Updated Dec 30, 2020
An Overview of DTCC
The Depository Trust & Clearing Corporation (DTCC) plays a vital role in the financial services industry. DTCC provides clearing and settlement services for the world’s financial markets. In 2019 DTCC processed 654 million securities transactions valued at more than $2.15 quadrillion (a quadrillion is a thousand trillion). After reading that last sentence, it should come as no surprise that DTCC is the world’s largest securities settlement organization.
In 2019 DTCC processed 654 million securities transactions valued at more than $2.15 quadrillion
Through its subsidiaries, DTCC provides clearing, institutional matching, settlement, asset servicing, collateral management, global data management, and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, derivatives, mutual funds, money market instruments, alternative investment products, and insurance. When DTCC was established in 1999 as a holding company, it combined the functions of Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC). DTC, the original security depository, was established in 1973 and is known as the depository arm of DTCC. NSCC, the original clearing corporation, was established in 1976 and provides clearing and acts as the central counterparty for trades in the U.S.
A Paperwork Crisis
Before the formation of DTC and NSCC, trades were made manually, and every time a stock was exchanged, a physical stock certificate had to be exchanged as well. The late 1960s saw an exponential increase in daily trading. Between 1965-1968 trading had risen from 3 million to 15 million shares daily. By 1968 papers were stacked in piles on desks, and the NYSE had a backlog of more than $4 billion in unprocessed transactions. What’s now known as the “paper crunch” caused stock exchanges to operate only four days a week — they needed a day devoted to processing the paperwork. The entire, paper-based system gave rise to mix-ups and foul play, resulting in missed trades, market shutdowns, brokerage failures, and even theft.
In efforts to resolve this paperwork crisis, Congress charged the SEC with addressing the underlying issues. As a result, the financial community jointly addressed the streamlining and automation of securities transfers. This collaboration ultimately led to the formation of DTC and NSCC, thereby providing a single centralized location to store all paper stock certificates and keep electronic records of all certificates that indicated changes in ownership and other securities transactions.
Understanding Clearing and Settlement
Clearing and settlement is a process that finalizes a trade by transferring ownership of the traded asset and the cash to pay for it. Here’s a closer look at each.
Clearing or clearance is the process of transmitting, reconciling, and in some cases, confirming transactions prior to settlement. It is one of the initial steps in the post-trade process that finalizes the transfer of security ownership. It includes confirming the details of the transaction and, when a central counterparty (e.g., NSCC) is involved, guaranteeing that the trade will settle even if one of the original parties defaults.
In brief, settlement is the delivery of securities from one party to another. A more thorough explanation of settlement is the post-trade process that finalizes the exchange of and payment for securities that have been traded. When these securities are immobilized in a central securities depository (e.g., DTC), the change in ownership is recorded electronically on the books of the brokerage firms whose clients authorized the trade. No certificates change hands. Financial settlement is handled by electronic transfer between the accounts that the buying and selling firms maintain at DTC.
Leveraging DTCC Data
DTCC’s automation, centralization, and process standardization help ensure that trades are executed properly, quickly, and accurately. Firms that conduct a significant amount of direct business with carriers and fund companies can leverage DTCC data feeds, minimizing manual processing. Terrapin has partnered with DTCC for over 20 years, helping facilitate the use of their services. We process numerous DTCC data feeds supporting their mutual fund and insurance products and services, including commissions, positions, financial activity, and settlement. In 2019 we processed over 4 billion DTCC records on behalf of our clients. Our industry expertise helps our clients navigate the DTCC membership process and provide guidance on DTCC services.