[Federal Register Volume 68, Number 165 (Tuesday, August 26, 2003)]
[Notices]
[Pages 51311-51312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21824]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48366; File No. SR-EMCC-2003-02]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change 
Modifying the Clearing Fund Calculation

August 19, 2003.

I. Introduction

    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 proposed rule change SR-
EMCC-2003-02 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 June 30, 2003.\2\ No comment letters were received. 
For the reasons discussed below, the Commission is granting approval of 
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 48081 (June 24, 2003), 
68 FR 38733.
---------------------------------------------------------------------------

II. Description

    One of the purposes of the proposed rule change is to modify the 
clearing fund deposit requirement for certain EMCC members. The 
proposed change adds Addendum I to EMCC's rules. Addendum I establishes 
$50 million as the clearing fund deposit for members who are Inter-
Dealer Brokers (``IDBs'') or whose only business with EMCC is to clear 
for IDBs. EMCC will continue to calculate the clearing fund 
requirements for each of these members. To the extent that the 
calculated amount exceeds the $50 million fixed amount for any day, the 
difference will be required to be paid by all other EMCC members on a 
pro-rata basis based on their average clearing fund requirements over 
the previous 30 calendar day period. However, for the purpose of 
determining the pro-rata loss obligation of any member whose deposit is 
fixed at $50 million, the member's calculated clearing fund requirement 
will continue to be used by EMCC. Similarly, the additional amounts 
paid by other EMCC members will not be used by EMCC 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 with an EMCC member, the clearing fund requirement for the 
IDB or its clearing firm is based only on one side of the matched 
transaction. This one sided calculation may create a clearing fund 
obligation of a significant 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 IDB's calculated clearing 
fund requirement deposited by the other EMCC members. EMCC is concerned 
that if this requirement is not established IDBs will stop submitting 
their transactions to EMCC, and as a result, the dealer market will 
lose the benefits, such as risk management and standardized, electronic 
processing, currently provided by EMCC.
    While EMCC has determined that it is appropriate to set a fixed 
clearing fund amount of $50 million 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 
(Clearing Fund, Margin and Loss Allocation). Consequently, the proposed 
rule change provides that the calculated clearing fund amount and not 
the fixed clearing fund amount will 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 IDB's calculated clearing fund 
amount exceeds the fixed clearing fund amount similarly will 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 clearing 
fund, the clearing fund required of members is the greater of the 
calculated requirement or the highest requirement over the previous two 
months. When the ``look back'' feature was adopted, 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 that 
occurred over the prior two months. While this methodology provided 
EMCC with adequate collateral in most cases, EMCC could never be 
certain it was always fully protected. To remedy this, EMCC has 
determined to require members to submit trades earlier on trade date, 
to calculate clearing fund based on these trades, and to collect any 
additional required clearing fund on trade date. EMCC's rules are being 
changed to provide that novation of trades will not occur until after 
all 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 clearing fund will be due after each calculation and not just 
after the morning calculation. Because 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.\3\
---------------------------------------------------------------------------

    \3\ EMCC expects that by removing the ``look back'' feature, its 
members' clearing fund requirements will decrease. This decrease in 
required clearing fund should help offset any additional clearing 
fund requirement that members will be required to make under new 
Addendum I.
---------------------------------------------------------------------------

    Because EMCC will now be collecting clearing fund deposits in the 
afternoon, there will no longer be an overnight exposure. Accordingly, 
EMCC is deleting from its rules all references to calculations based on 
the ``overnight exposure cap.''

[[Page 51312]]

III. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to assure the safeguarding 
of securities and funds which are in its custody or control or for 
which it is responsible.\4\ The proposed rule change will allocate 
EMCC's clearing fund requirement in a manner that more appropriately 
reflects the risks of its members' activities. The proposed rule change 
will also allow EMCC to use a more accurate calculation and more time 
to collect members' clearing fund requirements. Accordingly, the 
proposed rule change should help assure EMCC's ability to safeguard 
securities and funds.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change 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 applicable.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-EMCC-2003-02) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-21824 Filed 8-25-03; 8:45 am]
BILLING CODE 8010-01-P