Comments of on S7-20-02

State Street Bank and Trust Company
Two International Place
Boston, Massachusetts 02110
Telephone: (617) 664-2500
Facsimile: (617) 664-2660

July 31, 2002

BY ELECTRONIC MAIL

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Release No. 34-46019, File No. S7-20-02, Customer Protection - Reserves and Custody of Securities (Rule 15c3-3)

Dear Mr. Katz:

State Street Bank and Trust Company (State Street) submits this letter in response to the proposed rule amendment (Proposed Amendment) to Rule 15c3-3 of the Securities Exchange Act of 1934 (Exchange Act). The Securities and Exchange Commission (Commission) published the Proposed Amendment for comment in the Federal Register on June 10, 2002. State Street has reviewed the Proposed Amendment in detail and appreciates the opportunity to provide the Commission with its comments.

State Street is a Massachusetts-chartered trust company and a member of the Federal Reserve System. State Street¹ is one of the world's leading specialists in serving mutual funds, collective funds, pension and retirement plans and other large institutional investors worldwide. As of June 30, 2002, State Street² had $6.2 trillion in assets under custody and $770 billion in assets under management, making it the third largest custodian worldwide and the seventh largest investment manager worldwide. State Street is also one of the world's largest securities lending agents, providing comprehensive securities lending services to large, financially sophisticated institutions both in the U.S. and abroad. State Street has participated in securities lending markets on behalf of its clients (State Street Clients)³ since 1974.

State Street strongly supports and welcomes the Proposed Amendment. State Street urges the Commission to issue as soon as possible a final rule and related exemptive order or orders regarding the Proposed Amendment (respectively, Final Rule and Collateral Orders). State Street also supports and welcomes the delegation of the Commission's authority to the Division of Market Regulation (Division) so that the Division may issue Collateral Orders designating the expanded types of collateral that may be pledged by U.S. brokers or dealers (each, a U.S. Broker) when borrowing securities from securities lenders (directly or through their securities lending agents, if applicable). If the Commission's authority is so delegated, State Street requests that the Division act promptly in issuing such Collateral Orders. State Street believes that the prompt issuance of the Final Rule and Collateral Orders will facilitate and promote efficient securities markets, decrease costs, increase competition and enhance the liquidity of securities markets.

State Street requests that the Commission not delay the issuance of the Final Rule or Collateral Orders under any circumstance. However, for the reasons set forth below, State Street urges the Commission to grant, either concurrently with the issuance of the Final Rule or Collateral Orders or on a date in the near future, the authority for any Qualified Institutional Lender (as defined below) to negotiate the types of collateral that may be pledged by U.S. Brokers in any securities lending transaction involving a securities loan by such Qualified Institutional Lender. A "Qualified Institutional Lender," as used in this context, means any institutional securities lender⁴ that either (i) is a qualified institutional buyer (QIB), as that term is defined under Rule 144A promulgated under the Securities Act of 1933 (1933 Act), or (ii) owns and invests on a discretionary basis at least $100 million in eligible securities as specified in Rule 144A of the 1933 Act.⁵

State Street strongly believes that such further relief sought for Qualified Institutional Lenders is warranted because, among other reasons discussed more fully in this response letter, the collateral requirements prescribed by Rule 15c3-3(b)(3)(iii) interfere with the ability of Qualified Institutional Lenders (directly or through their securities lending agents, if applicable) to negotiate for, and accept types of, collateral that would generate more revenue and allow Qualified Institutional Lenders to better manage risk by constructing a portfolio of loans in which the collateral pledged is more closely correlated to the loaned securities.

State Street believes that Qualified Institutional Lenders should be able to make their own judgment as to what is in their best interests and should be able to structure the overall terms of the particular securities lending transactions in the most appropriate fashion without the imposition of an artificial constraint on the types of collateral that they may accept from U.S. Brokers, particularly given the process by which securities lending transactions are effected under State Street's securities lending program (State Street Program) and other comparable institutional securities lending programs. To that end and as discussed more fully in this response letter, State Street believes that the continued imposition of any such collateral requirements on the State Street Clients and other Qualified Institutional Lenders will interfere with the facilitation and promotion of efficient securities markets, increase costs for both the State Street Clients and other Qualified Institutional Lenders and U.S. Brokers, reduce competition, adversely affect the liquidity of securities markets, and result in certain securities lending transactions being shifted off-shore to foreign brokers or dealers.

State Street believes that the Commission can most effectively implement such further relief sought for Qualified Institutional Lenders by amending Rule 15c3-3 to exempt Qualified Institutional Lenders from the collateral requirements prescribed by Rule 15c3-3(b)(3)(iii), or, alternatively, by allowing the Commission's authority to be delegated to the Division so that the Division may issue exemptive orders so exempting Qualified Institutional Lenders (QIL Orders). If the Commission's authority is so delegated, State Street requests that the Division act promptly in issuing such QIL Orders.

I. Overview

This letter responds in detail to the Commission's request for comment as to whether Rule 15c3-3(b)(3)(iii) should limit the types of collateral that may be pledged by U.S. Brokers in borrowing from institutional customers⁶ or whether the collateral should be left to negotiation between the particular institutional customer and U.S. Broker after adequate disclosure. The Commission also requested comments with respect to several related questions in the event the types of collateral were to be subject to negotiation by institutional customers and U.S. Brokers. Before addressing the Commission's specific questions in detail, we have prepared for the Commission's convenience a brief description of the process by which securities lending transactions are effected under the State Street Program, and additional reasons that support the further relief sought for Qualified Institutional Lenders. State Street believes that the process by which securities lending transactions are effected under other institutional securities lending programs generally is comparable to that employed in the State Street Program.

II. State Street Program

Each State Street Client appoints and authorizes State Street, as its agent, to lend on its behalf securities that State Street holds as trustee or custodian⁷ to certain borrowers (each, a Borrower)⁸ in accordance with the terms of the particular State Street Client's agreement with State Street (each, a Securities Lending Authorization Agreement). Each State Street Client also authorizes State Street to enter into one or more securities loan agreements (each, a Securities Loan Agreement) with a Borrower on behalf of the particular State Street Client, subject to certain limitations prescribed in the Securities Lending Authorization Agreement. The Securities Lending Authorization Agreement requires, for example, that (i) a Borrower be an entity identified in the Securities Lending Authorization Agreement and approved by the particular State Street Client; (ii) the collateral to be pledged by a Borrower be of the type approved by the particular State Street Client; and (iii) the market value of the pledged collateral in relation to the market value of the loaned securities satisfies specified minimum levels (generally not less than 100%), as approved by the particular State Street Client. State Street would like to emphasize that the type of collateral pledged by the Borrowers and the minimum collateral coverage level for such type of collateral must be authorized in writing by the State Street Client before State Street will initiate any securities lending transactions using such type of collateral.

Each State Street Client authorizes State Street to negotiate the terms of each Securities Loan Agreement with a Borrower, but subject at all times to the requirements prescribed in the Securities Lending Authorization Agreement between the particular State Street Client and State Street. If, in the context of any securities loan, State Street wishes to act in a manner inconsistent with its Securities Lending Authorization Agreement with a particular State Street Client (for example, by accepting on behalf of the particular State Street Client a type of collateral not previously authorized in writing by that State Street Client), State Street may do so only with the prior written authorization of that State Street Client.

State Street also conducts extensive due diligence on behalf of the State Street Clients with respect to each Borrower both prior to and after lending securities of any of the State Street Clients to the Borrower and imposes certain requirements on the Borrower under the applicable Securities Loan Agreement, including those described above. For example, with respect to any Borrower, State Street (i) conducts ongoing credit analyses to monitor the Borrower's creditworthiness; (ii) establishes and monitors limits on the amount of securities loaned to the Borrower at any particular time; (iii) requires that collateral be transferred to State Street on or prior to the time that securities are transferred to the Borrower; (iv) requires a daily mark to market of all loaned securities; (v) requires the Borrower to transfer additional collateral to State Street for the benefit of the State Street Clients if the minimum specified collateral level is not satisfied; and (vi) requires, if the Borrower is a U.S. Broker, compliance with the Commission's net capital rules. All State Street Clients are currently advised and acknowledge and agree that, if a Borrower is a U.S. Broker, the provisions of the Securities Investors Protection Act of 1970 (SIPA) may not protect the State Street Client with respect to any loan of its securities and that, therefore, the collateral transferred to the State Street Client with respect to such a loan may constitute the only source of satisfaction of the obligation of the U.S. Broker in the event the U.S. Broker fails to retransfer the loaned securities.

For the information of the Commission, we highlight that as a result of this level of due diligence and the protections and processes built into the State Street Program, no State Street Client has ever suffered a loss because of a default by a Borrower of its obligations under the relevant Securities Loan Agreement.

State Street believes that other securities lending agents enter into agreements similar to the Securities Lending Authorization Agreement and the Securities Loan Agreement in respect of Qualified Institutional Lenders that participate in their institutional securities lending programs and the borrowers that borrow securities of such Qualified Institutional Lenders. State Street similarly believes that the level of due diligence conducted by other securities lending agents on behalf of their Qualified Institutional Lenders with respect to such borrowers both prior to and after lending securities of those Qualified Institutional Lenders generally is comparable to the diligence that State Street conducts with respect to Borrowers on behalf of the State Street Clients.

III. Current Rule Impact

Rule 15c3-3(b)(3)(iii) currently dictates the pledge of cash or U.S. government or certain other securities.⁹ This has the tendency to require U.S. Brokers either to acquire qualifying securities or to liquidate other securities for cash or borrow cash which, in turn, results in increased costs that would not otherwise be the case if other securities in the existing inventories of U.S. Brokers could be pledged as collateral. This adversely reduces the profitability of the transaction from the perspective of both the Qualified Institutional Lenders and the U.S. Brokers. To the extent U.S. Brokers can provide collateral that is in their existing inventories or is otherwise less costly from either a capital or expense perspective, then U.S. Brokers will be able to pay Qualified Institutional Lenders a higher fee for borrowing a particular security against that form of pledged collateral. In doing so, this will reduce the costs incurred by U.S. Brokers and enhance the profitability of a transaction for U.S. Brokers, while also increasing the revenue for Qualified Institutional Lenders, and thereby will benefit both parties to the transaction.

In addition, Rule 15c3-3(b)(3)(iii) currently interferes with the ability of the Qualified Institutional Lenders to manage risk. For these large sophisticated institutional securities lenders, an important goal is to create a portfolio of loans that is appropriately matched against the collateral that has been pledged from both risk and return perspectives. This matching process takes into account a variety of factors, including the volatility of not just the collateral pledged but also of the respective loaned securities and the correlation of the expected price movements between the collateral pledged and the loaned securities. By dictating the specific types of eligible collateral, Rule 15c3-3(b)(3)(iii) interferes with this matching process and the ability of the particular Qualified Institutional Lender to achieve the desired correlation necessary to obtain the optimal level of risk and return.

IV. Customer Relationship

State Street believes that the relationship between institutional securities lenders, including Qualified Institutional Lenders, and U.S. Brokers does not represent the typical "customer-broker" relationship contemplated by Rule 15c3-3. Rather, State Street believes that there are persuasive technical and policy reasons for concluding that Qualified Institutional Lenders and other institutional securities lenders that lend their securities to U.S. Brokers should not be deemed to be customers within the meaning of Rule 15c3-3. As a technical matter, Rule 15c3-3(a)(2) defines "securities carried for the account of a customer" or "customer securities" that are entitled to the protections of Rule 15c3-3(b) (including the provisions regarding required collateral for securities borrowing transactions) as (i) "securities received by or on behalf of a broker or dealer for the account of any customer and securities carried long by a broker or dealer for the account of any customer" and (ii) "securities sold to, or bought for, a customer by a broker or dealer." Securities held by a Qualified Institutional Lender or other institutional securities lender, as applicable, for loan to a U.S. Broker are typically held in custody by a bank or trust company. These loans generally are made to allow the U.S. Broker to deliver the loaned securities to a third party (to cover a short sale or a fail transaction) rather than to hold them at the U.S. Broker for the account of the Qualified Institutional Lender or other institutional securities lender, as applicable.¹⁰ Thus, these securities loans do not appear to fall within the literal language of this definition or the intended application of the customer protection provisions of Rule 15c3-3.¹¹

From a policy perspective and consistent with the intent and scope of the language of Rule 15c3-3, Qualified Institutional Lenders and other institutional securities lenders have no reasonable expectation that they will be afforded the protections of Rule 15c3-3. Furthermore, Qualified Institutional Lenders are financially sophisticated, knowledgeable about securities lending transactions and otherwise fully capable of analyzing the risks (which risks State Street believes are quite small in these types of transactions) and rewards associated with securities lending transactions and the types of collateral that may be acceptable to them. In fact, Qualified Institutional Lenders are best suited to select the collateral for the particular securities loan (i.e., selecting collateral that is most closely correlated to the securities loaned from a price movement perspective). Accordingly, while State Street fully recognizes the Commission's desire to address the treatment of securities lenders not otherwise eligible for SIPA and Rule 15c3-3 protections, it is not necessary to impose such collateral requirements on Qualified Institutional Lenders under these circumstances.¹²

State Street believes that the effect of the foregoing is either to unnecessarily deprive the State Street Clients and other Qualified Institutional Lenders of opportunities to loan securities to U.S. Brokers or to otherwise increase the costs of securities lending transactions because of the limitations imposed on collateral that U.S. Brokers may pledge and thereby reduce the overall profitability for both the State Street Clients and other Qualified Institutional Lenders and U.S. Brokers. Also, as noted above, the imposition of these collateral requirements has the tendency to shift a certain number of securities lending transactions off-shore to foreign brokers or dealers.¹³ This, in turn, unnecessarily raises complex cross-border tax issues for the State Street Clients and other Qualified Institutional Lenders.

In conclusion, State Street believes that the collateral requirements prescribed by Rule 15c3-3(b)(3)(iii) frustrate competition, undercut the efficiency of securities markets, increase borrowing costs, reduce the profitability of the securities lending transaction for both parties, decrease the liquidity of securities markets and may, by causing certain securities lending transactions to be shifted off-shore, expose the State Street Clients and other Qualified Institutional Lenders to greater risks than would otherwise be the case if they could effect such transactions with U.S. Brokers.

V. Additional Support for Qualified Institutional Lender Exemption

In addition to the foregoing, State Street believes that there is ample justification to support a determination by the Commission that the collateral requirements prescribed by Rule 15c3-3(b)(3)(iii) should not apply to the State Street Clients and other Qualified Institutional Lenders and thus to exempt such Qualified Institutional Lenders from those requirements. State Street urges the Commission to consider each of the following factors in determining that such an exemption is warranted for Qualified Institutional Lenders:

(i) The Commission has elsewhere determined, by rule, that the protections afforded by other Commission rules are not appropriate for, and thus has specifically exempted from their coverage, certain categories of investors based on their financial sophistication and large size. See, for example, QIBs under Rule 144A of the 1933 Act, "qualified investors" under the Exchange Act and "qualified purchasers" under Section 3(c)(7) of the Investment Company Act of 1940.

(ii) The State Street Clients are financially sophisticated and knowledgeable about securities lending transactions, and they, in conjunction with State Street, are fully capable of analyzing the types of collateral that the Borrowers may pledge in borrowing securities from them and assessing what is in their best interests from both risk and return perspectives. State Street believes that this is also the case with respect to other Qualified Institutional Lenders.

(iii) The terms of the Securities Lending Authorization Agreements and the overall process by which securities lending transactions are effected under the State Street Program provide considerable protections to the State Street Clients. State Street believes that this is also the case with respect to securities loans effected by other securities lending agents for other Qualified Institutional Lenders that participate in their institutional securities lending programs.

VI. Responses to the Commission's Specific Questions

Although we have addressed in part some of the specific questions raised by the Commission in its issuance of the Proposed Amendment, the following responses address the specific questions raised by the Commission on this aspect of the Proposed Amendment:

(i) Whether Rule 15c3-3(b)(3)(iii) should limit the types of collateral that must be supplied by U.S. Brokers in borrowing from an institutional customer or whether the collateral should be left to negotiation between a particular institutional customer and U.S. Broker after adequate disclosure?

For the reasons discussed above, State Street believes that, in the context of securities loans from a Qualified Institutional Lender, the collateral should be left to negotiation between the particular Qualified Institutional Lender (directly or through its securities lending agent, if applicable) and the U.S. Broker after adequate disclosure. State Street believes that this approach is in the public interest, is entirely consistent with and will further carry out the Commission's goals of adding liquidity to the securities markets and lowering borrowing costs for U.S. Brokers, will benefit the State Street Clients and other Qualified Institutional Lenders by providing them with additional lending opportunities and the resulting associated additional revenue and will promote more efficient securities markets and reduce the overall costs in connection with securities lending transactions for the benefit of both these securities lenders and borrowers. This approach will also reduce the number of securities lending transactions that would otherwise be shifted off-shore to foreign brokers or dealers.

(ii) If the latter, should the ability to negotiate collateral be limited to a certain category of institutional customers?

Yes, the ability to negotiate collateral should be limited to Qualified Institutional Lenders because, among other reasons, Qualified Institutional Lenders, in conjunction with their securities lending agents, if applicable, are fully capable of analyzing the types of collateral that U.S. Brokers may pledge in borrowing securities from Qualified Institutional Lenders and assessing what is in their best interests from both risk and return perspectives.¹⁴

(iii) How should the Commission define this category?

Please see the definition of Qualified Institutional Lender, as described more fully above.

(iv) What disclosures would be necessary if the collateral were left to negotiation?

State Street does not believe that additional disclosure requirements are necessary. This is because a State Street Client and State Street would discuss and agree upon the types of collateral that may be acceptable to the particular State Street Client. As discussed more fully above, State Street, as the particular State Street Client's agent, cannot accept any type of collateral that is not authorized in writing by that State Street Client. State Street believes that other Qualified Institutional Lenders and their securities lending agents would engage in similar discussions and analyses and implement similar procedures.

(v) Should there be any required minimum amount of collateral to protect the institutional customer and the U.S. Broker?

A minimum amount is not necessary in State Street's judgment; however, as an administrative matter and consistent with the current practice of State Street and other securities lending agents and certain requirements prescribed by provisions of the Code,¹⁵ requiring collateral under revised Rule 15c3-3(b)(3)(iii) with a market value of at least 100% of the market value of the securities loaned would be entirely acceptable to State Street.

***

In sum, State Street respectfully urges the Commission to issue as soon as possible the Final Rule and Collateral Orders. State Street welcomes the delegation of the Commission's authority to the Division so that the Division may issue Collateral Orders designating the expanded types of collateral that may be pledged by U.S. Brokers when borrowing securities from securities lenders (directly or through their securities lending agents, if applicable). By doing so, State Street believes that efficient securities markets will be facilitated and promoted, costs will be decreased, competition will be increased and the liquidity of securities markets will be enhanced.

State Street similarly urges the Commission to implement the further relief sought for Qualified Institutional Lenders,¹⁶ either concurrently with the issuance of the Final Rule or Collateral Orders or on a date in the near future. State Street requests that the Commission do so either by amending Rule 15c3-3 to exempt Qualified Institutional Lenders from the collateral requirements prescribed by Rule 15c3-3(b)(3)(iii), or, alternatively, by allowing the Commission's authority to be delegated to the Division so that the Division may issue QIL Orders. By doing so, the Commission will afford Qualified Institutional Lenders, acting directly or through their securities lending agents, the ability to negotiate the appropriate types and level of collateral with U.S. Brokers. If Rule 15c3-3(b)(3)(iii) is left unchanged in this regard, there will continue to be inefficiencies in the securities markets and higher costs in securities lending transactions and U.S. Brokers and the State Street Clients and other Qualified Institutional Lenders will continue to be placed at a significant competitive disadvantage.

In the event that the Commission's authority is delegated, either with respect to Collateral Orders or QIL Orders, State Street requests that the Division act promptly in issuing such Collateral Orders or QIL Orders.

State Street appreciates the opportunity to comment on the Proposed Amendment and to seek further relief for Qualified Institutional Lenders. State Street would be pleased to respond to any questions that the staff of the Commission may have.

Very truly yours,

/s/ Michael P. McAuley

Michael P. McAuley
Vice President
Global Securities Lending

cc: Annette Nazareth, Director, Division of Market Regulation
Michael Macchiaroli, Associate Director, Division of Market Regulation
Randall W. Roy, Special Counsel, Division of Market Regulation
Securities and Exchange Commission
Maureen S. Bateman, Executive Vice President and General Counsel
Charles C. Cutrell, Senior Vice President and Associate General Counsel
Scott M. Sefton, Vice President and Managing Counsel
State Street Bank and Trust Company

______________________________

¹ Any reference to State Street in this sentence includes State Street's affiliated companies on a worldwide basis.
² Id.
³ The State Street Clients are comprised of a diverse group of large, sophisticated institutions, including registered investment companies, foreign entities, public and private employee benefit plans, charitable foundations and endowment funds.
⁴ Natural persons would not qualify as Qualified Institutional Lenders in any event.
⁵ For example, a large foreign public charity that does not qualify as an organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (Code), or does not fall within any other category listed in Rule 144A would nevertheless qualify under this subclause (ii). This subclause (ii) is not intended to circumvent or otherwise alter any other requirements or limitations applicable to an entity that is a QIB because it falls within one of the categories of eligible entities specified in Rule 144A. For example, foreign banks must have an audited net worth of at least $25 million as specified in Rule 144A(a)(1)(vi) and a trust fund subject to Rule 144A(a)(1)(i)(F) may not include the assets of individual retirement accounts or H.R. 10 plans as specified in Rule 144A(a)(1)(i)(F).
⁶ For the reasons discussed more fully below, State Street believes that Qualified Institutional Lenders should not be deemed "customers" for purposes of Rule 15c3-3.
⁷ State Street also provides third party (non-custodial) lending services in which State Street acts as lending agent for those State Street Clients, the assets of which are held in the custody of other global custodians.
⁸ The Borrowers that borrow securities of the State Street Clients are principally U.S. and foreign banks, foreign brokers and dealers and U.S. Brokers that typically borrow securities to cover failed trades, effect short sales and complete other similar transactions. The Borrowers do not have any discretion or control in any event over the types of securities of any State Street Client that may be loaned to them.
⁹ Under the provisions of Rule 15c3-3(b)(3)(iii), cash and U.S. Treasury notes and Treasury bills constitute eligible collateral; however, other securities are also permissible based upon interpretive guidance from the staff of the Commission with respect to Rule 15c3-3(b)(3)(iii). See NYSE Interpretation Handbook, Interpretation /01 to Rule 15c3-3(b)(3). See also Public Securities Association (available March 2, 1989). Irrevocable letters of credit issued by banks also are permissible collateral under Rule 15c3-3; however, they generally are not used as collateral for a variety of reasons, the most compelling of which is the costs Borrowers typically incur with respect to the provision of such collateral.
¹⁰ The Exchange Act Release No. 46,019 (May 31, 2002), Fed. Reg. 39,642 (June 10, 2002) notes that Rule 15c3-3 "requires broker-dealers to take steps to protect the securities that customers leave in their custody" (emphasis added). In the case of securities borrowed from a Qualified Institutional Lender or other institutional securities lender that has established a separate custodial relationship with a bank or trust company, it would seem counterintuitive to view the U.S. Broker (which generally will use the borrowed securities to satisfy a delivery obligation) as the customer's custodian. We note that Regulation T, as promulgated by the Board of Governors of the Federal Reserve System, permits U.S. Brokers to borrow securities subject to the provisions of Regulation T without complying with the provisions of Regulation T if such borrowings are "for the purpose of making delivery of the securities in the case of short sales, failure to receive securities required to be delivered, or other similar situations." See 12 C.F.R. § 220.10(a).
¹¹ U.S. Brokers have no discretion or control over the decision by the institutional securities lender to lend securities and are subject to the terms of a securities loan agreement, which imposes significant obligations on the borrowing U.S. Brokers. (Please see Section II for a discussion about the Securities Loan Agreement between State Street, as agent for the State Street Clients, and the Borrowers.) The negotiation of the terms of these securities loan agreements, including the eligible types of collateral that may be pledged, are conducted on an arms' length basis and involve parties that are sophisticated in securities markets and related transactions.
¹² The Commission may also determine that it similarly is not necessary to impose collateral requirements on other institutional securities lenders in light of (i) the unique nature of the relationship between U.S. Brokers and other institutional securities lenders in the context of securities lending transactions, (ii) the overall level of sophistication of institutional securities lenders and (iii) the lack of any expectation by institutional securities lenders of any protections under Rule 15c3-3.
¹³ It is State Street's understanding that brokers and dealers in the United Kingdom and most of the European securities lending markets generally are not subject to rules comparable to Rule 15c3-3(b)(3)(iii); thus, these foreign brokers and dealers may pledge as collateral a wide variety of securities that are not currently permitted under Rule 15c3-3(b)(3)(iii) and current interpretive guidance from the staff of the Commission with respect to Rule 15c3-3(b)(3)(iii).
¹⁴ The Commission may also determine that it similarly is not necessary to impose collateral requirements on other institutional securities lenders for the reasons discussed elsewhere in this response letter.
¹⁵ These Code provisions apply to securities lenders that are tax-exempt and therefore potentially subject to unrelated business taxable income (UBTI). See Sections 512(a)(5) and 514(c)(8) of the Code, which provide a safe harbor from UBTI for securities lending income if certain conditions are satisfied, including posting collateral equal to at least 100% of the market value of the loaned securities.
¹⁶ As noted above, the Commission may determine that the further relief sought for Qualified Institutional Lenders is also appropriate for other institutional securities lenders in the context of securities lending transactions.

¹	Any reference to State Street in this sentence includes State Street's affiliated companies on a worldwide basis.
²	Id.
³	The State Street Clients are comprised of a diverse group of large, sophisticated institutions, including registered investment companies, foreign entities, public and private employee benefit plans, charitable foundations and endowment funds.
⁴	Natural persons would not qualify as Qualified Institutional Lenders in any event.
⁵	For example, a large foreign public charity that does not qualify as an organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (Code), or does not fall within any other category listed in Rule 144A would nevertheless qualify under this subclause (ii). This subclause (ii) is not intended to circumvent or otherwise alter any other requirements or limitations applicable to an entity that is a QIB because it falls within one of the categories of eligible entities specified in Rule 144A. For example, foreign banks must have an audited net worth of at least $25 million as specified in Rule 144A(a)(1)(vi) and a trust fund subject to Rule 144A(a)(1)(i)(F) may not include the assets of individual retirement accounts or H.R. 10 plans as specified in Rule 144A(a)(1)(i)(F).
⁶	For the reasons discussed more fully below, State Street believes that Qualified Institutional Lenders should not be deemed "customers" for purposes of Rule 15c3-3.
⁷	State Street also provides third party (non-custodial) lending services in which State Street acts as lending agent for those State Street Clients, the assets of which are held in the custody of other global custodians.
⁸	The Borrowers that borrow securities of the State Street Clients are principally U.S. and foreign banks, foreign brokers and dealers and U.S. Brokers that typically borrow securities to cover failed trades, effect short sales and complete other similar transactions. The Borrowers do not have any discretion or control in any event over the types of securities of any State Street Client that may be loaned to them.
⁹	Under the provisions of Rule 15c3-3(b)(3)(iii), cash and U.S. Treasury notes and Treasury bills constitute eligible collateral; however, other securities are also permissible based upon interpretive guidance from the staff of the Commission with respect to Rule 15c3-3(b)(3)(iii). See NYSE Interpretation Handbook, Interpretation /01 to Rule 15c3-3(b)(3). See also Public Securities Association (available March 2, 1989). Irrevocable letters of credit issued by banks also are permissible collateral under Rule 15c3-3; however, they generally are not used as collateral for a variety of reasons, the most compelling of which is the costs Borrowers typically incur with respect to the provision of such collateral.
¹⁰	The Exchange Act Release No. 46,019 (May 31, 2002), Fed. Reg. 39,642 (June 10, 2002) notes that Rule 15c3-3 "requires broker-dealers to take steps to protect the securities that customers leave in their custody" (emphasis added). In the case of securities borrowed from a Qualified Institutional Lender or other institutional securities lender that has established a separate custodial relationship with a bank or trust company, it would seem counterintuitive to view the U.S. Broker (which generally will use the borrowed securities to satisfy a delivery obligation) as the customer's custodian. We note that Regulation T, as promulgated by the Board of Governors of the Federal Reserve System, permits U.S. Brokers to borrow securities subject to the provisions of Regulation T without complying with the provisions of Regulation T if such borrowings are "for the purpose of making delivery of the securities in the case of short sales, failure to receive securities required to be delivered, or other similar situations." See 12 C.F.R. § 220.10(a).
¹¹	U.S. Brokers have no discretion or control over the decision by the institutional securities lender to lend securities and are subject to the terms of a securities loan agreement, which imposes significant obligations on the borrowing U.S. Brokers. (Please see Section II for a discussion about the Securities Loan Agreement between State Street, as agent for the State Street Clients, and the Borrowers.) The negotiation of the terms of these securities loan agreements, including the eligible types of collateral that may be pledged, are conducted on an arms' length basis and involve parties that are sophisticated in securities markets and related transactions.
¹²	The Commission may also determine that it similarly is not necessary to impose collateral requirements on other institutional securities lenders in light of (i) the unique nature of the relationship between U.S. Brokers and other institutional securities lenders in the context of securities lending transactions, (ii) the overall level of sophistication of institutional securities lenders and (iii) the lack of any expectation by institutional securities lenders of any protections under Rule 15c3-3.
¹³	It is State Street's understanding that brokers and dealers in the United Kingdom and most of the European securities lending markets generally are not subject to rules comparable to Rule 15c3-3(b)(3)(iii); thus, these foreign brokers and dealers may pledge as collateral a wide variety of securities that are not currently permitted under Rule 15c3-3(b)(3)(iii) and current interpretive guidance from the staff of the Commission with respect to Rule 15c3-3(b)(3)(iii).
¹⁴	The Commission may also determine that it similarly is not necessary to impose collateral requirements on other institutional securities lenders for the reasons discussed elsewhere in this response letter.
¹⁵	These Code provisions apply to securities lenders that are tax-exempt and therefore potentially subject to unrelated business taxable income (UBTI). See Sections 512(a)(5) and 514(c)(8) of the Code, which provide a safe harbor from UBTI for securities lending income if certain conditions are satisfied, including posting collateral equal to at least 100% of the market value of the loaned securities.
¹⁶	As noted above, the Commission may determine that the further relief sought for Qualified Institutional Lenders is also appropriate for other institutional securities lenders in the context of securities lending transactions.