[Federal Register Volume 59, Number 231 (Friday, December 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29698]


[[Page Unknown]]

[Federal Register: December 2, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35009; File No. SR-MBS-94-02]

Self-Regulatory Organizations; MBS Clearing Corporation; Order 
Temporarily Approving Proposed Rule Change Establishing the 
Electronic Pool Notification Service

November 25, 1994.
    On May 6, 1994, the MBS Clearing Corporation (``MBS'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-MBS-94-02) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change 
establishes the electronic pool notification (``EPN'') service. The 
Commission published notice of the proposed rule change in the Federal 
Register on May 20, 1994.\2\ No comments were received as a result of 
the Federal Register notice.\3\ On May 25, 1994, and on November 10, 
1994, MBS filed Amendment No. 1 and Amendment No. 2, respectively, to 
the proposed rule change.\4\ Both amendments were technical in nature 
and did not require republication of notice of filing.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 34066 (May 13, 1994), 59 
FR 26532.
    \3\MBS received two comment letters generally supporting the 
proposed rule change. The concerns raised by the commenters are 
discussed in Section II, infra.
    \4\Amendment No. 1 modified the filing by reporting that the 
proposed rule change was approved by the MBS Board of Directors.
    Amendment No. 2 modified the filing by clarifying that the only 
MBS rules and procedures applicable to EPN users are the rules and 
procedures located in Articles VI, VII, VIII, IX, and X of MBS's 
rules.
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    For the reasons discussed below, the Commission is temporarily 
approving the proposed rule change through November 30, 1995.

I. Description

    The proposed rule change adds Articles VI, VII, VIII, IX, and X to 
MBS's rules in order to establish the EPN service. EPN was developed by 
MBS in response to a Public Securities Association (``PSA'') initiative 
to automate the pool notification process with the ultimate goal of 
supplementing and/or replacing the current manually intensive telephone 
and fax environment. EPN is an electronic, post-trade communication 
system for mortgage-backed securities. EPN provides an electronic 
communications network through which EPN users will be able to transmit 
quickly and efficiently mortgage-backed securities pool allocation 
information regarding deliveries of securities for settlement. EPN was 
designed for use by organizations actively engaged in the allocation 
and notification process associated with mortgage-backed securities and 
derivative securities. EPN user firms may be acting as principal to the 
underlying trade activity or as agent on behalf of another EPN user in 
a fully disclosed capacity.
    An EPN message will be required to contain (1) the lot-sequence of 
``good delivery millions'' (i.e., the number of million dollar lots 
delivered in accordance with PSA guidelines), (2) a pool number that 
references a specific pool of mortgages, (3) the principal amount at 
date of issue, (4) the coupon rate, and (5) a termination code. In 
addition, an EPN message may contain, among other things, additional 
information such as the maturity date, CUSIP number, current 
outstanding principal amount, an MBS trade number, internal control 
number, and interest accrued.
    MBS decided that a complete stand-alone set of rules for EPN was 
preferable to trying to integrate the EPN rules into existing MBS 
rules. As a result, many of the EPN rules mirror the language of 
existing MBS rules in order to make the provisions of those rules 
applicable to the EPN service. There has been an attempt to use the 
same terms and definitions that MBS uses in its current rules wherever 
possible. The EPN rules do differ, however, from existing MBS rules in 
several respects. First, the EPN rules describe EPN and define new 
terms related to EPN such as ``EPN Eligible Security,''\5\ ``EPN 
User,'' ``EPN User Fund,'' ``Message Detail Report,'' ``Message Purge 
Report,'' and ``Message Recovery Report.'' These terms reflect 
applicable names for existing functions and for new services and 
concepts. For example, because users of the EPN service will not 
necessarily be full participants of MBS, they are called ``EPN Users.''
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    \5\The number of securities eligible for the EPN service will be 
greater than those eligible for the comparison and clearing service 
at MBS. All mortgage-backed securities eligible for comparison and 
clearing at MBS will be eligible for the EPN service. In addition, 
securities which are not eligible for comparison and clearing 
because of their lack of volume or inability to be valued will be 
eligible for the EPN service.
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    Another change from existing rules concerns who can become an EPN 
user. Because EPN is essentially a sophisticated e-mail/database system 
that does not involve traditional clearance or settlement functions, 
the risk to MBS from defaulting EPN users is limited to their fees. As 
a result, the standards for applicants to become EPN users are 
significantly less demanding than those which are applicable to 
applicants that wish to become full participants of MBS. It is 
anticipated that some applicants that do not qualify as full 
participants of MBS may still qualify and be able to become EPN users.
    Because the EPN service will time stamp messages, the new rules 
provide that this time stamp will be valid, binding, and enforceable as 
a determination of good delivery of the message. Under EPN, when a 
seller initiates a pool notification message and EPN receives and 
redelivers the message to the buyer, this action will represents the 
good delivery of the message because it is made available to the buyer 
whether or not the buyer physically retrieves the message. The buyer's 
retrieval of the physical message is not part of the good delivery 
process.
    The rules also provide that several reports will be issued to EPN 
users.\6\ In addition, the new EPN rules provide for an EPN user fund. 
This is intended to be similar in purpose to but smaller in scope than 
the existing MBS participants fund. The EPN user fund is intended to 
protect MBS in the event that any EPN user defaults in payments of 
fees.
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    \6\One of the reports issued by MBS to EPN users, the Message 
Detail Report, will constitute a confirmation. The Message Detail 
Report, which lists the contents of each message, will constitute 
the sole confirmation of messages between EPN users to be processed 
by MBS. As the sole confirmation, the Message Detail Report will 
evidence a valid, binding, and enforceable contract.
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II. Discussion

    The Commission believes that MBS's proposed rule change is 
consistent with Section 7A of the Act\7\ and in particular with Section 
17A(b)(3)(F) of the Act.\8\ Section 17A(b)(3)(F) requires, among other 
things, that the rules of a clearing agency be designed to remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions. The Commission believes that MBS's proposal to establish 
the electronic pool notification service is consistent with this 
obligation.
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    \7\15 U.S.C. 78q-1 (1988).
    \8\15 U.S.C. 78q-1(b)(3)(F) (1988).
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    Currently, in order for participants in the mortgage-backed 
securities market to notify other participants of pool information, 
they must manually telephone or fax the information to other 
participants. Historically, billions of dollars of fails have occurred 
and continue to occur each month because sellers are not able to 
communicate with buyers because of the buyer's telephone and fax 
limitations (e.g., busy signals preventing the exchange of 
information). The establishment of the EPN service should help to 
significantly prevent fails in the mortgage-backed securities market by 
making the notification process more efficient and more reliable by 
replacing a manually intensive communication system with an electronic 
communication system.
    MBS received two comment letters generally supporting the proposed 
rule change.\9\ Both commenters, however, raised concerns regarding 
MBS's use of message information sent or received by the EPN user. 
Under the proposed rule change, MBS will have the right to use message 
information to assist MBS in its operation of the clearing system or 
EPN service or for other purposes as MBS may determine from time to 
time.\10\ The commenters were concerned that the language of the rule 
allowed MBS to use sensitive information relating to a firm's 
proprietary trading which may be contained in EPN messages. In 
response, MBS stated that it will only use the information contained in 
EPN messages for internal business purposes and the information will 
otherwise be confidential.\11\ The Commission agrees that the 
information contained in EPN messages can facilitate MBS's assessment 
of the volume and concentration of trading done by participants and 
believes that this, in turn, can help MBS fulfill its safeguarding 
obligations.
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    \9\Letter from Gregory W. Burnes, Vice President, CS First 
Boston Corporation, to Dennis Paganucci, MBS (April 25, 1994) and 
letter from L. LoCosa and S. Mellas, Morgan Stanley, to Lynn Douglas 
and Dennis Paganucci, MBS (January 10, 1994).
    \10\MBS Rules, Article VII, Rule 2, Section 8.
    \11\Telephone conversation between Dennis Paganucci, MBS, and 
Ari Burstein, Attorney, Division of Market Regulation, Commission 
(November 4, 1994).
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    During the temporary approval period, MBS will continue to test the 
EPN service and will begin to run the service on a pilot basis.\12\ In 
addition, MBS will create a disaster recovery program for the EPN 
service in case of emergency and will keep the Commission informed on 
the progress of the disaster recovery program's development.
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    \12\MBS will inform the Commission by letter when they begin the 
pilot program.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the Act, in particular with 
Section 17A of the Act, and with the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-MBS-94-02) be, and 
hereby is, temporarily approved through November 30, 1995.

    \13\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.\14\
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    \14\17 CFR 200.30-3(a) (12).
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35007; File No. SR-Phlx-94-46]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to a Post 
Primary Trading Session

November 25, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on October 
3, 1994, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') 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 by the self-regulatory 
organization. On November 25, 1994, the Phlx filed Amendment No. 1 to 
the proposed rule change.\1\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\See letter from Gerald O'Connell, First Vice President, Phlx, 
to Glen Barrentine, Senior Counsel, Commission, dated November 23, 
1994.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx, pursuant to rule 19b-4 of the Act, proposes to extend the 
close of trading on the Exchange's equity trading floor from 4:00 to 
4:15 P.M., creating a new Post Primary session (``PPS''). The PPS would 
take place each trading day from 4:00 to 4:15 P.M. Exchange rules 
applicable to floor trading during the Exchange's regular trading hours 
(i.e., 9:30 a.m.-4:00 p.m.) would continue to apply to floor trading 
during the PPS, except that during the PPS, orders that are designated 
``PPS'' are eligible for execution. Accordingly, the Exchange proposes 
to amend the following Phlx rules: Rule 101, adding Commentary .02 to 
specify equity floor trading hours; Rule 229, Commentary .17, adding 
reference to implementing the Philadelphia Stock Exchange Automated 
Communication and Execution System (``PACE'') as a routing system only, 
with Floor Procedure Committee approval; Rule 232 to add the PPS as 
well as opening before the primary market; and Equity Floor Procedure 
Advice EF-1, which provides the procedures for the designation and 
execution of orders in instances where the primary market is not open 
in an issue for which the Phlx is open, to change the eligibility 
designation from use of the yellow copy of the order ticket to the 
designator ``EXP'' and to make several clarifications. The text of the 
proposed rule change is available in full at the Commission Public 
Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
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. The self-regulatory organization 
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

1. Purpose
    Currently, Rule 232 governs after-hours trading (crossing session) 
of GTX orders.\2\ At this time, the Phlx is proposing to add to that 
rule a PPS on the equity trading floor from 4:00 to 4:15 p.m. each 
trading day. Rather than assigning PPS a new rule number, the 
applicable PPS provision is being added to Rule 232 in order to group 
into a single rule the three Exchange provisions relating to trading on 
the Phlx during periods when the primary market is not open for free 
trading.\3\ Accordingly, the Exchange is amending Rule 232 to encompass 
two situations in addition to GTX orders: (1) The PPS; and (2) opening 
for trading on the Phlx before the primary market is open for trading. 
The GTX provisions would be renumbered as paragraph (c).
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    \2\A ``GTX'' order is an order that is good until cancelled and 
that is eligible for primary market protection based on volume that 
prints on the New York Stock Exchange or American Stock Exchange 
after-hours trading session. See Phlx Rule 232.
    \3\With respect to equities, ``free'' trading is that which 
occurs after the initial opening of a security, but not during a 
trading halt.
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    First, the Phlx proposes to implement a PPS for extended trading on 
the equity floor of the Exchange. During the PPS, pursuant to proposed 
Rule 232(b), orders designated PPS would be eligible for execution 
during the 4:00-4:15 p.m. trading session. PACE would not provide 
automatic executions during the PPS, but could be available as a 
routing system only if permitted by the Floor Procedure Committee.\4\ 
Unlike the GTX session, the PPS is an extension of the auction market, 
whereby bids and offers are dynamically updated for trading under 
normal auction market principles. As such, Exchange rules applicable to 
floor trading during the Exchange's regular session, as established by 
Rule 101, would continue to apply. Orders must be designated PPS in 
order to be eligible for the PPS. Market, limit and contingent order 
types currently acceptable under Exchange rules would be accepted for 
PPS if so designated. For example, pursuant to Rule 207, a ``GTC 
PPS''\5\ order would be eligible for PPS execution, and, if not 
executed, would be eligible for execution during ensuing days because 
of the GTC designation.
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    \4\``PACE'' is the acronym for the Phlx Automated Communication 
and Execution System. It provides a system for the automatic 
execution of orders on the Exchange equity floor under predetermined 
conditions. Orders accepted under the system may be executed on a 
fully automated or manual basis in accordance with the provisions of 
Rule 229. See Phlx Rule 229.
    \5\Such an order differs from a GTX order in that the later is 
eligible for execution after the close of the Exchange. See note 2, 
supra.
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    Second, the situation where the Phlx is open for trading before the 
primary market is open, or during a non-regulatory halt in trading on 
the primary market, is proposed to be codified into Rule 232(a). 
Currently, these provisions appear in Equity Floor Procedure Advice EF-
1, Designating Orders for Execution in Instances Where the Primary 
Market Is Not Open in an Issue for Which the Phlx is Open for Free 
Trading.\6\ The Phlx now proposes to codify this Advice into Phlx 
rules. In addition, the use of the yellow ticket, to designate orders 
eligible for execution when the Phlx is open for trading in an issue 
not open on the primary market, would be replaced with the use of the 
designator ``EXP,'' meaning ex-primary, to parallel the designators 
``PPS'' and ``GTX'' in Rule 232. The Exchange is also proposing a 
corresponding amendment to the Advice to incorporate the ``EXP'' 
designator, reword the three-year cycle for imposing fines,\7\ and 
explain that the primary market may not be open for free trading due to 
a delay or a halt in trading.\8\
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    \6\Advice EF-1, as well as the accompanying fine, which is 
proposed to be amended to incorporate these changes, is administered 
pursuant to the exchange's minor rule violation enforcement and 
reporting plan. Securities Exchange Act Release No. 27596 (January 
8, 1990) (File No. SR-Phlx-89-15).
    \7\The fine schedule is structured such that successive 
violations committed during a three-year time span result in 
increased fines (e.g., first occurrence: $100.00, second occurrence: 
$250.00).
    \8\This explanation is also proposed to be codified into Rule 
232(a).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act in general, and in particular, with Section 
6(b)(5), in that it is designed to promote just and equitable 
principles of trade, prevent fraudulent and manipulative acts and 
practices, to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, as well as to protect 
investors and the public interest by extending equity trading hours. 
The Exchange believes that the proposed PPS should provide an important 
opportunity for traders and investors to hedge option positions, as the 
options markets continue to trade 10-15 minutes after Phlx equity 
trading hours.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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

    No written comments were either solicited or received.

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

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 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 the 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, 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 at 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 Phlx. All 
submissions should refer to File No. SR-Phlx-94-46 and should be 
submitted by December 23, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-29698 Filed 12-1-94; 8:45 am]
BILLING CODE 8010-01-M