Summary: As a result of U.S. securities markets' continued reliance on physical securities certificates, risks and inefficiencies in settling trades persist. For example, the Securities and Exchange Commission (SEC) reported in 1990 that $2.6 billion in certificates had been lost or stolen. Furthermore, physical certificate transfers remain an obstacle to the goal of shortening U.S. settlement time from five to three working days. Although U.S. markets have reduced the use of physical certificate transfers for institutional investors and other large traders, physical certificates continue to be relied on to settle many small or retail investor trades. The prospects for automating these transfers are uncertain because SEC and the securities industry have not agreed on how to resolve this problem. A main obstacle is the potentially adverse effect such a change would have on retail investors who request and receive certificates in settling their transactions. Legal concerns also need to be resolved before physical certificates are eliminated. Failure by U.S. securities markets and regulators to cut settlement time and risks could cause international investors to resort to foreign markets that offer more efficient settlement services.
