Professional Documents
Culture Documents
C Y C L E
O F
S E C U R I T Y
CYCLE
OF
SECuRITY
and make
In the quest to attract capital
most
their economies more vibrant,
countries with active capital markets
have central securities depositories
and
(CSDs) to provide the custody
the
recordkeeping services that enable
when
electronic transfer of ownership
and
investors buy and sell securities
settling
initiate settlement. With CSDs,
the huge volume of securities traded
markets
every day in the worlds capital
is fast, cost effective, and secure.
offers
shares that an issuing corporation
in addifor sale in one or more countries
tion to its home market. This approach
with a
allows the corporation, working
capital in
local depositary bank, to raise
NT
CROSS-BORDER SETTLEME
provide
In addition to the services they
crossdomestically, CSDs also handle
securiborder settlement and may hold
ties issued in countries other than
their own.
Those securities may include
receipts, or certificates, representing
A CSD
THE MANY ROLES OF
CSDs
Custody and recordkeeping.
d
safekeeping for securities immobilize
provide
records
in their vaults and electronic ownership
. Using
for those that are dematerialized
updates
book-entry accounting methods, a CSD
Immobilization
Securities
services
Other services. The range of
country,
a CSD provides varies from country to
on a
and many expand and create new offerings
services
continual basis. Examples of additional
include a role in underwriting new securities,
CSDs record
ownership records electronically. Some
others the
the names of the beneficial owners and
names of only their member firms.
CSDs are
Settlement services. Very few
able to complete cash settlement by themselves.
Generally, CSD members instruct a settlement
their
meet
to
bank
bank or the countrys central
due them,
payment obligations, receive payments
or both, for processing through the CSD.
Dematerialization
processing dividend
and interest payments, announcing, reporting, and
as
facilitating corporate action events, such
facilitating
tender offers and reorganizations, and
the deposit and withdrawal of securities.
LIFE
CYCLE
OF
SPOTLIGHT ON DTC
SECuRITY
WHATS AN
INTERNATIONAL CSD?
(DTC) was
The Depository Trust Company
settlecreated in 1973 to transform the
ment process for securities transactions.
In the mid-1960s, when the predecessor
Service,
to DTC, the Central Securities
trading
central
began operations, the paper-based
or holding them in custody in a
become
was
system in the United States had
location. That central location
down
overly cumbersome and was bogged
DTC, now the largest central securities
by the increasing transaction volume.
depository in the world.
Before DTC, when a corporation
DTC acts as a CSD for virtuToday,
each
issued,
as well
went public or a bond was
ally all US municipal securities,
and
purchaser received an elaborately
as the vast majority of equities
United
designed, and often quite beautiful,
corporate bonds issued in the
name that
g
paper certificate in his or her
States. In addition to its recordkeepin
date of
it provides a numdetailed the issuers name, the
par value, and custody services, services. For
issue, the number of shares, the
of asset processing
ber
identifying
trades
and, after 1967, a unique
example, it settles institutional
a secuCUSIP number.
directly, manages all phases of
,
To sell, the owner endorsed and
ritys life cycle, and offers underwriting
broker,
a
to
action
delivered the certificate
interest, dividend, and corporate
broker
n
who delivered it to the buyers
services, including reorganizatio
the
in exchange for payment. Before
processing and tender offers for
of ownerpurchaser could receive proof
securities it holds in its custody.
issued.
that
ship, a new certificate had to be
requirement
no
is
There
was to
to
The solution to this bottleneck
equities or bonds be held at DTC
record changes of ownership electronitrade. But increasingly, many brokercally, using a computerized book-entryof
age firms and issuers want to take
system that eliminated the exchange
advantage of the efficiencies and
them,
paper certificates by immobilizing
cost benefits that DTCs electronic
offers.
system
book-entry
Since 1999, DTC and National
Securities Clearing Corporation
of
(NSCC) have been subsidiaries
the Depository Trust & Clearing
most
Corporation (DTCC), the worlds
efficient and cost effective post-trade .
clearance and settlement organization
Book - entry
System
Clearance
and Settlement
Custody
The Global
Market
Creating Stock
Corporate Actions
50695
Managing Risk
9 780982 907528
V I R G I N I A B. M O R R I S
AND
STUART Z. GOLDSTEIN
Donald F. Donahue
Chairman and CEO
The Depository Trust & Clearing Corporation
c o n t e n t s
2 The Capital Markets
20 Retiring a Stock
6 Creating Stock
10 Holding Stock
28 Managing Risk
12 Corporate Actions
30 Paying Taxes
14 Dividend Payments
16 Voluntary Tenders
34 Glossary
18 Corporate Reorganizations
life
cycle
of
sec u rity
CENTRAL SECURITI
SECONDARY MARKET
TRADING
For several hundred years, organized securities markets operated in much the same
way as they always had. Investors placed
their orders through brokerage firms, and
those brokers handled the exchange of
securities and cash or checks required to
finalize a trade. Securities issuers dealt
directly with their investors when owner2
life
cycle
of
IES DEPOSITORY
sec u rity
lif e
cycle
of
s e c u ri t y
Immobilization
Securities
Dematerialization
processing dividend
and interest payments, announcing, reporting, and
facilitating corporate action events, such as
tender offers and reorganizations, and facilitating
the deposit and withdrawal of securities.
lif e
cycle
of
s e c u ri t y
WHATS AN
INTERNATIONAL CSD?
lif e
cycle
of
Creating Stock
Issuing new stock takes the
coordinated effort of
many players.
Privately held companies go public when
they issue stock through an initial public
offering (IPO). When a company goes
public, outside investors may purchase
shares and become part owners of
the company.
A company may choose to do an IPO
for a number of reasons. Usually, its to
gain access to outside capital so that it
can expand or improve upon its business
operations or to be better able to compete
against companies providing similar
products or services in the marketplace.
s e c u ri t y
A Company IPO
1
1
Company
2
2
Underwriting
Firm
Preliminary
Prospectus
3
3
PRICE
A Compan
y
Road Sho
w
AHEAD
1
1 The IPO process begins when a
2
2 The most common underwriting
3
3 The next step is a road showa
lif e
cycle
of
FULL DISCLOSURE
SHARE
PRICE
4
4
s e c u ri t y
GETTING PAID
Institutional
Investors AND
DTC
share because it believes there is enough
demand. If, on the other hand, the issue
is undersubscribed, the lead underwriter
may downsize or reprice the offering.
DISTRIBUTING THE SHARES
4
4 While its possible for individuals
Firms
Clients
Secondary
Markets
USING DTCS SYSTEMS
lif e
cycle
of
s e c u ri t y
SETTLING UP
Trades are finalized on T+3, the settlement date. NSCC sends final instructions
for settlement to the firms, and DTC communicates their net credit or net debit
status to both firms and their settling
banks, which handle the payment or
receipt of payments on behalf of firms
through the Federal Reserve
Banks elec-
Customer
Sells
EXC
Broker
HA
NS
NET
Financial
Institution
M i n imu m
10 ,0 0 0
S h ar es
Broker
NS
MANAGING TRADES
AIL
RET
TITU
TRA
lif e
cycle
of
NETTING
Broker
CC
TING
Financial
Institution
Mi nimu m
10 ,000
S h ares
TION
DES
s e c u ri t y
Customer
Buys
TRADE
S
NGES
AL
FUNGIBLE SECURITIES
lif e
cycle
of
s e c u ri t y
Holding Stock
Securities processing is streamlined when most shares are
held in custody.
The way you hold stock determines what
happens when you buy and sell, as well as
how you receive investor communications,
including annual reports and voting
IN STREET NAME
which show the securitys value and dividends the issuer has paid that have been
credited to the beneficial owners account.
THROUGH DIRECT
REGISTRATION
lif e
cycle
of
s e c u ri t y
A corporation issuing a new security may give DTC custody of a certificate for the total number of
shares in the offering. Such issues are referred to as book-entry only (BEO) and essentially require
street-name ownership, eliminating any individual physical certificates or physical processing.
IDENTIFYING SECURITIES
CHECK DIGIT
SECURITY POSITION
REPORTS
lif e
cycle
of
s e c u ri t y
Corporate Actions
Big changes can take place in a stocks lifetime.
A corporate action is an event that produces a corporate restructuring, and, very
often, affects the value of the companys
securities. Some of these actions have a
financial impact, directly or indirectly,
on the companys shareholders.
One example of direct financial
impact is any change in the companys
dividend payments that results from
an action. The same would be true for
bondholders if there were a change in the
repayment of company debt. Alternatively,
a two-for-one stock split resulting in twice
as many shares as each shareholder had
before is an example of an indirect
financial impact.
Its indirect because, while the split
itself does not directly affect the total
value of the stock holding (since the price
of the shares are adjusted to account
for the change in number of shares outstanding), market reactions to the split
may drive the stock price up or down.
TYPES OF
CORPORATE ACTIONS
D ividend payments
Interest payments
V oluntary tender offers
C orporate reorganizations
R ights offers
C onvertible securities
W arrants
R edemption on municipal and
corporate bonds
lif e
cycle
of
WHATS AT STAKE
s e c u ri t y
GLOBAL
CORPORATE
ACTIONS
lif e
cycle
of
s e c u ri t y
Dividend Payments
Dividends are part of the return shareholders realize on
their investment.
Corporations that realize a profit may
choose to pay their shareholders a
dividend, or share of the earnings, reinvest the earnings in the business, or
both. In the United States, dividends
are most commonly declared and paid
quarterly, usually in cash.
The dividend youre entitled to
may be credited to your account at your
brokerage firm, you may receive a check,
or, if the corporation offers a dividend
reinvestment program (DRIP), you
may choose to automatically reinvest your
dividends to buy additional shares of the
corporation. If you hold your shares
in certificate form, you generally receive
a check for the amount from the issuer
or the bank that acts as the issuers
paying agent.
DTC plays a major role in facilitating
these payments when theyre made on
issues held in DTCs nominee name of
Corporation
Declaration
Date
Ex-date
Record
Date
Payment
Date
Dividends
TAX FACTS
Dividend payments are taxable unless the investment is owned through a tax-deferred account,
such as an employer sponsored retirement plan or individual retirement account (IRA). However,
dividend payments on most US and many international stocks are considered qualifying dividends.
That means dividend payments are taxed at the lower long-term capital gains rate, provided the
investor has owned the stock the required length of time, rather than at the ordinary income rate.
14
lif e
cycle
of
DTC
s e c u ri t y
Shareholders
Dividends
Brokers
15
lif e
cycle
of
s e c u ri t y
Voluntary Tenders
To engineer a corporate takeover, the weapon of choice is
often a voluntary tender.
A tender offer is a voluntary corporate
action. Its an open offer to purchase some
or all of the stock shareholders own in a
target company by a certain date and time
rather than buying shares in the stock
market. Often, its a third partytypically
another corporation, a wealthy individual,
or group of investorstrying to acquire
control of the target company. However,
issuers can also use voluntary tenders to
buy back their own security.
Tender offers can be classified as
friendly or hostile, depending on how
willing the management of the target company is to participate in the prospective
FOLLOWING A PATTERN
Some tender offers succeed and others fail. Some are resolved quickly while others drag on. But theyre
all handled in essentially the same way, with DTC facilitating the process because it holds a majority of the
shares that will be tendered in its nominee name, Cede & Co. In addition, because of DTCs centralized,
automated book-entry system, changes in securities ownership can be made accurately and efficiently.
INITiATION
3rd PARTY
Te n d e r
Offer
DATA SHARING
DTC
Circulars
AGENTS
Target Co.
Shares
Tendered Securities
DELIVERY OF SECURITIES
Tender
Agents
Account
lif e
cycle
of
SETTING A PRICE
ANNOUNCEMENT
OK
to
r
tende
6
6
EXPIRATION AND
ENTITLEMENTS
s e c u ri t y
MAKING ARRANGEMENTS
OFBROKER/
FDEALERS
ER
TARGET
COMPANY
Ins
lif e
cycle
of
s e c u ri t y
Corporate Reorganizations
Reorganizations can mean major changes for stockholders.
A corporate reorganization is a type of
corporate action that can occur during a
securitys life cycle. In a reorganization, a
company may make changes to its legal or
operational structures, or it may restructure its ownership.
Companies usually elect to reorganize
their business following some major
change or problem, such as a bankruptcy,
that has caused or may eventually cause
the company financial harm. For that
reason, the goal of reorganization is usually the same: to improve a companys
efficiency, organization, and profitability.
MANDATORY
vs.
HANDLING
REORGANIZATIONS
VOLUNTARY
18
lif e
cycle
of
s e c u ri t y
KEEP IT SIMPLE
DTC
DTCs Reorganization
Service helps simplify
communications and
processing for corporate
reorganization events.
Using it, DTC participants,
including banks and broker/dealers, and other
third parties who
view,
and track:
D istributions related to
reorganization allocations
19
lif e
cycle
of
s e c u ri t y
Retiring a Stock
The time may come when a stock no longer
has a place in the capital market.
There are a number of reasons that
trading in a particular stock may end.
For example, any time a stocks CUSIP
changesafter a corporate reorganization, such as a name change, or other
corporate action, such as a mergernew
stock is issued to reflect the change, and
the original stock is retired.
Other times, a stock disappears from
the marketplace because it has lost all
its value. If a stock you own becomes
totally worthless, youre experiencing first
hand the primary risk of investing: You
can potentially lose all of the money you
invested in this stock. If you find yourself
in this position, the only real comfort is
that there may be tax strategies you can
use to help soften the loss, as long as you
follow the rules and the stock youre
holding qualifies.
A BAD END
Its hard to predict the long-term performance of a stock at the time its issued or
the number of years it will continue to trade.
Most stocks go through cycles of growth and
decline that reflect the pattern of the overall
market. Some do better than their peers
and others fail, sometimes because changes
in technology or taste make the companys
products or services obsolete, and sometimes
when poor management decisions drive the
company out of business.
20
lif e
cycle
of
s e c u ri t y
REPORTING WORTHLESS
SECURITIES
NEAR-WORTHLESS STOCK
DTC participants who hold worthless securities in nominee name may delete them
from their accounts by moving them to
DTCs Position Removal (PREM)
system. Alternately, DTC may move
securities to the PREM system after
notifying affected participants that the
worthless securities will be deleted from
their accounts.
When a company has been inactive or
insolvent for at least six years, DTC may
move the deleted shares from PREM to
its Destruction of Non-Transferable
Securities Certificates Program, where
the certificates are destroyed.
Before destroying a certificate, DTC
creates a digital image of the security and
keeps an electronic record of its existence.
Although it is unlikely, if the securitys
value ever recovers, DTC can then use the
digital image to return the position to participants accounts by
working with the companys transfer
agent. But, by destroying the certificate,
DTC eliminates the cost and risks associated with holding and maintaining
certificates from insolvent and otherwise
inactive companies.
21
lif e
cycle
of
s e c u ri t y
ISSUING CORPORATES
F iling a prospectus and other required offering documents with the Securities
and Exchange Commission (SEC)
lif e
cycle
of
KEEPING TRACK
creation, distribution,
bond issues, through
Services program
s e c u ri t y
ISSUING MUNICIPALS
Municipalities may issue bonds in one of
two ways. The first, known as a negotiated
arrangement, is similar to the equity or
corporate bond issuance processthe
municipality hires an investment bank to
underwrite the issue.
Using the second approach, known
as a competitive bid, the municipality is
obligated to select as lead underwriter
the bank that will cost the issuer least. If
the bond will be repaid with tax revenues,
as general obligation (GO) bonds are, the
law usually requires competitive bidding
to help ensure the bonds are issued at the
lowest possible cost.
AT YOUR SERVICE
A WORD ON
TREASURY SECURITIES
lif e
cycle
of
s e c u ri t y
When bonds are held at DTC in bookentry form, the issuer, its paying agent,
or its trustee transfers interest payments
to DTC as the registered holder of the
issue in its nominee name of Cede & Co.
On the payable date, DTC credits this
interest to its participants accounts so
that these brokerage firms and banks can
allocate interest to the accounts of their
clients who are the beneficial owners of
the bonds.
For the limited number of bearer
bonds still in circulation, DTCs Coupon
Collection Service (CCS) provides
participants with a central location for
submitting payment requests and collecting the interest due to their clients.
CCS allows participants to avoid
dealing with individual municipalities and
paying agents that would otherwise make
the process cumbersome and error prone.
FULL AND PARTIAL CALLS
B y self-selection,
allowing investors
to surrender bonds
until the quota
is met
O n a pro-rata
T hrough an
impartial lottery to
choose randomly
selected investors
who must cash in
their bonds
lif e
cycle
of
s e c u ri t y
BON
25
lif e
cycle
of
s e c u ri t y
B ankers acceptances
Institutional certificates of deposit (CDs)
M edium-term notes
T ax-exempt notes
D eposit notes
Even though they are actually debt
instruments, MMIs are considered
part of the asset class known as cash
equivalents since they are liquid securities considered to have limited market
risk because of their short terms and to
be nearly free of creditor defaultrisk
based on the issuers reputation.
To keep the MMI market as liquid as
possible and to handle the high volume
of trades that take place every day, DTC
offers an automated system to handle
the entire MMI life cyclefrom issuance
to redemptionthat expedites
processing while
minimizing risks.
INVESTORS
CUSTODIAN
KER
BRO
$$$$$
Issuer
Placed
TYPES OF
COMMERCIAL PAPER
26
Dealer
Placed
MM I
CP INVESTORS
lif e
cycle
of
Because such
a high volume
of CP is issued
and redeemed
every day, DTC
must ensure that
processing is as
s e c u ri t y
MEDIUM
TERM
TAXEXEMPT
THE ROLLOVER
MARKET
Comme
rcia
Paper l
Institutional
CD
DTC
lif e
cycle
of
s e c u ri t y
Managing Risk
Protecting against risk provides certainty
and safety in the capital markets.
If you invest, youre reminded frequently
of the risks you face. Stock prices can
drop. Companies can stop paying dividends. Interest rates can go up, reducing
the market value of existing bonds. Debt
issuers can default. And, if youre wise,
you employ a number of investment
strategies to help control the negative
consequences those risks could have on
your portfolio.
There are other risks when you invest
that youre less likely to think about, but
DTCC does, specifically through its clearing subsidiaries NSCC and FICC, and its
depository and settlement subsidiary DTC.
These risks include the possibility that
a transaction you authorize wont settle
that when you buy you wont end up with
the security you want or when you sell you
wont end up with the money thats due
youor that dividends, interest, or principal that youre owed wont be paid.
AVOIDING A MELTDOWN
A RISK OVERVIEW
DTC
As a defense against
the threat that a participant
firm will not be able to meet
its obligation
to pay what it owes to
settle its transactions,
DTC imposes a net debit
cap, which serves as a
liquidity control.
The cap is the highest amount a
participant is permitted to owe DTC in
a business day. Its comparable to the
credit limit on your credit card, but is
lif e
cycle
Counterparty risk is
the possibility that a participant firma broker/
dealer, bank, or other
financial institutionwill
fail and be unable to live
up to its side of the deal.
of
s e c u ri t y
In this case, the issuer or the issuers paying agent may not provide
DTC with the required cash or enough informationsuch as the identifying
CUSIP number for the security with interest or dividends dueto make the
payment on schedule. To reduce its exposure to default, DTC has developed
rules and procedures that allocate only those entitlements that are paid on
time and are correctly identified.
unique and dynamic for each firm based
on the amount in its collateral account at
DTC and the level of its trading activity.
Any transaction that would result
in a participants exceeding its net debit
cap is recycled, or held in a pending
account, until a credit from another
transaction, a payment, or other cash infusion increases the firms account
balance. At that point, the settlement
process can go forward.
INSTITUTIONAL TRADES
29
lif e
cycle
of
s e c u ri t y
Paying Taxes
Most countries tax the income you realize on investments
issued within their borders.
When you purchase securities issued by
a non-US company, you may owe taxes
on income you receive from your investment to the country where the company is
headquartered, just as you do on income
from US securities. Most countries tax the
dividends or interest that securities pay,
the capital gains realized from selling the
securities at a profit, and often both.
In most cases, taxes are withheld when
payments are made to investors outside
the country, unless there are tax agreements in place between the country of
investment and the investors home country. Such agreements, called tax treaties,
reduce the tax rate to the more favorable
treaty rate.
AT YOUR SERVICE
30
lif e
cycle
of
s e c u ri t y
US TAX
WITHHOLDING
SERVICES
31
lif e
cycle
of
s e c u ri t y
CS
C
CSD
Trade In
formatio
n Warehouse
DTCC
CSD
ACSDA
32
lif e
cycle
of
Electronic Links
CSD
SD CSD
CSD
s e c u ri t y
Through a DVP system, security payment and delivery are done at the same
time. The securities are transferred from
seller to buyer in a book-entry process at
the end of the day, with a corresponding
exchange of payment recorded when the
buyers securities are dispatched.
Delivery free of payment, on
the other hand, allows the electronic
movement of shares between DTCCs
US depository and other CSDs abroad,
but there is no money payment connected
with the movement. Payment for these
traded shares is handled outside the
respective securities settlement systems,
directly between the buying and
selling firms.
CSDs are also working to encourage
increased information sharing and
cooperation globally. DTCC has signed
memoranda of understanding (MOUs)
with a number of central securities
depositories and clearing organizations
around the world covering information
exchanges and joint work on projects.
In at least one case, DTCC has taken a
direct equity stake in Chiles depository as
part of a way to encourage international
cooperation and development of joint
services in Latin America.
CSD
CSD
CSD
CSD
CSD
CSD
CSD
G L OSS A R Y
Beneficial owner is an investor who
owns a security even though the title is
held in the nominee namealso known
as street nameof a central securities
depository, such as DTC. The beneficial
owner receives the dividends or interest
the security pays, has the right to sell the
security, and, in the case of stock, is entitled to vote on certain corporate matters.
Block trade is a securities transaction
that typically involves the sale or purchase of 10,000 or more shares of stock
or $200,000 or more in bonds in a single
order. Typically institutional rather than
retail investors make block trades.
34
G L OSS A R Y
Ownership records for immobilized
securities are updated electronically
using a book-entry system, first at the
CSD and then at the participant firms
whose clients are the beneficial owners.
Infrastructure organization is a
G L OSS A R Y
announces the record date at the same
time it announces the dividend.
Record owner, or record holder, is the
Settling bank handles the electronic payment or receipt of funds associated with
netted securities transactions for
the financial firms that have selected the
bank to act on their behalf. Payments
in the United States move through the
Federal Reserves Fedwire system and
are irrevocable.
Straight-through processing (STP)
or all of the outstanding stock that investors hold in a target company at a certain
price by a certain date. The bidder may
offer cash or other securities as payment,
provided that a sufficient number of shareholders agree to sell.
authors
Virginia B. Morris is the editorial director of Lightbulb Press. She oversees the development of a wide range of consumer content on investing, personal
finance, and the financial markets for print and interactive media. She serves as
a consultant for financial literacy and consumer education organizations for both
adults and young people, and shes a frequent guest speaker on financial radio and
television programs, as well as at national conferences.
Virginia is the author of more than a dozen books on financial subjects, including
Guide to Clearance & Settlement, Guide to Understanding Money and Investing,
An Investors Guide to Trading Options, A Womans Guide to Investing, Guide
to Understanding Exchange Traded Funds, An Advisors Guide to Behavioral
Finance, Your Guide to Understanding Investing, Saving for Retirement, and
Guide to Understanding Direct Investing. Her articles appear in a wide variety
of magazines and on corporate websites.
Stephen is currently a Director of Corporate Communications for The Depository Trust & Clearing
Corporation (DTCC) in New York and has been with the company 14 years, supporting its core
clearing and settlement businesses. Prior to that he has worked in the defense industry, for the
American Stock Exchange, and was a journalist for several years.
Lightbulb Press
Project Team
Design Director Dave Wilder
Art Director Kara W. Hatch
Editors Debbie DiVito, Mavis Morris
Production Mercedes Lopez, Thomas F. Trojan
SPECIAL THANKS
DTCC: Peter Gleeson, James Femia, Javette Laremont, Robert Hensey, Isaac Montal,
John Petrofsky, Gregory Kalina, Cheryl Lambert, Eric Miller, Patrick Kirby, Dan Thieke,
Kurt Holweger, Edward C. Kelleher, Michael Scholl
Sarah Hickey DeLucia
2010 by Lightbulb Press, Inc. all rights reserved.
L I F E
C Y C L E
O F
S E C U R I T Y
CYCLE
OF
SECuRITY
and make
In the quest to attract capital
most
their economies more vibrant,
countries with active capital markets
have central securities depositories
and
(CSDs) to provide the custody
the
recordkeeping services that enable
when
electronic transfer of ownership
and
investors buy and sell securities
settling
initiate settlement. With CSDs,
the huge volume of securities traded
markets
every day in the worlds capital
is fast, cost effective, and secure.
offers
shares that an issuing corporation
in addifor sale in one or more countries
tion to its home market. This approach
with a
allows the corporation, working
capital in
local depositary bank, to raise
NT
CROSS-BORDER SETTLEME
provide
In addition to the services they
crossdomestically, CSDs also handle
securiborder settlement and may hold
ties issued in countries other than
their own.
Those securities may include
receipts, or certificates, representing
A CSD
THE MANY ROLES OF
CSDs
Custody and recordkeeping.
d
safekeeping for securities immobilize
provide
records
in their vaults and electronic ownership
. Using
for those that are dematerialized
updates
book-entry accounting methods, a CSD
Immobilization
Securities
services
Other services. The range of
country,
a CSD provides varies from country to
on a
and many expand and create new offerings
services
continual basis. Examples of additional
include a role in underwriting new securities,
CSDs record
ownership records electronically. Some
others the
the names of the beneficial owners and
names of only their member firms.
CSDs are
Settlement services. Very few
able to complete cash settlement by themselves.
Generally, CSD members instruct a settlement
their
meet
to
bank
bank or the countrys central
due them,
payment obligations, receive payments
or both, for processing through the CSD.
Dematerialization
processing dividend
and interest payments, announcing, reporting, and
as
facilitating corporate action events, such
facilitating
tender offers and reorganizations, and
the deposit and withdrawal of securities.
LIFE
CYCLE
OF
SPOTLIGHT ON DTC
SECuRITY
WHATS AN
INTERNATIONAL CSD?
(DTC) was
The Depository Trust Company
settlecreated in 1973 to transform the
ment process for securities transactions.
In the mid-1960s, when the predecessor
Service,
to DTC, the Central Securities
trading
central
began operations, the paper-based
or holding them in custody in a
become
was
system in the United States had
location. That central location
down
overly cumbersome and was bogged
DTC, now the largest central securities
by the increasing transaction volume.
depository in the world.
Before DTC, when a corporation
DTC acts as a CSD for virtuToday,
each
issued,
as well
went public or a bond was
ally all US municipal securities,
and
purchaser received an elaborately
as the vast majority of equities
United
designed, and often quite beautiful,
corporate bonds issued in the
name that
g
paper certificate in his or her
States. In addition to its recordkeepin
date of
it provides a numdetailed the issuers name, the
par value, and custody services, services. For
issue, the number of shares, the
of asset processing
ber
identifying
trades
and, after 1967, a unique
example, it settles institutional
a secuCUSIP number.
directly, manages all phases of
,
To sell, the owner endorsed and
ritys life cycle, and offers underwriting
broker,
a
to
action
delivered the certificate
interest, dividend, and corporate
broker
n
who delivered it to the buyers
services, including reorganizatio
the
in exchange for payment. Before
processing and tender offers for
of ownerpurchaser could receive proof
securities it holds in its custody.
issued.
that
ship, a new certificate had to be
requirement
no
is
There
was to
to
The solution to this bottleneck
equities or bonds be held at DTC
record changes of ownership electronitrade. But increasingly, many brokercally, using a computerized book-entryof
age firms and issuers want to take
system that eliminated the exchange
advantage of the efficiencies and
them,
paper certificates by immobilizing
cost benefits that DTCs electronic
offers.
system
book-entry
Since 1999, DTC and National
Securities Clearing Corporation
of
(NSCC) have been subsidiaries
the Depository Trust & Clearing
most
Corporation (DTCC), the worlds
efficient and cost effective post-trade .
clearance and settlement organization
Book - entry
System
Clearance
and Settlement
Custody
The Global
Market
Creating Stock
Corporate Actions
50695
Managing Risk
9 780982 907528
V I R G I N I A B. M O R R I S
an d
STUART Z. GOLDSTEIN