[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]


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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.
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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 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.)
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    \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.
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    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\
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    \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).
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    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\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18964 Filed 7-15-98; 8:45 am]
BILLING CODE 8010-01-M