[Federal Register Volume 63, Number 151 (Thursday, August 6, 1998)]
[Notices]
[Pages 42087-42088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21059]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40288; International Series Release No. 1150; File No.
SR-EMCC-98-04]
Self-Regulatory Organizations; Emerging Markets Clearing
Corporation; Notice of Filing and Order Granting Accelerated Approval
of a Proposed Rule Change Establishing Interim Margin and Loss
Allocation Procedures
July 31, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 13, 1998, 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.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Under the proposed rule change, EMCC will establish interim margin
and loss allocation procedures for U.S. interdealer brokers and for
U.S. firms whose only business with EMCC consists of clearing for
interdealer brokers.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, EMCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. EMCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by EMCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Most transactions in emerging markets debt are conducted on a blind
brokered basis through interdealer brokers. Currently, only one
interdealer broker self-clears emerging markets debt transactions
through EMCC. The remaining interdealer brokers clear such transactions
through a clearing firm.
EMCC recognizes that a clearing firm has little control over its
positions at EMCC because its positions are determined by dealers
participating in the market. Prior to beginning operations, EMCC
realized that with a limited number of members a clearing firm could be
required to post a substantial amount of collateral with EMCC. EMCC now
believes that with its limited number of members it may not be
economical for a clearing firm to participate in EMCC under its current
margin procedures. Therefore, EMCC has determined that interim margin
procedures should be adopted.
Under this proposed rule change, EMCC is adopting interim margin
and loss allocation procedures for a period of one year or such shorter
period of time as determined by EMCC's Board.\3\ The interim margin
procedures will apply to interdealer brokers and to firms whose only
business with EMCC in emerging markets instruments consists of clearing
for interdealer brokers (sometimes referred to as ``special members'').
Interdealer brokers and clearing firms will be subject to a constant
base clearing fund requirement based upon EMCC staff simulations of
margin requirements. The base requirement will be equal to the staff's
best estimate of the approximate probably recurring upper bound of the
daily margin calculation for the firm given current market conditions
and the business and market share of the firm.\4\
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\3\ Should EMCC's Board decide that the use of the interim
margin and loss allocation procedures should be terminated before
the end of the one year period, EMCC must file a proposed rule
change pursuant to Section 19(b)(2) of the Act and obtain Commission
approval before terminating the interim procedures.
\4\ EMCC expects that the instances of uncollected exposure
under the interim margin procedures should be infrequent. To the
extent that market share or size changes in favor of a firm such
that its uncollateralized exposure calculations become frequent, the
Board may increase the firm's base requirement. Conversely, if
market share or size changes such that a firm's instances of
uncollateralized exposure become very infrequent, the Board may
reduce the firm's base requirement.
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Under the interim margin procedures, EMCC will not collect daily
margin calculations over the base requirement if a firm's resulting
uncollateralized exposure does not exceed the lesser of: (1) ten
percent of the excess net capital of the firm or (2) fifteen percent of
EMCC's current aggregate clearing fund. Thus, EMCC will only collect
additional margin under the interim margin procedures if the difference
between the daily margin calculation and a firm's base requirement
exceeds ten percent of the firm's excess net capital or fifteen percent
of EMCC's current aggregate clearing fund.
Any margin call required to be paid under the interim margin
procedures, other than the base requirement or any adjustments to it,
will be paid by the affected firm and by EMCC's dealer members as
follows. First, on each day, each special member will produce a report
under methodology approved by EMCC that sets forth (a) the approximate
percentage of leg-out transactions that are with dealers that have
funded EMCC (``funding non-member dealer percentage'') and (b) the
approximate percentage of leg-out transactions that are with others
(``firm percentage''). Second, the special member required to pay
additional margin will post the percentage of the margin call equal to
the firm percentage, and EMCC's dealer members will post the percentage
of the margin call equal to the funding non-member dealer's percentage.
This amount will be charged to all dealer members in proportion to
their current clearing fund requirement (exclusive of any amounts
charged for increased event risk).
The collateral posted by dealer members under the interim margin
procedures will be considered collateral of the special member and will
be applied against losses after the collateral posted by the special
member itself. Any amounts not so applied will be returned to the
dealer members in proportion to the amounts they deposited. However,
EMCC notes that in the event of the failure of a dealer member putting
up collateral for a special member's margin obligation, the collateral
will be considered part of the dealer's collateral and will be applied
against the dealer's losses before being returned to the dealer.
EMCC's normal loss allocation rules provide that in the event of a
failure of a dealer member, losses from blind brokered transactions
will be borne by the entire membership in proportion to their average
daily final margin calculations over the prior thirty days and losses
due to direct (i.e., non-brokered) transactions are borne by the actual
counterparties. Losses are so allocated after the failing firm's
clearing fund is applied to the losses. During the period in which the
interim margin and loss allocation procedures are in effect, brokered
transactions will be considered blind brokered transactions in the
event of the failure of a dealer member but only to the extent that the
leg-out transactions are with funding non-member dealers. For purposes
of
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calculating the pro rata loss allocation, the average daily margin
calculation for each member will be determined without regard to the
interim margin procedures except that any daily margin calculation for
a special member that exceeds the special member's base requirement
shall be considered as the base requirement.
EMCC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \5\ and the rules and
regulations thereunder because it will facilitate the prompt and
accurate clearance and settlement of securities transactions.
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\5\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
EMCC does not believe that the proposed rule change will have an
impact on or impose a burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants or Others
No written comments relating to the proposed rule change have been
solicited or received. EMCC will notify the Commission of any written
comments it receives.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Section 17A(b)(3)(F) of the Act \6\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible. The Commission believes that the proposed
rule change should provide EMCC with margin that is adequate to protect
EMCC from financial exposure if an interdealer broker or clearing firm
experiences financial difficulty while still providing a clearing fund
framework which does not deter interdealer brokers and clearing firms
from joining EMCC. Therefore, the Commission believes that the proposed
rule change is consistent with EMCC's safeguarding obligations under
Section 17A(b)(3)(F) of the Act.
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\6\ 15 U.S.C. 78q-1(b)93)(F).
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EMCC has requested that the Commission approve the proposed rule
change prior to the thirtieth day after publication of the notice of
the filing. The Commission finds good cause for approving the proposed
rule change prior to the thirtieth day after the publication of notice
because such approval should immediately encourage additional
participation in EMCC which should in turn reduce risk to those
involved in emerging market debt transactions.
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-98-04 and should be submitted by
August 27, 1998.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-EMCC-98-04) be and hereby is
approved on an accelerated basis.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-21059 Filed 8-5-98; 8:45 am]
BILLING CODE 8010-01-M
