Deutsche Bank Securities Deutsche Bank Securities Inc. 31 West 52nd Street New York NY 10019 Tel. 212 469-5000 July 31, 1998 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: Securities and Exchange Commission File No. S7-12-98 Dear Mr. Katz: Deutsche Bank Securities Inc. ("DBSI") welcomes the opportunity to provide the Securities and Exchange Commission (the "Commission") with comments on its proposed rules regarding the regulation of alternative trading systems, Release No. 34-39884 (63 Fed. Reg. 23504), April 29, 1998 (the "Proposing Release").[1] DBSI generally supports the Commission's efforts to pursue forward- looking regulatory policies that will encourage further development of these systems, and encourages the Commission to continue to adapt its regulations to the technological innovations that increasingly permeate the securities markets. DBSI is a leader in electronic trading. Our interactive electronic trading platform -- AutobahnSM -- provides a fully executable two-sided market for U.S. Treasury securities, TBA ("to be announced") mortgage pass-through securities, and German government securities. The AutobahnSM system is currently made available to DBSI's clients through Bloomberg L.P. via The Bloomberg Electronic Order Routing System. In the United States, DBSI is the sole operator of the AutobahnSM system and is solely responsible for the execution, settlement and clearance of all transactions effected through the system. DBSI has reviewed and fully supports the comment letter filed by The Bond Market Association on July 28, 1998.[2] We write to elaborate on two points: (1) the impact of the Commission's proposed rules on banks, and (2) the impact of proposed Rule 3b- 12(b)(2) on systems that display the quotes of both a broker-dealer and one or more of its affiliates. I. The Commission Should Provide Banks the Same Exclusions and Exemptions from Exchange Regulation as it Has Proposed for Broker-Dealers that Operate Alternative Trading Systems DBSI fully concurs with The Bond Market Association's view that the Commission should not regulate alternative trading systems by expanding the definition of "exchange" and simultaneously exempting many entities from it.[3] In the event that the Commission determines to go forward with its current proposal, however, DBSI strongly urges it to afford banks the same exclusions and exemptions from exchange regulation as it has proposed to provide broker-dealers that operate alternative trading systems. Section 3 of the Securities Exchange Act excludes banks from the statutory definitions of "broker" and "dealer." As the Commission is aware, this exclusion reflects a decision by Congress that the Commission should not have oversight jurisdiction with respect to banks, because banks are already subject to a complex scheme of administrative regulation at the federal and state level.[4] Indeed, the Exchange Act definition of "bank" is carefully tailored such that only those banking institutions that are subject to substantial federal or state regulatory oversight will fall within its scope (and thereby be excluded from regulation as brokers or dealers).[5] Thus, the Commission's authority under the Exchange Act to regulate brokers and dealers has generally been understood not to permit it to supervise the activities of banks.[6] Proposed Rule 3b-12 would fundamentally alter the current regulatory regime by sweeping a number of banks into the newly expanded definition of "exchange." Unlike the broker-dealers that would be brought into the expanded definition, however, the affected banks would be unable to take advantage of the various exemptions and exclusions from exchange regulation that the Commission has proposed, because those exemptions and exclusions are generally limited in their application to "brokers" and "dealers."[7] In DBSI's view, the resulting regulation of banks as securities exchanges would be neither consistent with the policies underlying the Exchange Act nor appropriate in any broader sense. Accordingly, in the event that the Commission determines to expand the definition of "exchange" as it has proposed, DBSI strongly recommends that it afford banks that fall within the Exchange Act definition of that term exclusions and exemptions from regulation comparable to those available to registered broker- dealers.[8] At a minimum, DBSI urges the Commission to consult with the federal agencies responsible for bank regulation before adopting any regulatory requirements that would potentially subject banks to regulation as securities exchanges. II. The Commission Should Amend Proposed Rule 3b-12(b)(2) to Clarify that the Exclusion of Single Dealer Systems from the Definition of "Exchange" Extends to Systems that Display the Quotes of Both a Single Dealer and Its Affiliates DBSI supports the Commission's proposal to exclude from the definition of "exchange" any organization, association, or group of persons that "[d]isplays the quotes of a single dealer and allows persons to enter orders for execution against such dealer's quotes."[9] As a technical matter, however, DBSI believes that the Commission should modify the language of proposed Rule 3b-12(b)(2) so as explicitly to confirm that the term "exchange" does not include an organization, association, or group of persons that "[d]isplays the quotes of a single dealer and its affiliates and allows persons to enter orders for execution against such dealer's or such affiliates' quotes." In the Proposing Release, the Commission notes that a system in which parties enter orders that execute only against a single designated counterparty "would be expressly excluded from proposed Rule 3b-12 under paragraph (b)(2)."[10] This statement and the surrounding discussion confirm that paragraph (b)(2) is consistent with the principle articulated in the Proposing Release that a firm would not be engaged in "exchange" activity if it does not "consolidate orders of multiple parties."[11] In DBSI's view, this principle should also be construed to exclude from "exchange" status systems in which quotes are displayed from both a single dealer and its affiliates.[12] The Proposing Release supports this construction by clarifying that "a system that has multiple sellers, but only one seller for each instrument, and multiple buyers for that instrument would not be considered to meet the `multiple parties' requirement."[13] DBSI believes that it would be useful to supplement this commentary and eliminate any ambiguity by modifying proposed Rule 3b-12(b)(2) as proposed above. * * * * We would be pleased to discuss any of the comments in this letter with the Commission or its staff. If we can be of further assistance to the Commission in this regard, please do not hesitate to contact the undersigned or Marianna Maffucci (212-469-8481). Sincerely yours, Christopher J. Carroll Managing Director **FOOTNOTES** [1]: DBSI, an indirect wholly-owned subsidiary of Deutsche Bank AG, is a Delaware corporation registered with the Commission as a broker-dealer. [2]: See Letter from Christopher J. Carroll and W. Hal Hinkle, Co-Chairs of The Bond Market Association's ATS Task Force, to Jonathan G. Katz, Secretary, Securities and Exchange Commission (July 28, 1998). [3]: See id. at 2-3, 8-12. [4]: American Bankers Ass'n v. SEC, 804 F.3d 739, 744 (D.C. Cir. 1986). [5]: Section 3(a)(6) of the Exchange Act. [6]: See, e.g., American Bankers Ass'n, supra at 755. [7]: See proposed Rules 3b-12(b) (excluding certain "broker-dealer" systems from the definition of "exchange"), 301(a) (exempting certain "broker- dealers" from compliance with substantive alternative trading system regulation) and 301(b)(1) (requiring nonexempt alternative trading systems to register as broker-dealers). As noted above, the terms "broker" and "dealer" in Sections 3(a)(4) and 3(a)(5) of the Exchange Act are each defined to exclude banks. [8]: This would include allowing banks both to take advantage of the various exclusions contained in proposed Rule 3b-12(b) and to qualify as exempt and non-exempt alternative trading systems under proposed Rules 301(a) and (b), respectively. [9]: See Proposing Release, 63 Fed. Reg. at 23,553. [10]: Id. at 23,508 n.29; see also id. at 23,508 & n.30. [11]: Id. at 23,508 n.30. [12]: To the extent that a party wishes to execute a trade against a quote that originated from a broker-dealer's foreign affiliates, DBSI assumes that the trade would, in appropriate cases, be intermediated by the U.S. registered broker-dealer in accordance with Exchange Act Rule 15a- 6. See, e.g., Cleary, Gottlieb, Steen & Hamilton (Apr. 7, 1997). [13]: Proposing Release, 63 Fed. Reg. at 23,508.