by Edward C. Kelleher
DTCC has outlined a proposal to fully dematerialize the U.S. financial services industry, helping reduce the costs and risks associated with existing physical securities. The multi-year program is designed to accelerate the drive to eliminate all remaining physical certificates.
The proposal comes in a white paper – Strengthening the U.S. Financial Markets: A Proposal to Fully Dematerialize Physical Securities, Eliminating the Costs and Risks They Incur – issued by The Depository Trust Company (DTC), a DTCC subsidiary. The paper states that “complete dematerialization will contribute to a more cost-effective, efficient, secure and competitive U.S. marketplace.”
Susan Cosgrove, DTCC Managing Director and General Manager, Settlement and Asset Services, and Daniel Thieke, DTCC Managing Director, Asset Services.
“This paper is a call to action,” said Susan Cosgrove, DTCC Managing Director and General Manager, Settlement and Asset Services. “We're asking all sectors of the industry – stakeholders, banks, brokers, transfer agents, regulators and industry associations – to partner with us and to provide in-depth feedback on the proposals in this paper and help identify key, value-added services DTC can give market participants to accelerate the drive toward full dematerialization.”
Fixed costs remain
While the campaign to immobilize and dematerialize the U.S. financial markets has been very successful to date, the paper says, the industry still supports a fixed-cost base that can be eliminated only when complete dematerialization is achieved.
“Thanks to the success of ongoing dematerialization efforts, the economies of scale for physical processing have been reversed: the fixed costs incurred to support physical processing are being recovered through dwindling transactions,” according to the paper. “That means, as the number of physical issuances and transactions declines, the unit cost of processing them rises...Until the U.S. markets are fully dematerialized, the industry will be obliged to support this fixed-cost infrastructure for physical processing regardless of the volume of certificates processed.”
Issuers’ perspective
Many companies such as Apple, Intel and Microsoft have gone entirely paperless and no longer issue physical certificates. Others continue to push for dematerialization and explain to investors the disadvantages of holding physical certificates and the benefit of going paperless.
“We default to book-entry and only issue certificates when a shareholder requests one,” said Joan DiBlasi, Senior Manager of Shareholder Services at Aflac. The number of certificates issued by Aflac has dropped from 2,628 in 2006 to a mere 184 in 2012.
“If shareholders do request a certificate, it is generally because their brokers have not discussed the disadvantages of holding physical certificates. In many cases, investors who do insist on a certificate turn around and hand it back to their brokers,” said DiBlasi.
New practices
“The success of this plan will require strong support from both the industry and regulators,” the paper states. “It will hinge on the industry’s adoption of new business practices that will call for changes in technology platforms, the legal landscape and in DTC’s pricing policy, as well as regulatory approval.”
Depending on the industry’s response, DTC could begin implementing recommendations for its dematerialization campaign in 2013, with the goal of reducing and ultimately eliminating physical processing over the following three-to-five years.@
(The white paper – Strengthening the U.S. Financial Markets: A Proposal to Fully Dematerialize Physical Securities, Eliminating the Costs and Risks They Incur – is available at http://www.dtcc.com/downloads/leadership/whitepapers/white_paper_July_2012.pdf.)
