[Federal Register Volume 63, Number 151 (Thursday, August 6, 1998)]
[Notices]
[Pages 42087-42088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21059]



[[Page 42087]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40288; International Series Release No. 1150; File No. 
SR-EMCC-98-04]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change Establishing Interim Margin and Loss 
Allocation Procedures

July 31, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 13, 1998, Emerging 
Markets Clearing Corporation (``EMCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared 
primarily by EMCC. The Commission is publishing this notice and order 
to solicit comments from interested persons and to grant accelerated 
approval of the proposed rule change.
---------------------------------------------------------------------------

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

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

    Under the proposed rule change, EMCC will establish interim margin 
and loss allocation procedures for U.S. interdealer brokers and for 
U.S. firms whose only business with EMCC consists of clearing for 
interdealer brokers.

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\
---------------------------------------------------------------------------

    \2\ 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

    Most transactions in emerging markets debt are conducted on a blind 
brokered basis through interdealer brokers. Currently, only one 
interdealer broker self-clears emerging markets debt transactions 
through EMCC. The remaining interdealer brokers clear such transactions 
through a clearing firm.
    EMCC recognizes that a clearing firm has little control over its 
positions at EMCC because its positions are determined by dealers 
participating in the market. Prior to beginning operations, EMCC 
realized that with a limited number of members a clearing firm could be 
required to post a substantial amount of collateral with EMCC. EMCC now 
believes that with its limited number of members it may not be 
economical for a clearing firm to participate in EMCC under its current 
margin procedures. Therefore, EMCC has determined that interim margin 
procedures should be adopted.
    Under this proposed rule change, EMCC is adopting interim margin 
and loss allocation procedures for a period of one year or such shorter 
period of time as determined by EMCC's Board.\3\ The interim margin 
procedures will apply to interdealer brokers and to firms whose only 
business with EMCC in emerging markets instruments consists of clearing 
for interdealer brokers (sometimes referred to as ``special members''). 
Interdealer brokers and clearing firms will be subject to a constant 
base clearing fund requirement based upon EMCC staff simulations of 
margin requirements. The base requirement will be equal to the staff's 
best estimate of the approximate probably recurring upper bound of the 
daily margin calculation for the firm given current market conditions 
and the business and market share of the firm.\4\
---------------------------------------------------------------------------

    \3\ Should EMCC's Board decide that the use of the interim 
margin and loss allocation procedures should be terminated before 
the end of the one year period, EMCC must file a proposed rule 
change pursuant to Section 19(b)(2) of the Act and obtain Commission 
approval before terminating the interim procedures.
    \4\ EMCC expects that the instances of uncollected exposure 
under the interim margin procedures should be infrequent. To the 
extent that market share or size changes in favor of a firm such 
that its uncollateralized exposure calculations become frequent, the 
Board may increase the firm's base requirement. Conversely, if 
market share or size changes such that a firm's instances of 
uncollateralized exposure become very infrequent, the Board may 
reduce the firm's base requirement.
---------------------------------------------------------------------------

    Under the interim margin procedures, EMCC will not collect daily 
margin calculations over the base requirement if a firm's resulting 
uncollateralized exposure does not exceed the lesser of: (1) ten 
percent of the excess net capital of the firm or (2) fifteen percent of 
EMCC's current aggregate clearing fund. Thus, EMCC will only collect 
additional margin under the interim margin procedures if the difference 
between the daily margin calculation and a firm's base requirement 
exceeds ten percent of the firm's excess net capital or fifteen percent 
of EMCC's current aggregate clearing fund.
    Any margin call required to be paid under the interim margin 
procedures, other than the base requirement or any adjustments to it, 
will be paid by the affected firm and by EMCC's dealer members as 
follows. First, on each day, each special member will produce a report 
under methodology approved by EMCC that sets forth (a) the approximate 
percentage of leg-out transactions that are with dealers that have 
funded EMCC (``funding non-member dealer percentage'') and (b) the 
approximate percentage of leg-out transactions that are with others 
(``firm percentage''). Second, the special member required to pay 
additional margin will post the percentage of the margin call equal to 
the firm percentage, and EMCC's dealer members will post the percentage 
of the margin call equal to the funding non-member dealer's percentage. 
This amount will be charged to all dealer members in proportion to 
their current clearing fund requirement (exclusive of any amounts 
charged for increased event risk).
    The collateral posted by dealer members under the interim margin 
procedures will be considered collateral of the special member and will 
be applied against losses after the collateral posted by the special 
member itself. Any amounts not so applied will be returned to the 
dealer members in proportion to the amounts they deposited. However, 
EMCC notes that in the event of the failure of a dealer member putting 
up collateral for a special member's margin obligation, the collateral 
will be considered part of the dealer's collateral and will be applied 
against the dealer's losses before being returned to the dealer.
    EMCC's normal loss allocation rules provide that in the event of a 
failure of a dealer member, losses from blind brokered transactions 
will be borne by the entire membership in proportion to their average 
daily final margin calculations over the prior thirty days and losses 
due to direct (i.e., non-brokered) transactions are borne by the actual 
counterparties. Losses are so allocated after the failing firm's 
clearing fund is applied to the losses. During the period in which the 
interim margin and loss allocation procedures are in effect, brokered 
transactions will be considered blind brokered transactions in the 
event of the failure of a dealer member but only to the extent that the 
leg-out transactions are with funding non-member dealers. For purposes 
of

[[Page 42088]]

calculating the pro rata loss allocation, the average daily margin 
calculation for each member will be determined without regard to the 
interim margin procedures except that any daily margin calculation for 
a special member that exceeds the special member's base requirement 
shall be considered as the base requirement.
    EMCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder because it will facilitate the prompt and 
accurate clearance and settlement of securities transactions.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

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

    EMCC does not believe that the proposed rule change will 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

    No written comments relating to the proposed rule change have been 
solicited or received. EMCC will notify the Commission of any written 
comments it receives.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Section 17A(b)(3)(F) of the Act \6\ 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 or 
for which it is responsible. The Commission believes that the proposed 
rule change should provide EMCC with margin that is adequate to protect 
EMCC from financial exposure if an interdealer broker or clearing firm 
experiences financial difficulty while still providing a clearing fund 
framework which does not deter interdealer brokers and clearing firms 
from joining EMCC. Therefore, the Commission believes that the proposed 
rule change is consistent with EMCC's safeguarding obligations under 
Section 17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1(b)93)(F).
---------------------------------------------------------------------------

    EMCC has requested that the Commission approve the proposed rule 
change prior to the thirtieth day after publication of the notice of 
the filing. The Commission finds good cause for approving the proposed 
rule change prior to the thirtieth day after the publication of notice 
because such approval should immediately encourage additional 
participation in EMCC which should in turn reduce risk to those 
involved in emerging market debt transactions.

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. 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 also will be available for 
inspection and copying at the principal office of EMCC. All submissions 
should refer to File No. SR-EMCC-98-04 and should be submitted by 
August 27, 1998.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-EMCC-98-04) be and hereby is 
approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-21059 Filed 8-5-98; 8:45 am]
BILLING CODE 8010-01-M