WASHINGTON -- A securities industry task force yesterday recommended that stock and bond trades be settled in three days instead of five.
The recommendation was part of a 52-page report presented to Securities and Exchange Commission Chairman Richard C. Breeden by the Bachmann task force, an eight-member industry advisory panel set up by the SEC.
Mr. Breeden sought to allay industry fears that settling trades in three days, or T plus 3 as it is termed, will be implemented in a way that could disrupt the securities industry.
"We're probably looking at a timetable of two to three years," he said at a press conference where he formally received the task force report.
Before adopting any of the recommendations, the SEC will carry out its own examination and receive public comment, Mr. Breeden added.
Commission members who attended the press conference emphasized that T plus 3 is a feasible goal for all market participants, including broker-dealers handling municipal bonds. More than 80% of all securities trades with retail clients now settle within three days, according to a recent report by the U.S. Working Committee of the Group of Clearance and Settlement Project.
Many new issues of tax-exempt bonds are already issued in book-entry form, making it easy to go to a faster settlement system, said Richard Ketchum, executive vice president of the National Association of Securities Dealers. At the same time, he said, task force members recognized that the size and diversity of the municipal market make compliance more difficult than in other markets.
The task force, headed by John Bachmann, chairman of St. Louis-based Edward D. Jones & Co., was set up in November 1991 to find ways to improve the clearance and settlement system. The SEC is seeking to modernize how broker-dealers take payment for trades in an effort to minimize risk in today's high-speed, high-volume marketplace.
"Shortening the settlement cycle will uncover potential problems before they mushroom or begin to cascade through the industry," Mr. Bachmann said in a statement. "In addition, if retail trades must settle more quickly, then the wiring of funds to and from customers should be a practical, inexpensive, and reliable alternative."
The task force agreed with a March 1992 report from the Federal Reserve that says proposals to require broker-dealers and banks to mark to market would not be a good idea because it might increase liquidity pressures in handling trades.
"Shortening the settlement cycle is the most effective way to limit the exposure in the clearing system for corporate and municipal securities," the task force report says. "In the longer term, moving to settlement on T-3 serves as a platform for future industry discussions of further risk reduction measures."
One main obstacle to achieving three-day settlement is the lack of an electronic payment system for retail transactions, the task force concluded. But efforts are under way within the securities industry to upgrade the automated clearing-house system, the domestic electronic payment system used by over 22,000 banks and other depository institutions.
A related problem is that current clearinghouse procedures give the client up to 60 days to cancel a transaction. That procedure would have to be waived, said Richard Stream, a commission member and managing director for Piper Jaffray & Hopwood Inc. in Minneapolis.
The task force also stressed that broker-dealers can educate their clients and try to change their behavior in order to speed settlement, notably by asking for payment on the telephone when trades are made rather than waiting for a written confirmation of an order.
Mr. Ketchum said that retail customers often have money market accounts and can make payment on a trade for the approximate amount due, with any small amount left going into the account.
