[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
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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