[Federal Register Volume 64, Number 232 (Friday, December 3, 1999)]
[Notices]
[Page 67963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31391]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42180; File No. SR-EMCC-99-7]
Self-Regulatory Organizations; Emerging Markets Clearing
Corporation; Order Granting Approval of a Proposed Rule Change
Regarding Clearing Agency Cross-Guaranty Agreements
November 29, 1999.
On June 4, 1999, the Emerging Markets Clearing Corporation
(``EMCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-EMCC-99-7)
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').\1\ Notice of the proposed was published in the Federal
Register on August 6, 1999.\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. 41673 (July 30, 1999),
64 FR 43006 [File No. SR-EMCC-97-7].
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I. Description
EMCC's Rule 21 authorizes EMCC to enter into ``clearing agency
cross-guaranty agreements.'' \3\ On June 2, 1999, EMCC entered into
clearing agency cross-guaranty agreements with the National Securities
Clearing Corporation (``NSCC''), the Government Securities Clearing
Corporation (``GSCC''), and the International Securities Clearing
Corporation (``ISCC''). According to EMCC, the form of agreement with
each of these entities is substantially similar to the form of
agreement approved by the Commission in rule changes previously
submitted by NSCC, MBSCC, GSCC, and ISCC.\4\
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\3\ Under EMCC's Rule 1, ``clearing agency cross-guaranty
agreement'' means an agreement between EMCC and another clearing
entity relating to the guaranty by EMCC of certain obligations of a
member to such clearing entity.
\4\ Securities Exchange Act Release Nos. 37616 (August 28,
1996), 61 FR 46887 [File Nos. SR-MBSCC-96-02, SR-GSCC-96-03, and SR-
ISCC-96-04], and 39020 (September 4, 1997), 62 FR 47862 [File No.
SR-NSCC-97-11].
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Generally, the limited cross-guaranty provided for by the clearing
agency cross-guaranty agreements is invoked when a clearing entity
ceases to act for a common member. This limited guaranty enables
clearing agencies that have entered into limited cross-guaranty
agreements to benefit from a defaulting member's excess collateral at
other clearing agencies in which the defaulting member was a
participant. The guaranty provides that resources of the defaulting
common member remaining after the defaulting common member's
obligations to the guaranteeing clearing agency have been satisfied may
be used to satisfy any unsatisfied obligations to the other clearing
agencies. The guaranty is limited to the extent of the resources
relative to the defaulting common member remaining at the guaranteeing
clearing agency.
EMCC believes that the clearing agency cross-agency agreements
should be beneficial because the funds that may be made available to it
may provide resources that may make a pro rata charge against its
clearing fund unnecessary or lesser in amount.
The benefits accruing to EMCC from a Clearing agency cross-guaranty
agreement are illustrated by the following example:
Broker-dealer BD upon insolvency owes EMCC a net of $5 million. BD
is owed a net of $3 million by Clearing Entity X. In the absence of a
clearing agency cross-guaranty agreement, Clearing Entity X would be
obligated to pay $3 million to BD's bankruptcy estate, and EMCC would
have a claim for $5 million against BD's bankruptcy estate as a general
creditor with no assurance as to the extent of recovery. Under an
effective cross-guaranty agreement, however, Clearing Entity X would
pay to EMCC the $3 million it owned to BD. As a result, EMCC's net
exposure to the defaulting common member BD would be reduced.
II. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to assure the safeguarding of securities in
the custody or control of the clearing agency or for which it is
responsible and to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions. The
Commission believes that the proposal is consistent with EMCC's
obligation to assure the safeguarding of securities and funds in the
custody or control of the clearing agency for which it is responsible
because cross-guarantee agreements among clearing entities are a method
of reducing risk of loss due to a common member's default. Furthermore,
the Commission has encouraged the use of cross-guarantee agreements and
other similar arrangements among clearing agencies.\5\ Consequently,
cross-guarantee agreements should assist clearing agencies in assuring
the safeguarding of securities and funds in their custody or control.
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\5\ E.g., Securities Exchange Act Release Nos. 36431 (October
27, 1995), 60 FR 55749 [File No. SR-GSCC-95-03] and 36597 (December
15, 1995), 60 FR 66570 [File No. SR-MBSCC-95-05].
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The Commission also believes the proposals are consistent with
EMCC's obligation to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions. The
Commission believes that by entering into such agreements, EMCC can
mitigate the systematic risks posed to it and to the national clearance
and settlement system as a result of a defaulting common member.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposals are consistent with the requirements of the Act, and in
particular with the requirements of Section 17A of the Act and the
rules and regulations thereunder.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-EMCC-99-7) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-31391 Filed 12-2-99; 8:45 am]
BILLING CODE 8010-01-M