[Federal Register Volume 63, Number 136 (Thursday, July 16, 1998)]
[Notices]
[Pages 38445-38446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18964]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40190; International Series Release No. 1145; File No.
SR-EMCC-98-5]
Self-Regulatory Organizations; Emerging Markets Clearing
Corporation; Notice of Filing and Order Granting Accelerated Approval
of Proposed Rule Changing Relating to Warrant Processing
July 10, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby give that on May 28, 1998, the Emerging
Markets Clearing Corporation (``EMCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I and II below, which items have been prepared
primarily by EMCC. The Commission is publishing this notice and order
to solicit comments from interested persons and to grant accelerated
approval of the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposal Rule Change
The purpose of the proposed rule change is to provide a mechanism
whereby EMCC may process cash payments made with respect to warrants
for which there are outstanding fail receive and deliver obligations
and to permit EMCC to pair-off outstanding warrant fail receive
obligations with fail deliver obligations.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, EMCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposal rule change. The
text of these statements may be examined at the places specified in
Item IV below. EMCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
From time to time, issuers of warrants may declare a money
distribution on their warrants (``warrant payment''). If EMCC is
notified that a warrant payment has been declared by a warrant issuer,
those members with a fail deliver or fail receive obligation relating
to such warrant will receive a report from EMCC. The report will
specify the amount each member is obligated to pay/receive. EMCC will
also instruct the qualified securities depository \2\ of each such
member to appropriately debit and/or credit each member's account on
payable date with the amount(s) specified on the report. (Fail deliver
obligations will result in debits, and fail receive obligations will
result in credits.)
---------------------------------------------------------------------------
\2\ Currently, the Cedel Bank, Societe anonyme and the Euroclear
system, which is operated by the Brussels Office of Morgan Guaranty
Trust Company of New York, are the only qualified securities
depositories.
---------------------------------------------------------------------------
EMCC will not guarantee warrant payments. EMCC's willingness to pay
members with fail receive obligations is contingent on its ability to
collect these amounts from members with fail deliver obligations. If a
member with a fail deliver obligation does not pay EMCC the cash owed
with respect to a warrant payment, the proposed rule change (i) permits
EMCC to reverse the payment made to the member with the fail receive
obligations that was the original counterparty to the transaction
underlying such fail deliver obligation and (ii) obligates the member
with the fail deliver obligation that did not pay EMCC such monies
owed, to compensate EMCC for such non-payment.
The proposed rule change also provides that the member with the
fail receive obligation will be entitled to compensation for its late
receipt of the warrant payment if EMCC collects from the member with
the fail deliver obligation that failed to make timely payment. The
proposed rule change provides that if a member with a fail receive
obligation does not receive a warrant payment or if such a warrant
payment is reverse and, EMCC has ceased to act for the member with the
fail deliver obligation, the member with the fail receive obligation
may request that EMCC file a claim for the payment with the estate of
the member with the fail deliver obligation. Any such action shall be
taken at the sole cost and expense of the member with the fail receive
obligation.\3\
---------------------------------------------------------------------------
\3\ This approach is similar to that taken with respect to fail
obligations relating to warrants, as set forth in Rule 8, Sections
7(f) and 8(f).
---------------------------------------------------------------------------
EMCC states that, historically, fail rates with respect to warrant
transactions are high. Firms would periodically employ a process by
which they bilaterally paired-off outstanding warrant receive and
deliver obligations
[[Page 38446]]
in order to eliminate warrant fail obligations. Since warrants have
been eligible at EMCC, EMCC's records also indicate that there is high
fail rate with respect to warrant obligations. In order to eliminate
there fails, members have requested that EMCC implement a similar
process. The proposed rule change would allow EMCC to perform a
bilateral pair-off process for warrant obligations.
In order to be eligible to be paired-off, the obligations must be
within the same ISIN, and the fail deliver obligations and fail receive
obligations must have a contract value of $0. In addition, fail deliver
and fail receive obligations will be paired-off only if the quantity of
warrants with respect to one or more fail receive obligations (either
singly or in the aggregate) is equal to the quantity of warrants with
respect to one or more fail deliver obligations (either singly or in
the aggregate).
Using the process described above, EMCC will determine which fail
deliver and fail receive obligations are to be paired-off and will
issue a report to each member identifying such paired-off obligations.
EMCC will also instruct the member's qualified securities depository to
cancel the previously issued debit and credit instructions relating to
such paired-off obligations. At the time the report is distributed to
members, their rights or obligations with respect to the paired-off
fail deliver and fail receive obligations, under the Rules are
extinguished.
Although EMCC becomes the counterparty to all transactions
submitted to it, upon receipt of securities by EMCC they are
redelivered from EMCC to the original counterparty to the underlying
transaction. It is possible that the pair-off process will result in
the canceling of the fail obligation of only one of the original
counterparties, leaving the corresponding fail obligation open at EMCC.
Under these circumstances, EMCC will allocate any warrants received by
giving priority first to the oldest fail receive obligation and next to
the fail receive obligation relating to the largest number of warrants.
EMCC will not allocate any warrants which would not fully satisfy a
fail receive obligation. For example, if EMCC receives 10 warrants from
a member with a fail deliver obligation (where the corresponding fail
receive obligation had been canceled) and there are 3 fail receive
obligations of the same age, one of which is for 7 warrants, one of
which is for 6 warrants, and one of which is for 5 warrants, EMCC will
deliver 7 of the 10 warrants received to satisfy the fail receive
obligation for 7 warrants and will not deliver the remaining 3 warrants
until it has received a sufficient quantity of warrants which will
allow it to fully satisfy at least one fail receive obligation.
EMCC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder because it will facilitate the prompt and accurate clearance
and settlement of securities transactions.
(B) Self-Regulatory Organization's Statement on Burden on Competition
EMCC does not believe that the proposed rule change will have an
impact on or impose a burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
No written comments relating to the proposed rule change have been
solicited or received. EMCC will notify the Commission of any written
comments received by EMCC.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to facilitate the prompt and accurate
clearance and settlement of securities transactions for which it is
responsible. The Commission believes that the rule change should
provide EMCC with a process that should reduce the number of
outstanding fail receive obligations and fail deliver obligations
relating to warrants. The failure of one party to satisfy their
settlement obligations threatens the entire clearance and settlement
system because that party's failure may in turn cause other parties to
fail to meet their obligations. Therefore, by reducing the number of
outstanding fails at EMCC, the proposed rule change should facilitate
the prompt and accurate clearance and settlement of securities
transactions.
EMCC has requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after the
date of publication of notice of the filing. The Commission finds good
cause for approving the proposed rule change prior to the thirtieth day
after publication of notice because accelerated approval will enable
EMCC to begin reducing the number of fail obligations relating to
warrants immediately.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of EMCC. All submissions
should refer to File No. SR-EMCC-98-5 and should be submitted by August
6, 1998.
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\4\ that the proposed rule change (File No. SR-EMCC-98-5) be and
hereby is approved on an accelerated basis.
\4\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\5\
---------------------------------------------------------------------------
\5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18964 Filed 7-15-98; 8:45 am]
BILLING CODE 8010-01-M
