[Federal Register Volume 63, Number 28 (Wednesday, February 11, 1998)]
[Notices]
[Pages 7022-7026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3367]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39623; File No. SR-DCC-97-10]
Self-Regulatory Organizations; Delta Clearing Corp.; Notice of
Filing of Proposed Rule Change Relating to the Clearing of Repurchase
Agreement Instrument Transactions
February 5, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 31, 1997. Delta
Clearing Corp. (``DCC'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change 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 from
interested persons on the proposed rule change.
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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
The proposed rule change will revise DCC's rules to authorize DCC
to clear and to settle repurchase agreement instrument transactions
(``RAIT'').
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.\2\
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\2\ The Commission has modified the text of the summaries
prepared by DCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
A RAIT is a transaction pursuant to which the counterparties agree
to pay each other interest on an agreed upon amount (``notional
amount'')\3\ for the agreed term of the RAIT. One counterparty
(``selling member'') will pay interest that is based on the market rate
of interest for a repurchase agreement (``repo'') with treasury
securities as the underlying collateral and that is adjusted on a daily
basis throughout the term of the transaction (``floating rate''). The
other counterparty (``purchasing member'') will pay interest based on a
rate of interest that remains constant throughout the term of the
transaction (``fixed rate''). This proposed rule change will permit DCC
to clear and to settle RAITs.
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\3\ The notional amount must be $1 million or a multiple
thereof. The notional amount is used solely as reference and is not
exchanged between the parties.
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1. Structure of the Transaction
The parties will negotiate between themselves: (1) The notional
amount, (2) the type of repo to be referenced for the floating rate,
(3) the fixed rate, (4) the date the RAIT will start (``commencement
date''), (5) the date the RAIT will end (``expiration date''), and (6)
any premium that may be paid to one counterparty as consideration for
entering into the transaction.
[[Page 7023]]
On the trade date,\4\ the parties will report the agreed upon
transaction terms to DCC either directly or through a broker authorized
by DCC.\5\
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\4\ Trade date will be defined as the date on which members or
their broker report a RAIT to DCC.
\5\ Section 3 of this notice contains a description of the trade
reporting requirements.
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The parties' payment obligations will begin on the commencement
date and will end on the day before the expiration date. The
commencement date may be prior to or after the trade date. However,
RAITs with a commencement date which is prior to the trade date will
only be permitted to allow one party to enter into a RAIT with a new
counterparty to close out its existing RAIT position.\6\ Any premium
will be paid on the later of the first business day following the
commencement date or the first business day following the trade
date.\7\
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\6\ Such transaction is referred to as a closing transaction and
is discussed below in Section 4 of this notice.
\7\ Premium payments must be made to DCC by the later of 11:00
a.m. or the opening of FedWire and will be paid by DCC six hours
later. Members' obligations to pay premiums will be netted with
their right to receive premiums.
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The expiration date (also referred to as the settlement sum payment
date) may not be earlier than the later of the second business day
following the trade date or the second business day following the
commencement date.\8\ In addition, the expiration date may not be later
than the earlier of the first anniversary of the trade date or the
first anniversary of the commencement date.
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\8\ This time period will give DCC an opportunity to collect
margin on all RAITs on the day after the RAIT is accepted by DCC for
clearance.
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Prior to 8:00 a.m. on the expiration date, DCC will notify each
member of any amount required to be paid by or to such member with
respect to RAITs expiring on such date (``settlement sum'').\9\ This
information will be included on the daily RAIT activity reports sent to
members. Members will be required to make any payment indicated on the
daily reports prior to the settlement time on the expiration date.\10\
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\9\ Section 2 of this notice sets forth the formula that will be
used to determine the settlement sum.
\10\ Settlement time is defined as the later of 11:00 a.m. or
the opening of FedWire.
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The failure of a member to pay any premium or any settlement sum
will constitute a violation of the procedures. The defaulting member
will be suspended in accordance with Article 4 of DCC's procedures
(subject to deferral for up to two hours) and may be sanctioned in
accordance with Article 5.
2. Calculation of Payment
The members must select as the floating rate one of the five
special collateral rates or the general collateral rate. The special
collateral rates will equal the rate of interest for repos in which the
treasury securities underlying such agreements are the most recently
issued treasury security with an original maturity of two years, three
years, five years, ten years, or thirty years. The general collateral
rate will be the rate of interest for repos in which the treasury
securities underlying such agreements are any securities other than the
most recently issued treasury securities with an original maturity of
two, three, five, ten, or thirty years.\11\
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\11\ Participants in the treasury repo market finance other
treasury securities at a rate (i.e., the general collateral rate)
which does not otherwise distinguish the maturity date of the
collateral underlying such treasury repos. For example, market
participants finance a treasury security with a remaining term to
maturity of 8.5 years and a treasury security with a remaining term
to maturity of 1.5 years at the same overnight repo rate unless
either of these treasury securities is the most recently issued
treasury security of the applicable maturity in which event
participants would finance that treasury security at the applicable
special collateral rate for newly-issued treasury securities of that
maturity.
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Each special collateral rate and the general collateral rate will
be determined by DCC at the close of business on each business day upon
a reputable pricing source selected by DCC.\12\ DCC will then multiply
the applicable floating rate by the notional amount and divide by 360
to determine the floating rate amount. Any daily floating rate amount
determined for a business day will apply to any following nonbusiness
day.\13\
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\12\ Prior to the commencement of clearing RAITs, DCC will
notify its members of the pricing source to be used. (DCC initially
intends to contract with GovPX, Inc. [``GovPX''] as its pricing
source for determining the special and general collateral rates.)
DCC will also notify members of any change in the pricing source.
Any change in DCC's pricing source will not be applicable to RAITs
entered into based upon a previous pricing source unless otherwise
agreed to by the members to any such transaction.
\13\ For example, the daily floating rate amount calculated for
each Friday during the term of the transaction also will apply for
the immediately following weekend days.
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The fixed rate will be a fixed percentage carried out to three
decimal points. As a result, the fixed rate amount will remain constant
each day during the term of a transaction. The daily fixed rate amount
will be obtained by multiplying the fixed rate by the notional amount
and dividing that amount by 360.
At the end of a RAIT, DCC will calculate the sum of the daily
floating rate amounts and the sum of the daily fixed rate amounts in
each case calculated from and including the commencement date through
and excluding the expiration date. The difference between these amounts
is the settlement sum. If the sum of the daily floating rate amount is
in excess of the sum of the daily fixed rate amount, the selling member
will be required to pay the settlement sum to DCC for payment to the
purchasing member. If the sum of the daily fixed rate amounts is in
excess of the sum of the daily floating rate amounts, the purchasing
member will be required to pay the settlement sum to DCC for payment to
the selling member.
3. Trade Reporting and Acceptance
The trade reporting procedure for RAITs will be similar to the
trade reporting procedures for option transactions cleared by DCC.\14\
The transactions may be reported to DCC by the member counterparties or
by the broker for the transaction. Members will be required to report
RAITs to DCC on the date upon which the members agree to the trades.
RAITs made between 9:00 a.m. and 12:00 p.m. on any business day will
have to be reported to DCC by telephone prior to 12:30 p.m. of that
business day.\15\ RAITS agreed to between 12:00 noon and 5:00 p.m. on
any business day will have to be reported to DCC by telephone prior to
5:30 p.m. of that business day. Members or their broker will have to
submit written trade reports for all trades by 5:30 p.m. of that
business day.
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\14\ Trade reporting for options transactions is described in
Article 23 of DCC's procedures.
\15\ All references to time are Eastern Time (``ET'').
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Both the verbal and written trade report for each transaction will
need to report (a) The identities of the purchasing member and the
selling member, (b) the trade date, (c) the commencement date, (d)
whether any party is required to pay a premium and if so the party
required to pay such premium and the amount, (e) the notional amount,
(f) the fixed rate, (g) the floating rate, (h) the expiration date, (i)
whether a selling or purchasing transaction, (j) whether an opening or
closing transaction,\16\ and (k) such other information as may be
prescribed.\17\
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\16\ An opening transaction creates or increases a member's
short or long position. A closing transaction decreases a member's
short or long position.
\17\ Records maintained by members with respect to RAITs will
need to show the trade date, any premium, the party required to pay
the premium, the notional amount, the fixed rate, the floating rate,
the expiration date, and whether an opening or closing transaction.
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DCC will orally confirm that submitted trade reports contain the
required information and that the parties agreed as to the terms of the
[[Page 7024]]
transaction. As with option and repo transactions, DCC may reject a
RAIT for various reasons, including if the RAIT causes a member to
exceed its exposure limit established by DCC.\18\ If DCC rejects a RAIT
for any reason, it will promptly notify the members by telephone. If
DCC rejects a RAIT because the members' trade reports do not match, the
members are required to cooperate with DCC to reconcile any
differences. When DCC accepts a RAIT for clearance, DCC will enter into
matching transactions with each member so that DCC will act as the
counterparty to the purchasing and selling members with respect to
their rights and obligations under the RAIT.
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\18\ Note 21 contains a definition of exposure limit.
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4. Netting
A long position with respect to RAITs will be defined as the
aggregate rights and obligations of a member as the purchaser of one or
more RAITs. A short position with respect to RAITs will be defined as
the aggregate rights and obligations of a member as the seller of one
or more RAITs. A member's long position or short position will be
determined by reference to the applicable notional amount.\19\
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\19\ For example, if a member is the purchaser of a RAIT with a
notional amount of $3,000,000, the member will have a long position
in that RAIT for a notional amount of $3,000,000. Similarly, if a
member is the seller of a RAIT with a notional amount of $2,000,000,
the member will have a short position in that RAIT for a notional
amount of $2,000,000.
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Transactions entered into by a member with the same commencement
date, floating rate, fixed rate, and expiration date will be defined in
the procedures as being part of the same ``series of instruments.'' To
the extent that a member is the seller of one RAIT and the purchaser of
another RAIT in the same series of instruments, such member's long and
short positions in such RAITs will be netted.\20\
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\20\ For example, if the two transactions described in note 19
involved the same commencement date, floating rate, fixed rate, and
expiration date and were entered into by the same member, the
members's long and short positions in those RAITs would be netted
and the member would have a net long position of $1,000,000 in that
series of instruments.
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If a member wants to close out an existing position, it must enter
into a RAIT that has the same commencement date as that existing
position (i.e., a date that is prior to the trade date). If the RAIT is
the same series of instruments as the earlier RAIT and the member's
position is on the opposite side (e.g., the member was the selling
member and is now the purchasing member), the new RAIT will be netted
against the old RAIT. If the notional amount of the two RAITs is the
same, the member will no longer have a position with DCC in this series
of instruments. Such a transaction will be referred to as a closing
transaction.
5. Margin
At present, DCC has established exposure limits for each
member.\21\ These exposure limits apply to exposure for option
transactions and term repos on an aggregate basis. DCC also calculates
a member's margin requirements for options transactions and term repos
on an aggregate basis,\22\ and members are required to maintain such
margin with DCC's clearing bank in the form required by DCC.\23\
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\21\ Exposure limit currently is defined as the limit prescribed
for each member on the aggregate incremental margin due to DCC for
that day that the member may incur or carry in respect of its short
position in options, the settlement of exercised options, and its
positions in repos.
\22\ Overnight repos are subject to separate margin
requirements. Section 2203 of DCC's procedures.
\23\ Provisions relating to margin are set forth in Article 22
of DCC's procedures.
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Under the proposed rule, a member's exposure for options
transactions, term repos, and RAITs will be determined by aggregating a
member's exposure with respect to each transaction type. The member's
margin requirement will be reduced by a net positive position with
respect to a transaction type and will be increased by a net negative
position with respect to a transaction type.
Under the proposed rule change, margin provisions now applicable to
options and repo positions will become applicable to RAIT positions.
For example, DCC will have the right to collect intraday margin if DCC
determines such action is appropriate to reflect the change of the
value of a member's positions in RAITs during the day. In addition,
members will be able to borrow from DCC up to 35% of their net positive
exposure, if any, aggregating all their transactions in DCC's clearing
system.\24\
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\24\ To the extent that members with negative exposures to DCC
have not made required margin payments to DCC, DCC will not permit
members with positive exposure to borrow against their positive
exposures.
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Margin will be collected on a daily basis prior to the settlement
time on each business day. Margin for RAITs will be collected for the
first time on the first business day following the trade date. This is
true even in the case of transactions with a future commencement date
(``forward-start'') where margin will be collected prior to the
commencement date based on mark-to-market and performance margin
exposure. During this period prior to the commencement date, margin
will also be collected to cover any premium payments which may be
required to be made on the premium settlement date.
A member's margin requirement with respect to RAITs will be the sum
of accrual margin, mark-to-market margin, and performance margin.\25\
All payment obligations of accrual margin, mark-to-market margin, and
performance margin will be discounted at the then prevailing general
collateral rate to calculate the member's margin requirement.\26\
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\25\ Accrual margin, mark-to-market margin, and performance
margin are explained later in this notice.
\26\ DCC believes that discounting is appropriate in order to
reflect the current value of the payment obligation. DCC believes
the general collateral rate accurately reflects the time value of
money under circumstances in which the payment obligations are
linked to and secured by treasury securities and that discounting by
another interest rate such as the overnight rate on federal funds or
the London interbank offered rate (``LIBOR'') would result in too
steep a discount to the future payment obligation thus leaving DCC
unnecessarily exposed to a member.
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a. Accrual Margin. Accrual margin will take into account the
positive or negative interest amounts accrued with respect to a RAIT
based upon the daily fixed and floating rate amounts through the date
on which margin is calculated discounted at the current general
collateral rate. In the case of a forward-start RAIT, accrual margin
will not be applied during the period between the trade date and the
commencement date.
b. Mark-to-Market. Mark-to-market margin involves a mark-to-market
valuation of a member's RAIT positions based upon a comparison of the
daily fixed rate amount for the transaction and the current interest
rates on comparable repos.\27\ The calculation
[[Page 7025]]
with respect to such mark-to-market value will be: (notional size)
times (number of days to end of RAIT/360) times (difference between the
fixed rate and current repo rate). The calculation, after discounting
the resulting value at the prevailing general collateral rate through
the applicable expiration date, produces the mark-to-market value for
both members to a RAIT. The payor of the fixed rate will incur an
obligation to deposit mark-to-market margin in the event that the
comparable interest rates are less than the RAIT's fixed rate.
Conversely, the floating rate payor will incur an obligation to deposit
mark-to-market margin in the event that the comparable repo rates are
greater than the RAIT's fixed rate. In the case of a forward-start
RAIT, mark-to-market margin also will take into account the premium
required to be paid or received by the member on the premium settlement
date for the RAIT.\28\
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\27\ DCC intends to solicit members with respect to selecting
comparable repos for each of the six indexes. During the course of
each business day, the marketplace establishes the applicable
interest rates for repos for each of the six indices based upon the
number of days from the current business day to the prospective
expiration date for each such repo agreement. The number of days
between the current business day and prospective expiration date are
quoted in standard units of time starting with weekly increments for
the most immediate prospective expiration dates and eventually
quoted in months for the most distant expiration date structures.
For example, market participants will quote fixed rates for repos
for each of the following time units: one week, two weeks, three
weeks, one month, two months, and three months through to one year,
inclusive. Such term structure of interest rates are established and
routinely quoted for each of the five special collateral rates and
the general collateral rate. Such term structures are supplied by
the market on a continuous basis. In identifying such term
structures, DCC will be able to establish benchmark pricing. In the
event a RAIT's remaining term to maturity falls between two quoted
time units, DCC will interpolate between the two time units on a
linear basis to derive the appropriate rate for the comparable term
structure for such RAIT. For example, the interpolated rate for a
RAIT with forty days remaining to its expiration date would be 3.44%
assuming the one month rate was 3.40% and the two month rate was
3.52% [(3.52%-3.40%) (10/30) + 3.40%]. Such benchmark pricing would
be equivalent to ``end of day'' pricing for outstanding RAITs with
respect to calculating DCC's exposures to members and will be
utilized in the margining process.
\28\ On the first business day following the trade date of a
forward-start RAIT, the member required to pay premium on the
premium settlement date will be required to deposit margin in an
amount equal to such premium obligation. Conversely, the member
entitled to receive premium will have a net positive value with
respect to the premium payment until the premium payment is made on
the premium settlement date.
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c. Performance Margin. Performance margin will adjust a member's
margin requirement based on a hypothetical three standard deviation
movement adverse to the member in the fixed rates on comparable
repos.\29\ For each period to maturity and reference rate, DCC will
determine the volatility of the rates on the comparable repos based
upon the changes in such rates during the immediately preceding 100-day
period. The calculation for performance margin will be (notional size)
times (# of days to end of RAIT/360) times (# of basis points
representing three standard deviations).
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\29\ Note 27 contains a description of comparable repos.
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d. Application of Margin in Event of Default. If a DCC member
becomes insolvent or otherwise defaults on a payment obligation, DCC
will attempt to transfer that member's positions to other DCC members.
If DCC cannot locate a third party willing to accept the transaction,
DCC will be required to liquidate the transaction based upon the RAITs'
values as calculated for accrual and mark-to-market margins. To the
extent that DCC would be required to pay a third party to assume a RAIT
or would be required to pay the nondefaulting counterparty upon the
liquidation of a RAIT, DCC will pay the third party or the
nondefaulting counterparty, as applicable, the equivalent of the
accrual and mark-to-market margin for the RAIT.
6. Maximum Potential System Exposure (``MPSE'')
DCC is required to ensure that MPSE does not at any time exceed
one-third of the coverage provided by DCC's credit enhancement
facility.\30\ To the extent necessary to ensure that MPSE does not
exceed the prescribed limit, a member may be restricted from entering
into opening transactions, may be required to reduce or eliminate
existing positions through closing transactions, and may be required to
pay additional margin.
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\30\ MPSE represents the liability to DCC of its members'
positions reduced by margin on hand or to be collected by the next
day.
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With respect to RAITs, DCC will calculate MPSE by adjusting all
member positions by a hypothetical adverse six standard deviation
movement in the repo rates for comparable repos.\31\ The standard
deviation for MPSE will be determined by reference to the most volatile
100-day period from the earliest date from which repo rate information
is available to DCC to the present.\32\
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\31\ Note 27 contains a definition of comparable repos.
\32\ Pricing data for at least a five-year period for each repo
rate is available from the dealer community, and DCC intends to
obtain such data. DCC intends to file with the Commission a
supplemental information report which will show the applicable
reference periods and other relevant data for determining volatility
for MPSE purposes. DCC acknowledges that the Commission's receipt of
the supplemental information report in a form which is acceptable to
the Commission will be a condition to the Commission's approval of
this filing.
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7. Operational Implications
DCC believes its current operating environment is sufficiently
robust and appropriately configured to accommodate RAITs. DCC's current
arrangements with its clearing bank with respect to the payment and the
receipt of margin and premium payments and the prospective arrangements
with respect to the payment of funds with respect to expired RAITs are
within DCC's existing capabilities. DCC's systems will be adapted to
incorporate RAIT related exposure management requirements into DCC's
established mechanism regarding exposure management. Such other
necessary system enhancements will be introduced as DCC consults with
the user community during the RAIT development and implementation
process.
DCC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \33\ and the rules and
regulations thereunder which require that a clearing agency be
organized and its rules be designed to promote the prompt and accurate
clearance and settlement of securities transactions, to safeguard funds
and securities in DCC's possession and control, and to remove
impediments to and to perfect the mechanism of a national system for
the prompt and accurate clearance and settlement of securities
transactions. DCC believes that the amendment contemplated by the
proposed rule change will permit wider utilization of the clearing
system by members and will provide a clearing service which addresses
market needs.
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\33\ 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 that is not necessary or appropriate in
furtherance of the purposes of the Act.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from members, or Others
No comments on the proposed rule change were solicited or 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 periods: (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 the self-regulatory organization consents,
the Commission will:
(a) by order approve the 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 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
[[Page 7026]]
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 Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing also will be available
for inspection and copying at the principal office of DCC. All
submissions should refer to File No. SR-DCC-97-10 and should be
submitted by March 4, 1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3367 Filed 2-10-98; 8:45 am]
BILLING CODE 8010-01-M