[No title available]

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]

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