[Federal Register Volume 60, Number 54 (Tuesday, March 21, 1995)]
[Notices]
[Pages 14987-14989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6939]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35491; File No. SR-DGOC-94-06]


Self-Regulatory Organizations; Delta Government Options Corp.; 
Notice of Proposed Rule Change Relating to Implementing New Procedures 
Allowing for the Clearance and Settlement of Repurchase Transactions 
and Reverse Repurchase Transactions

March 15, 1995.
    Pursuant to Section 19 (b)(1) of the Securities Exchange Act of 
1934 (``Act''),\1\ notice is hereby given that on October 31, 1994, 
Delta Government Options Corp. (``DGOC'') 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 DGOC. On December 9, 1994, January 10, 1995, January 24, 
1995, February 13, 1995, and March 3, 1995, DGOC filed amendments to 
the proposed rule change.\2\ The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Letters from Barry E. Silverman, President, DGOC, to Jerry 
Carpenter, Assistant Director, Securities Processing Regulation, 
Division of Market Regulation (``Division''), Commission, (December 
16, 1994); Barry E. Silverman, President, DGOC, to Jerry W. 
Carpenter, Assistant Director, Office of Securities Regulation 
(``OSPR''), Division, Commission (January 9, 1995); Kathryn V. 
Natale, Morgan, Lewis & Bockius, to Jerry W. Carpenter, Assistant 
Director, Division, Commission, (January 20, 1995); Kathryn V. 
Natale, Morgan, Lewis & Bockius, to Jerry W. Carpenter, Assistant 
Director, Division, Commission (February 10, 1995); and Barry 
Silverman, President, DGOC, to Christine Sibille, Senior Counsel, 
OSPR, Division, Commission (March 2, 1995).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DGOC is proposing amendments to its Procedures that will insert new 
procedures allowing for the establishment of a clearance and settlement 
system for repurchase agreements (``repos'') and reverse repurchase 
agreements (``reverse repos''). Standards for participation, financial 
requirements, financial reports, audits, admission procedures, 
withdrawal of a participant(s), and such other standards as described 
in these new procedures are similar to DGOC's existing procedures and 
have been modified only insofar as they reflect repos and reverse 
repos. [[Page 14988]] 

II. Self-Regulatory Organization's Statement of the Purpose of and 
Statutory Basis for the Proposed Rule Change

    In its filing with the Commission, DGOC 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. DGOC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to enable DGOC to clear 
and settle repos and reverse repos. Existing participants and 
nonparticipants have expressed an interest in such services. DGOC 
believes that by providing a centralized clearing and settlement 
facility for repos and reverse repos, it will enable users of such a 
facility for repos and reverse repos, it will enable users of such a 
facility to reduce credit exposure, decrease capital utilization, 
reduce transaction flow, and improve efficiency.
    In the recent past, the U.S. fixed income securities dealer 
community has expressed significant interest in exploring mechanisms 
designed to reduce the risks associated with holding inventories of 
securities, trading derivative securities, and the attendant costs of 
maintaining such inventories. In particular, this exploratory effort 
has focused on the U.S. Treasury securities market as a consequence of 
the dramatic growth in the outstanding notional amounts and the 
resulting increased dealer trading inventories of Treasury Bills, 
Notes, and Bonds during the last several years.
    In addition to the benefits that DGOC believes will accrue to the 
dealer community, DGOC believes the following systemic benefits of 
creating a clearing and settling mechanism for repos and reverse repos 
also are likely. First, through the imposition of daily margin 
requirements, there is an enhanced probability of performance on the 
part of participants even during times of market stress. Second, 
through netting, the exposures giving rise to margin requirements will 
result in optimal use of collateral. Third, as the common contraparty 
subject to Commission oversight, DGOC will provide transparency and 
access to an activity which is fundamental to efficiently functioning 
capital markets.
    Prior to using the system, a DGOC participant must apply for 
membership in DGOC's repo clearance system. All applications for 
membership will be reviewed by DGOC's executive committee. The 
standards for participation are similar to the standards for 
participation in DGOC's other systems. For example, broker-dealer 
members must have minimum net capital of $25 million, and bank or 
insurance company members must have total equity capitalization of $500 
million. At the time of admission to the system, each participant will 
be assigned a trading limit and may be assigned a position limit for a 
particular CUSIP.
    DGOC's system will clear repo trades that result from a direct 
agreement between two participants or repo trades that have been agreed 
to through the facilities of brokers that have been specially 
authorized by DGOC (``Authorized Brokers'') to offer their services to 
DGOC participants. The Authorized Broker will make use of their own 
communications networks for the purpose of accepting bids and offers 
and effecting repo trades that will be cleared through DGOC. 
Specifically, bids and offers will be called in to the Authorized 
Broker by a participant, and the Authorized Broker will in turn display 
those bids and offers to all of its customers who are DGOC 
participants. Once the bidder and offerer agree on the repo rate, the 
underlying collateral description, the start date, the end date, and 
the partisan amount to be delivered, the trade will be effected.\3\ 
Representatives of the buyer and seller at the Authorized Broker will 
intermediate between the buyer and seller to obtain a price to use for 
the collateral. The participants will not learn the identity of their 
contraparty.

    \3\Generally, participants can cancel transactions at any time 
until the price of the underlying collateral has been agreed upon by 
the parties. Depending on participant system capabilities, 
cancellation will typically take place either on-line or by voice 
communication. If the cancellation is effected through voice 
communication, a follow-up notice will be prepared and transmitted 
to the participants.
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    After the price has been agreed upon, the Authorized Broker then 
will prepare either one trade report, representing both sides of the 
trade, or two trade reports, one for each side of the trade. The 
Authorized Broker then will forward the trade report or reports to 
DGOC. If the participants have agreed to the trade directly between 
themselves, each participant will forward a trade report to DGOC 
indicating its side of the trade. If DOGC does not receive a trade 
report from the contraparty, DGOC will contact the contraparty within 
one half hour to confirm the trade entered against them.
    The trade report must show for each transaction (a) the identity of 
the reporting party and the contraparty, (b) the type of transaction, 
(c) the CUSIP number for the underlying collateral, (d) the repo rate 
for the transaction, (e) the par amount of securities for the total 
transaction, (f) the par amount of securities for each delivery and the 
associated money,(g) the trade date and time, and (h) the on-date and 
the off-date of the transaction. DGOC will review all trade reports to 
determine if their contents are valid and that all required information 
has been submitted.
    If two separate trade reports are received for a transaction, DGOC 
will match the two trade reports. In order to be accepted for 
clearance, the trade reports must agree as to identity of the 
contraparty, type of transaction, the repo rate, the price, any rights 
of substitution, settlement date, maturity date of the Treasury 
securities, coupon rate if the underlying securities are Treasury notes 
or bonds, the CUSIP number, the on-date, and off-date. If the details 
do not match, the trade report(s) will go back to the sending party or 
parties until the match is reconciled. Matching of positions will be 
done continuously throughout the day and at the close of each trading 
day.\4\ All trade reports received through an Authorized Broker also 
will be confirmed either orally or via facsimile with the buying and 
selling participants.

    \4\The close of each trading day will be at 2:30 p.m.
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    It the trade reports have been matched and confirmed, DGOC will be 
deemed to have accepted the transaction for clearance. However, DGOC 
will reject the transaction if it exceeds the participant's trading or 
position limits, the participant has been suspended from the system, or 
the transaction is not designated as delivery versus payment. If the 
transaction is accepted, DGOC interposes itself as the contraparty to 
both sides of the transaction. Trade data then will be keyed into 
DGOC's computer system for the purposes of generating clearance 
instructions to the clearing bank and for purposes of margining. The 
participants will receive a written daily activity report indicating 
DGOC's acceptance of the trade. The daily activity report will 
[[Page 14989]] report trades DGOC accepted the previous business 
day.\5\

    \5\If the on-leg is scheduled to settle that day, participants 
will not receive confirmation that DGOC has accepted the trade until 
the day after the trade has settled.
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    The details of the trade will be sent to the clearing bank along 
with the delivery instructions. Participants must maintain a bank 
account in one or more correspondent banks for purposes of the payment 
or return of margin, delivery or acceptance of the Treasury securities, 
or making or receiving payment for such securities. The selected 
correspondent bank must be a member of the Fed Wire System. The selling 
participant must deliver securities to the clearing bank against 
payment no later than one minute prior to the close of the Federal Bank 
Wire System. The clearing bank will redeliver such securities to the 
purchasing participant against payment for such securities.
    DGOC will net trades under two circumstances. If a participant has 
a repo and a reverse repo with the same underlying collateral and off-
date, the off-date settlement positions will be netted as to par 
amount, price, and accrued interest. If a participant renews a maturing 
repo for the same underlying collateral prior to the off-date for such 
repo. DGOC will report to the participant the net money difference 
between the two repo transactions.
    DGOC's existing margining methodology will be adapted to 
incorporate repo transaction and reverse repo transaction exposures. 
Margin may be deposited in the form of ``Central Bank Funds,''\6\ 
Treasury bills, Treasury Notes, or Treasury bonds. Treasury securities 
will be valued at 95% of their market value. All participants will be 
required to maintain a minimum margin deposit of $1 million par amount 
Treasury bills with a maturity of less than 180 days. The amount of 
margin will be derived from two calculations: Mark to market and 
performance margin. Mark to market will represent the net amount of the 
estimated cost to liquidate a participant's under-margined position 
offset by the estimated proceeds from liquidation of its over-margined 
positions. Performance margin will represent an estimate of the net 
shortfall from the liquidation of a participant's repo positions at the 
close of the next business day taking into account the most adverse 
market movement in the price of the underlying Treasury securities 
which could reasonably be anticipated.

    \6\Central Bank funds is defined as cash balances available for 
immediate withdrawal in accounts maintained at banks that are 
members of the Federal Reserve System or any other wire system 
operated in a similar characteristics or attributes.
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    Price files, which will be updated several times intraday, as well 
as daily mark to market prices on repos will reference data on the 
underlying collateral as well as the participant's existing positions 
which are then used to calculate margin requirements. The margining 
system will be run and margin reports will be prepared and distributed 
to participants for margin collection. This process also will be the 
beginning point for the accounting system which will track all system 
activity. Margin will be set for each participant and will reflect the 
netting of payments and any potential exposures to the participant. 
Margin requirements will go into effect at the time the trade is 
accepted for clearance. Prior to 8:00 a.m. of each business day, each 
participant will be issued a daily margin report which will indicate 
the margin surplus or deficit. At or before settlement time on each 
business day, each participant will be obligated to deposit sufficient 
margin to satisfy the margin deficit shown on the daily report.
    In the event of a failure to deliver securities on either the on-
leg or off-leg, DGOC will still margin the transaction. DGOC also may 
elect to collect intraday margin if DGOC deems such collection 
necessary or advisable to reflect a market price change, the size of 
the participant's positions, the financial or operational condition of 
the participant, or otherwise to protect DGOC.
    DGOC believes the proposed rule change is consistent with Section 
17A of the Act and the rules and regulations thereunder applicable to 
DGOC and in particular with Section 17A(b) (3) (F) of the Act.\7\ That 
section requires that a clearing agency's rules be designed, among 
other things, to promote the prompt and accurate clearance and 
settlement of securities transactions and to remove impediments to and 
perfect the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions. DGOC believes the 
proposed rule change will permit wider utilization of its system by 
providing participants with the ability to clear and settle repos and 
reverse repos.

    \7\15 U.S.C. 78q-1(b)(3)(F) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DGOC does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purpose of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Comments have neither been solicited nor 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 period (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 such 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, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the 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. 522, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of DGOC. 
All submissions should refer to the File Number SR-DGOC-94-06 and 
should be submitted by April 11, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\

    \8\17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-6939 Filed 3-20-95; 8:45 am]
BILLING CODE 8010-01-M