WASHINGTON - The Public Securities Association warned yesterday that recommendations being considered to reform clearance and settlement procedures in U.S. securities markets could disrupt the municipal bond market.
The trade group was responding to recommendations made by the Bachmann Task Force, which was set up in November 1991 at the request of Securities and Exchange Commission Chairman Richard Breeden. The task force is an outgrowth of the Group of 30, an international panel examining how to streamline clearance and settlement of securities worldwide.
The PSA was commenting on the findings of the May 26 study entitled "The Report of the Bachmann Task Force on Clearance and Settlement Reform in U.S. Securities Markets."
The report concludes that stock and bond trades, including municipals, should be settled in three days instead of the current five and should provide for same-day funds settlement. Regulators are eyeing a mid-1994 implementation date for the so-called T-plus-3 concept.
The deadlines spelled out by the task force "could have serious disruptive effects on the municipal securities market given its heavy retail orientation and its unique distribution system through regional dealers and dealer banks," the PSA said in a comment letter to the task force, which is headed by John Bachmann, chairman of St. Louis-based Edward D. Jones & Co.
"We strongly urge greater study of the effects of the recommendations on the municipal securities market before determining any time frames for their implementation," the PSA said.
The trade group also noted that the retail sector now holds 72.5% of all municipal securities outstanding. In addition, it noted that major changes are needed in confirmation and payment procedures and in customer behavior for the Bachmann goals to be achieved.
"Twenty percent of transactions are done via mail," said PSA vice president George Brakatselos, outlining unique problems of meeting the T-Plus-3 deadline in the municipal market.
"Confirmations are sent out to the retail investor. The retail investor waits for the confirmation and sends payment with the check," he explained. "How are you going to settle in three days?"
The Bachmann report recommends an electronic payment schedule, he noted.
"We agree," he said. "But even if you set that up, you still have confirms going through the mail."
"So it entails a drastic change in customer behavior," he added. "You would have to maybe encourage the customer to send the payment before the customer gets the confirm."
The PSA also noted that a vast majority of the 500 registered dealers who are active in the market are located outside of New York and range dramatically in both size and capital. This has to be taken into account when deciding whether firms can settle trades within three days, the PSA said.
The PSA stressed that there are three key conditions for achieving T-plus-3: a faster confirmation delivery system, an electronic payment system, and major changes in customer behavior.