Self-Regulatory Organizations; Delta Clearing Corp.; Notice of Filing and Order Granting Accelerated, Temporary Approval of a Proposed Rule Change Relating to Margin Requirements for Overnight Repurchase Agreements

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39824; File No. SR-DCC-98-03]

Self-Regulatory Organizations; Delta Clearing Corp.; Notice of

Filing and Order Granting Accelerated, Temporary Approval of a Proposed

Rule Change Relating to Margin Requirements for Overnight Repurchase

Agreements

April 1, 1998.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on March 20, 1998, Delta

Clearing Corp. (``DCC'') filed with the Securities and Exchange

Commission (``Commission'') the proposed rule change as described in

Items I and II below, which items have been primarily prepared by DCC.

The Commission is publishing this notice and order to solicit comments

on the proposed rule change from interested persons and to grant

accelerated approval of the proposed rule change through March 31,

1999.

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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 extend the temporary

approval for DCC's rules regarding the collection of margin for

overnight repurchase and reverse repurchase agreements (``overnight

repos'').

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 the text of the summaries

prepared by DCC.

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A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

DCC seeks an extension of the temporary approval of its rules

relating to the collection of margin for overnight repos. On April 2,

1997, the Commission granted approval of DCC's overnight repo margining

rules through September 30, 1997.\3\ On September 30, 1997, the

Commission granted accelerated approval of DCC's overnight repo

margining rules through March 31, 1998.\4\

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\3\ Securities Exchange Act Release No. 38471 (April 2, 1997),

62 FR 17257.

\4\ Securities Exchange Act Release No. 39174 (October 7, 1997),

62 FR 52368.

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Prior to the proposed rule change, DCC calculated each

participant's margin requirement for all repos, including overnight

repos, at the end of each business day and required margin to be

deposited by 11:00 a.m. the next business day. DCC does not believe

that this procedure is appropriate for overnight repos because

overnight repos terminate on the following day. As a result, DCC

amended its procedures for calculating and collecting margin for

overnight repos.\5\

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\5\ For a detailed description of DCC's overnight repo margin

procedures, refer to Securities Exchange Act Release No. 38471

(April 2, 1997), 62 FR 17257.

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These procedures require each participant which engages in

overnight repos to deposit with DCC as core margin either $1 million or

a greater amount as determined by DCC at the end of each week based

upon the participant's daily overnight repo exposures during the eight

prior weeks.\6\ If DCC determines as a result of any weekly calculation

that a participant is required to maintain a higher core margin amount

on deposit with DCC, DCC will notify the participant of such higher

core margin requirement by 3:00 p.m. on that date of the calculation,

and the participant is required to deposit by 11:00 a.m. on the

following business day margin whose value equals or exceeds the

participant's additional margin requirement. Such deposit must be in

cash or U.S. Treasury securities.

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\6\ Overnight repos are defined as repo agreements whose off-

date is the immediately succeeding business day following the on-

date for such transactions. Term repos are defined as repos

agreements whose off-date is two or more business days following the

on-date for such transactions.

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In addition to the weekly calculation described above, DCC

calculates on each business day each participant's mark-to-market

exposure from overnight repos. If a participant's exposure from

overnight repos exceeds 65 percent of the participant's core margin

requirement, DCC requires the participant to deposit additional margin

equal to the amount of such excess. Such additional margin must be

deposited with DCC no later than 5:00 p.m. on the applicable business

day. If additional margin is required, DCC may apply towards a

participant's exposures on overnight repos excess margin maintained by

the participant with DCC which is not then being used to collateralize

other margin obligations to DCC. However, DCC may not apply a

participant's core margin amount maintained with DCC towards other

margin obligations to DCC arising from options transactions or term

repos.

In connection with the proposed rule change, DCC agreed that during

the temporary approval period, the Commission may request reports

detailing the operation of the margining system for overnight repos.

DCC instituted the new margining system on July 1, 1997, and has been

periodically providing reports to the Commission since that time.

DCC believes the proposed extension of the temporary approval of

the proposed rule change is consistent with the requirements of Section

17A of the Act\7\ and the rules and regulations promulgated thereunder

because the proposed rule change will better enable DCC to safeguard

the funds and securities under its possession and control by giving DCC

procedures to help assure that it has adequate collateral to address a

participant's default or insolvency.

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\7\ 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

Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Section 17A (b)(3)(F) \8\ of the Act requires, among other things,

that the rules of a clearing agency be designed 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. The

Commission believes that DCC's proposed rule change is consistent with

this obligation because the proposal provides for: (1) a minimum core

margin requirement to reflect DCC's exposure to each participant's

overnight repo activity and (2) an intraday margin requirement that is

triggered if a participant's mark-to-market exposure is valued at more

than 65 percent of the core requirement. Therefore, the

[[Page 17250]]

Commission believes that the proposal should provide to DCC margin in

an amount that will assist DCC in meeting its obligation to safeguard

securities and funds.

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\8\ 15 U.S.C. 78q-1(b)(3)(F)

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Currently, DCC has operated its new margining system for only nine

months. Therefore, the Commission believes that it is appropriate to

extend temporary approval of the proposal in order that the Commission

and DCC will have opportunity to further monitor the effectiveness of

the new system in practice. Accordingly, the Commission is temporarily

approving the proposed rule change through March 31, 1999. During this

temporary approval period, upon the Commission's request DCC will

submit reports detailing its analysis of its overnight repo margining

system.

DCC has requested that the Commission find good cause for approving

the proposed rule change prior to the thirtieth day after the date of

publication of notice of the filing. The Commission finds good cause

for approving the proposed rule change prior to the thirtieth day after

the date of publication of notice of filing because accelerated

approval will allow DCC to continued to use its overnight repo

margining procedures without interruption when the current temporary

approval period expires on March 31, 1998.

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 Section, 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 No. SR-DCC-98-03 and should be

submitted by April 29, 1998.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,

that the proposed rule change (File No. SR-DCC-98-03) be, and hereby

is, approved through March 31, 1999.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\9\

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\9\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-9129 Filed 4-7-98; 8:45 am]

BILLING CODE 8010-01-M