[Federal Register Volume 63, Number 189 (Wednesday, September 30, 1998)]
[Notices]
[Pages 52311-52313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26156]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40475; File No. SR-EMCC-98-09]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change Relating to Pair-Off Procedures for Fail 
Receive and Fail Deliver Obligations

September 24, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 18, 1998, the 
Emerging Markets Clearing Corporation (``EMCC'') filed with the 
Securities and Exchange Commission (``Commission'') and on September 
22, 1998, amended the proposed rule change as described in Items I and 
II below, which items have been prepared primarily by EMCC. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to grant 
accelerated approval.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The purpose of the proposed rule change is to permit EMCC to 
perform pair-offs with respect to fail receive and fail deliver 
obligations for EMCC eligible instruments other than warrants.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, EMCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. EMCC has prepared

[[Page 52312]]

summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.\2\
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    \2\ The Commission has modified parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Since EMCC commenced operations in April 1998, EMCC states that it 
has experienced a 98% settlement rate on settlement date. However, 
during the last few weeks (due to the current global market 
environment), EMCC has seen the settlement rate decline with respect to 
certain instruments to less than 50%. Currently, there are more than 
2000 open fails on the books of EMCC, as well as those of its members, 
in selected issues.
    Prior to the formation of EMCC, if a member was experiencing a 
significant fail problem, it would conduct bilateral pair-offs with its 
counterparties on the failed transactions. EMCC has determined that it 
would be beneficial for both EMCC and its members for EMCC to conduct 
bilateral pair-offs to help eliminate fails for the following reasons. 
First, EMCC believes that the bilateral pair-offs will help to 
eliminate uncertainties that could result from potential buy-ins of the 
failed transactions. (Buy-ins have the potential to exacerbate existing 
market volatility.) Second, EMCC expects it could eliminate the need 
for members to deposit significant additional amounts of clearing fund 
obligations related to the failed positions. This could benefit members 
by allowing them to utilize these funds in other ways during periods of 
market volatility. Third, EMC expects that bilateral pair-offs will 
permit members as well as EMCC to reduce the number of open fails 
carried on their books on a daily basis.
    Fail deliver and fail receive obligations may be paired-off only if 
(i) they relate to EMCC eligible instruments within the same ISIN, (ii) 
they relate to the same quantity of EMCC eligible instruments either 
individually or when aggregated with other fail obligations (a fail 
obligation cannot be partially paired-off), and (iii) the original 
transactions underlying fail obligations to be paired-off are with the 
same counter party.
    The proposed rule change permits EMCC to conduct pair-offs as 
frequently as EMCC determines is necessary and for such EMCC 
instruments as EMCC determines to be beneficial. The pair-off process 
gives members the opportunity to notify EMCC if they determine to be 
excluded from a particular pair-off date. With respect to the first 
bond pair-off, EMCC states that members have been notified that EMCC 
has requested that the Commission approve the proposed rule change to 
allow EMCC to conduct the first pair-off process on Friday, September 
25, 1998. EMCC states that to date all members have indicated that they 
intend to participate in the first bond pair-off. EMCC will notify 
members regarding the approval of the rule filing and at such time, 
EMCC will confirm with its members the scheduling of the first pair-off 
process. With respect to future bond pair-offs, EMCC intends to give 
its members two days prior notice of any such bond pair-off. The pair-
off process may be conducted with respect to specific EMCC eligible 
instruments or with respect to all EMCC eligible instruments. Depending 
upon the number of fails affected by the pair-off process, the time 
period for conducting the pair-off process could extend beyond one 
business day.
    As a result of the pair-off process, EMCC will issue cancellation 
instructions on behalf of the affected members to the appropriate 
qualified securities depository (``QSD'') with respect to each paired-
off transaction. In addition, EMCC will issue to the QSD appropriate 
debit/credit instructions which result from the differences among the 
transactions which have been paired-off.
    EMCC believes that the proposed rule change is consistent with 
Section 17A of the Act and the rules and regulations promulgated 
thereunder because it will facilitate the prompt and accurate 
settlement of securities transactions.\3\
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    \3\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    EMCC does not believe that the proposed rule change will have an 
impact on or impose a burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments relating to the proposed rule change have been 
solicited or received. EMCC will notify the Commission of any written 
comments received by EMCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Section 17A(b)(3)(F) \4\ requires that the rules of a clearing 
agency be designed to promote the prompt and accurate clearance and 
settlement of securities transactions. The Commission believes that 
EMCC's rule change is consistent with EMCC's obligations under Section 
17A(b)(3)(F) because the bilateral pair-off process will help reduce 
the number of failed transactions on EMCC's books. By reducing the 
number of failed transactions, EMCC will be able to increase the number 
of transactions which settle promptly and on a timely basis.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    EMCC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of the filing. Because of the current 
global market environment, EMCC has requested that its proposed rule 
change be approved by Thursday, September 24, 1998, so that EMCC may 
conduct the first pair-off on Friday, September 25, 1998, to begin 
eliminating fails as soon as possible. In order to allow EMCC to begin 
using its pair-off process as soon as practically possible, the 
Commission finds good cause for approving the proposed rule change 
prior to the thirtieth day after the date of publication of notice of 
filing.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW, 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal

[[Page 52313]]

office of EMCC. All submissions should refer to the File No. SR-EMCC-
09-09 and should be submitted by October 21, 1998.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-EMCC-98-09) be and hereby is 
approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-26156 Filed 9-29-98; 8:45 am]
BILLING CODE 8010-01-M