of almost three times or more over that needed for an average trading session. The NYSE is averaging 505 million shares per day and reports that its systems could handle up to 2.5 billion shares, or five times average capacity. The Chicago Board Options Exchange is averaging 733,000 contracts per day and has capacity to handle 2 million contracts, or almost three times average capacity. Nasdaq has average volume of approximately 622 million shares with a capacity of one billion shares without affecting normal system operation.

Increased Capacity at Broker-Dealers.-Our overall assessment is that the major broker-dealers' computerized trading systems are ready for volatile trading days. The major broker-dealers have around two times capacity over that needed for an average trading session. We further believe that the major broker-dealers have adequate on-line performance monitoring during the trade day which helps identify potential choke-points and provide the means to re-route message traffic to alleviate queuing. The major broker-dealers have adequate capacity modeling and verification of models used, and adequate budgeting to procure necessary hardware. The major broker-dealers also have taken steps to keep their systems ahead of projected transaction message growth rates. When compared to the status of the capacity of computerized systems in 1987, the broker-dealers are generally ready for extremely volatile trading days.

Capital and Internal Controls

Improved Broker-Dealer Capitalization. In the event of a major market downturn, the capital adequacy at the major broker-dealers, the market-makers, and the regional firms will be tested. No significant broker-dealer failed in 1987, and firm capitalization has increased substantially since 1987. The major firms have sufficient capital to withstand substantial losses associated with a severe equity market drop. As of September 30, 1996, broker-dealers filing FOCUS reports with the Commission had approximately $1.6 trillion in total assets and $95.6 billion in total regulatory capital (equity capital plus qualifying subordinated debt).

Reduction in Relative Equity Positions at Large Firms.-Equity position market value vis-a-vis total assets at these firms have diminished since 1987. The market value of equity positions of these firms at the end of September 1987 was only a relatively small fraction of their total assets-in most cases less than 5 percent of the total assets of the firms. The market value of equity positions of these firms at the end of September 1996 was smaller than in 1987, comprising approximately 2 percent of the total assets of these firms. This indicates a reduced market risk exposure on proprietary positions.

Improved Securities Investor Protection Corporation Financial Condition.-In the event of a failure of a retail broker, SIPC has taken action to increase the size of its insurance fund. In 1987, the SIPC fund totaled approximately $379 million. As of February 15, 1997, the SIPC fund had a balance of approximately $1 billion. In addition, SIPC has access to a $1 billion line of credit established with a consortium of banks and statutory authority to borrow up to $1 billion from the U.S. Department of the Treasury, through the Commission.

Enhanced Internal Controls/Operations.-In the event of a severe market downturn, the internal controls and operational procedures of broker-dealers will be tested. The advancement of technology also has reduced the likelihood of processing/ clearing delays caused by the break. Clearing firms now have substantially increased clearing capacity and are able to handle substantially greater transactional volume. In addition, the events of 1987 demonstrated that the SEC's customer protection rules worked well. Risk management policies have been improved substantially since 1987 at the major securities firms.

Improvements in Clearance and Settlement

Adoption of T+3 Settlement.-On June 7, 1995, the Commission established a standard three-business-day (T+3) settlement timeframe for most broker-dealer transactions. T+3 settlement reduces risks in the clearance and settlement system by eliminating two days of potential participant default. Clearing organizations and the securities industry in general modified their procedures to effectively implement the T +3 settlement cycle.

Same-Day Funds Settlement System.-On February 22, 1996, the industry took a major step in addressing the finality of payments in the clearance and settlement system and the liquidity requirements of clearing members by converting to a sameday funds settlement system. Payment is made in funds that are immediately available and final at the time of settlement. The goal of SDFS is to reduce risk in the clearance and settlement process by simplifying cash management, reducing overnight exposure, and achieving close conformity with payment methods used in derivative markets, government securities markets, and other markets.

Cross-Margining at The Options Clearing Corporation (OCC). Since 1987, OCC has established several cross-margining programs. Currently, OCC has entered into cross-margining agreements with the Intermarket Clearing Corporation, the Chicago Mercantile Exchange, the Board of Trade Clearing Corporation, the Comex Clearing Corporation, and the Kansas City Board of Trade Clearing Corporation. The cross-margining programs are designed to increase liquidity and depth to markets by reducing clearing members' combined daily margin requirements and by reducing potential for financial gridlock, particularly during volatile markets when clearing organizations may demand additional clearing margin from their members. These programs utilize participants' end-of-day positions to determine combined daily margin requirements.

Risk Control Improvements at OCC.-OCC has developed and implemented a number of other major system enhancements to reduce risk in the clearance and settlement system for options including (1) a sophisticated, risk-based, methodology for calculating margin, (2) an electronic notification and approval system for settlement processes, and (3) a sophisticated risk analysis system designed to help OCC clearing members and exchanges manage the risk of their customers and members in the same manner that OCC manages its risks.

Cross Guarantee Agreements.-Cross guarantee agreements are agreements between clearing agencies which generally provide that in the event of a default of a participant common to both clearing agencies, any resources remaining after the failed common participant's obligations to one clearing agency have been satisfied will be made available to the other clearing agency. The guarantee is generally not absolute, but rather is limited to the extent of the resources of the failed participant remaining at the guaranteeing clearing agency. The principal resources of defaulting participants will be settlement credit balances, clearing fund deposits, and collateral. The National Securities Clearing Corporation has executed cross guarantee agreements with the Depository Trust Company and OCC. Additionally, MBS Clearing Corporation, Government Securities Clearing Corporation, Participants Trust Company, and International Securities Clearing Corporation have amended their rules to allow them to enter into cross guarantee agreements with other clearing agencies, including futures clearing organizations.

Collateral Management Service (CMS).-In 1995, NSCC developed CMS whereby NSCC collects from and provides to participants and other clearing entities information regarding a participant's clearing fund, margin, and other similar requirements and deposits at participating clearing entities. CMS helps clearing agencies and their participants to better monitor clearing fund, margin, and other similar required deposits that protect a clearing agency against loss should a member default on its obligations to the clearing agency. DTC, Stock Clearing Corporation of Philadelphia, Philadelphia Depository Trust Company, GSCC, MBSCC, PTC, and OCC have received Commission approval to participate in the CMS service.

Creation of the Securities Clearing Group and Unified Clearing Group.-There have been a number of initiatives since 1987 to improve cooperation and information sharing among the securities and futures clearing organizations. As part of this effort, in 1989 the major U.S. securities clearing organizations formed the Securities Clearing Group and in 1995 joined with the futures clearing organizations to create the Unified Clearing Group.

Liquidity Improvements at Clearing Agencies.-DTC, NSCC, and OCC have substantially increased their total participants/clearing funds and their total lines of credit since 1987.

MUTUAL FUND INDUSTRY

Question. Recent mutual funds topped $3.5 trillion. What are your greatest concerns about the mutual fund industry?

Answer. The $3.5 trillion is a reflection of the strength and importance of the mutual fund industry. The industry has suffered no major problems in over two decades and we should work with the industry to continue this excellent record. We have some concerns about the industry despite its tremendous growth. We believe we must make every effort to encourage fund investors to become educated; make sure fund information, including risk, is communicated clearly to investors; and maintain the industry's excellent record of compliance in the face of the pressures of increasing competition.

Fund Shareholders. Our greatest concern is fund shareholders. We worry whether the fund industry is doing enough to educate investors not only about particular types of funds, but about investing in general, how to allocate assets and better understand risk, for example. We're trying to do our part on the education front. We're continually trying to educate investors through meetings with investors, preparing

investor brochures, and assisting in the development of high school and college courses relating to investing.

Disclosure.-We have met with investors from throughout the country. So many of these hardworking, intelligent people are putting their hard earned money into funds as a way of saving for their children's college education or their own retirement. We are concerned that the expectations these people have about funds may be unrealistic and will not be met. That's why we've been pressing so hard for funds to use good, clear disclosure in their written documents and for sellers of fund shares to be guided by the highest ethical principles. Expectations are, after all, shaped by what investors read and are told.

New Entrants.-The fund industry has grown dramatically over the past 10 to 15 years. We are concerned, on behalf of fund shareholders, that new entrants to the business-like new entrants in any business-may not fully understand their obligations in managing fund assets and selling fund shares. A survey we saw recently of the CEO's of 1,300 domestic and foreign banks and thrifts, for instance, indicated that 25 percent of these institutions have no risk management process for the sale of mutual fund shares. Concerns over new entrants have caused us to focus more of our fund inspection unit's time and attention on those companies.

Compliance. Many have pointed to the extreme competition we are starting to see in the fund business. The competition may well lead to lower fund expenses, which would be most beneficial for shareholders. We are concerned, though, that costcutting could also mean cutbacks of important functions, particularly compliance. That would be a mistake and would hurt the fund business in the long run.

INVESTMENT ADVISERS

Question. As a result of the National Securities Markets Improvement Act, oversight for over 70 percent of all registered investment advisers will become the responsibility of the states. The SEC will now be responsible for the 8,000 investment advisers that manage portfolios over $25 million.

What impact will this division of responsibility have on the SEC?

Answer. We will be able to reduce our current examination cycle for the advisers who will be registered with the SEC to once every 4-5 years. In the past, examination cycles ranged from every 7-8 years for the largest advisers, to every 44 years for the smaller advisers. The advisers who will remain registered with the SEC and subject to this enhanced oversight manage approximately 95 percent of the industry's assets under management. In addition, we will be able to conduct “targeted inspections" which identify specific topics of regulatory interest (such as with the soft dollar project now underway) as well as continue our routine and cause inspections. In a targeted inspection, we obtain an understanding of how a practice or activity is performed, the types of problems or violative conduct that can arise and whether there is further need for regulatory consideration of the practice or activity.

Question. What responsibility will the SEC have to oversee the state run programs?

Answer. We will have no direct responsibility. Each state will be responsible for regulating those advisers within its borders that manage under $25 million. The SEC will not be responsible for overseeing the various state programs. The Improvement Act does, however, direct the SEC to make technical and other assistance available to the states. We have been active in this effort by developing training programs for state regulators, creating SEC internships, conducting joint examinations, and sharing information about examination techniques and about specific advisers that will be solely state-regulated.

Question. Does this policy change have any budget implications?

Answer. The changes to the Advisers Act were intended to affect the investment adviser program, and not to have a budget impact. This legislation has vastly improved our ability to examine and regulate the adviser population registered with the SEC. To prepare for the legislation, the Commission has reallocated eight existing staff positions to the Division of Investment Management to form a task force to update the Commission's adviser rules. In addition, $20 million was authorized by the Improvement Act for 1997.

ELECTRONIC DATA GATHERING ANALYSIS AND RETRIEVAL (EDGAR] SYSTEM Question. The current EDGAR contract expired in January 1997. You've stated in your written testimony that EDGAR is 10 year old technology and the Improvement Act asked SEC to look into the possibility of privatizing EDGAR by April 9, 1997. What is the status of the EDGAR recompetition?

Answer. The SEC is currently evaluating proposals received in response to Phase 1 of the solicitation. We are also preparing the report to the Congress that will address the issue of the modernization of EDGAR through privatization.

It is anticipated that once the Congress has provided its guidance on privatization, the SEC will issue Phase 2 of the solicitation and will award a new contract following proposal receipt and final evaluations.

Question. Are there funds requested in the President's 1998 budget for the SEC to update EDGAR?

Answer. The 1998 budget request has carried forward the 1997 level of $8 million for the maintenance of EDGAR operations. This funding level is not sufficient to carry out an EDGAR modernization program.

SUBCOMMITTEE RECESS

Senator GREGG. Thank you. Thanks for your time. The hearing is concluded.

[Whereupon, at 2:28 p.m., Wednesday, March 19, the subcommittee was recessed, to reconvene at 2 p.m., Thursday, March 20.]

STATE,

DEPARTMENTS OF COMMERCE, JUSTICE, AND THE JUDICIARY, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 1998

THURSDAY, MARCH 20, 1997

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS,

U.S. SENATE,

Washington, DC.

The subcommittee met at 2 p.m., in room S-146, the Capitol, Hon. Judd Gregg (chairman) presiding.

Present: Senators Gregg, Domenici, Hollings, and Lautenberg.

UNITED NATIONS

STATEMENT OF AMBASSADOR BILL RICHARDSON, U.S. PERMANENT REPRESENTATIVE TO THE UNITED NATIONS

ACCOMPANIED BY PRINCETON N. LYMAN, ASSISTANT SECRETARY FOR THE BUREAU OF INTERNATIONAL ORGANIZATION AFFAIRS

OPENING REMARKS

Senator GREGG. We will start the hearing. I know there are other Members of the Senate that are going to be joining us, but I do not want to hold the Ambassador up. Here is the ranking member right now.

Basically we very much appreciate the Ambassador coming by. I would just say, as a bit of an opening statement, that we have been working with the Ambassador and with the Secretary of State on the issue of arrearages. We have a working group functioning that has been aggressively trying to resolve the problem.

I hope that by the middle of April we will have some sort of an agreed-to position between the Congress and the administration on how to address the arrearages question; how much we will pay; and the manner of the payments and the conditions of the payments.

I personally do not intend to spend any time or any significant time on that issue, although it is deemed to be the most controversial. There is so much going on in the way of trying to resolve it, that I do not think it is necessary to spend a lot of time on it, in my viewpoint.

However, there are other issues, obviously, which involve the United Nations and we appreciate the Ambassador coming today. I would yield to the ranking member for any comments that he might have.