First Chicago Corp. is benefiting from the advent of electronic commercial paper as it bids for leadership as a processing agent for those securities.

First Chicago is challenging the big New York banks, whose location has been an advantage in serving as agents for issuers of the short-term financing instruments.

Before electronic book entry, which eliminates the physical transfer of certificates, a bank needed a New York presence. A huge volume of paper certificates had to be moved from issuing agent banks to investors' banks - in armored trucks.

The ability to transfer commercial paper electronically, through a two-year-old system administered by Depository Trust Co., New York, has demonstrated how automation can lower barriers to entry into a specialized banking service.

While First Chicago has long had a New York office, the ability to hook directly into Depository Trust's mainframe computer allowed it to become a major player.

"With book entry, now First Chicago can more actively complete," said James V. Reilly, vice president of planning at the DTC.

In the book entry program, First Chicago is one of the top six issuing and paying agents, the others being New York banks, according to DTC.

Outstandings Surge

The opportunities are certainly vast. The amount of commercial paper outstanding in the United States, which fluctuates month to month, rose $8.5 billion in June to a seasonally adjusted $542.2 billion, according to the Federal Reserve Bank of New York.

Nor does it appear necessary for the major paper issuers to in New York. At least one big financial concern is closing its New York office and relying on computers and telecommunications, according to market sources.

About 43% of the current commercial paper market is in the book-entry program that was launched in late 1990. Large issuers that have not yet converted to book entry include General Motors Corp., Ford Motor Co., Chevron Corp., Sears Roebuck and Co., and American Express Co., or their finance affiliates. Financial companies issue about 75% of all commercial paper.

By the second quarter of 1993, the vast majority of major issuers are expected to be doing book entry, Mr. Reilly said.

By the end of this month, First Chicago will be among those handling electronic, or book-entry, issues for two of the biggest paper issuers - Ford Motor Credit Corp., which has on average of about $15 billion in commercial paper outstanding each quarter, and Chevron Corp., which has an average $3.5 billion outstanding, according to Ronald M. Thalheimer, vice president of First Chicago.

Mr. Thalheimer, commercial paper product manager, said First Chicago was also acting as issuing and paying agent for the hook entry programs of Sears Roebuck Acceptance Corp., which issues about $11 billion quarterly, and Household International's Household Finance unit, which issues about $3 billion.

The banker said Sears' program would begin in the fourth quarter and Household Finance's early next year.

By moving to book entries, the banks that act as issuing and paying agents can expect to reduce their operating costs substantially.

How the System Works

The ultimate savings will have to wait until the Depository Trust Co. has a disaster recovery site in full operation. Until then, the banks must be capable of generating and transporting physical certificates in the event of a system breakdown.

Under the book-entry procedure, a company desiring to issue commercial paper sends an instruction to the issuing agent. The agent, in this case First Chicago, reformats the message and sends it to DTC'S mainframe computer.

On the same day, DTC credits First Chicago's account with the quantity of paper issued, and delivers the paper by making an entry on its own books. The financial institution sends a confirmation message to the investor, usually at a trust or investment bank.

The system has required First Chicago to build links from its system to those of Chevron, Ford, and other customers so that the issuers can get up-to-date information.

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