[Federal Register Volume 68, Number 125 (Monday, June 30, 2003)]
[Notices]
[Pages 38733-38734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16467]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48081; File No. SR-EMCC-2003-02]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Notice of Filing of a Proposed Rule Change Modifying the 
Clearing Fund Calculation

June 24, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 8, 2003, Emerging 
Markets Clearing Corporation (``EMCC'') filed with the Securities and 
Exchange Commission (``Commission'') and on June 2, 2003, and June 5, 
2003, amended 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 on the 
proposed rule change from interested persons.
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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

    The proposed rule change would modify the way in which EMCC 
calculates its members' clearing fund requirements.

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.\2\
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    \2\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    One of the purposes of the proposed rule change is to modify the 
clearing fund deposit requirement for certain EMCC members. The 
proposed change would add Addendum I to EMCC's rules that would 
establish a fixed amount of $50 million to be deposited by members who 
are Inter-Dealer Brokers (``IDBs'') or whose only business with EMCC is 
to clear for IDBs. EMCC would continue to calculate the clearing fund 
requirements for each of these members. To the extent that the 
calculated amount exceeds the fixed amount for any day, the difference 
would be required to be paid by the other EMCC members pro-rata based 
on their average clearing fund requirements over the previous 30 
calendar day period. The calculated amount, however, would continue to 
be used by EMCC for the purpose of determining pro-rata loss 
obligations of any member whose deposit is fixed at $50 million, and 
the different amounts paid by other members would not be included in 
determining their pro-rata loss obligations.
    The function of an IDB is to bring together principals in 
transactions on a matched anonymous basis while taking no principal 
risk themselves. If every dealer who interacted with an IDB were a 
member of EMCC, the IDB or its clearing firm would have to deposit only 
a minimal clearing fund amount. To the extent that one side of an IDB 
trade is not an EMCC member, the clearing fund requirements for the IDB

[[Page 38734]]

or its clearing firm are based only on one side of the matched 
transaction. This one sided calculation may create a clearing fund 
obligation of a significant financial amount for the IDB or its 
clearing firm. EMCC believes it is appropriate, given the role of IDBs 
in providing liquidity to the market place, to establish a fixed 
clearing fund requirement for such firms or their clearing firms and to 
have the difference between the fixed amount and the calculated amount 
deposited by the other EMCC members. EMCC is concerned that if this 
requirement is not established IDBs will no longer submit their 
transactions to EMCC, and as a result, the dealer market will lose the 
benefits of the risk management process currently provided by EMCC.
    While EMCC has determined that it is appropriate to set a fixed 
clearing fund amount for such members, it does not want this fixed 
amount to alter the status quo among members in the event that a pro-
rata charge is imposed pursuant to Section 11(c) of Rule 4. 
Consequently, the proposed rule change would provide that the 
calculated amount and not the fixed amount would be used in determining 
the pro-rata liability of any affected members. Further, any amount 
that is required to be paid by other members because the calculated 
amount exceeds the fixed amount would similarly not be taken into 
account when determining pro-rata charges.
    A second purpose of the proposed rule change is to modify the time 
at which EMCC novates transactions and to change the clearing fund 
formula to eliminate the ``look back'' feature. Currently, EMCC novates 
transactions at different times depending on whether the trade is 
received and compared on trade date or thereafter. Since under the 
current rules EMCC novates transactions received on trade date before 
EMCC has the opportunity to collect any additional required margin, the 
clearing fund required of members is the greater of the calculated 
requirement or the highest requirement over the previous two months. 
EMCC believed that by ``looking back'' it would have sufficient 
clearing fund deposits so long as a member's current trades were 
similar to the trading which occurred over the prior two months. While 
this methodology provides EMCC with adequate collateral in most cases, 
EMCC can never be certain it is always fully protected. To remedy this, 
EMCC has determined to require members to submit trades earlier on 
trade date, calculate margin based on these trades, and collect any 
additional required margin on trade date. EMCC's rules will be changed 
to provide that novation of trades will not occur until after any 
margin requirements are received from both sides of the trade. This 
will apply to trades included in the afternoon calculation as well as 
trades covered by the morning calculation. As before, EMCC will do an 
afternoon and a morning clearing fund calculation, but now payments of 
required margin will be due after each calculation. Since EMCC will be 
collecting margin to cover its exposure on a timely basis, it will no 
longer need to collect the highest margin calculation over the prior 
two months. Therefore, the ``look back'' feature of its clearing fund 
calculation will be eliminated.
    It is expected that by removing the ``look back'' feature, members' 
requirements will decrease. This decrease will help offset any 
additional requirement any member may be required to make under 
proposed Addendum I. Because EMCC will now be collecting fund deposits 
in the afternoon, there will no longer be an overnight exposure. 
Accordingly, all references to calculations based on the ``overnight 
exposure cap'' are also being deleted.
    EMCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because it will permit the equitable allocation of charges 
among participants.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    EMCC does not believe that the proposed rule change would 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

    Written comments from EMCC members have not been solicited or 
received on the proposed rule change.

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 the self-regulatory organization consents, 
the Commission will:
    (a) By order approve the 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 NW., Washington, DC 20549-0609. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-EMCC-2003-02. This file number should be included on the 
subject line if e-mail is used. To help us process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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 NW., Washington, DC 20549. Copies 
of such filing will also be available for inspection and copying at the 
principal office of EMCC. All submissions should refer to the File No. 
SR-EMCC-2003-02 and should be submitted by July 21, 2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\3\
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    \3\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-16467 Filed 6-27-03; 8:45 am]
BILLING CODE 8010-01-P