Self-Regulatory Organizations; MBS Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to the Establishment of the Electronic Pool Notification Service

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34066; File No. SR-MBS-94-02]

Self-Regulatory Organizations; MBS Clearing Corporation; Notice

of Filing of Proposed Rule Change Relating to the Establishment of the

Electronic Pool Notification Service

May 13, 1994.

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

(``Act''),\1\ notice is hereby given that on May 6, 1994, the MBS

Clearing Corporation (``MBS'') filed with the Securities and Exchange

Commission (``Commission'') the proposed rule change (File No. SR-MBS-

94-02) as described in Items I, II, and III below, which Items have

been prepared primarily by the self-regulatory organization. The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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\1\15 U.S.C. 78s(b)(1) (1988).

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I. Self-Regulatory Organizations Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change will add Articles VI, VII, VIII, IX, and X

to MBS's rules relating to the establishment of MBS's electronic pool

notification (``EPN'') service.

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 section 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

The purpose of the proposed rule change is to add Articles VI, VII,

VIII, IX, and X to MBS's rules relating to the establishment of MBS's

EPN service. EPN is a real-time, store and forward message switch that

will provide an electronic communications network through which EPN

Users will be able to transmit mortgage-backed securities pool

allocation information regarding securities deliveries for settlement

quickly and efficiently. An EPN Message will be required to contain (i)

the lot-sequence of Good Delivery Millions (i.e., the number of million

dollar lots delivered in accordance with PSA guidelines); (ii) a pool

number that references a specific pool of mortgages; (iii) the

principal amount at date of issue; (iv) the coupon rate; and (v) a

termination code. In addition, an EPN Message may contain additional

information, such as the maturity date, CUSIP number, current

outstanding principal amount, an MBS trade number, internal control

number, and interest accrued, among other things.

Currently, in order for participants to notify other participants

of pool information, participants must manually phone or fax the

information to other participants. Because of the nature of this method

of exchanging information, busy signals are common. Historically,

billions of dollars of fails have been incurred each month because

sellers are not able to communicate with buyers because of the buyer's

phone, fax, and staffing limitations. The proposed rule change,

therefore, will establish rules for the EPN service which should make

this process more efficient and more reliable.

MBS has 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 existing MBS rules and

make those rules applicable to users of the EPN service. To this end,

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,'' ``EPN User,''

``EPN User Profile,'' ``EPN User Agreement,'' ``EPN User Fund,'' ``EPN

Service,'' ``Message Detail Report,'' ``Message Purge Report,''

``Message Recovery Report,'' and ``Messages,'' etc. These reflect

applicable names for existing functions and new services and concepts

that do not exist in the current MBS rules. For example, because users

of the EPN service will not necessarily be full participants of MBS,

they are called ``EPN Users.'' In addition, the EPN User fund entails

the same concept as the current participants fund.

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 the clearance or settlement of securities, the

risk to MBS from defaulting EPN Users is limited to their fees. As a

result, the standards for the approval of applicants to become an EPN

User is significantly less than is required of applicants who wish to

become full participants of MBS. It is anticipated that applicants who

would not qualify as participants of MBS could still become EPN Users.

Because the EPN service will time stamp messages, the new rules

provide that this time stamp will determine good delivery. The rules

also provide the several reports will be issued to EPN Users, one of

which will constitute a confirmation. In addition, as stated above, 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

participants fund. This will protect MBS in the event that any EPN User

defaults in payments of fees. Finally, like MBS's existing rules, the

EPN rules expressly limit MBS's liability in the performance of its

obligations to the same extent as MBS's existing rules.

MBS believes that the proposed rule change is consistent with

Section 17A of the Act and the rules and the regulations thereunder in

that it promotes the prompt and accurate clearance and settlement of

securities transactions.

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

MBS does not believe that the proposed rule change will impose any

burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants, or Others

The proposed rule change was developed through discussions with

participants and the Computer-To-Computer-Interface User

Committee.Written comments from MBS participants or others have not

been solicited nor received.

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

Commission Action

Within 35 days of the date of 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 such 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 submission

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies

of the submissions, 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, DC 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-94-02 and should be submitted by

June 10, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-12302 Filed 5-19-94; 8:45 am]

BILLING CODE 8010-01-M