|
[Main Tabs]
[Table of Contents - 7500]
[Index]
[Previous Page]
[Next Page]
[Search]
7500 - FRB Regulations
{{6-30-05 p.7631}}
Interpretations
§ 211.601 Status of certain offices for purposes of the
International Banking Act restrictions on interstate banking
operations.
The Board has considered the question of whether a foreign bank's
California office that may accept deposits from certain foreign sources
(e.g., a United States citizen residing abroad) is a branch
or an agency for the purposes of the grandfather provisions of section
5 of the International Banking Act of 1978
(12 U.S.C. 3103(b)). The
question has arisen as a result of the definitions in the International
Banking Act of "branch" and "agency," and the limited
deposit-taking capabilities of certain California offices of foreign
banks.
The International Banking Act defines "agency" as
"any office * * * at which deposits may not be accepted from
citizens or residents of the United States," and defines
"branch" as "any office * * * of a foreign bank * * * at which
deposits are received." (12 U.S.C.
3101(1) and (3)). Offices of foreign banks in California prior
to the International Banking Act were generally prohibited from
accepting deposits by the requirement of State law that such offices
obtain Federal deposit insurance (Cal. Fin. Code 1756); until the
passage of the International Banking Act an office of a foreign bank
could not obtain such insurance. California law, however, permits
offices of foreign banks, with the approval of the Banking Department,
to accept deposits from any person that resides, is domiciled, and
maintains its principal place of business in a foreign country (Cal.
Fin. Code 1756.2). Thus, under a literal reading of the definitions of
"branch" and "agency" contained in the International
Banking Act, a foreign bank's California office that accepts deposits
from certain foreign sources (e.g., a U.S. citizen residing abroad), is
a branch rather than an agency.
Section 5 of the International Banking Act establishes certain
limitations on the expansion of the domestic deposit-taking
capabilities of a foreign bank outside its home State. It also
grandfathers offices established or applied for prior to July 27, 1978,
and permits a foreign bank to select its home State from among the
States in which it operated branches and agencies on the grandfather
date. If a foreign bank's office that was established or applied for
prior to June 27, 1978, is a "branch" as defined in the
International Banking Act, then it is grandfathered as a branch.
Accordingly, a foreign bank could designate a State other than
California as its home State and subsequently convert its California
office to a full domestic deposit-taking facility by obtaining Federal
deposit insurance. If, however, the office is determined to be an
"agency," then it is grandfathered as such and the foreign bank
may not expand its deposit-taking capabilities in California without
declaring California its home State.
In the Board's view, it would be inconsistent with the purposes and
the legislative history of the International Banking Act to enable a
foreign bank to expand its domestic interstate deposit-taking
capabilities by grandfathering these California offices as branches
because of their ability to receive certain foreign source deposits.
The Board also notes that such deposits are of the same general type
that may be received by an Edge Corporation and, hence in accordance
with section 5(a) of the International Banking Act, by branches
established and operated outside a foreign bank's home State. It would
be inconsistent with the structure of the interstate banking provisions
of the International Banking Act to grandfather as full deposit-taking
offices those facilities whose activities have been determined by
Congress to be appropriate for a foreign bank's out-of-home State
branches.
Accordingly, the Board, in administering the interstate banking
provisions of the IBA, regards as agencies those offices of foreign
banks that do not accept domestic deposits but that may accept deposits
from any person that resides, is domiciled, and maintains its principal
place of business in a foreign country.
[Codified to 12 C.F.R. § 211.601]
[Section 211.601 added at 45 Fed. Reg. 67309, October 10,
1980]
{{6-30-05 p.7632}}
§ 211.602 Investments by United States banking organizations in
foreign companies that transact business in the United States.
Section 25(a) of the Federal Reserve Act
(12 U.S.C. 611, the "Edge
Act") provides for the establishment of corporations to engage in
international or foreign banking or other international or foreign
financial operations ("Edge Corporations"). Congress has declared
that Edge Corporations are to serve the purpose of stimulating the
provision of international banking and financing services throughout
the United States and are to have powers sufficiently broad to enable
them to compete effectively with foreign-owned institutions in the
United States and abroad. The Board was directed by the International
Banking Act of 1978 (12 U.S.C.
3101) to revise its regulations governing Edge Corporations in
order to accomplish these and other objectives and was further directed
to modify or eliminate any interpretations that impede the attainment
of these purposes.
One of the powers of Edge Corporations is that of investing in
foreign companies. Under the relevant statutes, however, an Edge
Corporation is prohibited from investing in foreign companies that
engage in the general business of buying or selling goods, wares,
merchandise or commodities in the United States. In addition, an Edge
Corporation may not invest in foreign companies that transact any
business in the United States that is not, in the Board's judgment,
"incidental" to its international or foreign business. The latter
limitation also
{{12-31-91 p.7633}}applies to investments by bank
holding companies (12 U.S.C.
1843(c)(13)) and member banks (12 U.S.C. 601).
The Board has been asked to determine whether an Edge Corporation's
minority investment (involving less than 25 percent of the voting
shares) in a foreign company would continue to be permissible after the
foreign company establishes or acquires a United States subsidiary that
engages in domestic activities that are closely related to banking. The
Board has also been asked to determine whether an Edge Corporation's
minority investment in a foreign bank would continue to be permissible
after the foreign bank establishes a branch in the United States that
engages in domestic banking activities. In the latter case, the branch
would be located outside the State in which the Edge Corporation and
its parent bank are located.
In the past the Board, in exercising its discretionary authority to
determine those activities that are permissible in the United States,
has followed the policy that an Edge Corporation could not hold even a
minority interest in a foreign company that engaged, directly or
indirectly, in any purely domestic business in the United States. The
United States activities considered permissible were those
internationally related activities that Edge Corporations may engage in
directly. If this policy were applied to the subject requests, the Edge
Corporations would be required to divest their interests in the foreign
companies notwithstanding the fact that, in each case, the Edge
Corporation, as a minority investor, did not control the decision to
undertake activities in the United States, and that even after the
United States activities are undertaken the business of the foreign
company will remain predominantly outside the United States.
International banking and finance have undergone considerable growth
and change in recent years. It is increasingly common, for example, for
United States institutions to have direct or indirect offices in
foreign countries and to engage in activities at those offices that are
domestically as well as internationally oriented. In this climate,
United States banking organizations would be placed at the competitive
disadvantage if their minority investments in foreign companies were
limited to those companies that do no domestic business in the United
States. Moreover, continued adherence to the existing policy would be
contrary to the declaration in the International Banking Act of 1978
that Edge Corporations' powers are to be sufficiently broad to enable
them to compete effectively in the United States and abroad.
Furthermore, where the activities to be conducted in the United States
by the foreign company are banking or closely related to banking, it
does not appear that any regulatory or supervisory purpose would be
served by prohibiting a minority investment in the foreign firm by a
United States banking organization.
In view of these considerations, the Board has reviewed its policy
relating to the activities that may be engaged in in the United States
by foreign companies (including foreign banks) in which Edge
Corporations, member banks, and bank holding companies invest. As a
result of that review, the Board has determined that it would be
appropriate to interpret sections 25 and 25(a) of the Federal Reserve
Act (12 U.S.C. 601, 611) and
section 4(c)(13) of the Bank Holding Company Act
(12 U.S.C. 1843(c)(13))
generally to allow United States banking organizations, with the prior
consent of the Board, to acquire and hold investments in foreign
companies that do business in the United States subject to the
following conditions: (1) the foreign company is engaged predominantly
in business outside the United States or in internationally related
activities in the United States; *
(2) the direct or indirect activities of the foreign company in the
United States are either banking or closely related to banking; and (3)
the United States banking organization does not own 25 percent or more
of the voting stock of, or otherwise control, the foreign company. In
considering whether to grant its consent for such investments, the
Board would also review the proposals to ensure that they are
consistent with the purposes of the Bank Holding Company Act and the
Federal Reserve Act.
{{12-31-91 p.7634}}
[Codified to 12 C.F.R. § 211.602]
[Section 211.602 added at 46 Fed. Reg. 8437, January 27, 1981,
effective January 19, 1981]
§ 211.603 Commodity swap transactions
(a) State-chartered banks that are members of the Federal Reserve
System are required to obtain the approval of the Board under
Regulation H (Membership of State Banking Institutions in the Federal
Reserve System) before permitting any change to be made in the general
character of their business or in the scope of the corporate powers
they exercised at the time of admission to membership. The Board has
considered whether engaging in transactions linked to commodity or
equity security prices or indices would represent a change in the
general character of the business of a state member bank.
(b) Banking organizations have developed a number of commodity- or
equity-linked transactions in which a portion of the return is linked
in the price of a particular commodity or equity security or to an
index of such prices. These transactions have been offered in a variety
of forms, including commodity-indexed deposits, loans, debt issues, and
derivative products, such as forwards, options, and swaps. In these
transactions, the interest, principal, or both, or payment streams in
the case of swaps, are linked to the price of a commodity. In addition,
banks are also entering into exchange-traded commodity or stock-index
futures and options in order to hedge the exposure inherent in these
transactions. These types of transactions have been linked to a variety
of commodities, including gold, oil, aluminum, and copper, as well as
individual securities and stock indices.
(c) With the exception of gold, silver, and, in some cases,
platinum, banks are not empowered to purchase or hold the commodities
or equity securities that underlie these transactions. Although
commodity-linked transactions settle only in cash, they effectively
expose banks to commodity or equity market price risks. Thus, linking
payments to commodities or equities may present risks with which banks
generally are not familiar, and the inability of the bank to purchase
the commodity or equity security to which a transaction is linked may
increase the difficulty of hedging the exposure created by such
transactions.
(d) The Board has determined that engaging in transactions linked
to commodities or securities that a state member bank does not have the
authority to purchase and hold directly should generally be considered
a change in the character of the bank's business unless the
transactions are entered into on a perfectly matched
basis. 1
State member banks that wish to engage in commodity- or equity-linked
transactions that are considered to be a change in the general
character of their business should obtain Board approval before
initiating these transactions or, in the case of activities commenced
prior to the adoption of this interpretation, to continue such
activities. Applications to continue such activities should be
submitted on or before February 3, 1992.
(e) Transactions linked to securities or monetary metals that a
state member bank is authorized to purchase and hold directly will not
be considered to be a change in the general nature of the bank's
business, and approval will not be
required. 2
Additionally, approval will not be required for a state member bank to
offer loan or deposit contracts in which only the interest portion of
the return is linked to a commodity or security even if the bank is not
authorized to hold the commodity or security.
{{10-31-07 p.7634.01}}
(f) Applications to engage in commodity-related activities should
outline the types of transactions and scope of activities that the bank
plans to undertake. The application also should demonstrate that the
bank has the expertise to engage in such transactions and has developed
adequate policies and controls to govern the conduct of these
activities and to monitor the associated risks.
(g) Recent revisions to Regulation K (International Banking
Operations) permit bank holding company subsidiaries, Edge and
agreement corporations, and member banks to act as principal or agent
outside of the United States in swap transactions, subject to any
limitations applicable to state member banks under Regulation H.
Banking organizations that wish to engage in swap transactions based on
commodities that the organizations do not have the authority to
purchase directly, therefore, must submit applications under Regulation
K in order to engage in such transactions. Because Regulation K
provides separate authority to engage outside of the United States in
swap transactions based on equity securities or indices, approval of
these transactions is not required.
[Codified to 12 C.F.R. § 211.603]
[Section 211.603 added at 56 Fed. Reg. 63408, December 4,
1991]
§ 211.604. Data processing activities.
(a) Introduction. As a result of a recent proposal by a
bank holding company to engage in data processing activities abroad,
the Board has considered the scope of permissible data processing
activities under Regulation K (12 CFR part 211). This question has
arisen as a result of the fact that § 211.5(d)(10) of Regulation K
does not specifically indicate the scope of data processing as a
permissible activity abroad.
(b) Scope of data processing activities. (1) Prior to
1979, the Board authorized specific banking organizations to engage in
data processing activities abroad with the expectation that such
activity would be primarily related to financial activities. When
Regulation K was issued in 1979, data processing was included as a
permissible activity abroad. Although the regulation did not provide
specific guidance on the scope of this authority, the Board has
considered such authority to be coextensive with the authority granted
in specific cases prior to the issuance of Regulation K, which relied
on the fact that most of the activity would relate to financial data.
Regulation K does not address related activities such as the
manufacture of hardware or the provision of software or related or
incidental services.
(2) In 1979, when the activity was included in Regulation K for
the first time, the data processing authority in Regulation K was
somewhat broader than that permissible in the United States under
Regulation Y (12 CFR part 225) at that time, as the Regulation K
authority permitted limited nonfinancial data processing. In 1979,
Regulation Y authorized only financial data processing activities for
third parties, with very limited exceptions. By 1997, however, the
scope of data processing activities under Regulation Y was expanded
such that bank holding companies are permitted to derive up to 30
percent of their data processing revenues from processing data that is
not financial, banking, or economic. Moreover, in other respects, the
Regulation Y provision is broader than the data processing provision in
Regulation K.
(3) In light of the fact that the permissible scope of data
processing activities under Regulation Y is now equal to, and in some
respects, broader than the activity originally authorized under
Regulation K, the Board believes that § 211.5(d)(10) should be read
to encompass all of the activities permissible under § 225.28(b)(14)
of Regulation Y. In addition, the limitations of that section would
also apply to § 211.5(d)(10).
(c) Applications. If a U.S. banking organization wishes
to engage abroad in data processing or data transmission activities
beyond those described in Regulation Y, it must apply for the Board's
prior consent under § 211.5(d)(20) of Regulation K. In addition, if
any investor has commenced activities beyond those permitted under
§ 225.28(b)(14) of Regulation Y in reliance on Regulation K, it
should consult with staff of the Board to determine whether such
activities have been properly authorized under Regulation K.
[Codified to 12 CFR § 211.604]
[Section 211.604 added at 64 Fed. Reg. 58781, November 1,
1999]
{{10-31-07 p.7634.02}}
§ 211.605 Permissible underwriting activities of foreign banks.
(a) Introduction. A number of foreign banks that are
subject to the Bank Holding Company Act ("BHC Act") have
participated as co-managers in the underwriting of securities to be
distributed in the United States despite the fact that the foreign
banks in question do not have authority to engage in underwriting
activity in the United States under either the Gramm-Leach-Bliley Act
("GLB Act") or section 4(c)(8) of the BHC Act
(12 U.S.C. 1843(c)(8)). This
interpretation clarifies the scope of existing restrictions on
underwriting by such foreign banks with respect to securities that are
distributed in the United States.
(b) Underwriting transactions engaged in by foreign banks. (1) In
the transactions in question, a foreign bank typically becomes a member
of the underwriting syndicate for securities that are registered and
intended to be distributed in the United States. The lead underwriter,
usually a registered U.S. broker-dealer not affiliated with the foreign
bank, agrees to be responsible for distributing the securities being
underwritten. The underwriting obligation is assumed by a foreign
office or affiliate of the foreign bank.
(2) The foreign banks have used their U.S. offices or affiliates
to act as liaison with the U.S. issuer and the lead underwriter in the
United States, to prepare documentation and to provide other services
in connection with the underwriting. In some cases, the U.S. offices or
affiliates that assisted the foreign bank with the underwriting receive
a substantial portion of the revenue generated by the foreign bank's
participation in the underwriting. In other cases, the U.S. offices
receive "credit" from the head office of the foreign bank for
their assistance in generating profits arising from the underwriting.
(3) By assuming the underwriting risk and booking the
underwriting fees in their foreign offices or affiliates, the foreign
banks are able to take advantage of an exemption under U.S. securities
laws; a foreign underwriter is not required to register in the United
States if the underwriter either does not distribute any of the
securities in the United States or distributes them only through a
registered broker-dealer.
(c) Permissible scope of underwriting activities. (1) A foreign
bank that is subject to the BHC Act may engage in underwriting
activities in the United States only if it has been authorized under
section 4 of the Act. The foreign banks in question have argued that
they are not engaged in underwriting activity in the United States
because the underwriting activity takes place only outside the United
States where the transaction is booked. The foreign banks refer to
Regulation K, which defines "engaged in business" or "engaged
in activities" to mean conducting an activity through an office of
subsidiary in the United States. Because the underwriting is not booked
in a U.S. office or subsidiary, the banks assert that the activity
cannot be considered conducted in the United States.
(2) The Board believes that the position taken by the foreign
banks is not supported by the Board's regulations or policies. Section
225.124 of the Board's Regulation Y (12 CFR 225.124(d)) states that a
foreign bank will not be considered to be engaged in the activity of
underwriting in the United States if the shares to be underwritten are
distributed outside the United States. In the transactions in question,
all of the securities to be underwritten by the foreign banks are
distributed in the Untied States.
(3) Regulation K (12 CFR part
211) was amended in 1985 to provide clarification that a
foreign bank may not own or control voting shares of a foreign company
that directly underwrites, sells or distributes securities in the
United States (emphasis added). 12 CFR
211.23(f)(5)(ii). In proposing
this latter provision, the Board clarified that no part of the
prohibited underwriting process may take place in the United States and
that the prohibition on the activity does not depend on the activity
being conducted through an office of subsidiary in the United States.
Moreover, in the transactions in question, there was significant
participation by U.S. offices and affiliates of the foreign banks in
the underwriting process. In some transactions, the foreign office at
which the transactions were booked did not have any documentation on
the particular transactions; all documentation was maintained in the
United States office. In all cases, the U.S. offices or affiliates
provided virtually all technical support for participation in the
underwriting process and benefitted from profits generated by the
activity.
{{10-31-07 p.7634.03}}
(4) The fact that some technological and regulatory constraints
on the delivery of cross-border services into the United States have
been eliminated since the Regulation K definition of "engaged in
business" was adopted in 1979 creates greater scope for banking
organizations to deal with customers outside the U.S. bank regulatory
framework. The definition in Regulation K, however, does not authorize
foreign banking organizations to evade regulatory restrictions on
securities activities in the United Sates by directly underwriting
securities to be distributed in the United States or by using U.S.
offices and affiliates to facilitate the prohibited activity. In the
GLB Act, Congress established a framework within which both domestic
and foreign banking organizations may underwrite and deal in securities
in the United States. The GLB Act requires that banking organizations
meet certain financial and managerial requirements in order to be able
to engage in these activities in the United States. The Board believes
the practices described above undermine this legislative framework and
constitute an evasion of the requirements of the GLB Act and the
Board's Regulation K. Foreign banking organizations that wish to
conduct securities underwriting activity in the United States have long
had the option of obtaining section 20 authority and now have the
option of obtaining financial holding company status.
(d) Conclusion. The Board finds that the underwriting of securities
to be distributed in the United States is an activity conducted in the
United States, regardless of the location at which the underwriting
risk is assumed and the underwriting fees are booked. Consequently, any
banking organization that wishes to engage in such activity must either
be a financial holding company under the GLB Act or have authority to
engage in underwriting activity under
section 4(c)(8) of the BHC Act
(so-called "section 20 authority"). Revenue generated by
underwriting bank-ineligible securities in such transactions should be
attributed to the section 20 company for those foreign banks that
operate under section 20 authority.
[Codified to 12 C.F.R.
§ 211.605]
[Section 211.605 added at 68 Fed. Reg. 7899 February 19, 2003]
[The page following this is 7641.]
* This condition would ordinarily not be met where a foreign
company merely maintains a majority of its business in international
activities. Each case will be scrutinized to ensure that the activities
in the United States do not alter substantially the international
orientation of the foreign company's business. Go Back to Text
1The term "perfectly matched," as used in this
interpretation refers to transactions that are entered into on a
matched basis, that is, offsetting transactions where the
counterparties for both transactions have been found before the bank
enters into either transaction and the transactions are consummated on
the same day. Offsetting transactions include transactions that have a
price differential to provide the bank with its usual and customary fee
or commission for its services. The exemption from prior approval for
perfectly matched transactions would include mirror image equity swaps
executed by a state member bank with any affiliate that is authorized
under Regulation K to engage in equity swaps. Go Back to Text
2Gold and silver are the only commodities that banks generally
have authority to purchase. In states where banks have authority to
deal in platinum, transactions linked to platinum will not be
considered a change in the general nature of the business of a bank. Go Back to Text
[Main Tabs]
[Table of Contents - 7500]
[Index]
[Previous Page]
[Next Page]
[Search]
|
