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A study forthcoming in the Federal Reserve Bank of New York’s Economic Policy Review examines the origins and early development of the Federal Reserve’s book-entry system for U.S. Treasury securities. Origins of the Federal Reserve Book-Entry System, by Kenneth D. Garbade, explores the forces that ended reliance on physical certificates--a change that dramatically improved the efficiency of the Treasury market.
Garbade observes that in the early 1960s, the costs and risks associated with safekeeping and transferring physical certificates owned by outside parties and held at Federal Reserve Banks had become so large that market participants sought more efficient ways to manage the securities. The conversion to book-entry was driven by the interest of the Reserve Banks and the Treasury in lowering their operating costs and risks, the desire of the Reserve Banks and the Treasury to preserve market liquidity, and the goal of the Reserve Banks to prune member bank operating costs.
The early history of the book-entry system also suggests that the mere prospect of greater efficiency may not always suffice to bring about rapid change that requires coordination among diverse market participants. Two events in particular accelerated the development of the book-entry system. In 1962, the loss of certificates worth $7.5 million by one Reserve Bank prompted the Federal Reserve System’s Conference of Presidents to support the adoption of a book-entry system for the Fed’s twelve regional banks. In 1970-71, several insurance companies, citing the high risk of theft during the transfer of bearer bonds, threatened to discontinue coverage. This “insurance crisis” had the potential to impair the liquidity of the Treasury market and injected a sense of urgency in expanding the book-entry system to include securities not safekept at the Federal Reserve.
Kenneth D. Garbade is a vice president at the Federal Reserve Bank of New York.