NYSBL 96(1) and 200
October 5, 2005
Michael M. Wiseman, Esq.
Sullivan & Cromwell LLP
New York , NY 10004-2498
Dear Mr. Wiseman:
This responds to your letter dated February 11, 2005 ("February 11 Letter") in which you seek the Banking Department's ("Department's") non-objection on behalf of your client, The Bank of New York ("Bank"), with respect to the issuance and sale by the Bank of debt instruments in the form of deposits and notes linked to individual equity securities and equity baskets.1
The Bank plans to issue customer-driven debt instruments in the form of deposits and notes, the returns of which are based on various rates and indices, including individual equity securities, equity indices and equity baskets. The depositors or noteholders generally will have the contractual right (a) to receive interest (if any) based on the performance of the reference equity prices, indices or baskets, and (b) to the return of principal at maturity. All deposits and notes will be cash-settled. Deposits offered to retail investors will be principal protected. Deposits and notes offered to institutional investors may include a portion of principal which is at risk.
The Bank intends to disclose the risks and terms of the deposits and notes to investors. Deposits will be documented in substantially the same manner set forth in the Bank's 1997 equity-linked deposit fact sheet; notes will be issued under the Bank's existing global notes program with a pricing supplement or under substantially similar documentation.
The Bank will hedge equity exposure from these deposits and notes by entering into equity derivatives or by transacting in the underlying security or in exchange-traded contracts on such securities, as permitted in the 2003 Approval Letter.2 Payment of principal or interest (if any) will not be affected by the performance of the hedging activities of the Bank.
As you note in your February 11 Letter, the Department took a no-objection position with respect to the issuance and sale by the Bank of debt instruments in the form of deposits and notes linked to certain equity indices. (See Letter dated December 24, 2004 from Sara Kelsey to Michael Wiseman of Sullivan & Cromwell). The current request differs from the earlier request relating to Bank-issued notes only in that it seeks clarification that the Department will not object to the Bank issuing debt instruments in the form of deposits and notes linked to individual equity securities and equity baskets.
Your February 11 Letter cites various Department and Office of the Comptroller of the Currency precedents, including the Department's 2003 Approval Letter, to support the position that the issuance by a New York bank of equity-linked deposits and notes is permissible under both New York and federal banking law. We will not repeat the entire analysis here. Much of the analysis consisted of the same reasoning employed by the Bank and adopted by the Department in the 2003 Approval Letter concerning why the equity-related activities should not be viewed as prohibited equity investments under New York Banking Law or the federal Glass-Steagall Act. You assert that the fact that the proposed deposits and notes may be linked to individual equity securities and equity baskets, rather than a broad index, should not affect the conclusion that the issuance of such deposits and notes is permissible for the Bank. We concur with your assertion, and interpose no objection to the Bank engaging in these activities.
We trust that the foregoing is helpful.
Sara A. Kelsey
Deputy Superintendent and Counsel
1 A second request was made in the February 11 Letter relating to a modification of a condition to the Department's approval of the Bank's equity derivatives activities granted in a letter dated April 25, 2003 from Deputy Superintendent and Counsel Sara Kelsey to Marcia Wallace, Esq. of the Bank ("2003 Approval Letter"). The Bank's second request is still under review and will be addressed separately by the Department.
2 Although the February 11 Letter originally proposed that the Bank will hedge the equity exposure from these deposits and notes "by entering into equity derivatives transactions with unaffiliated parties as permitted under the 2003 Approval Letter or by transacting in the underlying security or in listed contracts on such securities," in our subsequent conversations with you, we clarified that hedging activities by the Bank were not restricted in the 2003 Approval Letter to hedging transactions with unaffiliated parties. The 2003 Approval Letter contemplated that the Bank would hedge permissible equity derivatives transactions by engaging in equity derivatives transactions or by purchasing equities, either simultaneously or contemporaneously with the underlying equity derivative transaction, and either on a matched or portfolio basis. The Letter further stated that the Department would not consider a transaction to be properly hedged if the Bank's hedge transaction was with (1) the customer (or a consolidated entity thereof) with which the Bank conducted the underlying derivative transaction; or (2) the Bank's SPV or SPE or with a subsidiary of the Bank that is consolidated (using GAAP) on the Bank's balance sheet, unless that subsidiary, in turn, simultaneously or contemporaneously hedges the transaction with an entity not consolidated on the Bank's balance sheet.