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Banking and Securities Industry Committee (BASIC)

The group that promoted the standardization and automation of stock certificates processing

What is the Banking and Securities Industry Committee (BASIC)?

The Banking and Securities Industry Committee (BASIC)  was established in 1970 with the goal of standardizing, automating, and streamlining the processing of stock certificates. It was tasked with ensuring uniformity in the rules and regulations for stock certificate and options processing. BASIC attempted to reduce the physical exchanges of stock certificates when transferring ownership to new owners by bringing on board an automated procedure to accelerate the process.

 

Banking and Securities Industry Committee (BASIC) diagram

 

The main push behind the plan to standardize and automate the stock certificate and options process was the paperwork crisis that occurred during the bull market of the late 1960s. Many small-time investors entered the stock market, which led to increased trading volumes that touched new highs. Since the trading involved physical exchange of certificates, there were significant amounts of paperwork involved in completing the transfer of ownership to the buyers. At one point during the crisis, more than eight million shares traded every day, and the traders needed an alternative that would make the process quick and efficient.

 

Depository Trust Company (DTC)

When the National Association of Securities Dealers, the New York Clearing House Banks, and other organizations collaborated to form BASIC, their goal was to resolve the paperwork crisis in the securities industry. BASIC attempted to reduce the physical exchange when completing the transfer of ownership and its efforts led to the formation of the Depository Trust Company (DTC).

Established in 1973, the Depository Trust Company is located in New York City. Today, the DTC is one of the world’s largest depositories, handling millions of securities every year. Before the formation of the DTC, the New York Stock Exchange experienced increased trading volumes that sometimes went up in excess of eight million shares daily.

 

Depository Trust and Clearing Company (DTCC)

Although the DTC was established as an independent institution, it merged with other security clearing companies in 1999 and became a subsidiary of the Deposit Trust and Clearing Company (DTCC). The role of the DTCC is to oversee the financial system and manage potential risks facing its participants.

 

Functions of the DTC

Electronic recordkeeping

The DTC provides automated recordkeeping of securities and acts as a clearinghouse to process trades in corporate and municipal securities. It also maintains custody of global stock certificates and other documents of ownership through its affiliated partnership nominee, Cede and Company. This company’s partners comprise DTC employees.

 

Dividend services

The DTC also provides dividend services to corporations. When a company announces the amount of dividends to be distributed to shareholders, the DTC collects the dividends from the issuing company and allocates them to the shareholders. It then reports these payments, and investors interested in investing in various companies can compare the dividend payments across multiple companies. Apart from dividend services, the DTC also provides global tax services, direct registration, underwriting, reorganization, asset servicing, and proxy services.

 

Custody of securities

The DTC is a custodian of corporate stocks and bonds, municipal bonds, and money market instruments. Through the DTC services, the NYSE can handle billions of trades every day at lower costs and higher accuracy. Due to the trillions worth of securities that are held in the DTC, security brokers, settling banks, institutional investors, and insurance companies rely on the DTC to perform their trades. The DTC is a member of the Federal Reserve and is registered with the Securities and Exchange Commission (SEC).

 

Founders of BASIC

The National Association of Securities Dealers, New York Clearing House Banks, the New York Stock Exchange, and other stock exchanges established BASIC in 1970. Here is a summary of the entities:

 

National Association of Securities Dealers (NASD)

The NASD was founded in 1939, and it played a crucial role in the management of stock trading marketing between 1939 and 2007. It was one of the leading founders of the NASDAQ stock market and the Banking and Securities Industry Committee in 1971 and 1970, respectively. It was a self-regulatory entity that supervised the operation and regulation of the NASDAQ stock market and over-the-counter markets. It was charged with overseeing the NASDAQ’s market operations under the overall supervision of the Securities and Exchange Commission (SEC). In 2007, NASD merged with the New York Stock Exchange regulation committee to form the Financial Industry Regulatory Authority (FINRA).

 

New York Clearing House Banks

The New York Clearing House Association is the largest and oldest U.S. bank clearing house. It was established in 1853 for the purpose of processing transactions among 24 U.S. banks, and it was modeled after the London Clearing House, which was founded in 1773. It works as an independent organization that advocates for legislative, regulatory and legal policy issues before lawmakers, courts, and other regulatory bodies in the United States.

Before the establishment of the Federal Reserve, the New York Clearing House Association helped stabilize the monetary system and manage currency fluctuations. It seeks a level ground for all participants to promote economic growth and a sound banking system. The clearinghouse and its owner banks also form a strong consensus on issues that are central to the banking industry.

 

The New York Stock Exchange (NYSE)

The New York Stock Exchange (NYSE) is the largest equities-based exchange globally, based on market capitalization of its listed securities. The NYSE became a public entity following the acquisition of Archipelago, an electronic trading exchange, in 2005 before merging with Euronext in 2007. In 2013, NYSE Euronext was acquired by Intercontinental Exchange for $11 billion.

NYSE traders relied on floor trading using the open outcry system for many years. However, since the acquisition of the Archipelago electronic trading exchange in 2007, many trades have been transitioned to the electronic system. This has increased efficiency and the number of securities traded daily on the exchange.

 

Summary

The Banking and Securities Industry Committee (BASIC) was established in 1970 with the goal of automating and standardizing stock certificates and options processing. It was created following the paperwork crisis that emanated from the bull market of the 1960s. The efforts of the banking and securities industry committee led to the formation of the Depository Trust Company (DTC).

 

Related Readings

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