In a white paper released today, the Depository Trust & Clearing Corporation (DTCC) has called on the financial services industry to complete the dematerialization of securities in the United States.
DTCC says it has seen an 87% drop in the number of physical securities deposited in and a 94% reduction withdrawn from its vaults since 2000. However, the dwindling number of physical securities in circulation means the economies of scale of supporting them have been reversedwith fewer physical securities used, the cost of processing them has risen significantly. That coupled with the risks associated with processing physical securities, DTCC says, means the industry must cooperate to eliminate the remaining physical securities in the U.S. markets.
It has proposed a multi-year program to achieve this goal with the ultimate aim of achieving a more cost-effective, efficient, secure and competitive U.S. marketplace.
The plan involved three key work streams. First is traditional physical transactions, which are transactions clients regularly send to DTCC for immobilization. DTCC plans to completely eliminate centralized processing of physical securities by 2015. Second, it is developing business practices for primary issuance of securities that does not involve physical certificate processing. Finally, it will work on paring down existing physical securities in its vaults.
As for traditional physical transactions, subject to industry support, DTCC plans to implement three new deposit options by 2013 to aid in the dematerialization process. The first is utilizing DTCCs Deposit and Withdrawal at Custodian (DWAC) facility, which redirects the clients distribution directly to the Fast Automated Securities Transfer (FAST) transfer agent, thereby removing DTCC from the process. A second option would enable clients to deposit to DTCC for provisional credit subject to agent approval. With this option, deposits are initially credited as provisional until the clearing transfer is complete, at which time the client may use the deposit. The final option is deposits at DTCC for immediate credit, a higher-cost service that would enable deposits to be used as soon as they are deposited. However, credits may be reversed on these deposits if there is a transfer reject. Clients may pick and choose any combination of the three options.
DTCC plans to implement extra fees for clients who choose not to use its Direct Registration System (DRS)the system it launched in 1996 to allow investors to keep their share ownership on the books of issuers or their transfer agents rather than holding physical securitiesfor DRS-eligible securities. In other words, clients who continue to use physical securities when they could opt for the dematerialized option will be be subject to a surcharge in addition to the deposit fee. Additionally, DTCC will increase fees on BDS deposits, by which DTCC takes on full certificate examination and negotiability review responsibilities.
DTCC says the additional fees will be recouped over time once the efficiencies and reduced risk of dematerializing securities is taken into account.
DTCC says once this phase of dematerialization is complete, it will work on terminating physical certificates at the client. One idea is to utilize an electronic imaging platform, whereby clients could scan their certificate directly into DTCCs systemmuch like services allowing clients of commercial banks to scan checks into their accounts for deposit. This would require legal changes, however, as it would involve changes to the rules that govern transfer agent activities and the destruction of certificates.
As for new issues, DTCC plans to advance its e-Certificate program to accept retail certificates of deposit (CD) in electronic form. Currently, CD underwriters must deposit a physical certificate at DTCC, but the new plan would allow electronic certificates to be deposited. It is also considering paperless book-entry only (BEO) certificates on its FAST program, which records securities in book-entry form on the books and records of the issuers transfer agent. The paperless version would substitute an electronic image of a certificate for the physical certificate.
Finally, DTCC plans to continue dematerializing assets registered in its nominee name, Cede & Co.
This year, DTCC is seeking feedback from industry stakeholders on its proposal with the aim of making any necessary regulatory filings in the fourth quarter. The changes will take place over the course of the next three years, with the ultimate goal being virtual dematerialization by 2015.
This paper is a call to action, says Susan Cosgrove, DTCCs managing director and general manager, Settlement and Asset Services. Were asking all sectors of the industry stakeholders, banks, brokers, transfer agents, regulators and industry associations to partner with us and to provide in-depth feedback on the proposals in this paper and help identify key, value-added services DTC can give market participants to accelerate the drive toward full dematerialization.
(CG)