[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]
[Notices]
[Pages 4559-4561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2320]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38198; File No. SR-DCC-96-12]


Self-Regulatory Organizations; Delta Clearing Corp.; Notice of 
Filing of a Proposed Rule Change to Amend Procedures Relating to 
Monitoring and Limiting Exposure From Repurchase Agreements

January 23, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 26, 1996, the 
Delta Clearing Corp. (``DCC'') filed with the Securities and Exchange 
Commission (``Commission'') and on January 10, 1997, amended the 
proposed rule change (File No. SR-DCC-96-12) as described in Items I, 
II, and III below, which items have been prepared primarily by DCC. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DCC is proposing to amend the margining of overnight repurchase 
agreements (``repos''). DCC's policy statement 96-01, attached as 
Exhibit 1 to this notice, describes the proposed amendments in greater 
detail.

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

    In its filing with the Commission, DCC 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. DCC 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 amend DCC's 
procedures for monitoring and limiting its exposure from the clearance 
and settlement of its participants' overnight repos. First, the 
proposed rule change will establish DCC's participants' core margin 
requirement as either $1 million dollars par amount of U.S. Treasury 
securities or a greater amount as determined by DCC based upon 
exposures arising out of overnight repo agreements effected by the 
participant.\2\ DCC will calculate weekly the core margin requirement 
for each participant by using the most recent eight weeks (if 
available) of overnight repo transactions and will notify each 
participant of its core margin requirement. If DCC notifies a 
participant that the participant is required to deposit additional core 
margin, the participant by 11 a.m. on the business day following the 
notice must deposit with DCC's clearing bank U.S. Treasury securities 
whose market value equals or exceeds the participant's additional 
margin requirement.
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    \2\ Overnight repos will be defined as repo agreements whose 
off-date is the immediately succeeding business day following the 
on-date for such transactions. Term repos will be defined as repos 
agreements whose off-date is two or more business days following the 
on-date for such transactions.
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    Second, the proposed rule change will amend Section 2602 of DCC's 
rules to require DCC to provide each participant with a supplemental 
daily margin report by 3 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,\3\ 
(iii) the core margin and excess unreturned margin on deposit, and (iv) 
the amount of additional margin that the participant must deposit with 
DCC's clearing bank. In the event that the net mark-to-market valuation 
exceeds 65% of the sum of the participant's core requirement and 
unreturned margin on deposit, DCC will require the participant to 
deposit additional margin in the amount of such excess. The additional 
margin must be deposited with DCC no later than 5 p.m. of that business 
day. Failure to deposit the amount of any margin deficit shown on the 
supplemental daily margin report will be grounds for suspension and 
sanctions pursuant to Section 2608 of DCC's rules.
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    \3\ Net mark-to-market means the arithmetic sum resulting from 
the estimated cost to liquidate a participant's under margined 
positions in overnight repos offset by the estimated proceeds from 
liquidating a participant's over margined positions in overnight 
repos.
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    Third, the proposed rule change will amend DCC's rules to eliminate 
the collection of performance margin for overnight repos. The daily 
margin report will reflect only the margin required on the 
participant's term repo positions.
    DCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \4\ and the rules and 
regulations thereunder because the proposed rule change will better 
enable DCC to safeguard the funds and securities under its possession 
and control by amending DCC's procedures to assure that it has adequate 
collateral to address a participant's default of insolvency.
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    \4\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DCC 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 were neither 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 DCC 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

[[Page 4560]]

Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, D.C. 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. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies 
of such filing will also be available for inspection and copying at the 
principal office of DCC. All submissions should refer to the file 
number SR-DCC-96-12 and should be submitted by February 20, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit 1

Risk Basked Core Margin Analysis

Introduction

    Delta Clearing Corp. (``Delta'') collects a fixed core margin. The 
purpose for collecting core margin is to ensure that Delta has 
sufficient funds so as to minimize the risk of exposure to Participants 
engaging in Overnight Repo or Reverse Repo (collectively ``Overnight 
Repo'') transactions. Because Delta does not currently collect margin 
on overnight trades until 11:00 a.m. the following day, there is a 
potential exposure for up to 27 hours (assuming market opening at 8:00 
a.m.) Although the vast majority of trades unwind on a next day basis 
before the 11:00 a.m. deadline, there is nevertheless a need to collect 
margin funds in a more timely manner in order to reduce the level of 
the exposure Delta assumes opposite each Participant. The methodology 
that Delta will employ to address potential exposures for Overnight 
Repo trades will be a two-step process. The first step is to establish 
core margin requirements based on an evaluation of each Participant's 
Overnight Repo trading activity. The goal is to set core margin 
requirements at a level sufficiently high enough to cover the majority 
of potential mark-to-market exposures Delta assumes opposite each 
Participant. The second step is to employ intra-day margin calls in the 
event market exposure exceeds the core margin. The amounts of total 
margin collected should be sufficient to cover the intra-day exposure 
and any additional exposure which could arise the following day.

Core Margin Methodology

    Using a statistically based methodology, core margin levels will be 
established by Delta that are sufficient to cover 97.5% of 
Participant's statistically predicted potential Overnight Repo mark-to-
market exposure to Delta. The adequacy of core margin will be evaluated 
weekly.

Average Overnight Exposure

    Each week, Delta will review the Overnight Repo trading activity 
for each Participant to determine the Overnight Repo mark-to-market 
exposure that Participant posed to Delta. Mark-to-market exposure is 
the total net sum of the differences between the contract value of an 
Overnight Repo when such Overnight Repo was effected and the mark-to-
market value of such Overnight Repo reflective of the end-of-day 
pricing for the collateral underlying such Overnight Repos. A negative 
number represents an exposure for Delta, while a positive number 
represents overcollateralization. An exposure can result from either a 
Long Repo or Short Repo Position. The following example shows how mark-
to-market exposure is calculated.

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                                                                                 Delta's          Delta's net   
                                                    Contract     Mark-to-     (exposure) or      (exposure) or  
     Participant                Position             value        market           over               over      
                                                                            collateralization  collateralization
----------------------------------------------------------------------------------------------------------------
A....................  Repo.....................          100          101              1      .................
                       Reverse..................          102          104             (2)     .................
                       Repo.....................          100           97             (3)     .................
                       Reverse..................          101          100              1                 (3)   
B....................  Reverse..................          104          102             (2)     .................
                       Repo.....................           99          103              4      .................
                       Repo.....................           98           92             (6)                (4)   
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    Delta would have a net mark-to-market exposure to Participants A 
and B of 3 and 4, respectively. Such daily mark-to-market exposures 
would be calculated for each Participant on each Business Day during 
the prior eight calendar weeks. Such daily mark-to-market exposures 
will then be averaged to derive an average daily mark-to-market 
exposure for each Participant. It should be noted that Business Days on 
which a net overcollateralization is derived will be eliminated from 
the survey for the purposes of deriving an average daily mark-to-market 
exposure.

Statistical Analysis

    The average Overnight Repo mark-to-market exposure is a starting 
point but may not be a sufficient determinant of market risk exposure. 
The core margin level will be set at an amount in excess of the average 
net negative mark-to-market in order to ameliorate exposures that vary 
from the mean. To determine an adequate level of core margin Delta 
performed the following analysis:
     Delta reviewed the trading activity of all Participants 
dating back so that 8

[[Page 4561]]

weeks (40 observations) could be studied.
     The core margin for each Participant will be adjusted to 
reflect a two (2) standard deviation test of the net negative mark-to-
market over the course of the observation period. By statistical 
inference, such a level of core margin should be sufficient to cover 
95% of all mark-to-market exposures. The left tail of the distribution 
curve represents those market movement occurrences when the Overnight 
Exposure will be 2 standard deviations (``sigma'') less than the 
average. The resulting exposure will be covered by the core amount. 
Therefore, Delta is only potentially exposed on the right tail and the 
core statistically predicted to cover 97.5% of the occurrences of 
exposure. The remaining 2.5% will be covered by intra-day margin calls.
     In the event there are an insufficient number of actual 
observations (i.e., less than 40), Delta will calculate an average 
based upon the number of actual observations. Delta will apply the 
calculated average to the number of observations derived by subtracting 
the number of known observations from 40. This shall be the population 
of observations used to calculate the average negative net mark-to-
market.
    For example, a Participant with an average overnight exposure for 
the prior eight weeks of $1MM whose standard deviation is calculated to 
be $250M would be required to post core margin of $1.5MM.

Intraday Margin Calls

    In the event that the intra-day mark-to-market valuation with 
respect to Overnight Repos exceeds the Participant's core requirement 
and any additional margin, Delta would require the Participant to 
deposit supplemental margin in the amount of such excess already on 
deposit by 5 p.m. of such Business Day.

Operational Procedures

    On each Business Day, prior to 3:00 p.m., Delta's margining system 
will produce a Supplemental Daily Margin Report which will list the 
following:
    1. All Overnight Repos in which the On-date is the current Business 
Day and the Off-date is the subsequent Business Day;
    2. Cash prices used to value underlying collateral;
    3. The Overnight Repo mark-to-market values utilizing current 
prices for the collateral underlying such Overnight Repos; and
    4. The net exposure.
    In the event the net exposure is in excess of 65% of the core 
margin and any additional margin, supplemental margin will be called 
for by Delta. Such supplemental margin must be deposited by 5:00 p.m.
    Every Monday, Delta's credit department will produce a spreadsheet 
which will calculate the week's core margin requirement. The 
spreadsheet will contain the following headings:
    1. Participant;
    2. 8 Week Average Exposure;
    3. Standard deviation of the 8 week average mark-to-market 
exposure; and
    4. Core Margin Requirement.
    A database of the daily market-to-market exposures will be created 
and maintained for each Participant in a spreadsheet. The database will 
contain the latest 40 daily mark-to-market exposures for each 
Participant (over-collateralized values will be excluded). Each 
Participant's 8 week average and the applicable standard deviation will 
be calculated as described above. The average net mark-to-market will 
be adjusted to reflect the two standard deviation test. The resulting 
product becomes the new core margin requirement for each Participant. 
These new core margin requirements will then be forwarded to Delta's 
Risk Manager for input into the margining system.
    By 3:00 p.m. on Each Business Day on which such core margin 
requirement has been calculated, each Participant will be notified of 
its new core margin requirement. If the requirement is greater than the 
then 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.

[FR Doc. 97-2320 Filed 1-29-97; 8:45 am]
BILLING CODE 8010-01-M