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Securities in book-entry form are less vulnerable to theft and loss, can't be counterfeited and don't require counting or recording by certificate number. In addition, owners do not submit coupons to obtain interest payments or present certificates to redeem securities.
As of year end 1988, about $1.8 trillion, or 98.7 percent of the outstanding marketable Treasury debt, was in book-entry form. All Treasury securities held in physical form by depository institutions—whether owned by them or held on behalf of others—are eligible for conversion to book entry and for transfer by wire.
The first steps toward modern securities clearance were taken in the 1920s when Treasury securities became transferable by telegraph among banks in different Reserve districts. At that time, all transfers required specific approval by the Treasury's Commissioner of the Public Debt. In time, these telegraphic transfers of securities became known as CPDs, drawing from the initials of the office approving the transfers.
Under the early CPD system, the sender of a security—usually a commercial bank—delivered certificates to the local Federal Reserve Office. That office, as fiscal agent of the U.S., retired the securities and sent a telegram to another Reserve office located near the institution receiving the security.
The Reserve office receiving the telegram issued identical physical securities to the bank to which they were being transferred or they were deposited in that bank's safekeeping account at the Federal Reserve.
The difficulties involved in making actual deliveries of physical government securities to and from the Federal Reserve Bank in New York City (and among the banks and dealers in the city) led to the establishment of New York's Government Securities Clearing Arrangement (GSCA) in 1965. The GSCA permitted the telegraphic transfer of securities during the day with a net settlement in physical securities at the end of the day.
In 1968, another major step toward automating the government securities market was taken when a Treasury regulation authorized the first book-entry procedures to eliminate paper U.S. Government securities. Under these procedures, securities were issued and transferred electronically on the records of a Reserve Bank.
At the end of 1977, it was possible to eliminate the GSCA due to the widespread use of book entry.
In addition to the U.S. Treasury, several government sponsored agencies have issued book-entry regulations and many of their securities have been available in book-entry form since the 1970s. Beginning in late 1983, short-term agency discount notes also became eligible for book entry.
Finally, mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Corporation were issued in book-entry form beginning in 1985.
Currently 74 depository institutions, as well as several agencies, have direct or on-line access, via computer or terminal links, to the securities transfer network in the New York Federal Reserve district.
Depository institutions include member and non-member commercial banks, mutual savings banks, savings and loan associations, credit unions and U.S. branches and agencies of foreign banks.
The network, known as Fedwire, allows district depository institutions to transfer securities for their own account or the accounts of customers directly to one another and to depository institutions throughout the U.S. Securities transfers compose about 28 percent of the transactions on Fedwire, which also moves funds.
As part of the program to expand the use of book entry, the Treasury began offering new bills exclusively in book-entry form in 1979. In August 1986, with the introduction of a program named Treasury Direct, the Treasury began marketing all new notes and bonds only in book-entry form.
Treasury Direct makes principal, interest and redemption payments on notes and bonds bought through the Fed directly into an individual investor's account at a financial institution. These payments are made electronically rather than by check. The Treasury Direct system was expanded to include bills in 1987.