[Federal Register Volume 60, Number 236 (Friday, December 8, 1995)]
[Notices]
[Pages 63088-63090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29921]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36540; File No. SR-MBS-95-09]


Self-Regulatory Organizations; MBS Clearing Corporation; Notice 
of Filing and Order Granting Accelerated Approval of Proposed Rule 
Change Requesting Permanent Approval of the Electronic Pool 
Notification Service

November 30, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 3, 1995, the MBS 
Clearing Corporation (``MBS'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change (File No. SR-MBS-
95-09) as described in Items I and II below, which Items have been 
prepared primarily by MBS. The Commission is publishing this notice and 
order to solicit comments from interested persons and to grant 
accelerated approval of the proposed rule change.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change requests permanent approval of the rules 
that set forth and establish the Electronic Pool Notification (``EPN'') 
service. The Commission previously approved on a temporary basis 
through November 30, 1995, a proposed rule change that added Articles 
VI, VII, VIII, IX, and X to MBS's rules to establish the EPN 
service.\2\

    \2\ Securities Exchange Act Release No. 35009 (November 25, 
1994), 59 FR 61913 [File No. SR-MBS-94-02] (order temporarily 
approving proposed rule change).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, MBS 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. Summaries of the most significant aspects of such 
statements are set forth in sections A, B, and C below.\3\

    \3\ The Commission has modified the text of the summaries 
prepared by MBS.
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A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to request permanent 
approval of the rules that set forth and 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 manually intensive 
telephone and fax environment. EPN is an electronic, post-trade 
communication system for mortgage-backed securities.\4\ EPN provides an 
electronic communications network through which EPN users can quickly 
and efficiently transmit 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.\5\

    \4\ 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 lack of volume or inability to be valued will be 
eligible for the EPN service.
    \5\ MBS commenced the EPN service on a pilot basis in February 
1995. During September 1995, EPN users processed 6,936 messages 
comprised of 56,224 pools with a current face value of approximately 
$58 billion. Currently there are fourteen EPN users.
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    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. However, the EPN rules do differ from existing MBS rules in 
several respects. The EPN rules define new terms specifically related 
to EPN. Another change from existing MBS 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 
nonpayment of fees. As a result, the standards for applicants to become 
EPN users are significantly less demanding than the standards for 
applicants that wish to become full participants of MBS. It is 
anticipated that some applicants that do not qualify as full 
participants of MBS will still qualify to become EPN users. The EPN 
rules also provide for an EPN user fund. The EPN user fund will be 
similar in purpose to the existing MBS participants fund, but because 
the risk to MBS is limited to nonpayment of fees, the EPN user fund 
will be smaller.
    MBS believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \6\ and the rules and regulations 
thereunder because it facilitates the prompt and accurate clearance and 
settlement of securities transactions.

    \6\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    MBS does not believe that the proposed rule change will have an 
impact or impose any burden on competition.

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

    No written comments relating to the proposed rule change have been 
solicited or received. MBS will notify the Commission of any written 
comments received by MBS.

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

    Section 17A(b)(3)(F) of the Act \7\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that MBS's proposal to establish the EPN service on a 
permanent basis is consistent with this obligation.

    \7\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    One reason the Commission previously approved the EPN service only 
on a temporary basis was EPN's lack of a disaster recovery program. 
During the temporary approval period, MSB established and thoroughly 
tested the EPN service's disaster recovery program. Because the EPN 
disaster 

[[Page 63090]]
recovery program has operated successfully during its testing, MBS has 
decided to request permanent approval of the EPN service.
    Prior to the establishment of the EPN service, participants in the 
mortgage-backed securities market had to manually telephone or fax pool 
information to other participants. Historically, billions of dollars of 
fails occurred because sellers were not able to communicate with buyers 
because of telephone and fax limitations (e.g., busy signals preventing 
the exchange of information). The Commission is permanently approving 
the rules for the EPN service because it believes that replacing a 
manually intensive communication system with an electronic 
communication system should help to significantly reduce the number of 
fails in the mortgage-backed securities market by making the 
notification process more efficient and more reliable. Furthermore, MBS 
has demonstrated that the disaster recovery program for the EPN service 
is capable of ensuring the continuity of critical EPN business 
operations in the event the primary computer operations become 
unavailable to EPN users.\8\

    \8\ On September 27, 1995, staff of the Division of Market 
Regulation met with MBS to discuss the disaster recovery program 
developed for the EPN service. The staff also reviewed and assessed 
documentation related to the management and operation of the 
disaster recovery system and conducted an examination of the primary 
data center.
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    MBS 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 temporary approval period for 
the EPN service will expire on November 30, 1995. The Commission finds 
good cause to grant accelerated approval of the proposal because the 
EPN service has operated successfully since its implementation and 
because the Commission did not receive any comment letters during the 
comment period before it granted temporary approval or during the 
temporary approval period and because the Commission does not expect to 
receive any during the current comment period. Furthermore, accelerated 
approval will allow the EPN service to continue operating without 
interruption.

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, 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 NW., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of MBS. All 
submissions should refer to file number SR-MBS-95-09 and should be 
submitted by December 29, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-MBS-95-09) be and hereby is 
approved on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29921 Filed 12-7-95; 8:45 am]
BILLING CODE 8010-01-M