Greenspan Urges Faster Settlement Of Stock Trades

Mike Godfrey, Tax-news.com, New York

17 October 2000

Speaking yesterday on the subject of Electronic Finance at a Financial Markets Conference in Sea Island, Georgia, US Federal Reserve Chairman Alan Greenspan warned that delays in trading stocks were putting the US financial system at risk.

Mr Greenspan urged the US securities industry to reduce the time it takes to complete stock trades, saying rising volumes of stock trading are "straining the capacity" of brokerages to settle trades in a timely fashion. He said: 'an increasing number of transactions are failing to settle as scheduled on the third business day after the trade is executed.'

Mr Greenspan said such a lengthy delay between the time an investor purchases a stock and when all the paperwork is completed for the transfer increases risks to the US financial system, including the banks that make loans to help finance purchases of stock. He noted that the Securities Industry Association, a trade group, has been working to compress the settlement cycle with the aim of having all trades completed one day after the stock sale is made rather than the current three-day period. The reason behind this is that if a shorter timescale was instituted for the completion of stock sales, the risk of default on any one trade would be lower.

Yesterday's remarks by Mr Greenspan mirrored a speech he delivered in April to the Senate Banking Committee in which he called for a limited role by government regulators in the rapid changes in stock trading as a result of computers and the Internet. He said: 'Government authorities are poorly suited to picking winners and losers among competing technologies and market structures. Innovations have to be tested by the marketplace - ultimately by consumer choice.' There is no doubt that change has swept across the US financial markets, as millions of new investors and increasing competition from new electronic communications networks, known as ECNs, have put pressure on the nation's two biggest exchanges, the New York Stock Exchange and the Nasdaq Stock Market.

Greenspan said any changes should be determined by market forces without government interference. He stated: 'Policy-makers should resist any temptation to preserve the franchise values of some institutions by protecting them from competition from other institutions that are better able to take advantage of new technologies. Equity markets will inevitably shift capital from the losers to the winners.'

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