Alert December 09, 2008

OCC Issues Interpretive Letter Concerning the Authority of a National Bank to Join the National Securities Clearing Corporation

In interpretive letter #1102 (“Letter 1102”), the OCC concluded that it is permissible under the National Bank Act (“NBA”) for the foreign branch of a national bank (the “Bank”) to engage in custodial clearing activities as a custodian clearing member (“CCM”) of the National Securities Clearing Corporation Limited (“NSCCL”), subject to lending limits and safety and soundness considerations.  Letter 1102 reasons that the NBA permits national banks and their branches to engage in custodian clearing activities, because clearing activities are functionally consistent with bank permissible credit and financial intermediation activities.  Letter 1102 also confirms that national banks and their foreign branches may contribute to funds and programs to guarantee the potential losses of others, as a condition of NSCCL membership, in order to engage in bank permissible activities, subject to lending limits.  The Bank’s exposure to the NSCCL for the defaults of other members is subject to the lending limit in 12 U.S.C. §84 or any lower limits set by its examiner-in-charge (“EIC”).

Letter 1102 requires that the Bank notify its EIC, in writing, of the proposed activities and receive written notification of the EIC’s supervisory no-objection before becoming an NSCCL member.  The no‑objection will be based on the EIC’s evaluation of the adequacy of the Bank’s risk measurement and management systems and controls to enable the Bank to engage in CCM activities on the NSCCL in a safe and sound manner, and the EIC’s evaluation of any other supervisory considerations relevant to NSCCL membership.