[Federal Register Volume 64, Number 98 (Friday, May 21, 1999)]
[Notices]
[Pages 27841-27843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12931]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41415; International Series Release No. 1197; File No. 
SR-EMCC-98-10]


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

May 17, 1999.
    On November 2, 1998, Emerging Markets Clearing Corporation 
(``EMCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-EMCC-98-10) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on December 28, 1998.\2\ No comment letters were received. For 
the reasons discussed below, the Commission is approving the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 40810, International 
Series Release No. 1174 (December 18, 1998), 63 FR 71532.
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I. Description

    Currently, EMCC processes its members' transactions on a trade for 
trade basis. The rule change enables EMCC to offer its members the 
ability to have their transactions processed on a netted basis through 
EMCC's netting services.
    Under EMCC's netting services, transactions between two netting 
members that have been reported on EMCC's ``accepted trade report,'' 
which is 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 trades that are to be processed 
on a netted basis.
    Both trade for transactions and netted transactions will be novated 
and guaranteed at the same time. Receive and deliver obligations for 
netting trades will be established when 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

[[Page 27842]]

QSD will be fixed by EMCC based on an average of the prices of all 
transactions in the ISIN \3\ 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 
are 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. This credit or debit 
will be referred to as the ``transaction adjustment payment.''
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    \3\ EMCC Rule 1 defines ISIN to mean the International 
Securities Identification Number as defined by International 
Organization for Standardization 6166.
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    As described below, the rule change makes specific changes to 
EMCC's rules.

Rule 1--Definitions

    The rule change adds definitions of ``netting member,'' ``netting 
services,'' and ``netting trade'' to Rule 1. The term ``netting 
member'' is defined as a member that is a participant in the netting 
services. The definition of ``netting trade'' sets forth the 
requirements that must be met in order for a trade to be eligible as a 
netting trade. Specifically, 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 states that EMCC may treat any trade either by netting 
member or by ISIN as ineligible to be a netting trade. The rule change 
also amends the definition of ``final net settlement obligation'' to 
include any unpaid transaction adjustment payment.
    The rule change makes 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, the rule 
change modifies the definition of ``contract value'' to state that this 
value is calculated by EMCC.

Rule 4--Clearing Fund, Margin, and Loss Allocation

    The rule change amends Rule 4 with respect to the expiration date 
of the paragraph in Section 10 of Rule 4 that permits EMCC to use 
clearing fund deposits for intraday financing. The amendment postpones 
this expiration date to the earlier of (i) the first anniversary of the 
date on which EMCC commenced operation as a registered clearing 
agency\4\ 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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    \4\ On February 13, 1998, the Commission granted EMCC temporary 
registration as a clearing agency until August 20, 1999. Securities 
Exchange Act Release No. 39661, International Series Release No. 117 
(February 13, 1998), 63 FR 8711.
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    In addition, the rule change amends Section 5 of Rule 4 with 
respect to the use of the term ``value of position.'' The term is 
currently used with respect to the calculations of both the mark to 
market amount and volatility amount. However, the current definition 
applies only to the mark to market calculation. As a result, the rule 
change moves the current definition from the text of Section 5 to a 
footnote to the mark to market formula. In addition, the rule change 
adds a different definition of ``value of position'' as a footnote to 
the volatility amount formula.

Rule 6--Receipt of Data

    The rule change amends Rule 6 to state that accepted trade reports 
will indicate whether a transaction is a netting trade or whether it 
will be settled on a trade for trade basis. 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 a net settlement position for a given settlement 
date for each ISIN in which a netting member has a netting trade. 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. The rule change also adds 
language to Rule 6 to 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

    The rule change amends Section 1 of Rule 7 so that it applies to 
the guaranty and novation of all trades submitted to EMCC. 
Specifically, the rule change amends Section 2(a) Rule 7 so that it 
applies to the creation of a member's receive and deliver obligations. 
With respect 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, the rule change amends Section 2(c) of Rule 7 to state that 
receive and deliver 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.
    The rule change amends Section 3 of Rule 7 so that it applies to 
the transaction adjustment payment. In additional the rule change makes 
the following technical changes so that (i) all rules pertaining to 
receive, deliver, and settlement obligations appear under one rule, 
Rule 7, and (ii) Rule 8 pertains solely to EMCC's settlement 
instructions only report. Specifically, the rule change makes the 
following changes:
    (1) ``Fail settlement positions'' is moved from Section 2 of Rule 8 
to Section 12 of Rule 7;
    (2) ``Partial deliveries'' is moved from Section 3 of Rule 8 to 
Section 13 of Rule 7;
    (3) ``Financing costs/obligation to receive securities'' is moved 
from Section 4 of Rule 8 to Section 14 of Rule 7 (a pararaph is added 
to this section that will enable EMCC to charge interest to or fine a 
member for failure to make a transaction adjustment payment);
    (4) ``Obligation to facilitate financing'' is moved from Section 5 
of Rule 8 to Section 15 of Rule 7; and
    (5) ``Relationship with qualified securities depository'' is moved 
from Section 6 of Rule 8 to rule 25.

Rule 25--Qualified Securities Depositories

    The rule change adds a section to Rule 25 to prohibit 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

    The rule change amends Addendum C to refer to contract values 
rather than settlement values.

Addendum F--Fee Schedule

    The rule change modifies the reference to trade date (T) in EMCC's 
fee schedule to Settlement Day (SD) so that the reference is consistent 
with the timetables contained elsewhere in EMCC's rules 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.

[[Page 27843]]

II. Discussion

    Section 17A(b)(3)(F) of the Act \5\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. The 
Commission believes that the proposed rule change is consistent with 
EMCC's obligations under Section 17A(b)(3)(F) because it should reduce 
the number of settlement payments and the size of delivery obligations 
among EMCC netting members and therefore should increase the speed and 
accuracy of the settlement process with regard to those members. In 
addition, the Commission believes that the arrangements for EMCC's 
netting services have been designed so that they help EMCC to assure 
the safeguarding of securities and funds that are under EMCC's control 
or for which it is responsible.
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    \5\ 15 U.S.C. 78q-1(b)(3)(D).
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III. Conslusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \6\ and the 
rules and regulations thereunder.
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    \6\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-EMCC-98-10) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12931 Filed 5-20-99; 8:45 am]
BILLING CODE 8010-01-M