“The Risks and Rewards of Technology”

I’m very pleased to be here today.  This is an historic and
exciting time for our securities and financial markets, and this
organization plays a central role in addressing the challenges we
all face.

In the 1990’s, we’ve witnessed an unprecedented expansion of
global securities markets and an unparalleled revolution in the
technology used to serve them.  Technology has changed
everything: from customer service, to the clearance and
settlement of trades, to the very concept of what constitutes an
“exchange.”

Every day we see new products, new trading mechanisms, and new
investors.  The benefits of technology are enormous.

Perhaps the most significant development is the way technology is
erasing the boundaries between our markets.  As the Internet and
high speed telecommunications become essential business tools,
investors throughout the world are gaining greater access to
markets and instantaneous trading information -- in ways that
were unimaginable a decade ago.

As we in the securities industry know better than most others,
however, reward is almost always accompanied by risk.  Rapid
technological changes are presenting new challenges to our
operational systems that must be addressed.  We in the United
States have been exploring ways to meet these challenges -- and
so have you.  We need to continue to work together to address
these pressing issues.

With that in mind, I thought it might be helpful to review how
we’re working to accommodate technology in three areas: exchange
regulation, clearance and settlement mechanisms, and “Year 2000”
computer conversions.

                             *  *  *

In the U.S., we’re taking a global view of how our regulatory
needs will shift as technology advances.  We want not only to
bring our regulatory structures up to date, but also to create
regulations that are flexible enough to grow as technology
advances -- in effect, creating a regulatory version of what
software engineers call “open architecture.”

We recently issued a paper that examines how technology has
transformed the concept of an exchange.  The paper explores and
invites public comment on ways that we can adjust our regulations
to keep up with new developments.  Our securities laws, like many
of yours, were enacted at a time when most trading was done on
the floor of an auction market.  Indeed, in the 1930s, thinking
about a screen-based electronic trading would have been viewed as
fanciful and farfetched -- and about as likely to happen -- as
having a portable device in your pocket that’s no bigger than
your wallet that is a telephone, an answering service, a rolodex,
a newspaper headline service, and a stock ticker.

Today there are numerous electronic trading systems that provide
alternatives to traditional markets.  Depending on the system,
investors and other market participants are able to display,
negotiate and execute orders confidentially, often reducing their
trading costs in the process. In this remarkably creative and
competitive era, and with the rapid expansion of computer power
and bandwidth, the development of even more innovative trading
systems is inevitable.

The alternative trading systems we’ve seen thus far combine the
characteristics of traditional exchanges and broker-dealers.
Rather than regulate these entities as exchanges in the
traditional sense, which would have imposed onerous restrictions
out of proportion to their activities, the Commission initially
chose to approach them as broker-dealers.  However, this approach
has not proven flexible enough to account for the growing volume
and significance of these systems.
In particular, under the current approach, alternative trading
systems are subject to a regulatory scheme that may not be
particularly suited to their market activities and may not
provide for sufficient transparency, surveillance, and systems
oversight.

In the paper we published -- which is known in SEC jargon as a
“Concept Release” -- we explored a number of ways to shrink these
gaps.  We could, for example, require these systems to satisfy
certain standards for markets to ensure adequate transparency and
investor protection.  We are also considering ways to reduce
unnecessary burdens on traditional registered markets, so that
they can remain competitive amid technological advances.

                              * * *

As we review our domestic regulatory structures to accommodate
developments in technology, we must always be mindful that the
rules we make to protect U.S. investors will affect international
markets. Likewise, developments in the international markets will
almost certainly affect U.S. investors.

A significant development addressed in the Concept Release is the
growing number of foreign trading systems that provide access to
U.S. investors.  While most agree that access to cross-border
trading opportunities benefits investors and markets alike, it
nevertheless raises complex regulatory issues.  The host country
of a trading system would appear to have an obvious interest in
regulating that system. That interest has to be balanced
alongside the interest of other countries in maintaining high
standards of investor protection in their markets.

There is also the interest that we all share in avoiding
overlapping and redundant regulatory burdens that can
unnecessarily increase costs without any benefit to investors.
Like the alternative trading systems that are appearing in the
United States, cross-border trading facilities increase
competition among existing markets.  The goal of a jurisdiction
seeking to regulate a foreign trading system should be to provide
necessary investor protections without discouraging the extension
of these systems to that jurisdiction’s investors.

The international community has been working to come to grips
with these same issues.  The FIBV has been at the forefront of
these efforts, and I applaud your leadership.

In its 1994 Report on the Regulation of Electronic Markets, the
FIBV outlined a number of principles essential to regulating
electronic markets in multiple jurisdictions.  These principles
promote functional regulation, which simply means that entities
performing similar functions should face similar regulations.

The Report also specifies the goals of any new regulations: they
should promote fairness among markets, they should not create
uneven competitive advantages, they should be flexible to foster
innovation, and they should encourage self-regulation.  These
principles are a model for all of us.

For our part, the SEC would be pleased to hear any of your
thoughts on these issues as we go forward.  We hope that our
Concept Release may be of use to you as you explore similar
issues in your home markets.
                              * * *

There are many reasons for us to continue to work together to
address these issues.  One of the most important is our common
desire to reduce systemic risk.  Simply put, this is the risk
that a major market participant’s problems will spread to other
participants and markets, which in turn will spread to even more
markets.

Reducing and limiting systemic risk must be one of the most
important and urgent objectives of our era.  This will not only
enhance investor confidence, it will pave the way for domestic
and foreign trading systems to provide seamless services to the
investing public.

The clearance and settlement of trades is a key area for the
reduction of risk.  Reliable and efficient mechanisms to ensure
that payment is made and securities are delivered are essential
to liquid, attractive securities markets.  The Group of Thirty,
in March of 1989, emphasized that, to promote market integrity,
there must be -- among other things -- a centralized securities
depository, timely comparison of trades, and a delivery versus
payment system.  I agree wholeheartedly.

It’s been a priority of mine to improve the efficiency of the
U.S. clearance and settlement system.  One of the most effective
steps we’ve taken is to shorten the settlement cycle for
securities transactions from five business days to three.  The
shorter cycle gives us increased stability, capacity, and
certainty; a reduction in credit risk; greater discipline among
financial entities; and faster discovery and resolution of
problems.

We are pleased to see other countries moving towards shorter
settlement cycles.  Let me make special mention of the efforts of
the United Kingdom, which had the difficult job of moving from a
fixed, two-week settlement period to a rolling, five-day
settlement cycle.  I believe that shorter cycles will benefit all
of us.  And, because many investors now look to markets around
the world for investment opportunities, it may be wise for us to
consider establishing uniform, global settlement cycles to
increase liquidity and enhance the movement of funds across
markets.

Another step we took in the U.S. was to convert from a next day
funds settlement system to a same day funds settlement system --
which requires financial intermediaries to pay in funds that are
immediately available.  This system ensures that payments made
today are good today.  It also forces financial intermediaries to
have the resources in place to meet their settlement obligations
-- thus eliminating the risk of withdrawn or reversed payments.

Disclosure is also important to understanding and controlling
risk in the settlement process.  Earlier this year, the
International Organization of Securities Commissions and the
Committee on Payment and Settlement Systems of the Central Banks
of the G-10 Countries developed a framework for making important
disclosures about securities settlement systems.  This framework
will help market participants evaluate the risks of participating
in securities settlement systems.  The Commission has asked major
U.S. clearing organizations for their response to the disclosure
framework, and I urge you to encourage clearing organizations in
your own jurisdictions to complete the disclosure framework as
well.

In the U.S., there is still widespread use of physical
certificates, which are at best an inefficient transfer
mechanism.  We’ve been taking steps to reduce dependence on
physical certificates.  For example, recently adopted U.S. market
rules require book-entry settlement of most transactions between
financial intermediaries; they also require that all exchange and
NASDAQ securities be made eligible for deposit at a clearing
agency.  In addition, we are working with a group of industry
representatives to develop what we call a Direct Registration
System that allows retail investors to hold securities in book-
entry form at the issuer, and to electronically move positions
between the issuer and the investors’ broker-dealers.  Our hope
is that all securities transfers will eventually be made
electronically.

I note that other countries are also putting into place
electronic systems that streamline the settlement process.  For
example, the new Swiss model allows for the bundling of
securities transactions -- combining the purchase or sale,
settlement, and transfer functions in one single operation, all
within a matter of seconds.  Besides the obvious advantages of
eliminating steps that could result in errors, this system all
but eliminates transaction failures and counterparty risk.

Each country must examine its own needs, however, and determine
what clearance and settlement systems may work best within the
structure of its markets.

                              * * *

There is one other technology-related issue I’d like to discuss
with you today that is more prosaic than profound: the Year 2000
problem.  As most of us have now learned, many of the computer
programs in existence until just recently assumed that the first
two digits of a year were always “19.”  These programs,
therefore, provided for the entry of dates using only the last
two digits of the year.  If any entity, whether regulator or
regulated, fails to fix its systems before the final tick of the
clock on December 31, 1999, the result may be potentially
catastrophic.  All the date functions performed on the entity’s
computers would be invalid, leaving firms, investors,
counterparties, and others with enormous exposure to risk.

In June 1997, IOSCO urged all “members and market participants in
their jurisdictions to take all appropriate and necessary action
to address this critical matter.”  I cannot emphasize enough the
need for the international securities industry to work together
on this critical problem.  The Year 2000 arrives first in Japan
and will sweep around the world in 24 hours.  Our systems must be
ready to track it.

To avoid the problems associated with the Year 2000, it is
imperative that all trading, clearing, and operational systems be
checked and reprogrammed well in advance -- a monumental task.
All systems must be converted to avoid failures and disruptions
in the international securities markets.  The Commission is
working with the U.S. securities industry to educate investment
professionals and exchanges about these potentially devastating
problems.

On the international level, we must work together to prepare for
Year 2000 conversions.  Let me speak as candidly and directly
about this subject as I can.  The SEC realizes that there are
other important technology issues that demand immediate
attention.  Among these are the anticipated “Big-Bang” in Japan’s
securities and financial industries, and Europe’s move to the
European Monetary Unit.  These issues likely will consume
significant resources.  However, if we fail to correct the
problems raised by the coming millennium -- a deadline that
obviously cannot be bumped or delayed, fudged or finessed, even
by a single second -- we risk serious disruptions to the world’s
securities and financial markets, and I daresay enormous damage
to our economies.    These disruptions could undermine any
progress we make to resolve these other issues.  We therefore
need to coordinate not only on the EMU and Japan’s Big-Bang
issues, but also on Year 2000 problems.  And while it may not be
as exciting or inspiring, the Year 2000 problem must be at the
top of the list.

The Commission has already taken several steps to address this
issue.  Our efforts have centered on encouraging swift and
aggressive action and actively monitoring progress among the
exchanges, the NASD, and the clearing agencies.  We are also
speaking to public companies, reminding them of their disclosure
requirements, and offering informal guidance about how to apply
those requirements to the Year 2000 problem.  In addition, we’re
working with industry groups to educate the public on the issue.

The U.S. exchanges and the NASD likewise have taken an active
approach to the Year 2000 problem by emphasizing to their members
the importance of preparing their computer operations -- and by
putting their members on notice that they will be held
accountable for failing to do so.

Starting in early 1999, industry-wide systems testing will begin
in the United States, involving exchanges, registered clearing
corporations, depositories, and broker-dealers.  The Commission
regards this industry-wide testing program as critical to the
Year 2000 effort, and we expect the entire industry to
participate.

An essential component of all Year 2000 preparations is
contingency planning.  This includes creating back-up
capabilities to recover from any unexpected operational glitches
that may arise after January 1, 2000.  It also includes planning
for possible failures of brokers, dealers, transfer agents, and
clearance and settlement firms.  Exchanges themselves must also
create and test contingency plans.

We are fortunate to have a strong working relationship with our
exchanges, the NASD, securities firms, transfer agents, clearing
firms, investment companies and advisers, and mutual fund
complexes.  But as I said earlier, it’s not enough to address
this as a domestic problem.  It’s vital that all securities
exchanges, regulators, and industry participants in every corner
of the world make certain that Year 2000 computer conversions and
contingency plans are in place by early 1999 to allow for global
testing.  We must coordinate our efforts now, in order that
global systems testing can begin in early 1999.  The FIBV can
play an essential and invaluable role in addressing the Year 2000
problem.  You can stimulate action by your members to take needed
steps, including industry-wide testing well in advance of the
year-end.

This will afford everyone a few months to work on any unforeseen
problems, to ensure that we are all ready for January 1, 2000.

                              * * *

The market today is very different from the one that existed when
I entered this business as a stockbroker several decades ago.
Indeed, it has changed dramatically during the four years that I
have chaired the Commission.

Technology has made trading information and other valuable
services broadly available.  It has reduced the cost of entry,
and it has allowed greater participation in worldwide markets.
Transactions that used to take several days and involve
substantial labor can now be accomplished at the touch of a
button.  New instruments that fulfill important investment
strategies can be brought to market with increased speed.  And
investors can now obtain real-time trading information from a
variety of on-line sources.

                              * * *

These dramatic changes present major challenges to our regulatory
and oversight structures.  At times like these, the initial
reaction is sometimes to scrap the old system.  Yet even the most
zealous revolutionary would have to agree that the international
capital markets are working quite well.

It would be foolish to throw this working system out the window,
in the name of modernization.

But it would be equally foolish to assert that there is no room
for improvement, or to resist change in the name of our current
success.

Change can be disruptive.  But the securities industry has
succeeded spectacularly not by resisting change, but by embracing
it.

Change has always been the hallmark of our markets, and we have
succeeded by recognizing that fact and responding to it.  I look
forward to continuing to work with all of you to maintain that
proud record of achievement.