[Federal Register Volume 60, Number 202 (Thursday, October 19, 1995)]
[Notices]
[Pages 54094-54098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25930]



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[[Page 54095]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36367; File No. SR-DGOC-94-06]


Self-Regulatory Organization; Delta Government Options Corp.; 
Order Approving Implementation of New Procedures Allowing for the 
Clearance and Settlement of Repurchase Transactions and Reverse 
Repurchase Transactions

October 13, 1995.
    On October 31, 1994, Delta Government Options Corp. (``DGOC'') 
submitted a proposed rule change (File No. SR-DGOC-94-06) to the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
19(b) of the Securities Exchange Act of 1934 (``Act'') \1\ to permit 
DGOC to implement a new system to clear and settle repurchase 
agreements (``repos'') transactions and reverse repurchase agreements 
(``reverse repos'') transactions. On December 19, 1994, January 10, 
1995, January 24, 1995, February 13, 1995, and March 3, 1995, DGOC 
filed amendments to the proposed rule change.\2\ Notice of the proposal 
appeared in the Federal Register on March 21, 1995, to solicit comment 
from interested persons.\3\ On July 12, 1995, and on August 9, 1995, 
DGOC filed technical amendments to the proposed rule change.\4\ The 
Commission received two comment letters from one commenter.\5\ For the 
reasons and subject to the conditions discussed below, the Commission 
is approving the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1988).
    \2\ Letters from: Barry E. Silverman, President, DGOC, to Jerry 
W. Carpenter, Assistant Director, Office of Securities Processing 
Regulation (``OSPR''), Division of Market Regulation (``Division''), 
Commission (December 16, 1994); Barry E. Silverman, President, DGOC, 
to Jerry W. Carpenter, Assistant Director, OSPR, Division, 
Commission (January 9, 1995); Kathryn V. Natale, Morgan, Lewis & 
Bockius, to Jerry W. Carpenter, Assistant Director, OSPR, Division, 
Commission, (January 20, 1995); Kathryn V. Natale, Morgan, Lewis & 
Bockius, to Jerry W. Carpenter, Assistant Director, OSPR, Division, 
Commission (February 10, 1995); and Barry E. Silverman, President, 
DGOC, to Christine M. Sibille, Senior Counsel, OSPR, Division, 
Commission (March 2, 1995).
    \3\ Securities Exchange Act Release No. 35491 (March 15, 1995), 
60 FR 14987.
    \4\ See, e.g., notes 16 and 24. Letter from Kathryn V. Natale, 
Morgan, Lewis & Bockius, to Jerry W. Carpenter, Assistant Director, 
OSPR, Division, Commission (July 12, 1995) and letter from Kathryn 
V. Natale, Morgan, Lewis & Bockius, to Christine M. Sibille, Senior 
Counsel, OSPR, Division, Commission (August 8, 1995). These 
amendments were technical amendments that did not require 
republication of notice.
    \5\ Letters from Jeffrey Ingber, General Counsel and Secretary, 
Government Securities Clearing Corporation (``GSCC''), to Jerry W. 
Carpenter, Assistant Director, OSPR, Division, Commission (June 5, 
1995 [``June 5 GSCC letter'']) and July 19, 1995 [``July 19 GSCC 
letter'']).
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I. Description of the Proposal

    The proposed rule change establishes a trade matching clearance and 
settlement system for repos and reverse repos in U.S. Treasury 
Securities that will be offered to DGOC participants. Repo system 
participants must be approved by DGOC's executive committee,\6\ which 
will assign to each participant a maximum potential system exposure 
(``MPSE'') limit \7\ and a trading limit \8\ and may assign a 
participant a position limit for a particular CUSIP.\9\

    \6\ The standards for participation are similar to the standards 
for participation in DGOC's options clearance system. 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.
    \7\ A participant's MPSE is the sum of the participant's net 
exposure from repo and reverse repo positions and the net short 
position in options as offset by the net long position in options, 
all as adjusted to reflect a six standard deviation movement in the 
market price of the underlying treasury securities, minus the total 
margin placed on deposit with DGOC by that participant and margin 
funds due and owing from such participant at or before the immediate 
succeeding settlement time. If the MPSE for a participant exceeds 
its MPSE limit, the participant must deposit additional margin equal 
to the excess.
    DGOC also establishes a total systemic MPSE is the sum of each 
participant's individual MPSE and is intended to represent the 
maximum loss DGOC could incur. The total systemic MPSE may not 
exceed one-third of the letters of credit or surety bonds that DGOC 
has in place to secure payments in event of participant default 
(``credit enhancement facility''). Currently, the credit enhancement 
facility totals $100 million with an additional $50 million in 
stand-by credit. Before the repo system becomes operational, DGOC 
will increase its credit enhancement facility to $250 million with 
$50 million in stand-by credit.
    \8\ The trading limit will represent DGOC's maximum credit 
exposure from a participant based on the sum of potential changes (a 
three standard deviation movement over two days) in a participant's 
positions that have not been covered by margin on deposit.
    \9\ If a position limit is exceeded, DGOC may prevent a 
participant from opening new positions or may require a participant 
to reduce its outstanding positions.
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    DGOC's system will clear repo and reverse repo transactions that 
result from direct agreements between two participants and repo and 
reverse repo transactions 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.\10\ Participants may submit to DGOC for clearance only 
those repos and reverse repos that were entered into as principals with 
other DGOC repo system participants or Authorized Brokers and may not 
submit repos or reverse repos executed with or for their customers.

    \10\ Currently, Liberty Brokerage, Inc. and RMJ Special 
Brokerage Inc. are Authorized Brokers. DGOC will file with the 
Commission a proposed rule change pursuant to Section 19(b)(3)(A) of 
the Act prior to the addition of each new Authorized Broker. Such 
rule filing will include a needs assessment addressing the liquidity 
and operational demands that the increase in the volume of repos and 
reverse repos to be cleared through DGOC as a result of the new 
Authorized Broker will make on DGOC's system and the resources that 
DGOC has to meet the new demands. Letter from Robert Mendelson, 
Morgan, Lewis & Bockius, to Jonathan Kallman, Associate Director, 
Division, Commission (September 19, 1995).
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    DGOC's rules do not purport to govern trading conventions of 
Authorized Brokers which will use their own communications networks for 
the purpose of accepting bids and offers and effecting repo and reverse 
repo transactions that will be cleared through DGOC. After the repo or 
reverse repo has been executed, the Authorized Broker then will prepare 
either one trade report, representing both sides of the transaction, or 
two trade reports, one for each side of the transaction.\11\ The 
Authorized Broker then will forward the trade report or reports to 
DGOC. If two participants entered into a repo transaction directly 
between themselves, each participant will forward a trade report to 
DGOC indicating its side of the transaction.\12\ If DGOC does not 
receive a trade report from one of the parties to the transaction, DGOC 
will contact that party within one half-hour to confirm the trade 
entered against them.

    \11\ Whether the Authorized Broker prepares one trade report or 
two trade reports is determined by the Authorized Broker's internal 
procedures and not by any procedure of DGOC.
    \12\ Pursuant to DGOC's rules, a participant must provide a 
trade report to DGOC within one half-hour of the time that the 
transaction occurs if the transaction occurs prior to 1:30 p.m. If 
the transaction occurs between 1:30 p.m. and 2:15 p.m., a 
participant must deliver a trade report to DGOC within five minutes 
of the transaction. If the transaction occurs after 2:15 p.m., a 
participant must deliver a trade report to DGOC as soon as possible 
but in no event later than five minutes after the transaction. With 
respect to transactions for settlement on another day, a trade 
report must be delivered to DGOC by 6:00 p.m. of the trade date.
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    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.\13\ DGOC will 

[[Page 54096]]
review all trade reports to determine if all required information has 
been submitted and if their contents are valid.

    \13\ On-date is the settlement date for the first leg of the 
repo or reverse repo transaction (i.e., the date the holder of a 
repo delivers the securities against delivery by the holder of the 
corresponding reverse repo of payment for such securities). The off-
date is the settlement date for the closing leg of the repo or 
reverse repo transaction (i.e., the date the holder of a repo 
receives back its securities in exchange for payment to the holder 
of the corresponding reverse repo).
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    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 details of the trade reports must agree. If the details 
do not match, DGOC will return the trade reports to the sending party 
or parties until all the terms are reconciled. Matching of transactions 
will be done continuously throughout the day and at the close of each 
trading day.\14\ All trade reports received through an Authorized 
Broker also will be confirmed by DGOC either orally or via facsimile 
with the buying and selling participants.

    \14\ The close of each trading day will be at 2:30 p.m.
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    DGOC will be deemed to have accepted a transaction for clearance 
when DGOC has matched and verified all the information on the trade 
report(s). However, DGOC will reject any transaction if it causes a 
participant to exceed its trading or position limits, if the 
participant has been suspended from the system, or if the transaction 
is not designated as delivery versus payment. If the transaction is 
accepted, DGOC will interpose itself as the contraparty to both sides 
of the transaction. DGOC then will determine if either party must post 
additional margin as a result of the transaction. Each day participants 
will receive a written activity report indicating which trades DGOC 
accepted the previous business day and all trades due to settle that 
day.\15\

    \15\ If the on-leg is scheduled to settle on the trade date, 
participants will not receive confirmation that DGOC has accepted 
the trade until the day after the on-leg has settled.
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    DGOC will net trades under two circumstances. If a participant has 
a repo and a reverse repo with the same underlying collateral and same 
on-date or off-date,\16\ the settlement positions will be netted as to 
par amount, price, and accrued interest. If a participant renews a 
maturing repo or reverse 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, and the deliver 
and receive obligations will be netted.

    \16\ The notice of the proposed rule change stated that only 
off-date settlements would be netted. The July 12, 1995, amendment 
provides that on-date settlements also will be netted.
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    The details of the trade will be sent to DGOC's clearing bank \17\ 
along with delivery instructions. Each participant must maintain a bank 
account in one or more correspondent banks for margin and trade 
settlements. Because U.S. Treasury securities typically are maintained 
in book-entry accounts at Federal Reserve Banks and are delivered 
through the Federal Reserve System's Fed Wire system, the selected 
correspondent bank must be a depository institution with access to the 
Fed Wire system.

    \17\ The clearing bank is the commercial bank that performs the 
clearance and settlement of repos and reverse repos.
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    DGOC will establish delivery cut-off times. For example, in the 
case of opening repurchase transactions the selling participant must 
deliver the securities to DGOC's clearing bank against payment no later 
than one minute prior to the close of the Fed Wire system on the 
settlement day.\18\ DGOC's clearing bank will redeliver such securities 
to the purchasing participant against payment.

    \18\ Any delivery made by a selling participant after the one 
minute prior to the close of the Fed Wire System will be accepted on 
a best efforts basis, and DGOC will return the collateral to the 
selling participant if DGOC is unable to delivery to the purchasing 
participant in good delivery time. DGOC must deliver to the 
purchasing participant prior to the normal close of the Fed Wire 
system unless the purchasing participant agrees to accept late 
delivery.
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    If the selling participant fails to delivery the securities on the 
settlement day by one minute prior to the close of the Fed Wire system, 
DGOC has the option to buy-in the securities with the cost of such buy-
in being charged to the defaulting selling participant. If DGOC decides 
to buy-in a defaulting selling participant, DGOC will give the 
participant written notice of the buy-in which will describe the 
security, quantity, and price.
    If the purchasing participant does not accept all of the securities 
on the settlement day by one half-hour after the close of the Fed Wire 
system, DGOC may sell-out the securities with the cost of such sell-out 
being charged to the defaulting purchasing participant. After the sell-
out, DGOC will give the participant written notice of the sell-out 
which will describe the security, quantity, and the selling price.
    DGOC will adapt its existing margining methodology for its options 
system to incorporate repo transaction and reverse repo transaction 
exposures. The amount of margin a participant must deposit will be 
derived from two calculations: Mark-to-market and performance 
margin.\19\ Margin will be calculated every business day based on the 
difference between the aggregate net price of all repos and reverse 
repos and the net value of those positions including the repo interest 
obligation, at the time margin is calculated.\20\ Mark-to-market will 
represent the net amount of the estimated cost to liquidate a 
participant's under-margined positions 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 
assuming an adverse market movement of three standard deviations based 
on the last one hundred days closing prices of the underlying Treasury 
securities.\21\

    \19\ This is a separate obligation from a participant's 
obligation to deposit additional margin if its exceeds its MPSE 
limit.
    \20\ The value of the underlying collateral will be based on an 
industry accepted source of U.S. Treasury prices. The value of the 
repo is based on repo broker prices where available and if repo 
broker prices are not available on a survey of five dealers.
    \21\ In order to calculate performance margin, each repo is 
classified in one of nine sectors based on the maturity date of the 
underlying collateral. Margin is calculated in each sector based on 
assumptions of an increase and a decrease in security price. A 
participant must deposit margin based on the sum of the worst case 
(either a rise or a decline in value) from each sector. In contrast, 
when calculating the MPSE, DGOC assumes either a rise in value or a 
decline in value for all positions.
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    Prior to 8:00 a.m. of each business day, each participant will be 
issued a daily margin report which will indicate the participant's 
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.\22\ 
Margin may be deposited in the form of ``Central Bank funds'' \23\ or 
Treasury bills.\24\ Treasury bills 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 of Treasury bills with a 
maturity of not greater than 180 days.

    \22\ Excess margin deposits will be released to the 
participant's correspondent bank within six hours after settlement 
time.
    \23\ 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 fashion or possessing similar characteristics 
or attributes.
    \24\ The notice of the proposed rule change stated that DGOC 
would accept Treasury notes and Treasury bonds as margin. The August 
9, 1995, amendment clarified that these securities will not be 
accepted for margin purposes.
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    In the event of a failure to deliver securities on either the on-
leg or off-leg where DGOC does not buy-in the 

[[Page 54097]]
participant's securities, DGOC will still calculate and if appropriate 
collect margin deposits from one or both of the parties to 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.

II. Comments

    The Commission received two comment letters from one commenter 
opposing the proposal.\25\ This commenter argues that DGOC's services 
will adversely affect the safety and soundness of the repo marketplace, 
will pose risks to the commenter's members that use DGOC's services in 
ways that the commenter cannot control, and may irreparably harm the 
potential for effective servicing of the marketplace through efficient 
linkages.\26\ DGOC responded, asserting that the commenter has made 
inaccurate assumptions about DGOC's proposed system,\27\ and that the 
public benefits are substantial.\28\

    \25\ Supra note 5.
    \26\ Specifically, GSCC asserts that: (1) DGOC's manual 
comparison process will create inefficiencies; (2) DGOC has 
insufficient capacity for the large repo market; (3) DGOC has 
insufficient financial strength; (4) DGOC's privately-held corporate 
structure makes it unresponsive to the industry; (5) DGOC's 
margining system does not pass credits to participants or pay 
interest on mark-to-market debits; (6) DGOC's system will bifurcate 
the netting and risk management process for Treasury Securities; and 
(7) DGOC's filing does not discuss the impact on the national 
system.
    \27\ Letter from Barry E. Silverman, President, DGOC, and Steven 
K. Lynner, President, RMJ, to Jerry W. Carpenter, Assistant 
Director, OSPR, Division, Commission (July 7, 1995).
    \28\ DGOC asserts that its comparison process, like GSCC's 
process, relies on same day batch processing with delivery of 
reports indicating the confirmations on a next business day basis. 
DGOC asserts it has sufficient capacity and expertise to handle the 
repo market based on its experience in options on Treasury 
Securities gained during the last five years. DGOC believes that its 
systems are designed to handle any capacity and vulnerability issues 
that may arise and that its established infrastructure and expertise 
are suited to conducting clearance, netting, and settlement in the 
repo market. DGOC believes that it has sufficient financial strength 
to operate its proposed repo system based on its credit enhancement 
facility and margining system. DGOC states that even though its 
corporate structure is for profit, it is still responsive to the 
industry. For example, DGOC met with many industry members during 
the development of its repo system.
    DGOC believes that its proposed repo system would have a 
positive effect on the national clearance and settlement system by 
providing a centralized clearance and settlement facility for repos 
and reverse repos where government securities are the underlying 
collateral. DGOC believes that its system will reduce credit risk 
exposure, decrease capital utilization, reduce transaction flow, and 
impose efficiency in the marketplace. DGOC also believes that 
additional systemic benefits will be derived through its imposition 
of daily margin requirements which will enhance probability of 
performance on the part of participants and through its netting 
which will result in the optimal use of collateral. DGOC also states 
that by acting as the common counterparty to all repo and reverse 
repo transactions submitted to it for clearance and settlement, its 
system will provide additional transparency and access to capital 
markets.
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III. Discussion

    Section 17A(a)(2)(A) of the Act directs the Commission to 
facilitate the establishment of a national system for the clearance and 
settlement of securities transactions.\29\ Section 17A(b) (3) (F) 
requires that the rules of the clearing agency be designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions and 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.\30\ For the reasons set forth below, the Commission 
believes DGOC's system for the clearance and settlement of repo and 
reverse repo transactions meets these requirements. As a result, the 
Commission is approving DGOC's proposed rule change implementing such 
system.

    \29\ 15 U.S.C. 78q-1(a)(2)(A) (1988).
    \30\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    The Commission believes that DGOC's proposed repo clearance system 
will assist in the development of the national clearance and settlement 
system by providing a centralizing mechanism for transactions that are 
currently cleared and settled outside the facilities of a registered 
clearing agency. These trades may well benefit from DGOC's margining 
and netting systems and other risk reduction procedures which should 
decrease the likelihood of failure to settle.\31\ Furthermore, repo 
transactions executed with an Authorized Broker will be submitted 
directly to DGOC by the Authorized Brokers. This should result in 
increased efficiency connected with the clearance and settlement of 
repo transactions by eliminating the need for the broker-dealer 
contraparty to enter transaction data with DGOC.\32\ The Commission 
therefore believes that DGOC's system with the conditions and 
limitations set forth above is consistent with the purposes of Section 
17A of the Act.

    \31\ The Commission notes that DGOC's netting system is limited 
in scope. For example, at this time DGOC does not net deliver and 
receive obligations from options transactions with deliver and 
receive obligations from repos.
    \32\ It is important to note that participants are not required 
to settle all trades through DGOC. Instead, only trades entered into 
through screens designated for that purpose are submitted directly 
to DGOC.
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    The one adverse commenter argues that DGOC's system does not have 
sufficient capacity and that its manual comparison processes are 
inefficient. While it is true that DGOC's system is not as fully 
automated as some other clearance and settlement systems, the 
Commission has reviewed capacity tests provided by DGOC that indicate 
that DGOC has sufficient capacity to function appropriately.
    Furthermore, DGOC has agreed that it will conduct a needs 
assessment and an evaluation of liquidity sources and operational 
capacity upon reaching an average of $10, $20, and $30 billion of 
outstanding principal amount of repos and reverse repos over a ten day 
moving period with on time spikes of $25, $35, and $45 billion, 
respectively. DGOC will provide the Commission with its findings of 
each of its reviews.\33\ When DGOC reaches the $30 billion threshold, 
it will file a proposed rule change pursuant to Section 19(b)(2) of the 
Act.\34\ It is anticipated that the proposed rule change will request 
either an increase in DGOC's volume limitations or removal of all 
volume limitations. The proposed rule change will give the Commission 
the opportunity to revisit DGOC's systems capacity, operation 
capability, and liquidity sources. During the Commission's review of 
DGOC's proposed rule change, the principal amount of outstanding repos 
and reverse repos in DGOC's system over a ten day moving period may 
reach but not exceed an average of $45 billion. Based on these 
limitations, the Commission believes that DGOC has the capacity to 
facilitate the prompt and accurate clearance and settlement of repo 
transactions in a safe and sound manner.

    \33\ Letter from Robert Mendelson, Morgan, Lewis & Bockius, to 
Jonathan Kallman, Associate Director, Division, Commission 
(September 19, 1995). DGOC also has agreed to provide semiannual 
reports on the experiences its has with fails and defaults and 
liquidity facility usages.
    \34\ The proposed rule changes will incorporate DGOC's needs 
assessments and evaluation of liquidity resources and operational 
capacity undertaken when the system reached the $30 billion 
threshold. Letter from Barry E. Silverman, President, DGOC, to Larry 
E. Bergmann, Associate Director, Division, and Jonathan Kallman, 
Associate Director, Division, Commission (October 10, 1995).
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    The commenter believes that the absence of a clearing fund results 
in DGOC having insufficient financial strength. At the time of DGOC's 
initial registration as a clearing agency, the Commission considered 
whether the absence of a clearing fund created unnecessary financial 
risks.\35\ The Commission determined that, at least initially, DGOC's 
credit analysis of participants, participant monitoring, margin 
requirements, credit enhancement facilities, and MPSE limits 

[[Page 54098]]
provided sufficient safeguards and liquidity to allow DGOC's system to 
begin operations. The Commission continues to believe that when coupled 
with DGOC's commitment to reevaluate its systems and controls at 
various volume levels, DGOC's risk reduction and monitoring procedures 
are designed to provide adequate protection from the risks presented by 
the clearance and settlement of repos and reverse repos.

    \35\ Securities Exchange Act Release No. 26450 (January 12, 
1989), 54 FR 2010.
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    The commenter further argues that DGOC's organization as a 
corporation without a user governed board results in DGOC being less 
responsive to industry concerns. The Act does not prohibit for profit 
corporations from serving as clearing agencies. In fact, the Division's 
release outlining its standards for clearing agencies notes that the 
clearing agencies then in existence included profit making 
entities.\36\ However, the Division in that release stated that 
notwithstanding a clearing agency's corporate structure, a clearing 
agency must provide for fair representation by its participants in the 
selection of its directors and administration of its affairs. In the 
first order granting DGOC temporary registration, the Commission found 
that DGOC was providing representation to its participants in the 
administration of its affairs through the use of a participants 
advisory committee.\37\ However, the Commission recently has been 
informed that DGOC does not have a participants advisory committee for 
its options system as required by its rules and by the first order 
granting DGOC temporary registration.\38\ DGOC has represented that in 
order to provide representation to its repo and reverse repo 
participants, a participants advisory committee for its repo system 
will be established.\39\ The Commission believes that the establishment 
of such a committee will result in DGOC being responsive to industry 
concerns consistent with the purposes of the Act. The Commission 
intends to review the representation provided DGOC's repo and reverse 
repo participants in connection with any proposed rule filing DGOC 
should submit requesting an increase or elimination of its volume 
limitations.

    \36\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41290.
    \37\ Securities Exchange Act Release No. 26450 (January 12, 
1989), 54 FR 2010. The Commission found, however, that DGOC had not 
met the standard for fair representation in the selection of 
directors. DGOC is currently operating under a temporary exemption 
from such requirement.
    \38\ Letter from Laura R. Silvers, Attorney, Morgan, Lewis & 
Bockius, to Christine Sibille, Senior Counsel, and Michele Bianco, 
Staff Attorney, OSPR, Division, Commission (September 20, 1995).
    \39\ DGOC will provide the Commission with a report on the 
Participants Committee six months following approval of this 
proposed rule change. Meeting between Robert Mendelson and Laura 
Silvers, Morgan, Lewis & Bockius; Barry Silverman, DGOC; Michael 
Spencer and Declan Kelly, Intercapital Group, Ltd; and Jonathan 
Kallman, Jerry Carpenter, Gordon Fuller, Christine Sibille, David 
Turner, and Michele Bianco, Commission.
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    GSCC also argues that DGOC's margining system is inadequate 
because, unlike GSCC's system, credits are not passed through to 
participants and interest is not paid on mark-to-market debits. The 
Commission believes that different clearing agencies may decide to rely 
on different types of margining systems, as long as the proposed system 
provides adequate protection to the clearing agency and its 
participants. The Commission believes that DGOC's margining system 
provides sufficient protection consistent with DGOC's need to safeguard 
securities and funds for which it is responsible by taking into account 
both current and potential price changes in the underlying collateral. 
DGOC has further protection through imposition of trading limits and 
MPSE limits. The Commission therefore believes that DGOC's margining 
system provides adequate protection from the risks presented by the 
clearance and settlement of repos and reverse repos.

IV. Conclusion

    For the reasons stated above, the Commission finds that DGOC's 
proposal is consistent with Section 17A of the Act.\40\

    \40\ 15 U.S.C. 78q-1 (1988).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\41\ that the proposed rule change (File No. SR-DGOC-94-06) be, the 
hereby is, approved.

    \41\ 15 U.S.C. 78s(b)(2)(1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\42\

    \42\ 17 C.F.R. 200.30-3(a)(12)(1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-25930 Filed 10-18-95; 8:45 am]
BILLING CODE 8010-01-M