ICI LETTER ON SEC/FED PROPOSAL REGARDING STRUCTURAL CHANGE IN THE SETTLEMENT OF GOVERNMENT SECURITIES

[15032] August 13, 2002 TO: FIXED-INCOME ADVISORY COMMITTEE No. 10-02 MONEY MARKET FUNDS ADVISORY COMMITTEE No. 4-02 RE: ICI LETTER ON SEC/FED PROPOSAL REGARDING STRUCTURAL CHANGE IN THE SETTLEMENT OF GOVERNMENT SECURITIES The Institute has filed a comment letter (attached) with the SEC and the Federal Reserve Board (“Agencies”) in response to their interagency concept release on possible structural changes in the settlement of government securities.1 The Institute’s letter generally supports the Agencies’ initiative to examine vulnerabilities in the government securities market, but recommends against the creation of a central utility to clear, settle and finance U.S. Government securities. The letter expresses concern that a central utility would, among other things: (a) adversely impact the operational risk in the system by creating a single point of failure; (b) eliminate or substantially reduce the innovation and efficiency present in the current system; (c) entail a costly, time-consuming and untested process; and (d) adversely impact liquidity. Instead of creating a new utility, the letter supports improvements to the current system, including: (a) establishing minimum standards for the business continuity capabilities of the clearing banks; (b) requiring these banks to coordinate their continuity capabilities; (c) imposing periodic regulatory examinations of the business continuity capabilities; (d) imposing mandatory periodic testing of the capabilities with all market participants; and (e) strengthening the communication channels and broaden the network of market participants that are communicated with during times of crisis. Finally, the letter recommends the creation of an advisory group, under the auspices of the Agencies, which would consist of all market participants, including dealers, institutional investors and clearing banks. The advisory group would: (a) identify and analyze the costs and benefits of various solutions to reduce risks, including the risk of exit; (b) monitor contingency capabilities to ensure ongoing responsiveness to market developments and new risks; (c) explore for ways to strengthen communications among market participants; and (d) recommend common market practices that would enhance the ability of the system to respond to various threats and risks. Barry E. Simmons Associate Counsel Attachment (in .pdf format) 1 See Memorandum to Fixed-Income Advisory Committee No. 8-02 and Memorandum to Money Market Funds Advisory Committee No. 2-02, dated May 29, 2002.