WASHINGTON -- An independent task force urged the Securities and Exchange Commission yesterday to adopt trading reforms that would make settling transactions in the U.S. securities market faster and safer.
Equating time with risk, the panel's report recommended shortening to three days from five days the settlement period for securities trades and said the wiring of funds should be encouraged.
It stopped short of proposing the elimination of stock certificates, favored by many investors as tangible proof of their holdings, but called them "an anachronism" in this age of electronic transfers.
SEC Chairman Richard C. Breeden called the panel's report "a road map of how we can move forward to enhance the current system."
He said the current five-day period between transaction and completion "creates unnecessary and considerable volume of risk due to passage of time. The longer and slower the clearance and settlement system, the more the risk inherently involved."
John W. Bachmann, chairman of the task force and managing principal of Edward D. Jones and Co., a brokerage in St. Louis, said: "Shortening the settlement cycle will uncover potential problems before they mushroom or begin to cascade throughout the industry . . . Basically, in the period between clearance and settlement nothing good can happen; the thing that can happen is things can go wrong."
The panel, drawn from the securities industry in the wake of the 1987 market crash, estimated that the risk involved in any transaction would be cut by 58 percent by reducing the settlement time to three days.
The task force, established last year to improve efficiency and safety, identified five factors that have increased the risks in the securities industry: growing market volume; the complexity of transactions; the globalization of markets; the speed of transactions; and the increase in off-balance-sheet exposures.
"None of this is to suggest that today's clearance and settlement system is unsafe. It is not. It is the best in the world. It does recognize that when you settle in five days . . . you create more risk on a bad day," said Richard G. Ketchum, executive vice president of the National Association of Securities Dealers Inc.
In a letter accompanying his report, Mr.achmann said: "It would be nice to say that these problems are limited to a few large firms, but one cannot say that. Today's markets are so interdependent that a problem in the institutional markets is simultaneously a problem to retail firms and investors, as [the market crash in] October, 1987, proved."
The panel's main recommendations were:
* Shorten the settlement cycle. "If time equals risk, then less time between a transaction and its completion reduces risk."
* Revise the system of automated clearance. "If retail trades must settle more quickly, then the wiring of funds to and from customers should be a practical, inexpensive and reliable alternative."
Asked whether the $8 to $10 cost of wiring transfers, as opposed to the 29 cents for a postage stamp, would inhibit retail transactions, Mr. Bachmann said 80 percent of transactions, including retail trades, were already being completed by the third day.
* Confirm all institutional trades one day after clearance.
* Include municipal bonds in the accelerated trading timetable, tTC though any delay should not hold up the implementation of the three-day settlement period for corporate securities;
* Monitor activity on all markets to overcome fragmentation of information.
* Streamline the certificate process without eliminating it. The use of certificates is shrinking. In 1980, 16 million certificates were issued. In the past year, the number was closer to 6 million.