Chapter 3
The Paper Crunch and Development of New Institutions
Just as exchanges started to evolve in the 1960s so did clearance and settlement systems. All the paper moving about among brokers and transfer agents crushed the U.S. securities settlement system in the late 1960s.1 Former Secretary of the U.S. Treasury and former CEO of Merrill Lynch, Donald T. Regan, described Wall Street as caught in a “paper blizzard” (see Figure 3.1). The New York Stock Exchange (NYSE) restricted trading periods, and brokerage firms ran three shifts a day to try to keep up. The result of the blizzard was a dramatic change in recording securities transactions and ownership.
Source: Courtesy of NASA
FIGURE 3.1 1969 Apollo 11 Ticker Tape Parade in the Wall Street District of New York. The paper seen in the background is shredded paper from securities transactions.
In order to understand the development of modern clearing systems and the securities intermediaries that custody securities (a securities intermediary is an entity that stands between the investor and the issuer of the securities—it could be a bank or a broker-dealer or a combination of both), one has to first understand the following: (1) the concept of a trust, (2) a central securities depository (CSD), (3) multilateral netting, and (4) a central counterparty (CCP).
