The Depository Trust & Clearing Corporation (DTCC), recently published a white paper on dematerializing physical securities which launched the final stage in the industry’s long-standing campaign to reduce risks and costs, boost efficiencies and enhance the competitiveness and security of the U.S. capital markets. It also opened a formal discussion among industry stakeholders to gain consensus on critical next steps.
Reducing Costs
- The industry’s progress in dematerializing physical certificates in recent years has advanced to a point in which the economies of scale for physical processing have been reversed. As the number of physical issuances and transactions decline, the unit cost of processing is rising.
- According to one industry study, printing and issuing physical certificates cost the industry approximately $250 million annually, plus an additional $50 million to replace 1.2 million lost, stolen or counterfeit certificates. Also, an individual investor today can pay more than $500 for one paper certificate, compared to $5 for an electronic statement.
Reducing Risks
- The risks associated with the movement and manual processing of paper certificates is now greater than ever. The move to a shorter settlement cycle could reduce that risk.
- While providing liquidity on what otherwise would be illiquid assets, the Non-Transferable Deposit program presents risks to both DTCC and its clients. Non-transferable certificates can remain in a client’s customer’s name from several months to indefinitely. Should an issue emerge from non-transferable status, problems with negotiability may arise when the certificates are presented to the agent. This can result in DTCC charging the depositing client long after its customer has sold the securities and closed the account. In addition, some issues never emerge from non-transferable status, which has led to a buildup of certificate inventory in DTCC’s vault, where these issues now account for about 30% (375,000) of DTCC’s physical inventory.
- DTCC launched the Fast Automated Securities Transfer (FAST) program which minimizes certificate movements and streamlines transfer processing by recording the securities in book entry form on the books and records of the issuer’s transfer agent. This reduces the risks associated with lost securities and eliminates the costs of insuring, handling and shipping physical certificates.
Boosting Efficiencies
- FAST was an important step in helping reduce the number of physical certificates being created and moved between DTCC and the transfer agent community. As the physical securities market consolidated around a central depository, the benefits to market participants included both efficiency and reduced operational risk.
- DTCC expanded its deposit services, adding the Branch Deposit Service (BDS), Restricted Deposit Service (RDS) and Reorg allowing DTCC to bring more operating efficiencies to its clients.
- Networking for Equities (NFE), provides an automated system link that connects the client, issuer, transfer agent and the depository, streamlining and expediting the client’s ability to update and service the controlled investor’s accounts, while maintaining the transfer agent’s role as the gatekeeper of all transfer processing. These features are designed to bring greater efficiencies.
- Dematerialization will also support the industry’s move to a shorter settlement cycle, creating greater efficiency
Enhancing Competitiveness
- According to the DTCC, Complete dematerialization will contribute to a more competitive U.S. marketplace. Dozens of countries across Europe, Asia-Pacific, Africa and Latin America have stopped issuing paper certificates altogether.
In an effort to work together, DTCC asked for industry input on the outlined proposals in order to take the remaining steps to achieve their goal. Some industry leaders believe that the paper doesn’t go far enough.
References
White Paper: http://www.stai.org/pdfs/dtcc-white-paper-july-2012.pdf
White Paper Briefing: http://www.dtcc.com/downloads/leadership/whitepapers/4763DematerializationBriefing.pdf