Payment Risks Getting Fresh Look

Commercial and investment bankers have formed a committee to study ways of limiting risks in the payment system, New York Federal Reserve President E. Gerald Corrigan said last week.

The Payment and Settlement Committee is made up of 16 senior executives from commercial banks, investment banks, exchanges, and clearing houses, including First Chicago Corp.'s First National Bank of Chicago, Manufacturers Hanover Trust Co., Citicorp's Citibank, the Bank of New York, and J.P. Morgan & Co.'s Morgan Guaranty Trust Co.

The group first met in October and is expected to meet at least four times a year. It hopes to boost communication among private-sector institutions and regulators on payment, clearing, and settlement issues.

A Step Removed from Lobbying

While the group will not act as a lobbyist, it may make recommendations to Congress or state legislatures, said committee member Garrett Glass, a vice president in the credit policy group of First National Bank of Chicago. The panel's next meeting is scheduled for Dec. 11.

The executives represent a wide range of expertise in areas such as law, credit, trading, and back-office operations. They will serve three-year terms, with new members elected every year.

The committee evolved from a series of meetings organized by Mr. Corrigan in April 1990 to look into the implications for the payments system of the failure of the Drexel Burnham Lambert Group.

Sharply Focused Goals

After initial meetings, an advisory group was formed, and three panels were set up to look into contingency planning, network operations, and regulations that might alleviate risks when participants cannot meet their payment obligations. These panels were dissolved with the creation of the current committee.

Mr. Glass and Howard T. Shallcross, an executive with Merrill Lynch, Pierce, Fenner & Smith Inc. are cochairmen of the committee.

"What we want to do is not to get involved in macro-economic issues about the entire operation of the payments systems, but to focus on certain tasks where we feel we can accomplish something," Mr. Glass said.

So far, the group has set up three subcommittees to look into improving payment and settlement practice, clarifying laws, and improving contingency arrangements.

Question of Shared Collateral

One subcommittee is looking at whether exchanges or institutions should share collateral if an institution fails.

"Something that Drexel pointed out was that there were liquid assets on some exchanges that could not be used on other exchanges where Drexel had obligations to meet," Mr. Glass said.

Under current practice, banks cannot freely move assets across state borders or from one institution to another.

Bankruptcy Proposals Due Soon

The second subcommittee is also looking at clarifying bankruptcy laws. Under current law, financial products are not treated the same way for all the counterparties in the market.

Mr. Glass said that members would issue a report on this subject at the December meeting, and recommendations could be sent to Congress.

The panel is also looking at whether there is a role for an "honest broker" to act as intermediary when an institution is unable to meet its obligations for improvements in contingency plans.

Toward Institutionalized Role

During the Drexel failure, Manufacturers Hanover played this part - helping to arrange for settlement of certain securities by waiting to pay money out until it had received funds. The group is considering defining and institutionalizing such a role.

A fourth subcommittee may be created to look at the issue of settling some foreign exchange settlements in different currencies at the same time, to reduce the risk that a bank will be caught short.

The other members of the panel are Morgan Stanley & Co., Goldman Sachs and Co., the Chicago Mercantile Exchange, First Boston Corp., the Depository Trust Co., Merrill Lynch Pierce Fenner & Smith, Salomon Brothers, and the National Securities Clearing Corp.

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