The U.S. Depository Trust & Clearing Corporation (DTCC) Tuesday proposed changes in securities processing that are designed to help eliminate existing physical certificates and end the issuance of new certificates.
The DTCC says that dematerialization will help to lower costs, mitigate risk and bring greater efficiency to the industry, including the individual shareholder. Last year, its subsidiary, Depository Trust Company, issued a white paper that proposed the full dematerialization of the U.S. financial services industry to reduce the costs and risks associated with existing physical securities. And, it notes that Hurricane Sandy, which struck last year, proved that a move to full dematerialization would safeguard the certificates from potential physical damage by converting them to electronic holdings.
The DTCC said Tuesday it is moving ahead on the dematerialization issue. Among other things, it is proposing to significantly reduce the movement of physical certificates by further leveraging the Direct Registration System (DRS), which enables investors to register their assets on the books of the transfer agent in book-entry form and receive a statement rather than a paper certificate. It proposes that the industry mandate issuing ‘statements only’ instead of physical certificates for new listed issues, and it recommends expanding DRS eligibility to allow for the dematerialization of ‘restricted equities’.
It is also proposing to reduce the required holding time for the destruction of non-transferable securities to four years from six years. And, it’s seeking to eliminate the need for physical certificates at the time of issuance by replacing paper certificates with electronic certificates.
DTCC says it will begin working with a cross section of industry stakeholders to further build support and consensus for these proposed initiatives, with the goal of defining a strategy to implement elements of the plan as early as 2014, subject to regulatory approvals.
“We fully support DTCC’s efforts to bring renewed focus on the next steps to fully dematerialize the U.S. markets,” said Charles Rossi, president of the Securities Transfer Association (STA), the professional association of transfer agents in the U.S. “The time is right for a broad cross collaboration of all key stakeholders to move forward with an industry plan.”
The Securities Industry and Financial Markets Association (SIFMA) also supports the push for dematerialization. “SIFMA applauds DTCC’s dematerialization effort. A shift from physical securities to electronic holdings will help modernize U.S. markets and reduce risk for market participants,” said Tom Price, SIFMA managing director, operations, technology and business continuity planning.
“Some of these recommendations have been developed based on feedback received on the DTCC white paper and in conjunction with the industry over the past several months and represent major initiatives that will move the industry closer to full dematerialization,” said Daniel Thieke, DTCC managing director, asset services. “We have proposed timelines for each of these initiatives and will work with various industry groups in the coming months to undertake a cost versus benefits analysis of each project and decide on next steps.”