[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)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.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
