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The Depository Trust Company ("DTC") is the largest central securities depository in the world, and is based in New York, New York.
DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation. DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, GSCC, MBSCC, and EMCC; also subsidiaries of DTCC), as well as by the New York Stock Exchange, the American Stock Exchange, and the National Association of Securities Dealers. Access to the DTC system is also available to others that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”).
DTC custodies more than 2.5 million U.S. and non-U.S. equity, corporate, and municipal debt securities issues from over 100 countries valued at over $36 trillion, and it and its affiliates handle over $1.5 quadrillion of securities transactions a year. DTC holds and provides asset servicing for issues that DTC’s Direct Participants deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in the securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations.
While other central securities depositories formerly existed in the United States, DTC has acquired all of them, and is now the sole CSD in the United States. Midwest (in Chicago), Philadep (in Philadelphia), and Participants Trust Company (in New York) were the last 3 remaining other CSDs in the United States, but all were acquired by DTC in the past few years.
DTC is also a limited-purpose trust company organized under the laws of the State of New York, a clearing agency registered with the SEC under Section 17A of the Securities Exchange Act of 1934, a “banking organization” within the meaning of the New York Banking Law, and a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code.
Early years
DTC was established in response to the paperwork crisis in the securities industry that developed in the late 1960s. At that time, brokers still exchanged physical certificates and checks for each trade. Hundreds of messengers scurried through Wall Street clutching bags of checks and securities.
With the NYSE handling only 10 to 12 million shares daily, brokers were buried in paperwork. The crisis was so severe that, in order to help reduce the backlog, the exchanges closed every Wednesday and shortened trading hours on other days.
In reaction, the industry decided to maintain (or immobilize) the physical certificates for stocks in a central location, and to record changes of ownership using "book entry" (where no certificates change hands) accounting records.
The NYSE established the Central Certificate Service (CCS) on a limited basis in 1968 to keep track of the total number of shares held and transferred by broker-dealers who were NYSE members. Banks formed the Banking and Securities Industry Committee (BASIC) to recommend solutions, and BASIC's work led to the creation of DTC, to immobilize securities for broker-dealers and banks, complete the book-entry delivery of those securities, and handle the myriad operational tasks required to provide centralized, automated processing. In 1973, with the help of NYSE employees, DTC assumed the operations of CCS and focused on custodial services for banks, brokers, and other institutions. DTC also began providing centralized post-trade processing of institutional trades to further streamline this activity. Instead of hundreds or thousands of checks being written, a single net money figure could be computed and paid to or received from the central clearance and settlement organization for an entire day's trading.
Book-Entry-Only Issuance
When DTC acts as a securities depository for securities, generally the securities are deposited with DTC. To facilitate later transfers, typically securities deposited with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. This does not effect any change in beneficial ownership.
Purchases of such securities are made by or through "Direct Participants," which receive a credit for the securities on DTC’s records. The ownership interest of each actual purchaser of each security (“Beneficial Owner”) is in turn recorded on the Direct and "Indirect Participants’" records. Beneficial Owners receive written confirmations providing details of the transaction, and periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the securities are accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners, and in turn on DTC's books. Beneficial Owners don't generally receive certificates representing their ownership interests in the securities.
DTC and Cede & Co. only vote with respect to the securities if authorized by a Direct Participant. DTC typically mails an "Omnibus Proxy" to an issuer as soon as possible after the record date, assigning Cede & Co.’s voting rights to those Direct Participants to whose accounts the securities are credited. Redemption proceeds, distributions, and dividend payments on the securities are generally made to Cede & Co. DTC then credits Direct Participants’ accounts.
SEC regulation
DTC is heavily regulated by the United States Securities and Exchange Commission. The SEC staff meets with DTC throughout the year to review its practices, and performs frequent periodic on-site inspections. They also require DTC to have the capacity to facilitate the prompt and accurate settlement of securities transactions, and to safeguard securities and assets.
The standards require DTC to:
- Perform periodic operational risk assessments.
- Have a Board audit committee of non-management directors participate in selecting DTC's independent public accountant, and review its work.
- Have a competent internal audit department review internal accounting controls.
- Furnish audited financial statements to participants annually, and furnish unaudited quarterly financial statements on request.
- Furnish to participants annually an independent public accountant's opinion report based on a study and evaluation of DTC's system of internal accounting control.
- Have detailed plans to assure the physical safeguarding of securities and funds, the integrity of data processing systems, and the recovery from loss or destruction of securities, funds, or data.
In addition, the SEC generally does not allow DTC to make any significant changes to DTC's practices without:
- DTC first filing a request for SEC approval
- Awaiting publication of the proposal in the Federal Register, followed by a 35-day public comment period
- A rigorous analysis performed by the SEC Staff of the proposal and those public comments that have been received, typically including discussions between the Staff and DTC, leading at times to modifications in, and a resubmission of, the proposal
- If DTC has satisfied the Staff, the SEC's issuance of an Approval Order.
Generally, until all those steps have been completed, DTC cannot move forward with its proposal. As a practical matter, DTC finds itself making rule filings with the SEC once every 2 weeks or so. As a result of the rigorous level of analysis applied by the Staff, coupled with the Staff's obligation to often weigh competing interests and conflicting positions that may be expressed in public comment letters, approval orders generally follow months, or in the unusual case in which the conflicting interests that must be balanced are greatest, years later.
Ltitigation
DTC and its parent company DTCC have been sued with regard to DTC's 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.
While there is no dispute that illegal naked shorting happens, there is a fight as to the extent to which DTCC is responsible. Some companies blame DTCC as the keepers of the system where it happens, and say DTCC 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 trade 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.
Competition
Euroclear (in Brussels, Belgium) and Clearstream (in Luxembourg) are the second and third largest central securities depositories in the world.
References
- Drummond, Bob (August 4, 2006). "Naked Short Sellers Hurt Companies With Stock They Don't Have". Bloomberg.com. Retrieved 2007-12-25.
{{cite news}}: Check date values in:|date=(help) - "DTCC Chief Spokesperson Denies Existence of Lawsuit". financialwire.net. May 11, 2004. Retrieved 2007-12-25.
{{cite news}}: Check date values in:|date=(help) - ^ Emshwiller, John R. and Kara Scannell (July 5, 2007). "Blame the 'Stock Vault'?". The Wall Street Journal.
{{cite news}}: Check date values in:|date=(help) - "WayPoint Biomedical Holdings, Inc. Files Lawsuit Against The Depository Trust and Clearing Corporation (DTCC)". GEN (Genetic Engineering and biotechnology News. June 25, 2007. Retrieved 2007-12-25.
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