Clearance and Settlement Reform:

The Stock, Options, and Futures Markets Are Still at Risk

GGD-90-33: Published: Apr 11, 1990. Publicly Released: Apr 11, 1990.

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GAO evaluated the progress made in response to the President's Working Group on Financial Markets' recommendations for clearance and settlement reforms after the October 1987 stock market crash, focusing on: (1) the processing of information about trades; (2) procedures used by clearing organizations to manage financial risks; and (3) payments to and from clearing organizations.

GAO found that: (1) the exchanges' and clearing organizations' upgrades enabled the trade processing system to handle larger volumes and made it less vulnerable to delays; (2) clearing organizations made less progress in improving financial risk management, since there was not an intermarket sharing system to evaluate intermarket risks when clearing members participated in multiple markets; and (3) despite some progress in reducing cash flows and ensuring prompt payments, federal and self-regulatory organizations failed to implement all of the intermarket Working Group recommendations designed to reduce cash demands.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: CFTC has encouraged futures clearing organizations to take a number of actions to reduce reliance on letters of credit and to assure that the letters of credit they do accept provide appropriate security. For example, the Chicago Mercantile Exchange (CME) has eliminated letters of credit from its guarantee fund.

    Recommendation: The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) should reassess the adequacy of clearing organization use of letters of credit in their guarantee funds.

    Agency Affected: Commodity Futures Trading Commission

  2. Status: Closed - Implemented

    Comments: SEC has approved a National Securities Clearing Corporation proposal to reduce reliance on letters of credit in its guarantee fund.

    Recommendation: The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) should reassess the adequacy of clearing organization use of letters of credit in their guarantee funds.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Not Implemented

    Comments: Treasury's June 7, 1991, report on intermarket coordination to the President of the Senate stated that considerable progress had been made to: (1) develop a routine intermarket information-sharing system; and (2) ensure that studies exploring ways to lessen intermarket cash flow pressures and to simplify intermarket clearing are completed, but the report notes that the task is not complete.

    Recommendation: The Secretary of the Treasury, as Chairman of the Working Group, should ensure that a routine intermarket information sharing system is developed and used to assess the intermarket risks posed by joint members. The Secretary, working with other members of the Group as well as the exchanges and their clearing organizations, should identify responsibilities, assign tasks, and set time frames for accomplishing this recommendation.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: CFTC has overseen several systems improvements. These included revisions in settlement agreements between CME and Board of Trade Clearing Corporation and their settlement banks to eliminate potential ambiguities, development of improved procedures for intraday payment and collection of margin, and enhanced information sharing.

    Recommendation: SEC and CFTC should ensure that appropriate mechanisms are in place to ensure that payments required by clearing members and clearing organizations are made within established time frames.

    Agency Affected: Commodity Futures Trading Commission

  5. Status: Closed - Implemented

    Comments: SEC has overseen several changes in options clearing. The Options Clearing Corporation (OCC) will also guarantee matched trades at an earlier time. OCC will also change pay and collect times so that they will occur at the same time. OCC has proposed to eliminate its right to reject trades for nonpayment of premium.

    Recommendation: SEC and CFTC should ensure that appropriate mechanisms are in place to ensure that payments required by clearing members and clearing organizations are made within established time frames.

    Agency Affected: United States Securities and Exchange Commission

  6. Status: Closed - Not Implemented

    Comments: Treasury's June 7, 1991, report on intermarket coordination to the President of the Senate stated that considerable progress has been made to: (1) develop a routine intermarket information-sharing system; and (2) ensure that studies exploring ways to lessen intermarket cash flow pressures and to simplify intermarket clearing are completed, but the report notes that the task is not complete.

    Recommendation: The Secretary of the Treasury, as Chairman of the Working Group, should ensure that studies exploring ways to lessen intermarket cash flow pressures and to simplify intermarket clearing without diminishing safeguards against financial risk are completed and acted on appropriately. The Secretary, working with other members of the Group as well as the exchanges and their clearing organizations, should identify responsibilities, assign tasks, and set time frames for accomplishing this recommendation.

    Agency Affected: Department of the Treasury

 

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