[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]
[Notices]
[Pages 4559-4561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2320]
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SECURITIES AND EXCHANGE COMMISSION
[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.
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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 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.
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\2\ Overnight 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.
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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.
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\3\ Net 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.
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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.
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\4\ 15 U.S.C. 78q-1.
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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 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
[[Page 4560]]
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\
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\5\ 17 CFR 200.30-3(a)(12).
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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 two-step 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-to-market 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.
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Delta's Delta's net
Contract Mark-to- (exposure) or (exposure) or
Participant Position value market over over
collateralization collateralization
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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)
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Delta would have a net mark-to-market 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-to-market exposures
will then be averaged to derive an average daily mark-to-market
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-to-market 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-to-market 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
[[Page 4561]]
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 mark-to-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-to-market 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-to-market 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 (over-collateralized 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
