[Federal Register Volume 62, Number 203 (Tuesday, October 21, 1997)]
[Notices]
[Pages 54661-54663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27756]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39236; File No. SR-DCC-97-04]


Self-Regulatory Organizations; Delta Clearing Corp.; Order 
Granting Approval of a Proposed Rule Change Relating to the Combining 
of Options and Repo Procedures

October 14, 1997.
    On March 17, 1997, Delta Clearing Corp. (``Delta'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-DCC-97-04) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Delta amended the 
proposed rule change on May 7, 1997, and May 29, 1997. Notice of the 
proposal was published in the Federal Register on September 3, 1997.\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. 38971 (August 26, 1997), 
62 FR 46530.
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I. Description

    The proposal combines Delta's procedures for the clearance and 
settlement of options trades (``Options Procedures'') and Delta's 
procedures for the clearance and settlement of repurchase and reverse 
repurchase (``repo'') agreement transactions (``Repo Procedures'') into 
one set of procedures entitled the Procedures for the Clearing of 
Securities and Financial Instrument Transactions (``Combined 
Procedures'').
    The Combined Procedures allow Delta to integrate the processing of 
options and repo transactions. For example, the Combined Procedures 
consolidate the definitions of many terms (e.g., contract, position, 
and holder) to make these terms applicable to both option and repos.\3\ 
The Combined Procedures also clarify that calculations of a 
participant's exposure limit and the maximum potential system exposure 
(``MPSE'') are determined on an aggregate system-wide basis by 
providing for a single uniform definition of these terms and by 
providing in Section 204 of the Combined Procedures that each 
participant agrees to conduct all transactions cleared through the 
system within such participant's exposure limit.\4\
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    \3\ The Combined Procedures also provide for more uniform use of 
the terms ``repo'' and ``repurchase agreement.''
    \4\ Both the exposure limit and MPSE are designed to limit 
Delta's uncollateralized exposure to each participant.
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    Similarly, Section 307 of the Combined Procedures provides that 
Delta has a security interest in all money and securities of a 
participant as security for payment of any liability of such 
participant to Delta arising from participation in the system. Upon the 
occurrence of a participant default,\5\ Delta may liquidate all of a 
participant's repo and options positions contained in the defaulting 
participant's account through one liquidating settlement account 
established for such participant. The Combined Procedures combine the 
margin provisions for repos and options to clarify that a participant 
is required to deposit margin based upon its

[[Page 54662]]

aggregate net exposure on its options positions and its term repo 
positions. The Combined Procedures conform the Options Procedures and 
Repo Procedures by providing that margin deficits shown on the daily 
margin report must be deposited at or before the later of 11:00 a.m. or 
the earliest time practicable following the opening of the Federal 
Reserve System.\6\
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    \5\ The Combined Procedures contain a new term, ``participant 
default,'' which means a payment default, a delivery default, a 
premium default, or a margin default.
    \6\ Section 602 of the Options Procedures required the deposit 
of margin other than intraday additional margin at or before the 
settlement time on each business day. Section 2602.1 of the Repo 
Procedures provided for the deposit of margin other than 
supplemental or intraday additional margin at or before 11:00 a.m.
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    In many places, the Options Procedures and Repo Procedures had 
inconsistent provisions. The Combined Procedures provide uniform rules 
for both transactions. For example, the proposed rule change extends 
certain requirements placed on interdealer brokers for options to 
interdealer brokers for repos,\7\ and the trade reporting method for 
options is made applicable to repos. Section 2202 of the Combined 
Procedures also incorporates for options transactions the recently 
approved rule change \8\ to the Repo Procedures permitting participants 
to deposit treasury notes and treasury bonds as margin and 
incorporating the schedule of applicable haircuts found in Rule 15c3-
1(c)(2)(vi)(A)(1) under the Act. Section 2204 of the Combined 
Procedures provides that deposits are not required if the margin 
deficit shown on the daily margin report is $50,000 or less.\9\
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    \7\ Such provisions establish qualification requirements for 
interdealer brokers, including compliance with Rule 17a-23 under the 
Act, maintenance of books and records, and necessary operational 
capacity.
    \8\ Securities Exchange Act Release No. 37639 (September 4, 
1996), 61 FR 48186 (File No. SR-DCC-96-09) (order granting approval 
of proposed rule change relating to acceptable forms of collateral).
    \9\ Section 602 of the Options Procedures provided that deposits 
of additional margin with respect to margin deficits shown on the 
daily margin report are not required if the amount to be deposited 
by the participant is $5,000 or less. The Repo Procedures in Section 
2602.1 provided that deposits are not required if such amount is 
$50,000 or less.
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    The Combined Procedures adopt the definition of business day 
previously applicable to options transactions, which excludes Saturday, 
Sunday, a day on which banking institutions in New York City are 
authorized by law to close, and any day on which government securities 
dealers in New York City are not open for business. The Repo Procedures 
did not exclude days on which government securities dealers are closed.
    The Combined Procedures adopt the graduated fine schedule of the 
Options Procedures which provide for sanctions of $100 for the first 
filing of a late trade report, $200 for any second violation occurring 
within three months of the first violation, and $300 for any subsequent 
violation occurring within three months of a prior violation. Section 
3301 of the Repo Procedures provided that the sanction for filing a 
late trade report was an amount not to exceed $500.
    The Combined Procedures use the terms ``Fed Funds'' and ``Federal 
Reserve System'' instead of the terms ``central bank funds'' and 
``central bank wire system'' used in the Repo Procedures.\10\ Like the 
Options Procedures, the Combined Procedures provide that the suspension 
or termination of Delta's system will not affect the terms of any 
existing contract absent the consent of the participant which is party 
to such contract.\11\ As currently applicable for repo participants, 
Section 213 of the Combined Procedures provides that Delta will on an 
annual basis send a list of current repo and options participants in 
Delta's system to all participants.
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    \10\ The Repo Procedures in various places used the terms 
``central bank funds'' and ``central bank wire system.'' The use of 
these terms was intended to cover the situation where Delta had 
received authorization to clear trades to be effected by 
participants through central banks other than the Federal Reserve.
    \11\ The Repo Procedures provided that the suspension or 
termination of the operation of the system will not affect the terms 
of any existing repo agreement.
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    Under the Combined Procedures, a participant may borrow from Delta 
on an overnight basis up to 35% of the participant's net positive 
exposure on its options positions and positions in term repos adjusted 
for performance margin.\12\ Previously, participants could only borrow 
against their exposure on options. Under Section 2212, if the daily 
margin report shows that the participant has a net positive exposure 
after adjustment for performance margin, the participant may request on 
or before 11:00 a.m. of the morning on which the report is sent that 
Delta lend to it on an overnight basis cash or treasury securities to 
the extent available to Delta with a value of not more than 35% of the 
participant's net positive exposure after adjustment for performance 
margin. In order to make such overnight loans, Delta will generally 
transmit securities by 3:00 p.m. that day or will transmit funds by 
5:00 p.m. that day.
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    \12\ Performance margin represents an estimate of the net 
shortfall from the liquidation of a participant's positions at the 
close of the next business day.
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    Some provisions are revised from both the Options Procedures and 
the Repo Procedures. For example, the waiver of suspension provisions 
of Section 401 are revised to provide that suspension may be deferred 
not more than two hours in the event of a margin, premium, or payment 
default and for such period as Delta determines appropriate in the 
event of a delivery default if Delta determines that the participant 
required to make delivery has been unable to obtain the security 
required to be delivered after a good faith effort and that such 
failure to deliver is not the result of a change in the participant's 
financial condition.
    Section 206 of the Combined Procedures eliminates the requirement 
that participants deliver audited reports of their internal accounting 
controls. Participants will continue to be obligated to deliver to 
Delta annual audited financial statements.
    Under the Combined Procedures, Delta, rather than its clearing 
bank, assumes the authority and obligation to receive, compare, and 
transmit trade reports and other reports (Articles 23 and 30); to 
accent trades for clearance (Sections 2303 and 3003); to provide system 
software (Section 303); to calculate and maintain margin (Article 22); 
to transmit, receive, and assign exercise notices and to accept 
exercise notices for clearance (Article 28); and to reconcile 
differences with participants (Sections 2303 and 3003).
    Section 304 of the Combined Procedures provides that inspection by 
Delta of participants' records will be at such time as may be 
reasonably requested by Delta and that the scope of such inspections 
will be limited to matters related to Delta's procedures, the 
participant's transactions in Delta's system, and other matters related 
to Delta's business. Previously, Delta's right of inspection of a 
participant's books and records was not limited to any subject matter.

II. Discussion

    Section 17A(b)(3)(F) of the Act\13\ requires that 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 rule 
change is consistent with Delta's obligations under the Act. By 
combining its Options Procedures and Repo Procedures into a single 
Combined Procedures manual, this rule change, among other things, 
clarifies that Delta's risk management procedures apply to options and 
repos on an aggregate basis. For example, the Combined Procedures

[[Page 54663]]

provide that calculations of exposure limit and MPSE are to be 
determined on an aggregate system-wide basis and that liquidation of a 
participant's positions will be conducted through one account. By 
ensuring that Delta has access to all of a participant's assets held at 
Delta, the proposed rule change assists Delta in the safeguarding of 
securities and funds which are in Delta's control or for which it is 
responsible.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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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, 
the proposed rule change (File No. SR-DCC-97-04) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27756 Filed 10-20-97; 8:45 am]
BILLING CODE 8010-01-M