|For immediate release|
The Federal Reserve Board today announced its approval of the applications of J.P. Morgan & Co. Incorporated, New York, New York, and UBS AG, Zurich, Switzerland, to acquire voting shares of TP Group LDC, Grand Cayman, Cayman Islands.
Attached is the Board's Order relating to this action.
FEDERAL RESERVE SYSTEM
J.P. Morgan & Co. Incorporated ("JPM"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), and UBS AG ("UBS"), a foreign banking organization subject to the BHC Act, have requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.24 of the Board's Regulation Y (12 C.F.R. 225.24) to acquire or retain more than 5 percent of the voting interests in TP Group LDC, Grand Cayman, Cayman Islands ("TP Group"), and its majority owned subsidiary, Tradepoint Financial Networks plc, London, United Kingdom ("Tradepoint"), and thereby engage in operating a securities exchange.
Notice of the proposals, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 46,196, 48,397, and 48,643 (1999)). The time for filing comments has expired, and the Board has considered the notices and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act.
JPM, with total consolidated assets of $269 billion, is the fifth largest banking organization in the United States. UBS, with total consolidated assets of $583 billion, is the largest banking organization headquartered in Switzerland1. UBS operates branches in Los Angeles and San Francisco, California; Stamford, Connecticut; Chicago, Illinois; and New York, New York, and agencies in Miami, Florida; and Houston, Texas. JPM and UBS also engage through subsidiaries in a broad range of nonbanking activities in the United States and worldwide.
JPM proposes to control approximately 17 percent of the voting shares of TP Group, and UBS proposes to control approximately 11 percent of the voting shares of TP Group2. TP Group owns approximately 54.1 percent of the outstanding voting shares of Tradepoint, which operates the Tradepoint Stock Exchange ("Exchange"), an electronic securities exchange for the secondary trading of equity and equity-related securities listed on the London Stock Exchange. JPM and UBS also have stated that Tradepoint anticipates establishing an office or subsidiary in the United States. In light of these proposed actions, JPM and UBS have requested the Board's approval under section 4(c)(8) of the BHC Act to control their interests in TP Group3.
The Exchange is a screen-based electronic market that provides securities trade matching, execution, and related services to U.S. and foreign market-makers, broker-dealers, and institutional investors that become members of the Exchange4. Currently, members may access the Exchange and enter bid and ask quotes through electronic terminals linked to certain financial networks (e.g., a Bloomberg terminal) or through a personal computer linked directly to the Exchange. Terminals linked to the Exchange can be located anywhere in the world, though trading currently may occur only during U.K. business hours5. Orders entered into the Exchange's system are displayed on separate electronic order books for each security, which displays, in descending order, the best bid and ask quotations for the security. The Exchange automatically and continuously matches equal bid and ask offers for each listed security on a first-come, first-served basis6.
Tradepoint does not take a principal position in securities, clear or settle the securities transactions executed on the Exchange, or assume any principal risk for securities trades executed on the Exchange. Tradepoint and its shareholders also are under no obligation to guarantee a member's trades. Each member of the Exchange is required to be a member of the London Clearing House, or to appoint a member of the London Clearing House to clear the member's trades on the Exchange. Trades matched by the Exchange are registered at the end of each business day with the London Clearing House in the name of the appropriate clearing member. The London Clearing House then becomes the counterparty to each side of the trade until it is settled. Settlement occurs through the CREST system, which is operated by CRESTCo., a corporation established by the Bank of England for the settlement of uncertificated U.K. equities7. Tradepoint is not affiliated with the London Clearing House or CRESTCo.
The Exchange is a recognized investment exchange under Section 37(3) of the U.K. Financial Services Act 1986, and is regulated and supervised by the U.K. Financial Services Authority ("FSA") under the securities laws of the United Kingdom. Although Tradepoint makes its services available to customers in the United States, the Securities and Exchange Commission ("SEC") has granted Tradepoint a limited volume exemption from the registration requirements of section 5 of the Securities Exchange Act of 1934 ("1934 Act")8. The SEC's exemptive order permits Tradepoint to operate in the United States without registering as a securities exchange so long as (i) the Exchange's average daily dollar value of trades involving U.S. members does not exceed $40 million, and (ii) the Exchange's worldwide average daily volume does not exceed 10 percent of the average daily trading volume on the London Stock Exchange. The SEC's exemptive order also requires that the Exchange comply with a number of other conditions designed to protect U.S. investors and to ensure fair and orderly markets.
Closely Related to Banking Standard
The Board has not previously determined by regulation or order that operating a securities exchange is closely related to banking within the meaning of section 4(c)(8) of the BHC Act. The principal function of a securities exchange is to provide a centralized facility for the execution, clearance, and settlement of securities transactions10. Banks and bank holding companies currently are authorized to provide securities brokerage services to their customers and, as part of these services, to execute and clear such transactions on a securities exchange11. Bank holding company subsidiaries authorized to act as a dealer in securities ("section 20 subsidiaries") also may provide securities execution, clearance, and settlement services in connection with their dealer operations12. In addition, subsidiaries of banks and bank holding companies that act as a broker or dealer frequently become members of securities exchanges and, in the case of mutually owned exchanges such as the New York Stock Exchange ("NYSE"), acquire small (less than 5 percent) ownership interests in the exchange. Through these relationships, banks and bank holding companies have gained extensive experience with and knowledge of the rules and operations of securities exchanges.
Banks and bank holding companies also provide services that are functionally and operationally similar to those provided by the Exchange. Subsidiaries of banks and bank holding companies acting as a securities broker may execute cross-trades for their customers and thereby match equal bid and offer orders received from their customers. In addition, section 20 subsidiaries of bank holding companies may act as a specialist or market-maker on a securities exchange, such as the NYSE or NASDAQ13. A specialist generally maintains a book of current buy and sell orders received from other brokers and matches equal bid and offer quotes for execution14. Market-makers for a security on the NASDAQ securities exchange also publish bid and offer prices at which they stand ready to execute transactions in the relevant security, either for their own account or for the account of customers. In addition, a market-maker receives customer orders and matches them, to the extent possible, against an order received from another customer or against an order for the market-maker's own account.
For these reasons, and based on all the facts of record, the Board concludes that operating a securities exchange is an activity that is closely related to banking for purposes of section 4(c)(8) of the BHC Act.
Proper Incident to Banking Standard and Other Considerations
In considering the financial resources of the notificants, the Board has carefully reviewed the capitalization of JPM and UBS and has found the capitalization of each to be consistent with approval. In particular, the Board notes that JPM and its subsidiary bank, Morgan Guaranty Trust Company, New York, New York, are well capitalized and would remain so after consummation of the proposal, and that UBS's capital ratios satisfy applicable risk-based standards established under the Basle Accord, and are considered equivalent to the capital levels that would be required of a U.S. banking organization. The Board also has considered recent financial statements of JPM and UBS, including pro forma financial statements and other available information, and the condition of the U.S. operations of UBS.
Furthermore, as noted above, Tradepoint does not take a principal position in any security and does not assume any principal risk for the clearance or settlement of securities transactions executed on the Exchange. In addition, JPM and UBS would not guarantee any securities transactions executed on the Exchange. Based on these and other facts of record, including relevant supervisory information, the Board has determined that financial and managerial considerations are consistent with approval.
The Board also has carefully considered the competitive effects of the proposal. There are numerous existing and potential competitors for the proposed services. Accordingly, the Board concludes that consummation of the proposal would have a de minimis effect on competition.
In considering the potential for conflicts of interests and other adverse effects, the Board also has carefully reviewed the operational and supervisory framework within which the Exchange operates. As noted above, the Exchange is subject to regulation by the FSA under the securities laws of the United Kingdom, and its U.S. activities are subject to regulation by the SEC under the federal securities laws. U.K. law requires that recognized investment exchanges, such as the Exchange, promote and maintain high standards of integrity and fair dealing17. In furtherance of this requirement, the FSA has adopted a code of conduct governing recognized investment exchanges that is designed to ensure that the decisions of an exchange are not improperly influenced by conflicts of interest. Staff of the FSA has advised Board staff that the FSA could take supervisory action against a recognized investment exchange under U.K. law if the exchange sought to deny a person access to the exchange on the basis of an improper conflict of interest.
The U.K. Financial Services Act of 1986 also requires that the Exchange have financial resources sufficient to support its activities, and maintain rules and procedures to ensure that trading is conducted in an orderly manner and consistent with the protection of investors18. Pursuant to these requirements, Tradepoint has established rules for the Exchange that govern the admission of members, establish standard terms for the execution of securities transactions on the Exchange, and provide sanctions for noncompliance with the Exchange's rules. The FSA has reviewed the Exchange's rules and determined that they are consistent with the requirements of U.K. law and must review any proposed amendments to such rules19.
Tradepoint's operations in the United States also would remain subject to the antifraud provisions of the federal securities laws20. Although the SEC has granted Tradepoint a limited volume exemption from the registration requirements of section 5 of the 1934 Act, the SEC's exemptive order requires that Tradepoint comply with a number of conditions designed to ensure the maintenance of fair and orderly markets in the United States and the protection of U.S. investors. For example, these conditions permit the SEC to monitor the Exchange for compliance with the antifraud and other applicable provisions of the federal securities laws; require the Exchange to adopt and implement procedures to ensure the nondisclosure of confidential, material information held by the Exchange; and allow the SEC to obtain access to the books, records (including copies of membership applications and standards for admission as a member), facilities, and personnel of the Exchange as necessary or appropriate. Based on these and other conditions, the SEC concluded that the limited volume exemption provided the Exchange was consistent with the public interest and the protection of investors21.
Notificants have stated that consummation of the proposal would increase competition for the execution of equity and equity-related securities listed on the London Stock Exchange and provide added convenience to market-makers, broker-dealers, and institutional investors that seek to execute trades in such securities. The SEC also has stated that the Exchange's services provide U.S. investors with a lower-cost method of investing in foreign securities. In addition, the Board has noted that there are public benefits to be derived from permitting capital markets to operate so that bank holding companies can make potentially profitable investments in nonbanking companies and from permitting banking organizations to allocate their resources in the manner they consider to be most efficient when such investments and actions are consistent, as in this case, with the relevant considerations under the BHC Act22.
Based on all the facts of record, the Board has determined that consummation of the proposal can reasonably be expected to produce public benefits that outweigh any potential adverse effects of the proposal, and therefore that the performance of the proposed activity by JPM and UBS is a proper incident to banking for purposes of section 4(c)(8) of the BHC Act.
By order of the Board of Governors,23 effective November 8, 1999.
Robert deV. Frierson
1 Asset data are as of June 30, 1999, and ranking data are as of December 31, 1998.
2 JPM currently owns directly and indirectly an approximately 16 percent nonvoting interest in TP Group and UBS currently owns a 10.79 percent voting interest in TP Group. JPM and UBS acquired these interests in July 1999 in reliance on section 4(c)(13) of the BHC Act and the Board's Regulation K (12 C.F.R. Part 211).
On consummation of the proposal, JPM would convert its entire non-voting interest in TP Group into a voting interest in the organization. In connection with this conversion, JPM also would acquire an additional 1 percent of TP Group's shares from a third party. After the share conversion and purchase, JPM would control approximately 17 percent of the voting shares of TP Group.
3 A bank holding company must obtain the Board's approval under section 4(c)(8) of the BHC Act if a foreign company held by the bank holding company seeks to engage in business in the United States.
4 As of June 30, 1999, the Exchange had approximately 92 members. Unlike many U.S. securities exchanges, the Exchange is not owned by its members but rather by its shareholders, which may or may not be members of the exchange.
5 The Exchange's current trading hours are Monday to Friday, 7:30 A.M. to 5:30 P.M. London time, with a post-trade administration session from 5:30 P.M. to 6:00 P.M.
6 The Exchange also has the capacity to operate periodic auctions. In a periodic auction, bid and ask quotations would be allowed to accumulate and then filled, to the extent possible, at a single price calculated to match the largest possible number of accumulated buy and sell orders. The Exchange does not currently operate periodic auctions but may do so in the future for infrequently traded securities or the securities of smaller capitalization issuers.
7 Cross trades executed on the Exchange are not registered with the London Clearing House and are settled directly by the relevant member through CREST. Cross trades are trades where the buyer and seller are both customers of the same Exchange member.
8 15 U.S.C. § 78e; see Tradepoint Financial Networks plc, Exchange Act Release No. 41,199, 1999 SEC LEXIS 612 (March 22, 1999).
9 See National Courier Association v. Board of Governors of the Federal Reserve System, 516 F.2d 1229, 1237 (D.C. Cir. 1975). The Board may also consider any other basis that may demonstrate that the proposed activity has a reasonable or close connection or relationship to banking or managing or controlling banks. See Board Statement Regarding Regulation Y, 49 Federal Register 806 (1984); Securities Industry Association v. Board of Governors of the Federal Reserve System, 468 U.S. 207, 210-211 n.5 (1984).
10 The operations of the Exchange are more limited than many securities exchanges in that the Exchange does not directly or indirectly clear or settle securities transactions executed on the Exchange. Rather, the Exchange maintains systems to route trades to the London Clearing House for clearance and settlement through CREST.
11 See 12 C.F.R. 225.28(b)(7)(i); BankAmerica Corporation, 69 Federal Reserve Bulletin 105 (1983). See also 12 U.S.C. § 24(Seventh); OCC Interp. Letter No. 622 (April 9, 1993).
12 See J.P. Morgan & Co., Inc. et al., 75 Federal Reserve Bulletin 192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board of Governors, 900 F.2d 360 (D.C. Cir. 1990); First of America Corporation, 80 Federal Reserve Bulletin 1120 (1994).
13 See, e.g., Fleet Financial Group, 84 Federal Reserve Bulletin 227 (1998); Dresdner Bank AG, 82 Federal Reserve Bulletin 850 (1996).
14 See 5 L. Loss & J. Seligman, Securities Regulation 2513-14 (3d ed. 1990); New York Stock Exchange Rule 104.
15 See 12 U.S.C. § 1843(c)(8).
16 See 12 C.F.R. 225.26.
17 See Financial Services Act of 1986, sch. 4, par. 5.
18 See Financial Services Act of 1986, sch. 4, pars. 1 and 2.
19 The FSA has the authority to conduct on-site inspections of the Exchange if necessary or appropriate.
20 See, e.g. 15 U.S.C. § 78j(b).
21 JPM and UBS also have committed that Tradepoint will be considered a subsidiary for purposes of the BHC Act, and as an affiliate of any insured depository institution affiliate of the notificants for purposes of sections 23A and 23B of the Federal Reserve Act.
22 Regulation Y provides that a bank holding company must seek the Board's approval prior to altering in any material respect a nonbanking activity previously approved by the Board. See 12 C.F.R. 225.25(c)(3). As noted above, the Exchange does not currently clear or settle securities transactions executed on the Exchange. Because the clearance and settlement of securities transactions involves risks that are materially different from the risks associated with the execution of securities transactions, notificants must separately seek the Board's approval if the Exchange in the future proposes to clear or settle securities transactions to permit the Board to determine whether the performance of such additional activities by the Exchange would constitute a proper incident to banking under section 4(c)(8) of the BHC Act.
23 This action was taken pursuant to the Board's Rules Regarding Delegation of Authority (12 C.F.R. 265.4(b)(1)) by a committee of Board members. Voting for this action: Vice Chairman Ferguson and Governors Kelley and Gramlich. Absent and not voting: Chairman Greenspan and Governor Meyer.
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1999 Orders on banking applications