[Federal Register Volume 62, Number 132 (Thursday, July 10, 1997)]
[Notices]
[Pages 37093-37104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17987]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38810; International Series Release No. 1090; File No. 
600-30]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Notice of Filing of Application for Registration as a 
Clearing Agency

July 1, 1997.

I. Introduction

    On May 30, 1997, the Emerging Markets Clearing Corporation 
(``EMCC'') filed with the Securities and Exchange Commission 
(``Commission'') an application on Form CA-1 for registration as a 
clearing agency pursuant to Section 17A of the Securities Exchange Act 
of 1934 (``Exchange Act'') \1\ and Rule 17Ab2-1 thereunder \2\ in order 
to perform the functions of a clearing agency with respect to 
transactions in U.S. dollar-denominated Brady bonds.\3\ The Commission 
is publishing this notice to solicit comments from interested 
persons.\4\ Comments are solicited on all aspects of the EMCC 
application, and in particular the matters discussed in Section IV of 
this notice.
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    \1\ 15 U.S.C. 78q-1.
    \2\ 17 CFR 240.17Ab2-1.
    \3\ On June 2, 1997, and June 17, 1997, EMCC filed amendments to 
its application. Copies of the application are available for 
inspection and copying at the Commisison's Public Reference Room
    \4\ The description set forth in this notice regarding the 
structure and operations of EMCC have been largely derived from 
information contained in EMCC's Form CA-1 application and publicly 
available sources.
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II. Structure of the EMCC System

    EMCC is a corporation organized under the laws of the State of New 
York. EMCC was formed by the Emerging Markets Traders Association 
(``EMTA'') and the International Securities Clearing Corporation 
(``ISCC'') in response to an industry initiative to reduce risk in the 
clearance and settlement of emerging markets debt instruments.
    Initially, EMCC will be owned by EMTA, the National Securities 
Clearing Corporation (``NSCC''), and the International Securities 
Markets Association (``ISMA''). EMTA will be issued 300 shares (37.5% 
of the outstanding shares), NSCC will be issued 300 shares (37.5% of 
the outstanding shares), and ISMA will be issued 200 shares (25% of the 
outstanding shares).\5\
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    \5\ After the initial issuance of shares to EMTA, NSCC, and 
ISMA, EMCC intends to issue shares to persons that have contributed 
to the EMCC development fund and to finance EMCC's initial 
operations in such amounts and at such time as determined by EMCC. 
EMCC intends to issue shares no later than June 30, 1998. EMCC will 
file a proposed rule change prior to any such issuances.
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    EMTA is a trade association organized as a New York not-for-profit 
corporation in 1990 by financial institutions to promote the orderly 
development of trading markets in emerging market instruments. As of 
the end of 1996, EMTA had 154 members, which were mainly broker-dealers 
and banks. EMTA had 154 members, which were mainly broker-dealers and 
bankers. EMTA owns 100% of the outstanding voting securities of EMTA 
Black, Inc. EMTA Black, Inc. in turn owns 100% of the outstanding 
voting securities of each of Clear-EM, Inc., Match-EM, Inc., and Net-
Em, Inc. Match-EM, Inc. is the owner of Match-EM, which is an 
electronic post-trade confirmation and matching system for Brady bonds 
and sovereign loans operated by GE Information Services, Inc. (``GE''). 
Match-EM also enables EMTA to disseminate daily market volume and price 
data. Match-EM began services in May 1995.
    ISMA is an industry association composed of member broker-dealer 
firms. ISMA has approximately 820 members in 48 countries. ISMA is 
organized under the laws of Switzerland and is registered in the United 
Kingdom (``U.K.'') as a designated investment exchange. ISMA owns TRAX, 
a trade matching and reporting system started in 1989. U.K. broker-
dealers can use TRAX to fulfill their U.K. reporting requirements. 
ISMA's wholly-owned subsidiary, International Securities Market 
Association Limited (``ISMA Ltd.''), operates TRAX.
    NSCC is a clearing agency registered under Section 17A of the 
Exchange Act.\6\ NSCC is owned by the New York Stock Exchange, Inc., 
the American Stock Exchange, Inc., and the National

[[Page 37094]]

Association of Securities Dealers, Inc. NSCC is the parent corporation 
of ISCC, which is also registered as a clearing agency under the 
Exchange Act.\7\
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    \6\ See Securities Exchange Act Release No. 20221 (September 23, 
1983), 48 FR 45167 (order approving full registration of NSCC as a 
clearing agency.
    \7\ See Securities Exchange Act Release No. 26812 (May 12, 
1989), 54 FR 21691 (order approving temporary registration of ISCC 
as a clearing agency). ISCC continues to operate under its temporary 
registration. Securities Exchange Act Release No. 38703 (May 30, 
1997), 62 FR 31183.
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III. Description of EMCC Operations

    EMCC is being established as a clearing agency initially to 
facilitates the clearance and settlement of transactions in U.S. 
dollar-denominated Brady bonds.\8\ Currently, Brady bonds are settled 
through the facilities of Cedel Bank, Societe anonyme (``Cedel'') and 
the Euroclear system, which is operated by the Brussels Office of 
Morgan Guaranty Trust Company of New York (``Euroclear'').\9\ As more 
fully described below, EMCC will facilities the settlement of Brady 
bonds at Cedel and Euroclear (``depositories'').
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    \8\ Brady bonds were first issued pursuant to a plan developed 
by then U.S. Treasury Secretary Nicholas Brady to assist debt-ridden 
countries restructure their sovereign debt into commercially 
marketable securities. The plan provided for the exchange of bank 
loans for collateralized debt securities as part of an 
internationally supported sovereign debt restructuring. Typically, 
the collateral would be U.S. Treasury securities. The first Brady 
bonds were issued in 1990 for Mexico. Later securities that did not 
strictly adhere to the terms of the plan (e.g., such securities may 
not have been collateralized) were also referred to as Brady bonds.
    The definition of Brady bonds used to denote securities that 
will be eligible for processing by EMCC will be somewhat broader 
than the traditional usage of the term. As defined in EMCC's rules, 
Brady bonds are: (i) any bond or note issued in connection with the 
restructuring of indebtedness by a sovereign or an agency or entity 
thereof under the auspices of the Brady plan or under any similar 
restructuring or financing plan whether or not collateralized and 
including bonds or notes issued in exchange thereof or (ii) any 
warrant or similar right originally issued attached to a Brady bond. 
The term does not include securities offered by a sovereign debtor 
to investors through normal underwriting syndication channels.
    EMCC intends to offer clearance and settlement services for 
other emerging markets debt instruments in the future. EMCC will 
file proposed rule changes with the Commission prior to expanding 
the categories of securities eligible for processing at EMCC.
    \9\ For a description of Cedel, see Securities Exchange Act 
Release No. 38328 (February 24, 1997), 62 FR 9225 (order approving 
application for limited exemption from registration as a clearing 
agency). For a description of Euroclear, see Securities Exchange Act 
Release No. 38589 (May 9, 1997), 62 FR 26833 (notice of application 
for limited exemption from registration as a clearing agency).
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A. Clearance Services

    Brady bonds are traded in an over-the-counter market composed of 
dealers and interdealer brokers where trading is either directly 
between dealers or between dealers through interdealer brokers. 
Generally, Brady bonds that have warrants associated with them are 
traded to include the warrants. In order to participate in EMCC, 
dealers and interdealer brokers will need to submit transaction data to 
a locked-in trade source which will match such data using its own 
criteria. Initially, the locked-in trade sources designated by EMCC 
will be Match-EM and TRAX.
    Upon completion of the matching process, each locked-in trade 
source will submit all of its transaction data to EMCC regardless of 
whether the counterparties are EMCC members. EMCC will then segregate 
all data on trades between two EMCC members to input into EMCC system. 
As a result, all EMCC members that decide to use Match-EM or TRAX as a 
part of their normal trading process will be locked into settlement at 
EMCC and will be unable to select an alternative settlement process. 
While EMCC members will be able to delete their trades from EMCC's 
clearance system by submitting cancellation instructions through the 
locked-in trade source, such action may result in the trade legally 
being considered cancelled (i.e., the members would be required to 
reconfirm such trades outside of TRAX or Match-EM and therefore would 
not receive the benefit of using TRAX's or Match-EM's automated 
confirmation system).
    EMCC will receive data from the locked-in trade sources three times 
each business day: (1) At approximately 8:30 a.m. eastern time (``ET'') 
(``early morning transmission''), (2) at approximately 11:30 a.m. ET 
(``early midmorning transmission''), and (3) at approximately 9:30 p.m. 
ET (``evening transmission''). EMCC will review such data to determine 
whether it meets EMCC's and the depositories' operational parameters 
and will reject trades that do not meet such parameters.\10\ At 
approximately 10:30 a.m. ET and 11:30 p.m. ET, EMCC will send out to 
its members and to the locked-in trade sources a report of data that 
was rejected because it did not meet the operational parameters. Any 
correction or cancellation of data must be done through the locked-in 
trade sources.\11\
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    \10\ Such parameters include complete information and valid 
characters. In addition, EMCC has established a maximum delivery 
size of $20 million.
    \11\ Any cancellation or correction must be received by EMCC no 
later than the early morning transmission two business days after 
trade date (``T+2'').
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    EMCC will report to each member on its ``accepted trade report'' 
data on all trades: (a) that are eligible for processing by EMCC (i.e., 
U.S. dollar denominated Brady bonds), (b) that are matched by the 
locked-in trade sources, (c) that are received by EMCC on trade date 
(``T''), on T+1, and in the early morning transmission on T+2, and (d) 
that are not rejected by EMCC based on the operational parameters. 
Matched trades that are eligible for processing and that are received 
on T+2 in the midmorning transmission will be listed on a ``settlement 
instructions only report.'' \12\ Transaction data received by EMCC in 
the evening transmission on T+2 and thereafter will not be accepted by 
EMCC because it will be unable to submit timely settlement instructions 
to the depository.
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    \12\ EMCC provides settlement instructions on behalf of its 
members with respect to trades listed on the settlement instructions 
only report to the depositories for settlement directly between the 
members.
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    EMCC may also received uncompared transaction data from the locked-
in trade sources. If EMCC does not receive by the early morning 
transmission on T+2 updated data from a locked-in trade source 
indicating that an uncompared trade has been cancelled or compared, 
EMCC will include data on the uncompared trade on the settlement 
instructions only report if the submitting member has requested EMCC to 
do so pursuant to the member's standing instructions.
    Accepted trade reports will be made available to members at 
approximately 10:30 a.m. ET and 11:30 p.m. ET. The morning report will 
contain data on matched trades received in the early morning 
transmission. The evening report will contain data on matched trades 
received in the midmorning and evening transmission. The settlement 
instructions only report will contain data on matched trades received 
in the midmorning transmission on T+2 and data on unmatched trades 
received by the midmorning transmission on T+2. At approximately 12:30 
p.m. on T+2, EMCC will send settlement instructions to the depositories 
based on trade data contained in the accepted trade reports and in the 
settlement instructions only report.

B. Risk Management Services

    EMCC will interpose itself as the counterparty and guarantor on a 
trade-for-trade basis with respect to the trades it reports on its 
accepted trade report (``novation'') unless EMCC notifies or has made 
information available to its members that trades listed on the accepted 
trade report are not assumed and guaranteed because EMCC has ceased to 
act for the original

[[Page 37095]]

counterparty.\13\ EMCC's guarantee will be effective with respect to: 
(a) trades reported on the evening accepted trade report at the later 
of (i) midnight ET or (ii) one half hour after the issuance of the 
preliminary margin report \14\ and (b) trades reported on the morning 
accepted trade report at the later of (i) 1:00 p.m. ET or (ii) two and 
one half hours after issuance of the final margin report.\15\ The 
result is a novation of the original contract between the 
c'ounterparties, creating an obligation on the part of the seller to 
deliver the securities to EMCC and on the part of the purchaser to 
receive and pay for the securities delivered by EMCC.
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    \13\ EMCC does not interpose itself as the counterparty and 
guarantor for transactions reported on the settlement instructions 
only report.
    \14\ See infra Section IV.C.1.a for a description of the 
preliminary margin report.
    \15\ See infra Section IV.C.1.a for a description of the final 
margin report.
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C. Settlement Services

    EMCC will be a member of both Euroclear and Cedel. EMCC will 
transmit settlement instructions to the appropriate depository on 
behalf of members with EMCC as the counterparty to each side of the 
trade. With respect to each transaction reported on an accepted trade 
report which has not been deleted, EMCC will send receive and deliver 
instructions to the depository at 12:30 p.m. on T+2. If the accepted 
trade report indicates that a member has a securities receive 
obligation, EMCC will notify the depository to deliver the bonds from 
EMCC's account into the member's account against payment on the next 
day (``T+3''). If the member had a securities deliver obligation 
reflected on the accepted trade report, EMCC will instruct the 
depository to deliver the specified quantity of bonds from the member's 
account into EMCC's account against the receipt of the corresponding 
payment price on T+3.\16\
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    \16\ Consistent with industry conventions, EMCC assumes that the 
bonds will be delivered with attached warrants unless otherwise 
specified.
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    Settlement will occur in accordance with the rules of Euroclear or 
Cedel. Essentially, the receiver must have sufficient cash or line of 
credit to pay for the delivery, and the deliverer must have sufficient 
securities to make full delivery.\17\ The depositories will notify EMCC 
and its members each day at midnight ET of the status of trades 
indicating which have settled and which are still pending. EMCC will 
not provide settling trade reports or fail reports to its members.
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    \17\ Both Cedel and Euroclear employ mechanisms that can look 
beyond the initial counterparties' obligations. Cedel has a 
``chaining'' program which scans open transactions until all cash 
and securities resulting from same day settlements are reemployed to 
settle further transactions for same day value. Therefore, for back-
to-back transfers for equivalent funds, customers may not need to 
pay because proceeds from sales are used to settle purchases. 
However, Cedel's chaining program is limited when transactions are 
sent through its bridge connection with Euroclear. EMCC has informed 
the Commission that its members currently do not intend to use Cedel 
as a depository. If this changes, EMCC intends to maintain a line of 
credit at Cedel of approximately $40 million to allow the receipt 
and delivery of securities across the bridge.
     Euroclear's chaining program operates somewhat differently. In 
scanning open transactions, the Euroclear program will only look to 
the next settlement. For example, if a member does not have 
sufficient funds to receive securities, Euroclear will review to see 
if that member has a corresponding securities deliver obligation to 
another member. In such case, Euroclear will complete both 
transactions if the counterparty to the deliver obligation has 
sufficient funds to pay for the securities. But if the counterparty 
to the securities deliver obligation did not have sufficient funds 
to settle the transaction, Euroclear, unlike Cedel, would not look 
to subsequent settlements for funds and securities. Accordingly, if 
EMCC inserts itself as a common counterparty without sufficient 
funds to accept deliveries, Euroclear's system will only look to 
EMCC's member to determine if sufficient funds exist. Therefore, 
EMCC will maintain a line of credit between $60 and $100 million at 
Euroclear to reduce settlement inefficiencies. EMCC's line of credit 
will permit Euroclear to review not only the available funds of 
EMCC's member but also such member's subsequent counterparty, if 
any.
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    If a member cannot accept delivery of securities because of 
insufficient funds, EMCC will generate a fail compensation instruction 
and will transmit it to the appropriate depository. Pursuant to that 
instruction, the depository will debit the account of the member that 
had insufficient funds and credit its counterparty's account an amount 
of money based on the depository's overnight borrowing interest rate 
multiplied by the amount of funds which were not paid.
    With respect to matched transactions reflected on the settlement 
instructions only report, EMCC will send instructions on the afternoon 
of T+2 to the depository on behalf of the members listed as 
counterparties. The depository will be advised to deliver on T+3 bonds 
from the account of the member with the deliver obligation to the 
account of the member with the receive obligation against payment. EMCC 
will not monitor the settlement of these transactions.
    With respect to uncompared transactions reflected on the settlement 
instructions only report, EMCC will send instructions on the afternoon 
of T+2 to the depository on behalf of the member submitting the data 
naming the other member as the counterparty to the instruction. EMCC 
will not monitor the settlement of these transactions.

D. Buy-ins/Sell-Outs

    EMCC's rules will permit a buy-in or a sell-out in the event that a 
transaction has not been completed by five days after settlement date 
(``SD+5'') as described below. A buy-in or sell-out may be initiated by 
the member with the receive or deliver obligation, respectively, by 
submitting a pre-advice notice to EMCC. Upon receipt of the pre-advice 
notice, EMCC will transmit the pre-advice notice to the corresponding 
member with the fail obligation. If the instruments or money covered by 
the pre-advice notice are not received within two business days after 
the date of the pre-advice notice, then the member that requested the 
buy-in or sell-out will need to deliver to EMCC a buy-in or sell-out 
notice between two to five business days after issuance of the pre-
advice notice in order to proceed with the buy-in or sell-out. Upon 
receipt of the buy-in or sell-out notice, EMCC will transmit a buy-in 
or sell-out notice to the member with the fail obligation. Execution of 
the buy-in or sell-out will take place through an agent selected by 
EMCC on the fifth business day following the issuance of the buy-in or 
sell-out notice. EMCC also may initiate a buy-in or sell-out if it 
determines that such action is necessary to protect EMCC, its members, 
its creditors, or its investors; to safeguard securities or funds in 
EMCC's custody or control; or to promote the prompt and accurate 
clearance and settlement of securities transactions.
    EMCC will also use the buy-in or sell-out procedures for deliver 
and receive obligations for warrants. However, if EMCC has ceased to 
act for a member with fail obligation prior to the execution of the 
buy-in or sell-out, EMCC will undertake the buy-in or sell-out only at 
the expense of the member that submitted the pre-advice notice. If EMCC 
ceases to act for the defaulting member after the pre-advice notice has 
been submitted but before the execution of the buy-in or sell-out, EMCC 
will first confirm with the requesting firm that it wants to proceed 
with the buy-in at the requesting firm's expense.

E. Release of Clearing Data

    Pursuant to EMCC's rules, EMCC may release transaction data of its 
members to EMTA in accordance with a written agreement between EMCC and 
EMTA. Such data may be used only for the purpose of promoting market 
transparency on a noncommercial basis. On June 9, 1997, EMCC and EMTA 
entered into a letter agreement that provides for the release of 
information relating to the aggregate and per trade

[[Page 37096]]

transaction volumes and prices of trades processed by EMCC.

IV. EMCC's Request for Registration

A. Introduction

    Brady bonds are the most actively traded emerging market debt 
instrument. In the first quarter of 1997, Brady bonds represented $671 
billion of the $1.6 trillion traded in emerging markets instruments. 
Brady bonds constitute approximately 12% of the total $1.2 trillion 
issued of emerging market instruments.\18\
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    \18\ Broward Daily Business Review, May 20, 1997, at A3.
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    While Brady bonds currently are cleared and settled either through 
Euroclear or Cedel, neither guarantees settlement of these 
transactions. Furthermore, dealers have exposure to brokers until the 
assumption of risk by clearing firms on the afternoon of T+1. As a 
result, parties to a transaction retain a high degree of settlement 
risk. EMCC was developed in response to an industry initiative to 
reduce risk in the clearance and settlement of emerging market debt 
instruments. Therefore, in order to provide the benefits of guaranteed 
settlement to the Brady bond market, EMCC seeks registration as a 
clearing agency pursuant to Section 17A of the Exchange Act and Rule
17Ab2-1.

B. Goals of Clearing Agency Registration

    Section 17A of the Exchange Act directs the Commission to promote 
Congressional objectives to facilitate the development of a national 
clearance and settlement system for securities transactions.\19\ 
Registration and regulation of clearing agencies is a key element in 
promoting these statutory objectives. Before granting registration to a 
clearing agency, Section 17A(b)(3) of the Exchange Act requires that 
the Commission make a number of determinations with respect to the 
clearing agency's organization, capacity, and rules.\20\ The Commission 
has published standards developed by its Division of Market Regulation 
which are used in evaluating applications for clearing agency 
registration.\21\
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    \19\ 15 U.S.C. 78q-1. Section 17A(a)(1) provides:
    (1) The Congress finds that--
    (A) The prompt and accurate clearance and settlement of 
securities transactions, including the transfer of record ownership 
and the safeguarding of securities and funds related thereto, are 
necessary for the protection of investors and persons facilitating 
transactions by and acting on behalf of investors.
    (B) Inefficient procedures for clearance and settlement impose 
unnecessary costs on investors and persons facilitating transactions 
by and acting on behalf of investors.
    (C) New data processing and communications techniques create the 
opportunity for more efficient, effective, and safe procedures for 
clearance and settlement.
    (D) The linking of all clearance and settlement facilities and 
the development of uniform standards and procedures for clearance 
and settlement will reduce unnecessary costs and increase the 
protection of investors and persons facilitating transactions by and 
acting on behalf of investors.
    For legislative history concerning Section 17A, see, e.g., 
Report of Senate Comm. on Housing and Urban Affairs, Securities Acts 
Amendments of 1975: Report to Accompany S. 249, S. Rep. No. 75, 94th 
Cong., 1st Sess. 4 (1975); Conference Comm. Report to Accompany S. 
249, Joint Explanatory Statement of Comm. of Conference, H.R. Rep. 
No. 229, 94th Cong., 1st Sess., 102 (1975).
    \20\ 15 U.S.C. 78q-1(b)(3). See also Section 19 of the Exchange 
Act, 15 U.S.C. 78s, and Rule 19b-4, 17 CFR 240.19b-4, setting forth 
procedural requirements for registration and continuing Commission 
oversight of clearing agencies and other self-regulatory 
organizations.
    \21\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41920 (``Standards Release''). See also, Securities Exchange 
Act Release No. 20221 (September 23, 1983), 48 FR 45167 (omnibus 
order granting registration as clearing agencies to The Depository 
Trust Company, Stock Clearing Corporation of Philadelphia, Midwest 
Securities Trust Company, The Options Clearing Corporation, Midwest 
Clearing Corporation, Pacific Securities Depository, National 
Securities Clearing Corporation, and Philadelphia Depository Trust 
Company).
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C. Safety and Soundness Protections

    Sections 17A(b)(3) (A) and (F) of the Exchange Act require that a 
clearing agency be organized and its rules be designed to facilitate 
the prompt and accurate clearance and settlement of securities 
transactions for which it is responsible and to safeguard securities 
and funds in its custody or control or for which it is responsible.\22\ 
In the Standards Release, the Division enumerated certain requirements 
that should be met to comply with this standard.
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    \22\ 15 U.S.C. 78q-1(b)(3) (A) and (F).
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1. Clearing Fund
    The Standards Release stated that a clearing agency should have a 
clearing fund which is based on a formula applicable to all users and 
is comprised of cash or highly liquid securities. The rules of a 
clearing agency should limit the investments that can be made with the 
cash portion of its clearing fund to government securities or other 
safe and liquid investments. The clearing fund should only be used to 
protect participants and the clearing agency (a) from defaults of 
participants and (b) from clearing agency losses not resulting from day 
to day expenses and not covered by insurance or other resources of the 
clearing agency. While the Standards Release stated that a clearing 
agency could use temporary applications of the clearing fund in limited 
amounts to meet unexpected and unusual requirements for funds, the 
regular or substantial use of a clearing fund for operational purposes 
would be inappropriate.\23\ The clearing agency should provide for the 
maximum assessment to which any participant is subject. Comment is 
requested on whether EMCC meets these standards as described below.
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    \23\ The Standards Release also stated that there may be 
legitimate purposes for which a clearing fund may be used for a 
longer period of time so long as (a) the funds are properly 
protected, (b) the funds are used to facilitate the process of 
clearance and settlement, and (c) the participants and the 
Commission approve such use during the registration proceedings.
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    a. Clearing Fund Formula. EMCC will maintain and will manage a 
clearing fund for the purpose of limiting or eliminating EMCC's 
exposure to loss in the event a member would fail to perform its 
obligations to EMCC. Each member will be obligated to make deposits to 
EMCC's clearing fund. The initial required clearing fund deposit for 
each member will be set by EMCC based on the expected nature and level 
of the member's activity. The minimum required clearing fund deposit 
for each member will be US $1,000,000.
    Every day, EMCC will calculate margin in the morning and in the 
evening but will only collect margin based on the morning calculation. 
EMCC will generally calculate the margin amount as follows: (mark to 
market amount + volatility amount)  x  event risk factor.\24\ The mark 
to market

[[Page 37097]]

amount will be based on all trades due to settle on or after that day 
and all fails unless EMCC has received notice from the depository that 
such trade or fail has settled.\25\ The mark to market amount will be 
based on the difference between the market price and the contract value 
of the trade. If the net mark-to-market is a credit, the firm will have 
a zero mark-to-market.
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    \24\ EMCC has represented that it performed a stress test in 
which the proposed formula was applied using three months of data on 
EMCC eligible transactions obtained from Match-EM. The test assumed 
for each member that the market in which such member had its highest 
concentration of positions experienced an abnormal negative market 
move (i.e., the ``stressed market''). All securities positions for 
that member in other countries were run under the baseline 
assumptions (i.e., no unusual market movements). The tests assumed 
first a 10 strandard deviation market drop in the stressed market 
and second a 4 standard deviation market gain in the stressed 
market. The test assumed that bonds on the opposite sides of the 
stressed market had correlations of 80% while bonds on the same side 
of the stressed market had 100% correlation.
    However, the test did not attempt to take into account any 
spillover effect (i.e., where the sudden drop of prices in a 
country's bond market resulted in a similar drop in the bond markets 
of other countries with similar risk profiles). EMCC states that it 
is difficult to quantify any spillover effects. EMCC believes that 
spillover effects are addressed because the test assumes that for 
each firm the stressed event occurred in the country in which the 
firm was most concentrated and therefore would most adversely effect 
the value of the firm's position and also assumes a degree of 
deviation from the mean that was substantially higher than was the 
case in the Mexican debt crisis.
    Under this test, EMCC had no exposure 73.64% of the time. EMCC 
had exposure between $1 and $1 million 9.18% of the time. EMCC had 
exposure of greater than $10 million 1.7% of the time. The highest 
exposures were four occurrences of an exposure of approximately $15 
million and one exposure of approximately $50 million.
    \25\ EMCC will receive notice at midnight ET (or 6:00 a.m. in 
Brussels and Luxembourg) from Euroclear and Cedel of all trades that 
have settled. At that time, Euroclear and Cedel have already 
completed most of the settlements of that day (i.e., the notice 
issued at midnight ET on Friday morning will indicate trades that 
will settle Friday at the depository). Some trades will settle 
Friday at the depository). Some trades will settle later, but EMCC 
will receive notice of them before it begins its processing day. 
Thus, when EMCC calculates the margin in the morning and the 
evening, it will have received notice of which trades have settled 
or failed for the day.
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    The volatility amount for the evening calculation will be based on 
all trades due to settle on or after that day and all fails unless EMCC 
has received notice from the depository that such trade or fail has 
settled. The volatility amount for the morning calculation will be 
based on all trades due to settle on or after the current day and all 
fails calculated as of the prior day whether or not EMCC has received 
notice of the settlement of such trades or fails. Thus, the morning 
volatility amount will includes trades that have already settled that 
day, while the evening volatility amount will only include trades that 
have not settled.\26\ In order to calculate the volatility amount, each 
security will be placed into one of four liquidity categories based on 
the average bid/offer spread, which will determine which volatility 
formula will be applied to that security.\27\ The sum of the volatility 
amounts for each security will be the clearing member's volatility 
amount.\28\
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    \26\ The reason for including transactions in the morning 
volatility calculation whether or not they have settled is to insure 
that data on three days of pending trades is included. EMCC believes 
that because it is guaranteeing three days of trades, it is 
appropriate that data on three days of trading activity is included 
in the volatility calculation. At the time of the morning volatility 
calculation, the trades entered into three days before will have 
settled, but EMCC will not have received data for the trades entered 
into on the current day. Thus, by including data for trades settling 
that day, EMCC will be using three days of data. EMCC will calculate 
fails as of the prior day because fails calculated as of the current 
day would include trades due to settle that day (i.e., these trades 
would be doubled counted as trades due to settle that day and fail 
trades). With respect to the evening volatility calculation, EMCC 
will have received data on trades entered into on that day. Thus, it 
is no longer necessary to include trades that have settled that day.
    \27\ The four classes and spreads are as follows: L1--\3/8\ or 
less; L2--\3/4\ or less; L3--2 or less; L4--greater than 2 or no 
trading activity for a certain period of days.
    \28\ For each L4 security, the volatility amount is the value of 
the position  x  30%. For L1, L2, and L3 securities of each issuer, 
EMCC will take the larger of the following formula with: (a) the 
member's long positions in lines 1 and 2 and short positions in 
lines 3 and 4 and (b) the member's short positions in lines 1 and 2 
and long positions in lines 3 and 4.
    1. (value of long or short L1+L2)  x  2 Std, PLUS
    2. (value of long or short L3)  x  4 Std, PLUS
    3. (value of short or long L1+L2)  x  2 Std  x  CC, PLUS
    4. (value of short or long L3)  x  1 Std  x  CC
    Std. is equal to a one standard deviation move over a five day 
holding period based on the higher of a calculation using price data 
for one year and three months. CC is the smallest correlation 
coefficient between any security of that issuer in which the member 
has a short position and any security of that issuer in which the 
member has a long position. The correlation coefficient will be 
based on one year's pricing data and will be updated daily.
    EMCC may adjust the fixed percentage applied to L4 securities or 
the number of standard deviations applied to L1, L2, and L3 
securities without prior notice in order to increase the volatility 
calculations when warranted by circumstances. These adjustments may 
be made on a country by country basis or a bond by bond basis either 
for all members or for members unduly concentrated.
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    The event risk factor, which is designed to give EMCC an additional 
cushion against events in countries not covered by two standard 
deviations, will initially be set at 1.25. EMCC may adjust the event 
risk factor for a member or for all members without prior notice to the 
member(s). EMCC also will increase margin requirements by multiplying a 
global holiday risk factor to the formula to take into account days on 
which U.S. banks are closed but securities markets are open.
    The preliminary margin amount will be calculated each evening and 
will be reported to members at approximately 11:30 p.m. on a 
preliminary margin report. The report will show the member's current 
deposit, preliminary margin amount, and preliminary amount due, if any. 
However, members will not be required to make any payment to EMCC based 
on the preliminary margin report.
    The final margin amount will be calculated each morning and will be 
reported to members at approximately 10:30 a.m. on a final margin 
report. A member's required margin deposit will be equal to the largest 
single final daily margin amount computed for that member for the month 
during which such margin calculation is being performed and for the 
previous calendar month. The final margin report will indicate each 
member's current deposit, final margin amount, and final amount due, if 
any. A member will be required to pay any obligation with respect to 
its margin obligation reflected on the final margin report no later 
than the later of 11:30 a.m. ET or one hour after the final margin 
report is made available. Margin deficits of less than $100,000 will 
not be considered to be a margin deficit. Payment must be made through 
the U.S. Fedwire system.
    EMCC also will have the authority to collect additional amounts 
over and above the daily margin requirement in order to obtain adequate 
assurances of the financial responsibility or operational capability of 
a member. EMCC has created a policy statement on procedures to follow 
in determining whether additional clearing fund deposits are 
needed.\29\ EMCC also may collect additional margin if a member has 
been placed on surveillance status.\30\
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    \29\ Each day, EMCC will calculate a net country position and a 
net geographical position for each member. The net country position 
will be the sum of the settlement values of the member's position in 
L1, L2, and L3 securities plus the sum of the absolute settlement 
values of the member's position in L4 securities of each country. 
The net geographical position will be the sum of the net country 
positions in Latin America, Eastern Europe, Asia, and Africa. An 
undue concentration will be deemed to exist for a bank when the net 
country position exceeds 20% of net worth or the net geographical 
position exceeds 30% of net worth. An undue concentration will be 
deemed to exist for a broker-dealer when the net country position 
exceeds 50% of excess regulatory capital or the net geographical 
position exceeds 80% of excess regulatory capital. Under such 
circumstances, EMCC will contact the member to request information 
on the nature and magnitude of non-Brady bond exposure and on any 
hedging positions. If EMCC is not satisfied with the answers to 
these questions, EMCC may request additional clearing fund deposits.
    \30\ EMCC will put a member on surveillance status if any of the 
following factors are present: (a) The member fails to meet any 
financial standard for admission or continuance as a member, (b) the 
member's capital position falls below the standards for admission, 
(c) the member experiences an inability to meet its money or 
securities settlement obligations to EMCC, (d) EMCC's board 
determines that a significant reorganization, change in control, or 
management of the member is likely to impair the member's ability to 
meet its money or securities settlement obligations to EMCC, or (e) 
the member has been placed on surveillance status by another self-
regulatory organization or comparable regulatory organization. EMCC 
also will have the discretion to put a member on surveillance status 
if any of the following factors are present: (a) it experiences a 
significant operational problem, (b) the member's positions are 
significantly disproportionate to its usual activity in light of 
current industry conditions, (c) EMCC receives notification from the 
member's designated examining authority or appropriate regulatory 
agency or comparable regulatory organization of a pending 
investigation or administrative action that could call into question 
the member's ability to meet its obligations to EMCC, or (d) the 
member experiences any condition that could materially affect its 
financial or operational capability so as to potentially increase 
EMCC's exposure to loss or liability.
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    b. Margin Composition and Investment. Members will be required to 
pay margin in cash, U.S. Treasury

[[Page 37098]]

securities, or letters of credit from banks that have been approved by 
EMCC. If letters of credit are used as margin, no more than 70% of a 
member's requirement may be satisfied with letters of credit and, as a 
minimum, the greater of $100,000 or 10% of the member's margin 
requirement (up to a maximum of $1,000,000) must be in cash. 
Furthermore, no more than 20% of EMCC's total clearing fund may be 
letters of credit from any one issuer. If letters of credit are not 
used, the greater of $100,000 or 5% of the member's margin requirement 
(up to a maximum of $1,000,000) must be in cash. A haircut of 5% will 
be applied to letters of credit and treasury securities.
    EMCC may invest any cash deposited as margin in securities issued 
or guaranteed as to principal or interest by the U.S. or agencies or 
instrumentalities of the U.S., repurchase agreements related to EMCC, 
or otherwise pursuant to the investment policy adopted by EMCC. If not 
invested, cash funds will be deposited by EMCC in its name in a 
depository institution selected by EMCC. EMCC will retain all 
investment income from cash deposits. Comment is requested as to 
whether such investments are consistent with the standard that 
investments should be limited to safe and liquid investments such as 
government securities.
    c. Loss Allocation. EMCC will establish an overnight exposure cap 
for each member. This cap will be set at the lesser of (a) 5% of excess 
net capital for U.S. broker-dealers, 5% of excess financial resources 
for U.K. broker-dealers, and 1% of shareholders' equity for banks or 
(b) $20 million. If a member's preliminary margin calculation is in 
excess of its overnight exposure cap, the member will be subject to 
fines. The loss allocation method applied to trades of an insolvent 
member will be dependent upon whether the insolvent member has exceeded 
its overnight exposure cap.
    When the failed member is not an interdealer broker, EMCC will 
classify trades as brokered or direct.\31\ If there was an overnight 
exposure cap violation, EMCC will further classify such trades as 
trades received by EMCC before the violation (``old trades'') or trades 
received by EMCC after the violation (``new trades''). Any collateral 
of the defaulting member will be divided between direct trades and 
brokered trades in proportion to the amount of losses attributable to 
old trades in each category. If there is insufficient collateral to 
cover all of the losses attributable to old trades: (a) Losses 
attributable to brokered transactions that are old trades will be 
allocated pro rata among all members based upon each member's average 
final daily margin amount for the prior 30 calendar days \32\ and (b) 
losses attributable to direct transactions that are old trades will be 
allocated among all the original counterparties in proportion to the 
amount of losses created by each member's transactions.
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    \31\ If the failed member's counterparty was an interdealer 
broker, but the interdealer broker's counterparty on the other side 
was not an EMCC member, EMCC will consider the trade to be a direct 
trade between the insolvent and the interdealer broker. In other 
words, ``brokered trades'' are trades where the interdealer broker 
is an EMCC member and EMCC members are on both sides.
    \32\ A member that is assessed pursuant to this provision may 
limit its assessment to its current margin requirement if it chooses 
to terminate its membership.
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    After the losses from old trades have been satisfied, EMCC will 
determine if any clearing fund collateral of the defaulting member 
remains. EMCC will net new trades to obtain a net loss per issue of 
securities. Any remaining clearing fund of the defaulting member will 
be applied to the smallest loss, then the next remaining smallest loss 
until there is no remaining clearing fund of the defaulting member.\33\ 
EMCC then will segregate the smallest remaining losses up to an amount 
that equals the amount of the defaulting member's overnight exposure 
cap (``under the cap losses'').\34\ The under the cap losses will be 
allocated as follows: (a) losses attributable to direct transactions 
will be allocated back to the original counterparties in an amount 
equal to the losses attributable to the member's trades and (b) losses 
attributable to brokered transactions will be allocated pro rata among 
all EMCC members based upon each member's final daily margin amount 
calculated with respect to the prior thirty calendar days. Any 
remaining losses attributable to new trades will be allocated as 
follows: (a) Losses attributable to direct transactions will be 
allocated back to the original counterparties in an amount equal to the 
losses attributable to the member's trades and (b) losses attributable 
to brokered transactions will be allocated first to the interdealer 
broker member that was a contraparty to such trade to the extent of the 
loss attributable to such trade up to a maximum allocation of $3 
million per interdealer broker and then pro rata among members that 
were contraparties to interdealer brokers that reach their maximum 
allocation and that were on the opposite side of the market in the same 
issue of securities creating a loss with the same settlement date and 
at approximately the same price.
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    \33\ For example, after netting new trades in each issue of 
securities, EMCC may determine that there are losses of $2 million, 
$4 million, $3 million, and $10 million in four issues and EMCC has 
collateral of the defaulting member of $8 million. EMCC will satisfy 
the $2 million loss first, then the $3 million loss, then a portion 
of the $4 million loss.
    \34\ For example, if after netting there are losses of $5 
million, $7 million, and $3 million in four issues and the 
defaulting member had an overnight exposure cap of $10 million, EMCC 
will segregate out the $3 million loss, the $5 million loss, and $2 
million of the $7 million loss.
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    Different loss allocation rules will apply when the defaulting 
member is a broker. In such cases, any collateral of the defaulting 
member will be applied first to losses resulting from old trades. If 
there are remaining losses from old trades, such losses will be 
allocated among all the original contraparties in proportion to the 
amount of loss created by each member's transactions. EMCC then will 
net new trades to obtain a net loss per issue of securities. Any 
remaining clearing fund of the defaulting member will be applied to the 
smallest loss, then the next remaining smallest loss until there is no 
remaining clearing fund. Any remaining loss after application of 
clearing fund will be allocated back to the contraparties to the 
transactions giving rise to such loss to the extent of the loss 
attributable to such transactions.
    d. Use of Clearing Fund. EMCC's rules will provide that the use of 
clearing fund deposits is limited to satisfaction of losses or 
liabilities of EMCC arising from the failure of a member to satisfy an 
obligation to EMCC or as an incident to the clearance and settlement by 
EMCC and to provide EMCC with a source of collateral to meet its 
temporary financing needs. If EMCC pledges any part of the clearing 
fund deposits for more than 60 days as a source of temporary financing, 
EMCC will by the 74th day consider such amount to be a loss and will 
allocate such loss in accordance with the loss allocation rules. 
Comment is requested whether EMCC's proposed uses of its clearing fund 
are consistent with the requirement that temporary applications of the 
clearing fund should be used only in limited amounts to meet unexpected 
and unusual requirements for funds and that the regular or substantial 
use of a clearing fund for operational purposes would be inappropriate.
2. Standard of Care
    The Division stated in the Standards Release that the rules of a 
clearing agency should provide that it is liable to a participant for 
failure to deliver the participant's securities resulting from (i) the 
negligence or misconduct of the clearing agency, the clearing agency's

[[Page 37099]]

subcustodian or agent, or any of their respective employees, (ii) the 
placement of fully-paid participant securities of a lien or charge of 
any kind in favor of the clearing agency, the clearing agency's 
subcustodian or agent, or any person claiming through any one or more 
of them, (iii) larceny, (iv) mysterious disappearance, or (v) any other 
cause for which the clearing agency has assumed responsibility. Since 
the date of the Standards Release, the Commission has further clarified 
its position on clearing agency liability, stating that clearing 
agencies should perform their functions under a high standard of care 
and at a minimum custody services should be performed under an ordinary 
negligence standard.\35\ The Commission also has stated that custody 
functions include all functions related to transaction processing and 
the safekeeping of customer funds and securities.\36\
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    \35\ Securities Exchange Act Release Nos. 26154 (October 3, 
1988), 53 FR 39556 (registration order of the Intermarket Clearing 
Corporation [``ICC'']); 26450 (January 12, 1989), 54 FR 2010 
(registration order of the Delta Government Options Corp. 
[``DGOC'']); 26812 (May 12, 1989), 54 FR 21691 (registration order 
of ISCC); and 27611 (January 12, 1990), 55 FR 1890 (second 
registration order of DGOC).
    \36\ See, e.g., ICC registration order, supra note 35.
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    As proposed, EMCC's member's agreement, executed between EMCC and 
each member, will provide that EMCC is not subject to any liability 
under the agreement, including any liability with respect to EMCC's 
failure to provide any services under the agreement or EMCC's rules, 
except for losses resulting from EMCC's gross negligence, criminal act, 
or willful misconduct in connection with its duties. The agreement 
further will provide that EMCC will not be liable for any consequential 
or special damages which may result from EMCC's failure to perform its 
obligations under the agreement.
    EMCC's rules will provide that EMCC will have no responsibility for 
errors which may occur in any transmission of data to EMCC except in 
the case of EMCC's gross negligence. EMCC`s rules also will provide 
that EMCC will have no liability for errors made by it in the 
conversion of data from a yield basis to a price basis or vice versa or 
from the comparison of such converted data if EMCC has acted in good 
faith and takes prompt action to correct any error.
    The Commission preliminarily believes that EMCC's proposed standard 
of care is inconsistent with the Exchange Act and prior Commission 
positions. Because EMCC's actions bear directly upon the safeguarding 
of securities and funds, the Commission believes that EMCC's activities 
constitute custodial functions for which a negligence standard is 
appropriate. Furthermore, the Commission has never approved a gross 
negligence standard as a blanket standard of liability for a fully 
functioning clearing agency.\37\ The Commission invites comment upon 
the appropriateness of EMCC's proposed standard of liability.
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    \37\ While the Commission approved the temporary registration of 
the Government Securities Clearing Corporation (``GSCC'') under a 
gross negligence standard, such clearing agency's functions at the 
time were limited to comparison of data. In addition, the Commission 
urged GSCC to adopt a negligence standard for all functions 
affecting member settlements, including comparison of data. 
Securities Exchange Act Release No. 25740 (May 24, 1988), 53 FR 
19839. GSCC continues to operate under its temporary registration. 
Securities Exchange Act Release No. 38698 (May 30, 1997), 62 FR 
30911.
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3. Processsing Capacity
    ISCC has agreed pursuant to a service agreement to perform services 
for EMCC with respect to EMCC's clearing agency activities. ISCC will 
furnish the services necessary to conduct EMCC's operations for a fee 
designed to cover ISCC's costs. ISCC will provide EMCC with technical 
services in the following areas: data processing, operations, planning 
and development, communications, and research and development. 
Currently, ISCC has seven employees. Such employees' duties are 
generally limited to operational functions. ISCC currently provides 
limited clearing agency services. Many of ISCC's functions are 
performed by NSCC or by the International Depository & Clearing, L.L.C. 
(``IDC''). IDC is a company equally owned by NSCC and The Depository 
Trust Company, both registered clearing agencies. However, IDC is not 
regulated in any manner. The Commission invites comments as to whether 
ISCC has sufficient capacity to act as the facilities manager and 
operate another clearing agency.
    ISCC may use outside parties to fulfill its commitments to EMCC. 
Specifically, NSCC through ISCC will provide EMCC with management and 
administrative services in the following areas: financial, personnel, 
corporate communications, marketing, regulatory or compliance, and 
legal. The Securities Industry Automation Corporation (``SIAC''), 
through ISCC and NSCC, also will provide EMCC with managerial, 
clerical, and data processing services. In addition, ISCC will rely on 
employees of IDC for product development, marketing and sales, 
planning, participant services, and executive (i.e., decison making) 
functions. The Commission asks for comment as to whether these service 
arrangements are appropriate, and particularly whether it is 
appropriate that an unregulated entity such as IDC perform the above 
functions for a clearing agency.
    In addition, as discussed above, EMCC has no independent capacity 
to match trades. Instead, it relies on Match-EM and TRAX for such 
services, neither of which is regulated in the U.S. EMCC has 
represented that it has no contractual agreement with either GE (the 
operator of Match-EM) or ISMA Ltd. (the operator of TRAX) that would 
permit it to review their operational capabilities. Because the failure 
of Match-EM or TRAX could result in EMCC being unable to fulfill its 
clearance and settlement functions with respect to those trades which 
either Match-EM or TRAX should have matched and reported to EMCC, the 
Commission requests comment on whether the current arrangement is 
consistent with EMCC's obligations to ensure that it has sufficient 
operational capability. Specifically, the Commission believes that at a 
minimum, EMCC should obtain sufficient information to be able to make a 
determination that Match-EM and TRAX are operating in a manner that 
ensures that they will be able to accurately match and to report trades 
on a timely basis to EMCC. Furthermore, the Commission believes that it 
should have access to the materials that EMCC has relied on to make 
this determination. Comment is requested as to whether other conditions 
should be applied.
4. Audit Committee and Internal Audit Department
    The Standards Release stated that clearing agencies should have an 
audit committee composed of nonmanagement directors. A nonmanagement 
director is a director who is not associated with the clearing agency 
other than in a user capacity or with any entity which furnishes 
securities processing services to the clearing agency. The audit 
committee should have responsibility for reviewing the work performed 
by the clearing agency's independent public accountant.
    EMCC's bylaws will provide that the board of directors may appoint 
an audit committee consisting of three or more directors other than 
officers of EMCC. The audit committee will have responsibility for 
reviewing with the independent certified public accountants the scope 
of their auditing procedures and the financial statements of EMCC to be 
certified by the accountants. The Commission notes that EMCC's bylaws 
do not prohibit the directors that are representatives of

[[Page 37100]]

NSCC, ISMA, and EMTA from serving on the audit committee. Comment is 
requested as to whether the relationship and the services provided by 
NSCC, ISMA, and EMTA are such that the individuals representing these 
entities on EMCC's board should not serve on the audit committee.
    The Standards Release stated that a clearing agency should have an 
internal audit department which is adequately staffed with qualified 
personnel. NSCC's internal audit department will perform EMCC's 
internal auditing functions.
5. Securities, Funds, and Data Controls
    The Standards Release provides that a clearing agency should have 
off-site storage of up-to-date files, written procedures detailing 
steps involved in handling funds and securities, and emergency 
mechanisms for establishing and maintaining communications with 
participants and other entities. In addition, clearing agencies should 
have adequate insurance.
    EMCC has represented that through its facilities manager, SIAC, it 
has access to two computer sites in different locations, both of which 
are capable of being operated independently and are capable of handling 
total participant activity. Data received will be automatically written 
to both sites. EMCC has provided a detailed written statement of 
security measures that will be used to prevent unauthorized access to 
EMCC's processing facilities. EMCC maintains blanket bond insurance and 
all risk insurance.

D. Fair Representation

    Section 17A(b)(3)(C) of the Exchange Act requires that the rules of 
a clearing agency provide for fair representation of the clearing 
agency's shareholders or members and participants in the selection of 
the clearing agency's directors and administration of the clearing 
agency's affairs. This section contemplates that users of a clearing 
agency have a significant voice in the direction of the affairs of the 
clearing agency.
1. Governance Procedures
    EMCC's board will have a total of 21 directors, divided into four 
classes. The first three classes will consist of five directors each 
(``participant directors''). The fourth class will have six directors, 
consisting of one director selected by EMTA, one director selected by 
ISMA, two directors selected by NSCC, and two directors selected by the 
EMCC board. The term of office of the participant directors will be 
three years, with the term of one class of directors expiring each 
year.\38\ Participant directors may not serve for more than six 
consecutive years. The term of the fourth class will be one year.
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    \38\ The term of the initial directors in class one will expire 
in 1998, the term of the initial directors in class two will expire 
in 1999, and the term of the initial directors in class three will 
expire in 2000.
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    Members may nominate individuals to serve as participant directors 
by filing with EMCC's Secretary at least thirty days prior to the date 
of the annual meeting a petition signed by the lesser of five percent 
of the participants or ten participants.\39\ A nominating committee 
selected by the board will also select individuals to serve as 
participant directors. If any member files a petition for participant 
director, EMCC's Secretary will mail ballots to all members. Members 
will then be provided the opportunity to vote for participant 
directors.\40\
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    \39\ Only one director may be selected which is an officer of 
any single participant or its affiliate.
    \40\ Members will have three votes for each $1.00 of average 
clearing fund deposits during the twelve month period ending on the 
last day of the second month prior to the date of determination and 
two votes for each $1.00 of the average monthly fee payable or paid 
by the member to EMCC during the same twelve month period.
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2. Provision of Information to Participants
    The Standards Release stated that participants should have 
sufficient information concerning a clearing agency's affairs to 
participate meaningfully in its administration. Clearing agencies 
should furnish participants with audited annual financial statements, 
an annual report on internal accounting control prepared by an 
independent public accountant, and notices of any proposed rule 
changes.
    The Standards Release stated that the annual financial statements 
should be provided within 60 days following the close of the clearing 
agency's fiscal year prepared in accordance with generally accepted 
accounting principles. EMCC's rules will provide that EMCC will 
undertake to provide to all members audited financial statements and a 
report prepared by independent public accountants within 60 days 
following the close of its fiscal year. EMCC also will undertake to 
provide unaudited financial statements to its members within 30 days 
following the close of each of EMCC's fiscal quarters.
    The Standards Release stated that the report on internal accounting 
control should be based on a study and an evaluation which was made for 
the purpose of reporting on the clearing agency's overall system of 
internal accounting control. The report should disclose any material 
weaknesses discovered and any corrective action taken or proposed to be 
taken. The report should be furnished to all participants promptly 
after it becomes available and no later than 60 days after the period 
covered by the report. EMCC indicated in its Form CA-1 that it intends 
to prepare an annual internal accounting control report. However, EMCC 
does not provide that such report will be given to its participants.
    As discussed in the Standards Release, the notice of proposed rule 
changes should be provided to participants prior to or as soon as 
possible after filing with the Commission and should provide a 
description of the rule change, its purpose, and its effect. EMCC's 
rules will provide that it will immediately notify all members and 
registered clearing agencies of all proposals it has made to change, 
revise, add, or repeal any rule, including a brief description of the 
proposal, its purpose, and its effect.

E. Participant Standards

    Section 17A(b)(3)(B) of the Exchange Act enumerates certain 
categories of persons that a clearing agency's rules must authorize as 
potentially eligible for access to clearing agency membership and 
services.\41\ In addition, a clearing agency may accept specific 
categories of persons other than those enumerated, but a clearing 
agency should be cognizant of the impact that participation may have on 
the safety of the clearing agency and should provide safeguards to 
protect against that risk. Section 17A(b)(4)(B) of the Exchange Act 
contemplates that a registered clearing agency have financial 
responsibility, operational capability, experience, and competency 
standards that are used to accept, deny, or condition participation of 
any participants or any category of participants enumerated in Section 
17A(b)(3)(B), but that these criteria may not be used to unfairly 
discriminate among participants. In addition, the Exchange Act 
recognizes that a clearing agency may discriminate among persons in the 
admission to or the use of the clearing agency if such discrimination 
is based on standards of financial responsibility, operational 
capability, experience, and competence.
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    \41\ The classes are registered brokers or dealers, registered 
clearing agencies, registered investment companies, banks, and 
insurance companies.
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1. Members
    EMCC will provide services to those organizations, entities, or 
persons that

[[Page 37101]]

qualify as members under EMCC's rules, that apply to EMCC to act for 
them, whose applications are approved by EMCC, and that have 
contributed to EMCC's clearing fund. A partnership, corporation, 
limited liability company, or other organization, entity, or individual 
will be qualified to become a member of EMCC if it satisfies at least 
one of the following qualifications: (a) it is a broker or dealer 
registered under the Exchange Act; (b) it is a broker or dealer 
registered or regulated under the laws of the jurisdiction other than 
the U.S. in which it is organized or established; (c) it is a bank or 
trust company, including a trust company having limited power, which is 
a member of the Federal Reserve System or is supervised and examined by 
state or federal authorities in the U.S. having supervision and 
examined by the banking regulator in the jurisdiction other than the 
U.S. in which it is organized or established; or (e) if it does not 
qualify under (a) through (d) but is the successor or assigns of any 
member and has demonstrated to the board of directors that its business 
and capabilities are such that it could use EMCC's services without 
undue risk, then such successor or assigns may become a member for the 
limited purpose of winding up its business with EMCC in an orderly 
manner. Initially, only broker-dealers that are organized under the 
laws of the U.K. will be eligible for admission under (b) above. 
Comment is requested as to the advisability of admission of non-U.S. 
participants and whether the proposed admission standards provide 
sufficient protection to EMCC and the national clearance and settlement 
system.
    After the issuance of shares to persons which have contributed to 
the development fund for the organization and initial operation of 
EMCC,\42\ all applicants that EMCC accepts for membership will be 
required to be either a shareholder of EMCC or an affiliate or 
subsidiary of a shareholder of EMCC. EMCC may deny an application to 
become a member or to use one or more services of EMCC upon a 
determination by EMCC that EMCC does not have adequate personnel, 
space, data processing capacity, or other operational capability at 
such time to perform its services for the applicant or member without 
impairing the ability of EMCC to provide services for its existing 
members, to assure the prompt, accurate, and orderly processing and 
settlement of securities transactions, or to otherwise carry out its 
functions. However any such applications which are denied will be 
approved as promptly as the capabilities of EMCC permit.
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    \42\ See supra note 5.
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2. Financial Reports
    All applicants for admission to EMCC will need to provide a copy of 
the applicant's financial statements for the two fiscal years ending 
immediately preceding the year in which application is made, certified 
without qualification by the applicant's independent certified public 
accountants. To the extent that such audited financial statements are 
not prepared in accordance with U.S. generally accepted accounting 
principles (``GAAP''), the applicant will be required to provide EMCC 
with a discussion of the material variations of such accounting 
principles from U.S. GAAP.
    A U.S. broker-dealer applicant will need to provide copies of the 
its Form X-17A-5 FOCUS Reports (``FOCUS Reports'') or Form G-405 
Reports on Finances and Operations (``FOGS Reports'') for the last 24 
months if a monthly filer or the last eight quarters if a quarterly 
filer submitted to its designated examining authority and any 
supplemental reports required to be filed with the Commission pursuant 
to Exchange Act Rule 17a-11 \43\ or 17 C.F.R. Section 405.3. A bank 
applicant will need to provide all quarterly financial statements 
covered by the last audited financial statement plus all subsequent 
quarterly financial statements. A U.S. bank applicant also will need to 
provide copies of its three most recent Consolidated Reports of 
Condition and Income (``Call Reports'') submitted to its appropriate 
regulatory agency and, to the extent not contained within such Call 
Reports or to the extent that the applicant does not have Call Reports, 
information containing each of the applicant's capital levels and 
ratios, as such levels and ratios are required to be provided to its 
appropriate regulatory agency. A non-U.S. bank applicant also will need 
to provide all material regulatory filings made with its primary 
regulator in its home country over the prior two years. If the 
applicant is a U.K. broker-dealer subject to regulation by the 
Securities Futures Association (``SFA''), it will need to provide EMCC 
with its SFA monthly reports and returns for the prior twenty-four 
months and if necessary and feasible, financial statements prepared in 
accordance with U.S. GAAP.
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    \43\ 17 CFR 240.17a-11.
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    If required by EMCC, an applicant will need to provide a 
certificate of the chief executive or chief financial officer of the 
applicant that no material adverse changes have occurred in the 
financial condition of the applicant since the date of the most recent 
financial statements, FOCUS Report, FOGS Report, Call Report, or 
comparable reports to regulatory authorities, as applicable, filed with 
EMCC; that the applicant has not guaranteed the obligations of any 
other person; and that the applicant is not subject to any other 
contingent liabilities, except as set forth in such financial 
statements, FOCUS Report, FOGS Report, Call Report, comparable reports 
to regulatory authorities, or the certificate.
3. Admission Criteria for Members
    The board or the membership and risk committee of the board may 
approve an application to become a member upon a determination that 
such applicant meets the applicable admission criteria. The applicant 
must have adequate personnel, physical facilities, books and records, 
accounting systems, and internal procedures to enable it to 
satisfactorily handle transactions and communicate with EMCC, to 
fulfill anticipated commitments to and meet the operational 
requirements of EMCC with necessary promptness and accuracy, and to 
conform to any condition and requirement that EMCC reasonably deems 
necessary for its protection or that of its members.
    The applicant must have an established business history of a 
minimum of three years or personnel with sufficient operational 
background and experience to ensure, in the judgment of the board, the 
ability of the firm to conduct its business. The applicant must agree 
to make and have sufficient financial ability to make all anticipated 
payments required to be made to EMCC. The applicant must be in 
compliance with the capital requirements imposed by its designated 
examining authority or appropriate regulatory agency, any other self-
regulatory organizations, and any other regulatory authority or self-
regulatory authority to which it is subject by statute, regulation, or 
agreement. The applicant cannot be subject to an order of statutory 
disqualification as defined in Section 3(a)(39) of the Exchange Act 
\44\ or an order of similar effect issued by a federal or state banking 
authority in the U.S. or any non-U.S. regulator.
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    \44\ 15 U.S.C. 78c(a)(39).
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    EMCC must have received no substantial information that would 
reasonably and adversely reflect on the applicant or any associated 
person to such an extent that the applicant should be denied membership 
in EMCC. However, no application will be denied on such basis unless 
the board has

[[Page 37102]]

reasonable grounds to believe that the applicant or any associated 
person meets a disqualification criteria specified in EMCC's rules.\45\
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    \45\ For example, disqualification criteria will include closer 
than normal surveillance by the applicant's designated examining 
authority or appropriate regulatory agency, violations of the 
federal securities laws, convictions of any criminal offense 
involving securities transactions, or any injunction against 
engaging in securities transactions.
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    In addition, if the applicant is a bank, it must have net worth as 
of the end of the quarter prior to the effective date of its membership 
determined in accordance with U.S. GAAP of at least $500 million. 
However, an applicant bank may be accepted if it has a net worth of at 
least $200 million if the membership and risk committee of EMCC's board 
of directors makes a formal findings that will become part of EMCC's 
books and records to the effect that other credit factors of the 
applicant compensate for the lower net worth.\46\
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    \46\ In making such determination, EMCC will consider the 
applicant's return on average assets, capital to total assets ratio, 
non-performing assets to total assets ratio, and liquid assets to 
total assets ratio. EMCC also will consider the ratings assigned to 
the applicant by a nationally recognized statistical rating 
organization, any significant off balance sheet items, and the 
applicant's risk management controls.
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    If the applicant is a U.S. broker or dealer, its aggregate 
indebtedness/excess net capital ratio must be less than 950% or its 
excess net capital/aggregate debit items ratio must be in excess of 
5.25% and its excess net capital must equal at least $100 million. 
However, a U.S. broker-dealer applicant may have excess net capital of 
at least $50 million if the membership and risk committee of EMCC's 
board of directors makes a formal findings that will become part of 
EMCC's books and records to the effect that other credit factors of the 
applicant compensate for the lower excess net capital.\47\
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    \47\ EMCC will consider any ratings assigned by a nationally 
recognized statistical rating organization, any significant adverse 
off-balance sheet items, and the applicant's significant business 
lines as compared to its internal risk management controls and short 
term funding arrangements.
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    If the applicant is a U.K. broker or dealer, its financial 
resources must be at least 120% of its financial resources requirement 
and its excess financial resources must equal at least $100 million. 
However, the applicant may have excess financial resources of at least 
$50 million if the membership and risk committee of EMCC's board of 
directors makes a formal finding that will become part of EMCC's books 
and records to the effect that other credit factors of the applicant 
compensate for the lower excess financial resources.\48\
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    \48\ EMCC will consider any rating assigned by a nationally 
recognized statistical rating organization, any significant adverse 
off-balance sheet items, and the applicant's significant business 
lines as compared to its internal risk management controls and short 
term funding arrangements.
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    If a U.S. broker applicant is applying to become an interdealer 
broker member, it must have excess net capital of at least $10 million 
and must agree to submit trading data to EMCC in such instruments as 
requested by EMCC. EMCC will determine the interdealer broker's 
potential margin calls, and the interdealer broker must demonstrate an 
ability to meet such margin calls and loss allocation assessments. The 
interdealer broker can demonstrate this ability by agreeing to submit 
to EMCC only transactions with EMCC members on both sides and by 
demonstrating a low error rate.\49\
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    \49\ If an interdealer broker has a margin payment because one 
of its contraparties fails to submit data on a trade prior to 8:00 
a.m. ET on T+1, the contraparty must compensate the interdealer 
broker for the cost of financing the payment obligation and may be 
subject to fine by EMCC.
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    During the first six months of EMCC's operations, EMCC will permit 
an interdealer broker to become an EMCC member which does not meet the 
$10 million excess net capital requirement if it meets an alternate 
criterion. Such applicant must maintain a clearing relationship with an 
EMCC member which is not an interdealer broker. Pursuant to the 
clearing relationship, the clearing firm must take the place of the 
interdealer broker on T+1 on all trades which do not have EMCC members 
on both sides. The interdealer broker will have a fixed clearing fund 
deposit in lieu of the required margin deposit. However, EMCC will 
calculate each day for such interdealer broker a preliminary and final 
required fund deposit excluding any positions that resulted from a 
systems failure of a contraparty resulting in a failure to submit trade 
data. If the required fund deposit exceeds the broker's fixed deposit, 
EMCC will not guarantee any transactions to the broker until its 
required fund deposit is equal to or lower than its fixed deposit.\50\ 
However, EMCC will guarantee completion of the interdealer broker's 
trades to the original EMCC contraparties.\51\ In addition, if the 
interdealer broker's required fund deposit exceeds its fixed deposit, 
the interdealer broker will not be subject to assessment for loss 
allocations \52\ and the interdealer broker will be charged a market 
rate of interest on the difference between its required fund deposit 
and its fixed deposit. EMCC will notify all dealer members whenever an 
interdealer broker's required fund deposit exceeds its fixed deposit. 
Comment is requested as to whether this alternative standard provides 
sufficient protection to EMCC. Specifically, EMCC will be guaranteeing 
trades to EMCC members in the event that an interdealer broker becomes 
insolvent even though it will not have collected margin from the broker 
to cover the loss. Furthermore, this provision does not set forth any 
minimum excess net capital requirements for brokers to meet before 
becoming EMCC members. Comment is requested as to whether such 
provisions are consistent with a clearing agency's obligations to have 
appropriate membership standards.
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    \50\ The interdealer broker could lower its required fund 
deposit by depositing additional funds with EMCC. If it does not 
deposit additional funds, its required fund deposit will exceed its 
fixed deposit until at least the end of the next month (because its 
required fund deposit is based on the highest margin calculation 
during the current month and the prior month).
    \51\ Because EMCC is not guaranteeing trades to the broker, if a 
dealer contraparty becomes insolvent, the broker is responsible for 
completing the trade to its contraparty on the other side. As a 
result, the nondefaulting EMCC dealer member does not receive the 
benefit of EMCC's guarantee of brokered trades. If the broker is 
unable to complete the trade, EMCC will then guarantee the broker's 
trade to its EMCC member contraparty. However, the trade is treated 
as a direct trade between the broker and its contraparty. Thus, 
under the loss allocation rules, the dealer would be allocated a 
greater portion of its loss than if the broker had not exceeded its 
fixed deposit requirement.
    \52\ Because EMCC is not guaranteeing trades to the interdealer 
broker, there would be no loss from direct trades entered into with 
the broker. Therefore, there would be no reason to assess the broker 
for such loss.
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    The foregoing financial responsibility standards are minimum 
requirements, and the board may impose greater standards based upon the 
level of the anticipated positions and obligations of an applicant, the 
anticipated risk associated with the volume and types of transactions 
an applicant proposes to process through EMCC, and the overall 
financial condition of an applicant. If an applicant does not itself 
satisfy the above minimum capital requirements, the board may include 
for such purposes the capital of an affiliate of the applicant if the 
affiliate has delivered to EMCC a guaranty, satisfactory in form and 
substance to the board, of the obligations of the applicant to EMCC.
4. Membership Agreement
    Each applicant to become a member of EMCC will be required to sign 
a membership agreement pursuant to which the applicant agrees to abide 
by the rules of EMCC. Under the agreement, the member's books and 
records must at all times be open to inspection by EMCC, and EMCC must 
be furnished with all such information in respect of the member's 
business and

[[Page 37103]]

transactions as EMCC may require. However, upon ceasing to be a member, 
EMCC cannot inspect such member's books and records or require 
information relating to transactions that occurred after the time when 
it ceased to be a member.
    The member must agree to submit to the jurisdiction of the courts 
of the state of New York and the U.S. District Court for the Southern 
District of New York and to appoint a person acceptable to EMCC as its 
agent to receive on its behalf service of process. Under the agreement, 
membership in EMCC and use of EMCC's services is governed by the laws 
of the state of New York. The member must agree that any judgment 
obtained in an action or proceeding may be enforced in the courts of 
any jurisdiction where the applicant or any of its property may be 
found, and the applicant must irrevocably submit to the jurisdiction of 
each such court in respect of any such action or proceeding. To the 
fullest extent permitted by law, members must waive all immunity 
whether on the basis of sovereignty or otherwise from jurisdiction, 
attachment both before and after judgment, and execution to which it 
might otherwise be entitled in any action or proceeding in any county 
or jurisdiction relating in any way to the agreement or to any 
transaction.
    The membership agreement also provides EMCC with an additional 
source of information for risk control purposes. Upon the request of 
and at no charge to EMCC, members must provide research that they 
provide to any of their customers relating to EMCC eligible instruments 
and events or conditions which might affect the price of EMCC eligible 
instruments.

F. Capacity To Enforce Rules

    Section 17A(b)(3)(A) of the Exchange Act provides that a clearing 
agency must be organized and have the capacity to enforce (subject to 
any rule or order of the Commission pursuant to Section 17(d) or 
19(g)(2) of the Exchange Act) compliance by its participants with the 
rules of the clearing agency. In order to do so, a clearing agency must 
have procedures for determining whether a participant is experiencing 
financial or operational difficulties. Sections 17A(b)(3) (G) and (H) 
require that the rules of a clearing agency provide that its 
participants shall be appropriately disciplined for violations of any 
provision of those rules and provide fair procedures for disciplining 
participants, denying participation in the clearing agency to any 
person, prohibiting or limiting access to the clearing agency's 
services, and reviewing summary suspensions.
1. Financial Standards
    EMCC's Rule 13 will authorize EMCC to examine the financial 
responsibility and operational capability of any member or applicant to 
become a member and to require a member to furnish EMCC with adequate 
assurances of its financial responsibility and operational capability. 
Pursuant to this rule, a member may be required to provide additional 
assurances with respect to financial responsibility and operational 
capability, including additional reporting by a member of its financial 
or operational condition; increased clearing fund deposits by a member; 
and other assurances as may be required by EMCC.
    EMCC also will have general continuance standards that require a 
member to promptly inform EMCC in the event that it no longer is in 
compliance with any of the relevant standards for membership or any 
materially adverse change. The board may require additional financial 
reporting if the member no longer meets the standards for admission to 
membership, it has violated any rule of EMCC, it fails to satisfy in a 
timely manner any obligation to EMCC, there is a material change in 
control or financial condition of such member, or the board determines 
that it is necessary or advisable to protect EMCC, its other members, 
or its creditors or investors, to safeguard securities and funds in the 
custody or control of EMCC, or to promote the prompt and accurate 
processing, clearance, or settlement of securities transactions. The 
board must also make a determination as to whether the member should be 
placed on surveillance status consistent with its rules.\53\
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    \53\ See supra note 30.
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2. Ceasing to Act
    Section 17A(b)(5)(C) provides that a clearing agency may summarily 
suspend and close the accounts of a participant that has been and is 
expelled or suspended from any self-regulatory organization; that is in 
default of any delivery of funds or securities to the clearing agency; 
or that is in such financial or operational difficulty that the 
clearing agency determines and so notifies the appropriate regulatory 
agency for such participant that such suspension and closing of 
accounts are necessary for the protection of the clearing agency, its 
participants, creditors, or investors.
    Upon providing notice to the member, EMCC may at any time cease to 
act for a member if the board of directors determines that adequate 
cause exists to do so.\54\ EMCC may cease to act either with regard to 
a particular transaction or with regard to transactions generally. EMCC 
will promptly notify all members when it ceases to act for a member. A 
member for which EMCC has ceased to act may request a hearing to review 
EMCC's decision.
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    \54\ Such cause may exist if one or more of certain factors are 
found, including: the member has failed to perform any of its 
obligations or has failed to make any required payment to EMCC; the 
member is no longer in compliance with the admissions standards or 
continuance standards; the board has reasonable grounds to believe 
the member has been responsible for any fraudulent or dishonest 
conduct or breach of fiduciary duty or has made any material 
misstatement to EMCC in connection with its application to be a 
member or any EMCC service; the board has reasonable grounds to 
believe the member is in financial or operation difficulty; the 
member is in breach of any requirement imposed by an appropriate 
regulatory agency, self-regulatory organization, or any regulatory 
body; the member is not paying its debts as they become due or is 
otherwise involved in a bankruptcy proceeding; the member is 
dissolved or ceases to carry on its business; the member contests 
the validity of any agreement with EMCC; the member fails to perform 
its contracts with EMCC; or the board has reasonable grounds to 
believe that ceasing to act is necessary either for the protection 
of EMCC or for any of the other members or to facilitate the orderly 
and continuous performance of EMCC's services.
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    If certain factors are present, EMCC will treat a member as 
insolvent.\55\ EMCC will notify all members of the treatment of the 
member as insolvent. Upon a determination of insolvency, EMCC will 
immediately cease to act for such member. EMCC will delete all trades 
of that member to which EMCC's guaranty has not attached except trades 
that the board determines will promote an orderly market. EMCC will 
then close out the guaranteed trades and the trades that the board has 
accepted. EMCC will close out by buying in or selling out securities 
deliverable by or to the insolvent. The close out procedure will be 
completed by EMCC as promptly as practicable after EMCC has given 
notice of the treatment of the member as insolvent.
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    \55\ Such circumstances include: the member provides notice to 
EMCC that it is insolvent; the board or any regulatory body 
determines that the member is insolvent; a court order is entered 
adjudging the member to be insolvent; the member files or consents 
to the filing of a petition seeking bankruptcy relief; the member 
makes a general assignment to its creditors; the member is 
dissolved; or a resolution is passed by the member that it be wound 
up, liquidated, or dissolved.
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3. Hearing Procedures
    Section 17A(b)(5) of the Exchange Act provides that in any 
proceeding to determine whether a participant should be denied 
participation, prohibited or limited with respect to access to the

[[Page 37104]]

clearing agency's services, or disciplined, the clearing agency must 
notify the participant of the specific grounds of the denial of 
services or the changes brought against the member. The clearing agency 
must provide the member with an opportunity to be heard on the grounds 
of the denial or to defend against any charges. The clearing agency 
must keep a record of the proceeding.
    A member may request a hearing by filing with EMCC a written 
request setting forth the contested action of EMCC. Within seven 
business days after filing the request or three business days in the 
case of summary action, the objecting member must provide EMCC with a 
detailed written statement setting forth the contested action and the 
basis for objection. EMCC will notify the member in writing of the date 
and place of the hearing at least five business days prior to the 
hearing.
    The hearing will be before a panel drawn from participant directors 
on the membership committee unless the contested action was taken by 
the membership committee. In such a case, the panel will be drawn from 
participant directors on the executive committee. The Committee will 
select the members of the panel. The objecting member will have an 
opportunity to be heard and may be represented by counsel. The panel 
will make a decision within ten business days after conclusion of the 
hearing. Although the panel's decision is considered final, the board 
may overturn any decision adverse to the member.

G. Equitable Allocation of Dues, Fees, and Charges

    Section 17A(b)(3)(D) of the Exchange Act requires that the rules of 
the clearing agency provide for the equitable allocation of reasonable 
dues, fees, and other charges among its participants. EMCC's proposed 
fee schedule provides that it will charge $5 for input, $7.50 for late 
instructions after 9:00 p.m. on T, $25 for late instructions after 
11:00 a.m. on T+1, and $7.50 for net settlement.\56\
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    \56\ The Commission understands that EMCC may adjust its fee 
schedule soon after being registered (providing that the Commission 
grants EMCC registration).
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H. Burden on Competition

    Section 17A(b)(3)(I) of the Exchange Act requires that the rules of 
a clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purpose of the Exchange Act. As 
discussed in Section III.A., EMCC will automatically receive data on 
all trades of EMCC members that have been submitted to TRAX or Match-
EM. EMCC members do not have the ability to exclude trades from the 
EMCC clearance system unless they confirm trades without using TRAX's 
and Match-EM's automated confirmation system. Although EMCC's rules do 
not require that EMCC members submit all of their eligible trades to 
EMCC, as a practical matter EMCC members that want to obtain the 
benefit of Match-EM or TRAX must settle at EMCC. The Commission is 
concerned that this aspect of EMCC's operations could either force EMCC 
members to settle all their eligible trades at EMCC or result in trades 
being excluded from automated processing.\57\ In addition, EMCC's 
arrangements with the locked-in trade sources could result in 
inhibiting future clearing agencies from beginning operations. Comment 
is requested as to whether this aspect of EMCC's operations is 
consistent with the Exchange Act.
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    \57\ To exclude trades from EMCC settlement, EMCC members would 
be forced to use manual processes to confirm trades. Members may 
want to exclude trades from EMCC's system for various reasons. For 
example, if the trade would cause a member to exceed its overnight 
exposure cap, it may want to process the trade through other means. 
In addition, brokers may have agreed to only submit trades to EMCC 
with EMCC members on both sides. Information on such trades would 
then be generally unavailable which would reduce market 
transparency.
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing application by August 11, 1997. Such 
written data, views, and arguments will be considered by the Commission 
in deciding whether to grant Euroclear's request for exemption from 
registration. Persons desiring to make written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549. Reference 
should be made to File No. 600-30. Copies of the application and all 
written comments will be available for inspection and copying at the 
Commission's Public Reference Room, 450 Fifth Street, NW., Washington, 
DC 20549.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\58\
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    \58\ 17 CFR 200.30-3(a)(16).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-17987 Filed 7-9-97; 8:45 am]
BILLING CODE 8010-01-M