April 9, 1991
TO: INTERNATIONAL COMMITTEE NO. 4-91
RE: GROUP OF THIRTY RECOMMENDATIONS
__________________________________________________________
The Group of Thirty ("G30") is an independent, non-
partisan, non-profit organization comprised of international
financial leaders. The organization was established in 1978 to
"deepen understanding of international economic and financial
issues, to explore the international repercussions of decisions
taken in public and private sectors, and to examine the choices
available to policy makers."
In 1988 the G30 initiated a project to improve the state of
risk, efficiency and cost in the world's clearance and settlement
systems. The Group published the following nine recommendations
and began the process of setting up committees in each country to
oversee their adoption. The recommendations are:
1. All trade comparisons should be accomplished by T+1 no
later than 1990.
2. Indirect market participants (institutions, eg. pension
plans, mutual funds) should be members of a
confirmation/comparison system by 1992.
3. A central securities depository should be achieved in
each country by 1992.
4. A review of a trade netting system to determine its
appropriateness should be undertaken; and if
appropriate, netting should be implemented by 1992.
5. A delivery-versus-payment (DVP) practice should be in
place by 1992.
6. A same-day funds (SDF) settlement convention should be
adopted.
7. A rolling settlement system should be adopted with
final settlement on T+3 by 1992.
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8. Securities lending and borrowing should be encouraged.
9. Each country should adopt an international standard for
securities numbering and messages by 1992.
The United States presently meets six of the nine
recommendations, not meeting the recommended procedures of T+3
settlement, same-day funds, and international securities ID
numbers. The attached chart sets forth the status of each
country's settlement practices as of early 1990 compared with the
nine G30 recommendations. Each year the Group of Thirty issues
an updated status report which provides current information on
each country's progress toward adherence to the G30
recommendations. The 1991 status report is expected to be
available for distribution this June. The U.S. chapter of the
report is available now and is enclosed for your information.
In the United States, a Working Committee was established
to study the existing settlement systems in the United States.
This committee consists of representatives from brokers, banks,
financial intermediaries and other major industry organizations
including the Investment Company Institute.
The U.S. Working Committee ("USWC") representatives met
with SEC Chairman Breeden at a "Roundtable" on November 27, 1990.
The USWC presented the following proposals for change to the U.S.
securities markets based on two of the nine G30 recommendations -
moving to a T+3 settlement period and adopting a same-day funds
payment convention:
o By 1992, settlements and other movements of corporate
and municipal securities must be effected only by book-
entry movements within a depository for transactions
among financial intermediaries (brokers, dealers, and
banks) and between financial intermediaries and their
institutional clients.
o By 1992, all new corporate or municipal securities
issued must be eligible for depository processing, and
procedures have to be developed to monitor
inappropriate sale transactions during new issue
stabilization periods.
o In 1992, all payments for settlements among financial
intermediaries and their institutional customers should
be made using same-day funds. This would also apply to
payments associated with dividends, interest,
redemptions, and reorganizations. The 1992 time frame
is subject to validation as implementation plans are
developed.
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o By 1993, settlements of corporate and municipal
securities must be effected on T+3 only by book-entry
for all market participants. Alternatives to the
immobilization of assets of retail customers at
financial intermediaries will need to be in place prior
to the implementation of book-entry settlement. The
USWC proposed a direct registration system for assets
of retail customers.
Notwithstanding the USWC presentations to the SEC at the
"Roundtable", objections were raised by some of the participants
in the industry groups. In particular, representatives of the
Depository Trust Company ("DTC") and a major regional retail
stockbroker objected to the implementation schedule as well as
several general provisions.
While DTC acknowledged that T+3 settlement and same-day
funds are worthwhile goals, it stated that, at this time, the
costs of implementation outweigh the benefits to be gained. DTC
suggested that the costs of developing and operating a same-day
funds system be measured carefully against the risks and
associated costs of the current next-day funds environment. DTC
also stated that other projects to expand and improve U.S.
settlement systems must be considered before giving priority to
implementation of the G30 recommendations. DTC questioned the
time frames set for implementation by the G30 as it will need to
make substantial system changes to support the G30
recommendations. These system changes will take significantly
longer than the G30 schedule.
The regional retail broker/dealers are concerned that the
costs associated with making cash available for security
settlements on T+3 could drive smaller firms out of business, or
if passed on to investors, could discourage individual
participation in the financial markets. Some firms may require
money on deposit before executing a trade, branches may have to
"chase down" customer payments in order to meet shorter time
frames, and customers could lose the right to inspect and verify
a physical confirmation prior to payment. Retail investors may
find that dealing as individuals within this new environment is
too cumbersome. This may drive many individuals from the
marketplace altogether and may force smaller broker/dealers out
of business.
Chairman Breeden, while supporting the efforts of the USWC
and most of the G30 recommendations, departed from a major G30
proposal and took an unusual position stating that individual
shareholders should continue to be able to request physical stock
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certificates. The regional retail broker/dealers in particular
were counting on the reduced costs resulting from the
immobilization of certificates to partially offset the
potentially significant ongoing costs associated with the need
for settlement funds on T+3.
Chairman Breeden responded to the questions raised by the
regional retail broker/dealer community by asking Howard
Shallcross of Merrill Lynch to form a Retail Committee. The
Chairman asked that the Committee study the retail issues brought
forth by the recommendations and report its findings to the
Commission within six months. The Shallcross Retail Committee
has been meeting regularly and should be reporting back to the
SEC in May or June.
At the "Roundtable", the SEC also asked the USWC to
continue its efforts by documenting the steps necessary to
implement changes to the U.S. settlement system. In January
1991, the USWC submitted a report called "Issues Affecting
Implementation of The Group of Thirty Recommendation In the
United States" to the Commission. The report outlines the issues
critical to the implementation of the G30 recommendations and
proposes an approach and a timetable for resolving these issues.
The USWC is awaiting SEC comment.
The USWC has subsequently issued a proposal for changes
to the DTC Institutional Delivery ("ID") System to support T+3
settlement. It chartered the ID Focus Group which is made up of
DTC and industry representatives to finalize the proposal.
Presently, Donald O'Connor (VP - Operations) and Diane
Butler (Director, Operations/Fund Custody) are representing the
Institute on the U.S. Working Committee and the ID Focus Group
respectively.
Diane M. Butler Donald E. O'Connor
Director of Operations & Vice President - Operations
Fund Custody
Attachment
Enclosure