[Federal Register Volume 63, Number 23 (Wednesday, February 4, 1998)]
[Notices]
[Pages 5828-5829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2690]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39590; File No. SR-DCC-97-12]


Self-Regulatory Organizations; Delta Clearing Corp.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change to Clarify 
Procedures Relating to Collateral Substitution and Termination

January 28, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ notice is hereby given that on December 31, 
1997, Delta Clearing Corp. (``DCC'') 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 
primarily prepared 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

    The purpose of the proposed rule change is to clarify certain 
procedures for repurchase agreement transactions with respect to 
collateral substitution and termination.

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 
any comments received by DCC 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.\2\
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    \2\ The Commission has modified such summaries.
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A. Self-Regulatory Organization's Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On June 28, 1996, the Financial Accounting Standards Board issued 
Statement No. 125, Accounting for Transfers and Servicing of Financial 
Assets and Extinguishments of Liabilities (``FASB 125''). FASB 
institutes new accounting rules for generally accepted accounting 
principles applicable to all transactions involving transfers of 
financial assets, including repurchase agreements and buy-back/sell-
back transactions. FASB 125 became effective on January 1, 1998.
    Under FASB 125, the accounting treatment of repurchase transactions 
may differ based on the specific terms of each transaction. For 
example, where the repurchase agreement provides the purchaser with the 
right to sell or to repledge the underlying collateral and the seller 
does not have the right to substitute the securities used as collateral 
or to terminate the agreement on short notice (i.e., no control over 
the collateral), FASB 125 will require the seller to classify the 
securities used as collateral as a ``receivable for securities 
pledged'' and not as ``securities in inventory'' as they are currently 
classified.
    In response the FASB 125, many participants in the repurchase 
market, with the assistance of the Bond Market Association, have 
adopted amendments to their master repurchase agreements that contain a 
provision that grants to the seller a right of substitution or 
termination. Pursuant to such provisions, if a buyer rejects a seller's 
attempt to substitute collateral, the seller has a right to terminate 
the repurchase agreement. If the seller exercises its right of 
termination, it must pay the buyer its costs (e.g., to enter into a 
replacement transaction and to terminate hedging transactions or 
related transactions with third parties) and any losses incurred. These 
provisions will provide the seller with effective control over the 
securities used as collateral and therefore will mitigate the impact of 
FASB 125.
    While incorporation of this amendment is optional, DCC believes 
that many of its participants will use agreements that contain this new 
substitution and termination provision beginning January 1, 1998. 
Therefore, DCC is proposing to amend its rules and procedures to 
recognize the use of agreements that contain this substitution and 
termination provision and to clarify DCC's existing notice requirements 
involved in the exercise of the right of substitution and termination 
pursuant to such provisions.
    Pursuant to DCC's procedures, if the buyer elects not to accept the 
substitute collateral, it must notify DCC by the close of the business 
day unless the notice of substitution was given by the seller after 
10:15 a.m., in which case the buyer must notify DCC prior to the close 
of business on the next business day. With the notice of rejection, the 
buyer must provide to DCC its calculation of the expenses that it will 
incur as a result of the termination of the transaction. If the seller 
exercises its right of termination, the seller must pay DCC the buyer's 
computation of expenses by the close of the business day on the day of 
termination.
    DCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Exchange Act \3\ and the rules and 
regulations promulgated thereunder because the proposed rule change 
will clarify procedures with respect to substitution and termination.
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    \3\ 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 impact or 
impose a burden on competition.

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section

[[Page 5829]]

19(b)(3)(A)(iii) of the Act \4\ and Rule 19b-4(e)(4) thereunder \5\ in 
that the proposal effects a change in an existing service of a 
registered clearing agency that does not adversely affect the 
safeguarding of securities or funds in the custody or control of the 
clearing agency or for which it is responsible and does not 
significantly affect the respective rights or obligations of the 
clearing agency or person using the service. At any time within sixty 
days of the filing of the proposed rule change, the Commission may 
summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
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    \4\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \5\ 17 CFR 240.19b-4(e).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the 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. 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 No. SR-DCC-97-12 and should be submitted by February 25, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-2690 Filed 2-3-98; 8:45 am]
BILLING CODE 8010-01-M