[Federal Register Volume 59, Number 235 (Thursday, December 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30175]
[[Page Unknown]]
[Federal Register: December 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35037; File No. SR-DGOC-94-03]
Self-Regulatory Organizations; Delta Government Options Corp.;
Order Approving on a Temporary Basis a Proposed Rule Change Relating to
the Investment of Federal Funds Deposited by Participants as Margin
Collateral
December 1, 1994.
On June 2, 1994, Delta Government Options Corp. (``DGOC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Act'').\1\ The Commission published notice of the proposed
rule change in the Federal Register on June 24, 1994.\2\ No comments
have been received on the notice. As discussed below, the Commission is
approving the proposed rule change through November 30, 1995.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\Securities Exchange Act Release No. 34232 (June 17, 1994), 59
FR 32733.
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I. Description
DGOC's proposal establishes a one year pilot program to test a new
service which will expand DGOC's allowable investments of federal funds
deposited by participants as margin collateral.\3\ Specifically, the
proposal amends Article VI, Section 601 of DGOC's procedures to permit
DGOC to invest cash margin deposits in repurchase agreements which are
collateralized by participants' long positions. The pilot program is
limited to two participants.\4\
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\3\Currently, under DGOC's rules, cash margin deposits can be
invested only in overnight repurchase agreements which are
collateralized by Treasury bills with maturities not exceeding 180
days from the date of the repurchase agreement.
\4\DGOC will file with the Commission a proposed rule change
under Section 19(b)(2) of the Act prior to any expansion or
modification of the pilot program.
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The maximum amount of repurchase agreements a participant may enter
into using its long DGOC options positions as collateral is limited as
follows. The value of a participant's long positions is determined in
accordance with DGOC's prescribed margin methodology whereby the value
of a participant's long positions equals the sum of the mark-to-market
values of options owned by the participant less the sum of the mark-to-
market values of options written by the participant.\5\ The long
positions then will be reduced in value by a performance margin
component. Under DGOC's margining system, performance margin is
calculated for both long positions and short positions. Performance
margin represents an estimate of the potential reduction in value of
both long and short positions at the close of the next succeeding
business day taking into account the most adverse market movement in
the price of underlying Treasury securities which reasonably can be
anticipated.\6\
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\5\Mark-to-market margin valuation represents the net amount of
the estimated cost to liquidate a participant's short positions
offset by the estimated proceeds from the liquidation of its long
positions. Mark-to-market margin valuation can be a positive or
negative amount depending upon whether a participant has a long or
short position.
\6\Performance margin is always a negative number.
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The adjusted long position valuation amount is then multiplied by a
loan to value ration, which for the pilot program will be 35%. The
product of this calculation is the maximum that can be loaned through
repurchase agreements using a participant's long positions in DGOC
options as collateral.\7\ DGOC also has added an interpretation to
Section 601 limiting the total of all repurchase agreements
collateralized by participants' long positions to the difference
between the total cash margin deposits and the greater of either $10
million of 10% of the total cash margin deposits.
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\7\As an example, if a participant has long positions of $15
million with a performance margin requirement of $5 million and a
mark-to-market margin valuation of $15 million, the maximum
repurchase agreement allowed would be $3.5 million calculated as
follows: ($15M-$5M) x 35% =$3.5M.
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II. Discussion
The Commission believes the proposed rule change is consistent with
Section 17A of the Act and, therefore, is approving the proposal on a
temporary basis. Specifically, the Commission believes the proposal is
consistent with Section 17A(b)(3)(F)\8\ of the Act which requires that
the rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions and to
assure the safeguarding of funds which are in the custody or control of
the clearing agency.
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\8\15 U.S.C. 78q-1(b)(3)(F).
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DGOC's proposal will provide flexibility to DGOC by expanding the
types of investments that it may make with cash deposited as margin. By
providing participants that deposit cash as margin with a superior rate
or return on their deposited margin collateral and by providing a
facility whereby participants can efficiently finance their long DGOC
options, the proposal should encourage greater utilization of DGOC's
system. Greater utilization of DGOC's system will result in more trades
being brought into the national clearance and settlement system. The
Commission also believes that the methodology provided by DGOC is
consistent with DGOC's obligations to assure the safeguarding of funds.
By approving the proposed rule change on a temporary basis through
November 30, 1995, DGOC, the Commission, and other interested parties
will be able to assess further, prior to permanent Commission approval,
the effects of the program. During the pilot program, DGOC will have
the opportunity to operate the program, to gather data, and to analyze
the implications of the program. Prior to the end of the pilot period,
DGOC will submit to the Commission a report on the use of the program
and its analysis and conclusions regarding the program.
III. Conclusion
For the reasons stated above, the Commission finds that the
proposed rule change is consistent with Section 17A of the Act.
It is therfore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DGOC-94-03) be and hereby is
temporarily approved through November 30, 1995.
For the Commission by the Division of Market Regulatory pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30175 Filed 12-7-94; 8:45 am]
BILLING CODE 8010-01-M
