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
4560 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Notices

5 17 CFR 200.30–3(a)(12).

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

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, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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–96–12

and should be submitted by February

20, 1997.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.5

Margaret H. McFarland,

Deputy Secretary.

Exhibit 1

Risk Basked Core Margin Analysis

Introduction

Delta Clearing Corp. (‘‘Delta’’) collects

a fixed core margin. The purpose for

collecting core margin is to ensure that

Delta has sufficient funds so as to

minimize the risk of exposure to

Participants engaging in Overnight Repo

or Reverse Repo (collectively

‘‘Overnight Repo’’) transactions.

Because Delta does not currently collect

margin on overnight trades until 11:00

a.m. the following day, there is a

potential exposure for up to 27 hours

(assuming market opening at 8:00 a.m.)

Although the vast majority of trades

unwind on a next day basis before the

11:00 a.m. deadline, there is

nevertheless a need to collect margin

funds in a more timely manner in order

to reduce the level of the exposure Delta

assumes opposite each Participant. The

methodology that Delta will employ to

address potential exposures for

Overnight Repo trades will be a twostep process. The first step is to

establish core margin requirements

based on an evaluation of each

Participant’s Overnight Repo trading

activity. The goal is to set core margin

requirements at a level sufficiently high

enough to cover the majority of

potential mark-to-market exposures

Delta assumes opposite each

Participant. The second step is to

employ intra-day margin calls in the

event market exposure exceeds the core

margin. The amounts of total margin

collected should be sufficient to cover

the intra-day exposure and any

additional exposure which could arise

the following day.

Core Margin Methodology

Using a statistically based

methodology, core margin levels will be

established by Delta that are sufficient

to cover 97.5% of Participant’s

statistically predicted potential

Overnight Repo mark-to-market

exposure to Delta. The adequacy of core

margin will be evaluated weekly.

Average Overnight Exposure

Each week, Delta will review the

Overnight Repo trading activity for each

Participant to determine the Overnight

Repo mark-to-market exposure that

Participant posed to Delta. Mark-tomarket exposure is the total net sum of

the differences between the contract

value of an Overnight Repo when such

Overnight Repo was effected and the

mark-to-market value of such Overnight

Repo reflective of the end-of-day pricing

for the collateral underlying such

Overnight Repos. A negative number

represents an exposure for Delta, while

a positive number represents

overcollateralization. An exposure can

result from either a Long Repo or Short

Repo Position. The following example

shows how mark-to-market exposure is

calculated.

Participant Position Contract

value

Mark-tomarket

Delta’s (exposure) or over

collateralization

Delta’s net (exposure) or over

collateralization

A ................... Repo ............................................................................................. 100 101 1 ........................

Reverse ........................................................................................ 102 104 (2) ........................

Repo ............................................................................................. 100 97 (3) ........................

Reverse ........................................................................................ 101 100 1 (3)

B ................... Reverse ........................................................................................ 104 102 (2) ........................

Repo ............................................................................................. 99 103 4 ........................

Repo ............................................................................................. 98 92 (6) (4)

Delta would have a net mark-tomarket exposure to Participants A and

B of 3 and 4, respectively. Such daily

mark-to-market exposures would be

calculated for each Participant on each

Business Day during the prior eight

calendar weeks. Such daily mark-tomarket exposures will then be averaged

to derive an average daily mark-tomarket exposure for each Participant. It

should be noted that Business Days on

which a net overcollateralization is

derived will be eliminated from the

survey for the purposes of deriving an

average daily mark-to-market exposure.

Statistical Analysis

The average Overnight Repo mark-tomarket exposure is a starting point but

may not be a sufficient determinant of

market risk exposure. The core margin

level will be set at an amount in excess

of the average net negative mark-tomarket in order to ameliorate exposures

that vary from the mean. To determine

an adequate level of core margin Delta

performed the following analysis:

• Delta reviewed the trading activity

of all Participants dating back so that 8
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