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Illinois National Bank and Trust Co. of Chicago and chairman of our group's working committee. My comments will be directed solely to those provisions of the bill concerning securities depositories.
As was the case with our group's testimony before a subcommittee of the Senate in May of 1972 and July of this year, and this subcommittee last September, I will not address those issues relating to transfer agents, clearing agencies, or other matters covered by the bill. My testimony is to a great degree a restatement of the letter that our group forwarded to you on April 16 of this year.
The National Coordinating Group was formed in October 1971, to expedite the achievement of nationwide securities immobilization in a manner which would be acceptable to those responsible for the safekeeping of securities and maintenance of accurate records—primarily the banks as well as those burdened with excessive paperwork related to trading-primarily the brokers. These functions are carried on in major financial centers all over the country-not just in Wall Street.
The National Group agreed that a regional depository system with effective interface between regions would be better than a single national depository and would be more likely to accomplish the objective of immobilization because (1) it would serve regional needs, (2) it more quickly would win regional acceptance, (3) it would foster competition, and (4) it would reduce the dangers inherent in a single service facility, such as interruptions due to power failure, natural catastrophes, and other uncontrollable events.
Since the entire issue of depositories was first suggested and the regional concept introduced, considerable progress has been made toward achieving the ultimate objective of securities immobilization. We are all aware of DTC in New York, for example, which has reduced physical securities movement between brokers and transfer agents to the extent of about 25 to 30 percent.
In more specific detail, the Depository Trust Co., formerly Central Certificate Service, Inc., in New York has already on deposit approximately 2,800 issues representing 1,500 million shares with a dollar value of $55 billion.
On the west coast, the Pacific Securities Depository has on deposit approximately 8,300 issues representing 83 million shares with a dollar value of $1,200 million, and in the Midwest, the Midwest Securities Trust Co. has 1,350 issues representing 13 million shares and $390 million.
When participation is extended to include securities held by banks, insurance companies, mutual funds and other institutions, the number of securities involved will be extremely high. Regional depositories should, therefore, easily account for immobilization of 75 to 80 percent of all securities traffic, although the immobilization desired will not be achieved until full two-way interfaces are established between all regional depositories.
The introduction of regional processing centers which can interface with all depositories will help accelerate the immobilization process.
To achieve our main objective of securities immobilization, it has been determined that regional depository trust companies provide the best vehicle because they provide the security aspects of a bank-type institution and because they permit participation by those holding
securities in a fiduciary capacity. For this reason we endorsed amendments to existing State laws, specifically the Uniform Commercial Code and fiduciary holding laws, which would extend the legally permissible ownership of a depository and participation in it. Ås depositories become trust companies, already accomplished by two of the three major depositories, regulation by trust regulators also becomes a reality and this in turn increases the willingness of financial institutions, particularly banks, to participate.
We feel very strongly that the approach taken by H.R. 5050 could well defeat the purpose of the trust company approach and would thus tend to discourage fiduciaries from placing their securities in a depository. H.R. 5050 would have the depository look a great deal like a securities firm with the SEC being involved in all aspects of the depository—beginning with the rulemaking role, through, and including the supervisorial role. It is clear to us, as we have stated before, that securities held by banks and trust companies, particularly in a fiduciary capacity, will be entrusted only to a depository operating in a regulatory atmosphere similar to that in which banks and trust companies now operate.
Although our group does not feel that additional legislation is needed for regulation of depositories, we welcome the continued interest and concern of this committee and others with respect to depository developments. If, however, legislation is deemed necessary we cannot endorse the sole SEC rulemaking and supervisory provisions outlined in H.R. 5050. As an acceptable alternative, we can and have endorsed legislation such as S. 2058 under which (1) there would be mandatory consultation on general rulemaking between the SEC and the appropriate bank regulatory agency, (2) the appropriate bank regulatory agency would have sole rulemaking authority with respect to safeguards for securities and funds held by depository trust companies, and (3) the appropriate bank regulatory agency would have the principal responsibility for the supervision and examination of depositories.
At this point I would refer to the attached copy of our July testimony before the subcommittee of the U.S. Senate Committee on Banking, Housing and Urban Affairs. [See p. 1827]
It appears at this time that the three major depositories will all be members of the Federal Reserve System and will be regulated through that supervisory authority. The Depository Trust Co. in New York is already a member. Midwest Securities Trust Co. is in the process of filing for membership
and the Pacific Securities Depository has begun discussions with the Federal Reserve which, it is planned, will lead to membership. Additional depositories no doubt will follow the same course. We feel that this form of supervision, along with general trust company supervision, should be effective and fully meet the public interest. Supervision by a nonbank regulator should not be necessary.
Our second principal concern with H.R. 5050 involves its provisions regarding depository participation. As the record shows, our group endorses broad participation in depositories and we will continue to work toward this end.
We feel, however, that H.R. 5050 provides participation on too broad a scale without adequate consideration for the character, financial responsibility, and operational capability of potential participants. In our group's testimony before Senator Williams' committee in July, this issue was fully discussed, and we feel that the Senate subcommittee, through revised language in S. 2058, has recognized our concerns and provided for them in its proposed legislation. We feel that these additional tests will not pose a threat to those participants who realistically should be permitted to participate in a depository, and that they will provide necessary protection for the securities in a depository and for the safety and strength of the depository itself.
Io conclude, our overall message continues to be securities immobilization.” We support all efforts to achieve this objective. Broad participation in a secure, effective depository will help reach our goal. Our group thinks that the provisions of H.R. 5050 upon which I have commented will discourage rather than encourage participation.
I have included for the record copies of our group's recommended approach to depository insurance considerations, a financial industry numbering system, and our brochure on standard' funds settlement for depository eligible securities.
We stand ready to work with you in achieving our mutual objective, an efficient, effective, properly controlled “immobilized” securities environment.
Thank you for affording me the opportunity to give you the views of our group on this important legislation.
Mr. Moss. Thank you. At this time the Chair would ask unanimous consent that the items attached to the statement just read to the committee be included in the record following that statement. Is there objection?
Hearing none, it is so ordered.
STATEMENT OF THE NATIONAL COORDINATING GROUP FOR COMPREHENSIVE SE
CURITIES DEPOSITORIES BEFORE THE SUBCOMMITTEE ON SECURITIES OF THE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, U.S. SENATE, S. 2058 Mr. Chairman, my name is John H. Perkins; I am President of the Continental Illinois National Bank and Trust Company of Chicago. I am, however, appearing before you today as Chairman of the National Coordinating Group for Comprehensive Securities Depositories. My testimony today on behalf of our Group on proposed Bill S. 2058, parallels to a great degree that which we presented before this committee last fall on then-proposed Bills S. 3876, H.R. 14567, and H.R. 14826 and is limited to "Section 17A" entitled “Processing of Securities Transactions."
As we stated at that time, our Group endorses the concept of “—a nationwide system of interrelated regional depositories independently operated by the private sector to minimize the movement of physical securities.” We also stated that we preferred this approach because “A series of regional depositories can come into being more quickly than can a national depository.” A great deal has been accomplished relative to the development of regional depositories over the past several months. Without going into detail, I would like to touch on some of the key elements in this development:
DEPOSITORY TRUST COMPANY IN NEW YORK
(Formerly Central Certificate Service) This depository now has approximately $60 billion in securities on deposit. The expansion and acceptance of this regional facility by the brokerage and banking segments of the financial community certainly demonstrates support for the overall underlying concept of "securities immobilization."
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.
PACIFIO 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
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
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.
* * *
NATIONAL COORDINATING GROUP FOR COMPREHENSIVE SECURITIES DEPOSITORIES
MINUTES OF MEETING, JUNE 4, 1973, CHICAGO, ILL.
John M. Meyer, Jr.
Thomas P. Phelan
William L. Somerville
Samuel B. Stewart
Joseph P. Coriaci, Continental Bank, Chicago.
William J. Jaenike, American Stock Exchange, New York.
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 deposi 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 Corporation. 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