or, in the case of
a futures or forward contract on
Treasury market risk mortgage-backed
securities, the type of Treasury market
risk mortgage-backed security and the
value of the long futures position or long
forward position evaluated at the
current market price for such contract.
(2) For purposes of this part, the gross
long futures and forward interim haircut
shall be a positive number.
(B) Positive gross options interim
haircut. The "positive gross options
interim haircut” equals, for each
category in § 402.2(f)(1), the sum of the
interim haircuts on each purchased call
and sold put placed in the category
corresponding to the term to maturity or
type of underlying instrument.
{!) For purposes of this part, the
“interim haircut on each purchased call
and sold put” equals the lesser of the
market value of the option or, (i) in the
case of an option on a cash instrument,
the product of the net position haircut
factor for the category to which the
underlying cash instrument corresponds
and the market value of the underlying
cash instrument or, (//) in the case of an
option on a futures contract, the interim
haircut on the underlying futures
contract.
(2) For purposes of this part, the
positive gross options interim haircut is
a positive number.
(ii) Negative aggregate interim
haircut. The “negative aggregate interim
haircut” equals, for each category in
§ 402.2(f)(1), the sum of the negative net
immediate position interim haircut (see
paragraph (a)(2) of this Appendix), the
gross short futures and forward interim
haircut, and the negative gross options
interim haircut for that category.
Schedule D to this Appendix can be
used to make this calculation.
(A) Gross short futures and forward
interim haircut The “gross short futures
and forward interim haircuts” equals,
for each category in § 402.2(f)(1), the
sum of the interim haircuts on each
short futures position and short forward
position placed, in the case of a futures
or forward contract on Treasury market
risk instruments except mortgagebacked securities, in the category

5898

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

corresponding to the sum of the term to
maturity of the contract and the term to
maturity of the underlying instalment at
the time of the maturity of the contract
or, in the case of a futures or forward
contract on Treasury market risk
mortgage-backed securities, in the
category corresponding to the type of
Treasury market risk mortgage-backed
security.
(2) For purposes of this part the
“interim haircut on each short futures
position and each short forward
position” is the product of the net
position haircut factor for the category
corresponding to, in the case of a futures
or forward contract on Treasury market
risk instruments except mortgagebacked securities, the maturity of the
underlying instrument at the time of the
maturity of the contract or, in the case of
a futures or forward contract on
Treasury market risk mortgage-backed
securities, the type of Treasury market
risk mortgage-backed security and the
value of the short futures position' or
short forward position evaluated at the
current market price for such contract.
(2) For purposes of this part, the gross
short futures and forward interim
haircut is a negative number.
(B) Negative gross options interim
haircut The “negative gross options
interim haircut” equals, for each
categoiy in § 402.2(f)(1), the sum of the
interim haircuts on each sold call and
purchased put placed in the category
corresponding to the term to maturity or
type of underlying instrument.
(1) For purposes of this part, the
“interim haircut on each sold call and
purchased put” equals the lesser of the
market value of the option or, (i) in the
case of an option on a cash instrument,
the product of the net position haircut
factor for the category to which the
underlying cash instrument corresponds
and the market value of the underlying
cash instrument or, (ii) in the case of an
option on a futures contract, the interim
haircut on the underlying futures
contract.
(2) For purposes of this part, the
negative gross options interim haircut is
a negative number.
(4) Total hedging disallowance
haircut The “total hedging disallowance
haircut” equals the sum of the hedging
disallowance haircuts calculated
pursuant to each netting of qualified
netting interim haircuts. The “hedging
disallowance haircut” equals the
absolute value of the product of the
applicable category pair hedging
disallowance haircut factor specified in
| 402.2(f)(3) and the smaller in absolute
value of any two qualified netting
interim haircuts, netted in accordance

from its calculation of the Treasury
with the provisions of this paragraph.
market risk haircut and include m its
Schedule E of this Appendix can be
used to make this calculation.
calculation of the other securities
(1) Qualified netting interim haircut.
haircut long and short positions in
The term “qualified netting interim
Treasury market risk instruments if such
haircut” means a residual position
positions form part of a hedge against
interim haircut or a net residual position long and short positions in securities,
interim haircut.
futures contracts, forward contracts, or
(A) Residual position interim haircut. options which are not Treasury market
The “residual position interim haircut"
risk instruments. The value of each
equals, for each category in § 402.2(f)(1), position in Treasury market risk
the sum of the positive aggregate interim instruments excluded from the
haircut and the negative aggregate
calculation of the Treasury market risk
interim haircut corresponding to the
haircut and included in the calculation
category, calculated in accordance with of the other securities haircut may not
the provisions of paragraph (a)(3) of this exceed the value of the position which it
Appendix.
offsets as part of a hedge.
(B) (1) Net residual position interim (2) For purposes of this paragraph (b),
haircut. The “net residual position
a gross long or short position in
interim haircut” equals, for any two
Treasury market risk instruments shall
categories between which netting is
be considered part of a hedge if the
permitted, the sum of (i) the residual
such
position interim haircuts calculated for inclusion ofof the position in the
calculation
other securities
those categories, in the case of the
haircut would serve to reduce said
category of the larger in absolute value haircut
of the two residual position interim
(c) Schedules. This paragraph sets
haircuts being netted, and [ii] zero, in
forth schedules which
the case of the category of the smaller in government securities may be used by
brokers or dealers
absolute value of the two residual
in the calculation of total haircuts as
position interim haircuts being netted.
(2) For the purposes of this paragraph required by this Part 402. The or
appropriate regulatory agency
(a)(4), netting is permitted only between designated examining authority may
categories for which a category pair
specify
hedging disallowance haircut factor has requiredother substantially similar forms
been specified in paragraph § 402.2(f)(3). securitiesto be used by government
brokers or dealers in the
(ii) Net residual position interim
calculation of such haircuts.
haircuts shall be substituted for the
residual position interim haircuts in the
Sc h e d u le A.-—Liq u id Ca p it a l
respective categories in which they have
R e q u ir em en t S u m m ar y Co m p u ta tio n
been placed and shall be considered as
if they were residual position interim
[Dollars in thousand]
haircuts. New net residual position
1 i inslid capita!1.......................
interim haircuts may continue to be
2. Haircuts on security and fi­
calculated until for each category pair
nancing positions including
for which netting is permitted at least
contractual commitments:
one of the two qualified netting interim
a.
Total
governments
haircuts is zero or both qualified netting
offset portion haircut
interim haircuts are of the same sign.
(Schedule C)......................
(5) Residual net position haircut The
b. Total futures and op­
tions
offset
haircut
“residual net position haircut” equals
(Schedule D).....................
the sum of the absolute values of all
c. Total hedging disallow­
qualified netting interim haircuts
ance haircut (Schedule
remaining in each category after the
E)........................„ ..........
completion of the calculation of
d. Residual net position
permissible nettings described in
haircut (Schedule E)........
paragraph (a)(4) of this section.
e. Other securities haircut
(b) Other securities haircut The
(use SEC factors........
“other securities haircut” equals the sum 3. Haircuts on credit exposure:
a. Concentration of credit
of all deductions specified in § 240.15c3haircut...................... .
l(c)(2)(vi) and (c)(2)(viii) of this title and
b. Credit volatility haircut.....
§ | 240.15c3-la and 240.15c3-lb of this
4. Total haircuts (lines 2 + 3 ) ......
title for long and short positions in
5. Capital-to-risk ratio (line 1
securities, futures contracts, forward
divided by line 4 ).......................
contracts, options, and other inventory
1 Identical to the amount reported on line 3640 of the
which are not Treasury market risk
Report on Finances and Operations of Government Securi­
instruments as defined in | 402.2(e).
ties Brokers and Dealers, Form G-405.
(1) A registered government securities
broker or dealer may elect to exclude
®ILUM© CODS 481&-S5-K

T?»

T T

m(
~-»

(+)

<-)

Offset
Portions
(+)

Net
Immediate
Positions
U 71 )

0-44 days
A
B 45-134 days
B
C
C 135 days™
. 9 months
D
D 9-1® months
E 1.5-3.5 years
E
(1.5-3 years)
F 3.5-7.5 years
F
(3-5.5 years)
G
G 7.5-15 years
(5.5-9 years)
H
H 15-30 years
(9-12 years)
I
1 (12-21 years)
J (21 years and
J
over)
M
B
MB mortgage-backed
AR adjustable rate
AR
mortgage-backed
Column Number
1 2
3
4
5
6
7#
8#
__ ______________
(1+3)
(2+4)
(Note 1)
(5+6)
# Carry forward to Schedule C.
Note 1s The offset portion (Column 7) is the snaller of Columns 5 and 6.
J / The categories are designated in Sec. 402.2(f)(1). A category contains a ll securities with m aturities greater
than or equal to the lower of the designated maturities^ but less than the higher. Maturity designations in par­
entheses refer to m aturities of zero-coupon instruments to be placed in that category. In categories A, B, C,
and D, zero-coupon instruments are to be treated in the sane manner as a ll other instruments. A half year (.5) is
always considered! to be 6 months.
2/ Long financings are financings which provide securities to a broker or dealer? short financings are those which
provide funds.
A

Federal Register / Vol. 52, No. 36-37 / W ednesday, February 25,1987 / Proposed-Rules

Maturity
Category V

Schedule B
Calculation of Net Immediate Positions in
_______ Securities and Financings_______
($ millions)
h
Financings
Securities Positions Total Securities and
Long 2/ Short 2/ Long
Short Financing Positions

5©9S

5700

Federal Register / VoL 52, No. 36-37 / Wednesday, February 25,1987 / Proposed Rules

Schedule C

Maturity
Category V
A
B
C

Governments Offset Portion and Net Immediate
Position Interim Haircuts Calculation
($ millions)
Net Immediate Positions
Governments Offset Portion
Interim
$ Amounts Factors Haircuts $ Amounts Factors Haircuts
(.+)
------ " ' <+)
(+/-) ~ — '(+/-)

Q-44 days
None
None
45-134 days
0.0012
0.0005
0.0020
135 days0.0008
9 months
0
9-18 months
0.0045
0.0020
E
0.0110
1.5-3.5 years
0.0050
(1.5-3 years)
F
0.0220
3.5-7.5 years
0.0045
(3-5.5 years)
G
7.5-15 years
0.0330
0.0090
(5.5-9 years)
H
15-30 years
0.0155
0.0500
(9-12 years)
I
(12-21 years)
0.0775
0.0150
(21 years and
J
0.1125
0.0210
over)
M
B mortgage-backed
0.0330
0.0090
AR adjustable rate
0.0050
0.0110
mortgage-backed
Total Governments Offset Portion Haircut I
Colum Nunbar
7
9
10#
8
11
12##
(Note 1)
(7x9)
(Note 1)
(8x11)
# Carry to Schedule h p line 2a
## Carry forward to Schedule D (or Schedule E, if no forwards,
futures t or options).
Note 1s From Schedule B.
2/ The categories withdesignated in Sec. 402.2(f)(1). Atocategory contains
are
a ll securities
m aturities greater than or equal the lower of the
designated m aturities? ta t less than the higher. Maturity designations in
parentheses refer to m aturities of zero-coupon instruments to be placed
in the category. In categories A* B, C? and D, zero-coupon instruments are
to be treated in the same manner as a ll other instruments. A half year (.5)
is always considered to be 6 months.

— ~ W -1

(+)

(-)

(+)

(-)

(+)

(->

(+)

“

B
C
D

45-134 days
135 days9 months
9-18 months
1.5- 3.5 years
(1.5-3 years)
3.5- 7.5 years
(3-5.5 years)
7.5- 15 years
(5.5-9 years)
15-30 years
(9-12 years)
I (12-21 years)
J (21 years and
ewer)
MB mortgage-backed
m adjustable rate
mortgage-backed

Column Number

W ^T

E

F
G
H
I

J
M
B
AR
Total Futures and Options Offset Portions $_
Factors
Total Futures and Options Offset Haircuts $_
19
14
15
16
17
18
(Note 2)

20##
13
12
(Note 1)
# Carry to Schedule A„ line 2h„
## Carry forward to Schedule E.
Note Is From Schedule C.
Note 2s Ooluim 19 is the smaller of columns 17 and 18.
1/ The categories are designated in Sec. 402.2(f)(1). A category contains a ll securities with m aturities greater
“ than or equal to the lower of the. designated m aturities, but less than the higher. Maturity designations in
parentheses refer to m aturities of zero-coupon instruments to be placed in the category. In categories A, B,
C B and D, zero-coupon instruments are to be treated in the same manner as a ll other instruments. A half year
is always considered to be 6 months.
2/ The total futures and notions haircut is calculated from the total of column 19.

Federal Register / Vol. 52, No. 36-37 / W ednesday, February 25,1987 / Proposed Rules

Maturity
C at^orx J /

Schedule D
Consolidation of Net Immediate Position Interim Haircuts
with Gross Futures and Options Interim Haircuts_____
($ thousands)
Gross Interim Haircuts
Net Immediate
Position Interim Futures &
Aggregate Interim Futures & Options Residual Position
Forward
Options
Haircuts
Offset Portions 2/ Interim Haircuts
Haircuts

©o

Schedule E
Calculation of Hedging Disallowance Hairouts
when Metting Haircuts Across Categories
J/
{ thousands)
$
30% Disallowance
let
Hedging
Residual
Disallow­ Position
ance
Interim
Haircuts Haircuts
()
+
</>
+-

€0% Disallowance
let
Residual
Hedging
Disallow­ Position
Interim
ance
arus
Haircuts H i c t '
■+■
()
</>
+-

Hedging
Disallow­
ance
Haircuts
()
+

B

B 4 - 1 4 days
§=3
C 1 5 days3
9 months
D 9=1§ months

C
D
E

1 1 95=3 o5 y ea rs

do5=3 years)
F 3o5=70 years
5
(3=5o§ years)
G 7o5=15 years
(5o5=9 years)
E 15=30 years
(9=12 y a s ,
er)
I ( 2 2 years)
1-1
J ( 1 years and
2
oe)
vr
KB s a f g g - a k d
rrcaebce
M adjustable rate
mortgage-backed

Qualified
Netting
Interim
Haircuts
<)
♦

F
G
H
.

I
J
MB

Total Hedging Disallowance Haircuts!

m

Residual let Position Haircuts!
Column lumbar

20
2
1
22
23
21
4
25
26
270
2800
,
(lote .)
1
(Note 2
)
(lot© 2
)
(Mote 2 (lot® 3
)
)
0 Column 27 c r i s forward to Schedule kp line 2eD
are,
00 Column 28 total carries forward to Schedule A line 2d0
*
Hotels: From Schedule D ( r Schedule C if no forwards* f t r s ; or.options)0
o
*
uue,
Note 2s let of two offsetting haircuts of paired maturity categories»
Note 3 For every entry in column 20 there should be an entry in either column 27 or 28 (but never both).
s
1 See Sec 402.2(f)(3) for category pair hedging disallowance haircut factors»
/
1/ T e categories are designated.n Sec.'
h.
i
402.2(f)(1). h category contains all securities with maturities greater
than or equal to the lower of the designated maturities* but less than the higher. ,
Maturity designations in
parentheses refer to maturities of z r = e u o instruments to be placed i. the c t g r * In categories Aeo=opn
n
aeoy,
,
B C and D zero-coupon instruments are to be treated in the same manner as-all other instruments. A half
* ,
*
year ( 5 is always considered to be 6 m n h ®
.)
ots0

BILUNG

4810-2S-C

Federal Register / Vol. §2, No. 36-37 / W ednesday, February 25,1987 / Proposed Rules

Maturity
Category 2/

Residual
Position
Interim
Haircuts
(/)
+-

26% Disallowance
1st
Residual
Hedging
Disallow Position
ance
Interim
Haircuts Haircuts
()
+
'+</)

Federal R@gista‘ / YoL 52,. No. 36=37 / Wednesday, February 25, 1987 / Proposed Rules
§ 402.2b [Reserved]
§ < © „g App©ndSn C—Modification ©!
Sg ©
§ 240.15C3-1© off this tlSI®, r©l®te§ to
©©iresofdaitod] ©aleutatilon® off ©apitol, ter
purposes @ § 402.2.
1
?

Section 24Q.15c3-lc of this title shall
apply to government securities brokers
and dealers subject to the requirements
of | 402.2 with the following
modifications:
(a) References to “broker or dealer”
include government securities brokers
and dealers.
(b) References to “net capital” mean
“liquid capital” as defined in § 402.2(d).
(c) References to “aggregate
indebtedness” shall be disregarded.
(d) References to “17 CFR 240.15c3-l”
mean § 402.2.
(e) Section 240.15c3-lc(b)(l) is
modified to read as follows:
“(1) If the consolidation, provided for
in paragraph (a) of this section, of any
such subsidiary or affiliate, results in the
increase of the government securities
broker’s or dealer’s liquid capital, as
defined in § 204.2(d) of this title, or the
decrease of the government securities
broker’s or dealer’s total haircuts, as
defined in § 402.2(g) of this title, and an
opinion called for in paragraph (b)(2)
has not been obtained, such benefits
shall not be recognized in the
government securities broker’s or
dealer’s computation required by § 402.2
of this title.”
(f) The reference in § 24Q.15c3-lc(c)(3)
to “17 CFR 240.15c3-ld” means such
section as modified by § 402.2d.
§ 402.2d App©mdlK D—Modification of
§240.15c3-1d off this title, relating to
satisfactory. ®M
fe>©rdfaatfo[r? agreements, for
purposes off § 402.2.

Section 240.15c3-ld of this title shall
apply to government securities brokers
and dealers subject to the requirements
of § 402.2 with the following
modifications.
(a) References to “broker or dealer”
include government securities brokers
and dealers.
. (b) References to “17 CFR 24Q.15c3-l”
mean § 402.2.
(c) Section 240.15c3-ld(a)(2)(iii) is
modified to read as follows:
“(iii) The term “Collateral Value” of
any securities pledged to secure a
secured demand note shall mean the
market value of such securities after
giving effect to the haircuts specified in
§ 402.2a of this title.”
(d) References to “17 CFR 240.15c3™
Id” mean that section as modified by
this section.
(e) Section 240.15c3-ld(b)(6)(iii) is
modified to read as follows:
“(iii) The secured demand note
agreement may also provide that, in lieu

of the procedures specified in the
provisions required by paragraph
(b)(6)(ii) of this section, the lender, with
prior written consent of the government
securities broker or dealer and the
Examining Authority for such broker or
dealer, may reduce the unpaid principal
amount of the secured demand note.
After giving effect to such reduction, the
liquid capital, as defined in § 402.2(d) of
this title, of the government securities
broker or dealer may not be less than
150% of the government securities
broker’s or dealer’s total haircuts, as
defined in § 402.2(g) of this title. No
single secured demand note shall be
permitted to be reduced by more than
15% of its original principal amount and
after such reduction no excess collateral
may be withdrawn. No Examining
Authority shall consent to a reduction of
the principal amount of a secured
demand note if, after giving effect to
such reduction, liquid capital after
deducting total haircuts would be less
than 120% of the minimum dollar
amount required by § 402.2(b) or
§ 402.2(c) of this title as applicable.”
(f) Section 240.15c3-ld(b)(7) is
modified to read as follows:
“(7) A government securities broker or
dealer at its option but not at the option
of the lender may, if the subordination
agreement so provides, make a Payment
of all or any portion of the Payment
Obligation thereunder prior to the
scheduled maturity date of such
Payment Obligation (hereinafter
referred to as a “Prepayment”), but in no
event may any Prepayment be made
before the expiration of one year from
the date such subordination agreement
became effective. This restriction shall
not apply to temporary subordination
agreements which comply with the
provisions of paragraph (c)(5) of this
Appendix D. No Prepayment shall be
made if, after giving effect thereto (and
to all Payments of Payment Obligations
under any other subordinated
agreements then outstanding the
maturities or-accelerated maturities of
which are scheduled to fall due within
six months after the date such
Prepayment is to occur pursuant to this
provision or on or prior to the date on
which the Payment Obligation in respect
to such Prepayment is scheduled-to
mature disregarding this provision,
whichever date is earlier) without
reference- to any projected profit or loss
of the government securities broker or
dealer, -the liquid capital, as defined in
§ 402.2(d) of this title, of the government
securities broker or dealer would be less
than 150% of the government securities
broker’s or-dealer’s total haircuts, -as
defined in § 402.2(g) of this title.
Notwithstanding the above, no

5703

Prepayment shall occur without the
prior written approval of the Examining
Authority for such government securities
broker or dealer.”
(g) Section 240.15c3-ld(b}(8) is
modified to read as follows:
“(i) The Payment Obligation of the
government securities broker or dealer
in respect of any subordination
agreement shall be suspended and shall
not mature if, after giving effect to
Payment of such Payment Obligation
(and to all Payments of Payment
Obligations of such broker or dealer
under any other subordination
agreement(s) then outstanding which are
scheduled to mature on or before such
Payment Obligation), either the liquid
capital, as defined in § 402.2(d) of this
title, of the government securities broker
or dealer would be less than 150% of the
government securities broker’s or
dealer’s total haircuts, as defined in
§ 402.2(g) of this title, or the government
securities broker’s or dealer’s liquid
capital after deducting total haircuts
would be less than 120% of the minimum
dollar amount required by § 402.2(b) or
§ 402.2(c) of this title, as applicable. The
subordination agreement may provide
that if the Payment Obligation of the
government securities broker or dealer
thereunder does not mature and is
suspended as a result of the requirement
of this paragraph (b)(8) for a period of
not less than six months, the
government securities broker or dealer
shall thereupon commence the rapid and
orderly liquidation of its business but
the right of the lender to receive
Payment, together with accrued interest
or compensation, shall remain
subordinate as required by the
provisions of 17 GFR 240.15c3~l and
240.15c3-ld.”
(h) Section 240.15c3-ld(b)(10)(ii)(B) is
modified to read as follows:
“(B) The liquid capital, as defined in
§ 402.2(d) of this title, of the government
securities broker or dealer is less than
120% of total haircuts, as defined in
§ 402.2(g) of this title, throughout a
period of 15 consecutive business days,
commencing on the day the broker or
dealer first determines and notifies the
Examining Authority for the government
securities broker or dealer, or the
Examining Authority or the Commission
first determines and notifies the
government securities broker or dealer
of such fact;”.
(i) Section 240.15c3-ld(c)(2) is
modified to read as follows:
“(2) Notice of Maturity or Accelerated
Maturity. Every government securities
broker or dealer shall immediately
notify the Examining Authority for such
broker or dealer if, after giving effect to

s

7m

Federal Register / Vol. §2, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

all Payments of Payment Obligations
under subordination agreements then
outstanding which are then due or
mature within the following six months
without reference to any projected profit
or loss of the broker or dealer, the liquid
capital, as defined in § 402.2(d) of this
title, of such government securities
broker or dealer, would be less than
150% of total haircuts, as defined in
§ 402.2(g) of this title.”
(j) Section 240.15c3-ld(c)(5){i) is
modified to read as follows:
“(i) For the purpose of enabling a
government securities broker or dealer
to participate as an underwriter of
securities or other extraordinary
activities in compliance with-the capital
requirements of § 402.2 of this title, a
government securities broker or dealer
shall be permitted, on no more than
three occasions in any 12 month period,
to enter into a subordination agreement
on a temporary basis which has a stated
term of no more than 45 days from the
date such subordination agreement
became effective. This temporary relief
shall not apply to a government
securities broker or dealer if, at such
time, it is subject to any of the reporting
provisions of § 405.3 of this title,
irrespective of its compliance with such
provisions or if immediately prior to
entering into such subordination
agreement, the liquid capital, as defined
in § 402.2(d) of this title, of such broker
or dealer would be less than 150% of
total haircuts, as defined in § 402.2(g) of
this title, or the amount of its then
outstanding subordination agreements
exceeds the limits specified in
§ 240.15c3-l(d). Such temporary
subordination agreement shall be
subject to all other provisions of this
Appendix B.”
(k) Section 240.15c3-l(c)(5)(ii)(A) is
modified to read as follows:
“(A) After giving effect thereto (and to
all Payments of Payment Obligations
under any other subordinated
agreements then outstanding the
maturity or accelerated maturities of
which are scheduled to fall due within
six months after the date such
prepayment is to occur pursuant to this
provision or on or prior to the date on
which the Payment Obligation in respect
of such prepayment is scheduled to
mature disregarding this provision,
whichever date is earlier) without
reference to any projected profit or loss
of the government securities broker or
dealer, the liquid capital, as defined in
| 402.2(d) of frits title, of such broker or
dealer, would be less than 180% of total
haircuts, as defined in § 402.2(g) of this
title.”

PART 403—PROTECTION OF

custo m er

S E c y m is A m

BALANCES

Sec.

403.1 Application of part to registered
brokers and dealers.
403.2 Hypothecation of customer securities.
403.3 Use of customers’ free credit balances.
403.4 Customer protection—reserves and
custody of securities.
403.5 Custody of securities held by financial
institutions that are government
securities brokers or dealers.
Authority: Sec. 101, Pub. L 99-571,100 Stat.
3209 (15 U.S.C. 78o-5(b)(1)(A), (b)(2)).
§ 403. H Application ®f part to regietorod
hr@k®r© and dsaters.

Compliance by registered brokers or
dealers with §§ 240.8c-!, .15c2-l, and
.15c3-2 of this title (Commission Rules
8c-l, 15c2-l and 15c3-2), and with
§ 240.15c3~3 of this title (Commission
Rule 15g3“ 3) as modified by § 403.4(a)(i) constitutes compliance with this part.
1 403.1 IHlyp@
ffii©@
atSon @ @ustom®i?
f

securities.
Every registered government
securities broker or dealer shall comply
with the requirements of § 24Q.15c2-l of
this title concerning hypothecation of
customer securities with the following
modifications:
(a) In § 240.15c2-l(a), the words "as used in section 15(c)(1) of the Act” shall
be substituted for the words “as used in
section 15(c)(2) of the Act.”
(b) Section 24Q.15c2-l(d) is modified
to read as follows:
"(d) Exemption for clearing liens. The
provisions of paragraphs (a)(2), (a)(3)
and (f) of this section shall not apply to
any Hen or claim of a clearing bank, or
the clearing corporation (or similar
department or association) of a national
securities exchange or a registered
national securities association, for a
loan made on the date of purchase or
sale of the securities subject to said lien
and to be repaid on the same calendar
day, which loan is incidental to the
clearing of transactions in securities or
loans through such bank, corporation,
department or association: provided\
however, that for the purpose of
paragraph (a)(3) of this section,
“aggregate indebtedness of all customers
in respect of securities carried for their
accounts’ shall not include indebtedness
in respect of any securities subject to
any lien or claim exempted by this
paragraph.”
§ 4§So3 Us® off @is©f©mtrs”fr@®©rodlt
Mum©®©.
Every registered government
securities broker or dealer shall comply
with the requirement of § 240.15c3-2 of

this title concerning the use of customer
free credit balances.
§ 403.4
and

protection—reserves.
securities.

Every registered government
securities broker or dealer shall comply
with the requirements, of | | 246.15c3-3
and 24Q.15c3-3a of this title
(Commission Rule 15c3-3 and Exhibit A
thereto), with the following,
modifications:
(a) References to "broker or dealer”
include government securities brokers
and dealers.
(b) “Fully paid securities”, as defined
in § 240.15c3=3(a)(3) of this title,
includes all securities held by a
government securities broker or a
government securities dealer for the
account of a customer who has made
full payment, for such securities.
(c) “Margin securities”, as defined in
§ 240.15c3-3(a)(4) of this title, includes
any securities for which a customer has
not made full payment and for which the
customer has received an extension of
credit by a government securities broker
or government securities dealer for a
portion of the purchase price.
(d) “Excess margin securities”, as
defined in § 240.15c3-3(a)(5) of this title,
includes margin securities carried for
the account of a customer having a
market value in excess of 140 percent of
the total of the debit balances in the
customer’s account or accounts with the
broker or dealer.
(e) For purposes of this section,
§ 240.15c3-3(b) of this title shall include
a new paragraph (4) as follows:
“(4)(i) A broker or dealer that retains
custody of securities that are the subject
of a repurchase agreement between the
broker or dealer and a person other than
another broker or dealer that is
registered pursuant to section 15,15B or
15C (a)(1) (A) of the Act (15 U.S.C. 78o,
78o-4, 78o-5(a)(l)(A)) or that has filed
notice of its status as a government
securities broker or dealer pursuant to
section 15C(a)(l)(E) of the Act (15 U.S.C.
78o-5(a)(l)(B)) shall:
“(A) Obtain the repurchase agreement
in writing;
“(B) Provide in such agreement that
when the contract'price in the aggregate
of all currently outstanding repurchase
transactions with a single counterparty
is less than $5,000,000, any substitution
of other securities for the securities that
are the subject of any repurchase
transaction, pursuant to the terms of the
repurchase agreement, may be made
only with the prior agreement of the
counterparty to each specific
substitution;

Fgdteffa! Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / .Proposed Rules
“(C) Confirm in writing the specific
bank pursuant to a written clearing
securities that are the subject of a
agreement with such clearing bank
repurchase transaction pursuant to such which provides that:
agreement at the initiation of the
(i) Such account is established for the
transaction and a t the end of any day
purpose of segregating securities of
during which other securities are
counterparties or customers of such
substituted;
broker or dealer from proprietary
“(D) Advise the counterparty in the
securities of the broker or dealer;
repurchase agreement that the Securities
(ii) The broker or dealer is entitled to
Investor Protection Act of 1970 may not direct the disposition of the securities;
provide any protection to the
and
(iii) The clearing bank does not have,
counterparty with respect to the
repurchase agreement, and to the extent and will not assert, any claim or lien
that it is deemed applicable, the amount against such securities nor will the
clearing bank grant any third party,
of protection provided may not exceed
including any Federal Reserve Bank,
$500,000; and
“(E) Maintain possession or control of any interest in such securities so long as
they are maintained in the segregated
securities that are the subject of the
account.
agreement.
(g) In addition to the notification
“(ii) For purposes of this paragraph
required by § 24Q.15c3-3(i) of this title,
(4), securities are in the broker’s or
whenever any government securities
dealer’s control only if they are in the
broker or dealer is notified by a clearing
control of the broker or dealer within
the meaning of § § 24Q.15c3-3(c)(l),
bank that the bank refuses to place
securities in a Segregated Account (as
(c)(5), (c)(6), or | 403.4(f) of this title.
“(iii) A broker or dealer shall not be
defined in paragraph (f) of this section),
required to maintain possession or
the broker or dealer shall, in accordance
control during the trading day if:
with | 240.17a-ll(f) of this title, give
“(A) the repurchase agreement
telegraphic notice of the notification by
provides for the consent of the
the clearing bank within 24 hours and
counterparty to limited possession or
within 48 hours of the telegraphic notice,
control by including the following
file a report stating what steps are being
provisions:
taken to correct the situation.
“(7) ‘The securities allocated to the
(h) For purposes of this section,
repurchase transaction under the
| 240.15c3-3(l) of this title is modified to
agreement may be segregated from the
read as follows:
seller’s own securities only at the end of
"(1) Delivery or disposition of
each trading day.’; and
securities. Nothing stated in this section
“(2) ‘While the securities are
shall be construed as affecting the
commingled with the seller’s own
absolute right of a customer of a
securities during the course of a trading government securities broker or dealer,
day, they may be subject to a clearing
unless otherwise agreed in writing, in
lien or use by the seller for deliveries on the normal course of business
other securities transactions.’; and
operations following demand made on
“(B) The contract price of all currently the broker or dealer, to receive the
outstanding repurchase agreements with physical delivery of certificates if the
that counterparty in the aggregate
securities are issued in certificated form,
equals or exceeds $5,000,000.”
or to direct a transfer of or otherwise to
(f)(1) Securities under the control of a exercise control over any securities if
broker or dealer, as described in
they are:
§ 240.15c3-3(c) of this title, shall include
“(1) Fully-paid securities to which the
securities maintained by a broker or
customer is entitled;
dealer in an account at a depository
“(2) Margin securities upon full
institution, as defined in section
payment by such customer to the broker
19(b)(A)(i)-(vi) of the Federal Reserve
or dealer of the customer’s indebtedness
Act (12 U.S.C. 461 (b)(1)(A)(i)-(vi)),
to the broker or dealer; or
which depository institution has a book“(3) Excess margin securities not
entry securities account at a Federal
reasonably required to collateralize such
Reserve Bank through which it provides customer’s indebtedness to the broker or
clearing services (“clearing bank”),
dealer.”
provided the securities are maintained
(i) For purposes of this section
in a Segregated Account of the
| 240.15c-3(m) shall apply to
government securities broker or dealer. government securities, notwithstanding
(2) For purposes of this paragraph and the May 9,1973, order of the
paragraph (g) of this section, a
Commission (38 FR12103) suspending
Segregated Account is an account (other such applicability.
than a clearing account) of the
(j) For purposes of this section,
government securities broker or dealer
i 240.15c3-3(e)(3) is modified to read as
maintained on the books of a clearing
follows:

§>7®g

“(3) Computations necessary to
determine the amount required to be
deposited as specified in paragraph
■ (e)(1) of this section shall be made
weekly, as of the close of the last
business day of the week, and the
deposit so computed shall be made no
later than 1 hour after the opening of
banking business on the second
following business day; provided,
however, a government securities broker
or dealer registered pursuant to section
15C(a)(l)(A) of the Act (15 U.S.C. 78o~5
(a)(1)(A)) which has a ratio of liquid
capital to total haircuts (calculated in
accordance with Part 402 of this
chapter) of 1.8 or greater and which
carries aggregate customer funds (as
defined in paragraph (a)(10) of this
section), as computed at the last
required computation pursuant to this
section, not exceeding $1 million, may in
the alternative make the computation
monthly, as of the close of the last
business day of the month, and, in such
event, shall deposit not less than 105
percent f the amount so computed no
later than 1 hour after the opening of
banking business on the second
following business day. If a registered
government securities broker or dealer,
computing on a monthly basis, has, at
the time of any required computation, a
ratio of liquid capital to total haircuts of
less then 1.8, such broker or dealer shall
thereafter compute weekly as aforesaid
until four successive weekly
computations are made, none of which
were made at a time when its ratio of
liquid capital to total haircuts was less
than 1.8. Computations in addition to the
computation required in this paragraph
(3), may be made as of the close of any
other business day, and the deposits so
computed shall be made no later than 1
hour after the opening of banking
business on the second following
business day. The registered
government securities broker or dealer
shall make and maintain a record of
each such computation made pursuant
to this paragraph (3) or otherwise and
preserve such record in accordance with
| 240.17a-4.”
(k) For purposes of this section, Note
E(5) of | 240.15c3-3a of this title is
modified to read as follows:
“(5) Debit balances in margin
accounts (other than omnibus accounts)
shall be reduced by the amount by
which any single customer’s debitbalance exceeds 25% (to the extent such
amount is greater than $50,000) of the
government securities broker’s or
dealer’s liquid capital unless such
broker or dealer can demonstrate that
the debit balance is directly related to
credit items in the Reserve Formula.

57M

Fed©?®! Rogkter / Vol. 52, No. 36=37 / Wednesday, February 25, 1987 / Proposed Rules

Related accounts [e.g., the separate
accounts of an individual, accounts
under common control or subject to
cross guarantees) shall be deemed to be
a single customer’s accounts for
purposes of this provision.”
§ 4©3.§ Custody ©f s@<gM5lfe held by
-financial Insffitaions tltet ©ps government
securities brokers or dealers.
(a) A government securities broker or
dealer that is a financial institution
shall:
(1) Comply with Part 450 with respect
to all securities held for the account of
customers of the financial institution in
its capacity as a fiduciary or custodian
(unless otherwise exempt pursuant to
§ 450.3): and
(2) Comply with Part 450 and with
paragraphs (c) and (d) of this section
with respect to all securities held for
customers or counterparties of the
financial institution in its capacity as
government securities broker or dealer.
(b) A financial institution shall not be
in violation of the possession or control
requirements of paragraphs (c) and (d)
of this section if, solely as the result of
normal business operations, temporary
lags occur between the time when a
security is first required to be in the
financial institution’s possession or
control and the time when it is actually
placed in possession or control,
provided that the financial institution
takes timely steps in good faith to
establish prompt possession or control.
(c) (1) On each business day a
financial institution shall determine the
quantity and issue of such securities, if
any, that are required to be but are not
in the financial institution’s possession
or control. As appropriate to bring such
securities into possession or control, the
financial institution shall promptly:
(1) Obtain the release of any lien,
charge, or other encumbrance against
such securities,
(ii) Obtain the return of any securities
loaned;
(iii) Obtain possession or control of
securities failed to receive for more than
30 days;
(iv) Buy in securities as necessary to
the extent any shortage of securities in
possession or control cannot be resolved
by any of the above procedures.
(2) The financial institution shall
prepare and maintain a current and
detailed description of the procedures
and internal controls that it utilizes to
comply with the possession or control
requirements of this paragraph (c),
which shall be made available upon
request to its appropriate regulatory
agency.
(3) Nothing stated in this section shall
be construed, as affecting the absolute

(i) Hie repurchase agreement provides
for the consent of the counterparty to
limited possession or control by
including the following provisions:
(A) “The securities allocated to the
repurchase transaction under the
agreement may be segregated from the
seller’s own securities only at the end of
each trading day.”; and
(B) “While the
(i) Fully-paid securities to which the commingled with securities are
the seller’s own
customer is entitled;
securities during the course of a trading
(ii) Margin securities upon full
payment by such customer to the broker day, they may be subject to a clearing
or dealer of the customer’s indebtedness lien or use by the seller for deliveries on
other securities transactions.”; and
to the broker or dealer; or
(ii) The contract price in the aggregate
(iii) Excess margin securities not
reasonably required to collateralize such of all currently outstanding repurchase
customer’s indebtedness to the broker or transactions with that counterparty
dealer.
equals or exceeds $5,000,000.
(d)(1) A financial institution that
retains custody of securities that are the PART 404-*RECORDKEEPING AND
raeSE[FSWAY§©K! © f ^ s c o r n s
subject of a repurchase agreement
between the financial institution and a
Sec.
person other than another broker or
404.1 Application of part to registered
dealer that is registered pursuant to
section 15,15B or 150(a)(1)(A) of the Act 404.2brokers andtodealers. and kept current
Records be made
(15 U.S.C. 78o, 78o-4, 78o-5(a)(1)(A)) or
by registered government securities
that has filed notice of its status as a
brokers and dealers; records of non­
government securities broker or dealer
resident registered government securities
pursuant to section 150(a)(1)(B) of the
brokers and dealers.
Act (15 U.S.C. 78o-5(a)(l)(B)) shall:
404.3 Records to be preserved by registered

right of a customer of a government
securities broker or dealer, unless
otherwise agreed in writing, in the
normal course of business operations
following demand made on the broker or
dealer, to receive the physical delivery
of certificates if the securities are issued
in certificated form, or to direct a
transfer of or otherwise to exercise
control over any securities if they are:

(1) Obtain the repurchase agreement in
writing;
(ii) Provide in such agreement that
when the contract price in the aggregate
of all currently outstanding repurchase
transactions with a single counterparty
is less than $5,000,000, any substitution
of other securities for the securities that
are the subject of any repurchase
transaction, pursuant to the terms of the
repurchase agreement, may be made
only with the prior agreement of the
counterparty to such substitution;
(iii) Confirm in writing the specific
securities that are the subject of a
repurchase transaction pursuant to such
agreement at the initiation of the
transaction and at the end of any day
during which other securities are
substituted;

government securities brokers and
dealers.
404.4 Records to be made and preserved by
government securities brokers and
dealers that are financial institutions.
404.5 Securities counts by registered
government securities brokers and
dealers.
404.6 Securities counts by government
securities brokers and dealers that are
financial institutions.
Authority: Sec. 101, Pub. L. 99-571,100 Stat.
3209 (15 U.S.C. 78o-5(b)(l)(B), (b)(1)(C),
(b)(2)).
§ 404.1 Application ©f part 4© registered
brokers and dealers.

Compliance by a registered broker or
dealer with:
(a) Section 240.17a-3 of this title,
pertaining to records to be made,
(iv) Advise the counterparty in the
modified as provoded in § § 404.2(a) (3),
repurchase agreement that the funds
held by the financial institution pursuant (4)(b)and (5); 240.17a-4 of this title,
Section
to a repurchase transaction are not a
deposit and therefore are not insured by pertaining to preservation of records;
(c) Section 2Q4.17a-13 of this title,
the Federal Deposit Insurance
Corporation or the Federal Savings and pertaining to quarterly securities counts,
modified as provided in | 404.5(a)(2);
Loan Insurance Corporation, as
and
applicable; and
(v) Maintain possession or control of
(d) Section 240.17a-7 of this title,
securities that are the subject of the
pertaining to records of non-resident
agreement in accordance with § 450.4 (a) brokers or dealers, shall constitute
and (b).
compliance with this part.
(2) The financial institution shall not
be required to maintain possession or
control during the trading day if:

Federal Register / VoL 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
title. Such trial balances and
computations shall be prepared
currently at least once a month.”
(7) Paragraph 240.17a-3(b)(l) is
modified to read as follows:
(а ) Every registered government
not be deemed
securities broker or dealer shall comply to “(1) Thisasection shall securities
require government
with the requirements of § 240.17a-3 of broker or dealer registered pursuant to
this title (Commission Rule 17a-3), with section 150(a)(1)(A) of the Act (15 U.S.C.
the following modifications:
78o-5(a)(l)(A)) to make or keep such
(1) References to “broker or dealer”
records of transactions cleared for such
and “broker or dealer registered
government securities broker or dealer
pursuant to Section 15 of the Act”
as are customarily made
a
include registered government securities clearing broker or dealer and kept by the
pursuant to
brokers or dealers.
and
(2) References to § § 240.17a-3, .17a-4, requirements of § § 240.17a-3 clearing
240.17a-4: Provided,
the
.17a-5, and .17a-13 mean such sections broker or dealer has that maintains net
and
as modified by this Part and Part 405 of capital of not less than $25,000 (or, in the
this chapter.
case of a clearing broker or dealer that
(3) Section 24Q.17a-3(a)(4) is revised
is a registered government securities
by adding paragraph (a}(4)(vii) to read
broker or dealer, liquid capital less total
as follows:
haircuts, determined as provided in
“(vii) Repurchase and reverse
§ 402.2 of this title, of not less than
repurchase agreements.”
(4) Section 240.17a-3(a)(5) is modified $25,000) and is otherwise in compliance
with § 240.15c3-l, § 402.2 of this title, or
to read as follows:
the capital rules of the exchange of
“(5j A securities record or ledger
reflecting separately for each security as which such clearing broker or dealer is a
member if the members of such
of the clearance dates all "long” or
“short” positions (including securities in exchange are exempt from § 240.15c3-l
by paragraph (b)(2) thereof.”
safekeeping and securities that are the
(8) The undertaking in § 240.17asubjects of repurchase or reverse
repurchase agreements) carried by such 3(b)(2) is modified to read as follows:
“The undersigned hereby undertakes
member, broker, or dealer for his
to maintain and preserve on behalf of
account or for the account of his
[registered government securities broker
customers or partners or others and
or dealer] the books and records
showing the location of all securities
required to be maintained by [registered
long and the offsetting position to all
securities short, including long security government securities broker or dealer]
pursuant to 17 CFR § § 404.2 and 404.3
count differences and short security
count differences classified by the date and Rules 17a-3 and 17a-4 under the
of the physical count and verification in Securities Exchange Act of 1934 and to
permit examination of such books and
which they were discovered, and in all
records at any time or from time to time
cases the name or designation of the
during business hours by examiners or
account in which each position is
other representatives of the Securities
carried.”
(5) Section 240.17a-3(a)(8) is modified and Exchange Commission, and to
furnish to said Commission at its
to read as follows:
principal office in Washington, DC, or at
“(8) Copies of confirmations of all
any regional office of said Commission
purchases and sales of securities,
specified in a demand made by or on
including all repurchase and reverse
behalf of said Commission for copies of
repurchase agreements, and copies of
notices of all other debits and credits for books and records, true, correct
complete, and current copies of any or
securities, cash and other items for the
all, or any part, of such books and
account of customers and partners of
records. This undertaking shall be
such member, broker or dealer.”
binding upon the undersigned, and the
(б ) Paragraph 240.17a-3(a)(ll) is
successors and assigns of the
modified to read as follows:
undersigned.”
“(11) A record of the proof of money
(9) Section 240.17a-3(c) is modified to
balances of ail ledger accounts in the
form of trial balances, and a record of
read as follows:
the computation of liquid capital and
“(c) This section shall not be deemed
total haircuts, as of the trial date,
to require a government securities
determined as provided in § 402.2 of this broker or dealer to make or keep such
title; provided however, that such
records as the required by paragraph (a)
computation need not be made by any
reflecting the sale and redemption of
registered government securities broker United States Savings Bonds, United
or dealer unconditionally exempt from
States Savings Note and United States
Part 402 of this title by § 402.1(e) of this Savings Stamps.”

§ 404.2 IReeords to be read® and kept
current by registered government
securities brokers and dealers; records o?
non-resident registered government
securities brokers and dealers.

5707

(bXl) Every non-resident government
securities broker or dealer registered or
applying for registration pursuant to
section 15C of the Act shall comply with
§ 240.17a-7 of this title, provided that in
such section references to “broker or
dealer” shall include government
securities brokers or dealers.
(2) The term “non-resident
government securities broker or dealer”
means (i) in the case of an individual,
one who resides in or has his principal
place of business in any place not
subject to the jurisdiction of the United
States; (iij in the case of a corporation,
one incorporated in or having its
principal place of business in any place
not subject to the jurisdiction of the
United States; and (iii) in the case of a
partnership or other unincorporated
organization or association, one having
its principal place of business in any
place not subject to the jurisdiction of
the United States.
§ 404.3 Records to be preserved by
registered government securities brokers
and dealers.

Every registered government
securities broker or dealer shall comply
with the requirements of § 240.17a-4 of
this title (Commission Rule 17a-4), with
the following modifications:
(a) References to “broker or dealer”
and “broker and dealer” include
registered government securities brokers
or dealers.
(b) References to §§ 240.17a-3> .17a-4,
and .17a-5 mean such sections as
modified by this part and Part 405 of this
chapter.
(c) References to 1240.15c3-l, relating
to net capital, and “Computation for Net
Capital” thereunder mean § 402.2 of this
chapter and the computation of the ratio
of liquid capital to total haircuts
required thereunder.
(d) References to § 240.15c3-3, relating
to possession or control of customer
securities and balances, mean § 403.4 of
this chapter.
(e) References to Form X-17A-5 mean
Form G-405 (§ 449.5 of this chapter).
(f) The computation described in
1240.17a-4(b)(8Xx) is not required.
§ 404.4 R<s<g©rd© to b® mad® and
preserved by government ©eeurSfflss
brokers and dealers that ars finaneia!
Institutions.

(a) Every financial institution that is a
government securities broker or dealer
and that is not exempt from this part
pursuant to Part 401 of this chapter shall
comply with the requirements of
§ § 404.2 and 404.3 unless such financial
institution:
(1) Is subject to 12 CFR Part 12
(relating to national banks), 12 CFR Part

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
208 (relating to state member banks of
the Federal Reserve System) or 12 GFR
344 (relating to state banks that are not
members of the Federal Reserve
System), provided however, that the
records required to be made and kept by
those regulations shall be made or kept
without regard to the exemptions for
transactions in U.S. government or
federal agency obligations provided in
12 CFR 12.7(a), 12 CFR 2Q8.8(k)(8)(i), and
12 CFR 344.7(a); and
(2) Makes and keeps current:
(1) A securities record or ledger
reflecting separately for each
government security as of the clearance
dates all “long” or “short” positions
(including government securities in
safekeeping and government securities
that are the subjects of repurchase or
reverse repurchase agreements) carried
by such financial institution for its
account or for the account of its
customers or others and showing the
location of all government securities
long and the offsetting position to all
government securities short, including
long security count differences and short
security count differences classified by
the date of the physical count and
verification in which they were
discovered, and in all cases the name or
designation of the account in which
each position is carried;
(ii) A complete and current Form GFIN-4 (§ 449.3 of this chapter) or Form
U-4 (promulgated by a self-regulatory
organization) or Form MSD-4 (as
required for associated persons of bank
municipal securities dealers) for each
associated person as defined in
§ 400.4(e) of this chapter; and
(iii) A Form G-FIN-5 (§ 449.4 of this
chapter) or Form U-5 (promulgated by a
self-regulatory organization) or Form
MSB-5 (as required for associated
persons of bank municipal securities
dealers) for each associated person
whose association has been terminated
as provided in 1400.4(d)(2) of this
chapter.
(b)(1) The records required by
paragraph (a)(2)(i) of this section shall
be preserved for not less than six years,
the first two years in an easily
accessible place.
(2) The records required by
paragraphs (a)(2) (ii) and (iii) of this
section shall be preserved for at least
three years after the person who is the
subject of the record has terminated his
employment and any other association
with the government securities broker or
dealer function of the financial
institution

Federal Reserve Bank on whose books
the financial institution has securities
Every registered government
accounts;
securities broker or dealer shall comply
(3) Verify securities in transfer, in
with the requirements of § 240.17a-13 of transit, pledged, loaned, borrowed,
this title (Commission Rule 17a-13), with deposited, failed to receive, failed to
the following modifications:
deliver, subject to repurchase or reverse
(a) References to “broker or dealer”
repurchase agreements or otherwise
and “broker and dealer” include
subject to the financial institution’s
registered government securities brokers control or direction but not in its
or dealers.
physical possession, where such
(b) Sections 24G.17a-13(b)(l), (2), and securities have been in said status for
(3) are modified to read as follows:
“(1) Physically examine and count all longer than thirty days; of the counts
(4) Compare the results
securities held, including securities that required by paragraphs (a)(1) and (2) of
are the subject of repurchase or reverse this section and verification with the
repurchase agreements;
institution’s records; and
“(2) Account for all securities in
(5) Record on the books and records
transfer, in transit, pledged, loaned,
of the financial institution all unresolved
borrowed, deposited, failed to receive,
differences, setting forth the security
failed to deliver, subject to repurchase
involved and the date of comparison in
or reverse repurchase agreements or
a security count difference account no
otherwise subject to his control or
later than seven business days after the
direction but not in his physical
date of each required annual securities
possession by examination and
examination, count, and verification as
comparison of the supporting detail
provided in this paragraph.
records with the appropriate ledger
(b) For the purposes of this section,
control accounts;
“(3) Verify all securities in transfer, in “fiduciary capacity” includes trustee,
executor, administrator, registrar,
transit, pledged, loaned, borrowed,
transfer agent, guardian, assignee,
deposited, failed to receive, failed to
deliver, subject to repurchase or reverse receiver, managing agent, and any other
similar capacity involving the sole and
repurchase agreements or otherwise
subject to his control or direction but not shared exercise of discretion by a
financial institution having fiduciary
in his physical possession, where such
powers that is supervised by a federal
securities have been in said status for
or state financial institution regulator
longer than thirty days;”.
agency.

§ 404.5 Securities counts by registered
government securities brokers and dealers.

§ 404.S Securities counts by government
securities brokers and dealers fibat sir©
financial Institutions.

(a) Every government securities
broker or dealer that is a financial
institution shall, at least once in each
calendar year, with respect to all
government securities held by the
financial institution for customers
except those securities held in a
fiduciary capacity or in a custodial
capacity within the financial
institution’s trust department,
(1) Physically examine and count
securities held in definitive form,
including securities that are the subject
of repurchase or reverse repurchase
agreements;
(2) Account for securities, including
securities held in book-entry form and
securities subject to repurchase or
reverse repurchase agreements or
otherwise subject to the financial
institution’s control or direction but not
in its physical possession, by
examination and comparison of the
supporting detail records and with the
appropriate ledger control accounts and
by verification of the records of the
financial institution with those of any
depository, depository institution or

PA R T 4 0 i — REPO RTS AM© AUOSY

Sec.
405.1 Application of part to registered
brokers and dealers and to financial
institutions; transition rule.
405.2 Reports to be made by registered
government securities brokers and
dealers.
405.3 Supplemental current financial and
operational reports to be made by certain
registered government securities brokers
and dealers.
405.4 Financial recordkeeping and reporting
of currency and foreign transactions.
Authority: Sec. 101, Pub. L. 98-571,100 Stat.
3209 (15 U.S.C. 78o—
5(b)(1)(B), (b)(1)(C),
(b)(2)).
Application @ part to registered
ff
brokers and dealers and to financial
Institutions; transition rut®.

§ 405J

(a) Compliance by registered brokers
or dealers with | § 24Q.17a-5, .17a-8, and
•17a-ll of this title (Commission Rules
17a-5,17a-8 and 17a-ll) constitutes
compliance with this part.
(b) A government securities broker or
dealer that is a financial institution and
is subject to financial reporting rules of
its appropriate regulatory agency is

Federal Register / VoL 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
haircuts and ratio of liquid capital to
exempt from the provisions of § § 405.2
and 405.3.
total haircuts of the registered
(c) This part shall be effective July 25, government securities broker or dealer.”
1987, provided however,
(h) References to § 240.15c3-3 and the
(1) That registered government
exhibits thereto, relating to possession
securities brokers or dealers shall first
or control of customer securities and
be required to file the reports required
reserve requirements, mean § 403.4 of
by § 240.173-5(8), by virtue of § 405.2,
this chapter.
for the month and the quarter during
(i) The reference to § 24G.15bl-2 of
which they were first required to comply this title, relating to financial statements
with § 402.2 of this chapter, but that
to be filed upon registration, means
(2) For any quarter ending prior to the § 24G.15Ca2-2.
quarter during which they were first
(j) The supplemental report described
required to comply with § 402.2 of this
in § 240.17a-5 (e)(4) of this title,
chapter, registered government
concerning the Securities Investor
securities brokers or dealers shall file
Protection Act, is not required.
with the designated examining authority
(k) The statement described in
for such registered broker or dealer,
§ 240.17a—
5(F)(2) of this title shall be
within 17 business days after the close
headed “Notice Pursuant to Section
of the quarter, an unaudited balance
405.2,” and shall be filed within 30 days
sheet (with appropriate notes) for such
following the effective date of
registration as a government securities
quarter, prepared in accordance with
generally accepted accounting
broker or dealer.
(l) References in § 240.17a-5(h}(2) of
principles.
this title to § 240.17a-ll mean § 405.3 of
§ 405.2 Reports to be made by registered
government securities brokers and dealers. this chapter.
§ 405.3 Supplemental current financial and
Every registered government
securities broker or dealer shall comply operational reports to be made by certain
with the requirements of § 240.17a-5 of registered government securities brokers
this title (Commission Rule 17a-5), with and dealers.
Every registered government
the following modifications:
securities broker or dealer shall comply
(a) References to “broker or dealer”
include registered government securities with the requirements of § 240.17a-ll of
this title (Commission Rule 17a-ll), with
brokers and dealers.
the following modifications:
(b) References to “rules of the
(a) References to “broker or dealer”
Commission” or words of similar import
include registered government securities
include, where appropriate, the
brokers and dealers.
regulations contained in this chapter.
(b) References to § 240.15c3-l, relating
(c) References to Form X-17A-5 mean
to net capital, mean § 402.2 of this
Form G— (§ 449.5 of this chapter).
405
chapter.
(d) For the purpose of § 240.17a(c) References to “net capital” mean
5(a)(4) of this title, the Commission may,
“liquid capital” as defined in § 402.2 of
on the terms and conditions stated in
this chapter.
that subparagraph, declare effective a
(d) References to § 240.15c3-ld,
plan with respect to Form G-405, in
relating to subordination agreements,
which case, that plan shall be treated
mean that section as modified by
the same as a plan approved with
§ 402.2d of this chapter.
respect to Form X-17A-5.
(e) References to Form X-17A-5 mean
(e) References to "net capital” mean
“liquid capital” as defined in § 402.2(d) Form G-405 (§ 449.5 of this chapter).
(f) References to § 240.17a-5, relating
of this chapter.
(f) References to § 240.15c3-l, relating to reports and audit, mean § 405.2 of this
chapter.
to net capital, mean § 402.2 of this
(g) Section 240.17a-ll(b)(l), for the
chapter.
(g) Paragraph 240.17a-5(c)(2)(ii) is
purposes of this section, is modified to
read as follows:
modified to read as follows:
“(ii) A footnote containing a statement
“(1) If a computation made by a
registered government securities broker
of the registered government securities
or dealer pursuant to the requirements
broker’s or dealer’s liquid capital, total
of § 402.2 of this title shows, at any
haircuts, and ratio of liquid capital to
total haircuts, determined in accordance point during the month, that his liquid
with § 402.2 of this title. Such statement capital is less than 150 percent of total
shall include summary financial
haircuts, determined in accordance with
statements of subsidiaries consolidated § 402.2 of this title, such person shall file
pursuant to Appendix C of § 240.15c3-l a report on Part II or Part IIA of Form Gmodified as provided in § 402.2c of this 405 (§ 449.5 of this title) as determined
in accordance with the standards set
title, where material, and the effect
forth in § 240.17a-5(a)(2) (ii) and (iii),
thereof on the liquid capital, total

5709

within 15 calendar days after the end of
each month thereafter until 3 successive
months shall have elapsed during which
liquid capital does not fall below 150
percent of total haircuts.”
(h) References to § 240.17a-3, relating
to records, mean § 404.2 of this chapter.
§ 405.4 Financial recordkeeping and
reporting ©f currency and foreign
transaction©.

Every government securities broker or
dealer who is subject to the
requirements of the Currency and
Foreign Transactions Reporting Act of
1970 shall comply with the reporting,
recordkeeping and record retention
requirements of 31 CFR Part 103. Where
31 CFR Part 103 and § 404.3 of this
chapter require the same records to be
preserved for different periods of time,
such records or reports shall be
preserved for the longer period of time.
PART 449—PORfyiS, SECTOR 15C @F
THE SECURITIES EXCHANGE ACT OF
1934

Sec.
449.1 Form G-FIN, notification by financial
institutions of status as government
securities broker or dealer pursuant to
section 15C(a)(l)(B)(i) of the Securities
Exchange Act of 1934.
449.2 Form G-FINW, notification by
financial institutions of cessation of
status as government securities broker or
dealer pursuant to section 15C(a)(l)(B)(i)
of the Securities Exchange Act of 1934
and § 400.6 of this chapter.
449.3 Form G-FIN-4, notification by persons
associated with financial institutions that
are government securities brokers and
dealers pursuant to section
15Qa)(l)(B)(i) of the Securities Exchange
Act of 1934 and § 400.4 of this chapter.
449.4 Form G-FIN-5, notification of
termination of association with a
financial institution that is a government
securities broker or dealer pursuant to
section 15C(a)(l)(B)(i) of the Securities
Exchange Act of 1934 and § 400.4 of this
chapter.
449.5 Form G-405, information required of
registered government securities brokers
and dealers pursuant to section 15C of
the Securities Exchange Act of 1934 and
§ § 405.2 and 405.4 of this chapter.
449.6 Display of OMB control numbers.
Authority: Sec. 101, Pub. L. 99-571,100 Stat.
3208 (15 U.S.C. 78o-5(a), (b)(1)(B), (b)(2)).
§ 449.1 Form Q-FBM, notification by
financial institutions of status as
government securities broker or dealer
pursuant to section 15C(a)(1)(B)(i) of the
Securities Exchange Act of 1934.

This form is to be used by financial
institutions that are government
securities brokers and dealers not
exempt under Part 401 of this chapter to
notify their appropriate regulatory

571©

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

Currency, the Federal Deposit Insurance
agency of their status. The form is
promulgated by the Board of Governors Corporation, the Federal Home Loan
of the Federal Reserve System and is
Bank Board and the SEC.
available from the Board of Governors
§ 449.5 Form G-405, information required
of the Federal Reserve System, the
government securities
Comptroller of the Currency, the Federal of registereddealers pursuant to section
brokers and
Deposit Insurance Corporation, the
15C of the Securities
Federal Home Loan Bank Board and the and §§ 405.2 and 405.4Exchange Act ©f 1934
of this chapter.
SEC.
This form is to be used by registered
government securities brokers and
§ 449.2 Form G-FIMW, notification by
dealers to make the monthly, quarterly
financial institutions of cessation of statu©
as government securities broker or dealer
and annual financial reports required by
purusant to section 15C(a)(1)(B)(i) of the
Part 405 of this chapter. The form is
Securities Exchange Act of 1934 and
promulgated by the Department of the
§ 400.6 of this chapter.
Treasury and is available from the SEC
This form is to be used by financial
and the designated examining
institutions that are government
authorities.
securities brokers or dealers to notify
their appropriate regulatory agency that § 449.6 Display of OMB control numbers.
they have ceased to function as a
The following rules promulgated by
government securities broker or dealer. the Department of the Treasury pursuant
The form is promulgated by the Board of to the Government Securities Act of
Governors of the Federal Reserve
1986 containing information collection
System and is available from the Board requirements are listed with the control
of Governors of the Federal Reserve
numbers assigned by the Office of
System, the Comptroller of the Currency, Management and Budget.
the Federal Deposit Insurance
Currently
Corporation, the Federal Home Loan
assigned
Part or section of Title 17, CFR
Bank Board and the SEC.
OMB

Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(43)-(44)), Depository
institutions exempted under Part 401 of
this chapter from the requirements
applicable to government securities
brokers or dealers must comply with
this part. Certain depository institutions
that are government securities brokers
or dealers must also comply with this
part, as well as with additional
requirements set forth in § 403.5.
(b) The regulations in this subchapter
are promulgated by the Assistant
Secretary (Domestic Finance) pursuant
to a delegation of authority from the
Secretary of the Treasury. The office
responsible for the regulations is the
Office of the Deputy Assistant Secretary
(Federal Finance).
§450.2

Definitions.

For purposes of this subchapter:
(a) “appropriate regulatory agency”
has the meaning set out in section
3(a)(34)(G) of the Securities Exchange
Act of 1934 (15 U.S.C. 78c(a)(34)(G)),
except that the appropriate regulatory
agency for—
(1) An institution insured by the
control No.
Federal Savings and Loan Insurance
§ 449.3 Form G-FIN-4, notification by
§ 400.4......................................................................
persons associated with financial
Corporation is the Federal Home Loan
§ 400.5......................................................................
institutions that are government securities
Bank Board;
§ 400.6......................................................................
brokers and dealers pursuant to section
§ 404.2......................................................................
(2) A Federal credit union as defined
15C(a)(1){B)(i) of the Securities Exchange
§ 404.3......................................................................
in 12 U.S.C. 1752(1) and an insured
§ 404.4......................................................................
Act of 1934 and § 40C.4 of this chapter.
credit union as defined in 12 U.S.C.
This form is to be used by associated § 404.5......................................................................
§ 404 6......................................................................
1752(7) is the National Credit Union
persons of financial institutions that are § 405.2......................................................................
Administration; and
government securities brokers or dealers S 405.3......................................................................
(3) Any depository institution for
to provide certain information to the
whom an appropriate regulatory agency
financial institution and the appropriate SUBCHAPTER B—RULES AMD
is not explicitly specified by either
regulatory agency concerning
REGULATIONS UNDER TITLE i§ OF THE
section 3(a)(34)(G) or this paragraph, is
employment, education, residence, and GOVERNMENT SECURITIES ACT OF 1986
the SEC;
statutory disqualification. The form is
(b) "customer” includes the
promulgated by the Department of the
PART 450—CUSTODIAL HOLDINGS OF
counterparty to a transaction pursuant
Treasury and is available from the
GOVERNMENT SECURITIES BY
to a repurchase agreement for whom the
Board of Governors of the Federal
DEPOSITORY INSTITUTIONS
depository institution retains possession
Reserve System, the Comptroller of the Sec.
of the security sold subject to
Currency, the Federal Deposit Insurance 450.1 Scope of regulations; office
repurchase, but does not include a
Corporation, the Federal Home Loan
responsible.
broker or dealer that is registered
Bank Board and the SEC.
450.2 Definitions.
pursuant to section 15,15B or
450.3 Exemption for trust holdings and
§ 449.4 Form G-FIN-5, notification of
15C(a)(l)(A) of the Act (15 U.S.C. 78o,
holdings in trust departments.
termination of association with a financial
78o-4, 78o-5(a)(l)(A)) or that has filed
450.4 Custodial holdings of government
institution that is a government securities
securities.
notice of its status as a government
broker or dealer pursuant to section
450.5 Display of OMB control numbers.
securities broker or dealer pursuant to
l5C(a)(1)(B)(i) of the Securities Exchange
Authority: Sec. 101, Pub. L. 99-571,100 Stat. section 15C(a)(l)(B) of the Act (15 U.S.C.
Act of 1934 and § 400.4 of this chapter.
3208 (15 U.S.C. 78o-5fb)(l)(A), (b)(2),
78o-5(a)(l)(B)) except to the extent that
This form is to be used by financial
(b)(3)(B)); Sec. 201, Pub. L. 99-571,100 Stat.
a depository institution holds securities
institutions that are government
(31 U.S.C. 3121, 9110).
for customers of such broker or dealer;
securities brokers or dealers to notify
(c) “depository institution” has the
the appropriate regulatory agency of the § 450.1 Scope of regulations; office
responsible.
meaning stated in clauses (i) through (vi)
fact that an associated person is no
of section 19(b)(1)(A) of the Federal
longer associated with the government
(a) This part applies to depository
Reserve Act (12 U.S.C. 461 (b)(1)(A)(i)securities broker or dealer function of
institutions that hold government
(vi)) and also includes a foreign bank, an
the financial institution. The form is
securities as fiduciary, custodian, or
promulgated by the Department of the
otherwise for the account of a customer, agency or branch of a foreign bank and
a commercial lending company owned
Treasury and is available from the
and that are not government securities
or controlled by a foreign bank (as such
Board of Governors of the Federal
brokers or dealers, as defined in
terms are defined in the International
Reserve System, the Comptroller of the sections 3(a)(43) and 3(a){44) of the

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
Banking Act of 1978, Pub. L. 95-369,92
Stat. 607);
(d) “fiduciary capacity” includes
trustee, executor, administrator,
registrar, transfer agent, guardian,
assignee, receiver, managing agent, and
any other similar capacity involving the
sole or shared exercise of discretion by
a depository institution having fiduciary
powers that is supervised by a federal
or state financial institution regulatory
agency; and
(e) “government securities” means
those obligations described in
subparagraphs (A), (B), or (C) of section
3(a)(42) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(42)(A)-(C)).
§ 450.3 Exemption for trust holdings and
holdings in trust departments.

(a) The Secretary has determined’that
the rules and standards of the
Comptroller of the Currency, the Board
of Governors of the Federal Reserve
System and the Federal Deposit
Insurance Corporation governing the
holding of government securities in a
fiduciary capacity by depository
institutions subject thereto are
adequate. Accordingly, such depository
institutions are exempt from this part
with respect to their holdings of
government securities in a fiduciary
capacity and their holdings of
government securities in a custodial
capacity within their trust departments,
provided such institutions agree, with
respect to such custodial holdings, to
adhere to all requirements applicable to
holdings of government securities in a
fiduciary capacity imposed by their
appropriate regulatory agency.
(b) The Secretary expects that each
appropriate regulatory agency will
notify the Department if it materially
revises its rules and standards
governing the holding of government
securities in a fiduciary capacity.
§ 450.4 Custodial holdings of government
securities.

Depository institutions that are
subject to this Part shall observe the
following requirements with respect to
their holdings of government securities
for customer accounts:
(a) All government securities held for
the account of customers shall be
segregated from the assets of the
depository institution and shall be kept
free of any charge, lien or claim of any
kind, unless expressly agreed to in
writing by the customer for whose
account such securities are held. A
safekeeping receipt or a confirmation
shall be issued for every government
security held for a customer.
(b) All depository institutions holding
government securities for customers

shall maintain possession or control of
such securities. Securities shall be
deemed to be under the control of a
depository institution to the extent that
it has instructed a Federal Reserve
Bank, correspondent bank, trust
company, or other custodian, as
appropriate, to maintain possession or
control of such securites free of any
charge, lien, or claim of any kind in
favor of such correspondent bank, trust
company, or other custodian or any
persons claiming through them, except
to the extent expressly agreed to in
writing by the customer for whose
account such securities are held.
(c) Records of government securities
held for customers shall be kept
separate and distinct from other records
of the depository institution. Such
records shall:
(1) Provide a system for identifying
each customer and each government
security held for the customer, unless
the depository institution is holding
securities for customers of another
depository institution or of a
government securities broker or dealer
registered pursuant to section
15C(a)(l)(A) of the Act (15 U.S.C. 78o5(a)(1)(A)) or a government securities
broker or dealer that has filed notice of
its status pursuant to section
15C(a)(l)(B) of the Act (15 U.S.C. 78o5(a)(1)(B));
(2) Describe the customer’s interest in
the government security;
(3) Indicate all receipts and deliveries
of government securities and all receipts
and disbursements of cash in connection
with such securities;
(4) Include a copy of the safekeeping
receipt or a confirmation issued for each
government security held; and
(5) Provide an adequate basis for
audit of such information.
(d) Counts of government securities
held for customers in both definitive and
book-entry form shall be conducted at
least annually and such counts shall be
reconciled with customer account
records. Counts of book-entry securities
and of definitive securities held outside
the possession of the depository
institution shall be made by verification
of the records of the depository
institution with those of any depository,
depository institution, or Federal
Reserve Bank on whose books the
depository institution has securities
accounts. The dates and results of such
counts and reconcilements shall be
documented with differences noted.

5711

requirements are listed with the control
numbers assigned by the Office of
Management and Budget.
Part or section of Title 17, CFR

Currently
Assigned
OMB
Control No.

§ 450 4 .....................................................................

Dated: February 19,1987.

Charles O. Sethness,

Assistant Secretary for Domestic Finance.
[FR Doc. 87-3800 Filed 2-24-87; 8:45 am]

BILUNG CODE

4810- 2 E-M

SECURITIES AND EXCHANGE

COMMISSION

17 e r a Parts 240 and 249

[Rel. No. 34-24109; File No. S7-4-87]
Request for Comments on Proposed
Rules and Proposed Revisions of
Form B >
D

Securities and Exchange
Commission.

agency:

ACTION: P ro p o se d ru le m ak in g a n d form
rev isio n .
SUMMARY: The Commission is

publishing for comment proposed rules
to implement provisions of the
Government Securities Act of 1986,
which requires currently unregulated
government securities brokers or
government securities dealers to register
with the Commission. Registered brokerdealers who act as government
securities brokers or government
securities dealers must file written
notice with the Commission. The
proposed rules prescribe the form and
information required to be filed by
government securtities broker-dealers in
their applications for registration with
the Commission. The Commission also
is publishing for comment proposed
revisions to Form BD, the form used to
register as a broker-dealer. The
proposed revisions adapt the form for
use by government securities brokerdealers and enable government
securities broker-dealers currently
registered or registering with the
Commission to use Form BD in order to
notify the Commission of their activities
as government securities broker-dealers.
dates : Comments should be submitted
by March 18,1987.
ADDRESSES: All comments should be
submitted in triplicate to Jonathan G.
§ 450.5 Display of OMB control numbers.
Katz, Secretary, Securities and
The following rules promulgated by
Exchange Commission, Washington, DC
the Department of the Treasury pursuant 20549, and should refer to File No. S7-4to the Government Securities Act of
87. All submissions will be available for
1986 containing information collection
public inspection at the Commission’s

5712

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

the Commission, by July 25,1987.5
Under the Act, broker-dealers currently
registered with the Commission 6 that
F©R FURTHER INFORMATION CONTACT:
act as government securities brokers
Lynne G. Masters, Esq. at (202) 272-2848, government securities dealers are notor
Division of Market Regulation,
required to re-register with the
Securities and Exchange Commission,
Commission. They are, however,
450 Fifth Street, NW., Washington, DC
required to file by July 25,1987 7 written
20549.
notice with the Commission that they
SUPPLEMENTARY INFORMATION:
are government securities brokers or
government securities dealers. 8
Introduction
Similarly, financial institutions that are
On October 28,1986, the Securities
government securities brokers or dealers
Exchange Act of 1934 (the “Exchange
are required to file with their
Act”) was amended by Pub. L. No. 99571,1 the Government Securities Act of appropriate regulatory agency 9 by July
1986 (the “Act”). As amended, the
5 Government securities brokers and dealers
Exchange Act contains a new section
registering pursuant to section 15C(a) are also
required to become members of a registered
15C(a) that requires government
securities association or a national securities
securities brokers 2 and government
exchange. See section 15C(e)(l).
securities dealers,3 other than those
6 These
already registered with the Commission “registeredbroker-dealers (hereinafter referred to as
broker-dealers”) are broker-dealers
or financial institutions,4 to register with registered under Section 15(b) of the Exchange Act

Public Reference Section, 450 Fifth
Street, NW., Washington, DC 20549.

1100 Stat. 3208.
2 New section 3(a)(43) of the Exchange Act
defines a government securities broker as:
Any person regularly engaged in the business of
effecting transactions in government securities for
the account of others, but does not include—
(A) Any corporation the securities of which are
government securities under subparagraph (B) or (C)
of paragraph (42) of this subsection; or
(B) Any person registered with the Commodity
Futures Trading Commission, any contract market
designated by the Commodity Futures Trading
Commission, such contract market’s affiliated
clearing organization, or any floor trader on such
contract market, solely because such person effects
transactions in government securities that the
Commission, after consultation with the Commodity
Futures Trading Commission, has determined by
rule or order to be incidental to such person’s
futures-related business.
3 New section 3(a)(44) of the Exchange Act
defines a government securities dealer as:
Any person engaged in the business of buying and
selling government securities for his own account
through a broker or otherwise, but does not
include—
(A) Any person insofar as he buys or sells such
securities for his own account, either individually or
in some fiduciary capacity, but not as a part of a
regular business;
(B) Any corporation the securities of which are
government securities under subparagraph (B) or (C)
of paragraph (42) of this subsection;
(C) Any bank, unless the bank is engaged in the
business of buying and selling government
securities for its own account other than in a
fiduciary capacity, through a broker or otherwise; or
(D) Any person registered with the Commodity
Futures Trading Commission, any contract market
designated by the Commission, any contract market
designated by the Commodity Futures Trading
Commission, such contract market’s affiliated
clearing organization, or any floor trader on such
contract market, solely because such person effects
transactions in government securities that the
Commission, after consultation with the Commodity
Futures Trading Commission, has determined by
rule or order to be incidental to such person's
futures-related business.
3 New section 3(a)(46) of the Exchange Act
defines "Financial institution” as “(A) a bank as
defined in section 3(a)(6) of the Act, (B) a foreign
bank, and (C) an insured institution as such term is
defined in section 401 of the National Housing Act.”

and non-bank intrastate municipal securities
dealers registered under Section 15B of the
Exchange Act. See section 3(a)(48).
7 Because July 25,1987, falls on a Saturday,
registered broker-dealers required to file notice
must file their notices no later than July 27,1987.
See Rule 0-3(a).
8 After the effective date of the amendments, all
registered broker-dealers that are government
securities broker-dealers are required by section
15C(a)(l)(B)(i) to file a notice with the Commission
when they cease to act as a government securities
broker or dealer. Section 15C(a)(l)(B) provides that
a government securities broker or dealer must file a
written notice with the appropriate regulatory
authority when it ceases to act as a government
securities broker or dealer. Although the literal
language of this provision could be interpreted to
apply to any government securities broker or dealer,
the Commission believes that Congress intended
this provision to apply only to broker-dealers
registered pursuant to sections 15 and 15B and
financial institutions, and not to government
securities broker-dealers registered solely pursuant
to section 15C(a)(l)(A).
9 As amended, section 3(a)(34) of the Exchange
Act defines "appropriate regulatory agency” to
include the following new paragraph:
(G) When used with respect to a government
securities dealer, or person associated with a
government securities broker or government
securities dealer;
(i) The Comptroller of the Currency, in the case of
a national bank, a bank in the District of Columbia
examined by the Comptroller of the Currency, or a
Federal branch or Federal agency of foreign bank
(as such terms are used in the International Banking
Act of 1978);
(ii) The Board of Governors of the Federal
Reserve System, in the case of a State member bank
of the Federal Reserve System, a foreign bank, a
State branch or a State agency of a foreign bank, or
a commercial lending company owned or controlled
by a foreign bank (as such terms are used in the
International Banking Act of 1978);
(iii) The Federal Deposit Insurance Corporation,
in the case of a bank insured by the Federal Deposit
Insurance Corporation (other than a member of the
Federal Reserve System or a Federal Savings Bank);
(iv) The Federal Home Loan Bank Board, in the
case of a Federal Savings and Loan Association,
Federal Savings Bank, or District of Columbia
savings and loan association;
(v) The Federal Savings and Loan Insurance
Corporation, in the case of an institution insured by
the Federal Savings and Loan Insurance

25,1987 written notice in the form
prescribed by the Board of Governors of
the Federal Reserve System.
Government securities brokers and
government securities dealers are
subject to the rulemaking authority of
the Secretary of the Treasury
(“Treasury”) in the areas of financial
responsibility, reporting, recordkeeping,
and exemptions from rulemaking. The
Treasury has proposed rules in these
areas, at 17 CFR 400.1-405.3.
For government securities brokerdealers required to register under
section 15C(a)(l)(A) of the Exchange
Act, the Act directs the Commission to
prescribe the forms to be used for
registration and for withdrawal from
registration, as well as the information
that must be filed with the required
forms. In addition, the Act authorizes
the Commission to establish the form to
be used by registered broker-dealers
that must file notice with the
Commission of their status as
government securities broker-dealers. In
order to implement the registration,
withdrawal from registration, and notice
requirements of the Act, the Commission
is proposing the rules described more
fully below and the corresponding
revisions to Form BD. Unless otherwise
noted, these rules impose upon
government securities broker-dealers
required to register under the A ct10
disclosure and filing requirements for
registration and withdrawal from
registration similar to those that are
imposed upon other broker-dealers. The
proposed revisions to Form BD are
intended to adapt the form for use by
government securities broker-dealers
applying for registration and by
registered broker-dealers notifying the
Commission of their government
securities activities or intention to cease
such activities.
I. Discussion of Rules
1. Proposed Rule 15Cal-l. The
Commission is proposing Rule 15Cal-l
to implement the requirement that
Corporation (other than a Federal Savings and Loan
Association, Federal Savings Bank, or District of
Columbia savings and loan association);
(vi) The Commission, in the case of all other
government securities brokers and government
securities dealers.
The term “District of Columbia savings and loan
associations", means "any association subject to
examination and supervision by the Federal Home
Loan Bank Board under Section 8 of the Home
Owners Loan Act of 1933.”
10 The Commission will exercise its interpretive
and no-action authority in determining whether
registration under the Act is required. See S. Rep.
No. 428, 99th Cong., 2d. Se98. n.87 (1988). Requests
for interpretative or no-action advice should be
addressed to the Chief Counsel, Division of Market
Regulation.

Federal Register / Vo!. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

5713

the nature and source of capital and
Form BD requires that an applicant
representing that such amount of capital
provide the Commission with
information concerning the nature of its has been contributed to and will
continue to be devoted to the business,
business, the background of its
(5) a statement concerning
principals, its controlling persons, and
its employees and is designed to permit establishment and maintenance of the
facilities and financing required for the
the Commission to determine whether
operation of the business, and (6) a
the applicant meets the statutory
requirements to engage in the securities statement for the ensuing year of
operations (a) describing die
business.14*Because the Act requires
arrangements made for obtaining the
applicants registering under section
funds necessary to operate the business,
15C(a)(l)(A) to meet substantially the
(b) setting forth the anticipated
same statutory requirements as other
applicants for broker-dealer registration, expenses for that year, and (c) providing
information as to any arrangements
the Commission has determined to use
which have been made to obtain
Form BD as the application for
additional financing if it becomes
registration for government securities
necessary. The purpose of the proposed
broker-dealers. Government securities
rule is to allow the Commission to
broker-dealers required to register
pursuant to section 15C(a)(l)(A) will be determine whether the applicant has the
required amount of capital and the
required to complete all Items on the
capacity to operate as a going concern.
Form.
At present, Rule 15b3-l(b) requires
Many of the government securities
registered broker-dealers to amend their brokers and dealers required to register
Form BDs promptly whenever
under the Act have been in operation for
information contained in the forms
substantial periods of time. Because
becomes inaccurate.16 The proposed
these firms often have substantial
rules do not contain a similar provision inventories of securities and adequate,
because such amendments are deemed well-established businesses, paragraph
reports under the Act, and the Act vests (e) of the proposed rule provides that
the Treasury with the authority to adopt firms in operation for one or more years
reporting requirements. However, the
prior to July 25,1987, the effective date
Treasury has proposed a rule requiring
of the Act, are not required to submit a
that Form BD be amended when the
schedule of securities, a detailed
Form as filed becomes inaccurate.16
description of the firm’s personnel and
3. Proposed Rule 15Ca2-2: Statement physical facility, or a detailed
11 Section 15C(a) (1) (B).
of Financial Condition to be Filed with description of arrangements for and
12 Form BD is the form filed by an applicant to
uses of its funds. Such firms, however,
Application for Registration as a
become registered pursuant to section 15(b) of the
must represent that they have been
Government Securities Broker or
Exchange Act. See Rule 15bl-l. In addition,
intrastate nonbank municipal securities dealers
Government Securities Dealer. Proposed acting as a government securities broker
required to register under Section 15B(a) file an
Rule 15Ca2-2 requires a government
or dealer as of a date prior to July 25,
application for registration with the Commission on securities broker-dealer applying for
1980. In reviewing the appropriateness
Form BD. See Rule 15Ba2-2. Municipal securities
registration to submit as part of its
of this exemption, the Commission
dealers that are banks or separately identifiable
departments or divisions of banks are not brokers
requests comment generally on the
application on Form BD a statement of
or dealers because of the exception for banks
utility of the information required by
financial condition and
contained in the section 3(a)(4) definition of broker information concerning other
the applicant’s
this rule to the self-regulatory
and the section 3(a)(5) definition of dealer. These
organizations in reviewing registration
municipal securities dealers are required to register financial resources. For example, the
with the Commission under section 15B and file an
Rule requires: (1) Disclosure of the
applications and admitting applicants to
application for registration on Form MSD. See Rule applicant’s assets, liabilities and net
membership.
15Ba2-l.
schedule
4. Proposed Rule 14Cc2-3:
13 In 1975 the Commission adopted Form BD as a worth, (2) a securities listing the
applicant’s
and, if readily
Registration of Successors. The
uniform form in order to enable broker-dealer
marketable, their market value, (3) a
applicants to file a single form for registration as a
Commission is proposing a successor
broker-dealer with the Commission, the states, and computation made in accordance with
rale for government securities brokerthe self-regulatory organizations. See Securities
the capital requirements to be
dealers similar to that already
Exchange Act Rel. No. 11424 (May 26,1975), 40 FR
applicable to broker-dealers registered
30334. Although the amendments facilitated the use established by the Secretary of the
Treasury,17 (4) a statement describing
of a single form, duplicative filing requirements
under section 15(b) of the Act.18*The
remained. See Securities Exchange Act Rel. No.
rule is intended to provide for a smooth
20020 (July 28,1983), 48 FR 30115. In 1983 the
14 For example, section 15C of the Exchange Act transition when one government
Commission amended Form BD to reduce those
incorporates by reference the provisions of section
securities broker-dealer succeeds to the
duplicative registration requirements. In addition,
15(b) of the Exchange Act to permit the Commission business of another government
the revisions made Form BD and Form BDW, the
to deny an applicant’s registration if it finds that the

government securities broker-dealers
already registered with the Commission
pursuant to sections 15(b) or 15B(a) of
the Exchange Act file written notice
with the Commission that they are
government securities brokers or
dealers.11 The Rule requires such
government securities broker-dealers to
file notice on Form BD that they are
government securities broker-dealers by
July 25,1987. Proposed Rule 15Cal-l
also requires a registered broker-dealer
that begins government securities
activities after July 25,1987 to file
written notice on Form BD with the
Commisison on or prior to the day it
begins acting as a government securities
broker-dealer. Paragraph (b) of the Rule
requires a registered broker-dealer that
has previously filed notice of
government securities activities to file
written notice on Form BD within 30
days of ceasing to act as a government
securities broker-dealer.
2. Proposed Rule 15Ca2-l: Under
paragraph (a) of proposed Rule 15Ca2-l,
government securities broker-dealers
required to register pursuant to new
section 15C(a)(l)(A) would be required
to apply for registration on Form BD.
Form BD is the uniform application form
for broker-dealer registration 1 used by
12
the Commission, state securities
regulators, and the National Association
of Securities Dealers, Inc. ("NASD”).13

form used for broker-dealer withdrawal from
registration, compatible with the NASD’s Central
Registration Depository (“CRD"). Hie CRD provides
a computer database that maintains current
registration information for every broker-dealer that
is a member of the NASD or registered with a state
that participates in the CRD system, See Securities
Exchange Act Rel. Nos. 20406 (Nov. 22,1983), 48 FR
54436; 22468 (Sept. 26,1985), 50 FR 41687 (“1985
Release”); 23646 (Sept. 26,1986), 51 FR 35655.

applicant has been convicted of committing certain
crimes, such as bribery, perjury or burglary within
the preceding 10 years.
18 See also Rules 15Ba2-2(c) and 15Ba2-l(b).
1817 CFR 400.5.
17 Under the Act, the Secretary of the Treasury is
to establish capital adequacy requirements for
government securities broker-dealers. The proposed
rule, therefore, differs from Rule 15bl-2 because it

requires information concerning compliance with
capital standards as established by the Secretary of
the Treasury rather than the Commission.
18 See Rule 15bl-3 and Rule 15fia2-4. Similar
successor rules also apply to investment advisers.
17 CFR 275.203-1 (c) and (d). For a more complete
discussion of the successor rules see 1985 Release,
at 16.

5714

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

securities broker-dealer that is
registered pursuant to section 15C(a) of
the Act. In general, a broker-dealer
succeeds to and continues the business
of a predecessor broker-dealer when the
successor broker-dealer assumes
substantially all the assets and
liabilities of the predecessor 19 and
therefore closely resembles the
predecessor registered government
securities broker-dealer.
Paragraph (a) of the rule applies to
most instances where a new legal entity
succeeds to the business of a registered
government securities broker-dealer.
The successor is allowed to operate
under the registration of the predecessor
for 75 days if it files its own complete
application for registration on Form BD
within 30 days of the date of the
succession.20 Paragraph (b) provides
special procedures for certain changes
in legal status that involve the legal
creation of a new entity but no practical
change in the broker-dealer—changes in
date or state of incorporation, form of
organization,21 or change in the
composition of a partnership. In these
instances, paragraph (b) allows the new
entity simply to amend the
predecessor’s Form BD within 30 days of
the date of the succession. The
amendment would include page 1 of
Form BD (the execution page), page 2
(indicating that the applicant is a
successor), and any other pages
necessary to reflect changes in the
successor government securities brokerdealer. In addition, the government
securities broker-dealer would be
required to comply with Rule 15Ca2~l
and file a statement of financial
condition described in Rule 15Ca2-l(a).
5. Proposed Rule 15Ca2~4:
Registration as Fiduciaries. The
Commission is proposing to adopt for
government securities broker-dealer3
substantially the same rule governing
the registration of fiduciaries that
applies to registered broker-dealers.22
The proposed rule permits a duly
appointed fiduciary to assume
immediate responsibility for the
operation of a government securities
broker-dealer’s business. Under the rule,
the registration of a government
19 The successor rule cannot be used by a
government securities broker-dealer to eliminate a
substantial liability. See 1985 Release, at 17.
20 The predecessor must file a Form BDW
indicating it is withdrawing from business.
21 Rule 15bl— as revised in 1988 contained a
3(b)
typographical error causing the phrase "form of
organization" to read as “form or organization.” The
Commission intended Rule 15bl— to refer to
3(b)
“form o/organization” and interprets the Rule in
this manner.
22See Rule 15bl-4 and 15Ba2-5 concerning
broker-dealers registered pursuant to section 15(b)
and section 15B, respectively.

securities broker-dealer is deemed to be The Rule requires that the applicant
stipulate to be bound by the service of
the registration of any executor,
process upon the Commission as if
guardian, conservator, assignee for the
personal service had been made.
benefit of creditors, receiver, trustee in
Paragraph (b)(1) of the Rule provides
insolvency or bankruptcy, or other
that registered government securities
fiduciary appointed or qualified by
broker-dealers that become non­
order, judgment or decree of a court of
competent jurisdiction. This enables the residents must file their consent within
30 days.
fiduciary to continue the business of a
Pursuant to Rule 15bl-5, the
registered government securities broker
Commission prescribed a series of forms
or dealer, provided that the fiduciary
to be used by non-resident brokerfiles with the Commission, within 10
dealers.25 The Commission is not
days after entering upon the
prescribing specific forms under Rule
performance of his duties, a statement
15Ca2-5; nevertheless, an appropriate
setting forth substantially the same
form to satisfy the requirements of the
information required by Form BD.
6. Proposed Rule 15Ca2-5: Consent to Rule would be one of those used for
Service of Process To Be Furnished by Rule 15bl-5 that is modified to apply to
a government securities broker-dealer
Non-Resident Government Securities
registered pursuant to section
Brokers or Government Securities
15C(a)(l)(A).
Dealers and by Non-Resident General
Unlike Rule 15bl-5, proposed Rule
Partners or Managing Agents of
15Ca2-5 does not grant registered
Government Securities Brokers or
government securities brokers or dealers
Government Securities Dealers. The
or those whose registrations are pending
Commission is proposing a rule
when the Rule becomes effective
governing service of process for non­
additional time in which to file the
resident government securities brokerconsents and powers of attorney.26
dealers that is similar to that applied to Non-resident government securities
non-resident registered brokerbrokers or dealers that may have
dealers.28 Generally, this rule provides already registered would have done so
that every non-resident government
pursuant to section 15(b) of the
securities broker-dealer applying for
Exchange Act and the rules thereunder.
The consent and power of attorney
registration pursuant to section
would have been filed in connection
15C(a)(l)(A) must provide the
Commission with a written irrevocable with their original application for
registration. Therefore, the Commission
consent and power of attorney. This
believes that these provisions are
consent and power of attorney
designates the Commission as an agent unnecessary in the proposed rule.
7. Proposed Rule 15Ccl-l:
upon whom may be served any papers
Withdrawal From Registration.
in connection with actions arising from
Proposed Rule 15Ccl-l provides that, in
the government securities broker or
dealer’s government securities business, order for a government securities
that are subject to the jurisdiction of the broker-dealer to withdraw its
United States and that accrue while the registration under section 15C of the
Exchange Act, it must file notice of
government securities broker or dealer
withdrawal from registration with the
is registered with the Commission.24
Commission on Form BDW.27
Registered broker-dealers withdrawing
from registration under other provisions
28 See Rule 15bl-5.
of the Exchange Act are required to file
24 Under the proposed rule, the government
securities broker-dealer's consent and power of
the same notice.28 On October 7,1980
attorney relate to causes of action that accrue
the Commission proposed largely
between the time the government securities broker
technical revisions to Form BDW that
or dealer becomes registered and when its
are intended to simplify the form and
registration is cancelled or revoked or when a
notice to withdraw from registration (Form "BDW") reduce the regulatory burden on brokerbecomes effective. See Rule 15Ca2-5(a). The cut-off dealers filing Form BDW.29 The
date in proposed Rule 15Ca2-5 differs slightly from
that in Rule 15bl-5 which relates to causes of action
accruing up until the Commission receives a brokerdealer’s Form BDW. Because a broker-dealer’s
withdrawal does not become effective for 60 days
from the date the Form BDW is filed, or a longer
time if proceedings are instituted pursuant to
section 15C, the Commission believes that Rule
15Ca2-5 should provide for causes of action that
may accrue between the time a government
securities broker-dealer files its Form BDW and the
date that notice becomes effective.

25 See Forms 7-M, 8-M, 9-M, and 10-M.
28 See Rule 15bl-5(b) (1) and (2).

27 Form BDW must be filed only if an entity is
completely ceasing its securities business; if an
entity is a registered broker-dealer and is ceasing its
government securities activities but continuing other
securities activities, it must file a notice on Form BD
to reflect this change. See proposed Rule 15Cal-l.
28 See Rule 15b0-l and rule 15Bc-8.
29 See Securities Exchange Act Rel. No. 23848
(September 28,1988), 51 FR 35855.

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
proposed rule does not affect those
proposed Form BDW revisions.
II. Proposed Revisions to Form BD.30
The Commission proposes to modify
Form BD for use as a registration form
by government securities broker-dealers
by adding a new Item 12. New Item 12
requires an applicant to indicate
whether it is applying for registration
solely as a government securities broker
or dealer. The new Item 12 will enable
the Commission, regulatory authorities,
and the public to identify government
securities brokers or dealers registering
pursuant to section 15C(a)(l)(A). In
addition, this identification will
facilitate the Commission’s
determination of the broker-dealer’s
compliance with other applicable
requirements.31
The Commission also proposes to
revise Form BD so that broker-dealers
registered or applying for registration
pursuant to sections 15 and 15B may use
it to notify the Commission of their
government securities activities. These
broker-dealers would file notice on
Form BD by answering “yes” to new
Item 13A, indicating they are acting as a
government securities broker or dealer.
After the effective date of the Act,
broker-dealers registered pursuant to
sections 15(b) and 15B that have
conducted a government securities
business also must notify the
Commission when they cease their
government securities activities.32
30 In addition to the new Items described below,
the Commission is proposing amendments to the
instructions page to describe the procedure for
registering with the Commission as a government
securities broker-dealer and for registered brokerdealers to provide notice of their government
securities activities.
31 Under the Act, government securities brokers
and dealers may be subject to different regulations
than broker-dealers registered under Section 15(b).
For example, a firm that conducts a business solely
in government securities, and therefore registers
with the Commission pursuant to section
15C(a)(l)(A), would not be a member of the
Securities Investor Protection Corporation (“SIPC").
See S. Rep. No. 426, 99th Cong., 2d. Seas. 25 (1988).
In addition, under section 15C(b) the Secretary of
the Treasury may adopt for government securities
broker-dealers rules governing their books and
records and capital requirements that may differ
from the rules applicable to broker-dealers
generally. Finally, under section 15A(f) of the Act
the NASD’s rulemaking authority over transactions
by government securities broker-dealers in
government securities is generally limited to
examining for and enforcing compliance with
applicable provisions of the Act. The NASD,
however, is specifically empowered to adopt rules
to prohibit fraudulent, misleading, deceptive, and
false advertising.
32 Section 15C(a)(l)(B).

Under the proposed amendments, notice
would be filed by answering “yes” to
Item 13B, indicating they are ceasing
their government securities activities.
Broker-dealers registered with the
Commission will have until July 25,1987,
to file this notice with the Commission.
Registered broker-dealers that become
government securities brokers or dealers
after that date will be required pursuant
to Rule 15Cal-l to notify the
Commission on the date they begin
acting as a government securities dealer
and within thirty days after ceasing
these activities.
Depending on their volume of
government securities business, brokerdealers filing notice of government
securities activities may also have to
amend their Form BD to reflect a change
in Item 10. Item 10 requires the applicant
to check boxes indicating the types of
business it is or will be engaged in if a
type of business accounts for 10 percent
or more of the applicant’s annual
revenue from the securities or advisory
business. Current Item 10 provides a box
only for government securities dealer
activities. The Commission is proposing
to add an additional box for government
securities brokers.
III. Proposed Revisions to Rule 15b2-2:
Inspection of Newly Registered Brokers
and Dealers
Section 15(b)(2)(C) requires the
Commission or the responsible selfregulatory organization to conduct an
inspection of a broker-dealer 33 within
six months 34 of granting its registration
in order to determine whether the
broker-dealer is operating in conformity
with the federal securities laws.
Pursuant to this requirement the
Commission adopted Rule 15b2-2. The
Commission is proposing revisions to
Rule 15b2-2 to provide for the inspection
of newly registered government
securities broker-dealers. The Rule
requires the responsible self-regulatory
organization to conduct inspections of
newly registered broker-dealers within
six months to a year 85 to determine
compliance with "applicable financial
responsibility rules.” The revisions
clarify the applicability of the Rule to
government securities broker-dealers
registered pursuant to section
15C(a)(l)(A) and define “applicable
financial responsibility rules" to include
33 Government securities broker-dealers that are
required to register pursuant to section 15C(a) are
broker-dealers, and are therefore subject to the
Rule.
34 The Commission may delay inspection of any
class of brokers or dealers for up to six months. See
section 15(b)(2)(C).
35 Rule 15b2-2(c) and (d).

5715

any rule adopted by the Secretary of the
Treasury pursuant to section 15C(b)(l).
Cost of Benefits. While there are no
direct fees required to file Form BD with
the Commission, government securities
broker-dealers may incur costs
associated with the proposed rules to
the extent that the preparation of the
required statements becomes timeconsuming or requires the assistance of
legal or accounting advice. These costs
are difficult to estimate; therefore, the
Commission solicits comments on the
specific costs firms would face in
complying with the proposed rules. The
Commission is particularly interested in
comments that identify’ the sources and
expected amount of expenditure needed
to meet the requirements of the
individual rule proposals as well as
suggestions for alternative, less costly
methods to comply effectively with the
intent of the Act.
The benefits of the proposed rules
may be viewed in terms of how
effectively they implement the intent of
Congress to increase confidence in the
government securities market and to
reduce risks by having U.S. government
securities brokers and dealers register
or file notice with the appropriate
regulatory authority.
The Commission believes that
investor protection will be enhanced by
the proposed registration requirements,
because they should provide an
adequate basis for determining whether
a firm meets minimum industry
standards for operating as a government
securities broker or dealer. In the case
of succession or withdrawal, the rules
would allow for a smooth, continuous
transition in management and, as with
withdrawal applications, enable the
Commission to determine if any further
action is necessary. Another major
benefit of the proposed registration
procedure is that it implements the
requirements of the Act while using a
pre-existing method and a standard
form familiar to the broker-dealer
industry and that is also used by the
states and the NASD.
The Commission solicits comments on
the costs and benefits of the proposed
rules and form changes. The
Commission is particularly interested in
comments addressing the identification
of other sources of costs and benefits
and the quantification of costs and
benefits to the proposed amendments.
IV. Regulatory Flexibility Act
Considerations
The Regulatory Flexibility Act
establishes procedural requirements
applicable to agency rulemaking that
has a “significant economic impact on a

5716

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

substantial number of small entities.” 36
The Chairman of the Commission has
certified pursuant to that Act that the
proposed amendments to Rule 15b2-2, if
adopted, will not have a significant
economic impact on a substantial
number of small entities. Rule 15b2-2
provides for inspections of newly
registered broker-dealers by the NASD
and the exchanges. Most government
securities broker-dealers will belong to
the NASD, therefore, the NASD will
incur most of the costs associated with
the proposed amendments to Rule 15b22. The NASD, however, is not a small
organization under § 601(4] of the
Regulatory Flexibility Act because the
NASD is considered “dominant in its
field.”
Under Rule 0-ll(e] of the Exchange
Act, the Commission defines a small
organization, when used with reference
to an exchange as any exchange that
has been exempted from the reporting
requirements of Rule H A a3-l. There is
only one exchange, the Spokane
Exchange, that falls within the definition
of small organization. It is not expected
that government securities brokerdealers will join the Spokane Exchange.
Therefore, it is unlikely that there will
be any economic impact on an exchange
that is a small entity.
The proposed amendments to Rule
15b2-2 may result in indirect costs to
government securities broker-dealers
that are small entities. The costs,
however, of being inspected by the
NASD or the exchanges are minimal and
will not have a significant economic
impact on such government securities
broker-dealers.
The Commission has prepared an
Initial Regulatory Flexibility Analysis in
accordance with 5 U.S.C. 603 regarding
proposed rules 15Cal-l, 15Ca2-l,
15Ca2-2,15Ca2-3,15Ca2-4,15Ca2-5,
15Ccl-l, 15b2-2, and proposed revisions
to Form BD. The Analysis notes that the
38 Although section 601(b) of the Regulatory
Flexibility Act defines the term "small entity,” the
statute permits agencies to formulate their own
definitions. The Commission has adopted
definitions of the term small entity for purposes of
Commission rulemaking in accordance with the
Regulatory Flexibility Act. Those definitions, as
relevant to this certification, are set forth in Rule 010,17 CFR 240.0-10. See Securities Exchange Act
Rel. No. 18452 (January 28,1982), 47 FR 5215. An
exchange generally is a “small business” or “small
organization” if it has been exempted from the
reporting requirements of 17 CFR 240.1lAa3-l. See
Rule 0-10{e). A broker or dealer generally is a
“small business” or “small organization" if it had
total capital of less than $500,000 on the date in the
prior fiscal year as of which its audited financial
statements were prepared pursuant to 17 CFR
240.17a-5(d) or if not required to file such
statements a broker or dealer that had total capital,
net worth plus subordinated liabilities, of less than
$500,000 on the last business day of the preceding
fiscal year. See Rule 0-10(c), 17 CFR 240.0-10(c).

objective of the rules is to implement the
provisions of the Act. The Analysis
utilized the Commission’s Rule 0-10
under the Exchange Act, which defines
small entities when used in reference to
a broker-dealer. The Commission
believes that the proposed rules will
have a significant economic impact on a
substantial number of small entities. The
impact, however, has been minimized by
requiring government securities brokerdealers to register using the same form
as the form used for registration of other
broker-dealers.
The intent of and the possible costs
and benefits of each rule proposal is
also discussed in the Analysis.
Comments are solicited with respect to
this initial regulatory analysis and the
appropriateness of the current definition
of a small broker-dealer for purposes of
the Analysis.
A copy of the Initial Regulatory
Flexibility Analysis may be obtained by
contacting Lynne G. Masters, Esq,,
Division of Market Regulation,
Securities and Exchange Commission,
Washington, DC 20549, (202) 272-2848.

V. Statutory Authority

Pursuant to the Securities Exchange
Act of 1934 and particularly sections 3,
15(b), 15C(a), and 23 thereof, 15 U.S.C.
78c, 78o(b), 78o-5(a), and 78w, the
Commission proposes to adopt
§§ 240.15Cal-l, 240.15Ca2-l, 240.15Ca22, 24G.15Ca2~3, 240.15Ca2-4, 240.15Ca25, 240.15Ccl-l, and to amend
§ 24Q.15b2-2 and Form BD, § 249.501 of
Title 17 of the Code of Federal
Regulations, in the manner set forth
below.

VI. Text of Proposed Amendments

In accordance with the foregoing, it is
proposed to amend 17 CFR Part 240 as
follows:
PART 240—GENERAL RULES AMD
REGULATIONS SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for Part 240 is
amended by adding the following
citations:
Authority: Sec. 23, 48 Stat. 901 as amended
15 U.S.C. 78w 4 4 4 Section 240.15b2-2, also
issued under Secs. 3,15 U.S.C. 78c, and 15,15
U.S.C. 78o, Secs. 240.15Cal~l, 240.15Ca2-l,
240.15Ca2-2, 240.15Ca2-3, 240.15Ca2-l,
240.15Ca2-5, 240.15Ccl-l, also issued under
Secs. 3,15 U.S.C. 78c, 15C, 15 U.S.C. 78o-5,4 4
*

124Q.14b2-2. Inspection o f newly
registered broker© and dealers.

(a) Definition . For the purpose of this
section the term “applicable financial
responsibility rules” shall include: (1)
Any rule adopted by the Commission
pursuant to sections 8 ,15(c)(3), 17(a), or
17(e)(1)(A) of the Act; (2) any rule
adopted by the Commission relating to
hypothecation or lending of customer
securities; (3) any other rule adopted by
the Commission relating to the
protection of funds or securities; and (4)
any rule adopted by the Secretary of the
Treasury pursuant to section 15C(b)(l)
of the Act.
(b) Each self-regulatory organization
that has responsibility for examining a
broker or dealer member (including
members that are government securities
brokers or government securities dealer?
registered pursuant to section
15C(a)(l)(A) of the Act) for compliance
with applicable financial responsibility
rules is authorized and directed to
conduct an inspection of the member,
within six months of the member’s
registration with the Commission, to
determine whether the member is
operating in conformity with
applicability financial responsible rules.
* < * * *
t
Registration of Government Securities
Brokers and Government Securities Dealers

3. By adding § § 24Q.15Cal-l,
24Q.15Ca2-l, 24Q.15Ca2-2, 24Q.15Ca2-3,
240.15Ca2-4, 24Q.15Ca2-5, 240.15Ccl-l
after the undesignated heading above as
follows:
§240.15Ca1~1. Notie© o f government
securities broker-dealer activities.

(a) Every government securities
broker or government securities dealer
that is a broker or dealer registered
pursuant to sections 15 or 15B of the Act
(other than a financial institution as
defined in section 3(a)(46) of the Act)
shall file with the Commission written
notice on Form BD (§ 249.501 of this
chapter) in accordance with the
instructions contained therein that it is a
government securities broker or
government securities dealer. After July
25,1987, every broker or dealer subject
to this paragraph shall file notice that it
is a government securities broker or
government securities dealer prior to or
on the date it begins acting as a
government securities broker or
government securities dealer.

(b) Every government securities
broker or government securities dealer
required to file notice under paragraph
(a) of this section shall file
2. § 240.15b2-2 is amended by revising Commission written notice with the BD
on Form
paragraphs (a) and (b) as follows:
in accordance with the instructions

Federal Register / Vol. 52, No. 38-37 / Wednesday, February 25, 1987 / Proposed Rules
contained therein when it ceases to be a its net worth and the Treasury capital
government securities broker or
requirements pursuant to clauses (1) and
government securities dealer. Notice
(3) hereof in testing compliance with the
shall be filed within 30 days after the
applicable capital rules.
date the broker or dealer has ceased
(b) The schedule of securities
acting as a government securities broker furnished as a part of such statement of
or a government securities dealer.
financial condition shall be deemed
confidential if bound separately from
§ 240.1SCa2=1. Application fo r regfetrsfI©r
the balance of such statement, except
as a government securities broker ©r a
that it shall be available for official use
government securities dealer.
by any official or employee of the
(a) An application for registration
United States or any state, by any
pursuant to section 15C(a)(l)(A) of the
national securities exchange or national
Act of a government securities broker or securities association of which the
government securities dealer shall be
person filing such statement is a
filed with the Commission on Form BD
(§ 249.501 of this chapter) in accordance member, or with whom the person is
associated,
with the instructions contained therein. seeking to be to whom the and by any
other person
Commission
(b) Every amendment to Form BD filed authorizes disclosure of such
by a government securities broker or
information
government securities dealer registered interest. as being in the public
pursuant to section 15C(a)(l)(A) of the
(c) Every government securities
Act shall constitute a “report” within
broker or government securities dealer
the meaning of sections 15,15C, and
who files an application for registration
32(a) of the Act.
on Form BD pursuant to Rule 15Ca2-l
shall file with such application a
§ 240.15Ca2"2. Statement o f financial
statement that shall include the
condition t© b® filed with application fo r
registration as ® government securities
following:
broker or government securities dealer.
(1) A representation that the capital of
such government securities broker or
(a) Every government securities
government securities dealer has been
broker or government securities dealer
who files an application for registration contributed, and that such amount of
capital will continue to be devoted to its
on Form BD pursuant to Rule 15Ca2-l
business as government securities
shall file with such application a
statement of financial condition as of a broker or government securities dealer,
date no more than 30 days after the date and a description of the nature and
on which such statement is filed and as source of such capital, and
of a later date reflecting any material
(2) A representation that adequate
change, if there has been a material
arrangements have been made by such
change. Such statement of financial
government securities broker or
condition shall: (1) Be in such detail as
government securities dealer for the
will disclose the nature and amount of
establishment and maintenance of
assets and liabilities and the net worth
adequate facilities and financing
of such government securities broker or required for the carrying on of its
government securities dealer; (2) contain business as a government securities
a schedule listing the securities of such broker or government securities dealer,
government securities broker or
and an undertaking that such
government securities dealer or in which government securities broker or
such government securities broker or
government securities dealer will
government securities dealer has an
continue to maintain facilities and
interest and, if a ready market for the
financing adequate for its business, and
security exists, valuing the security at
a detailed statement thereof, including a
the market price with an indication of
discussin of the nature of such
the market on which such valuation is
arrangements with respect to (i)
made, and (3) contain a computation
personnel, (ii) physical facilities, (iii) the
made in accordance with the capital
maintenance and preservation of books
requirements applicable to the business and records as required by applicable
of such government securities broker or provisions of law and any applicable
government securities dealer under the rules of any national securities
capital rules established by the
exchange or national securities
Secretary of the Treasury. For purposes association of which such government
of this paragraph (a), if the government securities broker or government
securities dealer is a member, including
securities broker or government
information concerning any
securities dealer is a soler
proprietorship, the personal assets and
arrangements made for the adequate
liabilities of such government securities performance of these functions and
duties with a bookkeeping service
broker or government securities dealer
shall be included in the computations of company or data processing service

5717

company, or otherwise, and (iv) the
methods and procedures to be employed
by such government securities broker or
government securities dealer for the
purpose of supervising the activities of
persons associated with it, and
(3) A statement describing the
arrangements made for the obtaining of
the funds required for the operation of
its business for the first year of
operations after registration, and the
uses to which such funds will be put,
stating in appropriate detail the
expenses expected to be incurred for
such first year of operations after
registration; and setting forth the
arrangements made, if any, for the
obtaining of additional funds if such
funds should become necessary.
(d) Attached to each of the statements
required by this rule shall be an oath or
affirmation that the information
contained therein is true and correct to
the best knowledge and belief of the
person making such oath or affirmation.
The oath or affirmation shall be made
before a person duly authorized to
administer such oath or affirmation. If
the government securities broker or
government securities dealer is a sole
proprietorship, the oath or affirmation
shall be made by the proprietor; if a
partnership, by a general partner; if a
corporation, by a duly authorized
officer.
(e) (1) The provisions of this rule shall
not apply to a government securities
broker or government securities dealer
succeeding to and continuing the
business of a registered government
securities broker or government
securities dealer, provided that such
successor government securities broker
or government securities dealer files
with the application on Form BD a
statement of financial condition as
specified in paragraph (a) of this section.
(2) The information required pursuant
to paragraphs (a)(2), (c)(2)(i), (c)(2)(ii),
and (c)(3) of this rule shall not apply to a
government securities broker or
government securities dealer that has
been acting continuously as a
government securities broker or
government securities dealer for one or
more years prior to July 25,1987, and
who files with its application for
registration a representation that it has
been acting as a government securities
broker or dealer as of a date prior to
July 25,1986.
(3j The Commission may, upon
written request or upon its own motion,
exempt from the provisions of this rule
any government securities broker or
government securities dealer, either
unconditionally or on specified terms or
conditions, as it deems necessary or

571®

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules

appropriate in the public interest or for
the protection of investors.
(4) The statement of financial
condition required by this rule shall be
deemed a part of the application for
registration within the meaning of the
provisions of sections 15,15C and 32(a)
of the Act authorizing the Commission
to prescribe the form of application for
registration of a government securities
broker or government securities dealer
and prohibiting the filing of a false
application.
§ 24G.15Ca2-3. [Registration of successor
to registered government securities broker
or government securities dealer.

(a) If a government securities broker
or government securities dealer
succeeds to and continues the business
of a government securities broker or
government securities dealer registered
pursuant to section 15C(a)(l)(A) of the
Act, the registration of the predecessor
shall be deemed to remain effective as
the registration of the successor for a
period of 75 days after such succession,
provided that an application for
registration on Form BD (§ 249.501 of
this chapter) is filed by such successor
within 30 days after such succession.
(b) Notwithstanding the proviso to
paragraph (a) of this rule, if a
government securities broker or
government securities dealer succeeds
to and continues the business of a
predecessor government securities
broker or government securities dealer
that is registered pursuant to section
15C(a){l)(A) of the Act, and the
succession is based solely on a change
in the predecessor’s date or state of
incorporation, form of organization, or
change in composition of a partnership,
the registration of the successor may be
effected by amending within 30 days of
the succession the Form BD of the
predecessor to reflect these changes.
This amendment shall be deemed an
application for registration filed by the
predecessor and adopted by the
successor. This successor government
securities broker or government
securities dealer also must file with its
Form BD amendment the statements of
financial condition specified in Rule
15Ca2-2.

judgment, or decree of a court of
competent jurisdiction to continue the
business of such registered government
securities broker or government
securities dealer, provided that such
fiduciary files with the Commission, no
more than 30 days after entering upon
the performance of its duties, a
statement setting forth as to such
fiduciary substantially the information
required by Form BD.
§ 240.1 §Ca2-5. Consent to service @
?
process te be furnished by non-resident
government securities brokers or
government securities dealers and by non*
resident general partners or managing
agents of government securities brokers or
government securities dealers.

(a) Each non-resident government
securities broker or government
securities dealer applying for
registration pursuant to section
15C(a)(l)(A) of the Act, each non­
resident general partner of a government
securities broker or government
securities dealer partnership that is
applying for such registration, and each
non-resident managing agent of any
other unincorporated government
securities broker or government
securities dealer that is applying for
registration, shall furnish to the
Commission, in a form acceptable to the
Commission, a written irrevocable
consent and power of attorney that: (1)
designates the Securities and Exchange
Commission as an agent of such
government securities broker or
government securities dealer upon
whom may be served any process,
pleadings, or other papers in any civil
suit or action brought in any appropriate
court in any place subject to the
jurisdiction of the United States, with
respect to any cause of action (i) that
accrues during the period beginning
when such government securities broker
or government securities dealer
becomes registered pursuant to section
15C(a){l)(A) of the Act and ending either
when such registration is cancelled or
revoked, or when a notice filed by such
government securities broker or
government securities dealer to
withdraw from such registration
becomes effective, whichever is earlier,
(ii) that arises out of any activity, in any
§ 240.15Ca2-4 Registration ©f fiduciaries.
place subject to the jurisdiction of the
The registration of a government
United States, occurring in connection
securities broker or government
with the conduct of the business of such
securities dealer pursuant to section 15C government securities broker or
government securities dealer, and (iii)
of the Act shall be deemed to be the
that is founded, directly or indirectly,
registration of any executor,
administrator, guardian, conservator,
upon the Securities Act of 1933, the
assignee for the benefit of creditors,
Securities Exchange Act of 1934, the
receiver, trustee in insolvency or
Trust Indenture Act of 1939, the
bankruptcy, or other fiduciary,
Investment Company Act of 1940, the
appointed or qualified by order,
Investment Advisers Act of 1940, or any

rule or regulation under any of those
Acts, and (2) stipulates and agrees that
any such civil suit or action may be
commenced against such government
securities broker or government
securities dealer by the service of
process upon the Commission and the
forwarding of a copy thereof as
provided in paragraph (c) of this section
and that the service as aforesaid of any
such process, pleadings or other papers
upon the Commission shall be taken and
held in all courts to be as valid and
binding as if due personal service
thereof had been made.
(b) Each government securities broker
or government securities dealer
registered pursuant to section
15C(a)(l)(A) of the Act that becomes a
non-resident government securities
broker or government securities dealer,
and each general partner or managing
agent of an unincorporated government
securities broker or government
securities dealer registered or applying
for registration pursuant to section
15C(a)(l)(A) of the Act who becomes a
non-resident after such registration or
filing of an application for such
registration, shall furnish such consent
and power of attorney no more than 30
days thereafter.
(c) Service of any process, pleadings
or other papers on the Commission
under this rule shall be made by
delivering the requisite number of copies
thereof to the Secretary of the
Commission or to such other person as
the Commission may authorize to act in
its behalf. Whenever any process,
pleadings, or other papers as aforesaid
are served upon the Commission, it shall
promptly forward a copy thereof by
registered or certified mail to the
appropriate defendants at their last
address of record filed with the
Commission; but any failure by the
Commission to forward such a copy
shall have no effect on the validity of
the service made upon the Commission.
The Commission shall be furnished a
sufficient number of copies for such
purpose, and one copy for its file.
(d) For purposes of this rule the
following definitions shall apply:
(1) The term “managing agent” shall
mean any person, including a trustee,
who directs or manages or who
participates in the directing or managing
of the affairs of any unincorporated
organization or association that is not a
partnership.
(2) The term “non-resident
government securities broker or
government securities dealer” shall
mean: (i) In the case of an individual,
one who is domiciled in or has his
principal place of business in any place

Federal Register / V ol 52, No. 36-37 / Wednesday, February 25, 1987 / Proposed Rules
not subject to the jurisdiction of the
United States, (ii) in the case of a
corporation, one incorporated in or
having its principal place of business in
any place not subject to the jurisdiction
of the United States; (iii) in the case of a
partnership or other unincorporated
organization or association, one having
its principal place of business in any
place not subject to the jursidiction of
the United States.
(3) A general partner or managing
agent of a government securities broker
or government securities dealer shall be
deemed to be a non-resident if he is
domiciled in any place not subject to the
jurisdiction of the United States.
§ 240.15Cc 1- 1. Withdrawal from
registration.
(a) Notice of withdrawal from
registration as a government securities
broker or government securities dealer
pursuant to section 15C(a)(l)(A) of the
Act shall be filed on Form BDW in
accordance with the instructions
contained therein.
(b) Except as hereinafter provided, a
notice to withdraw from registration
filed by a government securities broker
or government securities dealer shall
become effective for all matters on the
sixtieth day after the filing thereof with
the Commission or within such shorter
period of time as the Commission shall
determine. If a notice to withdraw from
registration is filed with the Commission
at any time subsequent to the date of the
issuance of a Commission order
instituting proceedings pursuant to
section 15C(c) to censure, place
limitations on the activities, functions or
operations of, suspend or revoke the
registration of, such government
securities broker or government
securities dealer or if, before the
effective date of the notice of
withdrawal pursuant to this paragraph
(b), the Commission institutes such a
proceeding or a proceeding to impose
terms or conditions upon such
withdrawal, the notice of withdrawal
shall not become effective pursuant to

5719

Keep a copy. Duplicated copies may be
filed if manually signed. Copies must be
made on standard size white paper, in
the same size as the original.
Form BD Initial Filings—Required
Statements
Rule 15bl-2 and Rule 15Ca2-2 require
filing with each initial Form BD
application two copies of special
P A R T 249— FORMS, SEC U R ITIES
statements of financial condition,
EXC H AN G E A C T O F 1934
capital contribution, facilities, and firstyear funding. (See Securities Exchange
4. The authority citation for Part 249
Act Release No. 9594 (May 12,1972);
continues to read, in part as follows:
Securities Exchange Act Release No.
Authority: The Securities Exchange Act of
24109 (Feb. 18,1987).)
1934,15 U.S.C. 78a. et seq.
5. FORM BD prescribed by § 249.501 is Successor Registration
revised as follows: Revisions to the
A broker-dealer that assumes
Instructions page, New Items 12 and 13 substantially all the assets and
added, Item 10 amended. (FORM BD
liabilities of and continues the business
does not appear in the Code of Federal
Regulations). The revised Form BD with of a predecessor broker-dealer is a
successor broker-dealer. Rule 15bl-3
the exception of Schedules A-E which
are unchanged appears in the Appendix and Rule 15Ca2-3 require a successor
broker-dealer to file a new Form BD (or,
below.
in special instances, to amend the
By the Commission.
predecessor broker-dealer’s Form BD)
Shirley E. Hollis,
within 30 days. The filing must indicate
Assistant Secretary.
on page 2 of the form that the applicant
February 18,1987.
is a successor and must contain the
statement of financial condition
Appendix-Form BD
required by Rule 15bl-2 or Rule 15Ca2-l
Note.—This appendix will not appear in
Form BD successor filings. (See
the Code of Federal Regulations.
Securities Exchange Act Release No.
OMB APPROVAL
22468, (September 26,1985); Securities
OMB No. 3235-0012
Exchange Act Release No. 24109 (Feb.
Expires May 31,1988
18,1987).)
U.S. Securities and Exchange
Prohibited Broker-Dealer Names
Commission, Washington, D.C. 20549
United States Code Title 18 Section
Special Instructions for Completing or
709 makes a criminal offense of using
Amending Form BD, Uniform
the words “National,” “Federal,”
Application for Registration as a
“United States,”
Broker-Dealer, with the U.S. Securities Insurance” in the"reserve,"aor "Deposit
name of person or
and Exchange Commission.
organization in the brokerage business,
unless otherwise allowed by Federal
How and Where to File
law. If these words are used in the
File Form BD and its schedules in
applicant’s name, include an opinion of
triplicate with the Securities and
counsel with the Form BD explaining
Exchange Commission, Washington,
why the words are permitted.
D.C. 20549. Manually sign and notorize
BILLING CODE 8010-01-SS
all three copies on the execution page.
this paragraph (b) except at such time
and upon such terms and conditions as
the Commission deems necessary or
appropriate in the public interest or for
the protection of investors.
(c) Every notice of withdrawal filed
pursuant to this section shall constitute
a “report” within the meaning of
sections 15,15C, and 32(a) of the Act.

57 m

Federal Rsgpigtef / Vol. 52, No. 36-37 / Wednesday, February 25,1987 / Proposed Rules
!

CM3 APPROVAL
|
0MB No l! > : J2J-3-0012 !
••t
E xpires: Perviirvj Action!

Instructions Cor Fora BD
1. Updating - By law, the applicant mast update the FOrm BD information by submitting amendments whenever the
information on f ile changes. Complete a ll amended pages in fu ll and circ le the rusnber of the item being
changed.
2. Contact Employee - The individual lis te d on page 1 as the contact employee must be authorized to receive a il
compliance information, communications and mailings and be responsible for disseminating i t within the
ap p lican t's organization.
3. FOrroat
° Attacks an execution page (page 1) with original manual signatures to the in itia l Form 5D filin g and each
amendment to the form or Schedules A through D.
° Type a ll information.
* Give the broker-dealer and date on each page.
° use only the Form BD and i ts Schedules or a reproduction of them.
4. Definitions
0 Applicant - The broker-dealer applying on or amending th is form.
° Control - The power to d ire c t or cause the direction of the managanent or p olicies of a conparry, whether
through ownership of secu rities, by contract, or otherwise. Any individual or firm th at is a d irecto r,
partner or o fficer exercising executive responsibility (or having sim ilar statu s or functions) or th at
d irectly or indirectly has the rig ht to vote 25 percent or more of the voting secu rities or is en titled
to 25 percent or more of the p ro fits is presumed to control that company.
° Jurisd ictio n - Any non-Ftederal government or regulatory body in the United S tates, Puerto Rico or Canada.
° Person - An individual, partnership, corporation or other organization.
0 Self-regulatory organization - Any national secu rities or commodities exchange or registered secu rities
association, or registered clearing agency.
5. Schedule A, B and C - Individuals not required to have a Form U-4 (individual registration) in the Central
R egistration Depository (CRD) who are liste d on Schedules A, B or C must attach page 2 of Form U-4. The
applicant broker-dealer must appear in Form U-4 Item 19 or 20. Signatures are not required.
6. Schedule D - Schedule D provides additional space for explaining "Yes" answers to Form BD items, but not
for.continuing Schedules A, B or C. To continue Schedules A, B or C, use copies of the Schedule being con­
tinued.
7. Schedule E - Schedule E Amendments to report changes in Branch O ffices may be submitted without an execution
page.
8. Federal Information Law and Requirements - The Securities Exchange Act of 1934, Sections 15, 15C, 17(a) and 23(a),
authorize the SEC to co llect the information on th is form fran applicants for reg istratio n as a broker or dealer
(and persons assxriated with applicants). The information is used for regulatory purposes, including deciding
whether to grant reg istratio n . The SEC maintains file s of the information on th is form and nakes it publicly
available. Oily the Social Security Number information, which aids in identifying the applicant, is voluntary.
9. Government Securities A ctivities
A. Section 15C of the Exchange Act requires government secu rities broker-dealers to register with the SEC.
TO do so, use Form BD and answer "yes" to Item 12 if conducting only a government secu rities business.
B. Broker-dealers registered or applicants applying for reg istratio n under Section 15(b) or I S of the
Exchange Act that conduct (or intend to conduct) a government secu rities business in addition to other
broker-dealer a c tiv itie s (if any) must file a notice cm Form BD by answering "yes" to Item 13A.
C. Broker-dealers registered under Section 15(b) or 15B of the Exchange Act th at cease to conduct a govern­
ment secu rities business must file notice when ceasing th eir a c tiv itie s in government secu rities. TP
do go, file an amendment to Form BD and answer "yes’ to Item 138.

To amend, circle Question numbers emended end fll» with a completed Execution page (Page 1).

F0B$ B
O

OFFICIAL USE

PAGE
1
(Execution Peso)

UNIFORM APPLICATION FOR BROKER-DEALER REGISTRATION

FO M10 Pigs 2
R

OFFICIAL use
Applicant Name

WARNING

0

AMENDMENT

2. To be registered with the following, ^designate) V initial Registration. "2 " Pending,
or membership listed herein is of a restricted nature, explain fully on Schedule D.

B.

ASE

u

IRS Empl. Ident. No..

1

s
t

Name under which business is conducted, if different:

c

T

0

E.

0
N

If name o f business is hereby amended, state previous name:

BSE

0
0
0
0

J

1 Exact name, principal business address, mailing address, if different, and telephone number o f applicant .

SECURITIES & EXCHANGE COMMISSION

0 0 0 0 0 0 0 0 0 0_________

S
R
0

FIRM CRD NO..

A. F u ll name o f applicant (If sole proprietor, state last, first, and middle name)

C
D

Already Registered. If any license, registration

CBOE

CSE

0 0 0
0 0 0
0 0 0 0
n 0 n

R1

SD

sc

TN

MSE

NASO

NYSE

0 0 0
0 0 0
0
g
n n 5
TX

UT

VT

PHLX

0
0
0
0
VA

PSE

OTHER (Specify!

0 0 0 0 0
0 0 0 0 0_____
0 0 0 0 5
0 0 0 0 o
WA

wv

Wl

WY

PR

Firm main address:
3 Date of form ation.
(NumMi and StrMt)

(City)

.

(Stats)

□ i

Corporation

(2Ip Coda)

□ <

Mailing Address, if different:

Complete Schedule A CU Partnership

□ l

Complete Schedule B I__ 1 Sole Proprietorship

Complete Schedule C

. Complete Schedule C

4 if applicant is a soie proprietor, state full residence aodress ano social security numoer

F. Telephone Number

Social Security No.
CONTACT EMPLOYEE

EXECUTION. For the purpose of complying with the laws of the Stateis) I have designated in Item 2 relating to either the offer or sale of
securities or commodities. I hereby certify that the applicant is m compliance with applicable state surety bonding re­
quirements and irrevocably apoomt the administrator of each of those State(s). or such other person designated by law.
and the successors »n such office, my attorney in said State(s) upon whom may be served any notice, process or pleading in
any action or proceeding agamst me arising out of or in connection with the offer or sale of securities or commodities, or
out of the violation or alleged violation of the laws of those Stale(S) and l do hereby consent that any such action or pro
ceedmg agamst me may be commenced in any court of competent jurisdiction and proper venue within said State(s) by ser­
vice of process upon said apoomtee with the same ellect as if l were a resident in said Stateis) and had lawfully been
served with process in said Stateis)
The undersigned, bemg first duly sworn, deposes and says that he has executed this form on behalf of. and with the
authority of said applicant The undersigned and applicant represent that the information and statements contained
herein including exhibits attached hereto and other information filed herewith all ol which are made a part hereof, are
current true, and complete The undersigned and applicant further represent thal to the extent any information previously
submitted is not amended, such information is cunentiy accurate and complete

iNutti6« i mo

St'e

5. is applicant a successor to a registered broker dealer’
If yes. explain on Schedule 0 ......................
.

..................................................

A Date of Succession__________________________________
B. Full name. IRS Empl ident No SEC File No and Firm CRD No of predecessor broker-dealer
Nam e................................................................. ..... ........

.

IRS Empl Ident No ______________________________

Name of Applicant

SEC File Number

______ __________ _____ ______ _

.......

......— r...-

FIRM CRD No -------------------------____________________________________________________

Signature and Tit'e

YES

6

Subscribed and sworn before me this_

A.

Does any person not named in Item 1 or Schedules A B or C. directly or indirectly through agreement or otherwise,
exercise or have the power to exercise control over the management or polices of applicant’

j— ,

\__ |

□ □

(if yes. state on Schedule D the exact name of each person (if individual state last, first and middle names) and
describe the agreement or other basis through which such person exercises or has the power to exercise c o n tro l)

My commission expires____________
This page m ust always be com pleted in lu ll with original, manual signature and notarhation.
To amend, circle Item (6) being amended.

DO NOT WRITE BELOW THIS LINE

□ □

If yes. state

FOR OFFICIAL USE ONLY

B.

is the business of applicant wholly or partially financed directly or indirectly by any pefson not named in Item 1 or
Schedules A. B or C m any manner other than by M ia public offering of securities made pursuant to the Securities
Act of 1933. (2i credit extended in the ordinary course of business by suppliers, banks and others, or a satisfactory
subordination agreement as defined m Rule I5 t3 1 under the Securities Exchange Act of 1934 (17CFR 5240I5c3 1)’
(If yes. state on Schedule D the exact name (last, first, middle) of each person and describe the agreement or
arrangement through which such financing is made available, including the amount thereof.)

yes
.— .
|__j

□0
NO

Federal Register / Vol. 52, No. 30-37 / Wednesday, February 25,1987 / Proposed Rules

Failure to keep th<s form current and to file accurate supplementary information on a timely basis, or the failure to keep
accurate books and records or otherwise to comply with the provisions of law aoolymg to the conduct of business os a
broke'-dealer would violate the Federal securities laws and the laws of tho jurisdictions and may result in disciplinary, ad­
ministrative. injunctive or criminal action.
INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS.
1 1 APPLICATION

c

Firm CRD No..

D a t e _________

(revived 1/86)

5721

5722

To em end, c irc le q u e stio n num bers em ended and file w ith o com pleted E xecution pogo (Page 1).

To emend, c irc le q u e stio n num bers am ended and file w ith a co m p le te d E xecution pag e (Pogo 1).

OFFICIAL USE

FO RM

1 0

Page 3

N ame
Date

_

Pap 4

Applicant Name:

Firm CR D No.
D a te - _________

7

Firm CRD No.

E Has any self-regulatory organization or commodities exchange ever

D efinitions
Control affiliate - An individual or firm that directly or indirectly controls, is under common control w ith, or
is controlled by the applicant. Included are any employees identified in Schedules A,B or C o f this form as exer­
cising control. Excluded are any employees who perform clerical, administrative, support or similar functions;
or who, regardless o f title , perform no executive duties or have no senior policy making authority
© Investment o r investment-related - Pertaining to securities, commodities, banking, insurance, o r real estate
(including, but n o t lim ite d to . acting as or being associated w ith a broker-dealer, investment company, investment
adviser, futures sponsor, bank, o r savings and loan association),
o Involved - Doing an act or aiding, abetting, counseling, commanding, inducing, conspiring w ith or failing reason­
ably to supervise another in doing an act.

(1) found the applicant or a control affilia te to have made a false statement or omission?
(2) found the applicant or a control affilia te to have been involved in a violation o f its rules?
(3)

(4) disciplined the applicant or a control a ffiliate by expelling or suspending it from membership, by barring
or suspending its association w ith other members, or by otherwise restricting its activities?

A. In the past ten years has the applicant or control a ffilia te been convicted o f or pleaded guilty or nolo contendere
("n o contest") to:
(1) a felony or misdemeanor involving:
investment or an investment-related business,
fraud, false statements or omissions,
wrongful taking o f property, or
YES
bribery, forgery, counterfeiting o r extortion?
(2) any other felony?

u
□

F Has any foreign government, court, regulatory agency, or exchange ever entered an order against the applicant
or a control affiliate related to investments or fraud?
G Is the applicant or a control affilia te now the subject o f any proceeding that could result in a "ye s" answer to
parts A-F o f this item?
NO

U0
□ 0

B Has any court
(1) In the past ten years enjoined the applicant or a control affiliate in connection w ith any investment-related
activity?

YES

NO

□

□ 0

(2) ever found that the applicant or a control affiliate was involved in a violation o f investment-related statutes
or regulations?

□

YES

(11 found the applicant or a control affiliate to have made a false statement or omission?
(2) found the applicant or a control affiliate to have been involved in a violation o f its regulations or statues?
(3) found the applicant or a control affiliate to have been a cause of an investment-related business having its
authorization to do business denied, suspended, revoked, or restricted?
(4) entered an order denying, suspending or revoking the applicant's or a control affiliate's registration or other
wise disciplined it by restricting its activities?

H. Has a bonding company denied, paid o u t on. or revoked a bond fo r the applicant?
I

NO

U0
□ 0

YES

□
YES

□
YES

9
□
□

□ 0
□ 0
□ 0

(4) m the past ten years entered an order against the applicant or a control affiliate in connection w ith invest­
ment related activity?
(5) ever denied, suspended, or revoked the applicant's or a control affiliate's registration or license, prevented it
from associating w ith an investment related business, or otherwise disciplined it by restricting its activities?
(6) ever revoked or suspended the applicant's or a control affiliate's license as an attorney or accountant?

YES

u
□

YES

NO

o a description o f the action.
8. Does applicant:
Have any arrangement w ith any other person, firm or organization under which
(1) A ny o f the accounts or records o f applicant are kept or maintained by such person, firm , or organization?
(2) Such other person, firm or organization (other than a bank or satisfactory control location as defined in
paragraph (c) o f Rule 15c3 3 under the Securities Exchange A ct o f 1934, 17 CFR §240.15c3 3) holds or
maintains funds or securities o f applicant or o f any of its customers?

B
.

Have any arrangements w ith any other broker or dealer under which applicant refers or introduces customers to
such other broker or dealer?
(If the answer to any question o f Item 8 is "ye s," furnish as to each such arrangement the fu ll name and principal
business address o f the other person, firm , or organization, and the summary o f each such arrangement on
Schedule D >
_________________________ ____________________________ — ______

NO

□ 0
□ 0

□ □0

o the court or body taking the action, and

NO

(3) ever found the applicant o r a control affiliate to have been a cause o f an investment-related business having
its authorization to do business denied, suspended, revoked, or restricted?

NO

o the title and date of the action,

□ 0

(2) ever found the applicant or a control a ffiliate to have been involved in a violation o f investment regulations
or statutes?

YES

o the broker-dealer and individuals named,

NO

(1) ever found the applicant or a control affiliate to have made a false statement or omission or been dishonest
unfair, or unethical?

NO

o an individual w ith a Form U-4 (individual registration) in the CRD, attach any necessary Form U-4
amendments to the Form BD. The CRD w ill update the Forms U-4 and BD.

A.

D Has any other Federal regulatory agency or any state regulatory agency

YES

For ooch y o o " to Item 7, glvo tho following dotollo o f any court or regulatory action:

NO

□ 0

NO

o the applicant broker-dealer, or an individual w ith o u t a Form U-4 (individual registration) in the CRD.
give the details on Schedule D.

□ 0

□
□

YES

If a "ye s" answer on Item 7 involves:

NO

□

□ □0
□ □0
□ □0
□ □0
□ □0
□ □0

Item 7 In s tru c tio n s

NO

YES

Does the applicant have any unsatisfied judgments or liens against it?

J. Has the applicant or a control affilia te o f the applicant ever been a securities firm or a control affiliate of a
securities firm that has been declared bankrupt, had a trustee appointed under the Securities Investor Protection
A ct, or had a direct payment procedure begun?

□ 0

YES

C Has the U S. Securities and Exchange Commission or the C ommodity Futures Trading Commission ever

found the applicant or a control a ffiliate to have been the cause of an investment-related business having its
authorization to do business denied, suspended, revoked or restricted?

NO

□ □0
□ □0
□ □0
YES

NO

YES

NO

YES

NO

□ □0
YES

9. Does applicant control, is applicant controlled by. or is applicant under common control w ith , d irectly or indirectly,
any partnership, corporation, or other organization engaged in the securities or investment advisory business?
(If "ye s," state full name and principal business address o f such partnership, corporation, or other organization and
describe the nature o f control on Schedule D See instructions fo r d e finition o f control.)

Federal Register / Vol. 52, No. 36-37 / Wednesday, February 25,1987 / Proposed Rules

□ □0
□ □0
YES

o

Federal Id^stes? / Vol. 52, No. SM7 / Wednesday, Fotansy 25,1887 / Proposed Rules
To cszctt e £ ^ c^scoma

o cstosgsJ okJ C o crS» o

Eccsufefj pc^j f s j .

(fTTI S ! Prp s
'?
C8D

10. Stsea types ofof Business engcgsdi nin «letlotototoengaged in, 12 ra tyet cstice) t j Bj ^clie s ns t. t. epEa
Sisetr types Business engcgcd (
engaged in, ra t yst cstice) c ^ lie n
not (StscS ony category tfuch ccootmts for or io espectcd to account fite l1era t e a 103 c2
cqsectcd
15ss o o
(Steed any
ccommts
rewUG
G cu ritlco lEsesteEBt
annual revenue £rtn tte cscitriU eo e t lEseateEBt c h ic o ry business.
A. EjCteitge esater csgaged ta eaStcnge c o rd csicn B usiness.................................
0 . Eo^ienge c s t o t engegod in eioot c e tio itlo o ...........................................................................................
C. Ercfter er feolot coking iR tsr-deolet c o fte ts In eargorese e s a ritio o eo ej-tio -ean ttar.................
D. Eraser or fealer retailin g corporate secu rities over-tte-CEstsor........................................................
G. underwriter er c e llie f group p articipant ieatporote secu rities other than cytual teu ja )...........
? . estual 2irad enderwtiscr ex qjsacar.......................................................
S. Ritual ftmd re ta ilo r.................................................................................................
H. 1. U.S. gewerreent c s s jritle e foo ler.................................................................................................................
2. y.S. gouernoent secu rities broker................................................................................................................ .
1. Kunicip.1 ( p a r i ti e s fo o ler......................................................................................................................................
J . Municipal secu rities broker.......................................................................................................................................
a. Broker or feeler celling variable lif e insurance or annuities.................................................................
L. S o licito r of covings cnS loan accounts................................................................................................................
tt. Beal estate cyndicator.................................................................................................................................................
o. Broker or fealer celling o il end gas in tern e ts...............................................................................................
O. Put and ca ll broker or fealer or ^ t lc n w riter................................................................................................
P. Greater or fealer celling secu rities of only one lesser or associated looters (otter then
outual funds)................................................................................................................................................................
g. Eraser or fealer celling c e a jritie s d m npproflt erganisotieso (e .g ., tsierctea. toq p italo )..
n . Itwecteerel edvi cory cerv ices....................................................................................................................................
S. Drcaer or fealer celling tea ctelto ro cr ita ite d partnanA ips.................................................................
T. ether (give d eta ils cn Eaitcfale 0 ).........................................................................................................................

{“ 1
(“ I
|^ |
) |
r~ l
|~ |
|*~t
1 1
I *
f~ t
1 1
I |
1 |
|~ |
|~ 1
1 |

CS
£~?
lea
EKl
EB
CD
Cu
€3
(S3
(3
C33
XHA

£3 ,
:.s
OGI
:

i ~ | DSA
|~ | tea
|~~t SAD
£ 3 ®P
1~ | OBJ

*bs to
11. k. tmeo applicant effect transactions in esooedity futures, csteo d ities, csssodity options as a
broker for others or fealer for i ts own account?............................................................................................ f ~ l ] I
CO
B. Does applicant engage in eny o tte r non-cocisritiec business? (if °yes,° describe each o tter
Pu g i .t sgs briefly on SrSvcdule 0 -)................... ....................................................................................................... j__I |__|
13X|
12.

YS m
E

Is enroll cam applying for reg istratio n Eolely os a govermssnt escuritieo broker or d ealer?... 1~°~1 1 I i'S l

13. Kotico of O overt^nt Escyritioo A ctiv ities
ft. Is applicant ectirej or 4«te?jdisEg ect os o ^BferrE^nt E scurities terckar c? daoler?
(Do not answer ‘‘Yes" if applicant ancaered "yes" to Quest ion 1 2 . ) .. . . . . ........................
0. Is applicant coasing its a c tiv itie s as a gevorrcsent secu rities broker cr &aaler? (to
ftot a«caer ®Yes° unless previ®aoly mrasered “yerf to Question l ^ i.) ....................................

[FI Doc. ©7-3® Filed g-M=€7; &4S am]
a s a ©a®2

YES

m

Cl o 121

YB C
E D

Cl O 2 i

5723

5724

Federal Kegagter / Vol. 52, No. 36-37 / Wednesday, February 25, 1987 / Notices

Comments, which should
refer to Docket No. R-0598, should be
[Docket No. R-0598]
tent to Mr. William W. Wiles, Secretary,
Board of Governors of the Federal
Financial Institutions Acting as
Reserve System, Washington, DC 20551.
©@v@mm@nt S©©yfftl@s ©r@k©r@ @
r
Comments may also be sent to Mr.
©@v®mm@r?t S©©yrfti©§ D@aS©rs
Robert Neal, Desk Officer, Office of
Board of Governors of the
Information and Regulatory Affairs,
Federal Reserve System.
Office of Management and Budget, New
AersOKi: Notice.
Executive Office Building, Room 3208,
Washington, DC 20503.
summary; Under section 15C(a)(l)(B) of
re© furthir information eoNYAen
the Securities Exchange Act of 1934,15
Director
U.S.C. 78o-5(a)(l)(B), as amended by the Robert S. Plotkin, AssistantMeyers,
(202-452-2782), or Susan S.
Government Securities Act of 1986 (Pub. Senior Securities Regulation Analyst
L 99-571), all financial institutions that (202-452-2781),
act as government securities brokers or Supervision andDivision of Bankingthe
Regulation; or, for
government securities dealers must
hearing impaired only:
notify their designated federal
Telecommunications Device for the Deaf
supervisory agencies of their broker/
(202-452-3544), Eamestine
dealer activities, unless exempted from Dorothea Thompson, BoardHill or
of
the notice requirement by Treasury
Governors of the Federl Reserve System.
Department regulation. The Board of
Federal Reserve Paperwork Clearance
Governors has the responsibility for
Officer Nancy Steele, Division of
establishing the form for this notice, as
Research and Statistics (202-452-3822).
well as the form of the notice to be filed Interested parties may also contact the
by financial institutions that are no
OMB Desk Officer, Robert Neal (202longer acting as government securities
FEDERAL RESERVE SVSYEK3

brokers or government securities
dealers, in discharging these
responsibilities, the Board is proposing
to adopt Form G-FIN (notification by
financial institution of status as
government securities broker or dealer)
and Form G-FINW (notification by
financial institution of termination of
status as government securities broker
or dealer).
These forms are also being submitted
for review and approval under the
Paperwork Reduction Act (chapter 35 of
44 U.S.C.) and OMB regulations on
Controlling Paperwork Burdens on the
Public (5 CFR Part 1320). Copies of the
proposed forms and supporting
documents are available from the Board
clearance officer listed below.

©ayes: Comments must be received by

March 27,1987.

Department rule. Financial institutions
that are currently acting as government
securities brokers or government
securities dealers and not otherwise
exempt must file a notice on Form GFIN by July 25,1987. Financial
institutions that intend to engage in
these activities after that date must file
a notice prior to commencement of these
operations.
In general, the appropriate regulatory
agency for national banks is the
Comptroller of the Currency; for state
member banks, the Board of Governors
of the Federal Reserve System; for
insured non-member state banks, the
Federal Deposit Insurance Corporation:
for savings and loan associations, the
Federal Home Loan Bank Board: and for
non-federally insured financial
institutions, the Securities and Exchange
Commission. A foreign bank should
refer to section 3(a)(34) of the Securities
Exchange Act (15 U.S.C. 78c(a)(34)) as
amended by section 102 of the
Government Securities Act to determine
its appropriate regulatory agency.
395-6880).
In a related action the TreasurySOF>PLSE3fiOTABV INFORMATION: The
Department is proposing rules under the
Government Securities Act that, among
Board is proposing to prescribe forms
G-FIN and G-FINW as the vehicles for other things, establishes exemptions
from the notice requirement for certain
financial institutions to submit the
notices of status as government
classes of financial institutions. (See
securities brokers and government
proposed 17 CFR Part 401.) In addition,
the Treasury Department is proposing to
securities dealers required by the
Government Securities Act of 1986,15
require the filing of an amendment to the
U.S.C. 78o-5(a)(l)(B). All financial
notice if any information contained
institutions (generally federal and state therein becomes inaccurate. (See
chartered commercial banks, foreign
proposed 17 CFR 400.5(b).)
banks, savings banks, and savings and
Reference to the Forms G-FIN and Gloan associations, but not credit unions) FINW will be at 17 CFR 449.1 and 449.2.
that act or cease to act as government
Board of Governor of the Federal Reserve
securities brokers or government
System February 23,1987.
securities dealers are required by
William W. Wiles,
section 78o-5(a)(l)(B) to file these
notices with their appropriate regulatory Secretary of the Board.
[FR Doc. 87-4043 Filed 2-24-87; 8:45 am]
agencies unless exempted from the
BILLING COOS 821 0-9 1-0
notice requirement by Treasury