Magazine article American Banker

Brokered CD Rule Hurts Secondary Sales, Merrill Says

Magazine article American Banker

Brokered CD Rule Hurts Secondary Sales, Merrill Says

Article excerpt

WASHINGTON -- New federal rules on brokered certificates of deposit are causing "disruption and confusion" in the secondary market for insured CDs, Merrill Lynch & Co. has argued on U.S. District Court for the District of Columbia.

Merrill's remarks are contained in a new brief from the Securities Industry Association, filed Monday in support of the lawsuit it brought last week against the Fedeeral Deposit Insurance Corp. and the Federal Home Loan Bank Board.

The trade group is asking the court to stop the rules from going into effect until at least six months after the case is decided. As of Oct. 1, the FDIC and Bank Board rules limit to $100,000 the amount any broker can funnel to one institution.

Part of the appeal of the brokered CDs for Merrill Lynch customers has been the readiness of the firm to buy back the CDs as part of its secondary market trading in the instruments. This market, a Merrill official charged, already is suffering because of the rules.

Merrill Lynch, Pierce, Fenner & Smith vice president Edwin H. Hall Jr. said the rules provide that CDs outstanding on March 26, if rolled over between Oct. 1, 1984, and Oct. 1, 1986, will remain insured only if still held by the purchaser of record in March.

"Since these instruments could only be traded in a secondary market as uninsured instruments, it is unlikely there will be such a secondary market," Mr. Hall told the court. Without such trading, he added, "the liquidity of such CDs will be drastically reduced."

Mr. Hall said the situation in the secondary market is further confused by the fact that CDs purchased before Oct. 1 will remain insured through maturity and can continue to be sold in the secondary market.

The problems with secondary market trading were only some of many damages the FDIC and Bank Board rules will inflict on the securities industry, financial institutions, and the investing public, SIA and Merrill told the court. …

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