Note 13. Regulatory Requirements and Dividend Restrictions
Certain U.S. and non-U.S. subsidiaries are subject to various securities, banking and insurance regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. Merrill Lynch's principal regulated subsidiaries are discussed below.Securities Regulation
MLPF&S, a U.S. registered broker-dealer, is subject to the net capital requirements of Rule 15c3-1 under the Securities Exchange Act of 1934. Under the alternative method permitted by this rule, the minimum required net capital, as defined, shall not be less than 2% of aggregate debit items arising from customer transactions. At December 29, 2000, MLPF&S's regulatory net capital of $2,898 million was approximately 12% of aggregate debit items, and its regulatory net capital in excess of the minimum required was $2,420 million.MLI, a U.K. registered broker-dealer, is subject to capital requirements of the Financial Services Authority ("FSA"). Financial resources, as defined, must exceed the total financial resources requirement of the FSA. At December 29, 2000, MLI's financial resources were $4,708 million, exceeding the minimum requirement by $883 million.
MLGSI, a primary dealer in U.S. Government securities, is subject to the capital adequacy requirements of the Government Securities Act of 1986. This rule requires dealers to maintain liquid capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At December 29, 2000, MLGSI's liquid capital of $1,468 million was 271% of its total market and credit risk, and liquid capital in excess of the minimum required was $818 million.
Banking Regulation
Two of the direct subsidiaries of ML & Co., MLBUSA, an FDIC-insured Utah chartered depository institution, and MLB&T, an FDIC-insured New Jersey chartered depository institution, are each subject to certain minimum aggregate capital requirements under applicable federal banking laws. Among other things, Part 325 of the FDIC regulations establishes levels of Risk Based Capital ("RBC") each institution must maintain. RBC is defined as the ratios of (i) Tier I capital or Total capital to (ii) risk-weighted assets, as those terms are defined in the FDIC regulations. As of December 29, 2000, MLBUSA had a Tier I RBC ratio of 10.60% and a total RBC ratio of 10.79% and MLB&T had a Tier I RBC ratio of 10.26% and a total RBC ratio of 10.28%. At December 29, 2000 MLBUSA had Tier I capital of $3,017 million and MLB&T had Tier I capital of $841 million.MLBUSA and MLB&T have each entered into a synthetic securitization of specified reference portfolios of asset-backed securities ("ABS") owned by each institution totaling in aggregate up to $20 billion. These ABS are AAA-rated and all are further insured as to principal and interest payments by a AAA-rated insurer. The synthetic securitization has allowed MLBUSA and MLB&T to reduce the credit risk on the respective reference portfolios by means of credit default swaps with a bankruptcy-remote special purpose vehicle ("SPV"). In turn, the SPV has issued a $20 million credit linked note to an unaffiliated buyer. These transactions have resulted in reductions in each institution's risk-weighted assets. MLBUSA has retained a first risk of loss equity tranche in this transaction of $1 million.
As a result of this transaction, MLBUSA has been able to reduce risk-weighted assets by $5,949 million at December 29, 2000, thereby increasing its Tier I and Total RBC ratios by 183 basis points and 186 basis points, respectively. MLB&T has been able to reduce risk-weighted assets by $2,815 million at December 29, 2000, thereby increasing its Tier I and Total RBC ratios by 262 basis points and 263 basis points, respectively. These structures have not resulted in a material change in the distribution or concentration of risk in the retained portfolio.
Insurance Regulation
Merrill Lynch's insurance subsidiaries are subject to various regulatory restrictions that limit the amount available for distribution as dividends. At December 29, 2000, $497 million, representing 84% of the insurance subsidiaries' net assets, was unavailable for distribution to Merrill Lynch.Other
Approximately 80 other subsidiaries are subject to regulatory and other requirements of the jurisdictions in which they operate. These regulatory restrictions may limit the amounts that these subsidiaries can pay in dividends or advance to Merrill Lynch. At December 29, 2000, restricted net assets of these subsidiaries were $5.6 billion.In addition, to satisfy rating agency standards, a credit intermediary subsidiary of Merrill Lynch must also meet certain minimum capital requirements. At December 29, 2000, this minimum capital requirement was $354 million.
With the exception of regulatory restrictions on subsidiaries' abilities to pay dividends, there are no restrictions on ML & Co.'s present ability to pay dividends on common stock, other than (1) ML & Co.'s obligation to make payments on its preferred stock and TOPrS, and (2) the governing provisions of the Delaware General Corporation Law.
