[Federal Register Volume 66, Number 196 (Wednesday, October 10, 2001)]
[Notices]
[Pages 51695-51698]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25380]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44896; File No. SR-EMCC-2001-03]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Notice of Proposed Rule Change Relating to Arrangements To 
Integrate Emerging Markets Clearing Corporation and The Depository 
Trust & Clearing Corporation

October 2, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act 
(``Act''),\1\ notice is hereby given that on August 22, 2001, the 
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 by EMCC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change involves the initial arrangements for the 
integration of EMCC with The Depository Trust & Clearing Corporation 
(``DTCC'').\2\
---------------------------------------------------------------------------

    \2\ DTCC is a holding company for The Depository Trust Company 
and the National Securities Clearing Corporation, which are 
registered clearing agencies.
---------------------------------------------------------------------------

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 the statements may be examined at the places specified in Item 
IV below. GSCC has prepared summaries, set forth in sections A, B, and 
C below, of the most significant aspects of such statements.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by EMCC.
---------------------------------------------------------------------------

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

    The proposed rule change is the first formal regulatory step to 
effect the integration of EMCC with DTCC. Specifically, the rule change 
would implement certain changes in EMCC's organizational documents to 
facilitate

[[Page 51696]]

the integration with DTCC and the subsequent exchange offer.
1. Background
    At its meeting on July 25, 2001, EMCC's Board of Directors voted to 
proceed with a plan for the integration of EMCC with DTCC (``Plan''). 
Such integration is expected to take place concurrently with the 
integration of the Government Securities Clearing Corporation 
(``GSCC'') and MBS Clearing Corporation (``MBSCC'') with DTCC.\4\ EMCC 
has been advised that the Board of Directors of DTCC has also agreed to 
proceed with the Plan.
---------------------------------------------------------------------------

    \4\ Pursuant to separate plans for the integration of GSCC and 
MBSCC with DTCC, it is contemplated that GSCC and MBSCC will become 
operating subsidiaries of DTCC at the same time that EMCC becomes an 
operating subsidiary of DTCC. However, the integration of EMCC with 
DTCC is not contingent on the integration of GSCC and MBSCC with 
DTCC and vice versa. Securities and Exchange Act Release Nos. 44985 
(Oct. 2, 2001) [File No. SR-GSCC-2001-11] and 44838 (Sept. 24, 2001) 
[File No. SR-MBSCC-2001-01].
---------------------------------------------------------------------------

    A principal goal of the Plan is to facilitate the development and 
timely execution of a strategy to harmonize the processing streams at 
EMCC, MBSCC, GSCC, The Depository Trust Company (``DTC'') and the 
National Securities Clearing Corporation (``NSCC'') (collectively, the 
``Operating Subsidiaries'') for the clearance and settlement of both 
institutional and broker transactions. Harmonized processing should 
help to accommodate shortened settlement cycles, address increasing 
volumes, improve risk management, and lower transaction processing 
costs.
2. The Plan
a. Exchange Offer and Valuation
    Under the Plan, DTCC will form a wholly-owned subsidiary 
(``Acquisition Company'') for the purpose of making an exchange offer 
(``Exchange Offer'') for EMCC shares. After receiving all regulatory 
approvals, Acquisition Company will conduct the Exchange Offer where 
eligible EMCC Class A shareholders will have the opportunity to 
exchange their EMCC shares for DTCC common stock.\5\ Concurrent with 
and subject to the effectiveness of the Exchange Offer, EMCC will 
repurchase the Class A and Class B common shares held by its trade 
association shareholders. Subject to the effectiveness of the Exchange 
Offer, EMCC's trade association shareholders will receive from EMCC in 
exchange for their Class A and Class B common shares cash in an amount 
equal to the lesser of (a) their acquisition cost or (b) the adjusted 
book value of their shares. EMCC's Class B shareholders will retain 
their Class B shares (other than the trade association shareholders who 
will be paid out as provided above) with the same rights to have their 
shares repurchased for cash as currently provided in EMCC's Amended and 
Restated Shareholder Agreement (``EMCC Shareholder Agreement'').\6\
---------------------------------------------------------------------------

    \5\ EMCC Class A shareholders eligible to participate in the 
Exchange Offer include EMCC Class A shareholders that are members or 
affiliates of members of EMCC, MBSCC, DTC, or NSCC.
    \6\ In addition and subject to the effectiveness of the Exchange 
Offer, holders of Class B shares will be provided with the limited 
right to vote for the election of EMCC Directors.
---------------------------------------------------------------------------

    The EMCC-DTCC share exchange will be valued on the basis of the 
adjusted book value of such EMCC and DTCC shares. Adjusted book value 
of the EMCC shares will equal book values less the retained earnings of 
EMCC at the time of (or as of the end of the last full calendar month 
preceding) the integration of EMCC with DTCC. Adjusted book value of 
the DTCC shares will equal book value less the smaller of (i) the 
retained earnings of DTCC attributable to NSCC's retained earnings at 
the time of the integration of NSCC and DTC with DTCC in 1999 or (ii) 
the retained earnings of DTCC attributable to the retained earnings of 
NSCC at the time of (or as of the last full calendar month preceding) 
the integration of EMCC with DTCC.\7\
---------------------------------------------------------------------------

    \7\ Such retained earnings are dedicated to NSCC's business.
---------------------------------------------------------------------------

    Following a successful Exchange Offer, Acquisition Company will be 
the majority shareholder of EMCC and the Class B and any non-eligible 
and/or non-tendering Class A EMCC shareholders will remain as minority 
shareholders in EMCC.
b. Changes to EMCC's Shareholder Agreement
    EMCC's Shareholder Agreement will be amended in connection with the 
Exchange Offer in order to eliminate any restrictions on transferring 
EMCC shares to Acquisition Company. Following a successful Exchange 
Offer, the EMCC Shareholder Agreement will be terminated.
c. Selection of EMCC's Directors and EMCC Activities
    DTCC, through its wholly-owned subsidiary, Acquisition Company, 
will elect as directors of EMCC the persons elected by the shareholders 
of DTCC to be the directors of DTCC.\8\ EMCC will continue to exist as 
a separate registered clearing agency and will operate essentially as 
it currently does by offering its own services to its own members 
pursuant to separate legal arrangements and separate risk management 
procedures. As a matter of DTCC policy, EMCC's retained earnings at the 
time of (or as of the end of the last full calendar month preceding) 
the integration of EMCC with DTCC will be dedicated to supporting 
EMCC's business. EMCC will be sufficiently capitalized for its 
activities as a clearing agency.
---------------------------------------------------------------------------

    \8\ Given that EMCC's initial post-integration board would be 
elected upon the effectiveness of the integration plan, EMCC has 
determined to postpone its 2001 annual election of directors, which 
would normally occur near calendar year-end, with the current Board 
remaining in office until the Plan is effectuated. Should the Plan 
not become effective by March 31, 2002, then EMCC will call an 
annual meeting for the election of directors pursuant to its current 
procedures.
---------------------------------------------------------------------------

d. DTCC's Role
    Neither Acquisition Company nor DTCC will engage in clearing agency 
activities. Certain support functions, including human resources, 
finances, audit, general administration, and corporate communications 
will continue to be centralized in DTCC and be provided by DTCC through 
NSCC to EMCC pursuant to service contracts.
e. Fair Representation
    As part of the proposed integrations, a structure will be 
implemented in order that the Operating Subsidiaries will satisfy their 
fair representation requirement of Section 17A of the Act. 
Specifically, the DTCC shareholders, consisting of the current 
shareholders of DTCC and the shareholders of EMCC, MBSCC, and GSCC, 
which become shareholders of DTCC as a result of the Plan, will elect 
the persons to serve on DTCC's Board of Directors. These individuals 
will, in turn, be selected by DTCC to serve as the directors of each of 
the Operating Subsidiaries. On a periodic basis to be determined by the 
DTCC Board, rights to purchase DTCC common stock will be reallocated to 
shareholders using the services of any one or more of the Operating 
Subsidiaries based upon their usage. Shareholders may, but will not be 
obligated to, purchase some or all of the DTCC common stock to which 
they are entitled. Holders of DTCC common stock will be entitled to 
cumulative voting in the election of directors.
f. Committees
    In addition, DTCC's existing International Operations and Planning 
Committee will include representatives of members of EMCC. The 
International Operations and Planning Committee will advise the DTCC 
Board and management on its policies and procedures with respect to the

[[Page 51697]]

international products and/or services of the Operating Subsidiaries, 
including EMCC, and will have certain other responsibilities to be 
assigned to the Committee.
    Furthermore, EMCC will continue to have a Membership and Risk 
Committee that will include representatives of EMCC's members. The EMCC 
Membership and Risk Committee will advise EMCC's Board of Directors and 
management with respect to membership, credit matters, and risk matters 
and will have certain other responsibilities to be assigned to it.
g. Changes to DTCC's and EMCC's Governing Documents
    DTCC's Certificate of Incorporation, By-Laws and Shareholders 
Agreement (``Basic Documents'') will be amended to extend to the 
shareholders of EMCC, MBSCC, and GSCC that become shareholders of DTCC 
as a result of the Exchange Offer the rights that the shareholders of 
DTCC currently have and, in particular, to satisfy the Fair 
Representation Requirement of the Exchange Act. The Basic Documents 
will provide the following:
     The persons elected as directors to the DTCC Board will 
also serve as the directors of each of the Operating Subsidiaries, 
including EMCC.
     Other than, as is currently the case, one director 
appointed to the DTCC Board by the New York Stock Exchange, Inc., as 
the owner of DTCC preferred stock, and one director appointed to the 
DTCC Board by the National Association of Securities Dealers, Inc., as 
an owner of DTCC preferred stock, all directors will be elected 
annually by the owners of DTCC common stock.
     The rights to purchase DTCC common stock will be 
reallocated to the users of each of the Operating Subsidiaries based 
upon their usage. Under the Basic Documents, these rights will be 
reallocated on a periodic basis to be determined by DTCC's Board and in 
accordance with the DTCC Shareholders Agreement.
     DTCC common stock owners will be able to exercise voting 
in the election of DTCC's directors.
     Each year the DTCC Board will appoint a nominating 
committee that may include both members and non-members of the DTCC 
Board. After soliciting suggestions from all users of each of the 
Operating Subsidiaries of possible nominees to fill vacancies on the 
DTCC Board, the nominating committee will recommend a slate of nominees 
for the full DTCC Board. The DTCC Board may make changes in that slate 
before submitting nominations to the holders of DTCC common stock for 
election. The election ballot included in the proxy materials will 
provide an opportunity for stockholders to cast their votes for a 
person not listed as a nominee. Because the Basic Documents will 
provide for cumulative voting, certain large holders of DTCC common 
stock may have a sufficient number of shares to elect a person not on 
the slate nominated for election by the DTCC Board.
    In addition, EMCC's Certificate of Incorporation and By-Laws will 
be revised to reflect the changes in EMCC's corporate governance 
structure and to include certain other changes so that these documents 
conform to the Certificates of Incorporation and By-Laws of GSCC and 
MBSCC, so as to promote efficiency in the governance of the Operating 
Subsidiaries upon completion of the Plan.\9\ EMCC's Certificate of 
Incorporation shall be amended as follows:
---------------------------------------------------------------------------

    \9\ The full text of the proposed changes to the Certificate of 
Incorporation and to the By-Laws is set forth in Exhibit A of EMCC's 
rule filing.
---------------------------------------------------------------------------

     Its operative provision, which currently is contained in 
the original Certificate and several amendments, will be restated into 
a single composite Amended and Restated Certificate of Incorporation 
and recorded and renumbered as appropriate.
     In Article 3 (as renumbered), the provisions relating to 
the Class B common shares will be modified to provide such shares with 
limited voting rights. These shares will have the right to vote, with 
the Class A common shares voting together as a single Class, for the 
election of directors.
     A new Article 4 will be inserted to provide that, in 
accordance with New York Business Corporation Law, EMCC shareholders 
may take action by written consent without a meeting and without 
unanimity as long as such consent is signed by the holders of 
outstanding shares having not less than the minimum number of votes 
that would be necessary to authorize or take such action at a meeting 
at which all shares entitled to vote thereon were present and voted.
     The supermajority voting provisions currently contained in 
Article 6 will be deleted since they will be unnecessary because DTCC, 
through its wholly-owned subsidiary, Acquisition Company, will be the 
controlling shareholder of EMCC.
     A new Article 6 will be added to limit the liability of 
the directors to EMCC and its shareholders for any breach of duty 
provided such limitation is consistent with the provisions of the New 
York Business Corporation Law.
     Since after the proposed integration DTCC through its 
wholly-owned subsidiary, Acquisition Company, will be the majority 
shareholder of EMCC, the current By-Laws of EMCC will be replaced with 
a set of By-Laws that generally conform to NSCC's By-Laws.\10\
---------------------------------------------------------------------------

    \10\ EMCC's By-Laws will differ from NSCC's By-Laws in that (i) 
all references will be gender-neutral, (ii) the requirement in 
Section 3.3 that the President shall be the Chief Executive Officer 
will be deleted, (iii) the number of directors shall be between 
fifteen and twenty-five as determined by the Board, and (iv) 
Sections 1.2 and Article VIII will provide that a majority of the 
outstanding shares may call a special shareholders meeting and may 
amend EMCC's By-Laws.
---------------------------------------------------------------------------

    EMCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Exchange Act and the rules and 
regulations thereunder applicable to EMCC because it is designed to 
coordinate further the activities of each of the Operating Subsidiaries 
in order to help assure the continued prompt and accurate clearance and 
settlement of securities transactions in the face of changing business 
and regulatory requirements for the securities industry. The proposed 
rule change will not affect and is therefore consistent with EMCC's 
duty to safeguard securities and funds in its custody or control or for 
which it is responsible.

B. Self-Regulatory Organization's Statement on Burden on Competition

    EMCC does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. EMCC, as well as each 
of the other Operating Subsidiaries, is a utility created to serve 
members of the securities industry by providing certain complementary 
services that are ancillary to the businesses in which industry members 
compete with one another.

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.

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

[[Page 51698]]

(ii) as to which the self-regulatory organization 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-
0609. 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 Room. Copies of such filing will also be 
available for inspection and copying at EMCC's principal office. All 
submissions should refer to File Number SR-EMCC-2001-03 and should be 
submitted by October 31, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-25380 Filed 10-1-01; 8:45 am]
BILLING CODE 8010-01-M