[Federal Register Volume 64, Number 98 (Friday, May 21, 1999)]
[Notices]
[Pages 27841-27843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12931]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41415; International Series Release No. 1197; File No.
SR-EMCC-98-10]
Self-Regulatory Organizations; Emerging Markets Clearing
Corporation; Order Granting Approval of a Proposed Rule Change Relating
to Netting Services
May 17, 1999.
On November 2, 1998, Emerging Markets Clearing Corporation
(``EMCC'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-EMCC-98-10)
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 28, 1998.\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. 40810, International
Series Release No. 1174 (December 18, 1998), 63 FR 71532.
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I. Description
Currently, EMCC processes its members' transactions on a trade for
trade basis. The rule change enables EMCC to offer its members the
ability to have their transactions processed on a netted basis through
EMCC's netting services.
Under EMCC's netting services, transactions between two netting
members that have been reported on EMCC's ``accepted trade report,''
which is made available to members no later than two days prior to
settlement date (``SD-2''), will be eligible for settlement netting.
The accepted trade report will indicate trades that are to be processed
on a netted basis.
Both trade for transactions and netted transactions will be novated
and guaranteed at the same time. Receive and deliver obligations for
netting trades will be established when the accepted trade report is
made available to members. On the scheduled settlement date, these
receive and deliver obligations will be extinguished and replaced with
new receive obligations or deliver obligations relating to the net
position. In order to meet the delivery parameters of the applicable
qualified securities depository (``QSD''), EMCC may establish one or
more receive and deliver obligations with respect to any one net
position.
The value at which receive and deliver obligations will be settled
at a
[[Page 27842]]
QSD will be fixed by EMCC based on an average of the prices of all
transactions in the ISIN \3\ underlying such receive and deliver
obligations. In order to compensate netting members for the difference
between the value at which the netted receive and deliver obligations
are settled and the actual consideration for the transactions
underlying the receive and deliver obligations, EMCC will debit or
credit members with the difference between the value at which such
obligations settle and the actual consideration. This credit or debit
will be referred to as the ``transaction adjustment payment.''
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\3\ EMCC Rule 1 defines ISIN to mean the International
Securities Identification Number as defined by International
Organization for Standardization 6166.
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As described below, the rule change makes specific changes to
EMCC's rules.
Rule 1--Definitions
The rule change adds definitions of ``netting member,'' ``netting
services,'' and ``netting trade'' to Rule 1. The term ``netting
member'' is defined as a member that is a participant in the netting
services. The definition of ``netting trade'' sets forth the
requirements that must be met in order for a trade to be eligible as a
netting trade. Specifically, the trade must (a) be a compared trade
between two netting members and (b) have been reported on an accepted
trade report made available to members no later than SD-2. The
definition also states that EMCC may treat any trade either by netting
member or by ISIN as ineligible to be a netting trade. The rule change
also amends the definition of ``final net settlement obligation'' to
include any unpaid transaction adjustment payment.
The rule change makes technical corrections to the definitions of
``fail long position,'' ``fail short position,'' and ``net settlement
obligation,'' all of which incorrectly refer to the ``settlement day''
rather than the ``scheduled settlement date.'' In addition, the rule
change modifies the definition of ``contract value'' to state that this
value is calculated by EMCC.
Rule 4--Clearing Fund, Margin, and Loss Allocation
The rule change amends Rule 4 with respect to the expiration date
of the paragraph in Section 10 of Rule 4 that permits EMCC to use
clearing fund deposits for intraday financing. The amendment postpones
this expiration date to the earlier of (i) the first anniversary of the
date on which EMCC commenced operation as a registered clearing
agency\4\ or (ii) the date on which all members are netting members (as
opposed to the date on which netting services are available).
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\4\ On February 13, 1998, the Commission granted EMCC temporary
registration as a clearing agency until August 20, 1999. Securities
Exchange Act Release No. 39661, International Series Release No. 117
(February 13, 1998), 63 FR 8711.
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In addition, the rule change amends Section 5 of Rule 4 with
respect to the use of the term ``value of position.'' The term is
currently used with respect to the calculations of both the mark to
market amount and volatility amount. However, the current definition
applies only to the mark to market calculation. As a result, the rule
change moves the current definition from the text of Section 5 to a
footnote to the mark to market formula. In addition, the rule change
adds a different definition of ``value of position'' as a footnote to
the volatility amount formula.
Rule 6--Receipt of Data
The rule change amends Rule 6 to state that accepted trade reports
will indicate whether a transaction is a netting trade or whether it
will be settled on a trade for trade basis. EMCC members will receive a
``netting detail report'' from EMCC with respect to netting trades
scheduled to settle on the following business day. The netting detail
report will indicate a net settlement position for a given settlement
date for each ISIN in which a netting member has a netting trade. The
net settlement position will equal the net amount of EMCC eligible
instruments in a particular ISIN that a netting member has purchased
from or sold to all other netting members. The rule change also adds
language to Rule 6 to indicate that cutoff times for submission of data
to EMCC may be different for netting trades and trades to be settled on
a trade for trade basis.
Rule 7--Novation and Guaranty of Obligations and Receive, Deliver and
Settlement Obligations and Rule 8--Settlement Instructions Only Report
The rule change amends Section 1 of Rule 7 so that it applies to
the guaranty and novation of all trades submitted to EMCC.
Specifically, the rule change amends Section 2(a) Rule 7 so that it
applies to the creation of a member's receive and deliver obligations.
With respect to netting trades, on the scheduled settlement date the
receive and deliver obligations that are established in accordance with
Section 2(a) will be extinguished and replaced with one or more new
receive and deliver obligations with respect to each net position. In
addition, the rule change amends Section 2(c) of Rule 7 to state that
receive and deliver obligations are to be settled at the settlement
value set forth on the accepted trade report for trades to be settled
on a trade for trade basis and as set forth on the netting detail
report with respect to netting trades.
The rule change amends Section 3 of Rule 7 so that it applies to
the transaction adjustment payment. In additional the rule change makes
the following technical changes so that (i) all rules pertaining to
receive, deliver, and settlement obligations appear under one rule,
Rule 7, and (ii) Rule 8 pertains solely to EMCC's settlement
instructions only report. Specifically, the rule change makes the
following changes:
(1) ``Fail settlement positions'' is moved from Section 2 of Rule 8
to Section 12 of Rule 7;
(2) ``Partial deliveries'' is moved from Section 3 of Rule 8 to
Section 13 of Rule 7;
(3) ``Financing costs/obligation to receive securities'' is moved
from Section 4 of Rule 8 to Section 14 of Rule 7 (a pararaph is added
to this section that will enable EMCC to charge interest to or fine a
member for failure to make a transaction adjustment payment);
(4) ``Obligation to facilitate financing'' is moved from Section 5
of Rule 8 to Section 15 of Rule 7; and
(5) ``Relationship with qualified securities depository'' is moved
from Section 6 of Rule 8 to rule 25.
Rule 25--Qualified Securities Depositories
The rule change adds a section to Rule 25 to prohibit a member from
canceling or otherwise modifying instructions previously transmitted by
EMCC to a QSD.
Addendum C--Statements of Policy With Respect to Additional Clearing
Fund Deposits
The rule change amends Addendum C to refer to contract values
rather than settlement values.
Addendum F--Fee Schedule
The rule change modifies the reference to trade date (T) in EMCC's
fee schedule to Settlement Day (SD) so that the reference is consistent
with the timetables contained elsewhere in EMCC's rules and because
members may submit trades that were done on a forward basis so long as
such trades are submitted to EMCC no earlier than
SD-3.
[[Page 27843]]
II. Discussion
Section 17A(b)(3)(F) of the Act \5\ requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions and 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 is consistent with
EMCC's obligations under Section 17A(b)(3)(F) because it should reduce
the number of settlement payments and the size of delivery obligations
among EMCC netting members and therefore should increase the speed and
accuracy of the settlement process with regard to those members. In
addition, the Commission believes that the arrangements for EMCC's
netting services have been designed so that they help EMCC to assure
the safeguarding of securities and funds that are under EMCC's control
or for which it is responsible.
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\5\ 15 U.S.C. 78q-1(b)(3)(D).
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III. Conslusion
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 \6\ and the
rules and regulations thereunder.
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\6\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-EMCC-98-10) 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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12931 Filed 5-20-99; 8:45 am]
BILLING CODE 8010-01-M