Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Notices 4557

1 15 U.S.C. 78s(b)(1).

2Policy Statement 96–02, which describes the

remedial steps DCC will take to correct a

participant’s violation of its exposure limits is

attached as Exhibit A to this notice.

3The Commission has modified parts of these

statements. 4 15 U.S.C. 78q–1(b)(3)(F).

[Release No. 34–38197; File No. SR–DCC–

96–13]

Self-Regulatory Organizations; Delta

Clearing Corp.; Notice of Filing of

Proposed Rule Change Amending the

Definitions of Trading Limits and

Maximum Potential System Exposure

January 23, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

November 26, 1996, Delta Clearing

Corp. (‘‘DCC’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) and on January 10,

1997, filed an amendment to the

proposed rule change as described in

Items I, II, and III below, which items

have been prepared primarily by DCC.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

DCC is proposing amendments to its

over the counter options trading system

procedures and its procedures for

repurchase and reverse repurchase

agreements (‘‘repo’’). In addition, DCC is

proposing to issue a new policy

statement 96–02.2 The amendments

would provide DCC greater flexibility to

address credit or liquidity difficulties

with its participants by providing that

DCC would not be obligated to reject a

transaction which exceeds a

participant’s ‘‘exposure limits’’ if DCC

determines that the additional risk of

such transaction to the system is de

minimis. The amendments also clarify

and limit the circumstances under

which margin funds due and owing

from participants may be deducted for

purposes of determining the ‘‘maximum

potential system exposure’’ (‘‘MPSE’’).

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

DCC 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. DCC has prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of such statements.3

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The proposed rule change amends

four DCC’s procedures and the issuance

of Policy Statement 96–02. First, the

term ‘‘trading limit’’ will be changed to

‘‘exposure limit.’’ Second, the

consequences of a participant exceeding

its exposure limit are clarified so that a

participant may continue to effect trades

for clearance and settlement in the repo

clearing system or the options clearing

system if DCC determines that the risk

involved is de minimis (i.e., the

additional exposure is less than 5%).

The processes for rejecting trades, for

notification of the affected participants,

and for related matters are described in

proposed Policy Statement 96–02. In the

event that a participant exceeds its

exposure limit twice or more in one

month, the revised rule would obligate

DCC to review with the participant and

the insurer, if necessary, whether to

change the participant’s exposure limit.

These changes would clarify the intent

that the scope of DCC’s procedures is on

the regulation of trade clearance and

settlement through DCC’s facilities and

not on the general trading activities of

participants. These changes also would

provide greater flexibility to DCC to

address credit or liquidity difficulties

with its participants. Third, Sections

204 and 2204, and the definitions of

‘‘exposure limit’’ in Section 101 and

2101, are amended to clarify that each

participant has one exposure limit

applicable to all transactions in the

system. Fourth, the definition of MPSE

in the procedures is revised to clarify

and limit the circumstances under

which margin funds due and owing

from participants may be deducted for

purposes of determining MPSE. Under

the proposed amendment, DCC would

continue to include as a credit in

calculating MPSE those margin funds

due and owing from such participants at

or before the immediately succeeding

settlement time that were called for by

DCC in the ordinary course of entering

trades into the options or repo clearing

systems, that were reflected in the daily

margin report and that were not an

additional margin requirement pursuant

to Section 603 or 2603 of DCC

procedures. This clarification should

reduce the possibility that margin calls

designed to reduce DCC’s credit

exposure inadvertently compound that

exposure.

DCC believes that the proposed rule

change is consistent with Section 17A of

the Act and the rules and regulations

thereunder applicable to DCC, and in

particular with Section 17A(b)(3)(F) of

the Act 4 which requires that a clearing

agency be organized and its rules be

organized and its rules be designed,

among other things, to promote the

prompt and accurate clearance and

settlement of securities transactions, to

safeguard funds and securities in DCC’s

possession and control, and to remove

impediments to and perfect the

mechanism of a national system for the

prompt and accurate clearance and

settlement of securities transactions.

DCC believes the proposed rule change

will permit wider utilization of the

system by providing greater flexibility to

address credit or liquidity difficulties

with its participants.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

DCC does not believe that the

proposed rule change will impose any

burden on competition not necessary or

appropriate in furtherance of the

purposes of the Act.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within thirty-five days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

ninety days of such date if it finds such

longer period to be appropriate and

publishes its reasons for son finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) By order approve such proposed

rule change or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street N.W.,
4558 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Notices

Washington, D.C. 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

Room in Washington, D.C. Copies of

such filing will also be available for

inspection and copying at the principal

office of DCC. All submissions should

refer to the file number SR–DCC–96–13

and should be submitted by February

20, 1997.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

Policy Statement 96–02

Exposure Limit Violations; Corrective

Action Steps

Introduction

The purpose of this Policy Statement

is to describe the remedial steps risk

management and clearing personnel

will take to correct a Participant’s

violation of such Participant’s Exposure

Limit. All capitalized terms, unless the

context otherwise requires, shall have

the meanings set forth in the Procedures

for Option Contracts and Procedures for

Repurchase and Reverse Repurchase

Agreements (‘‘Repos’’). The Participant’s

Exposure Limit is prescribed at the time

such Participant’s is admitted to the

System based on a credit and liquidity

analysis of the Participant by Risk

Management personnel in consultation

with CapMac and may be changed from

time to time at the direction of risk

management personnel and in

consultation with CapMac. An Exposure

Limit represents the aggregate

incremental margin which may be due

from a Participant for a prospective

Business Day one Business Day hence as

a consequence of such Participant’s net

Short Positions and Exercised Options

with respect to Option Contracts and net

Long and/or Short Positions with

respect to Repos.

Each day, before accepting trades for

submission in the clearing systems,

Delta will determine whether a

Participant’s potential incremental

margin due with respect to positions

and trades exceeds each Participant’s

pre-set Exposure Limit.’’ Such Exposure

Limit is the mathematical net of the

exposure derived from Option Contracts

and Repos. Risk management shall be

delegated with the authority to monitor

each Participant’s compliance with

remaining at or below such Participant’s

assigned Exposure Limit. In the event a

Participant exceeds their assigned

Exposure Limit, risk management

personnel shall be responsible for taking

remedial action to correct such

violation.

Remedial Steps

Risk management personnel shall take

the following sequential steps to address

and/or correct a violation of a

prescribed Exposure Limit:

1. Determine that a violation has

taken place by first, reviewing the

Participant’s open positions and second,

by comparing the effect any newly

executed positions may have on such

previously outstanding open positions.

2. Previously open positions may

exacerbate the Exposure Limit violation

due to market changes in the securities

underlying such open positions or,

alternatively, market changes with

respect to such open positions may have

ameliorated the effect of the Exposure

Limit violation.

3. After determining the effect of

market changes on open positions, risk

management personnel shall determine

the residual magnitude of the remaining

excess, if any, over the Participant’s

Exposure Limit.

4. Risk management personnel shall

determine if the Participant has

maintained any excess margin in such

Participant’s Account. Such excess

margin may take the form of collateral

held and not yet returned to such

Participant at the request of such

Participant. In the event such

Participant has maintained such excess

margin, risk management shall

determine whether such excess margin

is sufficient to cover the Exposure Limit

violation.

5. In the event there is no excess

margin, risk management personnel

shall determine whether the magnitude

of the violation is material or de

minimus. As a general matter, a de

minimus violation shall be construed to

be 5% or less of such Participant’s

Exposure Limit.

6. If the violation is determined to be

de minimus, no further remedial action

is required. If the violation is

determined to be material (i.e. in excess

of 5% of such Participant’s Exposure

Limit), then further remedial action is

required. If a de minimus exposure limit

occurs more than twice within thirty

days, Risk Management Personnel will

consider whether to change the

Exposure Limit.

7. Risk management personnel are

authorized to inform the Participant that

such Participant may not submit any

additional transactions unless such

transactions have the effect of reducing

such Participant’s Exposure Limit. In

addition, risk management personnel

are authorized and shall request intraday margin from the Participant. In the

event intra-day margin is not

forthcoming, risk management

personnel are authorized to reject

transactions which resulted in the

Participant exceeding their Exposure

Limit which are otherwise not

liquidating transactions. Risk

management personnel shall inform the

Participant subject to the Exposure

Limit violation that no additional

transactions may be submitted by such

Participant, unless such transactions

have the effect of reducing or

eliminating the violation. Risk

management personnel shall also inform

Authorized Brokers that all transaction

effected by the violation Participant

shall be rejected unless such

transactions have the effect of reducing

or eliminating the violation until further

notice. Accordingly, each such

transaction effected by an Authorized

Broker shall be reviewed on a trade by

trade basis.

8. In the interests of minimizing the

financial impact on Participants,

including those Participants in good

standing who have executed

transactions opposite a Participant

subject to an Exposure Limit Violation,

risk management personnel shall first

reject the most recently executed but not

yet settled forward start Repo trades. In

the event the Participant has not

effected any unsettled forward start

Repro trades or the rejection of such

trades does not result in the elimination

of the Exposure Limit violation, risk

management shall then reject all Option

Contract transactions executed during

the current business Day. Risk

management personnel shall promptly

contact other Participant, including

Authorized Brokers, in order to identify

a replacement party for the Participant

subject to the Exposure Limit violation.

Such replacement Participant assume

the rejected transactions on the terms

under which the trade was originally

executed. In the event a replacement

Participant cannot be identified, risk

management personnel shall be

authorized to contact the executing

counterparty opposite the Participant

subject to an Exposure Limit violation

and inform such executing counterparty

that the subject transaction has been

rejected for clearance.
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Notices 4559

1 15 U.S.C. 78s(b)(1).

2Overnight repos will be defined as repo

agreements whose off-date is the immediately

succeeding business day following the on-date for

such transactions. Term repos will be defined as

repos agreements whose off-date is two or more

business days following the on-date for such

transactions.

3Net mark-to-market means the arithmetic sum

resulting from the estimated cost to liquidate a

participant’s under margined positions in overnight

repos offset by the estimated proceeds from

liquidating a participant’s over margined positions

in overnight repos. 4 15 U.S.C. 78q–1.

9. In the event the rejection of forward

start Repo trades and current Business

Day Option Contact trades are

insufficient to eliminate the Exposure

Limit violation, risk management

personnel shall be authorized to create

a Liquidating Settlement Account for

such Participant. Upon the creation of

such an account, risk management

personnel shall begin the process of

closing such Participant’s outstanding

positions. Such authority to initiate the

liquidation process is predicated on the

Participant’s inability or unwillingness

to affirmatively respond to a previously

executed intra-day margin call pursuant

to the Procedures.

[FR Doc. 97–2259 Filed 1–29–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38198; File No. SR–DCC–

96–12]

Self-Regulatory Organizations; Delta

Clearing Corp.; Notice of Filing of a

Proposed Rule Change to Amend

Procedures Relating to Monitoring and

Limiting Exposure From Repurchase

Agreements

January 23, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

November 26, 1996, the Delta Clearing

Corp. (‘‘DCC’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) and on January 10,

1997, amended the proposed rule

change (File No. SR–DCC–96–12) as

described in Items I, II, and III below,

which items have been prepared

primarily by DCC. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

DCC is proposing to amend the

margining of overnight repurchase

agreements (‘‘repos’’). DCC’s policy

statement 96–01, attached as Exhibit 1

to this notice, describes the proposed

amendments in greater detail.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

DCC 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. DCC 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

The purpose of the proposed rule

change is to amend DCC’s procedures

for monitoring and limiting its exposure

from the clearance and settlement of its

participants’ overnight repos. First, the

proposed rule change will establish

DCC’s participants’ core margin

requirement as either $1 million dollars

par amount of U.S. Treasury securities

or a greater amount as determined by

DCC based upon exposures arising out

of overnight repo agreements effected by

the participant.2 DCC will calculate

weekly the core margin requirement for

each participant by using the most

recent eight weeks (if available) of

overnight repo transactions and will

notify each participant of its core

margin requirement. If DCC notifies a

participant that the participant is

required to deposit additional core

margin, the participant by 11 a.m. on

the business day following the notice

must deposit with DCC’s clearing bank

U.S. Treasury securities whose market

value equals or exceeds the participant’s

additional margin requirement.

Second, the proposed rule change will

amend Section 2602 of DCC’s rules to

require DCC to provide each participant

with a supplemental daily margin report

by 3 p.m. of each business day. The

supplemental daily margin report will

indicate (i) the participant’s overnight

repo positions established during that

business day, (ii) the net mark-to-market

valuations for the participant’s

overnight repo positions,3 (iii) the core

margin and excess unreturned margin

on deposit, and (iv) the amount of

additional margin that the participant

must deposit with DCC’s clearing bank.

In the event that the net mark-to-market

valuation exceeds 65% of the sum of the

participant’s core requirement and

unreturned margin on deposit, DCC will

require the participant to deposit

additional margin in the amount of such

excess. The additional margin must be

deposited with DCC no later than 5 p.m.

of that business day. Failure to deposit

the amount of any margin deficit shown

on the supplemental daily margin report

will be grounds for suspension and

sanctions pursuant to Section 2608 of

DCC’s rules.

Third, the proposed rule change will

amend DCC’s rules to eliminate the

collection of performance margin for

overnight repos. The daily margin report

will reflect only the margin required on

the participant’s term repo positions.

DCC believes that the proposed rule

change is consistent with the

requirements of Section 17A of the Act 4

and the rules and regulations

thereunder because the proposed rule

change will better enable DCC to

safeguard the funds and securities under

its possession and control by amending

DCC’s procedures to assure that it has

adequate collateral to address a

participant’s default of insolvency.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

DCC does not believe that the

proposed rule change will impose any

burden on competition not necessary or

appropriate in furtherance of the

purpose of the Act.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

Comments were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within thirty-five days of the date of

publication of this notice in the Federal

Register or within such longer period:

(i) As the Commission may designate up

to ninety days of such date if it finds

such longer period to be appropriate

and publishes its reasons for so finding;

or (ii) as to which DCC consents, the

Commission will:

(A) By order approve such proposed

rule change or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the