DTC Building
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Understanding the Depository Trust Company (DTC)

Companies that regularly engage with securities are likely to interact with the Depository Trust Company (DTC). The DTC is the world’s largest central securities depository. Based in New York City, the the company is responsible for electronic record-keeping of securities balances. It also acts as a clearinghouse for securities trade settlements.

The Basics

Founded in 1973, the DTC’s goal is to improve efficiencies and reduce risks in the securities market. Most banks and broker-dealers are DTC participants. The Depository Trust and Clearing Company (DTCC), a holding company, owns the DTC.

The company manages book entry securities transfers. It also provides custody services for stock certificates. Book-entry refers to uncertificated securities. Users employ an electronic tracking system for purchasing, holding, and transferring book-entry securities. This contrasts with certificated securities, which have physical stock certificates associated with them. Most investors who use a broker hold securities in book-entry form. The two major U.S. stock exchanges, NYSE and NASDAQ, require all listed equity securities to be eligible for a direct registration system (DRS), an electronic book-entry system for recording securities ownership.

Cede & Company is the main custodial nominee that the DTC designates to be the holder of record of the securities it manages that are in its custody. Cede & Co. is a specialized financial institution. Securities will be deposited with or on behalf of DTC and registered in the name of Cede & Co., as the nominee of the company.

DTC Eligibility

DTC eligible securities are public company securities that are freely tradable in accordance with U.S. securities laws. In order a make new issue of securities eligible, companies must submit a questionnaire to the DTC’s Underwriting Department for approval. Once eligible, a company’s securityholders can deposit their shares with a brokerage firm.

DTC Clearance and Settlement Services

Nearly all corporate, equity, and money market securities use DTC to settle their transactions. The company is a registered clearing agency by the Securities and Exchange Commission (SEC). According to 2020 data, each day the company processes approximately 1.5 million settlement-related transactions with an average value of $359 billion.

Settlement is a process that occurs at the end of the trading day. Settlement completes the transfer of securities ownership between parties.

Issuers who have fully eligible DTC securities can participate in the FAST-processing system. FAST, which stands for Fast Automated Securities Transfer, facilitates the electronic movement of securities between issuers, securityholders, brokerages, and clearing firms.

DTC Transfer
Photo by Shahadat Rahman on Unsplash

Using the FAST-processing system, there are two methods of transferring securities between brokers and the DTC — the DWAC method and the DRS method. The deposit/withdrawal at custodian (DWAC) system and the direct registration system (DRS) method both involve electronic book-entry securities. The main difference is that shares in DRS have already been issued. The transfer agent holds them on its books.

CUSIP Numbers

A CUSIP number is a unique identification code that is associated with U.S. registered securities and financial instruments. CUSIP, which stands for the Committee on Uniform Securities Identification Procedures, is an identifier searchable by investors on the CUSIP system. The 9-digit code consists of a combination of letters and numbers. The code identifies securities registered to be sold publicly. New CUSIP numbers must be DTC eligible.

Other Services

In addition to its primary functions of settlement, clearance, safekeeping, and recording of securities, the DTC also provides proxy, underwriting, and global tax services. The DTC provides custody and asset servicing for securities issued in the U.S. and 170 countries worldwide.

As a major player in the securities market, the DTC also has a responsibility to monitor securities for irregular or risky activities. It can impose “chills” or “freezes” on a public company’s securities, which restricts the company’s access to DTC services.

A “chill” is when the DTC restricts a company’s access to one or more DTC services. A “freeze” is more severe and occurs when the DTC discontinues the company’s access to all its services. A chill or freeze may last for a few days or a longer timeframe, depending on the issue. If the issue causing a freeze cannot be rectified, the security will lose its eligibility to access DTC services. When the DTC chills or freezes a security, a “Participant Notice” will be publicly posted on the DTC’s website. The DTC’s Office of Regulatory Compliance monitors chills and freezes imposed on securities.

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Ryan Carpenter serves as Attorney and Managing Director of Carpenter Wellington. Ryan advises clients across a broad set of corporate and commercial matters.

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Carpenter Wellington PLLC

Carpenter Wellington PLLC

Ryan Carpenter serves as Attorney and Managing Director of Carpenter Wellington. Ryan advises clients across a broad set of corporate and commercial matters.

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