allowing the two major groups of participants to have
control over and be responsible for their own components.

Integration Capability: Finally, and perhaps of greatest
importance, we believe the proposed three module ap-
proach offers the greatest flexibility in the effective inte-
gration of this system with other systems that may be
developed for other parts of the securities industry.

While the system is described in terms of three modules, with two of the modules possessing considerable freedom to meet the needs of their members, overall, the system must appear as a single organizational unit. This is necessary both for efficiency in operations and for the degree of coordination at the interfaces required to maintain system integrity. It is also needed for situations that require some form of adjudication within the overall system. Finally, a single, unambiguous point of responsibility for system performance must be presented to participants and to the outside world.

C. INTERFACES WITH OTHER SYSTEMS

As mentioned above, we consider the proposed organization structure very desirable from the standpoint of creating efficient interfaces with other securities systems. Our approach to the general problem of integration among the various securities markets is based on the following considerations:

(1) The different securities markets of the United States
serve overlapping groups of brokers but, by and large,
deal in securities with rather different market charac-
teristics. Thus, for the time frame with which our
study is concerned, we believe these markets can
perform best by establishing systems that meet their
own particular needs for transaction data collection
and clearing. The optimum systems to perform these
functions will differ, because the characteristics of
the individual markets differ. Consequently, we be-.
lieve any effort to construct a single system for
clearing all securities either will serve some markets

inadequately or will require so many compromises
that its overall effectiveness will be low.

(2). While activities close to the markets must be different
to meet individual market needs, activities associated
with transfer and delivery of securities should be
capable of being integrated or closely coordinated
among the different markets. These activities have a
great deal more commonality than do the transaction
data collection and clearing functions. Accordingly,
the transfer and delivery end of the system must have
the flexibility to interface easily and effectively with
a variety of different systems.

Figure 1 schematically describes the three major modules, their interrelationships and the interface to other systems. The Clearing Centers of other markets could participate as a special type of Clearing Member in the Broker Module, or could operate through the system of banks in the Banking Module. However, problems are encountered in this process because of: the need for transferring ownership to an appropriate nominee name for such participation; differences in the extent of fungibility and the requirements for eligibility of different securities that the various markets must deal with; etc. Therefore, we believe direct interface with the Custodian Module to be the most appropriate point of interface.

The Custodian Module will have authority to physically store securities in nominee (or other) name in such locations as may be appropriate for system needs. NYSE listed stocks can, therefore, be located in depositories in various parts of the country. With a closely associated co-transfer activity, physical certificates can be received and delivered rapidly and efficiently. Occasional bulk movements of certificates may be required. However, this will be in lieu of the large numbers of individual movements now needed. Modern inventory control techniques can be employed to make this type of operation highly efficient.

In similar fashion, the Custodian Module could store, both in New York and elsewhere, securities traded on other markets; these may be held in nominee names other than those of the two modules we have described. Since the physical certificates will be stored under the cognizance of the

custodian, the securities involved need not all have the same eligibility requirements as those of the NYSE Broker Module. The operation simply provides a centrally controlled custodial service for which it may or may not be desirable (or practical) to have a similar bookkeeping entry system. This question need not be decided now. What is important is that such a capability is in no way forestalled and that a custodian provides a framework for achieving whatever degree of integration proves desirable in the future.

It must also be emphasized that the approach we are proposing permits independent action by the different markets, but does not force it. If two or more markets desire to employ a common clearing and settlement system, there is no barrier to their having a common Broker Module. Alternatively, a single Custodian Module can service a variety of independent Broker Modules. A wide range of options is available.

IV. A BROKER MODULE FOR THE NYSE

The bookkeeping entry/depository concept is at the heart of the system we are describing. A primary requirement, therefore, is that the set of services offered by the NYSE Broker Module encourage Clearing Members, and the brokers they serve, to maintain as large a fraction of eligible securities as practical within the depository, and that withdrawals and re-entries be minimized. This process can be encouraged through the pricing schedule or by making it mandatory to maintain a fraction of segregated securities within the system. In general, however, the depository concept will succeed or fail on the basis of the quality and completeness of services offered, and the extent to which it permits participants to reduce their operating costs.

A. PRIMARY SERVICES

The services provided by the NYSE Broker Module must be designed to minimize the number of broker-to-broker Fails on settlement date. A series of defenses is available for this purpose. The first defense is the depository itself. A second line of defense is the provision of stock lending services. A third involves the collection of complete Fails information, the proper employment of Fails clearances and, where necessary, a system for Buy-Ins. These and other primary services are described below.

1. Clearing

We are not proposing any significant changes in clearing procedures; these can continue to employ the daily DBO/RBO system. Consideration might be given to automatically submitting the DBO's that result from compared transactions to the settlement run, except in cases where a Clearing Member takes action to stop such transfers - that is, an exception basis could be employed in moving from the DBO allocation run to the settlement operation. This move would lead to more efficient and less expensive operations. However, it should not be undertaken without the understanding and approval of the Membership. Exception reports do not provide the type of protection that positive instructions do and they lead to far more serious consequences if errors of omission occur.