Order Granting Limited Exemptions From Rules 101 and 102 of Regulation M in Connection With Distributions of AT1 Contingent Convertible Securities Pursuant to Rules 101(d) and 102(e) of Regulation M, 4083-4086 [2018-01531]
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Federal Register / Vol. 83, No. 19 / Monday, January 29, 2018 / Notices
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Dated: January 24, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–01599 Filed 1–26–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82575; File No. TP 18–08]
Order Granting Limited Exemptions
From Rules 101 and 102 of Regulation
M in Connection With Distributions of
AT1 Contingent Convertible Securities
Pursuant to Rules 101(d) and 102(e) of
Regulation M
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January 23, 2018.
By letter dated January 23, 2018,
counsel from Sullivan & Cromwell LLP
and Davis Polk & Wardell LLP
(collectively, the ‘‘Applicants’’),1
requested that the staff of the Division
of Trading and Markets grant, on behalf
1 17
CFR 240.17a–5(b).
from John O’Connor, Sullivan & Cromwell
LLP, and John Banes, Davis Polk & Wardell LLP, to
Josephine J. Tao, Assistant Dir., Office of
Derivatives Policy & Trading Practices, Div. of
Trading & Mkts., SEC (Jan. 23, 2018) (the ‘‘Request
Letter’’).
1 Letter
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of certain European financial
institutions (each, an ‘‘Issuer’’),
conditional class exemptive or no-action
relief from Rules 101 and 102 of
Regulation M under the Securities
Exchange Act of 1934, as amended (the
‘‘Exchange Act’’), to permit certain
transactions in ordinary shares
underlying the contingent convertible
debt securities qualifying as additional
tier 1 capital (‘‘AT1 Contingent
Convertible Securities’’), including
ordinary shares represented by
American depositary shares
(collectively, ‘‘Shares’’), by Issuers and
affiliated purchasers, including those
acting as distribution participants,
during a distribution of such AT1
Contingent Convertible Securities.2
AT1 Contingent Convertible Securities
Over the last several years, a number
of European financial institutions have
issued various series of AT1 Contingent
Convertible Securities that are designed
to qualify as additional tier 1 capital
(‘‘AT1 Capital’’) that can be counted by
a financial institution towards the
capital requirements mandated by
European regulators.3
Applicants represent in the Request
Letter that the AT1 Contingent
Convertible Securities to be offered are
fundamentally fixed-income debt
securities that are priced and traded by
investors as such.4 Applicants also
2 The requested relief is solely to permit
transactions in Shares during a distribution of an
Issuer’s AT1 Contingent Convertible Securities (i.e.,
the Request Letter does not seek relief with respect
to transactions in the AT1 Contingent Convertible
Securities themselves). For purposes of this relief,
the terms ‘‘affiliated purchasers’’ and ‘‘distribution
participants’’ shall have the same meaning as
defined in Rule 100(b) of Regulation M. See 17 CFR
242.100(b).
3 Applicants represent in the Request Letter that
the qualification requirements/features for AT1
Contingent Convertible Securities that qualify as
AT1 Capital are set forth in the European Union’s
Capital Requirements Directive IV and related
Capital Requirements Regulation (collectively, the
‘‘CRD IV’’), which were issued in response to the
new global regulatory frameworks on bank capital
adequacy and liquidity adopted by the Basel
Committee on Banking Supervision in December
2010 (generally known as ‘‘Basel III’’). Applicants
represent that the purpose of AT1 Capital is to
absorb future losses through conversion to common
equity (or write-down) so as to allow a financial
institution to maintain sufficient Common Equity
Tier 1 Capital to continue as a going concern. In
addition, the basic equity-related-structure of AT1
Contingent Convertible Securities that qualify as
AT1 Capital under CRD IV is summarized in the
Request Letter.
4 Applicants also represent that Issuers have
previously indicated that they expect AT1
Contingent Convertible Securities to price and trade
more like traditional fixed-income debt instruments
than conventional convertible instruments (i.e., that
investors in AT1 Contingent Convertible Securities
are generally focused on receiving interest
payments during the life of the AT1 Contingent
Convertible Securities rather than any potential
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represent in the Request Letter that,
unlike traditional convertible debt
instruments, the AT1 Contingent
Convertible Securities to be offered
automatically convert into Shares only
upon the occurrence of a remote, capital
adequacy-related trigger event that is set
forth in the terms of the relevant AT1
Contingent Convertible Security.
Specifically, Applicants represent,
among other things, the following:
• Relief is requested only with
respect to AT1 Contingent Convertible
Securities that automatically and
mandatorily convert into Shares if the
Issuer’s Common Equity Tier 1 Capital
Ratio (as calculated in accordance with
CRD IV) falls below a pre-determined
trigger level of 7.0% or lower; 5
• A Common Equity Tier 1 Capital
Ratio below 7.0% is effectively a sign of
distress, and conversion of AT1
Contingent Convertible Securities with a
trigger level of 7.0% or lower is unlikely
to occur as a result of actions within an
Issuer’s control;
• Because of the perceived severity of
the regulatory sanctions that would
otherwise apply to an Issuer who allows
its Common Equity Tier 1 Capital Ratio
to fall below its Combined Buffer
Requirement,6 Issuers have a strong
equity upside in the unlikely event of a conversion
into Shares), citing to prior requests for relief from
Rules 101 and 102 of Regulation M in connection
with offerings of AT1 Contingent Convertible
Securities: Letter from Josephine J. Tao, Assistant
Dir., Office of Derivatives Policy & Trading
Practices, Div. of Trading & Mkts., SEC, to Mark J.
Welshimer, Sullivan & Cromwell LLP (Apr. 7, 2015)
(ING Groep N.V.); Letter from Josephine J. Tao,
Assistant Dir., Office of Derivatives Policy &
Trading Practices, Div. of Trading & Mkts., SEC, to
John Banes, Davis Polk & Wardwell London LLP
(Mar. 6, 2014) (Lloyds Banking Group); Letter from
Josephine J. Tao, Assistant Dir., Office of
Derivatives Policy & Trading Practices, Div. of
Trading & Mkts., SEC, to George H. White, Sullivan
& Cromwell LLP (Nov. 7, 2013) (Barclays PLC);
Letter From Josephine J. Tao, Assistant Dir., Office
of Derivatives Policy & Trading Practices, Div. of
Trading & Mkts., SEC, to Michael J. Willisch, Davis
Polk & Wardwell Spain LLP (Nov. 3, 2017) (Banco
Bilbao Vizcaya Argentaria, S.A.).
5 Applicants represent that guidance from the UK
Prudential Regulation Authority will generally
result in a 7.0% trigger level for AT1 Contingent
Convertible Securities issued by UK financial
institutions, which is intended to ensure that only
instruments that will reliably absorb losses while a
firm is still a going concern can count towards the
leverage ratio under CRD IV. Applicants represent
that the applicable 7.0% threshold is equivalent to
the sum of the basic 4.5% minimum for Common
Equity Tier 1 Capital under CRD IV and the
additional 2.5% capital conservation buffer that is
also required to be satisfied with Common Equity
Tier 1 Capital under CRD IV.
6 In addition to the basic 4.5% minimum
Common Equity Tier 1 Capital Ratio under CRD IV,
there is a Combined Buffer Requirement applicable
to any institution that is incremental to the
minimum requirement and is composed of (1) in all
cases, an additional 2.5% capital conservation
buffer (with the consequence that the sum of the
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Federal Register / Vol. 83, No. 19 / Monday, January 29, 2018 / Notices
incentive to maintain capital levels, and
investors expect such Issuers to
maintain capital levels, well in excess of
the pre-determined trigger level; 7
• Because the risk of regulatory
capital falling below the pre-determined
trigger level is considered remote at the
time of the issuance, the price of the
Shares is not expected to have a
significant impact on pricing or market
demand for AT1 Contingent Convertible
Securities at the time of issuance;
• Because AT1 Contingent
Convertible Securities would convert
only if Common Equity Tier 1 Capital
fell below the pre-determined trigger
level of at least 7.0%, which would,
effectively, indicate distress of the
Issuer, investors do not purchase AT1
Contingent Convertible Securities in the
initial distribution of AT1 Contingent
Convertible Securities to have the
possibility of acquiring Shares in a
conversion or to increase their exposure
to the Issuer’s common equity (i.e.,
investors, instead, are focused primarily
on receiving interest payments during
the life of the AT1 Contingent
Convertible Securities);
• Accordingly, trading activity in the
Shares at or around the time of
distribution is unlikely to influence the
pricing or trading of the AT1 Contingent
Convertible Securities that would be in
distribution.
I. Rules 101 and 102 of Regulation M
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Rule 101 of Regulation M is an antimanipulation rule that, subject to
certain exceptions, prohibits any
‘‘distribution participant’’ (i.e.,
underwriters, brokers, dealers, or other
persons who have agreed to participate
or are participating in a distribution of
securities) and its ‘‘affiliated
purchasers’’ from bidding for,
purchasing, or attempting to induce any
person to bid for or purchase, any
security that is the subject of a
distribution until after the applicable
restricted period, except as specifically
permitted in the Rule. Rule 102 of
Regulation M includes the same
prohibitions but applies to issuers,
basic minimum and the Combined Buffer
Requirement is never less than 7.0%), and (2) at
least three other potential buffers—namely, (i) an
institution-specific counter-cyclical capital buffer
(which may be disapplied by member states to
small and medium-sized institutions), (ii) a member
state-specific systemic risk buffer, and (iii) any
applicable systemically important institution
buffers.
7 Applicants represent that the CRD IV regulatory
sanctions include automatic limitations on
distributions (such as the ability to pay dividends)
and compensation that create significant
disincentives for an Issuer to allow its Common
Equity Tier I Capital Ratio to fall below the
applicable Combined Buffer Requirement.
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selling security holders, and any of their
affiliated purchasers.
Regulation M applies to activities in
both the securities in distribution (i.e.,
activities in the ‘‘subject securities’’)
and any ‘‘reference securities,’’ such as
common stock underlying an
exercisable, exchangeable, or
convertible security that is being
distributed.8 Accordingly, the Issuer’s
Shares may be deemed to be ‘‘reference
securities’’ in relation to the AT1
Contingent Convertible Securities. Thus,
Regulation M would prohibit Issuers
and any affiliated purchasers from
making any bids for, purchases of, or
attempts to induce any other person to
bid for or purchase the Shares during an
applicable restricted period in
connection with a distribution of the
Issuer’s AT1 Contingent Convertible
Securities.
Discussion
Based on the representations and facts
presented in the Request Letter—
particularly, that a distribution of AT1
Contingent Convertible Securities that
satisfies the conditions set forth in the
Request Letter, as well as below, does
not raise the concerns at which
Regulation M is directed and that any
bids for, purchases of, or attempts to
induce any other person to bid for or
purchase of the Shares by Issuers or
affiliated purchasers during an
applicable restricted period in
connection with a distribution of the
Issuer’s AT1 Contingent Convertible
Securities would be unlikely, except in
unusual circumstances, to affect the
pricing or trading of the AT1 Contingent
Convertible Securities 9—the U.S.
Securities and Exchange Commission
(the ‘‘Commission’’) finds that it is
appropriate in the public interest and
consistent with the protection of
investors to grant class exemptive relief
from the requirements of Rule 101 and
Rule 102, under paragraph (d) of Rule
101 and paragraph (e) of Rule 102 of
Regulation M, respectively, in
connection with distributions of AT1
Contingent Convertible Securities that
satisfy the conditions set forth below to
permit transactions involving Shares by
8 See Anti-Manipulation Rules Concerning
Securities Offerings, Exchange Act Rel. No. 38067
(Dec. 20, 1996), 62 FR 520 (Jan. 3, 1997) (stating that
transactions in ‘‘reference securities’’ can have a
direct and substantial effect on the pricing and
terms of the security in distribution).
9 In particular, that AT1 Contingent Convertible
Securities do not convert to equity unless the
Issuer’s regulatory capital falls below a predetermined trigger level, and that the price of and
trading activity in Shares at or around the time of
a distribution is not expected to influence or have
a significant impact on pricing or market demand
for the AT1 Contingent Convertible Securities at the
time of issuance.
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an Issuer and its affiliated purchasers
(including those acting as distribution
participants) during a distribution of
such AT1 Contingent Convertible
Securities.10
Consistent with the limited scope of
relief sought in the Request Letter, this
relief is limited to distributions of AT1
Contingent Convertible Securities by or
on behalf of a ‘‘foreign private issuer’’
(within the meaning of Rule 3b–4 under
the Exchange Act) and where the
‘‘principal market’’ (as such term is
defined in Rule 100 of Regulation M) of
the underlying Shares is outside of the
United States. This condition narrowly
tailors the relief’s application to Issuers
who engage in distributions of the AT1
Contingent Convertible Securities that
are the subject of this relief and ensures
that the Issuers of such securities are
subject to the information reporting
requirements of the Exchange Act.
Limiting the scope of the relief in this
way should help to reduce the potential
risk of transactions in Shares that could
adversely affect U.S. markets during a
distribution of a non-U.S. Issuer’s AT1
Contingent Convertible Securities.
This relief is also limited to
distributions of AT1 Contingent
Convertible Securities that
automatically and mandatorily convert
into Shares if an Issuer’s Common
Equity Tier 1 Capital Ratio (as
calculated in accordance with CRD IV)
falls below a predetermined trigger level
of 7.0% or lower. Applicants represent
in the Request Letter that a Common
Equity Tier 1 Capital Ratio below 7.0%
is considered, under guidance from the
UK Prudential Regulation Authority, to
be effectively a sign of distress, and
conversion of AT1 Contingent
Convertible Securities with a trigger
level of 7.0% or lower is unlikely to
occur as a result of actions within an
Issuer’s control. As such, this condition
is intended to further ensure the
remoteness of any possibility of
conversion of the AT1 Contingent
Convertible Securities, thus also
decreasing the likelihood of any trading
activity in Shares during such
distributions affecting the pricing or
demand for the AT1 Contingent
Convertible Securities being distributed.
This relief also requires that, as of the
date of the most recent calculation
required to be reported to the relevant
10 Consistent with the limited scope of relief
sought in the Request Letter, the relief granted
herein, however, does not extend to transactions in
the AT1 Contingent Convertible Securities
themselves. Transactions in the AT1 Contingent
Convertible Securities that are being distributed
would need to comply with the requirements of
Regulation M and/or qualify for one of the
exceptions provided under Regulation M.
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Federal Register / Vol. 83, No. 19 / Monday, January 29, 2018 / Notices
supervising authority under applicable
regulatory capital rules prior to the
distribution of the AT1 Contingent
Convertible Securities, the Issuer’s
Common Equity Tier 1 Capital Ratio
must exceed the applicable Combined
Buffer Requirement.11 This condition,
which conforms to applicable regulatory
capital rules, is intended to ensure that
the Issuer maintains capital levels that
are sufficiently above the predetermined trigger level at the time of
distribution of the AT1 Contingent
Convertible Securities.12 Accordingly,
this condition helps to ensure the
remoteness of any possibility of
conversion of the AT1 Contingent
Convertible Securities and, thus, to
decrease the likelihood of any trading
activity in Shares during such
distributions affecting the pricing or
demand for the AT1 Contingent
Convertible Securities being distributed.
In addition, this relief applies only to
AT1 Contingent Convertible Securities
in distribution that do not include any
right of the Issuer or holders to convert
the AT1 Contingent Convertible
Securities into Shares at their option.
This condition is intended to help to
ensure the remoteness of any possibility
of conversion of the AT1 Contingent
Convertible Securities and, thus, to
decrease the likelihood of trading
activity in Shares affecting the pricing
or demand for the AT1 Contingent
Convertible Securities in distribution.
This relief also requires that any
transactions in Shares by an Issuer or
any of its affiliated purchasers must be
effected in the ordinary course of
business and not to facilitate the
distribution of the AT1 Contingent
Convertible Securities. This condition
should help to ensure that transactions
in Shares are more customer-driven
rather than driven by market activities
that could potentially be used to
artificially facilitate the distribution of
the AT1 Contingent Convertible
Securities or unduly impact the pricing
of or demand for the AT1 Contingent
Convertible Securities in distribution.
To ensure adequate transparency to
potential U.S. investors in the offering,
this relief also requires that any
prospectus or other offering document
that is distributed to U.S. investors in
connection with the offering of the AT1
Contingent Convertible Securities must
disclose the possibility of, or the
11 See
supra note 6.
mentioned above, because of the perceived
severity of regulatory sanctions that would apply to
an Issuer that allows its Common Equity Tier I
Capital Ratio to decline below the applicable
Combined Buffer Requirement, it is expected that
Issuers will maintain capital levels well in excess
of the predetermined trigger level.
12 As
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intention to engage in, transactions in
Shares by an Issuer or its affiliated
purchasers.
This relief is also limited to Shares
that qualify for the actively-traded
securities exception under Rule
101(c)(1) of Regulation M because such
securities are viewed by the
Commission to be less susceptible to
manipulation. This limitation should
also help to reduce the impact of any
attempt to artificially influence the price
of the AT1 Contingent Convertible
Securities that are being distributed by
engaging in transactions in the Shares at
or around the time of a distribution.
II. Conclusion
It is hereby ordered, pursuant to Rule
101(d) and Rule 102(e) of Regulation M,
that, based on the representations and
facts presented in the Request Letter,
class exemptive relief from the
requirements of Rules 101 and Rule 102,
respectively, is granted in connection
with distributions of AT1 Contingent
Convertible Securities that satisfy the
conditions set forth below to permit
transactions involving Shares by an
Issuer and its affiliated purchasers
(including affiliated purchasers who
may be deemed to be participating in a
distribution of such Issuer’s ATI
Contingent Convertible Securities)
during a distribution of such AT1
Contingent Convertible Securities, as
described in the Request Letter and
herein, subject to the following
conditions:
(1) The Issuer of the AT1 Contingent
Convertible Securities must be a foreign
private issuer (within the meaning of
Rule 3b–4 under the Exchange Act);
(2) The principal market (within the
meaning of Rule 100 of Regulation M)
of Shares must be outside of the United
States;
(3) The AT1 Contingent Convertible
Securities in distribution must only
automatically and mandatorily convert
into the Issuer’s Shares if the Issuer’s
Common Equity Tier 1 Capital Ratio (as
calculated in accordance with CRD IV)
falls below a pre-determined trigger
level of 7.0% or lower;
(4) As of the date of the most recent
calculation that is required to be
reported to the relevant supervising
authority under applicable regulatory
capital rules prior to the distribution of
the AT1 Contingent Convertible
Securities, the Issuer’s Common Equity
Tier 1 Capital Ratio must exceed the
applicable Combined Buffer
Requirement;
(5) The AT1 Contingent Convertible
Securities in distribution must not
include any right of the Issuer or
holders to convert the AT1 Contingent
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4085
Convertible Securities into Shares at
their option;
(6) Any transactions in Shares by the
Issuer or any of its affiliated purchasers
must be effected in the ordinary course
of business and not for the purpose of
facilitating the distribution of the AT1
Contingent Convertible Securities;
(7) Any prospectus or other offering
document that is distributed to U.S.
investors in connection with the
offering of the AT1 Contingent
Convertible Securities must disclose the
possibility of, or the intention to engage
in, transactions in Shares by the Issuer
or its affiliated purchasers;
(8) Shares must have an ADTV
(within the meaning of Rule 100 of
Regulation M) value of at least $1
million during the two full calendar
months immediately preceding, or any
consecutive 60 calendar days ending
within the 10 calendar days preceding,
the determination of the offering price,
and Shares must be issued by an Issuer
whose common equity securities have a
public float value (within the meaning
of Rule 100 of Regulation M) of at least
$150 million; and
(9) Except as otherwise exempted
herein, the issuance of the AT1
Contingent Convertible Securities shall
remain subject to the provisions of
Regulation M.
In the event that any material change
occurs in the facts or representations in
the Request Letter, the Applicants shall
promptly present for consideration the
facts to staff in the Division of Trading
and Markets. This exemption is subject
to modification or revocation at any
time the Commission determines that
such action is necessary or appropriate
in furtherance of the purposes of the
Exchange Act. In addition, persons
relying on this limited exemption are
directed to the anti-fraud and antimanipulation provisions of the
Exchange Act, particularly Sections 9(a)
and 10(b), and Rule 10b–5 thereunder.
Responsibility for compliance with
these and any other applicable
provisions of the federal securities laws
must rest with the persons relying on
this exemption.
This Order should not be considered
a view with respect to any other
question that the proposed transactions
may raise, including, but not limited to
the adequacy of the disclosure
concerning, and the applicability of
other federal or state laws to, the
proposed transactions.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Brent J. Fields,
Secretary.
[FR Doc. 2018–01531 Filed 1–26–18; 8:45 am]
BILLING CODE 8011–01–P
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82568; File No. SR–ISE–
2018–07]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Assess Fees for OTTO
Port, CTI Port, FIX Port, FIX Drop Port
and Disaster Recovery Port
Connectivity
January 23, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
19, 2018, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Schedule of Fees to assess fees for
OTTO Port, CTI Port, FIX Port, FIX Drop
Port and Disaster Recovery Port
connectivity. The text of the proposed
rule change is available on the
Exchange’s website at www.ise.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
sradovich on DSK3GMQ082PROD with NOTICES
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
13 17
CFR 200.30–3(a)(6) and (9).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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The purpose of the proposed rule
change is to amend the Schedule of
Fees 3 to assess fees for OTTO 4 Port,
CTI 5 Port, FIX 6 Port, FIX Drop 7 Port
and Disaster Recovery Port 8
connectivity. The Exchange has
completed the migration of the
Exchange’s trading system to the Nasdaq
3 The Exchange initially filed the proposed
pricing changes on January 2, 2018 (SR–ISE–2018–
01). On January 16, 2018, the Exchange withdrew
that filing and on January 19, 2018 submitted this
filing, making certain clarifying changes. The
Exchange represents that it has not added new
subscriptions or canceled existing subscriptions to
the ports described in this filing between the time
it withdrew the original proposal and the
submission of this filing.
4 OTTO is an interface that allows market
participants to connect and send orders, auction
orders and auction responses into ISE. Data
includes the following: (1) Options Auction
Notifications (e.g., Flash, PIM, Solicitation and
Facilitation or other information); (2) Options
Symbol Directory Messages; (3) System Event
Messages (e.g., start of messages, start of system
hours, start of quoting, start of opening); (5) Option
Trading Action Messages (e.g., halts, resumes); (6)
Execution Messages; (7) Order Messages (order
messages, risk protection triggers or purge
notifications).
5 CTI is a real-time clearing trade update is a
message that is sent to a member after an execution
has occurred and contains trade details. The
message containing the trade details is also
simultaneously sent to The Options Clearing
Corporation. The information includes, among
other things, the following: (i) The Clearing Member
Trade Agreement or ‘‘CMTA’’ or The Options
Clearing Corporation or ‘‘OCC’’ number; (ii)
Exchange badge or house number; (iii) the Exchange
internal firm identifier; and (iv) an indicator which
will distinguish electronic and non-electronically
delivered orders; (v) liquidity indicators and
transaction type for billing purposes; (vi) capacity.
6 FIX is an interface that allows market
participants to connect and send orders and auction
orders into ISE. Data includes the following: (1)
Options Symbol Directory Messages; (2) System
Event Messages (e.g., start of messages, start of
system hours, start of quoting, start of opening); (3)
Option Trading Action Messages (e.g., halts,
resumes); (4) Execution Messages; (5) Order
Messages (order messages, risk protection triggers or
purge notifications).
7 FIX Drop is a real-time order and execution
update is a message that is sent to a member after
an order been received/modified or an execution
has occurred and contains trade details. The
information includes, among other things, the
following: (1) Executions; (2) cancellations; (3)
modifications to an existing order; (4) busts or posttrade corrections.
8 Disaster Recovery Ports provide connectivity to
the Exchange’s disaster recovery data center in
Chicago to be utilized in the event the exchange has
to fail over during the trading day. Disaster
Recovery Ports are available for SQF, SQF Purge,
CTI, OTTO, FIX and FIX Drop.
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
INET architecture.9 This migration
included the adoption of new
connectivity, including OTTO, CTI, FIX,
FIX Drop, and Disaster Recovery Ports,
which are the same as connectivity
options currently used to connect to the
Exchange’s affiliate options markets,
including The Nasdaq Stock Market
(‘‘Nasdaq’’), Nasdaq BX (‘‘BX’’), Nasdaq
GEMX (‘‘GEMX’’) and Nasdaq Phlx
(‘‘Phlx’’).10 When the Exchange adopted
these new ports it did not assess a fee
for them so that members would not be
double charged for connectivity to the
old Exchange architecture and the new
Nasdaq INET architecture.11
The Exchange is proposing to amend
the Nasdaq ISE Schedule of Fees
Section V.D. to assess a fee of $400 per
month, per port, per mnemonic 12 for
OTTO Ports, $500 per port, per month,
per account number 13 for CTI Ports,
$300 per port per month, per mnemonic
for FIX Ports, and $500 per port per
month per account number for FIX Drop
Ports. The Exchange is proposing to
assess a fee of $50 per month, per port
for Disaster Recovery Ports. The
Exchange notes that it is adding ‘‘per
account number’’ to the CTI and FIX
Drop Port fees described above to clarify
that billing for the ports is based on how
many account numbers that a member
associates with a port, which will allow
the Exchange to determine a member’s
use of a port more precisely. The
Exchange notes that this is the method
by which GEMX bills these fees.14 The
Exchange is proposing to add ‘‘per
mnemonic’’ to OTTO and FIX Port fees,
which will allow the Exchange to more
granularly identify use of such ports.15
The Exchange notes that this is how the
9 See Securities Exchange Act Release No. 80432
(April 11, 2017), 82 FR 18191 (April 17, 2017) (SR–
ISE–2017–03).
10 See Nasdaq Option Rules, Chapter XV Options
Pricing, Sec. 3 Nasdaq Options Market—Ports and
other Services; BX Option Rules, Chapter XV
Options Pricing, Sec. 3 BX Options Market—Ports
and other Services; Nasdaq GEMX Schedule of Fees
Section IV.E.3; and Phlx Pricing Schedule, VII.
Other Member Fees, B. Port Fees.
11 See Securities Exchange Release No. 81095
(July 7, 2017), 82 FR 32409 (July 13, 2017) (SR–ISE–
2017–62).
12 A mnemonic is a unique identifier assigned to
a member consisting of a four character code. A
member may be assigned multiple mnemonics,
which are used to segregate a member’s order flow
based on its business and regulatory needs. Every
mnemonic must be affiliated with an account
number held by the member. Account numbers are
numeric codes used to identify members and the
default clearing information through which all
order flow affiliated with that account number will
clear. A member may be assigned multiple account
numbers.
13 An account number may have multiple
mnemonics affiliated with it. See id.
14 See Nasdaq GEMX Schedule of Fees Section
IV.E.3.
15 Supra note 12.
E:\FR\FM\29JAN1.SGM
29JAN1
]]>Agencies
[Federal Register Volume 83, Number 19 (Monday, January 29, 2018)]
[Notices]
[Pages 4083-4086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01531]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82575; File No. TP 18-08]
Order Granting Limited Exemptions From Rules 101 and 102 of
Regulation M in Connection With Distributions of AT1 Contingent
Convertible Securities Pursuant to Rules 101(d) and 102(e) of
Regulation M
January 23, 2018.
By letter dated January 23, 2018, counsel from Sullivan & Cromwell
LLP and Davis Polk & Wardell LLP (collectively, the ``Applicants''),\1\
requested that the staff of the Division of Trading and Markets grant,
on behalf of certain European financial institutions (each, an
``Issuer''), conditional class exemptive or no-action relief from Rules
101 and 102 of Regulation M under the Securities Exchange Act of 1934,
as amended (the ``Exchange Act''), to permit certain transactions in
ordinary shares underlying the contingent convertible debt securities
qualifying as additional tier 1 capital (``AT1 Contingent Convertible
Securities''), including ordinary shares represented by American
depositary shares (collectively, ``Shares''), by Issuers and affiliated
purchasers, including those acting as distribution participants, during
a distribution of such AT1 Contingent Convertible Securities.\2\
---------------------------------------------------------------------------
\1\ Letter from John O'Connor, Sullivan & Cromwell LLP, and John
Banes, Davis Polk & Wardell LLP, to Josephine J. Tao, Assistant
Dir., Office of Derivatives Policy & Trading Practices, Div. of
Trading & Mkts., SEC (Jan. 23, 2018) (the ``Request Letter'').
\2\ The requested relief is solely to permit transactions in
Shares during a distribution of an Issuer's AT1 Contingent
Convertible Securities (i.e., the Request Letter does not seek
relief with respect to transactions in the AT1 Contingent
Convertible Securities themselves). For purposes of this relief, the
terms ``affiliated purchasers'' and ``distribution participants''
shall have the same meaning as defined in Rule 100(b) of Regulation
M. See 17 CFR 242.100(b).
---------------------------------------------------------------------------
AT1 Contingent Convertible Securities
Over the last several years, a number of European financial
institutions have issued various series of AT1 Contingent Convertible
Securities that are designed to qualify as additional tier 1 capital
(``AT1 Capital'') that can be counted by a financial institution
towards the capital requirements mandated by European regulators.\3\
---------------------------------------------------------------------------
\3\ Applicants represent in the Request Letter that the
qualification requirements/features for AT1 Contingent Convertible
Securities that qualify as AT1 Capital are set forth in the European
Union's Capital Requirements Directive IV and related Capital
Requirements Regulation (collectively, the ``CRD IV''), which were
issued in response to the new global regulatory frameworks on bank
capital adequacy and liquidity adopted by the Basel Committee on
Banking Supervision in December 2010 (generally known as ``Basel
III''). Applicants represent that the purpose of AT1 Capital is to
absorb future losses through conversion to common equity (or write-
down) so as to allow a financial institution to maintain sufficient
Common Equity Tier 1 Capital to continue as a going concern. In
addition, the basic equity-related-structure of AT1 Contingent
Convertible Securities that qualify as AT1 Capital under CRD IV is
summarized in the Request Letter.
---------------------------------------------------------------------------
Applicants represent in the Request Letter that the AT1 Contingent
Convertible Securities to be offered are fundamentally fixed-income
debt securities that are priced and traded by investors as such.\4\
Applicants also represent in the Request Letter that, unlike
traditional convertible debt instruments, the AT1 Contingent
Convertible Securities to be offered automatically convert into Shares
only upon the occurrence of a remote, capital adequacy-related trigger
event that is set forth in the terms of the relevant AT1 Contingent
Convertible Security.
---------------------------------------------------------------------------
\4\ Applicants also represent that Issuers have previously
indicated that they expect AT1 Contingent Convertible Securities to
price and trade more like traditional fixed-income debt instruments
than conventional convertible instruments (i.e., that investors in
AT1 Contingent Convertible Securities are generally focused on
receiving interest payments during the life of the AT1 Contingent
Convertible Securities rather than any potential equity upside in
the unlikely event of a conversion into Shares), citing to prior
requests for relief from Rules 101 and 102 of Regulation M in
connection with offerings of AT1 Contingent Convertible Securities:
Letter from Josephine J. Tao, Assistant Dir., Office of Derivatives
Policy & Trading Practices, Div. of Trading & Mkts., SEC, to Mark J.
Welshimer, Sullivan & Cromwell LLP (Apr. 7, 2015) (ING Groep N.V.);
Letter from Josephine J. Tao, Assistant Dir., Office of Derivatives
Policy & Trading Practices, Div. of Trading & Mkts., SEC, to John
Banes, Davis Polk & Wardwell London LLP (Mar. 6, 2014) (Lloyds
Banking Group); Letter from Josephine J. Tao, Assistant Dir., Office
of Derivatives Policy & Trading Practices, Div. of Trading & Mkts.,
SEC, to George H. White, Sullivan & Cromwell LLP (Nov. 7, 2013)
(Barclays PLC); Letter From Josephine J. Tao, Assistant Dir., Office
of Derivatives Policy & Trading Practices, Div. of Trading & Mkts.,
SEC, to Michael J. Willisch, Davis Polk & Wardwell Spain LLP (Nov.
3, 2017) (Banco Bilbao Vizcaya Argentaria, S.A.).
---------------------------------------------------------------------------
Specifically, Applicants represent, among other things, the
following:
Relief is requested only with respect to AT1 Contingent
Convertible Securities that automatically and mandatorily convert into
Shares if the Issuer's Common Equity Tier 1 Capital Ratio (as
calculated in accordance with CRD IV) falls below a pre-determined
trigger level of 7.0% or lower; \5\
---------------------------------------------------------------------------
\5\ Applicants represent that guidance from the UK Prudential
Regulation Authority will generally result in a 7.0% trigger level
for AT1 Contingent Convertible Securities issued by UK financial
institutions, which is intended to ensure that only instruments that
will reliably absorb losses while a firm is still a going concern
can count towards the leverage ratio under CRD IV. Applicants
represent that the applicable 7.0% threshold is equivalent to the
sum of the basic 4.5% minimum for Common Equity Tier 1 Capital under
CRD IV and the additional 2.5% capital conservation buffer that is
also required to be satisfied with Common Equity Tier 1 Capital
under CRD IV.
---------------------------------------------------------------------------
A Common Equity Tier 1 Capital Ratio below 7.0% is
effectively a sign of distress, and conversion of AT1 Contingent
Convertible Securities with a trigger level of 7.0% or lower is
unlikely to occur as a result of actions within an Issuer's control;
Because of the perceived severity of the regulatory
sanctions that would otherwise apply to an Issuer who allows its Common
Equity Tier 1 Capital Ratio to fall below its Combined Buffer
Requirement,\6\ Issuers have a strong
[[Page 4084]]
incentive to maintain capital levels, and investors expect such Issuers
to maintain capital levels, well in excess of the pre-determined
trigger level; \7\
---------------------------------------------------------------------------
\6\ In addition to the basic 4.5% minimum Common Equity Tier 1
Capital Ratio under CRD IV, there is a Combined Buffer Requirement
applicable to any institution that is incremental to the minimum
requirement and is composed of (1) in all cases, an additional 2.5%
capital conservation buffer (with the consequence that the sum of
the basic minimum and the Combined Buffer Requirement is never less
than 7.0%), and (2) at least three other potential buffers--namely,
(i) an institution-specific counter-cyclical capital buffer (which
may be disapplied by member states to small and medium-sized
institutions), (ii) a member state-specific systemic risk buffer,
and (iii) any applicable systemically important institution buffers.
\7\ Applicants represent that the CRD IV regulatory sanctions
include automatic limitations on distributions (such as the ability
to pay dividends) and compensation that create significant
disincentives for an Issuer to allow its Common Equity Tier I
Capital Ratio to fall below the applicable Combined Buffer
Requirement.
---------------------------------------------------------------------------
Because the risk of regulatory capital falling below the
pre-determined trigger level is considered remote at the time of the
issuance, the price of the Shares is not expected to have a significant
impact on pricing or market demand for AT1 Contingent Convertible
Securities at the time of issuance;
Because AT1 Contingent Convertible Securities would
convert only if Common Equity Tier 1 Capital fell below the pre-
determined trigger level of at least 7.0%, which would, effectively,
indicate distress of the Issuer, investors do not purchase AT1
Contingent Convertible Securities in the initial distribution of AT1
Contingent Convertible Securities to have the possibility of acquiring
Shares in a conversion or to increase their exposure to the Issuer's
common equity (i.e., investors, instead, are focused primarily on
receiving interest payments during the life of the AT1 Contingent
Convertible Securities);
Accordingly, trading activity in the Shares at or around
the time of distribution is unlikely to influence the pricing or
trading of the AT1 Contingent Convertible Securities that would be in
distribution.
I. Rules 101 and 102 of Regulation M
Rule 101 of Regulation M is an anti-manipulation rule that, subject
to certain exceptions, prohibits any ``distribution participant''
(i.e., underwriters, brokers, dealers, or other persons who have agreed
to participate or are participating in a distribution of securities)
and its ``affiliated purchasers'' from bidding for, purchasing, or
attempting to induce any person to bid for or purchase, any security
that is the subject of a distribution until after the applicable
restricted period, except as specifically permitted in the Rule. Rule
102 of Regulation M includes the same prohibitions but applies to
issuers, selling security holders, and any of their affiliated
purchasers.
Regulation M applies to activities in both the securities in
distribution (i.e., activities in the ``subject securities'') and any
``reference securities,'' such as common stock underlying an
exercisable, exchangeable, or convertible security that is being
distributed.\8\ Accordingly, the Issuer's Shares may be deemed to be
``reference securities'' in relation to the AT1 Contingent Convertible
Securities. Thus, Regulation M would prohibit Issuers and any
affiliated purchasers from making any bids for, purchases of, or
attempts to induce any other person to bid for or purchase the Shares
during an applicable restricted period in connection with a
distribution of the Issuer's AT1 Contingent Convertible Securities.
---------------------------------------------------------------------------
\8\ See Anti-Manipulation Rules Concerning Securities Offerings,
Exchange Act Rel. No. 38067 (Dec. 20, 1996), 62 FR 520 (Jan. 3,
1997) (stating that transactions in ``reference securities'' can
have a direct and substantial effect on the pricing and terms of the
security in distribution).
---------------------------------------------------------------------------
Discussion
Based on the representations and facts presented in the Request
Letter--particularly, that a distribution of AT1 Contingent Convertible
Securities that satisfies the conditions set forth in the Request
Letter, as well as below, does not raise the concerns at which
Regulation M is directed and that any bids for, purchases of, or
attempts to induce any other person to bid for or purchase of the
Shares by Issuers or affiliated purchasers during an applicable
restricted period in connection with a distribution of the Issuer's AT1
Contingent Convertible Securities would be unlikely, except in unusual
circumstances, to affect the pricing or trading of the AT1 Contingent
Convertible Securities \9\--the U.S. Securities and Exchange Commission
(the ``Commission'') finds that it is appropriate in the public
interest and consistent with the protection of investors to grant class
exemptive relief from the requirements of Rule 101 and Rule 102, under
paragraph (d) of Rule 101 and paragraph (e) of Rule 102 of Regulation
M, respectively, in connection with distributions of AT1 Contingent
Convertible Securities that satisfy the conditions set forth below to
permit transactions involving Shares by an Issuer and its affiliated
purchasers (including those acting as distribution participants) during
a distribution of such AT1 Contingent Convertible Securities.\10\
---------------------------------------------------------------------------
\9\ In particular, that AT1 Contingent Convertible Securities do
not convert to equity unless the Issuer's regulatory capital falls
below a pre-determined trigger level, and that the price of and
trading activity in Shares at or around the time of a distribution
is not expected to influence or have a significant impact on pricing
or market demand for the AT1 Contingent Convertible Securities at
the time of issuance.
\10\ Consistent with the limited scope of relief sought in the
Request Letter, the relief granted herein, however, does not extend
to transactions in the AT1 Contingent Convertible Securities
themselves. Transactions in the AT1 Contingent Convertible
Securities that are being distributed would need to comply with the
requirements of Regulation M and/or qualify for one of the
exceptions provided under Regulation M.
---------------------------------------------------------------------------
Consistent with the limited scope of relief sought in the Request
Letter, this relief is limited to distributions of AT1 Contingent
Convertible Securities by or on behalf of a ``foreign private issuer''
(within the meaning of Rule 3b-4 under the Exchange Act) and where the
``principal market'' (as such term is defined in Rule 100 of Regulation
M) of the underlying Shares is outside of the United States. This
condition narrowly tailors the relief's application to Issuers who
engage in distributions of the AT1 Contingent Convertible Securities
that are the subject of this relief and ensures that the Issuers of
such securities are subject to the information reporting requirements
of the Exchange Act. Limiting the scope of the relief in this way
should help to reduce the potential risk of transactions in Shares that
could adversely affect U.S. markets during a distribution of a non-U.S.
Issuer's AT1 Contingent Convertible Securities.
This relief is also limited to distributions of AT1 Contingent
Convertible Securities that automatically and mandatorily convert into
Shares if an Issuer's Common Equity Tier 1 Capital Ratio (as calculated
in accordance with CRD IV) falls below a predetermined trigger level of
7.0% or lower. Applicants represent in the Request Letter that a Common
Equity Tier 1 Capital Ratio below 7.0% is considered, under guidance
from the UK Prudential Regulation Authority, to be effectively a sign
of distress, and conversion of AT1 Contingent Convertible Securities
with a trigger level of 7.0% or lower is unlikely to occur as a result
of actions within an Issuer's control. As such, this condition is
intended to further ensure the remoteness of any possibility of
conversion of the AT1 Contingent Convertible Securities, thus also
decreasing the likelihood of any trading activity in Shares during such
distributions affecting the pricing or demand for the AT1 Contingent
Convertible Securities being distributed.
This relief also requires that, as of the date of the most recent
calculation required to be reported to the relevant
[[Page 4085]]
supervising authority under applicable regulatory capital rules prior
to the distribution of the AT1 Contingent Convertible Securities, the
Issuer's Common Equity Tier 1 Capital Ratio must exceed the applicable
Combined Buffer Requirement.\11\ This condition, which conforms to
applicable regulatory capital rules, is intended to ensure that the
Issuer maintains capital levels that are sufficiently above the pre-
determined trigger level at the time of distribution of the AT1
Contingent Convertible Securities.\12\ Accordingly, this condition
helps to ensure the remoteness of any possibility of conversion of the
AT1 Contingent Convertible Securities and, thus, to decrease the
likelihood of any trading activity in Shares during such distributions
affecting the pricing or demand for the AT1 Contingent Convertible
Securities being distributed.
---------------------------------------------------------------------------
\11\ See supra note 6.
\12\ As mentioned above, because of the perceived severity of
regulatory sanctions that would apply to an Issuer that allows its
Common Equity Tier I Capital Ratio to decline below the applicable
Combined Buffer Requirement, it is expected that Issuers will
maintain capital levels well in excess of the predetermined trigger
level.
---------------------------------------------------------------------------
In addition, this relief applies only to AT1 Contingent Convertible
Securities in distribution that do not include any right of the Issuer
or holders to convert the AT1 Contingent Convertible Securities into
Shares at their option. This condition is intended to help to ensure
the remoteness of any possibility of conversion of the AT1 Contingent
Convertible Securities and, thus, to decrease the likelihood of trading
activity in Shares affecting the pricing or demand for the AT1
Contingent Convertible Securities in distribution.
This relief also requires that any transactions in Shares by an
Issuer or any of its affiliated purchasers must be effected in the
ordinary course of business and not to facilitate the distribution of
the AT1 Contingent Convertible Securities. This condition should help
to ensure that transactions in Shares are more customer-driven rather
than driven by market activities that could potentially be used to
artificially facilitate the distribution of the AT1 Contingent
Convertible Securities or unduly impact the pricing of or demand for
the AT1 Contingent Convertible Securities in distribution.
To ensure adequate transparency to potential U.S. investors in the
offering, this relief also requires that any prospectus or other
offering document that is distributed to U.S. investors in connection
with the offering of the AT1 Contingent Convertible Securities must
disclose the possibility of, or the intention to engage in,
transactions in Shares by an Issuer or its affiliated purchasers.
This relief is also limited to Shares that qualify for the
actively-traded securities exception under Rule 101(c)(1) of Regulation
M because such securities are viewed by the Commission to be less
susceptible to manipulation. This limitation should also help to reduce
the impact of any attempt to artificially influence the price of the
AT1 Contingent Convertible Securities that are being distributed by
engaging in transactions in the Shares at or around the time of a
distribution.
II. Conclusion
It is hereby ordered, pursuant to Rule 101(d) and Rule 102(e) of
Regulation M, that, based on the representations and facts presented in
the Request Letter, class exemptive relief from the requirements of
Rules 101 and Rule 102, respectively, is granted in connection with
distributions of AT1 Contingent Convertible Securities that satisfy the
conditions set forth below to permit transactions involving Shares by
an Issuer and its affiliated purchasers (including affiliated
purchasers who may be deemed to be participating in a distribution of
such Issuer's ATI Contingent Convertible Securities) during a
distribution of such AT1 Contingent Convertible Securities, as
described in the Request Letter and herein, subject to the following
conditions:
(1) The Issuer of the AT1 Contingent Convertible Securities must be
a foreign private issuer (within the meaning of Rule 3b-4 under the
Exchange Act);
(2) The principal market (within the meaning of Rule 100 of
Regulation M) of Shares must be outside of the United States;
(3) The AT1 Contingent Convertible Securities in distribution must
only automatically and mandatorily convert into the Issuer's Shares if
the Issuer's Common Equity Tier 1 Capital Ratio (as calculated in
accordance with CRD IV) falls below a pre-determined trigger level of
7.0% or lower;
(4) As of the date of the most recent calculation that is required
to be reported to the relevant supervising authority under applicable
regulatory capital rules prior to the distribution of the AT1
Contingent Convertible Securities, the Issuer's Common Equity Tier 1
Capital Ratio must exceed the applicable Combined Buffer Requirement;
(5) The AT1 Contingent Convertible Securities in distribution must
not include any right of the Issuer or holders to convert the AT1
Contingent Convertible Securities into Shares at their option;
(6) Any transactions in Shares by the Issuer or any of its
affiliated purchasers must be effected in the ordinary course of
business and not for the purpose of facilitating the distribution of
the AT1 Contingent Convertible Securities;
(7) Any prospectus or other offering document that is distributed
to U.S. investors in connection with the offering of the AT1 Contingent
Convertible Securities must disclose the possibility of, or the
intention to engage in, transactions in Shares by the Issuer or its
affiliated purchasers;
(8) Shares must have an ADTV (within the meaning of Rule 100 of
Regulation M) value of at least $1 million during the two full calendar
months immediately preceding, or any consecutive 60 calendar days
ending within the 10 calendar days preceding, the determination of the
offering price, and Shares must be issued by an Issuer whose common
equity securities have a public float value (within the meaning of Rule
100 of Regulation M) of at least $150 million; and
(9) Except as otherwise exempted herein, the issuance of the AT1
Contingent Convertible Securities shall remain subject to the
provisions of Regulation M.
In the event that any material change occurs in the facts or
representations in the Request Letter, the Applicants shall promptly
present for consideration the facts to staff in the Division of Trading
and Markets. This exemption is subject to modification or revocation at
any time the Commission determines that such action is necessary or
appropriate in furtherance of the purposes of the Exchange Act. In
addition, persons relying on this limited exemption are directed to the
anti-fraud and anti-manipulation provisions of the Exchange Act,
particularly Sections 9(a) and 10(b), and Rule 10b-5 thereunder.
Responsibility for compliance with these and any other applicable
provisions of the federal securities laws must rest with the persons
relying on this exemption.
This Order should not be considered a view with respect to any
other question that the proposed transactions may raise, including, but
not limited to the adequacy of the disclosure concerning, and the
applicability of other federal or state laws to, the proposed
transactions.
[[Page 4086]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
Brent J. Fields,
Secretary.
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\13\ 17 CFR 200.30-3(a)(6) and (9).
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[FR Doc. 2018-01531 Filed 1-26-18; 8:45 am]
BILLING CODE 8011-01-P
