[Federal Register Volume 63, Number 248 (Monday, December 28, 1998)]
[Notices]
[Pages 71532-71534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34258]
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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'') filed with 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.
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\1\ 15 U.S.C. 78s(b)(1).
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I. 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\
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\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.
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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.\3\
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\3\ The Commission has modified the text of the summaries
prepared by EMCC.
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(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.
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\4\ The term ``netting member'' will be defined in EMCC Rule 1
as a member that is a participant in the netting services.
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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.''
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\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.
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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).
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\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.
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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.
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\7\ 15 U.S.C. 78q-1.
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(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 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.
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, 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 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, 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\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34258 Filed 12-24-98; 8:45 am]
BILLING CODE 8010-01-M
