Self-Regulatory Organizations; Emerging Markets Clearing Corporation; Order Granting Approval of a Proposed Rule Change Regarding Clearing Agency Cross-Guaranty Agreements

[Federal Register Volume 64, Number 232 (Friday, December 3, 1999)]
[Notices]
[Page 67963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31391]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42180; File No. SR-EMCC-99-7]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change 
Regarding Clearing Agency Cross-Guaranty Agreements

November 29, 1999.
    On June 4, 1999, the Emerging Markets Clearing Corporation 
(``EMCC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-EMCC-99-7) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposed was published in the Federal 
Register on August 6, 1999.\2\ No comment letters were received. For 
the reasons discussed below, the Commission is approving the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 41673 (July 30, 1999), 
64 FR 43006 [File No. SR-EMCC-97-7].
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I. Description

    EMCC's Rule 21 authorizes EMCC to enter into ``clearing agency 
cross-guaranty agreements.'' \3\ On June 2, 1999, EMCC entered into 
clearing agency cross-guaranty agreements with the National Securities 
Clearing Corporation (``NSCC''), the Government Securities Clearing 
Corporation (``GSCC''), and the International Securities Clearing 
Corporation (``ISCC''). According to EMCC, the form of agreement with 
each of these entities is substantially similar to the form of 
agreement approved by the Commission in rule changes previously 
submitted by NSCC, MBSCC, GSCC, and ISCC.\4\
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    \3\ Under EMCC's Rule 1, ``clearing agency cross-guaranty 
agreement'' means an agreement between EMCC and another clearing 
entity relating to the guaranty by EMCC of certain obligations of a 
member to such clearing entity.
    \4\ Securities Exchange Act Release Nos. 37616 (August 28, 
1996), 61 FR 46887 [File Nos. SR-MBSCC-96-02, SR-GSCC-96-03, and SR-
ISCC-96-04], and 39020 (September 4, 1997), 62 FR 47862 [File No. 
SR-NSCC-97-11].
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    Generally, the limited cross-guaranty provided for by the clearing 
agency cross-guaranty agreements is invoked when a clearing entity 
ceases to act for a common member. This limited guaranty enables 
clearing agencies that have entered into limited cross-guaranty 
agreements to benefit from a defaulting member's excess collateral at 
other clearing agencies in which the defaulting member was a 
participant. The guaranty provides that resources of the defaulting 
common member remaining after the defaulting common member's 
obligations to the guaranteeing clearing agency have been satisfied may 
be used to satisfy any unsatisfied obligations to the other clearing 
agencies. The guaranty is limited to the extent of the resources 
relative to the defaulting common member remaining at the guaranteeing 
clearing agency.
    EMCC believes that the clearing agency cross-agency agreements 
should be beneficial because the funds that may be made available to it 
may provide resources that may make a pro rata charge against its 
clearing fund unnecessary or lesser in amount.
    The benefits accruing to EMCC from a Clearing agency cross-guaranty 
agreement are illustrated by the following example:
    Broker-dealer BD upon insolvency owes EMCC a net of $5 million. BD 
is owed a net of $3 million by Clearing Entity X. In the absence of a 
clearing agency cross-guaranty agreement, Clearing Entity X would be 
obligated to pay $3 million to BD's bankruptcy estate, and EMCC would 
have a claim for $5 million against BD's bankruptcy estate as a general 
creditor with no assurance as to the extent of recovery. Under an 
effective cross-guaranty agreement, however, Clearing Entity X would 
pay to EMCC the $3 million it owned to BD. As a result, EMCC's net 
exposure to the defaulting common member BD would be reduced.

II. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities in 
the custody or control of the clearing agency or for which it is 
responsible and to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions. The 
Commission believes that the proposal is consistent with EMCC's 
obligation to assure the safeguarding of securities and funds in the 
custody or control of the clearing agency for which it is responsible 
because cross-guarantee agreements among clearing entities are a method 
of reducing risk of loss due to a common member's default. Furthermore, 
the Commission has encouraged the use of cross-guarantee agreements and 
other similar arrangements among clearing agencies.\5\ Consequently, 
cross-guarantee agreements should assist clearing agencies in assuring 
the safeguarding of securities and funds in their custody or control.
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    \5\ E.g., Securities Exchange Act Release Nos. 36431 (October 
27, 1995), 60 FR 55749 [File No. SR-GSCC-95-03] and 36597 (December 
15, 1995), 60 FR 66570 [File No. SR-MBSCC-95-05].
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    The Commission also believes the proposals are consistent with 
EMCC's obligation to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions. The 
Commission believes that by entering into such agreements, EMCC can 
mitigate the systematic risks posed to it and to the national clearance 
and settlement system as a result of a defaulting common member.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposals are consistent with the requirements of the Act, and in 
particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-EMCC-99-7) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-31391 Filed 12-2-99; 8:45 am]
BILLING CODE 8010-01-M