[Federal Register Volume 63, Number 248 (Monday, December 28, 1998)]
[Notices]
[Pages 71532-71534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34258]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40810; International Series Release No. 1174; File No. 
SR-EMCC-98-10]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Notice of a Proposed Rule Change Relating to Netting 
Services

December 18, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 2, 1998, Emerging 
Markets Clearing Corporation (``EMCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by EMCC. The Commission is publishing this notice to solicit 
comments from interested persons on the proposed rule change.
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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

    Under the proposed rule change, EMCC will offer netting services to 
its members.\2\
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    \2\ The complete text of the proposed amendments to EMCC's Rules 
is attached as an exhibit to EMCC's filing, which is available for 
inspection and copying at the Commission's public reference room and 
through EMCC.
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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 summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by EMCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Currently, EMCC processes its members' transactions on a trade for 
basis. Under the proposed rule change, EMCC will offer its members the 
ability to have their transactions processed on a netted basis through 
EMCC's netting services.
    Under the proposal, transactions that are between two netting 
members \4\ and that have been reported on EMCC's ``accepted trade 
report'' made available to members no later than two days prior to 
settlement date (``SD-2'') will be eligible for settlement netting. The 
accepted trade report will indicate those trades that are to be 
processed on a netted basis.
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    \4\ The term ``netting member'' will be defined in EMCC Rule 1 
as a member that is a participant in the netting services.
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    Both trade for trade transactions and netted transactions will be 
novated and guaranteed at the same time. As with trade for trade 
transactions, receive and deliver obligations with respect to netting 
trades would be established at the time the ``accepted trade report'' 
is made available to members. On the scheduled settlement date, these 
receive and deliver obligations will be extinguished and replaced with 
new receive obligations or deliver obligations relating to the net 
position. In order to meet the delivery parameters of the applicable 
qualified securities depository (``QSD''), EMCC may establish one or 
more receive and deliver obligations with respect to any one net 
position.
    The value at which receive and deliver obligations will be settled 
at a QSD will be fixed by EMCC based on an average of the prices of all 
transactions in the ISIN \5\ underlying such receive and deliver 
obligations. In order to compensate netting members for the difference 
between the value at which the netted receive and deliver obligations 
will be settled and the actual consideration for the transactions 
underlying the receive and deliver obligations, EMCC will debit or 
credit members with the difference between the value at which such 
obligations settle and the actual consideration. These credits and 
debits will be referred to as the ``transaction adjustment payment.''
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    \5\ EMCC's Rules define ISIN to mean the International 
Securities Identification Number as defined by International Number 
as defined by International Organization for Standardization 6166.
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    The following paragraphs describe the particular changes that EMCC 
will make to its rules to accommodate netting services.
Rule 1--Definitions
    EMCC will add definitions of ``netting member,'' ``netting 
services,'' and ``netting trade'' to Rule 1. The definition of 
``netting trade'' will set forth the requirements that must be met in 
order for a trade to be eligible as a netting trade. The requirements 
are that the trade must (a) be a compared trade between two netting 
members and (b) have been reported on an accepted trade report made 
available to members no later than SD-2. The definition also will state 
that EMCC may treat any trade or trades, whether by netting member or 
by ISIN, as ineligible to be a netting trade(s). EMCC will also modify 
the definition of ``final net settlement obligation'' to include any 
unpaid transaction adjustment payment.
    EMCC will make technical corrections to the definitions of ``fail 
long position,'' ``fail short position,'' and ``net settlement 
obligation,'' all of which incorrectly refer to the ``settlement day'' 
rather than the ``scheduled settlement date.'' In addition, EMCC will 
modify the definition of ``contract value'' to clarify that this value 
is calculated by EMCC.
Rule 4--Clearing Fund, Margin, and Loss Allocation
    EMCC's risk system currently calculates members' margin 
requirements on a netted basis. Therefore, EMCC will not amend Rule 4 
other than with respect to the expiration date of the paragraph in Rule 
4 Section 10 that permits EMCC to use clearing fund deposits for 
intraday financing. The proposed change will postpone the automatic 
expiration of this ability to the earlier of (i) the first anniversary 
of the date on which EMCC commenced operation as a registered clearing 
agency \6\ or (ii) the date on which all members are netting members 
(as opposed to the date on which netting services are available).
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    \6\ The Commission granted EMCC temporary registration as a 
clearing agency on February 13, 1998. Securities Exchange Act 
Release No. 39661, International Series Release No. 1117 (February 
13, 1998), 63 FR 8711.
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    In addition, EMCC proposes to make a correction with respect to the 
use of the term ``value of position'' in Section 5 of Rule 4. Although 
the term ``value of position'' is currently employed with respect to 
the calculations of both the mark to market amount and volatility 
amount, its meaning is not the same for both calculations. The current 
definition applies only to the mark to market calculation. To clarify 
this, EMCC will move that definition from the text of Section 5 to a 
footnote to the mark to market formula. In addition, EMCC will insert a 
different definition of ``value of position'' as a footnote to the 
volatility amount formula.
Rule 6--Receipt of Data
    With the introduction of netting services, the ``accepted trade 
report'' will indicate whether a transaction is a

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netting trade or whether it will be settled on a trade for trade basis. 
EMCC will modify Rule 6 to reflect this. EMCC members will receive a 
``netting detail report'' from EMCC with respect to netting trades 
scheduled to settle on the following business day. The ``netting detail 
report'' will indicate with respect to each ISIN in which a netting 
member has a netting trade a net settlement position for a given 
settlement date. The net settlement position will equal the net amount 
of EMCC eligible instruments in a particular ISIN that a netting member 
has purchased from or sold to all other netting members. In addition, 
EMCC will add language to Rule 6 to clearly indicate that cutoff times 
for submission of data to EMCC may be different for netting trades and 
trades to be settled on a trade for trade basis.
Rule 7--Novation and Guaranty of Obligations and Receive, Deliver and 
Settlement Obligations and Rule 8--Settlement Instructions Only Report
    EMCC will amend Section 1 of Rule 7 so that it pertains to the 
guaranty and novation of all trades submitted to EMCC. No change is 
proposed with respect to the timing of the guaranty and novation.
    EMCC will amend Section 2(a) of Rule 7 so that it pertains to the 
creation of a member's receive and deliver obligations. EMCC proposes 
no change with respect to the point in time at which receive and 
deliver obligations are created by EMCC. However, with respect only to 
netting trades on the scheduled settlement date, the receive and 
deliver obligations that are established in accordance with Section 
2(a) will be extinguished and replaced with one or more new receive and 
deliver obligations with respect to each net position. In addition, 
subsection (c) of Section 2 will state that deliver and receive 
obligations are to be settled at the settlement value set forth on the 
``accepted trade report'' for trades to be settled on a trade for trade 
basis and as set forth on the ``netting detail report'' with respect to 
netting trades.
    EMCC will amend Section 3 of Rule 7 so that it pertains to the 
transaction adjustment payment. Because EMCC will calculate a 
settlement value for netted trades, EMCC will be required to credit or 
debit netting members with an amount equal to the difference between 
the net consideration of the transactions underlying each net 
settlement position and the net settlement value of such netting 
member's receive and deliver obligations for each net settlement 
position. This payment will be referred to as the transaction 
adjustment payment.
    In addition, EMCC will make the following technical changes so that 
(i) all rules pertaining to receive, deliver, and settlement 
obligations appear under one rule and (ii) Rule 8 pertains solely to 
EMCC's settlement instructions only report:
    ``Fail settlement positions''--moved from Section 2 of Rule 8 to 
Section 12 of Rule 7.
    ``Partial deliveries''--moved from Section 3 of Rule 8 to Section 
13 of Rule 7.
    ``Financing costs/obligation to receive securities''--moved from 
Section 4 of Rule 8 to Section 14 of Rule 7. A paragraph will be added 
to this section which will enable EMCC to charge interest to and/or 
fine a member for failure to make a transaction adjustment payment.
    ``Obligation to facilitate financing''--moved from Section 5 of 
Rule 8 to Section 15 of Rule 7.
    ``Relationship with qualified securities depository''--moved from 
Section 6 of Rule 8 to Rule 25.
Rule 25--Qualified Securities Depositories
    In addition to moving Section 6 of Rule 8 to Section 2 of Rule 25, 
EMCC will add a section to Rule 25 prohibiting a member from canceling 
or otherwise modifying instructions previously transmitted by EMCC to a 
QSD.
Addendum C--Statements of Policy with Respect to Additional Clearing 
Fund Deposits
    Addendum C will be corrected to refer to contract values rather 
than settlement values.
Addendum F--Fee Schedule
    In order to be consistent with the timetables contained elsewhere 
in its Rules which key off of settlement day (``SD'') and because 
members may submit trades that were done on a forward basis so long as 
such trades are submitted to EMCC no earlier than SD-3, EMCC proposes 
to change the references to Trade Date (T) in its fee schedule to SD.
    EMCC believes that the ability to offer the netting services would 
facilitate the prompt and accurate clearance and settlement of emerging 
market securities transactions and is therefore consistent with the 
requirements of Section 17A of the Act \7\ and the rules and 
regulations thereunder.
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    \7\ 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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which EMCC consents, the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, N.W., Washington, D.C. 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, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of EMCC. All 
submissions should refer to File No. SR-EMCC-98-10 and should be 
submitted by January 20, 1999.


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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34258 Filed 12-24-98; 8:45 am]
BILLING CODE 8010-01-M