THE FUTURE QUTLOOK FORSECURITIES PROCESSING REGULATION

SPEECH BY RICHARD G. KETCHUMDIRECTORDIVISION OF MARKET REGULATIONSECURITIES AND EXCHANGE COMMISSION

BEFORE THE QPERATIONS CONFERENCESECURITIES INDUSTRY ASSOCIATIONMAY 29~ 1985

I WANT TO THANK YOU FOR THE OPPORTUNITY TO TALK WITH YOU.

I'D LIKE TO SPEAK TO YOU TODAY ABOUT RECENT DEVELOPMENTSIN SECURITIES PROCESSING REGULATION. As MANY OF YOU KNOWJTHE PAST FIVE YEARS HAVE BEEN A VERY ACTIVE AND PRODUCTIVE TIMEFOR BOTH THE SECURITIES PROCESSING INDUSTRY AND THE COMMISSION.THESE YEARS HAVE BEEN MARKED BY A SPIRIT OF CLOSE COOPERATIONAND COORDINATION BETWEEN THE COMMISSION AND THE INDUSTRY.

THE LAST FIVE YEARS HAVE SEEN A STEADY EFFORT TO INCLUDEALL RELEVANT PARTIES AND SECURITIES IN THE NATIONAL CLEARANCESETTLEMENT SYSTEM. THROUGH YOUR WILLINGNESS TO WORK FOR CHANGEJ

THE PROCESSING AREA HAS BEEN AMONG THE INNOVATIVE SECTORS OF THESECURITIES INDUSTRY. FOR EXAMPLEJ WITH THE HELP OF ADOPTION OFNYSE RULE 387J THE NATIONAL INSTITUTIONAL DELIVERY SYSTEM HASINCLUDED THE MAJOR INSTITUTIONAL PLAYERS NECESSARY TO GREATLYINCREASE THE EFFICIENCY OF SECURITIES CLEARANCE AND SETTLEMENT.SIMILARILYJ THROUGH THE DEVELOPMENT OF DTC's VOLUNTARY OFFERINGSPROGRAM AND THE ADOPTION OF RULE 17An-14} TENDER OFFERS NO LONGERAUGER THE PROCESSING NIGHTMARES THEY ONCE DID.

IN ADDITION} MUNICIPAL SECURITIES PROCESSING HAS COME A LONGWAY IN THE LAST TWO YEARS. TODAY} THE MUNICIPAL SECURITIESINDUSTRY FOR THE MOST PART EXPERIENCES SYNCHRONIZED CUSTOMER-SIDE!STREET-SIDE SETTLEMENT. THIS IS A DIRECT RESULT OF COORDINATEDMSRB} COMMISSION} CLEARING CORPORATION AND SECURITIES DEPOSITORYEFFORTS. FURTHER ENHANCEMENTS ARE ON THE HORIZON. IN PARTICULAR}WE ARE LOOKING FORWARD TO THE SOON-TO-BE-IMPLEMENTED EXPANSION OF

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MOREOVER, THE INDUSTRY HAS BEEN EXPLORING NEW EXCITINGTECHNOLOGIES, LIKE LIGHT SIGNATURES, THAT CREATE MACHINE-READABLECERTIFICATES AND OFFER REAL PROTECTION AGAINST COUNTERFEITINGAND THEFT OF SECURITIES CERTIFICATES. THOSE TECHNOLOGIES, INOUR VIEW, COULD GREATLY INCREASE THE INTEGRITY OF SECURITIESCERTIFICATES, ESPECIALLY IF THE TECHNOLOGY IS LINKED TO SECURITIESINFORMATION CENTER, THE COMMISSION'S FACILITIES MANAGER FOR THELOST AND STOLEN SECURITIES PROGRAM. INDEED, THOSE TECHNOLOGIESOFFER THE SECURITIES INDUSTRY TANTALIZING POSSIBILITIES THATCOULD REDUCE THE PROCESSING INEFFICIENCIES INHERENT IN PHYSICALCERTIFICATES. THEY DESERVE SERIOUS EXAMINATION OVER THE COMINGYEAR.

THE MAJOR STRIDES MADE IN THE LAST FEW YEARS ARE TO THEINDUSTRY'S CREDIT. WE AT THE COMMISSION HAVE ATTEMPTED TO REMAINOPEN TO NEW INITIATIVES AND, WHERE APPROPRIATE, ADOPTED OR APPROVEDRULES NECESSARY TO BUILD USAGE OF INNOVATIVE SYSTEMS WHICH HAVEREDUCED PROCESSING COSTS FOR ALL. WE HAVE ALSO ATTEMPTED TOENCOURAGE THIS INNOVATIVE SPIRIT THROUGH HOSTING THE APRIL 1984SECURITIES PROCESSING ROUNDTABLE-

AT THE ROUNDTABLE MANY OF YOU HELPED IDENTIFY WAYS TO INCREASEEFFICIENCY AND SAFETY IN EXISTING NATIONAL CLEARANCE AND SETTLEMENTSYSTEM SERVICES-

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IN RESPONSE TO ROUNDTABLE DISCUSSIONS} STAFF FROM THECOMMISSION} CLEARING AGENCIES AND MARKET SRO's FORMED A MONITORINGCOORDINATION GROUP} WHICH HAS TAKEN SEVERAL STEPS TO IMPROVECOMMUNICATION WHEN A FIRM FACES FINANCIAL PROBLEMS. ALSO} ATRANSFER AGENT PRACTICES UNIFICATION GROUP WAS CREATED TO DEALWITH INDEPENDENT REGISTRAR REQUIREMENTS AND NON-UNIFORM TRANSFERAGENT STANDARDS} FORMS AND PRACTICES- FINALLY} THE SIGNATUREMEDALLION PROGRAM DEVELOPMENT GROUP HAS MET SEVERAL TIMES AND ISCLOSE TO A FINAL RECOMMENDATION ON WAYS TO STREAMLINE THE SIGNATUREGUARANTEE PROCESS-

WHILE WE HAVE MADE EXCELLENT PROGRESS} MUCH WORK STILL REMAINS-FOR EXAMPLEJ WE AT THE COMMISSION ARE CONCERNED ABOUT THE SLOWPROGRESS BEING MADE RESPECTING NSCC's PLANNED CENTRALIZEDJ

AUTOMATED SECURITIES LOAN ACCOUNTING AND MARKETING SYSTEM. THROUGHTHE SECURITIES LENDING TASK FORCEJ NSCC HAS MAINTAINED A DIALOGUESINCE THE ROUNDTABLE WITH THE SECURITIES LENDER COMMUNITY AND OTHERINTERESTED SECURITIES INDUSTRY GROUPS REGARDING THE CREATION OF SUCHA SYSTEM- YET NSCC INFORMS US THAT THE PROPOSAL HAS RECEIVED ALUKEWARM RECEPTION- WE UNDERSTAND THAT SOME PLAYERS ARE HESITANTBECAUSE THEY HAVE THEIR OWN EFFECTIVE STOCK LOAN ACCOUNTING ANDMARKETING PROGRAMS ANDJ UNDER THE PROPOSALJ FEAR PROGRAM DUPLICATION-HOWEVERJ WE BELIEVE THAT A WELL-CONCEIVEDJ INDUSTRY-WIDEJ UNIFORMSTOCK LOAN ACCOUNTING AND MARKING SYSTEM WILL REDUCE SUBSTANTIALLYTHE INDUSTRY'S RISKS FROM STOCK LOAN ACTIVITY- WHILE THE DIFFICULTYOF INSURING FULL INSTITUTIONAL PARTICIPATION IN THE SYSTEM MAY IMPOSE

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COSTS ON SOME FIRMS, IT SEEMS TO ME THAT THE POTENTIAL ADVANTAGESOF A CENTRALIZED SYSTEM OUTWEIGH THOSE COSTS- WE HAVE ALREADYSEEN SOME OF THE CONTROL PROBLEMS FIRMS HAVE ENCOUNTERED INRUNNING THEIR ISOLATED STOCK LOAN PROGRAMS - LET'S NOT WAIT FORTHE TYPE OF DISASTERS THAT HAVE OCCURRED IN THE GOVERNMENTSECURITIES REPURCHASE AREA BEFORE WE MOVE TO A SAFER SYSTEM-

IN ADDITION1 I WOULD LIKE TO TURN FOR A MOMENT TOAUTOMATING THE CUSTOMER ACCOUNT TRANSFER PROCESS- IF THESECURITIES INDUSTRY HAS AN ACHILLES HEEL THIS IS IT- THECOMMISSION HAS RECEIVED FAR AND AWAY MORE COMPLAINTS REGARDINGACCOUNT TRANSFER THAN ANY OTHER AREA- UNCONSCIONABLE DELAYSIN ACCOUNT TRANSFER REDUCE PUBLIC INVESTOR CONFIDENCE IN THESECURITIES MARKETS AND ENCOURAGE CUSTOMERS TO HAVE SECURITIESTRANSFERRED INTO THEIR OWN NAME- THE SITUATION TODAY REDUCESTHE EFFICIENCIES OF STREET-NAME OWNERSHIP AND FRUSTRATES FURTHERCERTIFICATE IMMOBILIZATION- To SPEED UP AND MAKE MORE EFFICIENTTHE BROKER-TO-BROKER CUSTOMER ACCOUNT TRANSFER PROCESS, NSCCAND THE NYSE HAS BEEN DEVELOPING AN AUTOMATED SYSTEM THAT WOULDTRANSFER BY BOOK-ENTRY A CUSTOMER'S ENTIRE STREET-NAME POSITIONBETWEEN BROKERS I INCLUDING FULLY-PAID AND MARGIN STOCKS1 MARGINCOLLATERAL I IRA's AND KEOUGH'S- NSCC's SYSTEM IS SCHEDULED FORA JULY START-UP- I ENCOURAGE YOUR SUPPORT OF THIS PROPOSAL-

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OTHER PROBLEM AREAS WILL BE DEMANDING YOUR ATTENTION DURINGTHE NEXT YEAR. FOR EXAMPLE) YOU WILL NEED TO MAKE COORDINATEDEFFORTS TO ADDRESS:

THE DEVELOPMENT OF STANDARD INTERFACES BETWEEN ALLDEPOSITORIESjTHE FAILURE OF MUNICIPAL PUT BOND TENDER AGENTS TOUSE DEPOSITORIES' VOLUNTARY OFFERINGS PROGRAMS TOPROCESS PUT TENDERS BY BOOK-ENTRYjNON-STANDARD DISCLOSURES TO MUNICIPAL BOND HOLDERSREGARDING PUT ELECTION PERIODSjTHE MOVE TO A SAME-DAY FUNDS SETTLEMENT CAPABILITYAT SECURITIES DEPOSITORIESj ANDTHE DEVELOPMENT AND EXPANSION OF TRANSFER AGENTCUSTODIAN PROGRAMS NATIONWIDE.

I KNOW THAT YOU WILL SOLVE THESE AND OTHER PROBLEM AREAS INTHE SAME COOP~RATIVEJ IMAGINATIVE AND RESPONSIBLE WAY THAT YOUHAVE MET PAST CHALLENGES.

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BECAUSE SO MUCH IMPORTANT WORK REMAINS TO BE DONEJ THECOMMISSION HELD THE SECURITIES IMMOBILIZATION WORKSHOPS INWASHINGTON IN FEBRUARY AND MARCH OF THIS YEAR- A NUMBER OF YOUPARTICIPATED IN THESE WORKSHOPSJ AND FISC WAS INSTRUMENTAL INHELPING US ORGANIZE THEM- WE APPRECIATE YOUR EFFORTS IN PUTTINGTHESE SESSIONS TOGETHER-

WE ARE IN THE PROCESS OF PREPARING A REPORT ON THE WORKSHOPSAND PLAN TO HAVE IT AVAILABLE FOR DISTRIBUTION VERY SOON- I'DLIKE TO PREVIEW FOR YOU WHAT WE THINK ARE THE MAJOR CONCLUSIONSAND ACTION ITEMS FROM THE WORKSHOPS.

THE WORKSHOPS FOCUSED PRIMARILY ON THREE OBJECTIVES:1- WAYS TO INCREASE THE IMMOBILIZATION OF SECURITIES

CERTIFICATES IN DEPOSITORIES-2. PROMOTING FULL IMMOBILIZATION THROUGH THE USE OF GLOBAL

CERTIFICATES- (A GLOBAL CERTIFICATE IS ONE CERTIFICATECUT FOR AN ENTIRE ISSUEJ REGISTERED IN THE NAME OF ADEPOSITORY AT ISSUANCEJ DEPOSITED AND PERMANENTLYIMMOBILIZED IN A DEPOSITORY- No ADDITIONAL CERTIFICATESARE THEN ISSUED AND OWNERSHIP INTERESTS ARE RECORDEDBY BOOK-ENTRY NOTATIONS-)

3- EVALUATION AND ISSUER CONSIDERATION OF CERTIFICATELESSBOOK-ENTRY SYSTEMS-

PARTIAL IMMOBILIZATIONTHE CONSENSUS OF THE WORKSHOP PARTICIPANTS WAS THAT THE

NATIONAL CLEARANCE AND SETTLEMENT SYSTEM FACILITIES HAVE BEENWORKING EFFECTIVELY IN IMMOBILIZING THE MAJORITY OF CORPORATESECURITIES- THE SUCCESSFUL PERFORMANCE OF THESE SYSTEMS ISDEMONSTRATED BY THE VOLUME OF CORPORATE SECURITIES NOW IN THEDEPOSITORY ENVIRONMENT- CURRENTLYJ 50% OF NYSE EQUITY AND 65%OF NYSE ISSUER DEBT ARE IN SECURITIES DEPOSITORIES-

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IN MY VIEWJ ACCELERATING THE ON-GOING IMMOBILIZATION OFCORPORATE EQUITY AND DEBT SECURITIES - PARTICULARLY OF INSTI-TUTIONAL PORTFOLIOS - CONTINUES TO BE THE MOST IMPORTANT TASKFACING THE INDUSTRY TODAY. FURTHER PROGRESS IN THIS AREA WILLBE CRITICAL TO YOUR ABILITY TO HANDLE SUSTAINED HIGH VOLUMETRADING ON A ROUTINE BASIS. THE TASK AT HAND INVOLVES THEEXTENSION AND REFINEMENT OF EXISTING FACILITIESJ AND AS SUCHJ

IS PART OF THE EVOLUTIONARY PROCESS BEGUN MORE THAN TEN YEARSAGO. SEVERAL MEANS TO ACCOMPLISH THIS ACCELERATION WEREEMPHASIZED AT THE WORKSHOPS:

1. EXPAND THE USE OF CLEARING AGENCY FACILITIES FOR THECONFIRMATIONJ AFFIRMATIONJ AND BOOK-ENTRY SETTLEMENT OF INSTI-TUTIONAL TRADES THROUGH FULL OF COMPLIANCE WITH NYSE RULE 387.CURRENTLYJ INSTITUTIONS ARE AFFIRMING ONLY 84% OF THE CONFIRMEDTRADESJ AND ONLY 91% OF THOSE TRADES ARE SETTLING WITHIN THEREQUIRED TIME FRAMES. SRO MONITORING PROGRAMS} FIRM COMMITMENTTO 387J AND SPECIAL ASSISTANCE SEMINARS WOULD HELP BOOSTCOMPLIANCE.

BEYOND THATJ IT MAKES SENSE FOR BOTH THE COMMISSION AND THESROs TO CONSIDER THE COSTS AND BENEFITS OF RULE REVISIONS TOELIMINATE THE CURRENT EXEMPTIONS FOR NON-DEPOSITORY PARTICIPANTAGENT TRADES.

2. THE INDUSTRY MUST PRESS FOR AMENDMENTS TO THE REMAININGSTATE STATUTORY RESTRICTIONS ON INSURANCE COMPANY USE OF SECURITIESDEPOSITORIES. ONLY ONE-THIRD OF THE $325 BILLION ELIGIBLE INSURANCE

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COMPANY ASSET BASE IS NOW IMMOBILIZED IN DEPOSITORIESj ONLY 20%OF INSURANCE COMPANIES THAT PARTICIPATE IN THE SECURITIES MARKETSHAVE ASSETS ON DEPOSIT IN DEPOSITORIES.

FIFTEEN STATES CONTINUE TO PROHIBIT DEPOSITORY USE BY INSURANCECOMPANIES BY REQUIRING THAT ALL ASSETS BE HELD WITHIN THE STATE.ALS01 NEARLY ALL STATES REQUIRE THAT INSURANCE COMPANIES DOINGBUSINESS IN THE STATE KEEP A CERTAIN AMOUNT OF ASSETS ON DEPOSITIN THE STATE - SOME REQUIRE THAT THE ASSETS BE HELD IN THE INSURANCECOMMISSIONER'S VAULT.

STATE INSURANCE REGULATORS' OPPOSITION TO DEPOSITORY USE HASDIMINISHED OVER THE LAST TEN YEARS. THIS HAS OCCURRED, IN PART,THROUGH THE PAST EFFORTS OF THE NATIONAL ASSOCIATION OF INSURANCECOMMISSIONERS (-NAIC-) TO SEEK TO CHANGE STATE LAWS AND TO INFORMSTATE INSURANCE COMMISSIONERS ABOUT THE SAFETIES AND BENEFITS OF-THE DEPOSITORY SYSTEM. WE BELIEVE IT IS TIME TO REVITALIZE THENAIC TASK FORCE AND COMPLETE THE TASK IT BEGAN TEN YEARS AGO --TO BRING THE BULK OF ELIGIBLE INSURANCE COMPANY ASSETS INTO THEDEPOSITORY SYSTEM. THE SlA's SUPPORT FOR THIS EFFORT WOULD BEVERY HELPFUL.

3. ON THE RETAIL SIDE1 WORKSHOP PARTICIPANTS ACKNOWLEDGEDTHAT WORK TOWARD ACHIEVING GREATER IMMOBILIZATION ALSO REMAINSTO BE DONE. THERE IS NEED FOR AN EDUCATIONAL CAMPAIGN AIMEDAT THE INDIVIDUAL INVESTOR ABOUT THE BENEFITS OF STREET-NAMEOWNERSHIP AND THE LITTLE-PUBLICIZED COSTS AND RISKS OF INVESTORCERTIFICATE CUSTODY.

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THESE STEPS TO INCREASE PARTIAL IMMOBILIZATION WOULD PROVIDESIGNIFICANT BENEFITS.

ISSUER TRANSFER AGENT COSTS COULD BE REDUCED BY ATHIRD IF WE MOVED FROM 50% TO 85% IMMOBILIZATIONIN A DEPOSITORY.THE BROKER COSTS OF SETTLING A RETAIL TRADE THROUGHBOOK-ENTRY ON A STREET-NAME ACCOUNT IS ONE-TENTH THATOF SETTLING A TRADE THAT INVOLVES PROCESSING A CERTIFICATE.BANK NET CHARGES FOR CERTIFICATED TRADE PROCESSING CANBE TWICE AS MUCH AS BOOK-ENTRY SETTLEMENT CHARGES.

ACCORDINGLYJ IN MY VIEWJ FASTER PROGRESS TOWARD FULLERIMMOBILIZATION IS THE MOST IMPORTANT AGENDA ITEM FOR 1985.GLOBAL CERTIFICATES

MOST OF YOU ARE AWARE OF THE SUCCESS OF FOUR RECENT MUNICIPALBOND OFFERINGS - DELAWAREJ MASSACHUSETTSJ UTAH AND CONNECTICUT -ISSUED IN ESSENTIALLY CERTIFICATELESS FORM THROUGH THE USE OFGLOBAL CERTIFICATES PERMANENTLY IMMOBILIZED AT DTC. ANDJ JUSTTHE OTHER DAYJ OHIO ISSUED $110 MILLION IN SPECIAL OBLIGATION

THE MARKET'S FAVORABLE RECEPTION HAS BEEN DEMONSTRATED BYDELAWARE'S PLACING ITS $50 MILLION GLOBAL ISSUE AT AN INTERESTRATE 10 BASIS POINTS LOWER THAN A HIGHLY-RATED OFFERING ISSUEDTHE PREVIOUS DAY. MORE TO THE POINT} A GLOBAL ISSUER PAYS VIRTUALLYNOTHING FOR ISSUANCE AND TRANSFER. ONLY ONE CERTIFICATE IS PRINTEDAND ISSUEDj ALL TRANSFER FUNCTIONS THROUGHOUT THE ISSUE'S LIFE AREPERFORMED BY THE DEPOSITORY AS AGENT FOR ITS PARTICIPANTS. MOREOVERJ

THE ELIMINATION OF CERTIFICATE HANDLING REDUCES DRAMATICALLY SECONDARYMARKET PARTICIPANT PROCESSING COSTS.

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WORKSHOP PARTICIPANTS RAISED TWO PRIMARY CONCERNS WITH EXPANDINGTHE USE OF GLOBALS. FIRST1 THEY EXPRESSED THE VIEW THAT IT WOULDBE INAPPROPRIATE TO MANDATE THE CONVERSION OF PHYSICAL SECURITIESPOSITIONS HELD BY MILLIONS OF PUBLIC INVESTORS THROUGHOUT THEUNITED STATES. SECOND I ISSUERS WERE CONCERNED THAT 100% STREET-NAME ISSUES WOULD EXACERBATE THE DIFFICULTIES OF COMMUNICATINGWITH THEIR SHAREHOLDERS. I AGREE THAT THESE ARE SERIOUS IMPEDI-MENTS TO THE USE OF GLOBAL CERTIFICATES FOR EQUITY SECURITIES.I CAN'T IDENTIFY1 HOWEVER1 ANY REAL IMPEDIMENTS TO THE USE OFGLOBALS FOR DEBT SECURITIES. WE PLAN TO DO WHAT WE CAN TO PROMOTESUCH ISSUES FOR BOTH CORPORATE AND MUNICIPAL BONDS1 AND WE HOPETO HAVE YOUR SUPPORT. WE INTEND TO MEET WITH GROUPS OF ISSUERSAND THEIR INVESTMENT BANKERS TO URGE THAT THEY CONSIDER USING THEGLOBAL CERTIFICATE MECHANISM FOR THEIR NEXT DEBT OFFERING.]OOK-ENTRY

THE WORKSHOPS ALSO EXAMINED THE POTENTIAL USES OF PUREBOOK-ENTRY SYSTEMS. PURE BOOK-ENTRY SYSTEMS OPERATED BY ISSUERSOR THEIR TRANSFER AGENTS PRESENT POTENTIAL OPERATIONAL PROBLEMSAND RAISE A NUMBER OF LEGAL SNARLS. ON THE OPERATIONAL SIDE1 IFSUCH A SYSTEM DOES NOT MAKE ACCOMMODATION FOR CENTRALIZED SETTLEMENTPROCESSING - EITHER THROUGH A DEPOSITORY OR THROUGH AN NSCC -SERVICE LIKE THE ONE BEING DEVELOPED FOR MUTUAL FUNDS - BROKERAND TRANSFER PROCESSING COULD FACE DELAYS AND CONFUSION.

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ON THE LEGAL SIDE} ONLY 14 STATES HAVE ADOPTED THE 1977AMENDMENTS TO THE UNIFORM COMMERCIAL CODE THAT RECOGNIZE UN-CERTIFICATED SECURITIES. THIS PATCHWORK OF STATE LAWS INJECTSSIGNIFICANT UNCERTAINTY INTO MULTISTATE SECURITIES TRANSACTIONSINVOLVING UNCERTIFICATED SECURITIES. ALSO} 1977 CODE PROVISIONS}WHICH REMAIN UNTESTED} CREATE SPECIAL DUTIES FOR ISSUERS ANDMARKET PARTICIPANTS.

DESPITE THESE OBSTACLES} IN MY VIEW BOOK-ENTRY ISSUANCESHOULD CONTINUE TO BE EXPLORED AS AN EFFICIENT LONG-RANGE MODELFOR SOME TYPES OF SECURITIES.MORTGAGE-BACKED SECURITIES

THE WORKSHOPS ALSO ADDRESSED THE RISKS INHERENT IN THECURRENT MORTGAGE-BACKED SECURITIES SETTLEMENT PROCESS - PARTICULARLYTHE SETTLEMENT OF GNMAs. GNMAs REMAIN THE LARGEST PART OF THEBURGEONING MORTGAGE-BACKED SECURITIES MARKET; THEY ARE TOTALLYCERTIFICATED AND SETTLEMENT OCCURS OUTSIDE OF ANY NC&SS FACILITY.WORKSHOP PARTICIPANTS UNANIMOUSLY CHARACTERIZED THIS AS A .PAPERWORKCRISIS. WAITING TO HAPPEN.

THE PAPER-INTENSIVE AND DECENTRALIZED SECURITIES PROCESSINGIN THIS MARKET IS REMINISCENT OF THE EQUITIES MARKETS TWENTY YEARSAGO. BUT THE RISKS OF AN OPERATIONAL BREAKDOWN IN THE GNMA MARKETARE GREATLY MAGNIFIED BY ITS PARTICULAR CHARACTERISTICS: GNMASETTLEMENT TAKES PLACE ONCE A MONTH WITHIN STRICT TIME CONSTRAINTS;SETTLEMENT IS IN SAME-DAY FUNDS; AND MOST TRADES ARE $1 MILLION

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OR MORE IN SIZE. ONE FAILURE TO DELIVER CAN GENERATE A DOMINO-LIKE SERIES OF FAILS WITH FINANCING BURDENS FOR FIRMS THAT FAREXCEED THAT OF THE USUAL FAILED EQUITY TRANSACTION.

RECENTLY~ THE INDUSTRY NARROWLY AVERTED A MAJOR CRISISCAUSED BY THE FALLOUT FROM THE ESM AND BBS FAILURES. S&LsTRYING TO LOCATE COLLATERAL} PRESUMABLY HELD IN SAFEKEEPING BYTHESE TWO FIRMS} PLACED STOP ORDERS ON $110 MILLION IN GNMACERTIFICATES. ALTHOUGH AFFECTING ONLY A SMALL PIECE OF THE$350 BILLION MORTGAGE-BACKED SECURITIES MARKET} THESE STOP ORDERSCAUSED SIGNIFICANT DISRUPTION AS DEALERS DISCOVERED AT SETTLEMENTTHEY WERE HOLDING NON-TRANSFERABLE} VALUELESS CERTIFICATES.

FOR SOME TIME THE INDUSTRY HAS RECOGNIZED THE NEED TO DEVELOPA DEPOSITORY OR BOOK-ENTRY SOLUTION TO THE GNMA SETTLEMENT PROBLEMS.FIRMS HAVE BEEN ON THE FENCE DECIDING WHETHER TO PARTICIPATE IN THEMIDWEST'S MBS-CC PILOT OR WAIT FOR GNMA TO TAP THE FED AS ITSFISCAL AGENT AND REQUIRE CONVERSION TO BOOK-ENTRY.

As THE LATEST CRISIS ILLUSTRATESj ACTION CANNOT BE FURTHERDELAYED. WE STRONGLY URGE YOU TO TAKE IMMEDIATE STEPS TO JOIN THEPILOT PROGRAM. WE WILL SUPPORT THAT PROCESS IN WHATEVER WAYS WE CAN-

IN SUMMARY~ WHAT WE HAVE SEEN DURING THE LAST FIVE YEARS ISTHE BEST SORT OF RELATIONSHIP BETWEEN GOVERNMENT AND THE SECURITIESPROCESSING INDUSTRY - STRONG INDUSTRY INNOVATION COUPLED WITH THEENCOURAGEMENT AND CAREFUL AUDIT OF THE REGULATORS. I LOOK FORWARDTO THAT SAME KIND OF LEADERSHIP AND INNOVATION FROM YOU IN FACINGTHE CHALLENGES OF THE SECOND HALF OF THIS DECADE.