T+2 Settlement Cycle & Dematerialization

United States | June 30, 2015

In our efforts to keep you informed of events in the industry, we are sharing an update regarding the financial industry moving forward with a shortened settlement cycle (T+2) and dematerialization. The effort was initially driven by the Depository Trust & Clearing Corporation (DTCC) and other U. S. financial services industry leaders.

As an initial step in the migration to T+2, the U.S. financial services industry formed an Industry Steering Committee (ISC), Industry Working Group (IWG), and Sub-Working Groups (SWGs). The ISC and IWG included representatives from asset managers, broker-dealers, transfer agents, exchanges, the DTCC and issuers. A shortened settlement timeframe will involve process, technology, behavioral (business and client), and regulatory changes.

Important Dates

On June 29, 2015 the U.S. Securities & Exchange Commission issued a news release expressing its agreement with and support for the initiative and committed to working with the industry group to implement T+2 as "soon as possible".

In recent years, the Fast Automated Securities Transfer (F.A.S.T) operated by the DTCC and the Direct Registration System (D.R.S), operated jointly by transfer agents and the DTCC were approved by regulators and implemented to further the objectives for dematerialization and immobilization of physical certificates.

Also during this time, DRS eligibility has become a prerequisite for DTCC membership and for listing on the major stock exchanges. Although the initiative for a shortened settlement cycle can and will move forward for a 3rd quarter 2017 implementation, it cannot be all inclusive unless there is a parallel movement toward further dematerialization and immobilization.

What are the Three Alternatives to Physical Certificates?

Currently, there are three (3) alternatives to holding physical securities:

  1. Hold in street name (held in a F.A.S.T. custody book-entry at the DTCC)
  2. Book-entry only (municipals, governments, options)
  3. Direct Registration System (DRS)

The Direct Registration System (DRS) is the SEC approved transfer agent operated book-entry registration system. Investors who choose to participate in a direct registration system can have their securities registered in book-entry form directly on the books of the issuer and receive a statement of ownership in lieu of a securities certificate.

Dematerialization has many varied benefits for Issuers and Investors, which include:

  • It will be an anticipatory response to the expected State level regulatory changes that will be driven by T+2 and the related need for further dematerialization and immobilization;
  • The costs and risks associated with replacing lost or stolen certificates will be reduced or eliminated;
  • The cost of delivery for high value certificates will be eliminated;
  • The need to maintain a physical inventory of certificates will be eliminated, along with the associated cost and risk;
  • It will reduce the costs incurred as a result of issuing paper certificates;
  • The electronic transfer of stock to a new holder without presentation of a physical certificate will be possible;
  • The electronic movement of shares between the investor's broker-dealer and AST will be made available;
  • It reduces or eliminates the "market risk* created by delays associated with the handling of physical certificates;
  • It enables the rapid distribution of sale proceeds;
  • It facilitates electronic processing of new issuances of stock associated with corporate actions (such as stock splits, reverse stock splits, mergers, etc.);
  • It reduces and eventually eliminates the administrative costs attributable to shareholder inquiries and requests related to physical certificates;
  • It will lead to the elimination of the opportunity for previously cancelled certificates to be fraudulently presented as valid instruments;
  • It will lead to a reduction in the costs associated with the processing of certificates subject to a stop transfer and the reporting to the Securities Information Center (S.I.C.); and
  • It will enable potential savings in the time and expense associated with the research and processing of unexchanged certificates from corporate actions.

We will continue to keep you updated regarding this initiative and other product updates. If you have any questions or we can be of further assistance, please contact your Relationship Manager.