Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Notices 4561

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

2Securities Exchange Act Release No. 37916

(November 1, 1996), 61 FR 57933.

3A participant with multiple accounts may group

its accounts into ‘‘families’’ (i.e., ‘‘collateral

groups’’) and instruct DTC to allocate a specified

portion of its overall collateral and net debit cap to

each family. All accounts that a participant

designates as belonging to a common collateral

group share a single collateral monitor and single

net debit cap.

4 17 CFR 240.15c3–3. Rule 15c3–3 under the Act

requires, among other things, that broker-dealers

maintain possession or control of fully-paid or

excess margin securities they hold for the accounts

of customers (‘‘customer fully-paid securities’’).

weeks (40 observations) could be

studied.

• The core margin for each

Participant will be adjusted to reflect a

two (2) standard deviation test of the net

negative mark-to-market over the course

of the observation period. By statistical

inference, such a level of core margin

should be sufficient to cover 95% of all

mark-to-market exposures. The left tail

of the distribution curve represents

those market movement occurrences

when the Overnight Exposure will be 2

standard deviations (‘‘sigma’’) less than

the average. The resulting exposure will

be covered by the core amount.

Therefore, Delta is only potentially

exposed on the right tail and the core

statistically predicted to cover 97.5% of

the occurrences of exposure. The

remaining 2.5% will be covered by

intra-day margin calls.

• In the event there are an insufficient

number of actual observations (i.e., less

than 40), Delta will calculate an average

based upon the number of actual

observations. Delta will apply the

calculated average to the number of

observations derived by subtracting the

number of known observations from 40.

This shall be the population of

observations used to calculate the

average negative net mark-to-market.

For example, a Participant with an

average overnight exposure for the prior

eight weeks of $1MM whose standard

deviation is calculated to be $250M

would be required to post core margin

of $1.5MM.

Intraday Margin Calls

In the event that the intra-day markto-market valuation with respect to

Overnight Repos exceeds the

Participant’s core requirement and any

additional margin, Delta would require

the Participant to deposit supplemental

margin in the amount of such excess

already on deposit by 5 p.m. of such

Business Day.

Operational Procedures

On each Business Day, prior to 3:00

p.m., Delta’s margining system will

produce a Supplemental Daily Margin

Report which will list the following:

1. All Overnight Repos in which the

On-date is the current Business Day and

the Off-date is the subsequent Business

Day;

2. Cash prices used to value

underlying collateral;

3. The Overnight Repo mark-tomarket values utilizing current prices

for the collateral underlying such

Overnight Repos; and

4. The net exposure.

In the event the net exposure is in

excess of 65% of the core margin and

any additional margin, supplemental

margin will be called for by Delta. Such

supplemental margin must be deposited

by 5:00 p.m.

Every Monday, Delta’s credit

department will produce a spreadsheet

which will calculate the week’s core

margin requirement. The spreadsheet

will contain the following headings:

1. Participant;

2. 8 Week Average Exposure;

3. Standard deviation of the 8 week

average mark-to-market exposure; and

4. Core Margin Requirement.

A database of the daily market-tomarket exposures will be created and

maintained for each Participant in a

spreadsheet. The database will contain

the latest 40 daily mark-to-market

exposures for each Participant (overcollateralized values will be excluded).

Each Participant’s 8 week average and

the applicable standard deviation will

be calculated as described above. The

average net mark-to-market will be

adjusted to reflect the two standard

deviation test. The resulting product

becomes the new core margin

requirement for each Participant. These

new core margin requirements will then

be forwarded to Delta’s Risk Manager for

input into the margining system.

By 3:00 p.m. on Each Business Day on

which such core margin requirement

has been calculated, each Participant

will be notified of its new core margin

requirement. If the requirement is

greater than the then prevailing core

requirement, the Participant must post

the difference the following Business

Day. If the new core requirement is

below the then prevailing core

requirement, the deposited excess will

be returned to the Participant by 11:00

a.m. the following Business Day.

[FR Doc. 97–2320 Filed 1–29–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38201; File No. SR–DTC–

96–17]

Self-Regulatory Organizations; The

Depository Trust Company; Order

Granting Approval of a Proposed Rule

Change Relating to the Movement of

Securities Positions Within a Collateral

Group

January 23, 1997.

On October 4, 1996, The Depository

Trust Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change (File No. SR–DTC–96–17)

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

Securities Exchange Act of 1934 (‘‘Act’’)

to permit the movement of securities

positions within a collateral group.1

Notice of the proposal was published in

the Federal Register on November 8,

1996.2 No comment letters were

received. For the reasons discussed

below, the Commission is granting

approval of the proposed rule change.

I. Description

The rule change offers a new service

to DTC participants that permits the

movement of securities positions within

a collateral group.3 The fee for this new

service is $.43 per transaction. Under

the rule change, DTC will eliminate

certain processing steps associated with

other kinds of book-entry deliveries for

transactions within a collateral group

and thereby will lower the cost of such

transactions. DTC has determined that

the credit and financial controls

employed for regular book-entry

deliveries are not necessary for transfers

that occur within the same collateral

group because a participant’s collateral

monitor and net debit position are not

affected by such transfers.

DTC anticipates that the new service

will be used in connection with

participant compliance with Rule 15c3–

3 under the Act.4 Presently, a brokerdealer can use DTC’s Memo Segregation

Service (‘‘memo seg’’) to help them

comply with Rule 15c3–3. The memo

seg service allows a participant to create

a ‘‘memo’’ position within its free

account to enable the participant to

avoid making an unintended delivery of

a designated quantity of customer fullypaid securities that either are in the

participant’s free account or are

expected to be received into that

account. Other participants prefer to

comply with Rule 15c3–3 by moving

customer fully-paid securities from a

free account to an additional DTC

account established by the participant.

Under DTC’s previous procedures, any

book-entry movement required DTC to

perform its regular risk management

procedures for book-entry deliveries

(e.g., review of the participant’s

collateral monitor and net debit

position). Accordingly, the application

of these procedures to book-entry
4562 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Notices

5 17 CFR 200.30–3(a)(12).

1See Securities Exchange At Release No. 38156

(January 10, 1997) (order partially approving file

SR–NASD–96–43).

2Among others, the new SEC rules include a new

rule, SEC Rule 11Ac1–4 (‘‘Display Rule’’),

governing the display of customer limit orders, and

amendments to the SEC’s firm quote rule, Rule

11Ac1–1, requiring market makers to reflect in their

quotes any better priced orders that they place into

an ECN (‘‘ECN Rule’’). The SEC also adopted an

‘‘ECN Display Alternative’’ that permits market

makers to comply with the ECN Rule by having an

ECN display their orders to the marketplace. See

Securities Exchange Act Release No. 37619A

(September 6, 1996), 61 FR 48290 (September 12,

1996).

3SelectNet permits NASD members to direct buy

or sell orders in Nasdaq securities to a single market

maker (preferenced orders) or broadcast the order

to all market makers in the security. Nasdaq

operates SelectNet to provide investors and

members with an automated means to facilitate the

communication of trading interest between

members, the negotiation of orders with the

possibility of price improvement, and the

dissemination of last sale reports to the tape.

SelectNet also serves as an effective auxiliary

mechanism to one-on-one telephone

communication between members, especially in

times of market stress. The service is available for

members to negotiate and execute orders form 9:00

a.m. until 5:15 p.m., Eastern Standard Time.

4Each exchange currently is permitted to trade up

to 500 Nasdaq National Market securities on a UTP

basis. At the present time, however, the CHX is the

only exchange that trades Nasdaq stocks pursuant

to UTP. Accordingly, the CHX would be the only

exchange that would be granted access to SelectNet

at this time.

deliveries between the participant’s free

account and the additional account

made this approach more expensive

than the memo seg approach as a means

of complying with Rule 15c3–3. The

rule change will accommodate transfers

of securities, including customer fullypaid securities, from a participant’s free

account to an additional account within

the same collateral group and will do so

using procedures that are less expensive

than a regular book-entry delivery.

II. Discussion

Section 17A(b)(3)(F) requires 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 is consistent with DTC’s

obligations under the Act. The new

service will permit participants to move

securities positions from a participant’s

free account to an additional DTC

account within the same collateral

group without undergoing DTC’s usual

risk monitoring controls and therefore at

a lower cost. Because such transfers do

not affect the overall level of a

participant’s collateral monitor or its net

debit position, the Commission believes

that DTC can implement the new

procedure while still assuring the

safeguarding of securities and funds in

its custody or for which it is

responsible. Furthermore, because the

fees associated with the transfer of

securities within a collateral group will

now be comparable to the costs of memo

seg, participants will be afforded the

flexibility to choose which method to

protect customer fully-paid securities

that best suits their needs without cost

differences being a significant factor.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposed

rule change is consistent with the

requirements of the Act and in

particular 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–

DTC–96–17) be and hereby is approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.5

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–2258 Filed 1–29–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38191; File No. SR–NASD–

97–02]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by National

Association of Securities Dealers, Inc.

Relating to Access to Nasdaq’s

SelectNet Service by National

Securities Exchanges Trading Nasdaq

Securities on an Unlisted Trading

Privilege Basis

January 22, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on January 17, 1997,

the National Association of Securities

Dealers, Inc. (‘‘NASD’’) or

‘‘Association’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items, I, II,

and III below, which Items have been

prepared by the NASD. 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

The NASD is proposing to grant

national securities exchanges trading

securities listed on The Nasdaq Stock

Market (‘‘Nasdaq’’) on an unlisted

trading privilege (‘‘UTP’’) basis access to

Nasdaq’s SelectNet Service for those

securities in which the exchange

disseminates quotations through the

Nasdaq system.

II. Self-Regulatory Organizations’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

NASD 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. The NASD has

prepared summaries, set forth in

Sections (A), (B), and (C) below, of the

most significant aspects of such

statements.

A. Self-Regulatory Organizations’s

Statement of the Purpose of, and

Statutory Basis of the Proposed Rule

Change

On January 10, 1997, the SEC approve

several NASD rule changes and a variety of

modifications to Nasdaq’s Small Order

Execution System (‘‘SOES’’) and SelectNet

Service 1 that are designed to integrate the

Commission’s new order handling and

execution rules.2 In particular, among other

things, the SEC approved an amendment to

SOES that provides that orders entered into

SOES will be rejected when a UTP exchange

is alone at the best bid or offer displayed on

Nasdaq. Because SOES will not execute

orders when a UTP exchange is alone at the

inside market, the NASD and Nasdaq believe

it is absolutely critical that NASD members

have the ability to readily access such

superior priced orders displayed by the UTP

exchange. Accordingly, in order to ensure

that the NASD members can efficiently

access UTP exchanges and that SOES will

not reject order for more than very brief

periods of time when a UTP exchange is

alone at the inside, Nasdaq proposes to

modify SelectNet to provide UTP exchanges

with the ability to send and receive

preferenced and broadcast SelectNet orders.3

For example, if the inside market in stock

ABCD is 10¥101⁄8, 10×10, and the Chicago

Stock Exchange (‘‘CHX’’) represents the only

offer at 101⁄8 SOES will reject all incoming

market orders to buy for as long as the CHX

is alone at the best offer and NASD members

will have the ability to send a preferenced

SelectNet order to the CHX specialist.4

In addition to minimizing the time

that SOES will reject orders when a UTP

exchange is alone at the inside, giving

the UTP exchanges access to SelectNet

will provide Nasdaq market makers and

UTP specialists with a more efficient

means to access each others quotes. In

this connection, Nasdaq market makers

have expressed their desire to have a