[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    \2\Amendment No. 2 completely superseded all previous 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