U.S.A.: Prospective changes : Dematerialisation of physical securities : Update
Further to our Announcement A12144, dated 30 July 2012, describing a number of initiatives taken to strengthen the functioning of the U.S. securities markets and to reduce risks in the area of settlement and custody, we hereby provide an update to one of these initiatives concerning the dematerialisation of physical securities.
Background
In a recent announcement, the Depository Trust & Clearing Corporation (DTCC) has proposed steps to advance full dematerialisation of physical securities. Hurricane Sandy, which struck last year, further evidenced the benefits of moving to full dematerialisation that would safeguard the certificates from potential physical damage by converting them to electronic holdings.
Working with industry stakeholders and regulators, the DTCC recommends the following steps in order to realise the full potential of the Direct Registration System (DRS) and reduce the costs and risks associated with physical certificates:
- Significantly reduce the movement of physical certificates by further leveraging DRS. The DTCC proposes that the industry mandate the DRS policy of issuing “statements only” as an alternative to physical certificates for new listed issues.
Note: The DRS enables note holders to register their assets on the books and records of the transfer agent in book-entry form, with note holders receiving a statement rather than a paper certificate. - Address the physical safekeeping and transaction volumes associated with “restricted equities”. The DTCC recommends expanding DRS eligibility to allow for the dematerialisation of “restricted equities”.
Note: Restricted securities are securities whose transfer is subject to certain transfer and ownership restrictions. - Significantly reduce safekeeping volumes and transactions associated with aged non-transferable securities. The DTCC proposes to reduce the required holding time of securities that become non-transferable from six to four years and will support an industry initiative to better define non-transferable securities so that they can be removed from a client’s account in less than four years.
- Eliminate the need to issue physical certificates at the time of issuance. In 2008, all listed U.S. equities were mandated to be “DRS-eligible”. At that time, however, the rule allowed issuers to continue to offer both certificates and statements, to issue statements only, or to “be DRS-eligible, but not participating”, which meant that the issuer continued to offer certificates only. The DTCC is now proposing that all new listed issues be eligible in statement form only and existing issues be converted to statement only.
The aim is to implement these elements of the dematerialisation initiative in 2014, subject to regulatory approvals.
Our comments
We are very supportive of this initiative and the ambitious target set in terms of its implementation schedule.
We continue to monitor developments under this initiative very closely and will provide further details as to possible impacts on our customers as they become available.
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