[Federal Register Volume 62, Number 68 (Wednesday, April 9, 1997)]
[Notices]
[Pages 17257-17259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8996]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38471; File No. SR-DCC-96-12]


Self-Regulatory Organizations; Delta Clearing Corp.; Order 
Approving on a Temporary Basis a Proposed Rule Change Relating to 
Monitoring and Limiting Exposure from Repurchase Agreements

April 2, 1997.
    On November 26, 1996, the Delta Clearing Corp. (``DCC'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-DCC-96-12) pursuant to

[[Page 17258]]

Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ 
On January 10, 1997, DCC filed an amendment.\2\ Notice of the proposal 
was published in the Federal Register on January 30, 1997.\3\ On March 
11, 1997, DCC filed a second amendment.\4\ No comment letters were 
received. For the reasons discussed below, the Commission is approving 
the proposed rule change through September 30, 1997.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Letter from Howard Meyerson, Esq., Morgan, Lewis, and 
Bockius (January 10, 1997).
    \3\ Securities Exchange Act Release No. 38198 (January 23, 
1997), 62 FR 4559.
    \4\ Letter from Howard Meyerson, Esq., Morgan, Lewis, and 
Bockius (March 11, 1997). The revisions contained in this amendment 
were nonsubstantive and therefore do not require republication of 
notice.
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I. Description

    The proposed rule change amends DCC's procedures for calculating 
the amount of margin to collect relating to the clearance and 
settlement of its participants' overnight repurchase and reverse 
repurchase agreements (``repos'').\5\ Currently, DCC's rules provide 
for collection of core margin and performance margin based on an 
estimate of the net shortfall from liquidation of a participant's repo 
and reverse repo positions at the close of the next succeeding business 
day. The proposed rule change institutes a new method of collecting 
margin for overnight repos by implementing the following changes.
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    \5\ Overnight repos are repo agreements whose off-date is the 
immediately succeeding business day following the on-date for such 
transactions. Term repos are repos agreements whose off-date is two 
or more business days following the on-date for such transactions.
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    First, the proposed rule change adds Section 2602.2 to DCC's rules 
to allow DCC to collect an intraday mark-to-market for overnight repos. 
At approximately 2:30 p.m. during each business day, the mark-to-market 
margin requirements will be calculated for each participant with 
respect to all overnight repo transactions effected by the participant 
and submitted to DCC for clearance that business day. DCC will 
calculate overnight repo exposures by comparing the value of each 
transaction at the time the transaction was executed with the value of 
the transaction using the most recent intraday price from an 
information vendor. DCC will net positive values against negative 
values in order to derive a net mark-to-market valuation. In the event 
that the net mark-to-market valuation exceeds 65 percent of the sum of 
the participant's core margin (discussed below) and unreturned margin 
on deposit, DCC will require the participant to deposit additional 
margin in the amount of such excess.
    DCC will provide each participant with a supplemental daily margin 
report by 3:00 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, (iii) the 
core margin and excess unreturned margin on deposit (including margin 
originally deposited for term repos), and (iv) the amount of additional 
margin that the participant must deposit with DCC's clearing bank. The 
additional margin must be deposited with DCC no later than 5:00 p.m. of 
that business day. Failure to deposit the amount of any margin deficit 
shown on the supplemental daily margin report including mark-to-market 
and core margin will be grounds for suspension and sanctions pursuant 
to Section 2608 of DCC's rules.
    Second, the proposed rule change establishes DCC's participants' 
core margin requirement as either $1 million dollars par amount of U.S. 
Treasury securities or a greater amount based upon exposures arising 
out of such participant's overnight repo agreements. To calculate each 
participant's core margin requirement, each week DCC will review the 
overnight repo activity of each participant for the most recent eight 
weeks (forty observations) of overnight repo transactions. This data 
will be used to calculate the mark-to-market exposure for each of these 
forty instances. Mark-to-market exposure will be calculated as the 
difference between the contract value of an overnight repo and the end-
of-day pricing for the collateral underlying such overnight repos.\6\ A 
negative number would represent an exposure for DCC, while a positive 
number would represent an overcollateralization. Instances of 
overcollateralization will be eliminated. The remaining instances will 
be used to calculate an average mark-to-market exposure.\7\ DCC will 
then calculate two standard deviations. A participant's core margin 
requirement will be the sum of the average and two standard deviations.
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    \6\ DCC will obtain the end-of-day prices from a vendor, which 
evaluates information received from traders, brokers, and various 
electronic sources.
    \7\ If 40 instances during the eight week period are not 
available, DCC will calculate an average based upon the number of 
actual observations.
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    By 3:00 p.m. on each business day on which the core margin 
requirement has been calculated, each participant will be notified of 
its new core margin requirement. If the requirement is greater than the 
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.
    Third, the proposed rule change amends DCC's rules to eliminate the 
collection of performance margin for overnight repos. The daily margin 
report will reflect only the performance margin required on the 
participant's term repo positions.

II. Discussion

    Section 17A(b)(3)(F)<SUP>8 of the Act 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 DCC's 
proposed rule change is consistent with DCC's obligations under the Act 
because the proposal establishes: (1) a minimum core margin requirement 
to reflect DCC's exposure to each participant's overnight repo activity 
and (2) an intraday margin requirement that is triggered if a 
participant's mark-to-market exposure is valued at more than 65 percent 
of the core requirement. Therefore, the Commission believes that the 
proposal should provide to DCC margin in an amount that will assist DCC 
in meeting its obligation to safeguard securities and funds.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    While the Commission believes that DCC's required overnight repo 
margining system should provide sufficient risk protection, the 
Commission recognizes that the margining system is novel both in 
concept and to DCC. Therefore, the Commission believes that it is 
appropriate to grant temporary approval of the proposal in order that 
the Commission and DCC will have the opportunity to monitor the 
effectiveness of the new system in practice. Accordingly, the 
Commission is temporarily approving the proposed rule change through 
September 30, 1997.
    In this regard, DCC has agreed that during the temporary approval 
period it will submit on a monthly basis reports detailing its analysis 
of its overnight repo margining system. The first report should be 
submitted by June 15, 1997, with each subsequent monthly report being 
submitted by the fifteenth of the succeeding month.

[[Page 17259]]

III. Discussion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of 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-DCC-96-12) be, and hereby 
is, approved through September 30, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.<SUP>9
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8996 Filed 4-8-97; 8:45 am]
BILLING CODE 8010-01-M