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Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents (Series 1) Browse by Media Type 7-1-2009 Guidance on the Net Capital and Reserve Formula Treatment of Senior Unsecured Debt Securities Issued Under the Debt Guarantee Program Financial Industry Regulatory Authority, Inc. (FINRA): National Association of Securities Dealers, Inc. (NASD) Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation Financial Industry Regulatory Authority, Inc. (FINRA): National Association of Securities Dealers, Inc. (NASD), "Guidance on the Net Capital and Reserve Formula Treatment of Senior Unsecured Debt Securities Issued Under the Debt Guarantee Program" (2009). YPFS Documents (Series 1). 8307. https://elischolar.library.yale.edu/ypfs-documents/8307 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents (Series 1) by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. FDIC Guaranteed DebtGuidance on the Net Capital and Reserve FormulaTreatment of Senior Unsecured Debt SecuritiesIssued Under the Debt Guarantee ProgramComponent of the FDIC’s Temporary LiquidityGuarantee ProgramEffective Date: July 15, 2009Notice Type GuidanceSuggested Routing Compliance Finance Legal Operations Regulatory Reporting Senior ManagementKey Topic(s) Customer Protection FDIC Guaranteed Debt Net CapitalReferenced Rules & Notices SEA Rule 15c3-1 SEA Rule 15c3-31Executive SummaryFINRA is issuing this Notice to advise firms of the Net Capital and ReserveFormula treatment of senior unsecured debt securities issued under theDebt Guarantee Program component of the Federal Deposit InsuranceCorporation’s (FDIC) Temporary Liquidity Guarantee Program. Terms ofthe guidance are detailed in a July 15, 2009, letter to the Securities andExchange Commission (SEC), included as Attachment A to this Notice.Questions concerning this Notice should be directed to: Yui Chan, Managing Director, Risk Oversight and OperationalRegulation (ROOR), at (646) 315-8426; Joanne Li, Director, ROOR, at (646) 315-8403; or Kathryn Mahoney, Director, ROOR, at (646) 315-8428.Background & DiscussionIn November 2008, the Board of Directors of the FDIC adopted a final ruleregarding the Temporary Liquidity Guarantee Program (TLGP). The TLGPwas announced by the FDIC as an initiative to counter the system-widecredit crisis in the nation’s financial sector.To assist firms in proper treatment of senior unsecured debt securitiesissued pursuant to the Debt Guarantee Program component of the FDIC’sTLGP (the Program) under Rules 15c3-1 (Net Capital) and 15c3-3 (ReserveFormula) of the Securities Exchange Act of 1934, the SEC’s Division ofTrading and Markets staff has provided guidance to FINRA. The guidanceis detailed in Attachment A of this Notice.Regulatory Notice 09-38July 2009As prescribed in the FDIC’s final rule regarding the Program, the FDIC will fully andunconditionally guarantee senior unsecured debt securities issued by participatingentities pursuant to the Program between October 14, 2008, and June 30, 2009,through the earlier of the maturity of such debt; the mandatory conversion date of any mandatory convertible debt; or June 30, 2012.In addition, as prescribed in the FDIC’s subsequent rule amendment regarding theProgram, the FDIC will fully and unconditionally guarantee senior unsecured debtsecurities issued by participating entities pursuant to the Program betweenApril 1, 2009, and October 31, 2009, through the earlier of the maturity of such debt; the mandatory conversion date of any mandatory convertible debt; or December 31, 2012.The debt securities issued pursuant to the Program, which include commercial paper,non-convertible debt securities and mandatory convertible debt securities, may be:1. full-term guaranteed by the FDIC: any debt securities issued pursuant to theProgram that have a maturity date that ends, or a mandatory conversion date thatis effective, on or before the aforementioned Program end-dates, such that thedebt securities are guaranteed by the FDIC for the entire term from the date theyare issued until their maturity date or mandatory conversion date;2. partial-term guaranteed by the FDIC: any debt securities, except mandatoryconvertible debt securities, issued pursuant to the Program that have a maturitydate that ends after the aforementioned Program end-dates, such that the debtsecurities are guaranteed by the FDIC for the entire period from the date they areissued until the Program’s end-date, but are not guaranteed by the FDIC for anyremaining period beyond the Program’s end-date through their maturity date; or3. non-guaranteed by the FDIC: any debt securities issued pursuant to the Programthat are not guaranteed by the FDIC for any period from the date they are issueduntil their maturity date.Based on the above, the SEC’s Division of Trading and Markets staff has advised thatFINRA firms may apply the Net Capital and Reserve Formula treatment on the debtsecurities issued pursuant to the Program as detailed in FINRA’s July 15, 2009, letterto the SEC (see Attachment A of this Notice).2 Regulatory NoticeJuly 200909-38Regulatory Notice 3July 2009 09-38Attachment AJuly 15, 2009Michael A. Macchiaroli, Esq.Associate DirectorSecurities and Exchange CommissionDivision of Trading and Markets100 F Street, NEWashington, DC 20549Dear Mr. Macchiaroli,FINRA has requested guidance from the Division of Trading and Markets staff of theSecurities and Exchange Commission as to the treatment of senior unsecured debtsecurities issued pursuant to the Debt Guarantee Program component of the FederalDeposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program (theProgram), under Rules 15c3-1 (Net Capital) and 15c3-3 (Reserve Formula) of theSecurities Exchange Act of 1934.As prescribed in the FDIC’s final rule regarding the Program, and confirmed throughdiscussions with FDIC staff, the FDIC will fully and unconditionally guarantee seniorunsecured debt securities issued by participating entities pursuant to the Programbetween October 14, 2008, and June 30, 2009, through the earlier of the maturity ofsuch debt, the mandatory conversion date of any mandatory convertible debt or June30, 2012. In addition, as prescribed in the FDIC’s subsequent rule amendment regardingthe Program, the FDIC will fully and unconditionally guarantee senior unsecured debtsecurities issued by participating entities pursuant to the Program between April 1,2009, and October 31, 2009, through the earlier of the maturity of such debt, themandatory conversion date of any mandatory convertible debt or December 31, 2012.The debt securities issued pursuant to the Program, which include commercial paper,non-convertible debt securities and mandatory convertible debt securities, may be:1. full-term guaranteed by the FDIC: any debt securities issued pursuant to theProgram that have a maturity date that ends, or a mandatory conversion date thatis effective, on or before the aforementioned Program end-dates, such that the debtsecurities are guaranteed by the FDIC for the entire term from the date they areissued until their maturity date or mandatory conversion date;4 Regulatory NoticeJuly 200909-38Mr. Michael Macchiaroli, Esq.July 15, 2009Page 2 of 42. partial-term guaranteed by the FDIC: any debt securities, except mandatoryconvertible debt securities, issued pursuant to the Program that have a maturitydate that ends after the aforementioned Program end-dates, such that the debtsecurities are guaranteed by the FDIC for the entire period from the date they areissued until the Program’s end-date, but are not guaranteed by the FDIC for anyremaining period beyond the Program’s end-date through their maturity date; or3. non-guaranteed by the FDIC: any debt securities issued pursuant to the Programthat are not guaranteed by the FDIC for any period from the date they are issueduntil their maturity date.Based on the foregoing and our subsequent discussions with you, it is ourunderstanding that the SEC’s Division of Trading and Markets staff is in agreement withFINRA staff that FINRA firms may apply the following Net Capital and Reserve Formulatreatment on the debt securities issued pursuant to the aforementioned Program:SEA Rule 15c3-1 - Net Capital TreatmentProprietary positions in full-term guaranteed commercial paper and non-convertibledebt securities issued by an unaffiliated entity shall be subject to the haircutdeductions under SEA Rule 15c3-1(c)(2)(vi)(A) (Government Securities).Proprietary positions in partial-term guaranteed and non-guaranteed commercialpaper issued by an unaffiliated entity shall be subject to the haircut deductions underSEA Rule 15c3-1(c)(2)(vi)(E) (Commercial Paper), if such securities meet all the requiredprovisions thereunder. Otherwise, the applicable haircut deductions of SEA Rule 15c3-1(c)(2)(vii) and the interpretations thereunder shall be applied on such debt securities.Proprietary positions in partial-term guaranteed and non-guaranteed non-convertibledebt securities issued by an unaffiliated entity shall be subject to the haircutdeductions under SEA Rule 15c3-1(c)(2)(vi)(F) (Non-Convertible Debt Securities), if suchsecurities meet all the required provisions thereunder. Otherwise, the applicable haircutdeductions of SEA Rule 15c3-1(c)(2)(vii) and the interpretations thereunder shall beapplied on such debt securities.Proprietary positions in any mandatory convertible debt securities issued by anunaffiliated entity shall be subject to the haircut deductions under SEA Rule 15c3-1(c)(2)(vi)(G) (Convertible Debt Securities), pursuant to the prescribed provisionsthereunder.Regulatory Notice 5July 2009 09-38Mr. Michael Macchiaroli, Esq.July 15, 2009Page 3 of 4Proprietary positions in any commercial paper or non-convertible debt securities issuedby an affiliated entity shall be treated as a non-allowable asset, unless the broker-dealercan satisfy the requirements prescribed under interpretation /061 of SEA Rule 15c3-1(c)(2)(vi).Proprietary positions in any mandatory convertible debt securities issued by anaffiliated entity shall be treated as a non-allowable asset.Broker-dealers that are allocated any debt securities issued by an affiliated entitypursuant to the Program, as part of a pool of collateral to a reverse repurchasetransaction pursuant to the FICC General Collateral Financing Repo Program, need notapply a deduction to net capital on the reverse repurchase contract if the allocatedcollateral is returned the next morning. The foregoing applies irrespective of theduration of the reverse repurchase contract (i.e., overnight or term). Broker-dealersmust apply a charge to their net capital for the computed deficit, if any, on such reverserepurchase contracts pursuant to SEA Rule 15c3-1(c)(2)(iv)(F)(2). In addition, where theunderlying collateral received from the FICC allocation includes the aforementioneddebt securities issued by an affiliated entity, broker-dealers must maintain records toevidence that the reverse repurchase contracts were effected pursuant to the FICCGeneral Collateral Financing Repo Program.Any reverse repurchase contracts that are not transacted pursuant to the FICC GeneralCollateral Financing Repo Program, where the underlying collateral received consists ofdebt securities issued by an affiliated entity pursuant to the Program, shall be treatedas a non-allowable asset.SEA Rule 15c3-3 Reserve Formula TreatmentFull-term guaranteed commercial paper and non-convertible debt securities issuedby an unaffiliated entity pursuant to the Program, either held in inventory by a broker-dealer or obtained through a reverse repurchase contract, may be deemed a “qualifiedsecurity”under SEA Rule 15c3-3(a)(6) for deposit into a Reserve Bank Account underthe following conditions:1. The total amount of all unaffiliated full-term guaranteed commercial paper andnon-convertible debt securities deposited into a Reserve Bank Account may notexceed 25 percent of the broker-dealer’s aggregate SEA Rule 15c3-3 Reserve BankAccount deposit(s) (Customer and PAIB); and6 Regulatory NoticeJuly 200909-38Mr. Michael Macchiaroli, Esq.July 15, 2009Page 4 of 42. The total amount of all unaffiliated full-term guaranteed commercial paper andnon-convertible debt securities of any single issuer deposited into a Reserve BankAccount may not exceed 10 percent of the broker-dealer’s aggregate SEA Rule15c3-3 Reserve Bank Account deposit(s) (Customer and PAIB).The foregoing limitations have been established in view of the 20 percent riskweighting applied by federal banking agencies to debt that is guaranteed by the FDICunder the Program, which is also consistent with such agencies’ capital treatment ofFDIC-insured deposits.All other commercial paper, non-convertible debt and mandatory convertible debtsecurities issued by either an unaffiliated or affiliated entity pursuant to the Program,may not be deemed a “qualified security”under SEA Rule 15c3-3(a)(6) for deposit intoa Reserve Bank Account.We understand that the foregoing represents a SEC staff position with respect to theNet Capital and Reserve Formula treatment of debt securities issued pursuant to theProgram. Furthermore, this guidance may be withdrawn or modified if your staffdetermines that such action is necessary in the public interest, for the protectionof investors, or otherwise in furtherance of the purpose of the securities laws.Very truly yours,Krisoula DaileyVice PresidentFINRA

Guidance on the Net Capital and Reserve Formula Treatment of Senior Unsecured Debt Securities Issued Under the Debt Guarantee Program

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Guidance on the Net Capital and Reserve Formula Treatment of Senior Unsecured Debt Securities Issued Under the Debt Guarantee Program

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