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Treasury-Federal Reserve Study of
the U. S. Government Securities Market


Staff study prepared by
F. T. Davis and M. J. Hoey
Federal Reserve Bank of New York
December 1966 (Rev. June 1969)



Research Library
















I - Introduction

The market in securities of the United States Government as

we know it today, so important both to fiscal policy and to the wellbeing of our economy, had its beginnings in the expansion of trading
that characterized the Liberty Loan Bonds issued during the First World
War. With the exception of the Federal Reserve System's telegraphic
securities transfer facilities, introduced in 1921, the five intervening
decades since World War I have seen few changes in the cumbersome and
time-consuming practices observed in issuing, receiving, and delivering
Government securities.

Considering that the purchases and sales made

by the primary dealers in U. S. Governments frequently number in the
thousands on a single day, it is apparent that an enormous amount of
time and effort is expended, unnecessarily, in completing all these individual transactions by physical delivery of the securities concerned.
In mid-1965 a beginning was made toward reducing the need for
individual "Street" deliveries of Government securities by the creation
of an experimental clearing arrangement applicable to securities transfers
between two New York City member banks and banks in other Federal Reserve
Districts through the Federal Reserve System's telegraphic transfer facilities. This paper describes that new clearing arrangement, which has
since been expanded to include eight of the eleven New York City member
banks whose operations in the Government bond market, either directly or
as clearing agent for nonbank dealers, are sufficiently broad to warrant
their participation in such an arrangement. Of even greater importance,
the clearing concept now encompasses local transfers of Government

securities among the New York City participants, in addition to the interDistrict transfers for which it was originally designed. A brief illustrated description of the various types of Government securities transfers
eligible for inclusion in the clearing arrangement appears in the accompanying charts.
During the same years that the securities clearing arrangement
was being developed in New York, plans were also being formulated within
the Federal Reserve System for the establishment of a book-entry procedure
in connection with the issuance and custody of U. S. Government securities
held by the Reserve Banks for member banks and certain other parties that
maintain securities accounts with the Reserve Banks. Among other things,
the book-entry procedure will ultimately contribute to the further development of the securities clearing arrangement by eliminating the present need
to settle the daily net clearing balances by the delivery of definitive
securities. This prospect, and other important implications of the bookentry concept, are also discussed in this paper.


II - Securities Clearing Arrangement

From time to

time over recent years the Federal Reserve Bank of New York has considered
various proposals designed to reduce the substantial volume of Government
securities that are daily delivered to and from this Bank, as fiscal agent
of the United States, in connection with inter-District telegraphic transfers of such securities between Federal Reserve cities. Early in 1965 the
Bank formulated a proposal designed to achieve this objective.
In essence, the proposal contemplated a clearing arrangement
between this Bank and seven of the major New York City member banks, providing for the establishment of securities clearing accounts at this Bank
in the name of each participating bank; in lieu of the physical deliveries
of securities by or to the New York City member banks then being made in
connection with each individual telegraphic transfer, appropriate entries
would be made in the clearing accounts, predicated on closed-circuit teletype notification to or from the bank concerned.

Settlement of the securi-

ties owing at the close of business each day, based on the net balances
developed in the securities clearing accounts of each participant, would
be made by deliveries of securities at this Bank, in the amounts indicated
by such balances, at or after the close of business. It was estimated

1 Bankers Trust Company, Chase Manhattan Bank, Chemical Bank New
York Trust Company, First National City Bank, Irving Trust Company,
Manufacturers Hanover Trust Company, and Morgan Guaranty Trust Company.


that, overall, this clearing process should result in reducing by about
80 per cent the burden of physical securities handling associated with
these transactions.
Following discussion of this proposal with the Treasury Department, this Bank received early in 19&5 Treasury approval to conduct a
pilot test operation of such a clearing arrangement with Morgan Guaranty
Trust Company. The pilot test was commenced in July of that year and was
extended in August to include Irving Trust Company. On the basis of the
successful test experience Bankers Trust Company and Manufacturers Hanover
Trust Company were invited to join the arrangement in mid-1966, followed
successively by First National City Bank, Chemical Bank New York Trust
Company, Chase Manhattan Bank, and the Bank of New York. With these additions the clearing arrangement grew to include as active participants
eight of the eleven New York City banks whose operations in the Government
bond market, either directly or as clearing agent for nonbank dealers, are
on a scale broad enough to make participation in a local clearing arrangement attractive and efficient. It is, of course, entirely possible that
other banks may elect to take advantage of the clearing concept as the
scope of its activities grows wider.
During the initial stages of the clearing arrangement questions
necessarily arose as to the limitations that should be established regarding participation therein. For example, while it was originally contemplated that the arrangement would extend only to the seven largest member
banks in New York City, and through them to the principal dealers in

2 Franklin National Bank will become the ninth active participant
in June 1969. Marine Midland Grace Trust Company and United States Trust
Company joined in signing the clearing agreement but have no immediate
plans for active participation.

Government securities, a number of exploratory inquiries were received
regarding direct nonbank dealer participation.

It appeared that it would

not be necessary or appropriate for this Bank to enter into such direct
arrangements with nonbank dealers so long as their clearing needs are
adequately served by the member banks in the clearing group. Similarly,
this Bank believes that dealer banks located in other Districts can and
should participate in the clearing arrangement through the facilities
offered by participating member banks in this city.
This Bank's experience in conducting the clearing arrangement in its
initial stages soon established that (l) there was a considerable and
increasing volume of transactions between the principal local banks involving the physical delivery and receipt of Government securities, other
than those related to inter-District transfers, and, (2) there was also
considerable interest on the part of the New York City banks and the
larger nonbank dealers in Government securities in the development of an
effective mechanism for clearing these intra-city member bank transactions
in such securities. On the basis of this knowledge, the Bank initiated
in January 1966 a series of discussions with members of The New York
Clearing House Association aimed at the development of a workable arrangement for clearing all transactions in Government securities that in any
way involved the larger New York City banks. In support of its view that
the present "clearance and payment facilities underlying the market for
U.S. Government securities are less than adequate", the Clearing House
prepared a paper stating in some detail the deficiences existing in the
available market mechanism and the steps it believed ought to be taken to
remedy that condition.

The paper included the observation that the development of a
central clearing arrangement could substantially relieve the strain on
present facilities, would be in the public interest, and would facilitate
the implementation of monetary and debt management policies in a growing

Comments in the "Highlights of Replies to Dealer Questionnaire"

and "Highlights of Dealer Consultations", based on material developed for
the Treasury/Federal Reserve Study of the U.S. Government Securities
Market, also make reference to the need for a central clearing arrangement,
accompanied by automated procedures for centrally recording the ownership
of Government securities.
In the course of discussions with the Clearing House banks, it
became quite evident that a clearing arrangement to include intra-city
transactions in Government securities could be developed only through the
temporary daily use, in connection with the daily clearing settlements, of
the stock of unissued Government securities held at this Bank as fiscal
agent of the United States. Proceeding on this premise, counsel to this
Bank drafted an agreement embracing both inter-District and intra-city
transfers which, following approval by the ten New York Clearing House
banks, became effective in August 19^7 > superseding previous letter agreements. The clearing of intra-city transfers had earlier been approved in
principle by the Treasury Department, with the understanding that any additional costs incurred by this Bank due to processing the local transactions
would be shared by the participating banks and would not be borne by the
Treasury Department.
While all inbound inter-District transfers, whether "free"



3 A "free" transfer occurs when the payment associated with the
sale of the securities has been effected separately from the transfer
itself; payment is not required as a condition to the delivery of the

or against payment, were eligible for clearing through the arrangement,
outbound transfers were limited at the outset to those made against payment.

Subsequently, provision was made for the inclusion of outbound

as well as inbound r,free" transfers, either inter-District or intra-city,
predicated on an agreement under which the participating banks undertook
to indemnify this Bank against loss in the event of non-delivery of balances owing to this Bank.
The processing of intra-city transfers through the clearing
arrangement has proved valuable to the participating New York City member
banks and to the nonbank dealers they serve, even though it has been
necessary to limit the total volume of these transactions until such time
as suitable electronic data processing equipment can be put into operation
by this Bank. Such equipment, which is scheduled for installation by yearend 1969* will have the capability of switching transfer instructions automatically, and at the same time capturing all pertinent information for
clearing and accounting purposes, including the development of net securities balances of the various participants, and the entry of debits and
credits, representing payments for the securities transferred, to the
reserve accounts of the member banks concerned. Pending the installation
of this electronic equipment, messages must be relayed and settlement positions developed by manual methods. Accordingly, it has been necessary
to keep the volume of intra-city transactions within manageable limits
by establishing relatively high dollar amounts per transaction (currently
$250,000) as the minimum amount eligible for handling through the clearing



There is a substantial

amount of daily traffic between this Bank and the New York City banks and
dealers in connection with the "splitting", or denominational exchange,
of Government securities, the rapid completion of which can often be a
critical factor in completing physical deliveries on a timely basis. In
order to expedite these denominational exchanges the clearing arrangement
was broadened, effective in January 19&9* to allow the participants to
request the "change" they require over the clearing teletype facilities,
deferring the surrender of the larger denominated certificates for inclusion as a part of the day's net settlement of balances.
As another means of encouraging the maximum use of the clearing arrangement, banks and other institutions subscribing to new issues
of Government securities, such as the weekly Treasury Bill offerings, are
permitted to take "delivery" of those securities, in whole or in part, as
a credit to their clearing account for the issue in question. Inasmuch
as a considerable portion of such newly issued securities are destined
for wire transfer to other local clearing banks, or to other Federal
Reserve Banks and Branches, on the issue date, this use of the clearing
arrangement can eliminate a great deal of unnecessary physical handling
for all parties concerned.
Looking forward to the time when most of the transactions in
Government securities involving the principal dealers therein are being
accommodated by the clearing arrangement, it would seem possible to
broaden the scope of the clearings to include securities issued by Agencies
of the United States. This possibility is further discussed in Section V.
The principle of clearing and settling for valuables on a net
balance basis is not a novel one, nor is the use of telegraphically

communicated information to effect the transfer of securities between a
seller and a purchaser. However, the combination of these two established
concepts in the current clearing arrangement, supported by the high-speed
switching and data-processing capabilities offered by today's electronic
computers, can provide much-needed assistance in coping with the rapidly
growing physical burden already taxing the resources of large-volume
handlers of Government securities.



Ill - Book-Entry Procedure
In June of 1963 the Board of Governors of the Federal Reserve
System suggested that the Conference of Presidents of the Federal Reserve
Banks consider the merits of adopting a book-entry arrangement for Government securities held in custody for member banks, as a means of freeing
vault space, reducing the burden of cutting and collecting coupon interest,
and minimizing the risk of misplacing securities of high value. Following
a study of this proposal by the various Reserve Banks, discussions were
held with officials of the Treasury Department and performance tests were
conducted at selected Reserve Banks. Meanwhile, counsel to the Reserve
Banks, in association with counsel to the Treasury Department, continued
to review the legal implications of the proposed book-entry procedure,

which was thereafter approved in principle by the Conference of Presidents
in December 19^5•
As approved by the Conference of Presidents, the book-entry
procedure permits the Reserve Banks to discontinue issuing definitive
securities and placing such securities in the custody accounts affected,
relying instead on a computer-based system of book-entry securities.
Originally, the book-entry procedure applied only to Government securities
held for member banks (l) as free safekeeping deposits, (2) as collateral
to Reserve Bank advances, and ( 3 ) as collateral to Treasury Tax and Loan
Accounts and other public deposits. Pursuant to specific regulations
governing book-entry accounts formulated by the Treasury Department, the
program was put into effect at the various Federal Reserve offices commencing January 1, 1968, and all holdings of Government securities for

the types of accounts mentioned above at such offices were converted to
a book-entry basis by the end of that year. In addition, a number of
custody accounts maintained by the Federal Reserve Bank of New York for
the Treasury Department and for various international organizations were
also converted.
While not expressed in the approval of the Conference of
Presidents, adoption of the book-entry procedure for safekeeping accounts
effectively brought to an end the long-standing policy of the Reserve
Banks against the acceptance of safekeeping deposits from banks located
in the central financial districts of their respective cities, which
policy was based primarily on the limited vault facilities available at
the Reserve Banks. However, because the book-entry procedure as initially
promulgated was in effect confined to the investment holdings of member
banks, and since a considerable amount of movement occurs between such
securities and those held by "city" banks as custodians for their correspondent banks, trust accounts, and others, including pledged accounts,
there was little response from such banks to the offer of this new service.
In addition, such banks have been reluctant to put any of these securities
under the book-entry system because of the requirements of existing Internal
Revenue Service rulings regarding the identification of such book-entry
securities for tax purposes.
A major step toward overcoming some of the obstacles now impeding the full-scale use of the book-entry procedure is currently in
progress, under which the applicable Treasury Department regulations are
being revised and broadened to permit the conversion of certain "thirdparty" accounts to a book-entry basis. This revision, though applicable
at the outset to pledged accounts of the types currently in effect at the


Federal Reserve Banks and Branches, nevertheless opens the door to the
inclusion of additional categories of accounts maintained by member banks
subject to the orders of others, such as correspondent banks, trust accounts, and nonbank dealers in Government securities. Coincidentally,
attempts are being made to bring about a modification of the current
Internal Revenue Service regulation on book-entry securities which, if
successful, should simplify the carrying out of transactions in these
Although large-scale adoption of the book-entry procedure by
banks in the central financial districts would present no difficulties
in terms of the maintenance by this Bank of the required book-entry
records, it could well generate a substantial amount of daily traffic
caused by requests from these depositors for physical delivery of securities to their representatives, or to others for their account. As discussed under the next topic, however, the effects of this increased activity, at least in the Federal Reserve Bank of New York, will be appreciably
reduced to the extent that the securities can be transferred through the
existing securities clearing arrangement, necessitating only teletype
notification, rather than physical delivery, to effect a transfer between
participating banks.
Plans are now being made to convert the securities in the
System Open Market Account to a book-entry procedure. At some future
date, discussions will be held with foreign central banks with a view to
converting their holdings to a book-entry system also. The inclusion of
the Open Market Account and this Bank's foreign accounts would greatly
facilitate the movement of securities resulting from the purchase and sale
transactions that occur so frequently between these accounts and member

Still further in the future may be the extension of book-entry
arrangements at one or more Reserve Banks to accommodate virtually all
owners of Government securities, including nonbanking institutions and
individuals, through member banks. Once the principle of relatively unlimited computer storage capacity is accepted, there appear to be no insurmountable barriers to the furnishing of book-entry custody service to
all types of holders, with appropriate identification on the books of
the Reserve Banks.


IV - Effecting Clearing Settlements
Through Book-Entry
As discussed in the preceding section, the book-entry procedure
adopted by the Federal Reserve Banks in January 1968. was restricted to
Government securities owned by member banks and deposited with their Reserve
Banks to be held either in free safekeeping, or as collateral to Reserve
Bank advances, Treasury Tax and Loan Accounts, or public deposits. Within
a short time, however, the book-entry concept will be extended to apply to
all Government securities held by member banks for their own or other accounts, thereby encompassing a number of additional categories of holdings,
including pledge arrangements, not provided for under the present system.
The development of the Government securities clearing arrangement has been accompanied by a gradual broadening of the types of transactions covered. For example, while inter-District transfers of securities
between Federal Reserve Banks and Branches are restricted to bona fide
sale transactions, or the borrowing or return of securities by a primary
securities dealer, no such limitation has been applied to the intra-city
transfer arrangement. As a consequence the local transfer activity will
increasingly be expanded to include transfers involving pledged, or "thirdparty" accounts, collateral to dealer loans and loans to others, and similar transactions. Thus the net settlements of the clearing balances at the
end of each day will involve a broad cross-section of the kinds of accounts
maintained by any one participating bank.
Under the book-entry procedure as it exists at this moment,
these diverse types of accounts are not included among those that are


eligible, and it is therefore not possible to settle the clearing account
balances through entry to such book-entry accounts. However, once the enabling steps have been taken to permit relatively unrestricted Government
security custody services to member banks on a book-entry basis, the way
will be cleared to permit a fully automated Government securities clearing
arrangement, free of the present need to transport large dollar amounts
of securities to and from this Bank in settlement of net balances at the
close of business each day. In lieu of such physical settlements it will be
necessary for this Bank merely to credit or debit the respective book-entry
accounts of the clearing banks with the par amounts of the Government securities issues owing to or from each bank as a result of the netting
process. To permit accurate accounting to their depositors, the member
banks would be expected to maintain adequate internal records indicating
the exact interests of each of their dealer or custody accounts in the net
clearing settlements, and in the resulting book-entry account balances.
Normally the clearing settlements would involve only one debit or credit
entry for each affected securities issue in a bank1s book-entry account,
but in certain cases it is contemplated that a limited number of sub-accounts
would be maintained for individual banks corresponding to the general categories of account (investment, trust, etc.) on the books of the bank.
One area of expansion of the clearing arrangement that should
be greatly assisted by the use of book-entry facilities relates to the
movement of securities as collateral to overnight loans made by banks to
nonbank dealers in Government securities. Normally negotiated well after
mid-day, when the dealers have tallied up their total receipts and deliveries
of securities and assessed their cash requirements, these loans call for
the physical movement of a large volume of Governments, amounting in the
aggregate to hundreds of millions of dollars, from the banks where the


securities are lodged to the banks which are extending the loans• The
labor involved in the counting, examining, and movement of this collateral
causes delays that normally defer the delivery of the pledged securities
to the lending banks until a fairly late hour in the afternoon. Under a
combined book-entry and clearing procedure it would be posssible to effect
these transfers simply by making entries in the accounts affected at this
Bank, confirmed by appropriate teletype notification, which should accelerate the "deposit" of loan collateral substantially. The proceeds of
the loan would be debited to the reserve account of the lending bank and
credited to the borrowing dealer, through the reserve account of its clearing bank, at the same time that the securities are transferred in the bookentry accounts. All entries would then be reversed on the following day
when the loan is liquidated.

Such an arrangement, in addition to saving

a considerable amount of time, would also eliminate the present risks attending the exposure of large dollar amounts of securities in the streets.


V - Clearing and Book-Entry
Applied to Agency Securities
There has been a rapid growth during recent years in the
volume of securities offered by the various Agencies of the United States
Government. The attractive rates afforded by these securities, which are
virtually indistinguishable from Governments from the standpoint of safety,
have generated considerable interest on the part of all investor classes,
resulting in a steadily rising trading pace for such securities in the
major financial markets.
Up to the present time, with few exceptions, all securities of
Agencies of the United States have been issued and paid for solely through
the Federal Reserve Bank of New York.

Since most of these issues are not

eligible for telegraphic transfer through the leased wire facilities of
the Federal Reserve System, purchasers located in other parts of the
country are obligated to lodge their holdings with correspondents in New
York5City or incur substantial costs incident to shipment to their own
In a number of instances, however, arrangements have been made
whereby subscribers in New York City to certain bearer issues* of the
Federal National Mortgage Association and the Export-Import Bank of the
United States may transfer their allotments, through Federal Reserve System


k Telegraphic transfer between Reserve Banks and Branches is possible only where stocks of unissued securities are maintained at such
banks in connection with the original issue and related fiscal services.
5 Shipment by registered mail will be made at the expense of the
issuer at the time of original issue only.

telegraphic facilities, to either the Chicago or the San Francisco Federal
Reserve Bank, which will complete delivery from a supply of unissued stock
maintained for that purpose.

In addition, telegraphic transfers resulting

from subsequent transactions in these securities may be effected between
these three Federal Reserve Banks by means of the same facilities.
The further development and expansion of the securities clearing arrangement discussed in this paper must of necessity extend, in time,
to include obligations of Agencies of the United States, if the arrangement is to furnish complete service to the financial community. To the
extent that these non-Government securities may become eligible for telegraphic transfer through Federal Reserve facilities, there will be an
increasing need to include them among the issues represented in the clearings. In any event, the anticipated continuing expansion of the clearing
arrangement may ultimately necessitate the use of this mechanism to simplify the local delivery of Agency securities, whether or not these issues
become eligible for telegraphic transfer between Federal Reserve cities.
As noted earlier, any costs incurred by the Federal Reserve Bank of New
York in providing an intra-city clearing service, whether for Government
or non-Government securities, would be absorbed by the participants in
such an arrangement rather than by the Treasury Department.
It is likely that the establishment of book-entry custody arrangements at the Reserve Banks, applicable initially to Government securities owned by their member banks, and later to securities owned by the
depositors and customers of these banks, will ultimately lead to the inclusion of securities of Government Agencies as well. The resulting expansion of the clearing arrangement and the book-entry procedure by roughly
one hundred per cent, in terms of the number of individual issues involved


in each category at the present time, should present no administrative
problem given the immense record-keeping capability of the sophisticated
data processing equipment now available.

Since the Reserve Banks have

long accepted the deposit for custody of all types of securities, including Agencies, from their member banks, neither does any question of
policy arise in this connection.


VI - Conclusion

The fifty years that have elapsed since the start of World

War I have seen remarkable changes affecting almost every aspect of the
economy. The myriad benefits of a computer-oriented society appear on
all sides, and the adoption of sophisticated labor and time saving devices has become prevalent in practically all areas of financial and
industrial activity. Nevertheless, the streets of Manhattan and other
financial centers through the country are still filled with hundreds of
messengers making thousands of trips each day, delivering individual
lots of securities back and forth between the banks and dealers that
comprise the Government bond market, exactly as they did when the first
offering of Liberty Loan bonds was made five decades ago. The failure
to complete any one such delivery by the appointed time can cause the
cancellation of trades involving millions of dollars, result in unanticipated and unnecessary interest costs, and create operational problems
that may affect a number of parties to these transactions.
It is apparent that it is now essential to change these cumbersome delivery methods and allow the traders in Government securities to
function free of the limitations that antiquated physical delivery methods
impose. Now that transactions in securities can be finally consummated
in seconds by means of teletype, and painfully slow individual deliveries
can be replaced by end-of-day settlement on a book-entry basis, the means
are at hand for radically improving the market mechanism. The savings in
time and labor resulting from the elimination of most physical securities-

handling tasks must of necessity result in more economical operations on
the part of all Government bond dealers, their clearing banks, the Treasury
Department, and the Federal Reserve Bank of New York as well.
The combination of teletype delivery techniques, clearing procedures, and book-entry arrangements, conducted with the aid of relatively
unlimited computer switching and data storage capability, can now broaden
the scope of Government trading activities to a degree never before thought
possible. Instantaneous completion of transactions, with immediate payment
in Federal Funds, will become commonplace and markets throughout the country
will be as accessible as those across the street. Further, the need to
issue, receive, deliver, or store physical securities will diminish rapidly,
in direct proportion to the increase in the number of banks and other parties
covered by the new arrangements.

In a period when extreme time pressures,

heavy work loads, and shortages of skilled manpower have become—and will
continue to be—crucial factors in all securities operations, these new
techniques offer the promise of solutions to many of the growing problems
that are being faced by banks, dealers, and others involved in Government
securities operations.



Charts of Typical
Clearing Transactions

CPD Transfer







Federal Reserve

Federal Reserve
Bank of New York

TIME: 1% Hrs.
In a typical CPD transfer, a seller in San Francisco,
for example, delivers Government securities to the Reserve
Bank in that city, which " r e t i r e s " the securities surrendered and sends teletype instructions to the Reserve
Bank in New York City to " i s s u e " a like amount of the
same securities to the purchaser. Upon receipt of the telegraphic order, the New \ork Reserve Bank normally withdraws the securities from its unissued stock and delivers
them to the purchaser or its clearing bank over the counter
(see 1 on chart). This involves several counting and examining operations by the Reserve Bank as well as by the
bank or dealer accepting delivery of the securities, which
must be individually transported to their offices. In effecting this physical delivery approximately 1 hour and 45
minutes will elapse from the receipt of the teletype
message by the Reserve Bank until receipt and final processing of the securities at the office of the New York bank
or dealer.




T e l e p h o n e or M e s s e n g e r










Federal Reserve
Bank of New York

TIME: 2Min.
By comparison to the present procedure, the same delivery of securities involved in telegraphic transfers can be
accomplished by a teletype notification from the New York
Reserve Bank to the New York City participant (see 2 on
chart). Such notification includes all the particulars of the
transfer and permits the recipient to readdress the securities, in whole or in part, to any other participant in the
arrangement where necessary. Since physical handling of
the securities is eliminated at this stage, no more than
2 minutes elapsed time is required to complete an incoming telegraphic transfer as compared to nearly 2 hours
where physical delivery is made. At the end of the day,
of course, physical settlement is made by the Reserve
Bank with each participant based on the net amounts of
securities of each issue in which transfers took place that

Local N e w York










In fulfilling a typical sale of Government securities by
one dealer to another located in the same city, the seller
will order his clearing bank to deliver a stated amount and
issue of securities to the other dealer, usually through the
clearing bank of the latter, against a stated payment. Completion of such a transaction necessarily involves withdrawal of the securities from a vault or other repository at
Bank A, several counting and examining operations at that
bank, and finally delivery by messenger to Bank B (see 1
on chart) where the counting and examining process is
repeated and the securities are ultimately deposited in
custody for the account of the buying dealer. Not until the
receiving bank has verified the correctness of the securities it received is payment for the transaction effected,
usually by sending a Federal Funds payment through the
wire transfer facilities of the Federal Reserve Bank. On
average, such a transaction requires at least 1 hour and
45 minutes for completion.
T e l e p h o n e or M e s s e n g e r




Federal Reserve
Bank of New York



TIME: 2 Min.
By comparison to the present procedure, the same
delivery of securities can be accomplished through the
Federal Reserve clearing arrangement by means of a simple
teletype message from Bank A addressed to Bank B ( s e e
2 on chart). Such message includes pertinent information
concerning both the selling dealer and the purchasing
dealer, and results in adjustments in the securities clearings accounts of the two participating banks concerned,
on the books of the Reserve Bank. No movement of securities is required for individual transactions, settlement being made on a net balance basis at the end of the day, and
payment for the transaction is debited and credited to the
reserve accounts of the respective banks coincident with
the transfer of securities.

Multiple Transfer
Involving All Participants

TIME: 5Hrs.
In a hypothetical c a s e , if a given lot of securities were
sold by one bank (or dealer) to another, then resold by the
buyer to a third bank, and so on, it is estimated that the
various withdrawal, counting, and delivering operations
necessary to move the securities through the series of
banks would require at least 5 hours to complete. In addition, there would be serious doubt whether the last one or
two banks in the series would be willing to accept delivery
considering the established closing hours for the receipt of
Government securities.




TIME: 50Min.
Under a clearing arrangement, whereby deliveries of
Government securities are effected by teletype notification through the Reserve Bank, it is merely n e c e s s a r y for
the first bank to send teletype instructions to Federal,
which relays them to the bank addressed, which in turn
sends a teletype order to the third bank, and so on. The
only time required under this arrangement to complete all
the hypothetical transactions is that involved in receiving
and retransmitting tape messages, which should not e x c e e d
an aggregate of 5 0 minutes. Physical settlement for these
transfers would be effected by the net amounts of securities received or delivered at the end of the day and, in the
hypothetical c a s e described, the first bank in the s e r i e s
would owe us the securities which we would deliver to the
last bank in the series.