regulatory organizations; proposed rule changes: Emerging Markets Clearing Corp.,

[Federal Register: December 28, 1998 (Volume 63, Number 248)]

[Notices]

[Page 71532-71534]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr28de98-127]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40810; International Series Release No. 1174; File No. SR-EMCC-98-10]

Self-Regulatory Organizations; Emerging Markets Clearing Corporation; Notice of a Proposed Rule Change Relating to Netting Services

December 18, 1998.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on November 2, 1998, Emerging Markets Clearing Corporation (``EMCC'') filedwith the Securities and Exchange Commission (``Commission'') 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 from interested persons on the proposed rule change.

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

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

   Under the proposed rule change, EMCC will offer netting services to its members.\2\

   \2\ The complete text of the proposed amendments to EMCC's Rules is attached as an exhibit to EMCC's filing, which is available for inspection and copying at the Commission's public reference room and through EMCC.

2. 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.\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

   Currently, EMCC processes its members' transactions on a trade for basis. Under the proposed rule change, EMCC will offer its members the ability to have their transactions processed on a netted basis through EMCC's netting services.

   Under the proposal, transactions that are between two netting members \4\ and that have been reported on EMCC's ``accepted trade report'' 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 those trades that are to be processed on a netted basis.

   \4\ The term ``netting member'' will be defined in EMCC Rule 1 as a member that is a participant in the netting services.

   Both trade for trade transactions and netted transactions will be novated and guaranteed at the same time. As with trade for trade transactions, receive and deliver obligations with respect to netting trades would be established at the time 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 QSD will be fixed by EMCC based on an average of the prices of all transactions in the ISIN \5\ 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 will be 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. These credits and debits will be referred to as the ``transaction adjustment payment.''

   \5\ EMCC's Rules define ISIN to mean the International Securities Identification Number as defined by International Number as defined by International Organization for Standardization 6166.

   The following paragraphs describe the particular changes that EMCC will make to its rules to accommodate netting services. Rule 1--Definitions

   EMCC will add definitions of ``netting member,'' ``netting services,'' and ``netting trade'' to Rule 1. The definition of ``netting trade'' will set forth the requirements that must be met in order for a trade to be eligible as a netting trade. The requirements are that 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 will state that EMCC may treat any trade or trades, whether by netting member or by ISIN, as ineligible to be a netting trade(s). EMCC will also modify the definition of ``final net settlement obligation'' to include any unpaid transaction adjustment payment.

   EMCC will make 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, EMCC will modify the definition of ``contract value'' to clarify that this value is calculated by EMCC. Rule 4--Clearing Fund, Margin, and Loss Allocation

   EMCC's risk system currently calculates members' margin requirements on a netted basis. Therefore, EMCC will not amend Rule 4 other than with respect to the expiration date of the paragraph in Rule 4 Section 10 that permits EMCC to use clearing fund deposits for intraday financing. The proposed change will postpone the automatic expiration of this ability to the earlier of (i) the first anniversary of the date on which EMCC commenced operation as a registered clearing agency \6\ or (ii) the date on which all members are netting members (as opposed to the date on which netting services are available).

   \6\ The Commission granted EMCC temporary registration as a clearing agency on February 13, 1998. Securities Exchange Act Release No. 39661, International Series Release No. 1117 (February 13, 1998), 63 FR 8711.

   In addition, EMCC proposes to make a correction with respect to the use of the term ``value of position'' in Section 5 of Rule 4. Although the term ``value of position'' is currently employed with respect to the calculations of both the mark to market amount and volatility amount, its meaning is not the same for both calculations. The current definition applies only to the mark to market calculation. To clarify this, EMCC will move that definition from the text of Section 5 to a footnote to the mark to market formula. In addition, EMCC will insert a different definition of ``value of position'' as a footnote to the volatility amount formula. Rule 6--Receipt of Data

   With the introduction of netting services, the ``accepted trade report'' will indicate whether a transaction is a

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   netting trade or whether it will be settled on a trade for trade basis. EMCC will modify Rule 6 to reflect this. 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 with respect to each ISIN in which a netting member has a netting trade a net settlement position for a given settlement date. 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. In addition, EMCC will add language to Rule 6 to clearly 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

   EMCC will amend Section 1 of Rule 7 so that it pertains to the guaranty and novation of all trades submitted to EMCC. No change is proposed with respect to the timing of the guaranty and novation.

   EMCC will amend Section 2(a) of Rule 7 so that it pertains to the creation of a member's receive and deliver obligations. EMCC proposes no change with respect to the point in time at which receive and deliver obligations are created by EMCC. However, with respect only 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, subsection (c) of Section 2 will state that deliver and receive 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.

   EMCC will amend Section 3 of Rule 7 so that it pertains to the transaction adjustment payment. Because EMCC will calculate a settlement value for netted trades, EMCC will be required to credit or debit netting members with an amount equal to the difference between the net consideration of the transactions underlying each net settlement position and the net settlement value of such netting member's receive and deliver obligations for each net settlement position. This payment will be referred to as the transaction adjustment payment.

   In addition, EMCC will make the following technical changes so that (i) all rules pertaining to receive, deliver, and settlement obligations appear under one rule and (ii) Rule 8 pertains solely to EMCC's settlement instructions only report:

   ``Fail settlement positions''--moved from Section 2 of Rule 8 to Section 12 of Rule 7.

   ``Partial deliveries''--moved from Section 3 of Rule 8 to Section 13 of Rule 7.

   ``Financing costs/obligation to receive securities''--moved from Section 4 of Rule 8 to Section 14 of Rule 7. A paragraph will be added to this section which will enable EMCC to charge interest to and/or fine a member for failure to make a transaction adjustment payment.

   ``Obligation to facilitate financing''--moved from Section 5 of Rule 8 to Section 15 of Rule 7.

   ``Relationship with qualified securities depository''--moved from Section 6 of Rule 8 to Rule 25. Rule 25--Qualified Securities Depositories

   In addition to moving Section 6 of Rule 8 to Section 2 of Rule 25, EMCC will add a section to Rule 25 prohibiting 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

   Addendum C will be corrected to refer to contract values rather than settlement values. Addendum F--Fee Schedule

   In order to be consistent with the timetables contained elsewhere in its Rules which key off of settlement day (``SD'') 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, EMCC proposes to change the references to Trade Date (T) in its fee schedule to SD.

   EMCC believes that the ability to offer the netting services would facilitate the prompt and accurate clearance and settlement of emerging market securities transactions and is therefore consistent with the requirements of Section 17A of the Act \7\ and the rules and regulations thereunder.

   \7\ 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 received by EMCC.

3. 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 EMCC 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.

4. 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. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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, N.W., Washington, D.C. 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-98-10 and should be submitted by January 20, 1999.

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   For the Commission by the Division of Market Regulation, pursuant to delegated authority.\8\

   \8\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 98-34258Filed12-24-98; 8:45 am]

   BILLING CODE 8010-01-M