[Federal Register Volume 66, Number 12 (Thursday, January 18, 2001)]
[Notices]
[Page 4879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1408]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 43824; File No. SR-EMCC-00-05]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Order Approving a Proposed Rule Change Relating to 
Increasing the Minimum Clearing Fund Requirement for All EMCC Members 
to $3,000,000 and Establishing Two Tiers of Inter-Dealer Broker 
Membership Standards

January 9, 2001.
    On July 14, 2000, the Emerging Markets Clearing Corporation 
(``EMCC'') filed with the Securities and Exchange Commission 
(``Commission'') and on August 16, 2000, and November 1, 2000, amended 
a proposed rule change (File No. SR-EMCC-00-05) 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 1, 
2000.\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. 43618 (November 27, 
2000), 65 FR 75327.
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I. Description

    The purpose of the rule change is to (i) increase the minimum 
clearing fund requirement for all EMCC members to $3,000,000 from the 
current required minimum of $1,000,000 and (ii) provide two tiers of 
IDB membership standards.\3\
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    \3\ EMCC's Rules define an IDB as ``a broker-dealer that 
conducts securities trading which matches buyers and sellers who are 
banks or dealers, and who is designated as such by the 
Corporation.''
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    With respect to the increased minimum clearing fund requirement, 
EMCC's risk advisory subgroup reviewed EMCC's two years of operations, 
including trade files and daily margin calculations. The subcommittee 
concluded that, generally, members' calculated clearing fund 
requirements did not go below $3,000,000. Moreover, raising the minimum 
requirement from $1,000,000 to $3,000,000 is consistent with the 
clearing fund requirements imposed on IDBs by other clearing 
corporations, \4\ and it addresses the fact that IDB members have a 
potential clearing fund loss liability that could well exceed the 
current $1,000,000 clearing fund minimum. Accordingly, EMCC has 
determined that it would be more appropriate to have a greater amount 
of IDB funds on hand to cover the potential exposure than to have to 
request such a deposit if needed due to a loss. Therefore, EMCC has 
determined that it is appropriate to increase all members', including 
IDBs', minimum clearing fund requirement to $3,000,000.
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    \4\ See, e.g., Government Securities Clearing Corporation Rule 
4, Section 2(c).
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    The rule change also separates IDBs into two membership categories 
based on excess net capital or excess financial resources. Those IDBs 
with excess net capital, or excess financial resources for a broker or 
dealer regulated by the Securities and Futures Authority Limited, of 
between $10,000,000 and $20,000,000 will be margined using an ``event 
factor'' of 1.5 instead of the factor of 1.25 currently used in EMCC's 
base margining formula. This factor is representative of the 
volatilities experienced during the last three emerging market 
events.\5\ Those IDBs with excess net capital or excess financial 
resources of more than $20,000,000 will be margined under the current 
event factor of 1.25.
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    \5\ October, 1997 (Asia), August, 1998 (Russia), and January, 
1999 (Brazilian).
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    EMCC believes that the two-tier membership standard will permit it 
to better collateralize the risk posed by IDBs with lower levels of 
capital. EMCC recognizes that the clearing fund is a key mitigant to 
market risk in the event of member insolvency and feels that margining 
those IDBs with less than $20,000,000 excess regulatory capital at an 
event factor of 1.5 should mitigate the risk of their lower capital 
levels.
    The effective date for these approved changes will be thirty days 
following the date the Commission approves the filing for current 
members and will be immediately for any applicant who becomes a member 
after the rule change is approved.

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 
and funds which are in the custody or control of the clearing agency 
for which it is responsible.\6\ The Commission believes that the 
approval of EMCC's rule change is consistent with this Section. The 
Commission believes it is prudent for EMCC to have a greater amount of 
IDB funds on hand to cover the potential exposure than to have to 
request such a deposit if needed and to increase all members', 
including IDBs', minimum clearing fund requirements to $3,000,000. In 
addition, the Commission believes that the two-tier membership standard 
whereby EMCC will margin IDBs with less than $20,000,000 excess 
regulatory capital at an event factor of 1.5 will permit EMCC to better 
collateralize the risk posed by IDBs with lower levels of capital.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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III. Conclusion

    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 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-00-05) 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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-1408 Filed 1-17-01; 8:45 am]
BILLING CODE 8010-01-M