What is the Depository Trust Company (DTC)?
The Depository Trust Company (DTC), a US-based corporation, is a central securities depository accepting deposits from over 65 countries. It provides book-entry and depository services, transfer and pledge of securities, operates a settlement system for securities, and also performs associated income distributions.
The DTC enables record-keeping of balances of securities in electronic form. It facilitates the processing and settlement of trades in various securities. The DTC provides settlement services for almost all corporate, equity, and money market securities in the United States, and it is a subsidiary of the Depository Trust and Clearing Corporation (DTCC).
- The Depository Trust Company (DTC), a US-based corporation, is a central securities depository that accepts securities from over 65 countries.
- The DTC provides settlement services for almost all corporate, equity, and money market securities in the United States.
- The majority of the large banks and broker-dealers in the U.S. are participants of the DTC.
Understanding the Depository Trust Company (DTC)
The Depository Trust Company (DTC) provides settlement services at lower risks and costs, increasing market efficiency. However, securities must be eligible to be settled using the DTC. Every trader or dealer trading in equity, money market, or debt instruments is presented with net settlement responsibilities by the DTC at the end of every trading day. The DTC offers a range of services, including asset services.
The majority of the large banks and broker-dealers in the U.S. are participants in the DTC. Hence, they occur as sole registered owners for securities deposited and held by them at the DTC. The brokers and dealers, participants of the DTC, own a pro-rata interest in the shares held by issuers at the DTC.
Holding an Eligible Security at the Depository Trust Company (DTC)
The manner in which the investors hold the securities determines what would happen when the securities are bought and sold, and the means of dividend payments. The following are the three ways that eligible securities can be held:
1. Street Name
If an investor holds a security in such a way, his/her name is listed on the books of the brokerage firm as a beneficial owner of the shares. The name of the brokerage firm is listed in the ownership records of the Depository Trust Company. The transfer agents maintain the records of the issuers on which Cede & Co., the nominee of the DTC, is recorded as the registered owner.
The legal title lies with the DTC, whereas the investor holds the shares indirectly. The street name method of holding any security is the least expensive, and the risk associated is also lower.
2. Direct Registration
If an investor wants to hold a security electronically in his/her name instead of a street name, the investor would need to go through a direct registration system (DRS). The DRS allows the investor to be recorded as the registered security holder on the books and records of the issuer. Investors using the DRS receive a statement as evidence of ownership, not a security certificate.
The issuer or his/her transfer agent directly sends the investor the dividends, proxy materials, investor information, and corporate communications. The direct registration method of holding any security is more expensive than holding a security in a street name; however, the risk associated is still lower.
3. Physical Certificate
An investor can hold a security in physical form as a certificate; however, it is a more expensive and high-risk option. Physical certificates may get lost, damaged, or stolen. Moreover, the replacement cost of a physical certificate is high, as it takes time to replace a physical certificate.
In order to get a physical certificate, the brokerage firm of the investor would withdraw securities from his/her account at the Depository Trust Company. The investor would’ve been registered in Cede & Co., the nominee of the DTC.
The transfer agents may sometimes charge a certain fee for providing a physical certificate. Some investment firms, or the issuer, may not provide the option of holding a security in the form of a certificate.
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: