MIDWEST SECURITIES TRUST COMPANY IN CHICAGO This depository now has approximately $400 million in securities on deposit. The Chicago Clearing House Banks have recently signed a Memorandum of Understanding with the Midwest Stock Exchange to develop the depository further and expand its capabilities. PACIFIC SECURITIES DEPOSITORY IN SAN FRANCISCO This depository has approximately $1.2 billion in securities on deposit. Like the Midwest, the West Coast Banks have recently agreed to provide $2.26 million of financial support to develop their regional depository further. Common to all three depositories is the fact that they have all become Trust Companies. In addition, the Depository Trust Company has become a member of the Federal Reserve System; the Midwest Securities Trust Company is in the process of applying for membership and the Pacific Securities Depository is in the process of doing the same. Our National Group has recently approved the recommendations made by our three working committees on the issues of: 1. Standard Funds Settlement 2. A Financial Industry Numbering System, and 3. Insurance A pilot interface study has been underway between the Depository Trust Company and the Midwest Securities Trust Company for several months. A like pilot will begin shortly between the Midwest Securities Trust Company and the Pacific Securities Depository. Rather than dwell on what we have and are doing any longer, I have submitted for the record, a copy of our National Group's meeting minutes of June 4, 1973, and a copy of a letter to Representative John E. Moss, House of Representatives, which was in reply to a letter he had submitted to our Committee. These documents will provide you with additional detail. In reviewing S. 2058, and assuming that Congress determines to enact legislation, our Committee feels that we can and do support this Bill. We do, however, wish to re-emphasize our overall position of mandatory consultation on rulemaking between the SEC with the appropriate bank regulatory agency, and we think the appropriate bank regulatory agency should have rulemaking powers with respect to safeguards for securities and funds in clearing agencies chartered as banks and are members of the Federal Reserve System. We concur and support the proposal that regulation of depositories be the responsibility of the appropriate bank regulatory agency. The SEC's enforcement authority under Section 21 of the 1934 Exchange Act is not to be exercised unless the bank regulatory agency fails to do its job. In the area of depository participation, we support the Bill in its reference to "Operational Capability" of a potential participant, but we feel that two additional criteria must be considered and they are: 1. Character, and 2. Financial Responsibility As we have stated, stressing the above points, we feel that the approach suggested in S. 2058 is acceptable and workable. Mr. Chairman, I wish to thank the committee for this opportunity to appear on behalf of our National Group and present our position on these issues which are of such importance to the financial community and our entire economy. William J. Jaenike, American Stock Exchange, New York. John Stimpson, Johnson & Higgins, Chicago. George Strohl, Bank of America, San Francisco. Michael E. Tobin, Midwest Stock Exchange, Chicago. Kenneth S. Uston, Pacific Coast Stock Exchange, San Francisco. John Perkins convened the meeting by welcoming all present and suggesting that every effort would be made to follow the agenda as presented. William Somerville then began the proceedings by bringing the Group up to date on the status of the Toronto Depository. He indicated that their primary functions thus far have included coordinating the activities of the banks, brokers, and trust companies. The Toronto Depository is basically of the Transfer Agent type. That is, the depository functions as an agency service bureau for the transfer agent. In addition, the Toronto Depository is acting as the Canadian Agent for CUSIP. Thomas Phelan reported on the progress of the Pacific Securities Depository. He indicated that the banks on the West Coast have made a financial commitment of $2.25 million to support further development of the Pacific Depository. It is expected that the eventual total depository cost will be in the neighborhood of $7 million. Although the PSD received trust company approval late last year, they have yet to activate their charter. They are in the process of preparing their Rules Package for submission to the Securities and Exchange Commission. The depository has approximately 9,000 issues on deposit at the present time with a market value of $1.2 billion. Sam Stewart confirmed and expanded on Mr. Phelan's comments. William Dentzer stated that CCS became "The Depository Trust Company” on May 11, 1973. The DTC has been approved for Federal Reserve membership. Their Rules Package has virtually been approved by the SEC. They are continuing to expand membership as well as adding issues and registered bonds in their system. George Becker along with Messrs. John Perkins and Michael Tobin reviewed the current status of the Midwest. They indicated that a letter of agreement between the banks and the Exchange had been approved which not only calls for a split-off of the depository activity from clearings, but also commits $1 million during the first year on the part of the banks to develop the depository system further. Tentative approval of the Midwest Securities Trust Company has been received and final approval is expected at any time. The Midwest has also applied for Federal Reserve membership. In the area of depository interface, the New York Depository has looked carefully at the Midwest operating systems and the few question areas which exist are being addressed. One-way interface between New York and Chicago has been piloted for the last three months with the hope of two-way interface beginning shortly. Gordon Macklin commented on the progress of the National Clearing Corpora tion. NCC currently has 300 members and they are continuing to expand. Their operations include New York, Boston, Philadelphia, Chicago, Atlanta, Washington, D.C., and St. Louis. Their Clearings list includes 7,800 issues. NCC is looking at a new "free account netting system." Relative to this system, are some questions with regard to duplication of activity in a regional depository environment. It is NCC's intent to ultimately interface with the various regional depositories. The meeting proceeded to the point in the agenda where reports from the working committees were submitted. John Stimpson reported for David Morgan on the question of depository insurance. He reviewed the study steps taken by the subcommittee and then proceeded to recap their findings: (a) Regional depositories should develop and maintain coverage on an individual basis. When total interface of regional depositories has been achieved, and some experience has been developed, consideration for some form of catastrophic blanket coverage would be appropriate. (b) An educational program for Insurance Industry representatives should be developed to acquaint the Insurance Industry with the new environment created by regional depositories. The National Coordinating Group approved the findings of the study and the working committee will develop implementation strategy. William Jaenike reported on the financial Industry Numbering System (FINS). He began his presentation by stating that this is really not a system but a standard way of identifying the securities processors whereas CUSIP identifies the securities. His presentation was one of general review including the "what is it and how and when to use it." The FINS concept, as recommended by the working committee, was endorsed by the National Group. The working committee will develop implementation strategy. Jack Griffiths and George White reported on Standard Funds Settlement. After some discussion relative to historical and source data issues, the recommendation of a "Funds Valued Tomorrow" environment was presented. It was further recommended, that for the sake of equity on the part of depository participants, implementation should take place as soon as possible. The National Group approved the recommendations of this committee and the working committee will now develop implementation strategy. John Meyer reported on the status of Uniform Commercial Code changes in the various states and also shared some observations relative to H.R. 5050. Sam Stewart is scheduled to be in Washington shortly, and he will attempt to visit with Representative Moss or a member of his staff in an effort to update them on the present status of the various regional depositories. The National Group encouraged Sam in this regard since so much is happening so rapidly in the depository environment that an updating might be helpful. The National Group maintains its position as stated in the past relative to proposed legislation on the rule making for and regulation of depositories. The Hartford and Boston areas are still studying the possibility of developing regional depositories. The question of whether or not these areas should be included on the National Group was once again reviewed. It was decided that the opportunity for membership should remain open, yet membership should not be granted until the criteria, as previously established, is met. John Perkins referred to the status reports presented earlier and reinforced the need for full interface as soon as possible. Although studies, correspondence pilot one-way interfaces, and conversations are and have been going on relative to this issue, he felt that the regional depositories are sufficiently well along to be more specific in this area. He restated the fact that there is no doubt in his mind that there is general agreement in principle on the entire issue of interface. As a result, he requested that by July 1, a letter be submitted to him by each of the four depositories (DTC, MSTC, PSD, and NCC) stating the guidelines for interface. Mr. Perkins also circulated a letter dated May 29, 1973, which he had received from Representative John E. Moss. It was felt that the progress of the National Group was considerable and that responding to Representative Moss' letter should not present any problems. The meeting adjourned without a specific date being established for the next meeting. NATIONAL COORDINATING GROUP FOR COMPREHENSIVE SECURITIES DEPOSITORIES, July 5, 1973. Representative JOHN E. Moss, DEAR MR. Moss: Your letter of May 29, 1973, relative to the progress being made by the National Coordinating Group was very timely. It just so happened that the National Group was scheduled to meet on June 4, and we had an opportunity at that time to discuss it. I would like to respond to your letter by directing my comments to the three questions which you raised: (1) "Guidelines for the interface of regional depositories". As you will notice in the minutes of our meeting. Enclosure A. a considerable amount of work has been devoted to depository interface. Some of the guidelines have been completed, and others are being developed, including: DEPOSITORIES AS ELIGIBLE DEPOSITORS The foundation for depository interface is provided by each depository's being a depositor in the other depositories. Thus, Depository “A”, being a depositor in Depository "B", can receive and deliver securities by book-entry from and to other depositors in "B", just like any other of "B's" depositors. Of course, “A” would be receiving and delivering in "B" on instruction of its own participants. In this respect "A" is little different from broker and bank depositors who are parties to book-entry transactions in depository "B" on behalf of their many customers. A pilot interface test has been in progress for several months between the Midwest and New York Depositories. Details are now being worked out for a similar test between the Midwest and the West Coast. Each depository's rules approved by the SEC provide that a depository shall be eligible to be a "Participant" (i.e., depositor). DEPOSITORIES AS CUSTODIANS FOR ONE ANOTHER Under the Uniform Commercial Code a "clearing corporation" must, as a practical matter, keep possession of securities held by it or place them in a custodian bank. Interface depends on the capacity of depositories to act as custodians for each other. This interrelationship among depositories can be accomplished when depositories are chartered as banks (i.e., trust companies incorporated under banking law). This has now been done, as concerns the Midwest, West Coast, and New York depositories. REGULATORY COORDINATION AND SUPERVISION Although each of the three depositories will be subject to examination and supervision by their respective state banking departments, what might be called another aspect of depository interface is coordinated regulation. This has been accomplished by the taking of two steps. The first is the submission of each depository's articles of incorporation, by-laws, and rules to the SEC for review and approval. This has been done by the Midwest and New York depositories, and is in process for the one on the West Coast. The other step is to obtain coordinated bank supervision and examination. This is to be accomplished by having each depository become a member of the Federal Reserve System. The New York depository has already received such membership and the Midwest is in the process of applying. FUNDS SETTLEMENT An important question of depository interface is the manner in which the cash side of securities transactions is settled both among depositories and between a given depository and its depositors. A working committee of the National Coordinating Group has studied this matter in depth and has made recommendations which have been adopted by the National Coordinating Group. A copy of the Working Committee report is enclosed. (Enclosure B). OTHER INTERFACE MATTERS Task forces from the depositories are working on a number of technical and procedural matters. Interdepository custodian agreements are being drafted. The use of facsimile and other fast transmission methods is being worked out. Enclosure C, a report on “Applicability of Electrical Communications Within a Depository" is being used to advantage. Other operating-level questions as to detail are surfacing and, one-by-one, being disposed of. Attention is also being given to some longer-range opportunities for efficiency and effectiveness. Development of a standard financial industry numbering system (FINS) has been approved and steps authorized to implement. This standard is not urgently needed now, but will definitely be needed later to facilitate use of modern communications technology. In general, it is believed that depositories can-as they are the hub-act as leaders, stimulators, and catalysts among the entire financial community in bringing modern technology to a major part of the trade completion process. Even for transactions in securities which cannot be made eligible for depositories— but every effort should be made to expand the eligible list-the related systems effect should be substantial. (2) "Whether banks are giving financial support to the development of depositories." The answer to this question is "yes"-"banks are giving financial support to the development of depositories." (a) Six Chicago banks have committed $1,000,000 in the next 12 months for the further development of the Midwest Securities Trust Company. This com mitment is reflected in paragraph 3 (page 8) of a Memorandum of Understanding executed by the six banks and the Midwest Stock Exchange, a copy of which is enclosed. (Enclosure D). (b) The West Coast banks have committed, for Phase I, $2.26 million for the development of the Pacific Securities Depository. The total projected capital investment for the whole project is $7.4 million. (c) The 12 New York Clearing House banks have contributed to BASIC from its formal inception on March 11, 1970, the amount of $650,000 or 50 per cent of the $1,300,000 expenses incurred by BASIC to date. The remaining 50 per cent has been paid by the American Stock Exchange, National Association of Securities Dealers, and the New York Stock Exchange, each of whom assume of the aforementioned 50 per cent. The Memorandum of Understanding executed in September, 1971, on a Comprehensive Securities Depository System between American Stock Exchange and the New York Clearing House banks is reproduced on pages 1922-28 of your 1971 hearings. For ease of reference, a copy is enclosed herewith. (Enclosure E). (d) In addition to these incurred and contemplated out-of-pocket expenditures the Midwest, West Coast, and New York banks have contributed extensively the time and experience of many of their officers and staff to the actual development and usage of the depositories in their respective areas and to the development of a Comprehensive Securities Depository System. Some of these contributions are evidenced, among other things, by their work pertaining to depository interface, insurance questions, the CHIPS, CUSIP and FINS Systems, Standardization of Funds Settlement for Securities Transactions, development of collateral loan programs for brokers and banks at depositories and by banks depositing securities with depositories, as participants, on a trial basis pending clarification of regulatory and other questions. The American Bankers Association has expended time, effort, and advice in furthering the necessary amendments to the UCC and by conducting and participating in seminars as to depository procedures and benefits. It is clear that banks are not only "giving financial support to the development of depositories" but are incurring further and indirect costs by contributing people, time, and experience in large measure. These commitments reflect the view that through participation in the development of depositories the banks, all of whom have fiduciary responsibilities, can assure that depositories will have the appropriate character, operational, financial, legal capabilities, and regulatory atmosphere. (3) "What, if any, new problems have arisen in the development of the interregional concept. More particularly, what is the probable effect of requiring new and higher rates or return on capital or increased interdepository charges?" No unforeseen problems of substance have been encountered. Some foreseen procedural problems remain to be resolved-and will be such as the handling of dividends, proxies, withdrawal of nominee certificates, etc., where the internal procedures for the handling of such matters now differ among depository operations. As to "requiring new and higher rates of return on capital or increased interdepository charges", it is contemplated that beyond a nominal rate of return on shareholders' investment, depositories' charges to users would be scaled to cover depository costs. Our committee appreciates your interest in this effort and the opportunity to tell you of our continuing progress. We will continue to keep your Committee informed. Sincerely, JOHN H. PERKINS, Chairman. NATIONAL CLEARING CORPORATION, Mr. JOSEPH P. CORIACI, Second Vice President, Continental Bank, DEAR JOE: The Subcommittee on Insurance and Protection is pleased to present to the National Coordinating Group the findings of its study and its recommendations. APPROACH AND FINDINGS The Subcommittee analyzed insurance and protection for certificate depositories from a nationwide point of view. It followed the guideline prescribed by the |