Depository Trust & Clearing Corporation

Depository Trust & Clearing Corporation

Company type	Private
Industry	Finance
Genre	Holding company
Founded	DTCC (1999) - holding company for DTC (1973) and NSCC (1976)
Headquarters	New York City , U.S.
Number of locations	4
Key people	Donald F. Donahue Chairman, CEO William B. Aimetti President, COO
Services	financial
Revenue	US$706,242,000 (2007)
Net income	US$ 4,375,000 (2007)
Total assets	US$30,222,740,000
Total equity	US $242,920,000
Owner	NYSE, NASD, AMEX, banks, brokers
Subsidiaries	NSCC DTC FICC DTCC Deriv/SERV LLC DTCC Solutions LLC EuroCCP Ltd.
Website	www.dtcc.com

The Depository Trust & Clearing Corporation (DTCC), based primarily at 55 Water Street in New York City, is the world’s largest post-trade financial services company. 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. It also provides custody of securities.

User-owned[1] 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 3.5 million securities issues, comprised mostly of stocks and bonds, from the United States and 110 other countries and territories, valued at $40 trillion, more than any other depository in the world.

In 2007, DTCC settled the vast majority of securities transactions in the United States, more than $1.86 quadrillion in value. DTCC has operating facilities in New York City, and at multiple locations in and outside the U.S.

In 2007 Chief Executive Officer Donald F. Donahue was named to the additional office of Chairman of DTCC and its subsidiaries, and Chief Operating Officer William B. Aimetti was named President.[2]

In 2008, The Clearing Corporation and the Depository Trust & Clearing Corporation announced CCorp members will benefit from CCorp's netting and risk management processes, and will leverage the asset servicing capabilities of DTCC's Trade Information Warehouse for credit default swaps (CDS). [3][4] [5][6]

History

Established in 1973, 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 in the U.S. securities industry in the late 1960s.

Before DTC and NSCC were formed, brokers physically exchanged certificates, employing hundreds of messengers to carry certificates and checks. The mechanisms brokers used to transfer securities and keep records relied heavily on pen and paper. The exchange of physical stock certificates was difficult, inefficient, and increasingly expensive.

In the late 1960s, with an unprecedented surge in trading leading to volumes of nearly 15 million shares a day on the NYSE in April 1968 (as opposed to 5 million a day just three years earlier, which at the time had been considered overwhelming), the paperwork burden became enormous.[7][8] Stock certificates were left for weeks piled haphazardly on any level surface, including filing cabinets and tables. Stocks were mailed to wrong addresses, or not mailed at all. Overtime and night work became mandatory. Turnover was 60% a year.[9]

To deal with this large volume, which was overwhelming brokerage firms, the stock exchanges were forced to close every week (they chose every Wednesday), and trading hours were shortened on other days of the week.

Two methods were used to solve the crisis:

The first was to hold all paper stock certificates in one centralized location, and automate the process by keeping electronic records of all certificates and securities clearing and settlement (changes of ownership and other securities transactions). The method was first used in Austria by the Vienna Giro and Depository Association in 1872.[10]

This led the New York Stock Exchange to establish the Central Certificate Service (CCS) in 1968 at 44 Broad Street in New York City.[11] New York Stock Exchange President Robert W. Haack promised: "We are going to automate the stock certificate out of business by substituting a punch card. We just can't keep up with the flood of business unless we do."[12] The CCS transferred securities electronically, eliminating their physical handling for settlement purposes, and kept track of the total number of shares held by NYSE members.[13] This relieved brokerage firms of the work of inspecting, counting, and storing certificates. Haack labeled it "top priority," $5 million was spent on it,[14] and its goal was to eliminate up to 75% of the physical handling of stock certificates traded between brokers.[15] One problem, however, was that it was voluntary, and brokers responsible for 2/3 of all trades refused to use it.[16]

By January 1969 it was transferring 10,000 shares per day, and plans were for it to be handling broker-to-broker transactions in 1,300 issues by March 1969.[17] In 1970 the CCS service was extended to the American Stock Exchange.[18] This led to the development of the Banking and Securities Industry Committee (BASIC), which represented leading U.S. banks and securities exchanges,[19], and was headed by a banker named Herman Beavis, and finally the development of DTC in 1973,[20] which was headed by Bill Dentzer, the former New York State Banking Superintedent.[21] All the top New York banks were represented on the board, usually by their chairman. BASIC and the SEC saw this indirect holding system as a "temporary measure," on the way to a "certificateless society."[22]

Stocks held by DTC are kept in the name of its partnership nominee, Cede & Co.[23] 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 1976.

Naked short selling; Litigation & proposed Senate hearings

DTCC has been sued with regard to its alleged participation in naked short selling. Further allegations about DTCC's possible involvement have been made by Senator Robert Bennett and discussed by the NASAA and in articles -- disagreed with by DTCC -- in the Wall Street Journal and Euromoney (magazine).

While there is no dispute that illegal naked shorting happens, there is a fight as to the extent to which DTCC is responsible. Some blame DTCC as the keeper of the system where it happens, and charge that DTCC turns a blind eye to the problem. DTCC has consistently noted that it has no authority over trading activities (which short selling is) and suggests that naked shorting is simply not 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 dismissively calls the claims that DTCC is responsible for naked short selling "pure invention." The SEC, however, views naked shorting as a serious enough matter to have initiated two separate efforts to restrict the practice. And in July 2007, Senator Bennett suggested on the U.S. Senate floor that the allegations involving DTCC and naked short selling are "serious enough" that there should be a hearing on them -- with DTCC officials called before the Senate Banking Committee. The committee's Chairman, Senator Christopher Dodd, indicated he was willing to hold such a hearing, although in the intervening 18 months no such hearing has been called or held. The North American Securities Administrators Association, representing state stock regulators, filed a brief saying 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." (The suit on which this brief was filed was subsequently dismissed by the court involved, and the dismissal was upheld on appeal.)[24][25]

Critics also contend that DTCC has been too secretive with information about where naked shorting is taking place. In 2007, WayPoint Biomedical sued DTCC for DTCC's refusal to comply with a subpoena request for documents that Waypoint needs to track trades in the company's shares.

Subsidiaries

The DTCC has several subsidiaries:

• The Depository Trust Company (DTC) – The original depository clearing corporation.[26][27]

Established in 1973, it was created to reduce costs and provide efficiencies by immobilizing securities and making "book-entry" changes to show ownership of the securities. DTC provides securities movements for NSCC's net settlements, and settlement for institutional trades (which typically involve money and securities transfers between custodian banks and broker-dealers), as well as money market instruments. In 2007, DTC settled transactions worth $513 trillion, and processed 325 million book-entry deliveries. In addition to settlement services, DTC retains custody of 3.5 million securities issues, worth about $40 trillion, including securities issued in the US and more than 110 other countries. DTC is a member of the U.S. Federal Reserve System, and a registered clearing agency with the Securities and Exchange Commission.

• National Securities Clearing Corporation (NSCC) - The original clearing corporation, it provides clearing and serves as the central counterparty for trades in the US securities markets.[28]

Established in 1976, it provides clearing, settlement, risk management, central counterparty services, and a guarantee of completion for certain transactions for virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment trusts. NSCC also nets trades and payments among its participants, reducing the value of securities and payments that need to be exchanged by an average of 98% each day. NSCC generally clears and settles trades on a "T+3" basis. NSCC has roughly 4,000 participants,[29] and is regulated by the U.S. Securities and Exchange Commission (SEC).

• Fixed Income Clearing Corporation (FICC) – Provides clearing for fixed income securities, including treasury securities and mortgage backed securities[30][31]

Created in 2003 to handle fixed income transaction processing, integrating the Government Securities Clearing Corporation and the Mortgage-Backed Securities Clearing Corporation. The Government Securities Division (GSD) provides Real-Time Trade Matching (RTTM), clearing, risk management, and netting for trades in US Government debt issues, including repurchase agreements or repos. Securities transactions processed by FICC's Government Securities Division include Treasury bills, bonds, notes, zero-coupon securities, government agency securities, and inflation-indexed securities. The Mortgage-Backed Securities Division provides real-time automated and trade matching, trade confirmation, risk management, netting, and electronic pool notification to the mortgage-backed securities market. Participants in this market include mortgage originators, government-sponsored enterprises, registered broker-dealers, institutional investors, investment managers, mutual funds, commercial banks, insurance companies, and other financial institutions.

• DTCC Solutions – DTCC’s subsidiary delivering information-based and business processing solutions to financial intermediaries globally, such as Global Corporation Action Validation Service (GCA VS) and Managed Accounts Service.[32]

GCA VS simplifies announcement processing by providing a centralized source of "scrubbed" information about corporate actions, including tender offers, conversions, stock splits, and nearly 100 other types of events for equities and fixed-income instruments traded in Europe, Asia-Pacific, and the Americas. In 2006, GCA VS processed 899,000 corporate actions from 160 countries. Managed Accounts Service, introduced in 2006, standardizes the exchange of account and investment information through a central gateway.

• DTCC Learning – Provides financial, technology, and career training and educational services to the global financial industry.[33]

• Loan/SERV - Provides services to loan syndicates and agents.

• Deriv/SERV – Provides clearing for credit derivatives, such as CDOs.[34]

It provides automated matching and confirmation services for over-the counter (OTC) derivatives trades, including credit, equity, and interest rate derivatives. It also provides related matching of payment flows and bilateral netting services. Deriv/SERV's customers include dealers and buy-side firms from 30 countries. In 2006, Deriv/SERV processed 2.6 million transactions.

• EuroCCP – Will provide clearing on European exchanges.[35]

• Omgeo – Partnership with Thomson Financial that provides clearing automation solutions.[36][37]

Omgeo is as a central information management and processing hub for broker-dealers, investment managers, and custodian banks. It provides post-trade, pre-settlement institutional trade management solutions, processes over one million trades per day and serving 6,000 investment managers, broker/dealers, and custodians in 42 countries.

Competition

Euroclear (in Brussels, Belgium) and Clearstream (in Luxembourg) are the second and third largest central securities depositories in the world.

External links

• DTCC corporate site
• Extensive description of DTC and its activities
• Extensive description of NSCC and its activities
• DTC corporate site
• NSCC corporate site
• Source for History
• Naked shorts
• "DTCC Calls Euromoney Article on its Stock Borrow Program and Naked Short Selling 'Sloppy Journalism,'" DTCC, 31/03/05
• "Blame the 'Stock Vault?'; Clearinghouse Faulted On Short-Selling Abuse;Finding the Naked Truth," Wall Street Journal, by John R. Emshwiller and Kara Scannell, 05//07/07
• "DTCC Responds to The Wall Street Journal article, 'Blame the 'Stock Vault?,'" DTCC, 06/07/07
• "The Rise and Effects of the Indirect Holding System: How Corporate America Ceded its Shareholders to Intermediaries," by David C. Donald, Institute for Law and Finance, 18/09/07