US Model for Clearing and Settlement

8/2/2019 US Model for Clearing and Settlement

1/22

The US Model for Clearing and Settlement

An Overview of DTCC

The Depository Trust & Clearing Corporation


2/22

Introduction 1

The Depository Trust & Clearing Corporation 3

What Markets Does DTCC Serve Today? 3

A. Clearing and Settlement

1. Equities, Corporate and Municipal Bonds

2. Government Securities

3. Mortgage-Backed Securities

B. Asset Services

C. Global Corporate Actions

D. OTC Derivatives

E. Wealth Management Services

F. Insurance

Who Are Our Customers? 6

Who Owns DTCC? 6

Who Regulates Us? 6

What are DTCCs Global Operating Capabilities? 6

What are DTCCs Financial Strengths? 7

How Does DTCCs Model Save Customers Money? 7

Post-Trading Costs: EU and US 7

Who Does DTCC Partner With? 8

How Do We Manage Risk? 8

How Do We Ensure Business Continuity? 9

Attachments:

DTCC 2006 Performance In Brief 10

Background Note on the Organisation in the US

Market for Clearing and Settlement (prepared by

the Cross-Border Committee of the Securities

Industry Association for the European Commission,

May 2005) 11

Table of Contents

April 2007


3/22

1

To give traders an opportunity to buy or sell a

security wherever the best price could be found,

regulators required the creation of trading links

between the exchanges. This meant that dealers

could choose to have a trade executed on whichever

market offered the best price. The corollary to this

was, if a trade could be executed on any market, it

could also be cleared and settled by whichever

organisation offered a better price or more efficient

service. In short, customer choice and competition

were encouraged.

Over time, US market participants came to

realise that while they could always compete on

the front end of the securities business, there

were considerable cost-efficiencies and risk-

reduction advantages to commoditising back-office

functions. They began to see the advantages of a

centralised infrastructure model that could

achieve economies of scale from critical mass.They also saw the value of centralised trade netting

to reduce cost and risk. Eventually, customers

steered the regional clearing and depository

organisations into consolidationa process that

took a number of years to complete.

Between 1977 and 1995, five regional

exchanges exited the business of clearance, set-

tlement and custody, and customers consolidated

this activity at NSCC and DTCC.

And, the process of consolidation continues.

Since 1999, DTCC has worked to bring our deposi-

tory, DTC, and our equities clearing organisation,

NSCC, under one roof. Later, we brought inand

consolidatedtwo more clearing corporations for

For more than 30 years, DTCCs family of compa-

nies has helped automate, centralise, standardise

and streamline processes that are critical to the

safety and soundness of the capital markets. As a

result, weve helped our customers increase their

operational efficiency, reduce risk and lower cost.

DTCC is a holding company established in 1999 to

combine The Depository Trust Company (DTC) and

National Securities Clearing Corporation (NSCC).

Those companies, in turn, grew out of Wall Streets

paperwork crisis in the late 1960s and early 1970s.

Neither company, however, started out serving a

national market. They were formed initially to handle

clearing and immobilise securities solely for the New

York Stock Exchange and American Stock Exchanges,

and later on, Nasdaq.

Clearing and settlement in the US was highly

fragmented at the time. Regional markets, suchas those in Boston, Philadelphia and Chicago, each

maintained separate clearing and depository

businesses. As trading volumes grew, customers

became concerned about the high costs,

inefficiencies, redundant systems and disparate

processes, as well as the need to post collateral

at each of the clearing companies.

At the same time, US regulators sought to

encourage the creation of a unified national market

mechanism. To guide the process, they advanced a

number of key concepts. At the heart of them

were two primary principles:

the need for customer choice, and

the need for price transparency.

Introduction


4/22

2

over-the-counter (OTC) derivative instruments. The

point is, of course, that by developing services in

conjunction with customers, we partner with our

customers and continue to earn their business.

DTCCs size has also not prevented us from

being quick to market or innovative. In fact, the

breadth of our experience across product lines and

the need to build different technology solutions for

diverse market sectors offer a distinct competitive

advantage. Weve been able to repurpose technology

and leverage existing software design to minimise

our technology development costs.

In 2006, for the third year in a row, our

customers have given us a strong vote of confi-

dence on the quality of service we provide to the

industry. In our annual industry-wide customersatisfaction survey, DTCC received a world-class

score of 91%.

We look forward to the continued growth and

development of additional services as we work to

anticipate our customers needs and the changing

nature of the industry. In our increasingly global

industry, we also look forward to collaborating and

partnering more closely with our colleagues

around the world.

fixed-income securities, Government Securities

Clearing Corporation (GSCC) and Mortgage Backed

Securities Clearing Corporation (MBSCC). Today,

DTCC subsidiaries clear and settle nearly all US

market trades in equities, corporate and municipal

bonds, government securities and mortgage-backed

securities, money market instruments and OTC

derivatives. We also provide securities safekeeping

and asset servicing capabilities for equities,

corporate and municipal debt, collateralised

mortgage obligations, exchange-traded funds,

money market instruments and many other

types of securities.

DTCC is owned by its principal users and oper-

ates on an at-cost basis, which means we look to

return profits we make to our customers. Driven

in part by economies of scale, our transaction feesare among the lowest in the world.

As our customers look to move beyond traditional

trading in equities and fixed income securities to

more derivative instruments, we continue to work

with them, responding to where market forces are

driving their businesses. For instance, we leveraged

our experience and technology to rapidly build

Deriv/SERV to automate and lower risk for the grow-

ing global market in credit default swaps and other


5/22

3

clearing, settlement, risk management, central

counterparty services and a guarantee of completion

for virtually all broker-to-broker trades involving

equities, corporate and municipal debt, American

depositary receipts, exchange-traded funds, and

unit investment trusts. NSCC also nets trades

and payments among its participants, reducing the

value of securities and payments that need to be

exchanged by an average of 98% each day. NSCC

generally clears and settles trades on a T+3 basis.

Services available:

Automated Customer Account Transfer

Service (ACATS)

Continuous Net Settlement (CNS)

Custom Index Share Processing

Inventory Management System

Processing Trade Reporting and Confirmation

Real-Time Trade Matching

Reconfirmation and Pricing Service

Settlement Services

Stock Borrow Program

2. Government Securities

The Government Securities Division (GSD) of

the Fixed Income Clearing Corporation (FICC), a

subsidiary of DTCC, provides real-time trade

matching, clearing, risk management and netting

for trades in US Government debt issues, includingrepurchase agreements or repos. Securities

transactions processed by FICCs Government

Securities Division include Treasury bills, bonds,

notes, zero-coupon securities, government

agency securities and inflation-indexed securities.

Services available:

Auction Takedown

Real-Time Trade Matching/RTTM Web

Government Securities Net Settlement

Services

Fail Netting

Repurchase (Repo) Agreement Processing

General Collateral Finance Repo Services

3. Mortgage-Backed Securities

The Mortgage-Backed Securities Division of the

Fixed Income Clearing Corporation, a subsidiary of

The Depository Trust &Clearing Corporation

DTCC, through its subsidiaries, provides

clearing, settlement and information services

for equities, corporate and municipal bonds,government and mortgage-backed securities,

money market instruments and over-the-counter

derivatives. In addition, DTCC is a leading processor

of mutual funds and insurance transactions, linking

funds and carriers with their distribution networks.

DTCCs depository provides custody and asset

servicing for 2.8 million securities issues from

the United States and 107 other countries and

territories, valued at $36 trillion. In 2006,

DTCC settled more than $1.5 quadrillion in

securities transactions.

DTCC operates through five subsidiarieseach

of which serves a specific segment and risk profile

within the securities industry:

National Securities Clearing Corporation

(NSCC)

The Depository Trust Company (DTC)

Fixed Income Clearing Corporation (FICC)

DTCC Deriv/SERV LLC

DTCC Solutions LLC

DTCCs joint venture company, Omgeo, has

6,000 customers in 42 countries and plays a

critical role in institutional post-trade processing,

acting as a central information management and

processing hub for brokers, investment managers

and custodian banks.

For a snapshot of DTCCs 2006 volume and

value settled, please see attachment 1, page 11.

What Markets Does DTCCServe Today?

A. Clearing and Settlement

1. Equities, Corporate and Municipal Bonds

DTCCs subsidiary, National Securities Clearing

Corporation (NSCC), established in 1976, provides


6/22

4

DTCC, provides real-time automated and trade

matching, trade confirmation, risk management,

netting and electronic pool notification to the

mortgage-backed securities market.

Key participants in this market are mortgage

originators, government-sponsored enterprises,

registered broker/dealers, institutional investors,

investment managers, mutual funds, commercial

banks, insurance companies and other financial

institutions.

Services available:

Real-Time Trade Matching

Electronic Pool Notification Services

Netting Services

Mortgage-Backed Securities Clearing Services

B. Asset Services

DTCCs subsidiary, The Depository Trust

Company, established in 1973, was created to

reduce costs and provide clearing and settlement

efficiencies by immobilising securities and making

book-entry changes to ownership of the securi-

ties. DTC provides securities movements for

NSCCs net settlements, and settlement for insti-

tutional trades (which typically involve money and

securities transfers between custodian banks and

broker/dealers), as well as money market instru-

ments. In 2006, DTC settled transactions worth

almost $445 trillion, and processed 292.7 million

book-entry deliveries.

In addition to settlement services, DTC brings

efficiency to the securities industry by retaining

custody of almost 2.8 million securities issues

worth about $36 trillion, including securities issued

in the US and more than 100 other countries.

Services available:

Custody & Safekeeping Services

Underwriting Services

Deposit & Withdrawal Services

Dividend, Reorganisation and Proxy Services

Restricted Securities Family of Services

Direct Registration Service

C. Global Corporate Actions

DTCCs Global Corporate Action Validation Service

(GCA VS), operated by DTCC Solutions LLC,

simplifies announcement processing by providing a

centralised source of scrubbed information about

corporate actions, including tender offers, con-

versions, stock splits, and nearly 100 other types

of events for equities and fixed-income instruments

traded in Europe, Asia-Pacific and the Americas.

For banks, broker/dealers and other financial

institutions, the GCA VS transforms the way

corporate action announcements are managed

globally by eliminating redundant operations and

technology, and by reducing the high fixed costs

associated with this labor-intensive processing.

In 2006, GCA VS processed more than 899,000corporate actions from more than 160 countries,

the most complete global coverage of corporate

actions by any organisation.

D. OTC Derivatives

DTCC Deriv/SERV LLC provides automated

matching and confirmation services for over-the-

counter (OTC) derivatives trades, including credit,

equity and interest rate derivatives. It also provides

related matching of payment flows and bilateralnetting services. Deriv/SERVs customer base,

which includes dealers and buy-side firms from

more than 30 countries, is the largest of any

post-trade service provider in the OTC derivatives

marketplace. In 2006, Deriv/SERV processed a

record 2.6 million transactions.

Deriv/SERV has already been an important driver

in increasing electronic confirmation rates, while

lowering the risk and cost of labor-intensive,

paper-based processing. More than 80% of credit

derivatives traded globally are now confirmed

through Deriv/SERV, up from 15% in 2004.

During 2006, DTCC also launched its global

Trade Information Warehouse to bring increased

accuracy, cost reduction and reduced risk to the

post-trade processing of OTC derivatives contracts.

The warehouse maintains the primary record of


7/22

5

each contract and handles the servicing of con-

tracts over their lifecycle, which can extend for

many years. Beginning with credit derivatives, this

global infrastructure solution, which was developed

in close collaboration with leading dealers and

buy-side firms, is designed to be extended to

accommodate interest rate, equity and other

OTC derivatives.

Services available:

Credit Default Swaps Matching and

Confirmation

Equity Derivatives Matching and Confirmation

Interest Rate Derivatives Matching and

Confirmation

Payment Matching, and Bilateral Netting

Trade Information Warehouse

E. Wealth Management Services

DTCC also provides a family of services to support

mutual funds, managed accounts and growing

interest in alternative investment products.

Mutual Fund Services, provided by DTCCs

subsidiary, NSCC, are the acknowledged industry

standards for processing fund transactions,

communicating account-related information, and

linking fund companies with their growing network

of distribution firms. Fund/SERV automates

purchases, registrations, redemptions and

settlement of these fund transactions in the US

and for off-shore funds. Other capabilities include

coordinating account information between funds

and firms; processing defined contribution trans-

actions; settling commission payments; trans-

ferring accounts between firms, and assets in

IRAs between fund companies; and providing a

centralised repository for information contained

in a funds prospectus, thereby expanding theservices role as a primary industry source for

rules-based processing.

Mutual Fund Services also provide money

settlement of transactions through the Fedwire

system.

Services available:

ACATS-Fund/SERV

Commission Settlement

Defined Contribution Clearance & Settlement

Fund/SERV

Fund/SPEED Mutual Fund Profile Service

Networking

Transfer of Retirement Assets

DTCCs Managed Accounts Service standardises

the exchange of account and investment information

through one central gateway, significantly reducing

operational costs, errors and the related risks.

Introduced in 2006 by DTCC Solutions LLC, the

service simplifies an unwieldy and costly account

set-up process, linking investment managers, spon-

soring broker/dealers and service providers through

one centralised, automated platform. The service

also includes features that address account

maintenance, corporate actions and fee billing.

Features available:

Account Set-Up

Account Maintenance

Corporate Actions

Fee Billing

DTCCs planned Alternative Investment

Products service will bring automation and efficiency

to critical transactions like subscriptions, redemp-

tions and position and valuation reporting for

hedge funds, funds of hedge funds, real estate

investment trusts and other alternative invest-

ments. The proposed service will be built on a

platform that will streamline trade order, docu-

mentation workflow, reporting and settlement of

these complex products.

In 2007, several hedge funds, fund administratorsand broker/dealer firms will pilot the service, which

is being designed to accommodate global hedge

fund providers and settlement reporting in multiple

currencies. The service will be provided by DTCCs

subsidiary, NSCC.


8/22

6

F. Insurance

Insurance Services, provided by DTCCs sub-

sidiary, NSCC, is helping to commoditise and

mainstream annuities, life insurance and retirement

programs. The services include processing of annuity

applications and premiums, licensing and appoint-

ments, commission payments, positions and

valuations, asset pricing, financial activity reporting

and annuity customer account transfers. In 2007,

two services will be added: Fund Transfers within

variable annuities; and Attachments, which will

support the electronic transfer of images, signa-

tures and other documents.

The aim of the business is to automate and

provide seamless end-to-end communication

between insurance carriers, distributors and theirsolution providers for the sale, processing and

money settlement of all types of insurance prod-

ucts nationwide.

Who Are Our Customers?

DTCCs customer base extends to thousands of

companies within the global financial services

industry. DTCC serves brokers, dealers, institu-

tional investors, banks, trust companies, mutual

fund companies, insurance carriers, hedge fundsand other financial intermediarieseither directly

or through correspondent relationships.

Increasingly, DTCCs customers operate both in

the US and overseas, where DTCC continues to

provide them with services.

In the US, DTCC provides critical services to the

markets for US Government and mortgage-backed

securities, and to all US equity marketplaces, includ-

ing the New York Stock Exchange, The Nasdaq Stock

Market, the American Stock Exchange, and regional

US markets, as well as electronic trading and com-

munications networks (ECNs).

Who Owns DTCC?

DTCC is industry-owned by its customers who

are members of the financial community, such as

banks, broker/dealers, mutual funds and other

financial institutions.

DTCC operates on an at-cost basis, returning

excess revenue from transaction fees to its

member firms.

Who Regulates Us?

All services provided through the clearing

corporations and depository are registered with

and regulated by the US Securities and Exchange

Commission (SEC). The depository is also a member

of the US Federal Reserve System and a limited-

purpose trust company under New York State

banking law.

What Are DTCCs GlobalOperating Capabilities?

DTCCs clearing and settlement systems have

been built with the flexibility to accommodate

practices in other markets, by incorporating multiple

settlement cutoffs, for example. Our subsidiaries

can accept real-time input from exchanges and other

marketplaces outside the US, and can accept trades

in multiple currencies. And our depository has the

ability to settle and service assets in currenciesother than the US dollar, with the flexibility to add

additional currencies as needed.

With regard to cross-border exchange mergers,

such as the New York Stock Exchanges (NYSE)

merger with Euronext, we are making systems

enhancements to meet specific requirements and

deploy those changes on an accelerated timetable.

Since almost half of our customer base are firms

that operate on a global basis, we continue to

expand our facilities in the UK and China, as well

as provide customer servicing capabilities on a

24/7 basis. DTCC has an extensive business

continuity program, which includes a fully redundant,

self-healing telecommunications network and

multiple data centers operating at great distances

that ensure replication and recovery of data to

within a two-minute window.


9/22

7

Omgeo, DTCCs joint venture with Thomson,

provides global support for institutional post-trade

processing and offers customers centralised,

automated access to multiple third-party service

providers, through Omgeo Connect.

DTCC has 16 cross-border depository links with

central infrastructure organisations worldwide,

including a link with the Canadian Depository for

Securities, which enables DTC to settle transactions

in Canadian dollars on behalf of its participants.

DTCC also has signed information and cooperation

agreements with major post-trade infrastructure

organisations in Japan, Korea, China and Taiwan.

What Are DTCCs FinancialStrengths?

In 2006, each of DTCCs regulated subsidiaries

(DTC, NSCC, FICC) received Standard & Poors

highest credit rating, AAA/A-1+.

DTCCs subsidiaries rules require most partici-

pants to maintain deposits of collateral related to

their activities based on calculated requirements

to secure participants obligations and certain

liabilities of the subsidiaries.

In 2006, DTCC generated revenue of just over

$1.3 billion, and gave back $580 million in rebates,

discounts and interest. In addition, DTCC reduced

its transaction fees for 2006 by $182 million for

services provided by its subsidiaries.

How Does DTCCs ModelSave Customers Money?

DTCCs rebates and fee reductions reflect its

economies of scale, critical mass and tight fiscal

management.

The record rebates and recent fee reductions

reflect DTCCs continuing commitment to eliminate

operational inefficiencies and drive down clearing

and settlement costs. DTCCs management team

has established aggressive yearly expense reduction

targets, and the company employs a variety of

best practices and strategies, including our Six

Sigma quality program and our successful pursuit

of the Capability Maturity Model Integration

(CMMI) recognition for standardising our technology

processes, to help us achieve our goals.

Rebates and fee reductions are only part of the

savings DTCC delivers to the industry. The netting

down, or reducing the number of trade obligations

requiring financial settlement, and streamlining

settlement processes frees up trillions of dollars

of capital each year that customers can then use

for other investment purposes.

NSCC optimises capital for its customers by

netting down trade obligations through its

Continuous Net Settlement system. In 2006,NSCC reduced the total value of obligations requiring

financial settlement by 98%from $174.9 trillion

to $3.8 trillion. On June 8, the peak trading day of

2006, NSCC processed 50.1 million transactions

valued at $1.02 trillion, but through netting,

reduced the value of obligations settling by 98%

to $16.6 billion.

Through its daily netting process, FICC sharply

lowers the total number of government and

mortgage-backed securities trade obligations that

require financial settlement. In 2006, FICCs netting

process eliminated three-quarters of all govern-

ment securities trades requiring settlement, and

nearly 95% of all mortgage-backed securities

trades. This markedly increased the capital available

to the financial services industry, while lowering

risk and improving efficiency.

Extensive risk mitigation services from DTCC

also help the industry avoid potential loss. (See

Risk Management page 8.)

Post-Trading Costs: EuropeanUnion and US

In recent years, several European studies have

compared the costs of post-trade processing in

the EU with the US. The studies have found that

post-trading processing costs in the EU are higher


10/22

8

than in the US, both for EU-domestic and cross-

border transactions.

While DTCC has, on request, contributed data

to various comparative cost studies, we have not

sought to draw our own comparisons. As the

European Commission pointed out in its working

paper draft about post-trading, many assumptions

impact this calculation, and it is difficult to achieve

a true comparison.

The Commission analysed the studies, which

include CEPS, Giovannini I, LSE/Oxera, NERA

Economic Consulting, AFTI/Eurogroup, among

others, and concluded that:

In the EU market, a cross-border equity

transaction is two-to-six times more expensivethan a domestic transaction from an investors

point of view.

A domestic transaction is up to eight times

more expensive in the EU post-trading environ-

ment than at DTCC.

The studies show that the aggregate excess

cost of post-trading for investors in the EU is

between 2 billion and 5 billion.

According to DTCCs estimate, clearing an equity

trade in the US market now costs about USD2.0

cents ( 0.015) per side, after rebates and dis-

counts. These calculations are less than estimates

by the European studies because they rely on differ-

ent assumptions (e.g., average trade size, inclusion

of rebates and discounts).

Who Does DTCC PartnerWith?

DTCC has hundreds of strategic partners

major companies, and smaller-sized and specialised

software providers. In addition, DTCC maintains

strong working relationships with clearing agencies

and securities depositories in dozens of countries

worldwide.

DTCC welcomes service organisations reaching

out to us, where business knowledge and techno-

logical advantage can add value to the breadth of

capabilities we can jointly offer to our customers.

DTCC has pursued a strategy to buy v. build

solutions where it would reduce costs. We partner

with well-respected technology and telecom

companies where this collaboration could bring

about innovation, and create alliances with major

consulting companies where their adeptness at

helping the financial service industry identify oppor-

tunities for greater efficiency can be joined with

our expertise as an infrastructure organisation.

One of the first major steps we took soon after

DTCC was formed in 1999 was to partner with

Thomson Financial to create Omgeo. No development

illustrates our commitment to a global businessstrategy of forging partnerships more than

Omgeo, which plays a critical role in the global

securities industry as a central information

management and processing hub for broker/dealers,

investment managers and custodian banks.

A few years ago, we teamed up with Euroclear

and Clearstream to build a new service that auto-

mates pre-issuance messaging for new issues of

European commercial paper. Euroclear and

Clearstream are using this technology to serve their

customers. It leverages technology we originally

developed for the US commercial paper market.

DTCC continues to actively seek out partners

and collaborative arrangements to help us serve

our customers. We view partnering with other

service providers as critical to ensuring our capacity

to meet and exceed customer expectations.

How Do We Manage Risk?

Managing the risks inherent in executing

securities transactions and holding securities in

custody is a key component of DTCCs business.

The globalisation of financial markets, the trading

of more complex instruments and the application

of new technologies all make the management of

risk more criticaland more challenging.


11/22

9

Todays markets require strong risk management,

and our customers place their confidence in DTCC.

DTCC routinely examines a wide range of factors

associated with market risk, credit risk, operational

risk and enterprise risk. Tools DTCC employs to

mitigate risk include continuous trade netting,

capital adequacy standards, a common clearing

fund, a fully collateralised settlement system that

is marked-to-market daily, ongoing operational risk

assessment, business resiliency exercises, the

wide geographic dispersion of operating and data

centers, a variety of advanced quantitative analytical

methodologies such as back and stress testing, and

a special focus on regulatory and compliance issues.

In addition, DTCCs principal subsidiaries all carry the

highest credit ratings.

By operating as central counterparties andthus taking the risk onto themselves, DTCCs

clearing subsidiaries help the industry reduce the

risk associated with trading, while freeing up

available capital. The clearing corporations do this

by stepping in between the seller and buyer of

each trade to assume the counterparty credit risk

and the responsibility to deliver the securities to

the buyer and payment to the seller. This is the

function of a central counterparty.

In the course of assuming this level of risk,

each DTCC subsidiary sets minimum standards for

capital adequacy and collateral that its customers

must meet in order to do business. Customers

typically must post collateral, and each customers

collateral requirements can change daily, based on

its open trading positions. The risk management

programs operated by DTCC clearing subsidiaries

determine how much collateral is required from

each customer to secure its outstanding trading

obligations. DTCCs depository controls the final

settlement of transactions in equities, corporate

and municipal debt, money market instruments,

and unit investment trusts, ensuring its ability to

complete settlement payments through a series of

settlement controls, including net debit caps and

collateralisation.

More recently, DTCC also has expanded its use

of analytical value-at-risk methodologies for stress

testing of customer and participant exposure in

extreme market conditions. The company now

regularly performs back testing of the quality and

accuracy of its risk management systems. And it

uses the results of these tests to recalculate the

clearing fund and collateral requirements placed on

its customers, or to respond to other risk factors

that the tests may reveal.

DTCC has long been in the business of managing

risk on behalf of the industryand views it as a

core competence.

How Do We Ensure BusinessContinuity?

DTCCs business continuity plan includes multi-

ple data and operating centers, a highly-resilient,

self-healing telecommunications network and data

replication technology, which allows data to be

captured and saved within 2 minutes at remote

locations at a distance of more than 1,000 miles.

On September 11, 2001, when the US markets

closed, DTCCs facilities in lower Manhattan (ten

blocks from the World Trade Center) remained

open to ensure the completion of trade settlement.

DTCC settled more than $280 billion on 9/11 and

$1.8 trillion in securities transactions that week,

which was critical to the resumption of markettrading the following weeks.

Afterward, DTCC moved swiftly to implement

a comprehensive business continuity plan to

further protect and decentralise staff and

systems. DTCC enhanced its communications

network and expanded both the connectivity

testing with major customers and the documen-

tation we provide on testing results.

DTCC now has fully redundant capabilities for allcritical business functions. We can, and have,

completed daily settlement from different locations.

Also in 2005, DTCC mobilised to help our customers

manage through Hurricane Katrina and its after-

math. DTCC swiftly enacted steps to help

customers impacted by the storm, along with

issuers and agents, to cope with the operational

problems, reduce risk and restore business as usual.


12/22

10

Performance Item 2006 2005 % Change

Revenue $1.36 billion $1.28 billion + 7%Settlement

Value of securities settled through DTCC $1.5 quadrillion $1.4 quadrillion + 8%

Value of money market settlement activity $140.2 trillion $113.8 trillion + 23%

(one side)

Value of securities on deposit at DTC $36 trillion $31.2 trillion + 15%

Volume of book-entry deliveries 292.7 million 263 million + 11%

Equity, ETF, corporate and municipal bond

transactions processed (NSCC)

Value of NSCC equity, municipal/corporate $175 trillion $130.7 trillion + 34%

bond and ETF transactions processed

Volume 8.5 billion 6.6 billion + 29%

Volume on peak day (NSCC- 10/06/05) 50.1 million 36.5 million + 37%

Peak day netting factor 98% 98% n/a

Government securities transactions

processed (FICC)

Value of trades in-net $864.1 trillion $874.3 trillion - 1%

Volume 24.9 million 25.5 million - 2%

Mortgage-backed securities transactions

processed (FICC)

Value $76.1 trillion $75.6 trillion + 1%

Volume 1.7 million 1.65 million + 3%

Deriv/SERV

Total customers 753 207 + 264%Mutual fund transactions processed

(NSCC Fund/SERV)

Value $2.1 trillion $1.67 trillion + 24%

Volume 143 million 117.8 million + 21%

Insurance applications, premiums and

commissions processed (NSCC)

Value $ 16.3 billion $13.0 billion + 25%

Volume 53.5 million 45.2 million + 18%

DTC underwriting

Value of issues $4.3 trillion $4.4 trillion - 1%

Volume of issues 50,867 47,178 + 8%DTC cash dividend and interest processing

Value of dividend and interest payments $1.79 trillion $1.60 trillion + 12%

Volume 4,389,000 3,920,000 + 12%

DTC corporate actions processing

Value of payments involved $1.47 trillion $1.19 trillion + 23%

Volume 271,780 273,100 0%

Value of non-US issues on deposit at DTC $4.66 trillion $3.29 trillion + 42%

DTCC 2006 Performance . . . In Brief

DTCC = The Depository Trust & Clearing Corporation; NSCC = National Securities Clearing Corporation; FICC = Fixed Income Clearing

Corporation; DTC = The Depository Trust Company

Attachment 1


13/22

11

1. What were the market circumstances

when the DTCC was created?

Early Enabling Legislation

Crisis as Catalyst

Beginnings in Vertical Silos

National Market System a Public Policy

Horizontal Consolidation

Vertical Re-Integration of CCP and CSD

2. What are the main differences between those

circumstances and the current ones in Europe?

Single Country

Single Securities Regulator, Common

Regulatory Framework

Dominant Market Centre

Homogeneous, Market Utility Business Model

Separate Infrastructures for Cash and

Derivatives Markets

Cross-Border Services not Policy Priority

3. What were the arguments used in favour and

against the creation of such a system?

Arguments Used in Favour: Regulatory Concerns,

Efficiency

Arguments Used Against: Revenue Protection,

Anti-trust Dangers

4. How is the system working?

5. Have there been important changes in the

structure of the DTCC?

National Market System

Expansion in Instruments

Expansion in Domestic Services

Expansion in Cross-Border Services

Continued Enlargement and Rationalisation

6. What are the strongest and weakest points

of such a system?

Strongest Points

Cautionary Notes on the Replication of US Market

Features in Europe

Abbreviations

References

Background Note on the Organisation in the US Market for Clearing and

Settlement (May 2005)

This background note has been prepared for the European Commissions Internal Market Directorate

General to assist in its work on clearing and settlement. The six questions answered in this paper were

provided by the Commission to guide the SIA on the topics of specific interest and relevance.

Prepared by the Cross-Border Committee of the Securities Industry AssociationFor the European Commission

Attachment 2


14/22

1. What were the market circum-stances when the DTCC wascreated?

The Depository Trust & Clearing Corporation

(DTCC) is a holding company formed in 1999 toconsolidate under the same corporate ownership the

clearing and settlement infrastructures in the US

the central counterparty National Securities

Clearing Corporation (NSCC), and central securities

depository The Depository Trust Company (DTC).

The integration of NSCC and DTC was driven by

market necessity. While the complementary func-

tions of these two institutions resulted in many

collaborative efforts over the two decades of their

separate existence, by the late 1990s deregula-

tion and evolutionary changes in the US financial

industry meant that as both companies extended

their services beyond their core functions, they

were, in some cases, beginning to overlap and in

danger of creating unnecessary conflicts, complexity

and costs for their industry constituents.

The integration resulted in a holding company

with two separate operating subsidiaries, recog-

nising the different products and services, regula-

tory requirements and risk profiles of clearing and

settlement organisations. The three legal entities(the holding company and its two operating sub-

sidiaries) share an executive management team

and a single slate of directors. Centralised corporate

services (i.e. legal, finance, auditing, etc.) support

all three entities.

In the European context, it may prove helpful to

examine the creation and evolution of NSCC and

DTC, in addition to the formation of the holding

company DTCC.

Early Enabling Legislation In 1961, twelve years

before the establishment of DTC, the New York

Stock Exchange (NYSE) together with several

major custodian banks had already successfully run

a one-year Pilot Operation for Central Handling of

Securities. Beginning with 15 securities and 31

firms, deliveries were made between members via

book-entry and without the physical movement of

certificates. Legislative changes were then initiated

in order to prepare for a centralised service for all

issues listed on the NYSE. In 1962, the process

to amend Article 8 of the Uniform Commercial

Code (UCC) was started in all the states, in order

to sanction the transfer of ownership or pledge of

securities by depository book-entry in lieu of

delivering physical certificates. The last states

amendment was obtained in 1970.

Crisis as CatalystThe paperwork crisis in the

securities industry that developed in the late

1960s served as the catalyst that accelerated

the immobilisation and book-entry transfer of

securities by a central service provider. At that

time, brokers still exchanged physical certificates

and checks for each trade, while hundreds of mes-

sengers scurried through Wall Street clutching

bags of checks and securities. A sharp increase in

trading led to a growing number of trades to fail.

The paperwork crisis was so severe that, in order

to help reduce the backlog, the exchanges closed

every Wednesday and shortened trading hours on

the other days. In 1968, the Central Certificate

Service was established by the NYSE to immobilise

share certificates, and the foundation of a national

depository system had begun to take form.

By the beginning of 1970, numerous studies ofthe problems of the US securities industry were

under way. A common conclusion was that long-

term solutions would require market-led efforts, and

an inter-industry organisation, the Banking and

Securities Industry Committee (BASIC) was formed.

BASIC acted on a number of projects to reduce the

costs and improve the process of securities

operations, the most significant of which was the

establishment of a Comprehensive Securities

Depository System (CSDS), expanding on the

NYSEs Central Certificate Service. Regional markets

and banks soon joined in the process and a National

Coordinating Group was formed.

Beginnings in Vertical Silos NSCC and DTC were

originally set up by the NYSE, the American Stock

Exchange, and National Association of Securities

Dealers (NASD). Other regional stock exchanges,

such as those in Boston, Philadelphia, Chicago,

12


15/22

13

etc. each owned its respective clearing and settle-

ment vehicles. In 1975 there were seven vertical

silos. Although industry participants favoured

consolidation of clearing and settlement arrange-

ments, the exchanges opposed unless theirs was

the surviving institution.

National Market System a Public PolicyThe

paperwork crisis and other problems within the

securities industry in the late 1960s prompted

the passage of the Securities Acts Amendments

of 1975 to promote a unified national market in

trading, clearing and settlement. Congress directed

the Securities and Exchange Commission (SEC) to

facilitate the establishment of the unified national

system that would have five objectives: efficiency,

competition, price transparency, best execution

and order interaction.

Congress policy was not to mandate a fixed

market structure but to use the five objectives

to guide a comprehensive but flexible regulatory

approach. The SEC, however, was less concerned

about competition among infrastructure providers

than ensuring that there was an efficient, robust

national infrastructure. CCPs and CSDs were

required to apply for SEC registration as clearing

agencies, the first time that these entities were

regulated. Regulated free interfaces betweenregional infrastructures were to form the heart

of the national market system.

It is worth noting that the SEC was able to

promote a national system for clearing and settle-

ment while leaving open the possibility for any

organisation wishing to compete. Any trading

space wishing to clear and settle without going

directly to the national infrastructures is free to

do so as long as it meets the standards set by

the SEC. In addition, any organisation can apply

for approval and registration as a clearing agency

(although in the cash equities markets no new

entrant since the late 1970s has so far chosen to

do so, and the existing entities have been consoli-

dated and integrated).

Horizontal Consolidation During 1976-7, about

a year after the SEC released a report on the

cost savings that CCP consolidation would bring to

the market, the NSCC was formed through the

merger of the individual CCPs of the NYSE, the

American Stock Exchange and NASD.

Also in the same year, all CSDs affiliated with

the individual stock exchanges were interlinked to

form a national system. This was accomplished by

CSDs opening accounts with each other. Market

participants could then trade the stock of a

company on any exchange and hold their shares in

their home CSD, by an arrangement called one

account settlement. When new shares were

issued, the underwriter would put the issue into

the CSD of its choice. The shares would then be

transferred, via book entry at this CSD, to the

account of a primary market subscribers home

CSD. Subsequent secondary market trading wouldsettle similarly by book entry.

The regional stock exchanges vertically-inte-

grated CCPs and CSDs were gradually absorbed

into NSCC and DTC respectively, a twenty-year

process that began in 1976 and ended with the

last integration taking place in 1997.

Vertical Re-Integration of CCP and CSD NSCC

and DTC subsequently became subsidiaries of DTCC

in 1999. The equities market structure today

consists of competing stock exchanges and trading

platforms that are required to make market informa-

tion publicly available on terms that are fair and

reasonable, but a single CCP and a single CSD

under common ownership serving the national

equities market. As covered in Section 5, it should

be noted that equities have been only one of a wide

range of financial instruments and markets support-

ed by DTCC subsidiaries, in particular fixed income,

some from the beginning and others over time.

2. What are the main differencesbetween those circumstances andthe current ones in Europe?

The main differences in the circumstances that

led to the consolidation of clearing and market

infrastructures in the US versus the current ones

in Europe include the following:


16/22

Single Country Although there are both state

and federal laws, and tax rates that are not the

same in every state, the US is nonetheless one

country with one currency. Relatively speaking,

consolidation was more straightforward. Still, the

50 different state laws have from time to time

posed challenges, as with revisions to Article 8

discussed above.

Single Securities Regulator, Common Regulatory

FrameworkIn 1975, the US Congress made a firm

and clear public policy to create a unified national

market, with a single securities regulator directed

to facilitate its establishment. The Congress set

five policy objectives, and the SEC used a compre-

hensive and flexible regulatory approach to estab-

lish, monitor, and strengthen a regulatory environ-

ment that gave the forces of competition suffi-cient room to flourish. Although competition

forces were allowed to shape market structure, a

single regulator exercised its regulatory authority

to act when necessary to address problems or

practices that could stand in the way of achieving

the objectives that Congress had set for the

national market system. Where competition might

not be sufficient, the SEC was empowered to act

promptly and effectively to ensure that the rules

and essential mechanisms were put in place as

rapidly as possible. The SEC was also in a position to

prompt, encourage and facilitate the securities

industry to create solutions that furthered the

unified national market objectives. Because the

SECs mandate from Congress spanned all three

securities market functions of trading, clearing

and settlement, it could take action in a holistic

manner that fulfilled the national market objectives.

Central providers of clearing and settlement

services (CCPs and CSDs) had to register with the

SEC as registered clearing agencies and registered

transfer agents, and be subject to common regula-

tions. The common regulatory framework put in place

since 1975 facilitated the consolidation which

gradually happened over the next twenty years.

When the SEC granted permanent registration

status to the clearing agencies and transfer

agents, it was primarily concerned with a robust

infrastructure for the unified national market

system. The SEC paid considerable attention to the

agencies provisions for participants fair represen-

tation and due process. It looked at each agencys

governance proposal individually, and was more con-

cerned with the objective of good governance who

controlled each one, due process, etc. and not

whether it was able to compete with the others.

Main differences with Europe: In Europe, there is

no empowered legislature to espouse an EU-wide

system equivalent to the US national market

system. A common regulatory framework in the

European context is generally taken to mean the

home country principle to facilitate competition

across national borders. EU-wide minimum safety

standards and governance objectives might not

necessarily be considered to fall within the scopeof a common regulatory framework.

Dominant Market CentreThe fact that there

was one predominant market centre New York

is significant in three respects. First, the New

York markets clearing and settlement infrastruc-

tures had the economies of scale to invest in

technology, and provided a low marginal cost foun-

dation for national consolidation. Second, because

of the large number of issuers whose shares were

listed on the NYSE, legislative changes that

enabled the formation of the CSD for that market

had to be made by every state, paving the way for

national legal harmonisation. These changes included

the fiduciary laws of many states limiting the form

and means of holding securities in certain capaci-

ties, and Article 8 of the UCC which then effectively

limited ownership of depositories to security

exchanges and associations (which would limit the

full participation of banks). Third, the infrastructures

in New York, NSCC and DTC, acted as the leader

in the national standardisation of services and

market practice.

Main differences with Europe: There are three

main trading centres: Euronext, Deutsche

Brse, and the London Stock Exchange. The pro-

posed takeover of the London Stock Exchange, if

it materialises, might create a similarly dominant

market centre.

14


17/22

15

Homogeneous, Market Utility Business Model

The regional CCPs and CSDs in the US were owned

by stock exchanges and focused on their core

function of providing a central service for their

respective markets in clearing and settlement.

NSCC and DTC were created at a time when stock

exchanges and central service providers in clearing

and settlement were typically not-for-profit market

utilities owned by users. The ownership and gover-

nance of NSCC and DTC were from the outset

those typical of market utilities. The NYSE, which

owned the predecessor of the DTC, offered DTC

stock to users in proportion to their usage.

Although DTC has a trust company charter under

New York State banking law and Federal Reserve

membership, it used these initially to bolster its

status with custodian banks and increase their

confidence in depository custody, and later to opena central bank account in order to support so-

called same-day (immediately available) net funds

settlement, replacing net settlement by paper

checks. DTC did not combine infrastructure CSD

and commercial banking services.

Main differences with Europe:The homogeneous

business model made the consolidation of market

infrastructures in the US more straightforward

than the current situation in Europe, where

different ownership structures and business

models bring competition issues to the forefront

when consolidation happens. European trading,

clearing and settlement infrastructures are

mostly for-profit; some are user-owned, others

are shareholder owned and either privately held

or publicly traded. The controversy in Europe

over CCPs revolves around whether an exchange

that owns one has an unfair competitive advan-

tage derived from cross-subsidisation over

an exchange that must rely upon an unaffiliated

CCP, potential ly one owned or controlled by the

competing exchange. The controversy over CSDs

in Europe revolve around (a) whether a bank has

an unfair competitive advantage derived from

leveraging and bundling over competitors when

it owns or is affiliated with a CSD, (b) how much

separation or transparency is needed between

the competitive and infrastructure services, and (c)

whether there are sufficient safeguards against

abuse of dominant position.

Separate Infrastructures for Cash and Derivatives

Markets Derivative financial instruments were

quite new in the 1970s when the unified national

market system was conceived. The options market

built a single CCP owned by multiple exchanges

from the outset; the exchanges that started trading

options did not have existing options CCPs to

protect. The financial futures market developed

more slowly; not only was it in Chicago (not in New

York), but it was also outside the jurisdiction of

the SEC. The focus of consolidation at the time

was therefore on the cash equity market alone.

Government bonds and mortgage-backed securities

are not held in DTC but in another national CSD,

the Federal Reserve Bank.

Main differences with Europe: In Europe, the

cash and derivatives markets are usually in thesame financial centre in each country, making

common ownership from the outset or via mergers

more easy to accomplish. Also, government bonds

and equities are usually immobilised in the same

CSD. The unified clearing of all financial instruments,

which can bring significant benefits to market

participants not only in the form of lower and

optimised clearing fund contributions but also

improved regulatory reporting and surveillance,

is easier to achieve in national markets in Europe

than in the US.

Cross-border Services not Policy Priority Of

$36 trillion worth of securities on deposit at DTC,

about $3.4 trillion-worth are securities (mainly

global bonds and shares) from non-US issuers, and

another $1.2 trillion-worth is in the form of ADRs

which also represent securities of non-US issuers.

That said, DTCC has a primarily US-domestic

focus. DTCC users benefit from economies of scale

for all securities which are held and settled at

DTC, but often use an entirely separate middle-

and back-office infrastructure for transactions in

the rest of the world.

Main differences with Europe: In Europe, the

policy direction is to remove barriers for national

market infrastructures to provide cross-border

services within the EU, with the objective of using

competition among market infrastructures to drive

intra-EU cross-border access costs down for the


18/22

infrastructure users. Expansion of cross-border

services beyond the EU is not a priority, either.

3. What were the arguments usedin favour and against the creation

of such a system?

Arguments Used in Favour:

Regulatory ConcernsThe paperwork crisis of

the late 1960s generated a deep concern within

Congress and the SEC. Beginning in 1970 a series

of hearings were conducted by US Senate and

House of Representatives sub-committees and the

SEC. After several years of intense discussion and

debate over the vision of a national securities

market system and its regulation, the Securities

Acts Amendments of 1975 were passed to create

a unified national market system.

EfficiencyThe paperwork crisis brought the whole

securities industry together, out of self-interest,

to find a common solution to achieve efficiency.

Banks, brokers and stock markets worked together

in BASIC, the inter-industry organisation formed in

1970 that determined the DTCs characteristics

and an acceptable corporate structure and

management. BASICs efforts to establish the

CSDS proceeded despite the legal uncertainty in

the first few years of its work.

Arguments Used Against:

Revenue Protection Opposition to consolidation,

also out of self-interest, came from the infra-

structures. Despite clear and compelling evidence

of reduced costs, the infrastructure entities

which would be absorbed into a single national

system opposed the elimination of even one CCP.

In most cases the CCPs accounted for a significantcomponent of the revenue of their affiliated

exchange, and both the exchanges and the CCPs

opposed any integration unless theirs was the

single remaining institution.

When the NYSE, American Stock Exchange and

NASD finally agreed to merge their CCPs to form

NSCC in 1976-7, the affiliated exchanges received

a per-trade fee for several years to compensate

them for revenues lost after the merger. The other

regional markets concerns about competition issues

(e.g. predatory pricing) were addressed via free

interfaces between registered agencies.

By the mid-1980's, as multiple market structures

became less accepted as an inevitability, the

divestment of the CCPs and the CSDs from the

remaining vertical silos and their consolidation

into NSCC and DTC went under way.

Anti-trust Dangers During the early years of

the implementation of the unified national market

system, the SEC was unsuccessfully sued by a

service provider to NSCC, who challenged the

SECs temporary registration of NSCC and thelatters failure to solicit competitive bids for a

service contract. The court found that competition

at the clearing level was of secondary impor-

tance to an efficient, robust infrastructure. In

balancing the anti-trust dangers with the goal

of a single national system, the court considered

that the goal of the 1975 Securities Acts

Amendments was to create the environment for

effective competition among brokers, to the

benefit of their investor customers, and not

competition among clearing systems or their

service providers.

4. Have there been importantchanges in the structure of DTCC?

National Market SystemThe most dramatic

change in the early years was the establishment

of the unified national market system concept,

including national clearing and settlement, in the

Securities Acts Amendments of 1975. Clearing

agencies (including depositories) were then regu-lated for the first time. Since then, there had

been a steady evolution in the scope of activities

undertaken by NSCC and DTC. They were separate

companies until their integration in 1999 under

DTCC. The creation of the holding company DTCC

gives the group more flexibility in expanding into

non-regulated services as well as acquisitions.

16


19/22

17

Expansion in Instruments and Domestic

Transaction Services In answer to industry needs

for greater synergies, cost reductions and effi-

ciencies in the post-trade processing of all securi-

ties, DTC expanded continuously the number and

types of securities it handles. In addition to equities,

it processes corporate and municipal bonds,

American and Global Depositary Receipts, collater-

alised mortgage obligations and exchange-traded

funds, as well as commercial paper and other

money market instruments. More than 2.7 million

securities issues are now DTC-eligible.

In its very early years, DTC introduced

Institutional Delivery (ID), an electronic trade affir-

mation hub service that coordinates among invest-

ment managers, brokers and custodians which

support institutional investors trades from execu-

tion through settlement and custody. This was the

service that DTCC eventually spun-off into the

Omgeo joint venture with Thomson Financial ESG.

DTC has long provided centralised and com-

prehensive asset services. These include custody,

securities distribution service for new issues,

reorganisations (such as stock splits, spin-offs,

bankruptcies, conversions, exchanges, mergers

and tender offers), dividend and interest payments,

redemptions, and US tax withholding.

DTCC also more recently created non-regulated

subsidiaries to provide a variety of post-trade pro-

cessing services, such as DTCC Solutions LLC

which offers services such as corporate actions val-

idation and messaging, and DTCC Deriv/SERV LLC

which offers an OTC derivatives processing solution.

NSCC offers two non-CCP services which are

central and automated service extensions that

leverage its wide customer base of brokers with

similar needs. Its mutual fund services include:

standardised formats for, and centralised processing

of, mutual fund purchases, redemptions, exchange

orders and account registrations, automated and

centralised exchange of customer account informa-

tion between fund companies and their distributors.

Its insurance services include: automated annuity

and life insurance application processing, premium

payment and financial reporting, linking insurance

carriers with broker/dealers, banks and trust

companies through one automated, centralised,

nationwide system. Both these services leverage on

economies of scale of a wide customer base with

similar needs for automated processing.

NSCC indirectly provides a service to retail

investors through its customer account transfer

service, which moves any asset held in customer

accounts from one broker to another.

Expansion in Cross-Border Services A number

of services were developed in response to specific

user demand.

DTC has securities accounts at several foreign

CSDs, inter-market links that allow its users to

settle foreign securities. These include the

Canadian, German, and Swiss depositories. The

Canadian service was set up initially to facilitate the

settlement of Canadian shares that are traded OTC

in New York. The German and Swiss arrangements

were set up initially for several non-US issues listed

and traded in US dollars on the NYSE (e.g. the

German company Daimler Chrysler, Swiss company

UBS). Similarly, a dozen CSDs from around the world

have direct accounts at DTC.

A global clearing network service set up in

the 1980s is still in operation but usage is low.

This service provides DTC users who desire a

standardised communication format to use the

DTC standard when they access foreign markets.

DTC provides a messaging interface only; the users

enter into direct custody and clearing agreements

with agent banks in the foreign markets.

In 2002 DTCC absorbed the Emerging

Markets Clearing Corporation (EMCC) which was

a specialised central counterparty for emerging

markets debt. Due to low market demand the

EMCC has since been wound down.

The European Pre-Issuance Messaging (EPIM)

service was developed for the issuance of

European commercial paper in partnership with


20/22

Clearstream Banking Luxembourg and Euroclear

Bank. This service leverages technology used in the

US market to bring efficiencies to the European

securities market infrastructure.

Omgeo is a joint venture between DTCC and

Thomson Financial that provides matching and

trade reporting services for institutional

investors trades worldwide, including the successor

to the ID service originally introduced by DTC in

1974. Omgeo has specific relevance in that its

significant market share and potential in the

marketplace drew intense regulatory review. An

SEC order defined a set of principles to govern

interoperability between Omgeo and potential

competitors requiring fair and reasonable linkages

that are transparent to customers. To assure

competition and to permit customers to choose

a single matching service, the principles call for

use of industry standard formats and protocols,

prevent a matching service from using intellectual

property to eliminate competition, prohibit interface

surcharges, set out interface pricing principles,

and provide strict guidelines for linkage imple-

mentation. In addition, the SEC order requires

Omgeo to maintain high standards of safety and

soundness, and calls for neutral industry involvement

in the negotiations between Omgeo and potential

competitors. The SEC intends to impose theseconditions on all central matching services that

obtain an exemption from registration.

Continued Enlargement and Rationalisation In

2002, the DTCC holding company further integrated

three additional CCPs which service US government

securities, mortgage-backed securities, and

emerging market debt respectively: MBS Clearing

Corporation, originally founded in the late 1970s;

the Government Securities Clearing Corporation,

founded in 1986, and Emerging Markets ClearingCorporation, founded in the mid-1990s.

DTCC has also discontinued services when market

conditions caused a drop in demand for DTCC

services. As mentioned above, the Emerging

Markets Clearing Corporation has recently been

wound down, due to lack of market activity.

Settlement of mortgage-backed securities, which

were eligible securities both in DTC and the Federal

Reserve, has been shifted to the Federal Reserve.

5. What are the strongest andweakest points of such a system?

Strongest Points:

A consolidated service provider which has the

ultimate scale economies in serving the principal

securities market in the US, that is neither

motivated by profits nor share price. Constant

reduction in customer costs is achieved through an

at-cost operating mentality and a policy to return

excess revenues to users in the form of discounts

and rebates. Nevertheless, the focus is not only on

price efficiency but also on operational risk manage-

ment, robust business continuity arrangements,investor risk and compensating safeguards.

The average fee paid by dealing firms for

settling an equity transaction, US$ 2.0 cents

( 1.5 cents), is perhaps the lowest in the

world. For the last five years, more than USD

200 million, or 20% of revenues, has been

returned each year to the industry.

The Board of Directors is composed almost

entirely of customers. This leads to many benefits

that are often otherwise derived from competition.

User-pays transparency and an equitable pric-

ing policy, which aligns fees with the cost of services

provided, and which maintains a desired balance in

revenues and margins between NSCC serving mainly

brokers, and DTC serving mainly investors.

Owned by its customers.

Each DTC and NSCC participant is free to

choose its own cash settlement agent that provides

the best liquidity and credit services with the mostcompetitive price and conditions. Credit risk taking is

spread among a large number of banks.

DTC has an account at the Federal Reserve and

participants or their cash settlement agents settle

NSCC and DTC transactions with finality in central

bank money. Although each participant is still

exposed to its cash settlement agent with whom it

18


21/22

19

holds cash balances, there is a choice of settlement

agents and no concentration of credit exposure.

No significant profit-generating services in

fails coverage, securities or cash lending.

All the above, and in addition strong corporategovernance, operational risk management and

financial safeguards to protect the organisation

from member loss, contribute to a AAA/A-1+

credit ratings from Standard & Poors for long-

and short-term debt.

Cautionary Notes on the Replication of US Market

Features in Europe:

As the single market infrastructure, significant

costs are required to manage operational risk andto have in place robust, fail-proof redundant

continuity of business arrangements.

The tendency of the board might be to

emphasize the needs of the largest users or the

widest mutual needs of all users, though the DTCC

Board balances this by including smaller firm

participants as well. In the absence of financial

performance pressures typical of for-profit

organisations, unless special effort is made, new

and growing specialised needs may be overlooked,

resulting in under-investment for the future.

Operating on an at-cost basis predisposes

the company to rely mainly on organic growth.

Network effects, high fixed costs in IT

infrastructure and economies of scale reduce

the likelihood of new entrants in the domestic

infrastructure role.

Common ownership of the historically separate

CCP and CSD can yield cost efficiencies through

shared facilities only up to a point. Investments

by both the market infrastructure and its

participants are needed to maximise the benefits,

such as a common communication interface.

However, the investment expense may not be

equitable to all participants.

Absence of national law prohibiting physical cer-tificates results in perpetuation of costs and risks in

the continued existence of physical securities that

are not dematerialised or immobilised in the CSD.

The fragmentation of the infrastructures

serving cash and derivatives markets is not

optimal. This is a consequence of differences in

the timing of market development, the financial

centres where these markets flourished, and

separate regulators.


22/22

20

Abbreviations

BASIC Banking and Securities Industry Committee

CNS Continuous Net Settlement

CSDS Comprehensive Securities Depository System

DTC The Depository Trust Company

DTCC The Depository Trust & Clearing Corporation

EMCC Emerging Markets Clearing Corporation

EPIM European Pre-Issuance Messaging

FICC Fixed Income Clearing Corporation

GSCC Government Securities Clearing Corporation

ID Institutional Delivery

MBSCC MBS Clearing Corporation

NASD National Association of Securities Dealers

NSCC National Securities Clearing Corporation

NYSE New York Stock Exchange

RTTM Real-Time Trade Matching

SEC Securities and Exchange Commission

UCC Uniform Commercial Code

References

1. A Short History of The Depository Trust Company, DTC, 1998

2. Background on the Formation of The Depository Trust & Clearing Corporation, DTCC, 2000

3. Testimony Concerning Preserving and Strengthening the National Market System for Securities

in the United States, Arthur Levitt, May 2000

4. EuroCCP Blueprint for a Single Pan-European Central Counterparty, European Securities Forum,

Dec 2000

5. Annual Report, DTCC, 2002

6. Annual Report, DTCC, 2003

Documents

US Model for Clearing and Settlement