[Federal Register Volume 59, Number 139 (Thursday, July 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17710]
[[Page Unknown]]
[Federal Register: July 21, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34381; File No. SR-DGOC-93-04]
Self-Regulatory Organizations; Delta Government Options Corp.;
Order Approving Proposed Rule Change Modifying Exercise Settlement Date
and Buy-In Procedures
July 14, 1994.
On December 27, 1993, Delta Government Options Corp. (``DGOC'')
filed a proposed rule change (File No. SR-DGOC-94-04) with the
Securities and Exchange Commission (``Commission'') pursuant to Section
19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ On February
16, 1994, and on March 4, 1994, DGOC submitted substantive amendments
to the filing.\2\ Notice of the proposal was published in the Federal
Register on May 25, 1994, to solicit comments from interested
persons.\3\ No comments were received. This order approves the
proposal.
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\1\15 U.S.C. 78s(b) (1988).
\2\Amendment No. 2 completely superseded all previous
submissions filed in connection with the proposed rule change, File
No. SR-DGOC-93-04.
\3\Securities Exchange Act Release No. 34083 (May 18, 1994), 59
FR 27087.
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I. Description of the Proposal
The proposed rule change modifies DGOC's exercise settlement
procedures. Under current practice, the exercise settlement date,
depending on certain factors, occurs from two to five business days
following the expiration date or the date on which an exercise notice
is tendered. For an option contract on a Treasury bond or a Treasury
note exercised on a day preceding the expiration date, the exercise
settlement date is the next business day following the day on which the
exercise notice is properly assigned to a participant. The proposal
makes no change to this provision of DGOC's rules. For an option
contract on a Treasury bond or a Treasury note exercised on the
expiration date, the exercise settlement date will now be the next
business day following the expiration date for those contracts.
Currently, the exercise settlement date for such contracts is the third
business day following the expiration date. Also, under the proposed
rule change, for an option contract on a Treasury bill, the exercise
settlement date will be the next business day after an exercise notice
is properly tendered. Currently, the exercise settlement date is
Thursday of the week in which the exercise notice is properly tendered.
In connection with the modifications to the exercise settlement
date, DGOC has amended Section 1005 of its Procedures to provide that
DGOC will allocate exercise settlement obligations prior to 8:00 a.m.
on the business day prior to the exercise settlement date. Previously,
DGOC allocated exercise settlement obligations on the second business
day prior to the exercise settlement date.
DGOC also has amended Section 1102 of its Procedures to clarify its
buy-in process applicable when a participant fails to make a required
delivery of Treasury securities to DGOC. First, upon the request of the
participant failing to deliver and with good cause shown, DGOC is now
authorized to defer the execution of a buy-in if Delta has reason to
believe that the delivery default will be cured on that other
arrangement adequate to protect Delta's interests have been made.\4\
Previously, DGOC could defer the execution of a buy-in for no more than
twenty-four hours from the time delivery was due. Second, the timing
for the execution of a buy-in has been set forth with specificity.
Under the more specific procedures, DGOC may transmit a notice of buy-
in to the participant which failed to deliver after the elapse of
thirty calendar days after the failure to deliver. DGOC must deliver in
duplicate a written notice of buy-in no later than 12:00 noon five
business days before the proposed execution date of the buy-in. The
amended section also sets forth the information DGOC must supply to the
participant in the buy-in notice.
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\4\Section 1102 of DGOC's Procedures authorizes DGOC to buy-in
Treasury securities for the account and liability of a participant
that fails to fulfill its delivery obligation.
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II. Discussion
The Commission believes that the proposal is consistent with the
Act and particularly with Section 17A of the Act.\5\ Sections 17A(b)(3)
(A) and (F) of the Act\6\ require that the rules of clearing agencies
be designed to promote the prompt and accurate clearance and to assure
the safeguarding of funds which are under the custody or control of a
clearing agency or for which it is responsible and to foster
cooperation and coordination with persons engaged in the clearance and
settlement of securities transactions.
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\5\15 U.S.C. 78q-1 (1988).
\6\15 U.S.C. 78-1(b)(3) (A) and (F) (1988).
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One purpose of the proposal is to respond to participants who have
requested that DGOC's settlement procedures more closely follow the
practices already established in the over-the-counter (``OTC'')
marketplace for the settlement of purchases and sales of Treasury
securities and for the settlement of exercised options on such
securities. by shortening DGOC's settlement periods to conform to the
industry standards, DGOC will reduce the amount of time such settlement
obligations remain outstanding which in turn will reduce credit
exposure to DGOC as well as generally in the settling of options on
Government securities. DGOC's use of the same settlement period as is
used in settlement of similar OTC options will help to ensure a
consistent approach among clearing entities and should serve as a
platform for additional coordination among clearing entities clearing
identical or complimentary securities.
Because DGOC's current settlement period of two to five business
days is longer than the settlement period for similar OTC products
cleared outside of DGOC, DGOC-issued options carry a price adjustment
for the additional financing costs. As a result, the price of DGOC-
issued options does not match exactly those of similar OTC-traded
options. Implementation of DGOC's revised settlement procedures will
make the relative values of DGOC-issued options comparable to those of
OTC-traded options and will eliminate participants' need to make the
additional calculations necessary to correlate the price of DGOC-issued
options with the price of OTC-traded options. Therefore, this proposal
should provide participants greater ease in trading and exercising
options issued by DGOC. The proposal also should result in more options
on Government securities being cleared and settled through the
automated facilities of DGOC, a registered clearing agency which
participates in the national system for the clearance and settlement of
securities transactions. These are options transactions that otherwise
would be cleared through decentralized and labor intensive processes.
In connection with the shorter settlement time frames, the rule
change enables DGOC to allocate exercise settlement obligations prior
to 8:00 a.m. on the day prior to settlement and, as noted above,
permits accelerated settlement time frames that are more consistent
with settlement of exercised options and settlement of securities in
the cash market. These changes should help DGOC to promote the prompt
and accurate clearance and settlement of securities transactions and
should foster cooperation and coordination by persons engaged in the
clearance and settlement of securities transactions. The proposal also
clarifies DGOC's buy-in procedures while providing DGOC with more
flexibility concerning buy-ins. The Commission believes that these
changes improve DGOC's ability to deal with the risks associated with
the failure of a participant to fulfill its delivery obligation. By
doing so, the modified buy-in procedures better enables DGOC to fulfill
its statutory obligations to safeguard securities and funds within its
possession or control for which it is responsible.
III. Conclusion
For the reasons discussed above, the Commission believes that the
proposal is consistent with the requirements of the Act, particularly
Section 17A of the Act, and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the above-mentioned proposed rule change (File No. SR-
DGOC-93-04) be, and hereby is, approved.
\7\15 U.S.C. 78s(b) (1988).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17710 Filed 7-20-94; 8:45 am]
BILLING CODE 8010-01-M
