Statement of David H. Morgan, President before the Subcommittee on Securities of the Senate Committee on Banking, Housing and Urban Affairs May 11, 1972 I am David H. Morgan, President of National Clearing Corporation, a wholly owned non-profit subsidiary of the National Association of Securities Dealers, Inc. Accompanying me is Lloyd J. Derrickson, Vice President and General Counsel of the National Association of Securities Dealers and also an officer of the Clearing Corporation. We are most appreciative of the opportunity to appear today in order to present our views on the presently pending bills relating to the securities processing cycle. You will recall that on October 1, 1971, Gordon S. Macklin, President of the National Association of Securities Dealers, Mr. Derrickson and I appeared before this Subcommittee and described the operation of the continuous net settleme system of the National Clearing Corporation and described in general our plans for the future. Since that time implementation of the continuous net settlement system has proceeded to the point where more than 60% of New York over-the-counter secu rities transactions are processed by NCC using the continuous net system. We anticipate that complete conversion of all existing New York members to continuous net will be accomplished this June. You may recall that under NASD rules all members will be required to clear securities through the facilities of the National Clearing Corporation, so long as the members and the issues traded meet the minimum standards and qualifications set forth in the rules. Currently, some 18,000 trades are processed by the Corporation daily. The system has operated as planned and we deem its implementation to be highly successful. With the cooperation of the Boston and Philadelphia Stock Exchanges regional facilities in Boston and Philadelphia will commence operation on May 8 and May 22, respectively, using the continuous net system. Longer range plans called for the implementation of regional clearing centers in other major cities throughout the nation during 1973. As you are aware, a clearing service between the Pacific Coast Stock Exchange in California and the National Clearing Corporation in New York has been operational for several years. Financially, we believe we have reached the point in our operation where additional monetary commitments to NCC will not be necessary. (Obviously, it will be necessary to expend additional sums in order to develop the continuous net system on a nationwide basis; nonetheless we believe NCC will be self-supporting from this point forward and foresee no major implementational problems.) The technical staff of the Association and the Clearing Corporation are now working on the design of a trade reporting system. Our goal will be to provide facilities to members so that they will be in a position to report trades through such a system for comparison, clearance and settlement by NCC. It is expected that the first phase of such a transaction reporting system could be operational shortly after the end of this year. Further, we are continuing to work with the staff of Central Certificate Service, part of the Stock Clearing Corporation of the New York Stock Exchange, to prepare the technical interface with this depository. We hope that a permanent standardized depository interface will be developed and working in New York by the beginning of next year. This standard interface should serve as a basis for an interface with depositories in other major cities as they become established and as we establish regional facilities for the continuous net system. In this respect, we are working with the National Coordinating Group in its efforts to coordinate the establishment of depositories through the nation. The three bills which are the subject of the Subcommittee's current inquiry are indicative of the awareness of necessity for suitable solutions to the problems of the securities industry which relate to the securities processing cycle. S. 2551 introduced by Senator Roth in September 1971 represents an early and laudable catalyst in achieving solutions to these problems. In view of developments since that time and the advances made in planning for and implementing continuous net settlement and in developing a standard interface with a national depository system, it does not now appear to us necessary to establish the organizations described in the bill. We support the aims and goals of the other bills, S. 3297 introduced by Senator Williams and S. 3412 introduced at the request of the Securities and Exchange Commission. Both bills are complementary to the efforts of the NCC in establishing a uniform non-discriminatory nationwide system for comparison, clearing, and settlement of over-the-counter securities transactions as well as complementary to our plans for a standard interface with securities depositories. The NASD and NCC function under the requirements of the Maloney Act, and S. 3297 is modeled in the pattern of that Act. Rules of the Association and the NCC must conform to statutory standards and must not be disapproved by the SEC. For this reason we favor S. 3297 as providing an appropriate vehicle for the regulation of the securities processing cycle on a national scale. S. 3412 provides for establishment of rules by the SEC relating to clearing agency function, minimum standards, and operational compatability with other agencies. While we believe that we could operate within the framework of S. 3412, simplicity and operational flexibility would be enhanced by continuation of the present system of self-regulation provided for in the Maloney Act with Commission oversight which is called for in S. 3297. To date this method of regulation has worked satisfactorily for the NASD and the NCC and we see no reason to believe this will not continue to be the case for the foreseeable future. We realize that S. 3297 does not address the problem of regulating transfer agents as does S. 3412. We share the concern of many others that uniformity and timeliness in the transfer agent function is desirable in order that a fully satisfactory nationwide clearing and depository system can be achieved. To the extent that conflicts arise in respect to regulation pertaining to banks, we support an arrangement which will accomplish nationwide uniformity. We assume that the industries involved will agree to that cooperation necessary to meet mutual regulatory purposes. Senator ROTH. At this time, it is my understanding that Mr. Perkins, Mr. Meyer, and Mr. Bevis would all like to testify together. STATEMENT OF JOHN H. PERKINS, VICE CHAIRMAN, CONTINENTAL ILLINOIS NATIONAL BANK & TRUST CO. OF CHICAGO AND CHAIRMAN, NATIONAL COORDINATING GROUP FOR COMPREHENSIVE SECURITIES DEPOSITORIES, ACCOMPANIED BY JOSEPH P. CORIACI, SECOND VICE PRESIDENT, CONTINENTAL ILLINOIS NATIONAL BANK & TRUST CO. OF CHICAGO Mr. PERKINS. That is right, Senator. Since we are working together, and there is so much on the same subject, we thought it might be helpful this way, and we would have some technical expertise to answer some questions. In addition, I have Mr. Joseph P. Coriaci, an associate of mine at the bank, and Mr. Hamilton Potter, from Sullivan & Cromwell, who is counsel for the BASIC group in New York. I thought I might read my statement, and then we might get the BASIC statement and we would take the questions together. Senator ROTH. That would be fine. Mr. PERKINS. I am John Perkins, vice chairman of the Continental Illinois National Bank & Trust Co. of Chicago and chairman of the National Coordinating Group for Comprehensive Securities Depositories. My testimony today as chairman of the National Coordinating Group is directed specifically to the question of depositories. I personally, along with the banks represented on the national coordinating committee, support the position of the American Bankers Associa tion relative to the supervision and direction of transfer agents and registrars. However, it is not my purpose to dwell on that particular issue. Our position concerning the regulation of depositories for the National Coordinating Group does not differ greatly from that with respect to transfer agents and registrars. I would like at this time to review our National Coordinating Group's position relative to depositories and the proposed legislation. I. The committee recommends a nationwide system of interrelated regional depositories independently operated by the private sector to minimize the movement of physical securities. The National Coordinating Group will coordinate the development by the participants of interdepository standards, with respect to insurance, security protection fund, and controls. Specifically, this approach is preferred and recommended because: (a) A series of regional depositories can come into being more quickly than can a national depository. For example, CCS in New York and the PSD on the west coast are already in existence with Chicago well on its way in the development of a like facility. (b) The NASD through the NCC is implementing a nationwide clearing system and discussions regarding interfacing with regional depositories are underway. (c) A regional approach will be more responsive to local needs and capabilities. The National Group will foster development of an interdepository communications system that will ultimately provide for a participant |