[Federal Register Volume 63, Number 34 (Friday, February 20, 1998)]
[Notices]
[Pages 8711-8723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4255]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39661; International Series Release No. 1117; File No.
600-30]
Self-Regulatory Organizations; Emerging Markets Clearing
Corporation; Order Granting Temporary Registration as a Clearing Agency
February 13, 1998.
On May 30, 1997, the Emerging Markets Clearing Corporation
(``EMCC'') filed with the Securities and Exchange Commission
(``Commission'') an application on Form CA-1 \1\ for registration as a
clearing agency pursuant to Sections 17A and 19 of the Securities
Exchange Act of 1934 (``Exchange Act'') \2\ and Rule 17Ab2-1
thereunder.\3\ Notice of EMCC's application was published in the
Federal Register on July 10, 1997.\4\ Eight comment letters were
received in response to the notice of filing of the EMCC
application.\5\ This order grants FMCC registration as a clearing
agency for a period not to exceed eighteen months and exempts EMCC from
certain provisions of the Exchange Act.
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\1\ On June 2, 1997, June 17, 1997, August 7, 1997, October 14,
1997, October 21, 1997, and October 28, 1997, EMCC filed amendments
to its application. Copies of the application are available for
inspection and copying at the Commission's Public Reference Room.
\2\ 15 U.S.C. 78q-1 and 78s.
\3\ 17 CFR 240.17Ab2-1.
\4\ Securities Exchange Act Release No. 38810 (July 1, 1997), 62
FR 37093 (``EMCC Notice'').
\5\ Letters from Jonathan Kord Lagemann, attorney for Asialuck
Limited (July 15, 1997); JP Morgan (July 30, 1997); Emerging Markets
Traders Association (August 8, 1997); UBS Limited (August 7, 1997);
Euro Brokers Maxcor Inc. (undated); EMCC European Operations
Committee (August 8, 1997); Salomon Brothers Inc. (August 8, 1997);
and Merrill Lynch, Pierce, Fenner & Smith Incorporated (August 6,
1997).
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Table of Contents
I. Description
A. EMCC Organization
B. Eligible Securities
[[Page 8712]]
C. Clearance Services
D. Settlement Services
E. Buy-ins/Sell-outs
F. Release of Clearing Data
II. Comment Letters
III. Discussion
A. Statutory Standards
B. Participant Standards
1. Eligible Categories of Members
2. Examination of Applicants
3. Membership Standards
4. Membership Agreement
5. Compliance with the Statutory Membership Requirements
C. Fair Representation
1. Governance Procedures
2. Provision of Information to Participants
D. Safety and Soundness Considerations
1. Clearing Fund
a. Clearing Fund Formula
b. Margin Composition and Investment
c. Loss Allocation
d. Use of Clearing Fund
2. Standard of Care
3. Operational Capacity
4. Audit Committee and Internal Audit Department
5. Securities, Funds, and Data Controls
E. Capacity to Enforce Rules
1. Participant Monitoring
2. Ceasing to Act
3. Hearing Procedures
F. Dues, Fees, and Charges
IV. Conclusion
I. Description of EMCC
A. EMCC Organization
EMCC is a corporation organized under the laws of the State of New
York. EMCC was formed by the Emerging Markets Traders Association
(``EMTA'') \6\ and the International Securities Clearing Corporation
(``ISCC'') \7\ in response to an industry initiative to reduce risk in
the clearance and settlement of emerging markets debt instruments.
Currently, the International Securities Markets Association
(``ISMA''),\8\ the National Securities Clearing Corporation
(``NSCC''),\9\ and EMTA are the owners of EMCC.\10\
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\6\ EMTA is a trade association organized in 1990 as a New York
not-for-profit corporation by financial institutions to promote the
development of trading markets in emerging market instruments. At
the end of 1996, EMTA had 154 members, which were mainly broker-
dealers and banks. EMTA owns 100% of the outstanding voting
securities of EMTA Black, Inc. EMTA Black, Inc. in turn owns 100% of
the outstanding voting securities of each of Clear-EM, Inc.; match-
EM, Inc.; and Net-EM, Inc. Match-EM, Inc. is the owner of Match-EM,
which is an electronic post-trade confirmation and matching system
for Brady bonds and sovereign loans operated by GE Information
Services, Inc. (``GE''). Match-EM also enables EMTA to disseminate
daily market volume and price data. Match-EM began operations in May
1995.
\7\ ISCC is the wholly owned subsidiary of the National
Securities Clearing Corporation and is registered as a clearing
agency under the Exchange Act. Securities Exchange Act Release No.
26812 (May 12, 1989), 54 FR 21691 (order approving temporary
registration of ISCC as a clearing agency). ISCC continues to
operate under its temporary registration. Securities Exchange Act
Release No. 38703 (May 30, 1997), 62 FR 31183.
\8\ ISMA is an industry association composed of broker-dealer
firms. ISMA has approximately 820 members in 48 countries. ISMA is
organized under the laws of Switzerland and is registered in the
United Kingdom (``U.K.'') as a designated investment exchange. ISMA
owns TRAX, a trade matching and reporting system started in 1989.
ISMA's wholly-owned subsidiary, International Securities Market
Association Limited (``ISMA Ltd.''), operates TRAX. U.K. broker-
dealers can use TRAX to fulfill their U.K. reporting requirements.
\9\ NSCC is a clearing agency registered under Section 17A of
the Exchange Act. Securities Exchange Act Release No. 20221
(September 23, 1983), 48 FR 45167 (order approving full registration
of NSCC as a clearing agency). NSCC is owned by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc.
\10\ EMTA owns 300 shares (37.5% of the outstanding shares),
NSCC owns 300 shares (37.5% of the outstanding shares), and ISMA
owns 200 shares (25% of the outstanding shares). No later than June
30, 1998, EMCC intends to issue shares to persons that have
contributed to the EMCC development fund and to finance EMCC's
initial operations in such amounts and at such times as determined
by EMCC. EMCC will file a proposed rule change prior to any such
issuances.
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B. Eligible Securities
EMCC has been established as a clearing agency to facilitate the
clearance and settlement of transactions in U.S. dollar-denominated
Brady bonds at Cedel and Euroclear (collectively referred to as
``depositories'').\11\ Currently, Brady bonds \12\ are settled through
the facilities of Cedel Bank, Societe anonyme (``Cedel'') and the
Euroclear system, which is operated by the Brussels Office of Morgan
Guaranty Trust Company of New York (``Euroclear'').\13\ In the future,
EMCC may expand its clearance and settlement services to include other
emerging markets debt instruments.\14\
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\11\ Initially, only Brady bonds will be eligible for processing
at EMCC. As defined in EMCC's rules, Brady bonds are: (i) any bond
or note issued in connection with the restructuring of indebtedness
by a sovereign or an agency or entity thereof under the auspices of
the Brady plan or under any similar restructuring or financing plan
whether or not collateralized and including bonds or notes issued in
exchange thereof or (ii) any warrant or similar right originally
issued attached to a Brady bond. The term does not include
securities offered by a sovereign debtor to investors through normal
underwriting syndication channels.
\12\ Pursuant to a plan developed by then U.S. Treasury
Secretary Nicholas Brady, certain countries have issued
collateralized debt securities (i.e., Brady bonds) in exchange for
outstanding bank loans as part of an internationally supported
sovereign debt restructuring. Typically, the collateral would be
U.S. Treasury securities. More recently, some issues of Brady bonds
have been issued without collateral.
\13\ For a description of Cedel, see Securities Exchange Act
Release No. 38328 (February 24, 1997), 62 FR 9225 (order approving
application for limited exemption from registration as a clearing
agency). For a description of Euroclear, see Securities Exchange Act
Release No. 38589 (May 9, 1997) 62 FR 26833 (notice of filing of
application for exemption from registration as a clearing agency).
\14\ EMCC will file proposed rule changes with the Commission
prior to expanding the categories of securities eligible for
processing at EMCC.
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C. Clearance Services
Dealers and interdealer brokers (``broker'') will submit
transaction data relating to trades to be settled at EMCC to a locked-
in trade source which will match such data using its own criteria.
Initially, the locked-in trade sources designated by EMCC are Match-EM
and TRAX.\15\ Upon completion of the matching process, each locked-in
trade source will submit transaction data to EMCC.\16\
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\15\ See supra notes 6 and 8.
\16\ TRAX will only submit data to EMCC on matched trades that
members have designated as EMCC trades. Match-EM will submit data to
EMCC on all trades submitted to it. EMCC will segregate out for
processing all data on trades between two EMCC members. However, if
an EMCC member maintains two accounts with Match-EM, EMCC will only
process trades in the EMCC designated account.
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EMCC will receive data from the locked-in trade sources three times
each business day: (1) Between 8:00 a.m. and 8:30 a.m. eastern time
(``ET'') (``early morning transmission''); (2) between 11:00 a.m. and
11:30 a.m. ET (``midmorning transmission''); and (3) between 9:00 p.m.
and 9:30 p.m. ET (``evening transmission''). At approximately 10:30
a.m. ET and 11:30 p.m. ET, EMCC will send to its members and to the
locked-in trade sources a report of data that was rejected because it
did not meet EMCC's or the depositories' operational parameters.\17\
Any correction or cancellation of data must be done through the locked-
in trade sources.\18\
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\17\ Such parameters include complete information and valid
characters. In addition, EMCC has established a maximum delivery
size of $20 million.
\18\ Any cancellation or correction must be received by EMCC no
later than the early morning transmission two business days after
trade date (``T+2'').
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EMCC will report to each member on its ``accepted trade report''
data on all trades: (a) That are matched by the locked-in trade
sources; (b) that are received by EMCC by the early morning
transmission two days after trade date (``T+2''); (c) that are eligible
for processing by EMCC (i.e., U.S. dollar denominated Brandy bonds);
and (d) that are not rejected by EMCC based on the operational
parameters. EMCC will interpose itself as the counterparty and
guarantor on a trade-for-trade basis with respect to the trades it
reports on its accepted trade report unless EMCC notifies or has made
information available to its members that trades
[[Page 8713]]
listed on the accepted trade report are not assumed and guaranteed
because EMCC has ceased to act for the original counterparty.\19\
EMCC's guarantee will be effective with respect to: (a) Trades reported
on the evening accepted trade report at the later of midnight ET or one
half hour after the issuance of the preliminary margin report \20\ and
(b) trades reported on the morning accepted trade report at the later
of 1:00 p.m. ET or two and one-half hours after issuance of the final
margin report.\21\
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\19\ EMCC does not interpose itself as the counterparty and
guarantor for transactions reported on the settlement instructions
only report.
\20\ See Infra Section III.D.1.a for a description of the
preliminary margin report.
\21\ See infra Section III.D.1.a for a description of the final
margin report.
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Matched trades that are eligible for processing and that are
received on T+2 in the midmorning transmission will be listed on a
settlement instructions only report (``SIO report''). For trades listed
on this report, EMCC will provide settlement instructions on behalf of
its members to the depositories but will not novate or guarantee the
trade. EMCC will not accept transaction data sent after the midmorning
transmission on T+2.
Upon standing instructions of a member, EMCC will also include on
the SIO report uncompared transaction on T+2. If EMCC receives by the
early morning transmission on T+2 updated data from Match-EM indicating
that an uncompared trade has been cancelled or compared, EMCC will not
include data on the trade on the SIO report. If submitted in time,
these trades will be reported on the accepted trade report. If not,
they will be processed by the depositories, but will not be guaranteed
by EMCC.
Accepted trade reports will be made available to members at
approximately 10:30 a.m. ET and 11:30 p.m. ET. The morning report will
contain data on matched trades received in the early morning
transmission. The evening report will contain data on matched trades
received in the midmorning and evening transmissions. The SIO report
will be issued at approximately 12:00 p.m. ET. At approximately 12:30
p.m. on T+2, EMCC will send settlement instructions to the depositories
based on trade data contained in the accepted trade reports and in the
SIO reports.
D. Settlement Services
EMCC is a member of both Euroclear and Cedel. For trades listed on
the accepted trade report, EMCC will transmit settlement instructions
to the appropriate depository on behalf of members with EMCC as the
counterparty to each side of the trade. EMCC will send instructions to
the depository at 12:30 p.m. on T+2 for settlement the next day
(``T+3''). The settlements will be made on a delivery against payment/
receive against payment basis through EMCC's account at each
depository.\22\
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\22\ Unless otherwise specified, EMCC assumes that bonds will be
delivered with attached warrants.
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In accordance with the depositories' rules, settlement will occur
only if the receiver has sufficient cash or line of credit to pay for
the delivery and the deliverer has sufficient securities to make full
delivery.\23\ The depositories will notify EMCC and its members each
day at midnight ET of the status of trades indicating which have
settled and which were scheduled to settlement but are still pending.
EMCC will not provide settling trade reports or fail reports to its
members.
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\23\ Both Cedel and Euroclear employ mechanisms that can look
beyond the initial counterparties' obligations. Cedel has a
``chaining'' program which scans open transactions until all cash
and securities resulting from same day settlements are reemployed to
settle further transactions for same day value. Therefore, for back-
to-back transfers for equivalent funds, customers may not need to
pay because proceeds from sales are used to settle purchases.
Euroclear's chaining program operates somewhat differently. In
scanning open transactions, the Euroclear program will only look to
the next settlement. For example, if a member does not have
sufficient funds to receive securities, Euroclear will ascertain
whether that member has a corresponding securities deliver
obligation to another member. In such case, Euroclear will complete
both transactions if the counterparty to the deliver obligation has
sufficient funds to pay for the securities. But if the counterparty
to the securities deliver obligation did not have sufficient funds
to settle the transaction, Euroclear, unlike Cedel, would not look
to subsequent settlements for funds and securities. Accordingly,
where EMCC as the counterparty to EMCC member trades has
insufficient funds to accept deliveries, Euroclear's system will
only look to EMCC's member to determine if sufficient funds exist.
In order to permit Euroclear to ``look through'' EMCC for settlement
and deliveries, EMCC will maintain a line of credit of at least $50
million at Euroclear. EMCC's line of credit will permit Euroclear to
review not only the available funds of EMCC's member but also such
member's subsequent counterparty, if any.
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If a member fails to accept delivery of securities from EMCC
because it has insufficient funds, EMCC will send a fail compensation
instruction to the appropriate depository. The next day (presuming that
the member is not insolvent), the depository will debit the account of
the member that had insufficient funds and credit its counterparty's
account an amount of money based on the depository's overnight
borrowing interest rate multiplied by the amount of funds which were
not paid.
With respect to transactions reflected on a member's SIO report,
EMCC will send instructions on the afternoon of T+2 to the depository
on behalf of that member for T+3 settlement. EMCC will not monitor the
settlement of these transactions.
E. Buy-ins/Sell-outs
EMCC's rules permit a member to buy-in or a sell-out of Brady bonds
in the event that a transaction has not been completed by five days
after settlement date (``SD+5'').\24\ EMCC may also initiate a buy-in
or sell-out if it determines that such action is necessary to protect
EMCC, its members, its creditors, or its investors; to safeguard
securities or funds in EMCC's custody or control; or to promote the
prompt and accurate clearance and settlement of securities
transactions.
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\24\ A buy-in or sell-out may be initiated by submitting a
``pre-advice'' notice to EMCC. Upon receipt of the pre-advice
notice, EMCC will transmit the notice to the member with the fail
obligation. If the instruments or money covered by the pre-advice
notice are not received within two business days after the date of
the pre-advice notice, then the member that requested the buy-in or
sell-out must deliver to EMCC a buy-in or sell-out notice between
two to five business days after issuance of the pre-advice notice in
order to proceed with the buy-in or sell-out. Upon receipt of the
buy-in or sell-out notice, EMCC will transmit a buy-in or sell-out
notice to the member with the fail obligation. Execution of the buy-
in or sell-out will take place through an agent selected by EMCC on
the fifth business day following the issuance of the buy-in or sell-
out notice.
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While a member may request a buy-in or sell-out for deliver and
receive obligations for warrants, EMCC will only complete the buy-in or
sell-out of warrants at the requesting member's expense in the event
that EMCC ceases to act for the member's counterparty. In addition, if
EMCC ceases to act for the defaulting member after the pre-advice
notice has been submitted but before the execution of the buy-in or
sell-out, EMCC will only proceed with the buy-in or sell-out after
confirming with the requesting firm that it wants to proceed at its
expense.
F. Release of Clearing Data
Pursuant to EMCC's rules, EMCC may release its members' transaction
data to EMTA in accordance with a written agreement between EMCC and
EMTA. Such data may be used only for the purpose of promoting market
transparency on a noncommercial basis. On June 9, 1997, EMCC and EMTA
entered into a letter agreement that provides for the public
dissemination of information relating to the aggregate and per trade
transaction volumes and prices of trades processed by EMCC.
II. Comment Letters
The Commission received eight comment letters in response to the
[[Page 8714]]
notice of filing of EMCC's application.\25\ Seven were in favor of
granting EMCC's application for registration. These commenters stated
that EMCC would be effective in reducing the risks, particularly
counterparty risk, involved in settling Brady bonds. In addition, many
of these commenters thought that EMCC would provide a cost-effective
means of settling Brady bond trades.
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\25\ Supra note 5.
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The one commenter that opposed EMCC's application stated that EMTA
has failed to respond to a New York Stock Exchange subpoena and that
such conduct was inconsistent with the conduct expected of a registered
clearing agency. EMCC responded to this commenter by stating that EMTA
had in fact responded to the subpoena and that EMTA's actions were
irrelevant to EMCC's application because EMTA's involvement is limited
to an ownership interest in EMCC pursuant to which it may elect only
one director out of the 21 directors on EMCC's board.
III. Discussion
A. Statutory Standards
Section 17A of the Exchange Act directs the Commission, having due
regard for the public interest, the protection of investors, the
safeguarding of securities and funds, and the maintenance of fair
competition, to use its authority to facilitate the establishment of a
national system for the prompt and accurate clearance and settlement of
securities transactions.\26\ Registration of clearing agencies is a key
element of the statutory objectives set forth in Section 17A.\27\
Before granting registration to a clearing agency, Section 17A(b)(3) of
the Exchange Act requires that the Commission make a number of
determinations with respect to, among other things, a clearing agency's
organization, rules, and ability to provide safe and accurate clearance
and settlement.\28\ Additionally, the Division of Market Regulation has
published the standards it applies in evaluating applications for
clearing agency registration.\29\
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\26\ 15 U.S.C. 78q-1. For legislative history concerning Section
17A, see, e.q., Report of Senate Comm. on Housing and Urban Affairs,
Securities Acts Amendments of 1975: Report to Accompany S. 249, S.
Rep. No. 75, 94th Cong., 1st Sess. 4 (1975); Conference Comm. Report
to Accompany S. 249, Joint Explanatory Statement of Comm. of
Conference, H.R. Rep. No. 229, 94th Cong., 1st Sess., 102 (1975).
\27\ ``Clearing agency'' is defined in Section 3(a)(23) of the
Exchange Act. 15 U.S.C. 78c(a)(23).
\28\ 15 U.S.C. 78q-1(b)(3). See also Section 19 of the Exchange
Act, 15 U.S.C. 78s, and Rule 19b-4, 17 CFR 240.19b-4, setting forth
procedural requirements for registration and continuing Commission
oversight of clearing agencies and other self-regulatory
organizations.
\29\ Securities Exchange Act Release No. 16900 (June 17, 1980),
45 FR 41920 (``Standards Release''). See also, Securities Exchange
Act Release No. 20221 (September 23, 1983), 48 FR 45167 (omnibus
order granting registration as clearing agencies to The Depository
Trust Company, Stock Clearing Corporation of Philadelphia, Midwest
Securities Trust Company, The Options Clearing Corporation, Midwest
Clearing Corporation, Pacific Securities Depository, National
Securities Clearing Corporation, and Philadelphia Depository Trust
Company).
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Section 17A(b)(1) provides that the Commission:
May conditionally or unconditionally exempt any clearing agency
or security or any class of clearing agencies or securities from any
provisions of [Section 17A] or the rules or regulations thereunder,
if the Commission finds that such exemption is consistent with the
public interest, the protection of investors, and the purposes of
[Section 17A], including the prompt and accurate clearance and
settlement of securities transactions and the safeguarding of
securities and funds.\30\
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\30\ 15 U.S.C. 78q-1(b)(1)
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As a result, in granting exemptions from portions of Section 17A, the
Commission requires substantial compliance with Section 17A and the
rules and regulations thereunder based on a review of the
standards.\31\
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\31\ The Commission has granted temporary registrations that
included exemptions from specific statutory requirements of Sections
17A. In granting these temporary registrations, the subject clearing
agencies were expected to become registered on a permanent basis.
See, e.g., Securities Exchange Act Release No. 25740 (May 24, 1988),
53 FR 19839 (order approving Government Securities Clearing
Corporation's temporary registration as a clearing agency with a
temporary exemption from compliance with Section 17A(b)(3)(C)).
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B. Participant Standards
1. Eligible Categories of Members
Section 17A(b)(3)(B) of the Exchange Act enumerates certain
categories of persons that a clearing agency's rules must authorize as
potentially eligible for access to clearing agency membership and
services.\32\ As discussed in the Standards Release, a clearing agency
may also accept specific categories of persons other than those
enumerated but must be cognizant of the impact that any additional
category of members may have on the clearing agency and must take steps
to address any such risk. While entities falling into the specified
categories are eligible for membership, applicants must also satisfy
the other criteria established by EMCC and discussed later in this
release.
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\32\ The classes are registered brokers or dealers, registered
clearing agencies, registered investment companies, banks, and
insurance companies.
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A partnership, corporation, limited liability company, or other
organization, entity, or individual will be qualified to become a
member of EMCC if it satisfies at least one of the following
qualifications: (a) It is a broker or dealer registered under the
Exchange Act; (b) it is a broker or deraler registered or regulated
under the laws of another jurisdiction;\33\ (c) it is a bank or trust
company, including a trust company having limited power, which is a
member of the Federal Reserve System or is supervised and examined by
state or federal authorities in the U.S. having supervision over banks;
(d) it is a bank or trust company, which is supervised and examined by
the banking regulator in another jurisdiction; or (e) if it does not
qualify under (a) through (d) but is the successor or assign of any
member and has demonstrated to the board of directors that its business
and capabilities are such that it could use EMCC's services without
undue risk to EMCC, then such successor or assign may become a member
for the limited purpose of winding up its business with EMCC in an
orderly manner.
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\33\ Initially, only broker-dealers that are organized under the
laws of the U.K. will be eligible for admission. EMCC will file a
proposed rule change setting forth membership criteria prior to
admission of other categories of non-U.S. broker-dealers.
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After the issuance of shares to persons which have contributed to
the development fund for the organization and initial operation of
EMCC,\34\ all applicants that EMCC accepts for membership will be
required to be either a shareholder of EMCC or an affiliate or
subsidiary of a shareholder of EMCC. EMCC may deny an application to
become a member or to use one or more services of EMCC upon a
determination by EMCC that EMCC does not have adequate personnel,
space, data processing capacity, or other operational capability at
such time to perform its services for the applicant or member without
impairing the ability of EMCC to provide services for its existing
members, to assure the prompt, accurate, and orderly processing and
settlement of securities transactions, or to otherwise carry out its
functions. However, any such applications which are denied will be
approved as promptly as the capabilities of EMCC permit. Further
Section 17A(b)(3)(F) of the Exchange Act requires that the rules of a
clearing agency should not be designed to discriminate in the admission
of members.
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\34\ See supra note 10.
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2. Examination of Applicants
The Standards Release notes that a registered clearing agency is
empowered by the Exchange Act to examine and verify the qualifications
of an applicant in accordance with the procedures
[[Page 8715]]
established by the rules of the clearing agency. However, the Standards
Release also states that such authority could be used only subject to a
clearing agency's responsibility not to discriminate in the admission
of participants and not to impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
Each applicant for admission to EMCC must provide a copy of its
financial statements for the two most recent fiscal years certified by
the applicant's independent certified public accountants. To the extent
that such audited financial statements are not prepared in accordance
with U.S. generally accepted accounting principles (``GAAP''), the
applicant must provide EMCC with a discussion of the material
variations of such accounting principles from U.S. GAAP.
A U.S. broker-dealer applicant must provide copies of its Form X-
17A-5 FOCUS Reports or Form G-405 FOGS Reports for the last two years
and any supplemental reports required to be filed with the Commission
pursuant to Exchange Act Rule 17a-11 \35\ or 17 CFR 405.3. If the
applicant is a U.K. broker-dealer subject to regulation by the
Securities and Futures Authority (``SFA'') or any successor
organization, it must provide EMCC with its SFA monthly reports and
returns for the prior 24 months and if necessary and feasible,
financial statements prepared in accordance with U.S. GAAP.
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\35\ 17 CFR 240.17a-11.
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A bank applicant must provide all quarterly financial statements
covered by the last audited financial statement plus all subsequent
quarterly financial statements. A U.S. bank applicant also must provide
copies of its three most recent Consolidated Reports of Condition and
Income (``Call Reports'') and information as to its capital levels and
ratios. A non-U.S. bank applicant also must provide all material
regulatory filings made with its primary regulator in its home country
over the prior two years.
If required by EMCC, an applicant must provide a certificate of the
chief executive or chief financial officer of the applicant that no
material adverse changes have occurred in the financial condition of
the applicant since the date of the most recent financial statements or
reports filed with EMCC; that the applicant has not guaranteed the
obligations of any other person; and that the applicant is not subject
to any other contingent liabilities except as set forth in such
financial statements, reports, or the certificate.
All applicants must fill out a questionnaire that elicits
information on any liabilities of the applicant, the types of business
conducted by the applicant, and the applicant's operational
capabilities. All applicants must provide to EMCC an opinion of outside
counsel as to the member's organization, the validity and
enforceability of the member's agreement, and the need for regulatory
approvals. In addition, the opinion of non-U.S. applicants must also
opine as to jurisdictional and conflict-of-law issues. A non-U.S.
applicant must represent that it is in good standing with its home
country's financial regulatory authority.
3. Membership Standards
Section 17A(b)(4)(B) of the Exchange Act contemplates that a
registered clearing agency have financial responsibility, operational
capability, experience, and competency standards that are used to
accept, deny, or condition participation of any participant or any
category of participants, but that these criteria may not be used to
unfairly discriminate among participants. The Standards Release states
that a clearing agency may discriminate among persons in the admission
to or the use of the clearing agency if such discrimination is based on
standards of financial responsibility, operational capability,
experience, and competence.
EMCC's board or the membership and risk committee of the board may
approve an application to become a member upon a determination that
such applicant meets the applicable admission criteria. The applicant
must have adequate personnel, physical facilities, books and records,
accounting systems, and internal procedures to enable it to
satisfactorily handle transactions and communicate with EMCC, to
fulfill anticipated commitments to and meet the operational
requirements of EMCC with necessary promptness and accuracy, and to
conform to any condition and requirement that EMCC reasonably deems
necessary for its protection or that of its members.
The applicant must have an established business history of a
minimum of three years or personnel with sufficient operational
background and experience to ensure, in the judgment of the board, the
ability of the firm to conduct its business. The applicant must agree
to make and have sufficient financial ability to make all anticipated
payments required to be made to EMCC. The applicant must be in
compliance with the capital requirements imposed by its designated
examining authority or appropriate regulatory agency, any other self-
regulatory organizations, and any other regulatory authority or self-
regulatory authority to which it is subject by statute, regulation, or
agreement. The applicant cannot be subject to a statutory
disqualification as defined in Section 3(a)(39) of the Exchange Act
\36\ or similar order. EMCC may deny an application if it has
reasonable grounds to believe that the applicant or any associated
person meets a disqualification criteria specified in EMCC's rules.\37\
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\36\ 15 U.S.C. 78c(a)(39).
\37\ For example, disqualification criteria will include closer
than normal surveillance by the applicant's designated examining
authority or appropriate regulatory agency, violations of the
federal securities laws, convictions of any criminal offense
involving securities transactions, or any injunction against
engaging in securities transactions. In addition, if the applicant
has been enjoined from engaging in securities related business or
has been expelled from a self-regulatory organization, EMCC must
deny the application.
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If the applicant is a U.S. broker or dealer, its aggregate
indebtedness/excess net capital ratio must be less than 950%, or its
excess net capital/aggregate debit items ratio must be in excess of
5.25% and its excess net capital must equal at least $100 million. If
the applicant is a U.K. broker or dealer, its financial resources must
be at least 120% of its financial resources requirement and its excess
financial resources must equal at least $100 million. However, a broker
or dealer applicant may have excess regulatory capital of at least $50
million if the membership and risk committee of EMCC's board of
directors makes a written finding that other credit factors of the
applicant compensate for the lower financial resources.\38\
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\38\ EMCC will consider any ratings assigned by a nationally
recognized statistical rating organization, any significant adverse
off-balance sheet items, and the applicant's significant business
lines as compared to its internal risk management controls and short
term funding arrangements.
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In addition, if the applicant is a bank, it must have net worth as
of the end of the quarter prior to the effective date of its membership
determined in accordance with U.S. GAAP of at least $500 million.
However, an applicant bank may be accepted if it has a net worth of at
least $200 million if the membership and risk committee of EMCC's board
of directors makes a written finding that other credit factors of the
applicant compensate for the lower net worth.\39\
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\39\ In making such determination, EMCC will consider the
applicant's return on average assets, capital to total assets ratio,
nonperforming assets to total assets ratio, and liquid assets to
total assets ratio. EMCC will also consider the ratings assigned to
the applicant by a nationally recognized statistical rating
organization, any significant off-balance sheet items, and the
applicant's risk management controls.
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[[Page 8716]]
If a U.S. broker applicant is applying to become a broker member,
it must have excess net capital of at least $10 million and must agree
to submit trading data to EMCC in such instruments as requested by
EMCC. EMCC will determine the broker's potential margin calls, and the
broker must demonstrate an ability to meet such margin calls and any
loss allocation assessments. The broker can demonstrate this ability by
agreeing to submit to EMCC only transactions with EMCC members on both
sides and by demonstrating a low error rate.\40\
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\40\ If a broker has a margin obligation because one of its
counterparties fails to submit data on a trade prior to 8:00 a.m. ET
on T+1, the nonsubmitting counterparty must compensate the broker
for the cost of financing the payment obligation and may be subject
to fine by EMCC.
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During the first six months of EMCC's operations, EMCC will permit
a broker to become an EMCC member which cannot demonstrate its ability
to meet potential margin calls if it meets an alternate criterion. Such
applicant must maintain a clearing relationship with an EMCC member
which is not a broker. Pursuant to the clearing relationship, the
clearing firm must take the place of the broker on T+1 for all trades
that do not have EMCC members on both sides. The broker will have a
fixed clearing fund deposit in lieu of the required margin deposit.
However, EMCC will calculate each day for such broker a preliminary and
final required fund deposit excluding any positions that resulted from
a systems failure of a counterparty resulting in a failure to submit
trade data. If the required fund deposit exceeds the broker's fixed
deposit, EMCC will not guarantee any transactions to the broker until
its required fund deposit is equal to or lower than its fixed
deposit.\41\ However, EMCC will guarantee completion of the broker's
trades to the original EMCC counterparties pursuant to the loss
allocation rules relating to a broker's default.\42\ In addition, if
the broker's required fund deposit exceeds its fixed deposit, the
broker will not be subject to assessment for loss allocations \43\ and
the broker will be charged a market rate of interest on the difference
between its required fund deposit and its fixed deposit. EMCC will
notify all dealer members whenever a broker's required fund deposit
exceeds its fixed deposit.
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\41\ The broker could lower its required fund deposit by
depositing additional funds with EMCC. If it does not deposit
additional funds, its required fund deposit will exceed its fixed
deposit until at least the end of the next month (because its
required fund deposit its based on the highest margin calculation
during the current month and the prior month).
\42\ Because EMCC is not guaranteeing trades to the broker, if a
dealer counterparty becomes insolvent, the broker is responsible for
completing the trade to its counterparty on the other side. As a
result, the nondefaulting EMCC dealer member does not receive the
benefit of EMCC's guarantee of brokered trades. In such a situation,
if the broker is then unable to complete the trade, EMCC will then
guarantee the broker's trade to its EMCC member counterparty.
However, the trade is treated as a direct trade between the broker
and its counterparty. Thus, under the loss allocation rules, the
dealer would be allocated a greater portion of its loss than if the
broker had not exceeded its fixed deposit requirement.
\43\ Because EMCC is not guaranteeing trades to the broker,
there would be no loss from direct trades entered into with the
broker.
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The foregoing financial responsibility standards are minimum
requirements, and EMCC's board may impose higher standards based upon
the level of the anticipated positions and obligations of an applicant,
the anticipated risk associated with the volume and types of
transactions an applicant proposes to process through EMCC, and the
overall financial condition of an applicant. If an applicant does not
itself satisfy its capital requirements, the board may include for such
purposes the capital of an affiliate of the applicant if the affiliate
has delivered to EMCC a guaranty, satisfactory in form and substance to
the board, of the obligations of the applicant to EMCC.
4. Membership Agreement
Each applicant to become a member of EMCC will be required to sign
a membership agreement pursuant to which the member's books and records
must at all times be open to inspection by EMCC and the member must
furnish EMCC with any information with respect to the member's business
and transactions as EMCC may require. However, upon ceasing to be a
member, EMCC cannot inspect a member's books and records or require
information relating to transactions that occurred after the time the
member ceased to be a member.
Membership in EMCC and use of EMCC's services are governed by the
laws of the state of New York. Each member must agree to submit to the
jurisdiction of the courts of the state of New York and the U.S.
District Court for the Southern District of New York and to appoint a
person acceptable to EMCC as its agent to receive on its behalf service
of process. Each member must also agree that any judgment obtained in
an action or proceeding may be enforced in the courts of any
jurisdiction where the member or any of its property may be found, and
the member must irrevocably submit to the jurisdiction of each such
court with respect to any such action or proceeding. To the fullest
extent permitted by law, each member must waive all immunity whether on
the basis of sovereignty or otherwise from jurisdiction, attachment
both before and after judgment, and execution to which it might
otherwise be entitled in any action or proceeding in any county or
jurisdiction relating in any way to the agreement or to any
transaction.
The membership agreement also provides EMCC with an additional
source of information for risk control purposes. Upon the request of
and at no charge to EMCC, members must provide research that they
provide to any of their customers relating to EMCC eligible instruments
and events or conditions which might affect the price of EMCC eligible
instruments.
5. Compliance With the Statutory Membership Requirements
The Commission notes that EMCC's rules do not provide for the
admission of certain of the statutory categories of members (e.g.,
registered investment companies).\44\ The Commission believes that
EMCC's provision for limited categories of members is appropriate at
least during EMCC's initial phases of operations. The Commission also
notes that during the comment period, EMCC did not receive any comments
from anyone in the category of entities not covered by EMCC's rules.
Therefore, the Commission is granting EMCC a temporary exemption from
Section 17A(b)(3)(B) of the Exchange Act with respect to this
requirement.
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\44\ Supra note 32.
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EMCC's rules also make certain categories of entities eligible for
EMCC services that are not within the statutory categories (i.e., non-
U.S. banks and U.K. broker-dealers).\45\ As discussed in the Standards
Release, clearing agencies may admit additional categories of members
provided that the goals of safety and soundness are met. The Commission
believes that the admission criteria EMCC has established for non-U.S.
banks and U.K. broker-dealers are consistent with the goals of safety
and soundness. As discussed above, EMCC will obtain legal opinions from
foreign members to assure that EMCC will be able to enforce its rules
and member's agreement. In addition, EMCC will obtain information from
the participant regarding its regulatory status in its home country and
will obtain copies of all regulatory filings made in its home
[[Page 8717]]
country. Thus, the Commission believes that EMCC's current procedures
for acceptance of non-U.S. participants are consistent with the goals
of the Exchange Act.
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\45\ EMCC's admission criteria for non-U.S. entities initially
will apply only to non-U.S. banks and U.K. broker-dealers.
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C. Fair Representation
Section 17A(b)(3)(C) of the Exchange Act requires that the rules of
a clearing agency provide for fair representation of the clearing
agency's shareholders or members and participants in the selection of
the clearing agency's directors and administration of the clearing
agency's affairs. This section contemplates that users of a clearing
agency have a significant voice in the direction of the affairs of the
clearing agency.
1. Governance Procedures
EMCC's board has a total of 21 directors, divided into four
classes. The first three classes consist of five directors each
(``participant directors'').\46\ The fourth class has six directors,
consisting of one director selected by EMTA, one director selected by
ISMA, two directors selected by NSCC, and two directors selected by
EMCC. The term of office of the participant directors is three years
with the term of one class of directors expiring each year.\47\
Participant directors may not serve for more than six consecutive
years. The term of the fourth class is one year.
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\46\ A member along with any of its affiliates which are members
may only have one representative sitting on the board.
\47\ The term of the initial directors in class one will expire
in 1998, the term of the initial directors in class two will expire
in 1999, and the term of the initial directors in class three will
expire in 2000.
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A nominating committee selected by the board will select
individuals to serve as participant directors. Members may also
nominate individuals to serve as participant directors by filing with
EMCC's Secretary at least 30 days prior to the date of the annual
meeting a petition signed by the lesser of five percent of the
participants of ten participants. If any member files a petition for
participant director, EMCC's Secretary will mail ballots to all
members. Members will then be provided the opportunity to vote for
participant directors.\48\
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\48\ Members will have three votes for each $1.00 of average
clearing fund deposits during the twelve month period ending on the
last day of the second month prior to the date of determination and
two votes for each $1.00 of the average monthly fee payable or paid
by the member to EMCC during the same twelve month period.
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Because members are given an opportunity both to nominate board
members and to vote in any contested election, members should have a
meaningful voice in the governance of EMCC. Therefore, the Commission
believes that EMCC's election procedures provide fair representation to
its members.
2. Provision of Information to Participants
The Standard Release states that participants should have
sufficient information concerning a clearing agency's affairs to
participate meaningfully in its administration. Clearing agencies
should furnish participants with audited annual financial statements,
an annual report on internal accounting control prepared by an
independent public accountant, and notices of any proposed rule
changes.
The Standards Release states that the annual financial statements
should be provided to participants within 60 days following the close
of the clearing agency's fiscal year and should be prepared in
accordance with generally accepted accounting principles. The Standards
Release also states that the report on internal accounting control
should be furnished to all participants promptly after it becomes
available and no later than 60 days after the period covered by the
report.\49\ The Standards Release also states that a notice of a
proposed rule change should be provided to participants prior to or as
soon as possible after filing with the Commission and should provide a
description of the rule change, its purpose, and its effect. After
review of EMCC's rules and procedures, the Commission finds that such
rules and procedures are consistent with EMCC's obligations to provide
information to its participants.
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\49\ The Standards Release also states that the report on
internal accounting control should be based on a study and an
evaluation which was made for the purpose of reporting on the
clearing agency's overall system of internal accounting control and
should disclose any material weaknesses discovered and any
corrective action taken or proposed to be taken. The Commission
expects EMCC to prepare its reports in accordance with these
principles.
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D. Safety and Soundness Considerations
Sections 17A(b)(3)(A) and (F) of the Exchange Act require that a
clearing agency be organized and its rules be designed to facilitate
the prompt and accurate clearance and settlement of securities
transactions for which it is responsible and to safeguard securities
and funds in its custody or control or for which it is responsible.\50\
In the Standards Release, the Division enumerated certain requirements
that should be met to comply with this standard.
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\50\ 15 U.S.C. 78q-1(b)(3)(A) and (F).
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1. Clearing Fund
The Standards Release states that a clearing agency should have a
clearing fund which is based on a formula applicable to all users and
is composed of cash or highly liquid securities. The rules of a
clearing agency should limit the investments that can be made with the
cash portion of its clearing fund to government securities or other
safe and liquid investments. The clearing fund should only be used to
protect participants and the clearing agency from defaults of
participants and from clearing agency losses not resulting from day to
day expenses and not covered by insurance or other resources of the
clearing agency. While the Standards Release states that a clearing
agency could use temporary applications of the clearing fund in limited
amounts to meet unexpected and unusual requirements for funds, the
regular or substantial use of a clearing fund for operational purposes
would be inappropriate.\51\
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\51\ The Standards Release also states that there may be
legitimate purposes for which a clearing fund may be used for a
longer period of time so long as (a) the funds are properly
protected, (b) the funds are used to facilitate the process of
clearance and settlement, and (c) the participants and the
Commission approve such use during the registration proceedings.
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a. Clearing Fund Formula
EMCC will maintain and will manage a clearing fund for the purpose
of limiting or eliminating EMCC's exposure to loss in the event a
member fails to perform its obligations to EMCC. Each member will be
obligated to make deposits to EMCC's clearing fund. EMCC will set the
initial required clearing fund deposit for each member based on the
expected nature and level of the member's activity. A member's required
margin deposit will be equal to the largest single final daily margin
amount computed, as described below, for that member for the month
during which such margin calculation is being performed and for the
previous calendar month. The minimum required clearing fund deposit for
each member will be U.S. $1,000,000.
Every day, EMCC will calculate margin in the morning and in the
evening but will only collect margin based on the morning
calculation.\52\ EMCC will generally calculate the margin amount as
follows: (mark-to-
[[Page 8718]]
market amount + volatility amount) x event risk factor.\53\
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\52\ EMCC refers to the amount that each member must contribute
to the clearing fund as its margin requirement.
\53\ EMCC has provided the results of a stress test in which the
proposed formula was applied using three months of data on EMCC
eligible transactions obtained from Match-EM. The test assumed for
each member that the market in which such member had its highest
concentration of positions experienced an abnormal negative market
move (i.e., the ``stressed market''). All securities positions for
that member in other countries were run under the baseline
assumptions of no unusual market movements. The tests assumed first
a 10 standard deviation market drop in the stressed market and
second a 4 standard deviation market gain in the stressed market.
The test assumed that bonds on the opposite sides of the stressed
market had correlations of 80% while bonds on the same side of the
stressed market had 100% correlation.
Under this test, EMCC had no exposure 73.64% of the time. EMCC
had exposure between $1 and $1 million 9.18% of the time. EMCC had
exposure of greater than $10 million 1.7% of the time. The highest
exposures were four occurrences of an exposure of approximately $15
million and one exposure of approximately $50 million. EMCC has
represented that it will continue to conduct periodic stress testing
on a quarterly basis. Results of the stress tests will be reviewed
with the membership and risk committee of EMCC's board of directors,
and EMCC will reconsider the event risk factor if warranted by the
results of the stress tests. The Commission directs EMCC to make the
results available to Commission staff periodically. For example,
EMCC is currently conducting stress testing based on data from
trading during the week of October 27, 1997, a volatile period for
the Brady bond markets. EMCC has stated that it will provide the
Commission with the results of this testing.
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The mark-to-market amount will be based on all trades due to settle
on or after that day and all fails, unless EMCC has received notice
from the depository that such trade or fail has settled.\54\ The mark-
to-market amount will be based on the difference between the market
price and the contract value of the trade. If the net mark-to-market is
a credit, the firm will have a zero mark-to-market charge.
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\54\ EMCC will receive notice at midnight ET (or 6:00 a.m. in
Brussels and Luxembourg) from Euroclear and Cedel of all trades that
have settled. At that time, Euroclear and Cedel have already
completed most of their settlements of that day (i.e., the notice
issued at midnight ET on Friday morning will indicate trades that
will settle Friday at the depository). Thus, when EMCC calculates
the margin in the morning and the evening, it will have received
notice of which trades have settled or failed for the day.
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The volatility amount for the evening calculation will be based on
all trades due to settle on or after that day and all fails, unless
EMCC has received notice from the depository that such trade or fail
has settled.\55\ The volatility amount for the morning calculation will
be based on all trades due to settle on or after the current day and
all fails calculated as of the prior day whether or not EMCC has
received notice of the settlement of such trades or fails. Thus, the
morning volatility amount will include trades that have already settled
that day while the evening volatility amount will only include trades
that have not settled.\56\ In order to calculate the volatility amount,
each security will be placed into one of four liquidity categories
based on the average bid/offer spread. The liquidity category into
which a security is placed will determine the volatility formula to be
applied to that security.\57\ The sum of the volatility amounts for
each security will be the clearing member's volatility amount.\58\
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\55\ Supra note 54.
\56\ By including transactions in the morning volatility
calculation whether or not they have settled, EMCC insures that data
on three days of pending trades (i.e., the number of days that EMCC
is guaranteeing) is included. At the time of the morning volatility
calculation, the trades entered into three days before will have
settled, but EMCC will not have received data for the trades entered
into on the current day. Thus, by including data for trades settling
that day, EMCC will be using three days of data. EMCC will use fails
as of the prior day because fails as of the current day would
include trades due to settle that day (i.e., these trades would be
double counted as trades due to settle that day and fail trades).
With respect to the evening volatility calculation, EMCC will have
received data on trades entered into on that day and therefore will
have data on three days of pending trades on which to base its
calculation.
\57\ The four liquidity classes and their bid/offer spreads are
as follows: L1--\3/8\ of a point or less; L2--\3/4\ of a point or
less; L3--2 points or less; L4--greater than 2 points or no trading
activity for a certain period of days.
\58\ For each L4 security, the volatility amount is the value of
the position x 30%. For L1, L2, and L3 securities of each issuer,
EMCC will take the larger of the following formula with: (a) the
member's long positions in lines 1 and 2 and short positions in
lines 3 and 4; and (b) the member's short positions in lines 1 and 2
and long positions in lines 3 and 4.
1. (value of long or short L1+L2) x 2 Std plus
2. (value of long or short L3) x 4 Std plus
3. (value of long or short L1+L2) x 2 Std x CC plus
4. (value of long or short L3) x 1 Std x CC
Std is equal to a one standard deviation move over a five day
holding period based on the higher of a calculation using price data
for one year and three months. CC is the smallest correlation
coefficient between any security of that issuer in which the member
has short position and any security of that issuer in which the
member has a long position. The correlation coefficient will be
based on one year's pricing data and will be updated daily.
EMCC may adjust the fixed percentage applied to L4 securities or
the number of standard deviations applied to L1, L2, and L3
securities without prior notice in order to increase the volatility
calculations when warranted by circumstances. These adjustments may
be made on a country by country basis or a bond by bond basis either
for all members or for members unduly concentrated.
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The event risk factor, which is designed to give EMCC an additional
cushion against events in countries not covered by two standard
deviations, will initially be set at 1.25. EMCC may adjust the event
risk factor for an individual member or for all members without prior
notice to the member(s). EMCC also will increase margin requirements by
use of a global holiday risk factor to take into account days on which
U.S. banks are closed but securities markets are open.
The preliminary margin amount will be calculated each evening and
will be reported to members at approximately 11:30 p.m. on a
preliminary margin report. The report will show the member's current
deposit, preliminary margin amount, and preliminary amount due, if any.
However, members are not required to make any payment to EMCC based on
the preliminary margin report.
The final margin amount will be calculated each morning and will be
reported to members at approximately 10:30 a.m. on a final margin
report. The final margin report will indicate each member's current
deposit, final margin amount, and final amount due, if any. A member
will be required to pay any obligation with respect to its margin
obligation reflected on the final margin report no later than the later
of 11:30 a.m. ET or one hour after the final margin report is made
available. Margin deficits of less than $100,000 will not have to be
paid by members. Payment must be made through the U.S. Fedwire system.
EMCC also has the authority to collect amounts over and above the
daily margin requirement in order to obtain adequate assurances of the
financial responsibility or operational capability of a member. EMCC
has created a policy statement on procedures to follow in determining
whether additional clearing fund deposits are needed.\59\ EMCC also may
collect additional margin if a member has been placed on surveillance
status.\60\
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\59\ Each day, EMCC will calculate a net country position and a
net geographical position for each member. The net country position
will be the sum of the settlement values of the member's positions
in L1, L2, and L3 securities plus the sum of the absolute settlement
values of the member's net position in L4 securities of each
country. The net geographical position will be the sum of the net
country positions in Latin America, Eastern Europe, Asia, and
Africa. An undue concentration will be deemed to exist for a bank
when its net country position exceeds 20% of net worth or its net
geographical position exceeds 30% of net worth. An undue
concentration will be deemed to exist for a broker-dealer when its
net country position exceeds 50% of excess regulatory capital or its
net geographical position exceeds 80% of excess regulatory capital.
Under such circumstances, EMCC will contact the member to request
information on the nature and magnitude of non-Brady bond exposure
and on any hedging positions. After analyzing a member's responses,
EMCC may request additional clearing fund deposits if it determines
an additional deposit is necessary.
\60\ EMCC will put a member on surveillance status if any of the
following factors are present: (a) the member fails to meet any
financial standard for admission or continuance as a member; (b) the
member's capital position falls below the standards for admission;
(c) the member experiences an inability to meet its money or
securities settlement obligations to EMCC; (d) EMCC's board
determines that a significant reorganization, change in control, or
management of the member is likely to impair the member's ability to
meet its money or securities settlement obligations to EMCC; or (e)
the member has been placed on surveillance status by another self-
regulatory organization or comparable regulatory organization. EMCC
also will have the discretion to put a member on surveillance status
if any of the following factors are present: (a) it experiences a
significant operational problem; (b) the member's positions are
significantly disproportionate to its usual activity in light of
current industry conditions; (c) EMCC receives notification from the
member's designated examining authority or appropriate regulatory
agency or comparable regulatory organization of a pending
investigation or administrative action that could call into question
the member's ability to meet its obligations to EMCC; or (d) the
member experiences any condition that could materially affect its
financial or operational capability so as to potentially increase
EMCC's exposure to loss or liability.
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[[Page 8719]]
The Commission preliminarily believes that EMCC's method of
calculating clearing fund requirements is consistent with its
obligations to safeguard securities and funds. The Commission will to
review the results form EMCC's future stress tests. Prior to any grant
of permanent registration as a clearing agency, the Commission will
reevaluate EMCC's clearing fund formula.
b. Margin Composition and Investment
Members will be required to pay margin in cash, U.S. Treasury
securities, or letters of credit from banks that have been approved by
EMCC. If letters of credit are used as margin, no more than 70% of a
member's requirement may be satisfied with letters of credit, and as a
minimum, the greater of $100,000 or 10% of the member's margin
requirement (up to a maximum of $1,000,000) must be in cash.
Furthermore, no more than 20% of EMCC's total clearing fund may be
letters of credit from any one issuer. If letters of credit are not
used, the greater of $100,000 or 5% of the member's margin requirement
(up to a maximum of $1,000,000) must be in cash. A haircut of 5% will
be applied to letters of credit and treasury securities.
Pursuant to EMCC's rules, EMCC may invest any cash deposited as
margin in securities issued or guaranteed as to principal or interest
by the U.S. or agencies or instrumentalities of the U.S. (``government
securities''), repurchase agreements related to such securities, or
otherwise pursuant to the investment policy adopted by EMCC. As part of
its application, EMCC has filed a copy of its investment policy.\61\
EMCC's investment policy provides that EMCC clearing fund cash may be
invested only in government securities with terms of one year or less
or in overnight repurchase agreements with government securities as
underlying collateral. The repurchase agreements must conform to
certain standards set forth in the investment policy regarding custody
and market value of the collateral and eligible counterparty. If not
invested, cash funds will be deposited by EMCC in its name in a
depository institution selected by EMCC. EMCC will retain all
investment income from cash deposits.
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\61\ If EMCC amends its investment policy, it will file a
proposed rule change with the Commission.
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The Commission believes that EMCC's investment policy and required
margin composition are consistent with EMCC's obligations under the
Exchange Act as explained in the Standards Release because they require
that EMCC's clearing fund is composed of liquid securities and that the
cash portion of the clearing fund is invested appropriately.
c. Loss Allocation
EMCC will establish an overnight exposure cap for each member. This
cap will be set at the lesser of: (a) 5% of excess net capital for U.S.
broker-dealers, 5% of excess financial resources for U.K. broker-
dealers, and 1% of shareholders' equity for banks; or (b) $20 million.
If a member's preliminary margin calculation is in excess of its
overnight exposure cap, the member will be subject to fines. The loss
allocation method applied to trades of an insolvent member will be
dependent open whether a defaulting member has exceeded its overnight
exposure cap.
When a failed member is not a broker, EMCC will classify trades as
brokered or direct.\62\ If there was an overnight exposure cap
violation, EMCC will further classify such trades as trades received by
EMCC before the violation (``old trades'') or trades received by EMCC
after the violation (``new trades''). Any collateral of the defaulting
member will be divided between direct trades and brokered trades in
proportion to the amount of losses attributable to old trades in each
category. If there is insufficient collateral to cover all of the
losses attributable to old trades: (a) Losses attributable to brokered
transactions that are old trades will be allocated pro rata among all
members based upon each member's average final daily margin amount for
the prior 30 calendar days; \63\ and (b) losses attributable to direct
transactions that are old trades will be allocated among all the
original counterparties in proportion to the amount of losses created
by each member's transactions.
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\62\ If the failed member's counterparty was an interdealer
broker, but the interdealer broker's counterparty on the other side
was not an EMCC member, EMCC will consider the trade to be a direct
trade between the insolvent and the interdealer broker. In other
words, ``brokered trades'' are trades where the interdealer broker
is an EMCC member and EMCC members are on both sides.
\63\ A member that is assessed pursuant to this provision may
limit its assessment to its current margin requirement if it chooses
to terminate its membership.
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After the losses from old trades have been satisfied, EMCC will
determine if any clearing fund collateral of the defaulting member
remains. EMCC will net new trades to obtain a net loss per security
issue. Any remaining clearing fund of the defaulting member will be
applied to the smallest loss, then the next remaining smallest loss
until there is no remaining clearing fund of the defaulting member.
Next, EMCC will take the smallest remaining losses up to an amount that
equals the amount of the defaulting member's overnight exposure cap
(``under the cap losses'') and will allocate the under the cap losses
as follows: (a) Losses attributable to direct transactions will be
allocated back to the original counterparties in an amount equal to the
losses attributable to each member's trades; and (b) losses
attributable to brokered transactions will be allocated pro rata among
all EMCC members based upon each member's final daily margin amount
calculated with respect to the prior 30 calendar days. Any remaining
losses attributable to new trades will be allocated as follows: (a)
Losses attributable to direct transactions will be allocated back to
the original counterparties in an amount equal to the losses
attributable to each member's trades; and (b) losses attributable to
brokered transactions will be allocated first to the broker members
that were counterparties to the trades to the extent of the loss
attributable to each trade up to a maximum allocation of $3 million per
broker and then pro rata among members that were counterparties to
brokers that reach their maximum allocation and that were on the
opposite side of the market in the same security issues creating a loss
with the same settlement dates and approximately the same prices.
Different loss allocation rules will apply when the defaulting
member is a broker. In such cases, any collateral of the defaulting
member will be applied first to losses resulting from old trades. If
there are remaining losses from old trades, such losses will be
allocated among all the original counterparties in proportion to the
amount of loss created by each member's transactions. EMCC then will
net new trades to obtain a net loss per security issue. Any remaining
clearing fund of the defaulting member will be applied to the smallest
loss, then
[[Page 8720]]
the next remaining smallest loss until there is no remaining clearing
fund. Any remaining loss after application of clearing fund will be
allocated to the counterparties to the transactions giving rise to such
loss to the extent of the loss attributable to such transactions.
d. Use of Clearing Fund
EMCC's rules provide that the use of clearing fund deposits is
limited to: (a) Satisfaction of losses or liabilities of EMCC arising
from the failure of a member to satisfy an obligation to EMCC, or (b)
providing EMCC with a source of collateral: (i) To finance the
temporary receipt by EMCC of EMCC eligible instruments that cannot be
redelivered to a member due to the inability of the member to pay for
the receipt but only if such inability constitutes the failure by the
member to meet its securities settlement obligations to EMCC; (ii) to
finance only on an intraday basis the receipt of EMCC eligible
instruments that will be redelivered to another member at a depository,
provided that no more than 10% of the total clearing fund may be used
for this purpose and that eligible letters of credit will be used to
the maximum extent practicable prior to the use of treasury securities,
and that cash will not be used; \64\ and (iii) to temporarily finance
the amount of any loss or liability allocated to a member prior to such
time as such member's actual clearing fund is applied to the loss. If
EMCC pledges any part of the clearing fund deposits for more than 60
days as a source of temporary financing, EMCC will by the 74th day
consider such amount to be a loss and will allocate such loss in
accordance with the loss allocation rules.
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\64\ This provision will automatically expire the earlier of the
first anniversary of EMCC's commencement of operations or the date
on which EMCC begins its netting service.
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The Commission believes that EMCC's uses of clearing fund to
satisfy losses or to finance settlements related to the failure of a
member is consistent with the Exchange Act and the Standards Release.
As a general rule, the Commission believes that procedures permitting
the routine use of clearing fund assets to finance on a daily basis the
receipt of instruments in the normal settlement process is not
consistent with the Exchange Act or the guidelines set forth in the
Standards Release. However, the Commission believes that the
limitations EMCC has established on its use of assets for the routine,
daily financing of security receipts (i.e., intraday financing, 10%
limitation, and use of letters of credit first to the extent possible)
and the limited purpose for which EMCC intends to use the clearing fund
collateral (i.e., to collateralize a line of credit at Euroclear to
permit ``chaining'' \65\), are reasonably designed and should not cause
undue risk to EMCC. The intraday financing procedures will allow EMCC
to collateralize its line of credit at Euroclear, which is needed to
allow EMCC to conduct its business effectively and efficiently, while
still providing adequate protection to the assets of its clearing fund.
Therefore, the Commission is granting EMCC a temporary exemption from
Sections 17A(b)(3)(A) and 17A(b)(3)(F) of the Exchange Act to permit
EMCC to use a portion of its clearing fund as described in (ii) above
until the earlier of one year after EMCC has commenced operations or
the date on which EMCC begins its netting service.\66\
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\65\ See supra note 23.
\66\ When EMCC institutes netting, the need for repeated use of
the clearing fund to facilitate chaining will be greatly reduced.
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2. Standard of Care
The Division stated in the Standards Release that the rules of a
clearing agency should provide that it is liable to a participant for
failure to deliver the participant's securities resulting from: (1) The
negligence or misconduct of the clearing agency, the clearing agency's
subcustodian or agent, or any of their respective employees; (2) the
placement on fully-paid participant securities of a lien or charge of
any kind in favor of the clearing agency, the clearing agency's
subcustodian or agent, or any person claiming through any one or more
of them; (3) larceny; (4) mysterious disappearance; or (5) any other
cause for which the clearing agency has assumed responsibility.
Subsequent to issuance of the Standards Release, the Commission has
stated that clearing agencies should perform their functions under a
high standard of care and that at a minimum custody functions should be
performed under an ordinary negligence standard.\67\ The Commission has
also stated that custody functions include all functions related to
transaction processing and the safekeeping of customer funds and
securities.\68\
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\67\ Securities Exchange Act Release Nos. 26154 (October 3,
1988), 53 FR 39556 (registration order of The Intermarket Clearing
Corporation [``ICC'']); 26450 (January 12, 1989), 54 FR 2010
(registration order of the Delta Government Options Corp.
[``DGOC'']); 26812 (May 12, 1989), 54 FR 21691 (registration order
of ISCC); and 27611 (January 12, 1990), 55 FR 1890 (second
registration order of DGOC).
\68\ See, e.g., ICC registration order, supra note 67.
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The member's agreement between EMCC and each member provides that
EMCC is not subject to any liability under the agreement, including any
liability with respect to EMCC's failure to provide any services under
the agreement or EMCC's rules, except for losses resulting from EMCC's
gross negligence, criminal act, or willful misconduct in connection
with its duties. However, with respect to the safeguarding of
securities or funds within its custody or control, the member's
agreement provides that EMCC is not be subject to any liability for any
act or omission in connection with the safeguarding of securities or
funds within its custody or control except for losses, costs, or
expenses resulting from EMCC's negligence, criminal act, or willful
misconduct. The agreement further provides that EMCC will not be liable
for any consequential or special damages which may result from EMCC's
failure to perform its obligations under the agreement.
The Commission believes that EMCC's standard of care is consistent
with the Exchange Act and prior Commission positions. However, the
Commission preliminarily believes that a clearing agency should accept
some responsibility for damages that are foreseeable and related to
securities settlement (e.g., damages resulting from a buy-in or sell-
out conducted as a result of EMCC's negligence in delivering or not
delivering funds or securities). At this time, the Commission is
temporarily registering EMCC as a clearing agency but intends to review
this issue further.
3. Operational Capacity
Pursuant to a service agreement, ISCC has agreed to perform
services for EMCC with respect to EMCC's clearing agency activities.
ISCC will furnish the services for a fee designed to cover ISCC's
costs. ISCC will provide EMCC with technical services in the following
areas: data processing, operations, planning and development,
communications, and research and development. Currently, ISCC provides
limited clearing agency services and has seven employees whose duties
are generally limited to operational functions.
Pursuant to its service agreement, ISCC may use outside parties to
fulfill its commitments to EMCC. Many of ISCC's functions will be
performed by NSCC. Specifically, NSCC through ISCC will provide EMCC
with management and administrative services in the following areas:
financial, personnel, corporate communications, marketing, regulatory
or compliance, and legal. The Securities Industry Automation
[[Page 8721]]
Corporation (``SIAC''),\69\ through ISCC and NSCC, also will provide
EMCC with clerical and data processing services. In addition, ISCC will
rely on International Depository & Clearing, L.L.C. (``IDC'') \70\ for
product development, marketing and sales, and planning functions.
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\69\ SIAC is owned by the New York Stock Exchange and the
American Stock Exchange.
\70\ IDC is a company equally owned by NSCC and The Depository
Trust Company, both registered clearing agencies. However, IDC is
not a regulated entity.
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As discussed above, EMCC has no independent capacity to match
trades. Instead, it will rely on Match-EM and TRAX for such services.
EMCC has verified that its board of directors has authorized the
selection of Match-EM and TRAX after review of information describing
these entities' operations and capacity testing.\71\ Furthermore, EMCC
has represented that Match-EM and TRAX have procedures in place
relating to capacity planning and systems testing, and that EMCC will
receive and will furnish to the Commission documentation relating to
such areas.
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\71\ Copies of the materials that EMCC's board of directors
relied on were filed with the Commission as part of EMCC's
application.
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While EMCC's operational structure will be unusual for a clearing
agency, the Commission believes that its structure and operational
arrangements will provide an adequate level of service. The Commission
notes in particular that EMCC's core functions, such as its managerial
functions, will not be performed by an unregistered entity. The
Commission will monitor EMCC's operation during the term of its
temporary registration and will review its structure and outsourcing
arrangements prior to granting permanent registration.
4. Audit Committee and Internal Audit Department
The Standards Release states that each clearing agency should have
an audit committee composed of nonmanagement directors. A nonmanagement
director is a director who is not associated with the clearing agency
other than in a user capacity or with any entity which furnishes
securities processing services to the clearing agency. The audit
committee should have responsibility for reviewing the work performed
by the clearing agency's independent public accountant.
EMCC's bylaws provide that the board of directors may appoint an
audit committee consisting of three or more directors other than
directors that are members of Class IV (i.e., directors elected by
EMTA, ISMA, or NSCC), or are officers of EMCC. The audit committee has
responsibility for reviewing with the independent certified public
accountant the scope of its auditing procedures and the financial
statements of EMCC to be certified by the accountant.
The Standards Release also states that a clearing agency should
have an internal audit department which is adequately staffed with
qualified personnel. The internal audit committee should report
periodically to the audit committee. NSCC's internal audit department
will perform EMCC's internal auditing functions. The audit department
reports directly to EMCC's audit committee. Accordingly, with regard to
internal audits, the Commission believes that EMCC fulfills the
Exchange Act's requirements.
5. Securities, Funds, and Data Controls
The Standards Release provides that a clearing agency should have,
among other things, off-site storage of back-up data, written
procedures detailing steps involved in handling funds and securities,
and emergency mechanisms for establishing and maintaining
communications with participants and other entities. In addition,
clearing agencies should have adequate insurance coverage.
EMCC has represented that through its facilities manager, SIAC, it
has access to two computer sites in different locations, both of which
are capable of being operated independently and are capable of handling
total member activity. Data received will be automatically written to
both sites. EMCC has provided a detailed written statement of security
measures that will be used to prevent unauthorized access to EMCC's
processing facilities. EMCC maintains blanket bond insurance and all
risk insurance.
The Standards Release emphasizes that a clearing agency should
assure the integrity and accuracy of its automatic data processing
operations. More recently, the Commission has issued automation review
guidelines for clearing agencies that provide a more specific outline
of clearing agencies' obligations with respect to such things as
capacity planning, contingency planning, data security,
telecommunications, systems development, and internal/external
audit.\72\ EMCC has acknowledged that it has obligations with respect
to capacity planning and systems testing under these guidelines and has
represented that it will fulfill its responsibilities with respect to
these obligations.\73\
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\72\ Securities Exchange Act Release Nos. 27445 (November 16,
1989), 54 FR 48703 and 29185 (May 9, 1991), 56 FR 22490; and
Memorandum from Division of Market Regulation to all registered
clearing agencies regarding Development of an Automation Review
Policy Statement For Clearing Agencies (April 25, 1994). Available
for copying and inspection in the Commission's Public Reference
Room.
\73\ As discussed above in Section III.D.3., EMCC has
represented to the Commission that March-EM and TRAX will provide to
EMCC information in these areas and that EMCC will provide the
information to the Commission.
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The Commission has also been monitoring efforts within the industry
to prepare computer systems for the Year 2000 date change.\74\ EMCC has
represented that it is Year 2000 compliant and will take appropriate
actions to ensure that the parties with which it conducts business
(e.g., vendors, and members) will be Year 2000 compliant on a timely
basis.\75\ Based on the foregoing, the Commission believes that EMCC
has adequate controls with respect to securities, funds, and data
processing.
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\74\ See Report to the Congress on the Readiness of the United
States Securities Industry and Public Companies To Meet the
Information Processing Challenges of the Year 2000, U.S. Securities
and Exchange Commission (June 1997).
\75\ Letter from EMCC (October 8, 1997).
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E. Capacity To Enforce Rules
Section 17A(b)(3)(A) of the Exchange Act provides that a clearing
agency must be organized and have the capacity to enforce (subject to
any rule or order of the Commission pursuant to Section 17(d) or
19(g)(2) of the Exchange Act) compliance by its participants with the
rules of the clearing agency. Sections 17A(b)(3)(G) and (H) require
that the rules of a clearing agency provide that its participants shall
be appropriately disciplined for violations of any provision of those
rules and provide fair procedures for disciplining participants,
denying participation in the clearing agency to any person, prohibiting
or limiting access to the clearing agency's services, and reviewing
summary suspensions.
1. Participant Monitoring
EMCC's Rule 13 authorizes EMCC to examine the financial
responsibility and operational capability of any member or applicant to
become a member. Pursuant to Rule 13, EMCC may require a member to
furnish EMCC with adequate assurances of its financial responsibility
and operational capability, including additional reporting by a member
of its financial or operational condition; increased clearing fund
deposits; and other assurances as may be required by EMCC.
[[Page 8722]]
EMCC also has general continuance standards that require a member
to promptly inform EMCC in the event that it is no longer in compliance
with any of the relevant standards for membership or has had any
materially adverse change. The board may require additional financial
reporting if a member no longer meets the standards for admission to
membership; if it has violated any rule to EMCC; if it fails to satisfy
in a timely manner any obligation to EMCC; if there is a material
change in control or financial condition of such member; or if the
board determines that it is necessary or advisable to protect EMCC, its
other members, or its creditors or investors; to safeguard securities
and funds in the custody or control of EMCC; or to promote the prompt
and accurate processing, clearance, or settlement of securities
transactions. The board must also make a determination as to whether
the member should be placed on surveillance status consistent with its
rules.\76\
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\76\ See, supra note 60.
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2. Ceasing to Act
Section 17A(b)(5)(C) of the Exchange Act provides that a clearing
agency may summarily suspend and close the accounts of a participant
that is expelled or suspended from any self-regulatory organization;
that is in default of any delivery of funds or securities to the
clearing agency; or that is in such financial or operational difficulty
that the clearing agency determines and so notifies the appropriate
regulatory agency for such participant that such suspension and closing
of accounts are necessary for the protection of the clearing agency,
its participants, creditors, or investors.
Upon providing notice to a member, EMCC may at any time cease to
act for such member if the board of directors determines that adequate
cause exists to do so.\77\ EMCC may cease to act either with regard to
a particular transaction or with regard to transactions generally. EMCC
will promptly notify all members when it ceases to act for a member. A
member for which EMCC has ceased to act may request a hearing to review
EMCC's decision.
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\77\ Such cause may exist if one or more factors are found,
including: the member has failed to perform any of its obligations
or has failed to make any required payment to EMCC; the member is no
longer in compliance with the admissions standards or continuance
standards; the board has reasonable grounds to believe the member
has been responsible for any fraudulent or dishonest conduct or
breach of fiduciary duty or has made any material misstatement to
EMCC in connection with its application to be a member of any EMCC
service; the board has reasonable grounds to believe the member is
in financial or operation difficulty; the member is in breach of any
requirement imposed by an appropriate regulatory agency, self-
regulatory organization, or any regulatory body; the member is not
paying its debts as they become due or is otherwise involved in a
bankruptcy proceeding; the member is dissolved or ceases to carry on
its business; the member contests the validity of any agreement with
EMCC; the member fails to perform its contracts with EMCC; or the
board has reasonable grounds to believe that ceasing to act is
necessary either for the protection of EMCC or for any of the other
members or to facilitate the orderly and continuous performance of
EMCC's services. EMCC Rule 15, Section 1.
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If certain factors are present, EMCC will treat a member as
insolvent.\78\ EMCC will notify all members of the treatment of the
member as insolvent. Upon a determination of insolvency, EMCC will
immediately cease to act for such member. EMCC will delete all trades
of that member to which EMCC's guaranty has not attached except trades
that the board determines will promote an orderly market. EMCC will
then close out the guaranteed trades and the trades that the board has
determined to accept. EMCC will close out by buying in or selling out
securities deliverable by or to the insolvent. The close out procedure
will be completed by EMCC as promptly as practicable after EMCC has
given notice of the treatment of the member as insolvent.
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\78\ Such circumstances include: the member provides notice to
EMCC that it is insolvent; the board or any regulatory body
determines that the member is insolvent; a court order is entered
adjudging the member to be insolvent; the member files or consents
to the filing of a petition seeking bankruptcy relief, the member
makes a general assignment to its creditors; the member is
dissolved; or a resolution is passed by the member that it be wound
up, liquidated, or dissolved. EMCC Rule 17, Section 1.
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3. Hearing Procedures
Section 17A(b)(5) of the Exchange Act provides that in any
proceeding to determine whether a participant should be denied
participation, prohibited or limited with respect to access to the
clearing agency's services, or disciplined, the clearing agency must
notify the participant of the specific ground of the denial of services
of the charges brought against the member. The clearing agency must
provide the member with an opportunity to be heard on the grounds of
the denial or to defend against any charges. The clearing agency must
keep a record of the proceeding.
A member may request a hearing by filing with EMCC a written
request setting forth the contested action of EMCC. Within seven
business days after filing the request or three business days in the
case of summary action, the objecting member must provide EMCC with a
detailed written statement setting forth the contested action and the
basis for objection. EMCC will notify the member in writing of the date
and place of the hearing at least five business days prior to the
hearing.
The hearing will be before a panel drawn from participant directors
on the membership committee unless the contested action was taken by
the membership committee. In such a case, the panel will be drawn from
participant directors on the executive committee. The committee will
select the members of the panel. The objecting members will have an
opportunity to be heard and may be represented by counsel. The panel
will make a decision within ten business days after conclusion of the
hearing. Although the panel's decision is considered final, the board
may overturn any decision adverse to the member.
The Commission believes that EMCC has the capacity to enforce its
rules. EMCC has criteria to determine when its has cause to cease to
act for a member or when it must treat a member as insolvent. A member
for which EMCC has ceased to act or for which EMCC has limited its
access to EMCC services may request a hearing pursuant to EMCC's rules.
The hearing procedures are consistent with the guidelines discussed in
the Standards Release. Therefore, the Commission believes that EMCC's
rules in this are consistent with the Exchange Act.
F. Dues, Fees, and Charges
Sections 17A(b)(3)(D) and (E) of the Exchange Act require that the
rules of the clearing agency provide for the equitable allocation of
reasonable dues, fees, and other charges among its participants and
prohibits a clearing agency from imposing or fixing prices for services
rendered by its participants. EMCC's proposed fee schedule is generally
usage based. EMCC does not impose any schedule of prices or fix rates
or other fees for services rendered by its customers. Accordingly, the
Commission is satisfied that the method by which EMCC provides for the
equitable allocation of reasonable dues, fees, and other charges among
its customers and its prohibitions regarding the fixing of prices of
its customers substantially satisfies the Exchange Act requirements.
IV. Conclusion
The Commission finds that EMCC's application for registration as a
clearing agency meets the standards and requirements deemed appropriate
except as otherwise discussed in this order for which EMCC has received
temporary exemptions.
[[Page 8723]]
The Commission has granted EMCC partial exemptions from Section
17A(b)(3)(B) of the Exchange Act to permit EMCC to limit the eligible
categories of members and from Sections 17A(b)(3)(A) and 17A(b)(3)(F)
of the Exchange Act to permit EMCC to use a portion of its clearing
fund to collateralize a line of credit at Euroclear subject to the
limitations discussed above. The Commission finds that granting the
above exemptions is consistent with the public interest, the protection
of investors, and the purposes of Section 17A, including the prompt and
accurate clearance and settlement of securities transactions as well as
the safeguarding of securities and funds. The Commission reserves the
right to modify, by order (including such orders as the Commission may
issue under Section 19(b) of the Exchange Act in connection with
changes to EMCC's rules), the terms, scope, or conditions of the
exemptions from the Exchange Act, if it determines such modification is
appropriate for the protection of investors or in the public interest.
It is therefore ordered, pursuant to Section 19(a)(1) of the
Exchange Act, that the applications for registration as a clearing
agency filed by EMCC (File No. 600-30) be and hereby is approved until
August 20, 1999 and that EMCC be granted the exemptions described above
subject to the terms, exemptions, and other qualification contained in
this order.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4255 Filed 2-19-98; 8:45 am]
BILLING CODE 8010-01-M
