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