Permission Expected for Computerized Settlements
Federal regulators are expected next month to drop restrictions on a computerized system for settling commercial paper transactions, officials at the Depository Trust Co. said.
"The investor community is very happy with it," said Craig Dukes, financial sales manager with Ford Motor Credit Co.
The move will enable corporations, banks, and brokers to convert most of country's remaining commercial paper documents into electronic bits of information.
Such a change promises to slash operating costs and reduce risk by eliminating the need to shuttle the notes - often worth billions of dollars - from issuers and investors to the banks and brokers that act as their agents.
Banks also expect the system to shake up a modestly profitable, fee-based business that has historically been dominated by New York money-center banks.
Two years ago, the Depository Trust started its so-called book-entry system for commercial paper, but under a federal restriction to no more than three-quarters of the market under control.
This restriction was intended to limit the risk of financial cataclysm should the Depository's computers fail and records disappear.
The industry has been cautious about exceeding the ceiling. As a result, it only holds about 45% of $555 billion of outstanding commercial paper issues in the book-entry system, said James Reilly, the company's vice president for planning.
But the Depository Trust recently built a backup computer center. Officials hope it will alleviate federal concerns by insuring that computer operations never halt for more than three hours and that records never disappear.
If all proceeds as planned, regulators could drop the market-share restriction by the end of October, Mr. Reilly explained.
"We expect that by next fall we will get around 80% of the market," he added.
In the Depository Trust's book-entry system, paper notes are held in vaults; and electronic messages are sent among issuers, banks, brokers, and investors to settle transactions.
The move toward electronic settlement. is also expected to alter the competitive playing field for banks. Observers said nearly all of the country's largest commercial paper issuers are eyeing new banks to act as their issuing and paying agents in book-entry transactions.
Included in this group is the the country's largest commercial paper issuer, GE Capital Corp., which expects to support book entry by mid-1993, according to Mr. Reilly.
Ronald Thalheimer, vice president and corporate trust operations manager for First National Bank of Chicago, said General Electric Capital is now asking banks to bid on becoming its new issuing and paying agents.
Ford Motor Credit, which vies with General Motors Acceptance Corp. for second place as a U.S. commercial paper issuer, last year decided to use three banks for book entry: Bankers Trust New York Corp., Citicorp, and First Chicago Corp. The move effectively split issuing business that Bankers Trust formerly dominated.
And cost savings from book entry are forcing banks to slash the fees they charge for commercial paper issuing and custody services by 10% to 50%, officials said.
Profit Margin Squeeze Possible
Profit margins, in the short term, could be squeezed as banks invest in new book-entry computer systems, and struggle to pare down their paper-based operations.
The largest commercial paper issuing bank is the Morgan Guaranty Trust, a division of J.P. Morgan & Co., which is believed to control 35% to 40% of the market. Other leaders include Chemical Banking Corp., Citicorp, Chase Manhattan, and First Chicago.
Banks collect millions of dollars in fees from the largest issuers.
The Depository Trust Co. is a regulated, industry-owned company founded in the early 1970s to facilitate trade settlement. Its book-entry systems are widely used in other financial markets.
For example, more than two-thirds of the shares traded on the New York Stock Exchange and nearly 90% of the country's municipal bonds are traded in this manner.