[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]
[Notices]
[Pages 4557-4559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2259]



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SECURITIES AND EXCHANGE COMMISSION
[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.
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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

    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'').
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    \2\ Policy 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.
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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\
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    \3\ The Commission has modified parts of these statements.
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(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.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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(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.,

[[Page 4558]]

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 intra-day 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.

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    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