The transfer, processing and record-keeping of securities for companies is mostly in electronic, or book-entry, format these days. The Depositary Trust Company (DTC) is a central securities depositary. It provides electronic record-keeping of securities balances. In addition to providing book-entry record-keeping services, the DTC also serves as a clearinghouse for the settlement of securities transactions.
According to data from the Depositary Trust & Clearing Corporation, the DTC processes approximately $600 billion of settlement-related transactions per day. Moreover, it provides centralized record-keeping for securities valued at $37.2 trillion.
Most large banks and broker-dealers in the United States are DTC participants. If an investor holds its securities in street name, the name of the brokerage firm is listed in the ownership records of the DTC. The company’s transfer agent will keep track of the actual owners of the securities. DTC’s nominee name, Cede & Co., is listed as the registered owner on the transfer agent’s books and records. Having securities held in street name can reduce trading costs and increase trading efficiency.
On the other hand, if an investor holds its securities in his/her own name, the investor would need to go through the direct registration system (DRS). The owner would receive a DRS statement evidencing his/her ownership. The individual investor’s own name would be listed as the registered owner on the transfer agent’s books and records. While an investor can sell its shares directly from its DRS account, this would have to be coordinated with the transfer agent. In connection with a sale, it is often easier to transfer the shares from the books and record of the transfer agent to an investor’s brokerage account through DTC.
There are two primary ways of transferring securities between a broker-dealer and the DTC. These two methods are known as Deposit/Withdrawal at Custodian (DWAC) and Direct Registration System (DRS). Both of these systems enable shares to be transferred and held in electronic, book-entry form.
The DWAC system facilitates the electronic deposit or withdrawal of securities to and from the DTC. DWAC uses the Fast Automated Securities Transfer Program (FAST) to immediately transfer securities between a broker-dealer and a company’s transfer agent. All DTC participants can use the FAST service.
The DRS system enables securities to be electronically held on books and records of the company’s transfer agent. Through the DRS Profile system, an investor’s broker can request that the investor’s securities be electronically transferred from their DRS account maintained by the transfer agent to the broker’s DTC account.
Both the DWAC and DRS systems allow shareholders to deposit their shares into a brokerage account of their choice. A key difference between DWAC and DRS is that the DWAC system requires a medallion signature guaranteed stock power, while the DTC DRS system is entirely paperless. A medallion signature is a special signature guarantee for the transfer of securities that ensures the signature is genuine. A medallion stamp is applied on the stock power by a bank or other financial institution.
