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58 Bus. Law. 917 (2002-2003)
Clearing Arrangements

handle is hein.journals/busl58 and id is 933 raw text is: Clearing Arrangements By Henry F Minnerop* INTRODUCTION Clearing arrangements and clearing brokers are integral parts of the securities industry. Approximately ninety percent of all broker-dealers registered with the Securities and Exchange Commission (SEC) hire clearing brokers and utilize clear- ing arrangements.' Although these broker-dealers, called introducing brokers, are often small in size, they represent collectively a significant percentage of daily trading volume.2 The total number of introducing brokers doing business with public investors has risen from 564 firms in 19753 to 4859 in 2001.1 This increase of nearly 900% over twenty-six years is, in large part, the direct result of favorable regulatory treatment accorded clearing arrangements by the SEC. Much of the initial impetus for this treatment came in response to the paper crunch of the late 1960s, a crisis that nearly paralyzed Wall Street and led to the collapse of numerous New York Stock Exchange (NYSE) member firms. These firms were unable to process a rising volume of trades, causing a domino effect of failed settlements of securities transactions among brokerage firms. Acting under the mandate of Congress to address the crisis, the SEC encouraged the securities industry to develop a modern clearance and settlement system. This the industry did with great success. While trading volumes of fourteen to sixteen million shares a day had overwhelmed Wall Street during the paper crunch, the securities *Henry F Minnerop, a member of the New York bar and a partner of Sidley Austin Brown & Wood LLP in New York City, specializes in the law and regulation of clearing brokers. He represents clearing brokers and has acted as counsel to the Securities Industry Association, Inc. and its Clearing Firms Committee on various matters. This Article was prepared with the assistance of Kimberly A. Johns, an associate at Sidley Austin Brown & Wood LLP in New York City 1. As of December 31, 2001, there was a total of 5493 broker-dealers registered with the SEC doing business with public investors. Of these 634 were self-clearing with the balance, 4859, utilizing clearing brokers. See SEC 2002 Annual Report, at tables 5, 7, & 8, available at http://www.sec.gov/ pdf/annrep02/ar02full.pdf. In addition, as of December 31, 2001, 1509 broker-dealers registered with the SEC but not doing business with public investors also utilized clearing brokers. See id. 2. Bear, Steams Securities Corp., a large, if not the largest, clearing broker, reportedly clears an estimated 12% of all NYSE trades. The Bank of New York Acquires SG Cowen's Clearing Business, SEc. WK., Feb. 7, 2000, at 3. 3. Henry F Minnerop & Hans R. Stoll, Technological Change in the Back Office: Implications for Structure and Regulation of the Securities Industry, in TECHNOLOGY AND THE REGULATION OF FINANCIAL MARKETS 31, 40 (Anthony Saunders & Lawrence J. White eds., 1986). 4. See supra note 1.

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