00-30669. Self-Regulatory Organizations; Emerging Markets Clearing Corporation; Notice of Filing of Proposed Rule Change Seeking To Increase the Minimum Clearing Fund Requirement for All EMCC Members to $3,000,000 and To Establish Two Tiers of Inter-...

November 27, 2000.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] notice is hereby given that on July 14, 2000, the Emerging Markets Clearing Corporation (“EMCC”) filed with the Securities and Exchange Commission (“Commission”) and on August 16, 2000, and November 1, 2000, 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 parties.

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

The proposed rule change (1) would increase the minimum clearing fund requirement for all EMCC members to $3,000,000 and (2) would establish two tiers of inter-dealer broker (“IDB”) membership standards.

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 these statements.^[2]

(A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

The purpose of the proposed rule change is to (i) increase the minimum clearing fund requirement for all EMCC members to $3,000,000 from the current required minimum of $1,000,000 and (ii) provide two tiers of IDB membership standards.^[3]

With respect to the proposed increased minimum clearing fund requirement, EMCC's risk advisory subgroup reviewed EMCC's two years of operations, including trade files and daily margin calculations. The subcommittee concluded that, generally, members' calculated clearing fund requirements did not go below $3,000,000. Moreover, raising the minimum requirement from $1,000,000 to $3,000,000 is consistent with the clearing fund requirements imposed on IDBs by other clearing corporations,^[4] and it addresses the fact that IDB members have a potential clearing fund loss liability that could well exceed the current $1,000,000 clearing fund minimum. Accordingly, EMCC has determined that it would be more appropriate to have a greater amount of IDB funds on hand to cover the potential exposure than to have to request such a deposit if needed due to a loss. Therefore, EMCC has decided to increase IDB's minimum clearing fund requirement to $3,000,000 and has determined that it is appropriate to have this standard apply to all members.

The rule change also proposes to separate IDBs into two membership categories based on excess net capital or excess financial resources. Those IDBs with excess net capital, or excess financial resources for a broker or dealer regulated by the Securities and Futures Authority Limited, of between $10,000,000 and $20,000,000 would be margined using an “event factor” of 1.5 instead of the factor of 1.25 currently used in EMCC's base margining formula. This factor is representative of the volatilities experienced during the last three emerging market events.^[5] Those IDBs with excess net capital or excess financial resources of more than $20,000,000 would be margined under the current event factor of 1.25. In either case, the event factor would be subject to EMCC's right to change the risk factor, as provided in EMCC Rule 4, Section 5(A)III.

EMCC believes that the two-tier membership standard will permit it to accept IDBs for membership while appropriately collateralizing the risk posed by those entities with lower levels of capital. EMCC recognizes that the clearing fund is a key mitigant to market risk in the event of member insolvency and feels that margining those IDBs with less than $20,000,000 excess regulatory capital at an event factor of 1.5 should mitigate any risk of their lower capital levels.

The effective date for these proposed changes will be thirty days following the date the Commission approves the filing for current members and will be immediately for any applicant who becomes a member after the rule change is approved.

EMCC believes that the proposed rule change is consistent with the requirements of section 17A of the Act ^[6] and the rules and regulations thereunder because it promotes the prompt and accurate settlement of emerging markets securities transactions.

(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.

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 reason for so finding or (ii) as to which the self-regulatory organization 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.

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. 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-00-05 and should be submitted by December 22, 2000.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[7]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  The Commission has modified the text of the summaries prepared by EMCC.

3.  EMCC's Rules define an IDB as “a broker-dealer that conducts securities trading which matches buyers and sellers who are banks or dealers, and who is designated as such by the Corporation.”

4.  See, e.g., Government Securities Clearing Corporation Rule 4, Section 2(c).

5.  October, 1997 (Asia), August, 1998 (Russia), and January, 1999 (Brazilian).

6.  15 U.S.C. 78q-1.

7.  17 CFR 200.30-3(a)(12).