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Mr. BEVIS. Mr. Meyer is now arranging conferences with banks in Chicago and California from the standpoint of getting their thinking shaped.

Mr. MCCOLLISTER. Just a moment.

With the participation of the Midwest Exchange, has BASIC been holding those discussions with the Chicago and Midwestern banks and west coast banks?

Mr. BEVIS. Our task force has met monthly with Mr. Montross or his assistant who are representatives, we think, of the Chicago financial community but oriented to the exchange, and with Mr. Delahunty or some of his associates from the Pacific Exchange. And there have been discussions with regard to banks participating in clearing operations to smooth the flow of securities transactions between the communities, but the objective goes beyond that, and that means getting bank-held securities all deposited, too. The Traumatic experience that New York banks have gone through in reshaping their thinking in this respect probably has to be done in the same way in the other cities.

Mr. MCCOLLISTER. You may find that bankers in Chicago or San Francisco are quicker to accept changes in procedures here.

I am joking, but before Mr. Howland, I would like to have Mr. Delahunty comment about this from the point of view of the West Coast Stock Exchange and your possible participation in the discusson now going on in BASIC.

Mr. DELAHUNTY. Essentially our discussions are merely at the staff level and not at the policymaking level of BASIC. We felt that we were going to have very little say in the development of CSDS at the early Stages. For this reason, we went our own route in the development of a depository in Los Angeles and San Francisco. This, in and of self, would give us a meaningful participation in the depository network.

The development of a depository system in California was much easier than it was in the New York environment. Banks in California are for a period of 20 years allowed PCSE Clearing Corporation to hold securities as pledgeholder for the banks. Consequently, banks' articipation in a depository environment is a reality in California. It is for this reason that west coast banks at this point are very willing to participate in CCS.

Additionally, the banks in California have participated as members of the clearing system for approximately 20 years, and, as indicated in our testimony, they are now participants in the PCSE depository. I concur with Mr. Montross' statement that the sheer size of CCS will dictate the method by which depositories are going to be developed. Its development has impacted the clearance and settlement of securities transactions in other areas of the country, particularly in a net-byet clearance system which is used by the Pacific Coast Clearance Corporation where we act for both sides of the transaction. Large deDominational certificates which are circularized by reasons of the existence of CCS create a financial burden for the Pacific Coast Stock Exchange Clearing Corporation. Where, for example, we receive a 10,000-share certificate which is owed to 100 brokers at 100 shares each, e in effect, are forced to break down the certificate by transfer and Enance the position while it is in transfer.

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A more meaningful participation of the west coast financial community in BASIC would have been good. Seeing that we were excluded from policy level participation to date, we pursued our own route and we felt that the depository we have developed is compatible with the proposed CSDS and the present CCS operation. We have asked for membership in CCS, which we believe will be granted. We hope that CCS will participate as a member of our depository. This will create the nucleus for a communication system between depositories.

Mr. McCOLLISTER. Mr. Howland, you had a comment.

Mr. HOWLAND. I am distressed that this has gotten into a geographical battle. I think we are all forgetting one thing, whether it is New York Stock Exchange, Midwest, Pacific, or any one of them, we all serve one master, and that master happens to be our members, and our members in most cases are dual.

For example, Shields, I think Mr. Peake in his testimony on Monday indicated he belonged to all exchanges represented at this table.

I think if we explored the question we would find few of our members want to have, for example, on deposit all of their ITT stock in several locations. I am sure it is not to their advantage ending up recordkeeping, x percent in New York, x percent on west coast, and try to amalgamate this when they want to make a delivery.

I further would like to end by saying that CCS isn't something that just happened. It has been going on now for about 31 years from when the idea was first conceived. The initial study done on a depository for McChesney Martin back in 1939 indicated that a daily volume of approximately two-plus-million shares was going to be required before it would make sense to have one.

I submit that rery few of our regional exchanges probably economically should have depositories. I think the testimony that we have submitted shows that probably three make sense. New York, Midwest. and Pacific are probably sound. Again I think we don't want to go down the line where we duplicate facilities and make it difficult on the membership who pay our bills.

Mr. McCOLLISTER. Mr. Montross, do you regret introducing the subject of geographical concern, sir?

Mr. Montross. I was just a poor boy led astray, Mr. McCollister, by the committee's questions. There are two things that I would like to clarify.

First of all, on the matter of the development of depositories, we do have quite a few initials for systems passed around and tend to think of them as being identical, and I just wanted to clarify at least from our standpoint some comments made by Mr. Delahunty.

I have not suggested—and he will have to speak for himself obvi. ously—but I have not suggested up to this time nor probably will I ever suggest that Midwest should have been consulted about the derelopment of CCS. That is, the existing CCS.

I think it would have been delightful if New York had consulted with Midwest on this since we do represent essentially the same membership as Mr. Howland said, but that is a New York Stock Exchange depository.

My concern or the concern of the Midwest, and the Pacific Coast shares the feeling, is in going beyond that interim system; that is,


our membership in CCS and perhaps CCS membership in our depository and other regional depositories on a reciprocal basis.

Going beyond that interim step to development of a uniform and national depository system is where we think we should be involved in the development process.

The other point that I wanted to clarify is that I do agree with Mr. Howland that the exchanges do represent many of the same members, and, of course, I am including the National Association of Securities Dealers in that. But the exchanges do not represent all of the financial interests in the country.

Midwest Stock Exchange does not represent all of the banks in Chicago. It represents its membership only. One of the question things is to have the involvement of the various financial interests and financial institutions which exist in all parts of the country.

It is not merely a matter of exchanges working together. I think we have established and made very clear that the exchanges can work together to the extent of this reciprocal membership in CCS.

I think that is a fine forward step but we do have other elements: to be considered if we are going to have a truly national system representative of all of the interests.

Mr. McCOLLISTER. Did anybody else want to make a comment ? Mr. Bevis?

Mr. Bevis. I intended when I had the microphone before to comment on the suggestion that I had oversimplified the interrelationship among regional depositories in the country.

I don't believe so. My principal basis of saying so, Mr. Chairman, is that I went over to Germany to study their depository system which has been in operation formally for some 40 years.

They have seven depositories in Germany, each locally owned and operated, but they do interface with one another by being depositors in one another.

They vary widely as to the volume that is handled locally, Frankfurt being the largest, about 45 percent of the total, they estimate, but they are depositors in one another and deliver and receive on behalf of one another. Their internal recordkeeping facilities vary all the way from sophisticated computer equipment in the larger, to plain bookkeeping machines in the smaller.

Nonetheless, in terms of effecting transactions among themselves by book entry, they are extremely effective and have been for many decades.

Mr. McCOLLISTER. Go ahead, Mr. Montross.

Mr. MONTRoss. It is my understanding that this system that Mr. Bevis is speaking about, which I agree has been most effective, was developed not by each participant in the system independently but was developed on a national basis with a national orientation in which each of the banks or each of the various members cooperated. But it was not an independent development in the sense we are discussing, and I think that is the point we have been speaking to.

Vr. McCOLLISTER. Mr. Bevis disagrees with you, Mr. Vontross.

Mr. Bevis. It was started as a private operation, before the turn of the century as regards the big banks in Berlin. Banks in other financial centers in Germany commenced doing the same thing, that is, netting out the transactions of their customers and dealing with one another on a mass basis for the net of the transactions.

It was formalized in 1938, I think, by Federal law setting out the rights and duties and privileges of all of the various elements including the depositories and individuals, but it started as private endeavor separately in each of the various cities.

Mr. McCOLLISTER. Mr. Sporkin, would you have any comments before my final question here of all of the discussion that has been going on.

Mr. SPORKIN. Well, I certainly think that there has got to be an interface of these systems. I would certainly urge that there be a partnership and that certainly the Midwest and the Pacific coast and the banking interests in those areas be consulted and actually have real participation in the decisions.

Mr. McCOLLISTER. What can SEC do to promote that?

Mr. SPORKIN. I think it is not what can it do but what has it done and there we have met with these people, we have brought them together in Washington in a number of meetings beginning as early as the early part of 1969 to see if we could get this kind of consensus, pretty much what you have been doing, Mr. McCollister, in saying, "Look why can't we get together, why can't this thing be arranged, what areas of agreement are there, what areas of disagreement are there." and I think along those lines at the same time permitting each of these areas to develop through their own creative techniques, I think what I have found, you have represented here today some of the finest people of the greatest ability in this field that you could possibly have assembled.

As you can tell, these are extremely able people in these fields and I think they all contribute a great deal and I just hope that they will continue to contribute a great deal.

Mr. McCOLLISTER. If I may judge from the comments of Mr. Delahunty and Mr. Montross, SEC efforts to forge this partnership hare not been wholly agreeable to them.

Mr. SPORKIN. Well, I don't know, I don't think we sit down there and try to tell these people that this is what you have to do. They are obviously enlightened people and people trying to find as much information as they can.

I know Mr. Bevis has sought as much data on this subject and I just get the feeling that I think they will and they have and they will continue to sit down and discuss these matters and try to arrive at common solutions.

It just doesn't make any sense to go one way where you are going to be offending a group as important as the Midwest members or a group as important as Pacific coast members and I think they have a great deal to contribute in addition to numbers.

Their skills are tremendous. Mr. Morgan, sitting here on my left, is a case in point. He was Mr. Delahunty's predecessor at the Pacific coast. He had in effect developed the net by net system. When it came time for NASD to develop their own system which would perhaps have more impact than the Pacific coast, we urged the NASD to obtain a man of Mr. Morgan's caliber in order to develop that kind of system and it is that kind of thing that we have been trying to accomplish and I think we have been effective.

I am not saying 100 percent but we have been effective. Mr. Moss. I would like to ask a question, Mr. Sporkin. Do you have authority in the Commission to impose a requirement of interfacing and to require participation in a common system?

Mr. SPORKIN. I think we do, Mr. Chairman.

Mr. Moss. Do you have any doubt as to whether or not you have that authority ?

Mr. Howland disagrees. We will get to him in a moment.

Mr. SPORKIN. When you say do we have any doubt, my view is under the provisions which give us oversight over NASD and over the exchanges, we do have such authority.

In addition section 17 of the Securities Exchange Act of 1934 gives us certain authority over what types of books and records exchanges and broker-dealers must maintain. We have additional authority. And I do feel we do have such authority.

If you say if there is some doubt, obviously if someone could show me we are wrong, I would listen. I haven't done that research but I do believe there is authority:

Mr. Moss. Before recognizing you for a comment, Mr. Howland, I would like to express a hope that my remarks and the discussion here which has recognized certain facts of like is not characterized as a battle. I think that would be most unfortunate.

The facing of reality does not necessarily mean that we are faced with a devisive factor or that we are engaged in a battle, but I think we must face it and it would be a mistake not to do so.

Now if you would like to comment.
Mr. HOWLAND. Mr. Chairman, I appreciate your comments.

One thing before I answer on the authority of the SEC. I think we should refresh our minds that just 21/2 years ago before this very committee CCS was still a glimmer in someone's eye and that we have spent roughly the last 2 years up until March of this year trying to make it work and we have had a lot of trouble. There are a lot of people

а who said "it ain't going to fly.”

Only in March or April of this year was any consideration made of spinning it off to allow it to be owned by someone other than New York Stock Exchange.

So I hope our reference to time here as to when all of this is happening doesn't give the impression that this is a battle. But to come back to Mr. Sporkin's comment, I think as long as New York Stock Exchange, the Pacific, or Midwest owned its own depository, then there is no question that the SEC has the authority to regulate it.

However, in the memorandum of understanding that BASIC entered into between clearinghouse banks in New York, NASD, American, and New York Stock Exchange, which provides for spinoff and the eventual ownership of depository by its depositors, means that you are going to have a conflict here regarding oversight. For example, are the banks going to come under SEC jurisdiction?

I question that. Would the insurance companies fall under SEC jurisdiction? I question that.

The ways CSDS is designed to be spunoff no later than mid-1973, says that it will be owned by its depositors, and its depositors are defined as those financial institutions which come under either Federal or State agency regulation,

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