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Revision as of 04:18, 14 July 2007

The Depository Trust & Clearing Corporation (DTCC), based primarily in 55 Water Street in New York City, is the world’s largest post-trade infrastructure organization. It was set up to provide an efficient and safe way for buyers and sellers of securities to make their exchange, and thus "clear and settle" transactions.

User-owned and directed, it automates, centralizes, standardizes, and streamlines processes that are critical to the safety and soundness of the world’s capital markets. Through its subsidiaries, DTCC provides clearance, settlement, and information services for equities, corporate and municipal bonds, unit investment trusts, government and mortgage-backed securities, money market instruments, and over-the-counter derivatives. DTCC is also a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC's DTC depository provides custody and asset servicing for 2.8 million securities issues from the United States and 100 other countries and territories, valued at $36 trillion, more than any other depository in the world.

In 2006, DTCC settled the vast majority of securities transaction in the United States, more than $1.5 quadrillion in value. DTCC has operating facilities in New York City and at multiple locations in and outside the U.S. DTCC's derivatives services are offered through DTCC Deriv/SERV LLC, a subsidiary of DTCC.

History

Established in 1972, The Depository Trust Company (DTC) was created to alleviate the rising volumes of paperwork and the lack of security that developed after rapid growth in the volume of transactions of the U.S. securities industry in the late 1960s. The increase in volume made the exchange of physical stock certificates more difficult, less efficient, and increasingly expensive. The goal of DTC was to automate this process by retaining paper certificates in one place, and keeping electronic records.

Two methods were devised to solve the crisis:

The first was to hold all stock certificates in a centralized location and record all changes of ownership electronically - this method led to the creation of DTC in 1973 (stocks held by DTC are kept in the name of its partnership nominee, Cede & Co.). The primary function of the DTC system is to provide centralized clearing and settlement of security transactions electronically. Not all securities are eligible to be settled through DTC ("DTC-eligible").

The second method involves multilateral netting; and led to the formation of the National Securities Clearing Corporation (NSCC) in 1975.

Before DTC and NSCC were formed, brokers physically exchanged certificates, employing hundreds of messengers to carry certificates and checks. With volumes approaching 10 to 12 million shares a day, the paperwork burden became enormous. To deal with this large volume, the exchanges were forced to close every week (they chose every Wednesday), and trading hours were shortened other days of the week.

This continuing growth in securities trading led the New York Stock Exchange to establish the Central Certificate Service (CCS) in 1968. The CCS kept track of the total number of shares held by NYSE members. This led to the development of the Banking and Securities Industry Committee (BASIC), and finally the development of DTC.

Litigation

DTCC has been sued with regard to its alleged participation in naked short selling. The plaintiff is seeking $400 million in damages. The North American Securities Administrators Association, which represents state stock regulators, filed a brief arguing that if the claims were correct, its shareholders "have been the victims of fraud and manipulation at the hands of the very entities that should be serving their interest." In the case of Pet Quarters, Inc. v. The Depository Trust & Clearing Corporation, et al., filed October 29, 2004, the DTCC Defendants’ motion to dismiss and plaintiffs’ motion to remand to state court are pending.

There is no dispute that illegal naked shorting happens. The fight is over the extent to which DTCC is responsible. Some companies blame DTCC as the keepers of the system where it happens, and say it has turned a blind eye to the problem. DTCC says naked shorting isn't widespread enough to be a major concern. "We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone," DTCC's chief spokesman Stuart Goldstein said. DTCC General Counsel Larry Thompson calls the claims "pure invention." The SEC has viewed naked shorting as a serious enough matter to have made two separate efforts to restrict the practice.

Critics contend that DTCC has been too secretive with delivery-failure data, depriving the public of important information about where naked shorting might be taking place. In June 2007 WayPoint Biomedical Holdings filed a lawsuit against DTCC claiming damages as a result of DTCC's refusal to comply with a subpoena request for documents that are needed by WayPoint in order to track trades in the company's shares.

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