ÆäÀÌÁö À̹ÌÁö
PDF
ePub

a. New York City-In the New York area, securities transactions are settled in funds valued tomorrow which are usually referred to as "New York Clearing House Funds". In fact, it appears that the connotation to most securities industry personnel for the term "Clearing House" is the New York type of payment. (Incidentally, the same convention of funds valued tomorrow exists in the settlement of international payments.)

An interesting development in funds settlement has occurred recently with the Depository Trust Company (DTC) which was formerly Central Certificate Service, Inc. (CCS). DTC rule 9 is as follows:

"Balances due the corporation from a participant or pledgee
shall be paid by check payable in New York Clearing House
Funds which shall be a cashier's check or certified if in the
amount of $5,000 or more, unless such requirement is waived
by the corporation in its discretion."

The First National Bank of Boston and the Corporate Trust Activities Committee at the American Bankers Association have requested that the Securities and Exchange Commission, which is reviewing the rules, change the terminology of Rule 9 to this:

"Balances due DTC from a participant or pledgee shall be
settled in funds valued tomorrow (Clearing House Funds
rather than Federal Funds)."

The significant point about this requirement is that it was developed by DTC which is a user, and not by banks. DTC needs assurance by receipt of a certified check presented to DTC after the settlement is calculated each afternoon that funds will actually be available the next day for settlement purposes. A check could be presented by a non-New York bank, but there is no guarantee that funds will be available tomorrow even though the bank on which funds are drawn could be a one-day point for available funds provided the checks were presented to the Federal Reserve Bank before scheduled deadlines. Conceivably, the bank may decide to return the check for some reason. Therefore, it illustrates the need of the user to have assurance that funds will be available as specified.

Another alternative for solving this problem would be to expand the capabilities of the Federal Reserve Wire Network to enable transmission of funds valued tomorrow, or any other time in the future, as well as continuing transmission of funds valued today. With such a change, an organization like DTC could receive a Federal Reserve Wire Transfer, which would guarantee that the sender would have funds transferred from his reserve account in a Federal Reserve Bank the next day just as a certified check today guarantees funds the next day.

Checks issued for the settlement of securities transactions, even if drawn upon the same bank where the depositing broker or organization has a bank account, are generally not debited to withdraw funds from the writer's checking account until the following day. While some banks may show a debit that day on an account statement, the transfer of available funds from the account for determining the available balances or cash in the account actually takes place the following day.

Checks drawn on the twelve New York Clearing House banks, which were received for deposit the previous day by the presenting bank, are exchanged at several times during the early morning hours and finally at 10:00 a.m. on each business day. The net position of each bank is determined after the 10:00 a.m. exchange, and the individual banks' deposit accounts with the Federal Reserve Bank of New York are debited or credited in funds valued today for this exchange of checks.

There are exceptions to the settlement of funds valued tomorrow where one party is not in the securities industry, as in the case of individuals and corporations. Most banks generally handle all retail checking account transactions by crediting deposits under a deferred availability schedule running from one day (similar to funds valued tomorrow) to several days, roughly measuring the time until collection from the payor bank and credit of funds through the Federal Reserve System and allowing sufficient days for "non-sufficient funds", "stop payment", or any other type of checks to be returned. In the case of most large corporations' new securities offerings, the funds are credited as funds valued tomorrow in the same way the transaction would be handled for any broker or financial institution. There are, however, cases where the underwriter pays the corporation in funds valued today, but receives payment in funds valued tomorrow.

b. Chicago-Securities transactions in Chicago are handled somewhat differently than in New York. The major Chicago banks have an exchange of checks at 10:30 a.m. each business morning similar to the 10:00 a.m. exchange at the New York Clearing House. Checks drawn on other Chicago banks and deposited in a Chicago bank too late to make the morning exchange are in effect valued tomorrow because they cannot be exchanged until the next day.

However, this standard practice can be avoided by a payee's arranging to deposit at the payor's bank. For example, a brokerage firm could instruct the Midwest Stock Exchange's Midwest Securities Trust Company to issue a check drawn on a bank where that firm maintains a Chicago bank account. When that check is deposited, the Chicago bank would make funds valued today or cash available to the firm which could, therefore, invest funds overnight or pay off loans. Certain Chicago banks will place immediately available funds to the credit of a broker at another Chicago bank on a selective basis.

The same firm, if it pays in New York but receives money in Chicago, could gain overnight use of funds provided the funds are invested, such as in Treasury Bills. Conversely, if the firm pays in funds valued today in Chicago for securities but receives payment in New York City, it would lose the use of funds for one day, since the funds received in New York City are valued tomorrow.

c. California-Los Angeles and San Francisco clearing house practices for exchange of checks are similar in all major respects except that the deadlines for check exchanges are 8:00 a.m. and 7:00 a.m., respectively.

The settlement of securities differs in several ways from that of other major financial centers. Payments deposited in the bank upon which they are drawn are immediately available provided sufficient funds valued today or cash are in the payor's account. If drawn on another local bank, the funds will be valued tomorrow.

Funds settlement practices on out-of-town checks vary. Some banks have their own schedule, while others adhere to that of the Federal Reserve Bank.

Funds valued today are withdrawn from brokers' accounts by the issuance of banks' cashiers' checks or the certification of the brokers' checks making funds available to the banks unless special arrangements are made.

In the vast majority of transactions, bank originated debits and credits to brokers' local bank accounts are on a funds valued today basis. Exceptions are arranged by either special requests or standing instructions. The Pacific Clearing Corporation (PCC) pays brokers having net clearing balances with a draft drawn on the PCC's current bank of account. PCC will accept payments from brokers, in settlement of clearing balances, drawn on the brokers' local banks. Generally, PCC deposits these checks in their account with the bank upon which they are drawn and obtains funds valued today. While this procedure can be handled relatively easily with modest volume, it becomes very difficult with heavy volume such as in New York.

C. FEDERAL RESERVE SYSTEM'S WIRE NETWORK

Many are familiar with the operation of the Federal Reserve System's (FRS) Wire Network. (The basic functions of the FRS Wire Network are discussed in Appendix II.)

Funds valued today can be transferred among member banks of the FRS through the facilities of FRS's computer switch located at Culpeper, Virginia. The funds transfer process actually takes place through debits and credits in each individual bank reserve position or deposit maintained at the FRS.

D. BANK WIRE

As an alternative to the Federal Reserve System's Wire Network, the transfer of funds can be handled with the Bank Wire which is managed by major banks in Chicago and New York. The Bank Wire is a switching network connecting over 230 banks throughout the United States. (The Bank Wire is described in Appendix III.)

It is a fine point, but while funds can actually be transferred throughout the country on the FRS Wire Network, this is not so with the Bank Wire. On the Bank Wire, instructions are transmitted from a bank to its correspondent bank to charge its account with the correspondent and make funds available to some other organization. Frequently, the funds transferred by the Bank Wire are disbursed within the same correspondent bank. Bank Wire funds transactions can be valued today or later.

E. STATUS OF FEDERAL RESERVE SYSTEM PLANS TO MODIFY FUNDS SETTLEMENT SYSTEM

In September, 1972, the FRS questioned various financial organizations on the feasibility of extending the transmission time of this network later than now available. On April 1, 1973 the FRS increased by half-an-hour the availability of the network for transmission from west to east to equalize transmission time in both directions.

F. STATUS OF NEW YORK CLEARING HOUSE ASSOCIATION PLANS TO SETTLE INTERNATIONAL TRANSACTIONS

International payments in New York City are settled in funds valued tomorrow, a similar convention to that practiced for securities transactions.

In 1970, the New York Clearing House Association (NYCHA) installed an automated clearing house through which international payments could be switched by means of a central computer located at the NYCHA. This system is referred to as the Clearing House Interbank Payments System (CHIPS) and is described in Appendix IV.

It has generally been assumed by some bankers and Federal Reserve officials that CHIPS transactions could be converted from a funds valued tomorrow settlement basis to a funds valued today basis fairly readily. However, NYCHA committees analyzing possible conversion have found major potential problems regarding credit for participants when funds must be paid on a funds valued today basis, or cash equivalent, since funds valued today or cash cannot be transferred or paid from an account until funds valued today are received if the account does not maintain a high enough balance to cover the transaction.

This appears to cause major queuing problems in completing transactions at the latest time possible. In addition, this also requires that the computer switch maintain the current status of every participating organization's account.

The NYCHA international payment committees have concluded that the advantages of settling international transactions in funds valued today are outweighed by the severe demands this would place on the payment mechanism. These committees have recommended that no changes be considered until after early 1974 when a new larger CHIPS computer system is installed.

V. CONCLUSIONS

The Subcommittee concludes that the question of funds valued today or tomorrow should not be the primary focus of the securities industry. Instead, the focus should be on a standard funds settlement system that will be applicable to current capabilities and adaptable to changes in the future.

The Subcommittee concludes that there are possible abuses in the present settlement process for securities transactions because of the lack of standard industry funds settlement procedures. Generally speaking, there has not been a national effort in the past that had the senior management levels of both banking and the securities industry involved in addressing issues, such as the funds settlement process. Under the circumstances, it can only be expected that different procedures would be applied in different parts of the country. Some organizations, in both the banking and securities industries, could benefit from these differences. Consequently, the discrepancies which are inequitable at best will cause problems in settling transactions among securities depositories which are being formed in various parts of the country for participation by both regional and national firms.

Rather than assume that the Federal Reserve Wire Network schedule will be changed, the Subcommittee in its investigation determined that, although changes could occur, conclusions should be based on conditions as they presently exist.

The Subcommittee believes that future efforts to improve the efficiency of the payment mechanism—and particularly to reduce the checks in the process of collection, or float-will include specifying funds settlement dates. This will eliminate the tremendous queuing problems that occur when large volumes of transactions must be settled in cash or funds valued today.

In deciding that a standard funds settlement is necessary, the Subcommittee concludes that the standard adopted must be able to be implemented as quickly as possible for the benefit of all participants in the settlement of securities transactions. In addition, the Subcommittee concludes that the standard must not be so different from the present way of conducting business that the capital structure of a brokerage firm is affected.

Factors, which are discussed below, could make it feasible to consider converting to a funds valued today basis in the future. The factors in making such a change would be the availability of computer switches in the various money market locations, such as in New York City where CHIPS is installed, and in California where the Federal Reserve installed a switching computer in October, 1972, for use by the California Automated Clearing House Association, Incorporated. In addition, factors such as the availability throughout the entire business day of the Federal Reserve network for the transfer of funds valued today, as is being explored by the Federal Reserve System, should also be taken into consideration.

Another major factor in deciding to change the funds settlement basis would be the ratio of securities transactions taking place in the depository where a standard settlement process would be followed versus those taking place outside of the depository by the issuance of certificates in institutional and private name registrations. As more settlements take place through depositories, which will be able to determine net settlement positions, it will be easier to settle the funds related to a securities transaction. It is intended that, in the near term, banks and institutions participating in depositories will deposit their own holdings and securities held for others. It may then be desirable to re-evaluate and change the settlement process even though the same problems mentioned in this report for securities remaining outside of certificate depositories will continue to exist.

VI. RECOMMENDATIONS

The Funds and Settlement Subcommittee recommends that all securities clearing corporations and the National Association of Securities Dealers specify their funds settlement procedures to be funds valued tomorrow. Settlements through the New York and American stock exchanges are already made on a funds valued tomorrow basis. However, this standard does not preclude special settlement arrangements agreed upon between buyer and seller at the time of trade or transaction.

The Subcommittee also recommends that efforts be initiated nationally as soon as possible to standardize payments for all securities settled through clearing corporations or over-the-counter issues on a funds valued tomorrow basis.

APPENDIX I-CHECK PROCESSING SYSTEMS

Approximately 22 billion checks are handled annually by commercial banks. Approximately 1/3 of all checks are written by depositors in one bank for the credit of depositors in the same bank. Another 1/3 of all checks are written for depositors in the same city or marketing area. These checks are exchanged directly among the banks, most often through the facilities of local clearing houses.

The remaining 1/3 of all checks go outside the local area. Most of these checks are distributed through the facilities of the Federal Reserve System (FRS) or by "direct sending" arrangements which banks establish among themselves when check and dollar volumes warrant.

Federal Reserve System

The map on the next page shows the twelve FRS districts, the locations of FRS banks and branches. The FRS receives the deposit of checks from banks on established daily schedules and grants funds valued after today to the banks based on when the checks will be returned to the banks on which they are drawn. The funds for checks drawn on banks in cities where a FRS bank or branch is located usually are credited in funds available tomorrow to the depositing banks. Checks drawn on other points designated "country banks" are usually valued a day or so later depending on the location.

To speed up the flow of funds through the check processing system, the FRS has recently made two major changes. One change is the establishment of Regional Check Processing Centers (RCPC's) to speed up the movement of checks over wide geographical areas. The first RCPC covered a radius of 40 miles around Washington, D.C. Checks presented to the RCPC in the evening and early morning are returned to the bank on which they are drawn in the morning. Organizations depositing checks drawn on banks in the RCPC area receive funds valued tomorrow, where previously the movement of checks often took several days. RCPC's are being established throughout the country where check exchange facilities are not available.

The second major modification to the check processing system occurred in November, 1972, with the change in the FRS's Regulation J. This regulation requires that all banks settle checks with the FRS on the day presented in funds valued today. Previously, "country banks" had been allowed one additional day or allowed to settle in funds valued tomorrow. This change puts all banks, regardless of location, on an equal basis in settling checks and reduces the amount of FRS checks in the process of collection-or "float" as it is usually called.

« ÀÌÀü°è¼Ó »