[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