I think the other very important dimension to be brought out is that, as we mentioned earlier, we have a tremendous amount of interarea activity, much of which is not covered through any organized clearing facility at this point.

In other words, the difficulties in clearing a transaction in the overthe-counter market, for example, between a broker in Miami who might be trading with a broker in Seattle, if you wanted to use that as an example, at this particular point in time, without the use of a clearing mechanism, are far greater than the difficulties of clearing through an exchange, where there are organized clearing facilities and generally speaking, the preponderance of trades are done within limited geographic areas.

Mr. PAINTER. You also have a considerable number of trades per day, 40,000 or 50,000, possibly, and these trades are widely dispersed geographically speaking?

Mr. MORGAN. That is correct. Perhaps 30,000 of those trades could be considered outside of New York. Perhaps 15,000 would be going into all different geographical areas of the country.

Mr. MCGUIRE. Is it not possible that in an OTC trade you can have an agent-principal agent versus an agent trade on the floor of the exchange where you are executing the order for the two inventors, where the over-the-counter broker is actually taking a position in the stock and then later executes the order with either his own customer or with another broker?

So you might be doubling up, if you look at it that way, or might have to double up.

Mr. MORGAN. The question of doubling up what?

Mr. MCGUIRE. The transactions.

Mr. MORGAN. I suppose that could be possible, yes.

I think, as we have measured transactions, and as the exchange measures transactions, however, we are fairly consistent.

Mr. PEAKE. As a broker-dealer, I would tend to support Mr. Morgan's estimate as being a correct estimate. If anything, it is on the low side, especially when bonds, which are by far the most difficult securities to process and clear, are excluded from the numbers, and I believe he has excluded them.

Mr. Moss. The Chair will say in the interests of orderly procedure that questions will have to be channeled through members of the panel. I would like to have broader participation, but it is not possible. Mr. PAINTER. Today, transactions on the Pacific Coast Stock Exchange clear through the Pacific Coast Exchange's Clearing Corporation. Transactions executed on the Midwest Stock Exchange clear through the Midwest Stock Exchange's Clearing Corporation, and transactions executed on the New York Exchange clear through the New York Stock Exchange's Stock Clearing Corporation, while transactions executed in the over-the-counter market clear in a variety of ways. I think this has already been mentioned by Mr. Morgan, in fact, including clearance directly between brokers, the use of the mails, banks, and private and public carriers. Is that a fairly accurate description?

Mr. KAESTNER. Yes, Mr. Painter.

Mr. PAINTER. The National Clearing Corporation, Mr. Morgan, appears to be a laudatory first step in standardizing clearing transactions throughout the United States.

Since it deals, however, only with the over-the-counter market, it still leaves the different clearing procedures for exchange transactions with their different forms, rules, and so on.

Shouldn't the clearance of all transactions, whether over-thecounter, or on an exchange, be standardized? Isn't this particularly true if we had, eventually, one national securities market, as has been proposed by some who have studied the matter?

Can national uniformity be achieved in any manner other than Federal legislation?

Mr. Morgan, do you have any comment?

Mr. MORGAN. Mr. Painter, the discussions I have had with brokers who will be users of our system certainly indicate that it would be very desirable, as soon as possible, which could mean anytime in the future and I can't predict that, that a standard method of clearance and settlement of securities would be desirable.

I certainly don't want to interject my influence on that of the exchanges, because I think that perhaps the exchanges have developed clearing systems at this point that meet their own needs quite satisfactorily.

Further, I think that a good point can be made of the fact that perhaps the development of a national depository system would be the way to begin to effect standardization.

Now, separating the over-the-counter from the listed business sectors at this point, the theme that we have been reiterating is the need to develop a nationwide system for clearing over-the-counter securities transactions.

I think that that certainly is the first point to which we wish to direct ourselves. I noticed in the testimony given by Mr. Montross, for example, he is advocating the adoption of the industry as a whole of the continuous net settlement method of clearing, and I would like to see a standard method as well as anybody else would, but I don't think that we as the NASD and NCC would wish to demand that such be the case.

Mr. PAINTER. You don't see the need for Federal legislation here? Mr. MORGAN. I would imagine that if standardization was to be a requirement set down by the Congress with regard to effectuating a common uniform system, legislation perhaps could be required.

Mr. PAINTER. You have said in your statement that Federal legislation might impede efforts now underway in this area. In what respect do you feel that Federal legislation might impede the efforts that are now being considered?

Mr. MORGAN. I do think that is a statement that does require some clarification.

As we mentioned in that testimony, we prefer to see the formation of the depository worked out at the industry level, but we certainly would be willing to go the legislative route if accord cannot be reached on such matters as ownership, representation, cost of ownership, and many of the problems which Mr. Bevis' testimony refers to as being very real and necessary to be overcome in order to get the job done.

And, as we also mentioned, the NASD has the right, as does every other signatory to the memorandum of understanding, to pull out of the effort that is being done at the industry by BASIC if details such as these are unacceptable.

I think perhaps I would have to say that the NASD and NCC see as the real question regarding Federal regulation or participation as related to the degree of national purpose that Congress deems fit to assume, and I think that just to cite as an illustration, if you were to draw a matrix of all the testimonies that are given here today by the various parties, we see everything, ranging from what I could refer to perhaps as Federal enablement, to the actual enactment and operation of such a depository.

We have felt that although Congress could certainly have a say in the creation of the system, we have also been very impressed by Čongress' apparent attitude of wanting industry itself to take strong action.

With specific regard to the use of the word "impede," the concern that we would have would be looking at the various efforts that have been cited to date, and the activities that have been taking place on the part of the various groups that this panel represents, the question of perhaps diluting or perhaps slowing down the momentum of the progress being made by changing horses in midstream could perhaps be of some concern.

I am not saying or suggesting that legislation would impede. The question is, Might the intervention of an entirely different game plan at this point act to slow things up?

Mr. PAINTER. It wouldn't necessarily have to be an entirely different game plan, would it, Mr. Morgan?

In other words, could you envisage Federal legislation which might build upon what has already been done by the industry to date, and bring out of that progress which has been made a degree of uniformity which might not otherwise come than through Federal legislation?

In short, is it possible-and I would like Mr. Peake's views on thisis it possible that Federal legislation might act as a stimulus rather than an impeding force and provide for a uniformity in this area which might not otherwise emerge? Mr. Peake, do you wish to speak on that?

Mr. PEAKE. Well, I believe, in my statement, the conclusion that I arrived at was that the most rapid and most effective, and least costly solution would be creation of the agency.

On page 2, I state that the entity should be created using all existing resources within the industry and the cornerstone, or more correctly stated, the foundation of the proposed services corporation would be the Central Certificate Service, the depository run by the New York Stock Exchange.

I would include within that, a clearance and settlement system, the best selected from those available today.

Mr. PAINTER. Mr. Peake, do you think that things are going rapidly enough? Do you think that things should be speeded up and, if so, would Federal legislation do this, or would it merely impede what is being done?

Mr. PEAKE. I happen to be a very impatient man at times, Mr. Painter, and these changes do not come fast enough for me. But having served with the SIP Task Force trying to get the implementation of the CUSIP number as a standard, to get the industry to develop a standard bank-broker number standard, and we have been working on that since 1968, and we do not have it today, I do not believe, in

certain areas, that these efforts have been moving fast enough for my particular likes.

Mr. PAINTER. I think it is appropriate, Mr. Chairman, to ask some of the other panelists if they have views with regard to what has been said.

Mr. Moss. Mr. Needham?

Mr. NEEDHAM. Yes, Mr. Chairman. It seems to me the broad question is not whether or not we need Federal legislation, when you get down to the specifics of clearance, settlement, and delivery. I have been advised by my associates with me today that the NASD has ample authority under its existing statutory authority to require all of its members to adopt a uniform system.

Mr. Painter, you might like to explore that later with our lawyers who will be participating in this panel.

It seems to me, however, Mr. Chairman, that the broader question is one of mechanics. What seems to be lacking and probably disturbing to you in the Congress, as well as to us at the SEC, is a total systems approach to this matter, and to speak in terms of legislation without knowing specifically what it is we are going to legislate, it seems to me we get the cart in front of the horse.

The reason, I believe, that the Commission has moved cautiously in this entire area is that there is so much going on that we did not want in any way to deter or impede the development of ideas and concepts.

We think that the industry has come a long way in the last few years in the development of new ideas and technologies, and is showing a greater concerted effort toward the solution of the various problems that are under category 1.

So, Mr. Chairman, I would hope that as part of your record you would put the burden of proof on those people who advocate one system over another. Having done that if then you are able to reach a conclusion that one method is better than the other, it seems to me that through NASD or perhaps through SEC rulemaking authority, the system can be implemented without having to bother the Congress with the specifics of what a form should look like, how it should be routed, or so on.

I think that is an expertise that should be left within the self-regulatory framework or in the SEC. A total systems concept is what is needed here. The question is, Are we wise enough at this time to decide what it is?

Mr. Moss. I think the things that have concerned the Congress, and one, of course, is the total systems concept-that is certainly the foundation of a proper system-but as the individual efforts are being made, is there sufficient coordination, is there a building in of compatibility? Can there be, if it develops it is desirable, a totally standardized system created from the various individual efforts now going on?

Shouldn't there be at least an agency interest in assuring sufficient compatibility in the efforts so that the ultimate standardized system, if it is desirable, can be implemented at a reasonably early date?

Mr. NEEDHAM. Well, Mr. Chairman, I think I have some expertise in the area of systems development. Systems development is predicated, in fact its only foundation, is a sound organizational system, and that,

Mr. Chairman, is what in my opinion is lacking at the moment. Let me be specific so that I am not misunderstood.

At the present time, the entire industry, the Commission, this committee, and on the other side Senator Williams' committee, is wondering what the structure of the securities industry of the future will be. Will it be, as some have advocated, a two-market system, one of those two systems being the over-the-counter market system, and the other would be an amalgamation in some form of the existing exchanges? Once that determination has been made, then the question is, How do you create a communications system between members of the specific market system?

Once you have developed that, then it is really a question of mechanics, because there is general agreement among all the participants, at least based on my reading of their testimony, and that there is adequate technology available to develop a system.

So it seems to me again, and I don't mean to oversimplify things, but I do think in discussing specifics you sometimes lose the picture of the overall problem, and this is, of course, what the Commission is trying to grapple with, Mr. Chairman, in its own hearings which are being conducted simultaneously with your own, and that is, "What does the market system of the future look like, and to what extent should the SEC through its rulemaking authority assist in the development of that; or, if we don't have the authority, what should we come to the Congress with, to see that the markets of the country remain in a viable form?"

That is where I am. Mr. Chairman, and I think it is important here, and we would find it of great assistance at the Commission, for example, that when you get into a discussion of the net-by-net method, or the daily balance method, that the burden of proof fall on the advocate

of each of those.

But we still have to solve the overall problem. What are the markets going to look like?

Then we come back to whether we need legislation. As our attorneys will bring out further, we feel there is adequate authority vested now in the NASD to accomplish many of the things relating to communication at least in the over-the-counter market if we could only agree on one thing: What is the correct way to do it?

Mr. Chairman, if I may again, since I will not be present this afternoon, I would like to speak to an aspect of this matter which I am sure your staff has already anticipated is an area of concern for the Commission, and that is the depository system.

The despository system as outlined before you in the testimony does not really speak to the question of customer protection, because there still is in the hands of the depositor just a record of the street name ownership of those securities.

The bookkeeping and the transfer facility still is lodged in the broker-dealer, and as you know, we are charged with a specific directive from the Congress to develop rules on free credit balances, and the segregation of securities.

So I would not want anyone reading this record to think that by creating a depository system we have completely eliminated the problem of giving investors the protection they need and have asked for under specific legislation.

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