The Story of The Depository Trust & Clearing Corporation

CELEBRATING

YEARS

THE STORY OF The Depository Trust & Clearing Corporation

JEFFREY L. RODENGEN

FOREWORD BY FRANK LA SALLA PRESIDENT, CEO AND DIRECTOR THE DEPOSITORY TRUST & CLEARING CORPORATION

THE STORY OF The Depository Trust & Clearing Corporation

JEFFREY L. RODENGEN

Edited by Christian Ramirez Design and Layout by Sandy Cruz and Jessica Quijada

Also by Jeffrey L. Rodengen

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Names: Rodengen, Jeffrey L., author. | Ramirez, Christian, 1980– editor. | Cruz, Sandy, designer. | Quijada, Jessica, designer. | La Salla, Frank, writer of foreword. Title: The story of the Depository Trust & Clearing Corporation / Jeffrey L. Rodengen ; edited by Christian Ramirez ; design and layout by Sandy Cruz and Jessica Quijada ; foreword by Frank La Salla, President, CEO and Director, the Depository Trust & Clearing Corporation. Other titles: Story of the Depository Trust and Clearing Corporation Description: Fort Lauderdale, FL : Write Stuff Enterprises, LLC, [2023] | Includes bibliographical references and index.

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Identifiers: ISBN: 978-1-947991-22-4 (hardcover) | 978-1-947991-23-1 (ebook) | LCCN: 2023930724

Subjects: LCSH: Depository Trust & Clearing Corporation—History. | Securities industry—United States—History. | Financial services industry—United States—History. Classification: LCC: HF5686.B65 R64 2023 | DDC: 332.6320973— dc23

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Table of Contents

FOREWORD byFrankLaSalla........................ vii

ACKNOWLEDGMENTS

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii

CHAPTER ONE Crisis Creates Opportunity . . . . . . . . . . . . . . . . . 10 CHAPTER TWO Regulation, Regionalization and Reorganization . . 20 CHAPTER THREE Technological Revolution . . . . . . . . . . . . . . . . . . . 34 CHAPTER FOUR Mitigating Risk, Seizing Opportunity . . . . . . . . . . 46 CHAPTER FIVE Going Global . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 CHAPTER SIX A Day Unlike Any Other . . . . . . . . . . . . . . . . . . . 68 CHAPTER SEVEN TwinStorms............................ 80 CHAPTER EIGHT AHigherProfile......................... 96 CHAPTER NINE RiskManagement....................... 110 CHAPTER TEN A Bright Future . . . . . . . . . . . . . . . . . . . . . . . . 122

BIBLIOGRAPHY

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

INDEX

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

VII

Foreword Frank La Salla PRESIDENT, CEO AND DIRECTOR

T he year 2023 marks an important milestone in The Depository Trust & Clearing Corporation’s (DTCC’s) history— it’s our company’s 50th anniversary. Moments like this are an opportunity to celebrate the past, reflect on the path our company has traveled and gain perspective on how those experiences have shaped our firm’s evolution. But anniversaries are also about the future—about setting bigger goals, building upon past achievements and elevating the organization to new levels of success. DTCC’s storied history began in response to the paperwork crisis of the late 1960s and early 1970s—and we’ve been innovating, shaping and advancing the financial services industry ever since. When an organization’s founding is rooted in solving a crisis, it indelibly shapes the firm. Our company is purpose driven: We protect and safeguard the stability and integrity of the global financial markets. That makes us unique among our industry colleagues. It also means we have a critical responsibility to our constituents and the investing public. While DTCC has grown considerably in scale and scope over the past half-century, our commitment and dedication to fulfilling our mission has remained constant. Our firm’s success belongs to those who came before us and is a testament to our past and present DTCC colleagues, clients and stakeholders, whose support has made it all possible. This book, and the story it tells, is a tribute to all of you. As we look to the next 50 years, we’re committed to building upon our rich heritage as we write the next chapter in our amazing company’s history and lead the advancement of the global financial markets as the most influential, strategic and tech-focused partner.

PHOTO BY NEIL VAN NIEKERK.

VIII

Acknowledgments

M any dedicated individuals assisted in the research, preparation and publication of The Story of the Depository Trust & Clearing Corporation. Research Assistant Sandy Smith conducted the principal archival research for the book. Vice President, Writer and Producer Christian Ramirez managed the editorial content, while Senior Vice President/Creative Services Manager Sandy Cruz and Graphic Designer Jessica Quijada brought the story to life. The author would like to extend his gratitude to DTCC President, CEO and Director Frank La Salla for allowing us to tell the story of this organization that has been dedicated to maintaining the security and integrity of the global financial system since 1973. Special thanks are also extended to Marie Chinnici-Everitt, Craig Donner and Michael Bellini, who helped shepherd this book to completion and whose considerable time and collaborative efforts provided invaluable guidance to the storytelling process. The author would also like to recognize past and present DTCC employees, board members, community partners, retirees and friends who were generous

with their time and insights. We are particularly beholden to those whose thoughts and words added important historical context to the story, including: Anthony Alizzi, Mike Ames, Peter Axilrod, Keisha Bell, Cathie Bellini, Lynn Bishop, Michael Bodson, Kevin Brennan, Mary Ann Callahan, Christopher Childs, John Colangelo, Marisol Collazo, Jill Considine, Susan Cosgrove, Nellie Dagdag, Dennis Dirks, Donald Donahue, Andrew Douglas, Robert Druskin, John Faith, James Femia, Jacob Feuchtwanger, Rob Gambardella, Robert Garrison, Andrew Gray, Bill Hodash, Tim Keady, Anthony Leone, Jennifer Peve, Tony Portannese, Murray Pozmanter, Matthew Stauffer, Larry Thompson and Joseph Trentacoste. Finally, special thanks are extended to the contributors and colleagues at Write Stuff Enterprises, LLC, who worked diligently and tirelessly to produce this book: Scott Luxor, senior editor; Patricia Dolbow and Barbara Martin, transcriptionists; Maude Campbell, Laurie Russo and Sharon Tripp, proofreaders; Ligia Leonardi, photo retoucher; Lisa Ryan, indexer; Kevin Rodengen, audio embed engineering; Amy Major, executive assistant to Jeffrey L. Rodengen; Marianne Roberts, president, publisher and chief financial officer; and Tiffany Massenburg, marketing assistant.

1966–1970 One

C H A P T E R

These four years comprised one of the most difficult periods in the history of the securities industry. It was characterized by a crushing burden of paperwork, followed by a severe cost-income squeeze that brought financial disaster to many brokerage firms.

Lee D. Arning SENIOR VICE PRESIDENT NEW YORK STOCK EXCHANGE IN TESTIMONY TO CONGRESS, AUGUST 2, 1971

Crisis Creates Opportunity

I n the mid-1960s, Wall Street was booming, part of a prolonged expansion as institutional investors moved into the markets. The upswing caught Wall Street off guard and brought on the realization that the current way of doing things—physically delivering security certificates to customers—was outdated and insufficient to meet the volume. The New York Stock Exchange (NYSE), in a report to Congress in 1971, admitted that antiquated or otherwise unsatisfactory securities handling methods prevailed at virtually every type of financial organization involved in the various phases of the securities issuance and transfer process. Quick fixes proved fruitless, mainly “hasty efforts to apply sophisticated computer technology to operations problems which had not been adequately analyzed in advance,” the NYSE reported to Congress.

The trading floor of the New York Stock Exchange (NYSE) in the 1960s, when physically delivering security certificates to customers was the only way settlement of trades occurred—until the Central Certificate Service, the NYSE’s own internal computerized bookkeeping technology, was developed. (Photo courtesy of Library of Congress Prints and Photographs Division Washington, D.C. 20540 USA. Collection: U.S. News & World Report magazine photograph collection. Reproduction Number: LC-DIG-ppmsca-56735.)

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

The trading volume was so intense that brokers could not physically deliver securities to their customers—they were unable to get them from transfer agents quickly enough. Compounding the problem, the securities industry had been weakened from the late 1920s through the early 1950s, having endured the Great Depression and World War II, creating a management gap. “In some instances, older, experienced management personnel simply had not groomed successors and found themselves overwhelmed by the volume surge. At other firms, younger management did not at first appreciate the risks inherent in the avalanche of paperwork or in neglecting to maintain financial standards above the minimum requirements set by the Exchange,” the NYSE report stated. Of course, some firms had invested in technology prior to the crisis, improving back-office functions and automating what they could. But even the most advanced firms were bogged down by the issues elsewhere. William Denzter, later head of The Depository Trust Company (DTC), put it this way in a history of the firm: “The paperwork crisis caused the post-trade processing of hundreds of millions of dollars to be delayed or to fail entirely, dividends to investors to be misdirected, and brokerage firms to go bust.” It was clear that the very foundation of the security industry was at risk.

Too Much of a Good Thing

The bull market in the early 1960s started off at a trot, and the flow of business was manageable for the first half of the decade. By 1967, however, the volume increased sharply, up 14 percent above the previous record for a three-month period. In all, some 615 million shares were traded in the first quarter of 1967.

1967 AUGUST The New York Stock Exchange (NYSE) Board of Governors

1968 JANUARY

1968 FEBRUARY The settlement period

1968 MARCH

Trading in all securities markets is limited to four hours a day. NYSE member companies are told to keep offices staffed until at least 7 p.m. on weekdays to catch up on paperwork.

The typical 5.5-hour trading day resumes. By June, volumes for the quarter will exceed 845 million shares and the NYSE, the American Stock Exchange (AMEX) and National Association of Securities Dealers vote to close markets one day per week.

is extended from four days after a transaction to five. Some firms begin operating six and seven days a week, while others maintain a 24-hour workday.

curtails trading by 90 minutes on nine consecutive business days to ease the paperwork problem.

CHAPTER ONE | CRISIS CREATES OPPORTUNITY

Stockbrokers working on the floor of the NYSE in 1963. (Photo courtesy of Library of Congress Prints and Photographs Division Washington, D.C. 20540 USA. Collection: U.S. News & World Report magazine photograph collection. Reproduction Number: LC-DIG-ppmsca-03199.)

It would only amp up from there, with each successive quarter of 1967 breaking the record set by the previous one. In all, some 2.53 billion shares—a 33 percent increase over 1966—were traded. The problem was becoming a full-blown crisis, and the NYSE Board of Governors began to act. In August, it curtailed trading by 90 minutes on nine consecutive days to allow firms to catch up on paperwork. By the end of that year, it had authorized nine “combined settlement dates” in the last five months of the year to allow firms to concentrate on their individual paperwork problems. Most significantly, however, the NYSE opted to discontinue development of its central computer accounting programs and to redirect the manpower and funds into the development of the Central Certificate Service (CCS).

1968 JUNE The Central Certificate

1968 DECEMBER

1969 FEBRUARY The NYSE and AMEX retain the Rand Corporation to develop a plan to improve operations of the securities industry. Rand identifies expansion of CCS, advanced design of an automated clearing and central certificate system, and floor automation that would integrate with CCS as keys to future success.

1969 JUNE

Despite having 12 percent fewer trading hours than in 1967, 1968 ends with a new record of 2.93 billion shares, an increase of 400 million shares over the previous record. On 25 days during the year, the reported volume exceeds the 16.4 million

CCS expands its operations. By the end of the year, CCS has 464 million shares on deposit.

Service (CCS) is activated on a limited basis by the NYSE. Initially, ownership in shares of four NYSE-listed issues were transferred by computer bookkeeping entry, with other issues phased in throughout the year. By the end of its first six months of activation, CCS handles 535 listed issues, about 43 percent of the total.

share daily record set during the 1929 stock market crash.

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

In the late 1960s, the NYSE experienced a surge in trading volume, which resulted in the paperwork crisis on Wall Street. The large number of stock trades caused a buildup of paperwork, leading to a backlog of stock certificates. Brokerage firms were unable to keep up with the demand, prompting action to be taken. As a result, trading was restricted to four days a week and the Securities and Exchange Commission concentrated on improving settlement methods in order to mitigate the crisis.

CHAPTER ONE | CRISIS CREATES OPPORTUNITY

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

It would not prove to be a quick fix, and by 1968, the problems only increased. In January, heavy trading volume strained the entire system. With a daily volume that averaged 12 million shares, the number of “fails to deliver” securities skyrocketed. With securities firms stretched to the limits, there simply was no time to check on delinquent items. The heavy trading volume created a cascade of other challenges as well. Failure to deliver meant that “keeping track of where the dividends belong and that sort of thing becomes a monumental accounting problem,” said William Jaenike, who worked at the American Stock Exchange (AMEX) at the time. He would later become chairman and CEO of CCS’ successor, DTC. “Tremendous write-offs took place and a lot of big brokers went out of business.” The year would be a challenging one—and one of ongoing increases in volume. The NYSE adopted a series of reporting requirements designed to identify special problems. Along with AMEX and the National Association of Securities Dealers, the NYSE voted to begin closing the markets one day per week. Every Wednesday, markets shuttered so that the paperwork could catch up. The other four days, trading only occurred from 10 a.m. to 2 p.m. “All it did was push the volume into the remaining trading days and hours,” Jaenike told the Securities and Exchange Commission Historical Society in 2011.

After a day of trading on the NYSE (below), mountains of paper are swept up from the trading floor (opposite). With every trade managed by paper in the 1960s, it took five full business days to settle a trade despite shorter trading hours. Still there were many fails to deliver, with the Stock Exchange shortening hours to allow the paperwork to catch up. (Photo below courtesy of Library of Congress Prints and Photographs Division Washington, D.C. 20540 USA. Collection: U.S. News & World Report magazine photograph collection. Reproduction Number: LC-DIG-ppmsca-56734.)

That volume was significant. By the end of 1968, the market had topped a record 2.93 billion shares, despite having 12 percent fewer trading hours than the previous year. It was an increase of 400 million shares over the 1967 volume. Most significantly, for 25 days during the year, markets reported volume of more than 16.4 million shares, topping a volume record that had stood since the great sell-off of October 29, 1929, known as Black Tuesday.

One Possible Solution

CCS, a computerized bookkeeping solution, stepped in as one possible fix to the crisis. CCS took its first deposits in 1966 and first book-entry deliveries on June 21, 1968. Initially, the service transferred ownership in just four issues, with additional issues added on an alphabetical basis

CHAPTER ONE | CRISIS CREATES OPPORTUNITY

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

WHAT IS TRADE SETTLEMENT? Trade settlement is the final process of a securities trade, completing the exchange of securities ownership and payment. In its earliest days, this was handled largely manually, with checks exchanged for stock certificates. Later, Central Certificate Service (CCS) member brokers would deliver stocks they had deposited to the accounts of other CCS member brokers, with payment occurring late in the day, a method known as book-entry delivery versus

payment. In the first days of CCS, member brokers could only process a limited number of securities in this way. These days, securities are delivered by book entry between The Depository Trust Company participant accounts throughout the day. That is more than 1.3 million times, on average, versus cash debits and credits in their net settlement statements, with net cash settlement at approximately 4:15 p.m. Eastern time.

throughout the year. By the end of 1968, about 43 percent of the NYSE’s issues were handled through CCS. CCS got off to an “inglorious start,” as Jaenike recalled. “It crashed the first time they tried to bring it up.” A second, slower start proved successful, but its restrictions were quickly apparent. CCS was limited only to brokers on the NYSE. “The real problem was that delivering securities was not as much between brokers as it was between a broker and the institutional customer,” Jaenike said. “The institutional customer had something called the COD privilege, meaning that the institutional customer wouldn’t pay until the certificates were delivered. Retail customers paid on settlement day and certificates were delivered whenever,” Jaenike said. The large window between payment and settlement left brokers exposed to a great deal of risk. With that quirk in how institutional certificates were delivered, another shortcoming became quickly apparent. CCS lacked “one key ingredient: the institutional customers’ custodian banks,” Jaenike said. It also was still a heavily manual process. John Colangelo, who was hired at CCS in 1971 and stayed when CCS became DTC, helped balance the stock records: Keeping in mind that this is a period where there wasn’t too much automation and a lot of it was manual, very frequently when securities moved, security transactions were booked, mistakes were made and you had to correct those mistakes and balance those, the “daily” as it was called, the stock records.

While CCS was a good early first step, a better solution was needed.

Government Intervention

By 1969, Wall Street was getting a handle on the paperwork crisis. On the first day of trading of the new year, the markets resumed a five-day-a-week,

CHAPTER ONE | CRISIS CREATES OPPORTUNITY

four-hour-a-day trading cycle. Fully activated, CCS served all 1,200 eligible NYSE-listed securities in February. Average hourly trading volumes remained high, but the actions put in place by the industry—and the development of CCS—provided confidence that the paperwork problem would be solved. The industry was able to shift its focus from the immediate crisis to a long-term solution. Robert W. Haack, the NYSE’s president, called for a nationwide securities depository in an annual message to NYSE members: While many questions still must be resolved, we have set our sights firmly on the establishment of a truly nationwide depository system that will make the benefits of CCS available to everyone involved in the transfer and delivery of securities. The industry was starting to circle around the same idea, creating the Banking and Securities Industry Committee (BASIC) to tackle the problem. Commercial and investment bankers were wary partners, having been kept apart by the 1933 Glass-Steagall Act. BASIC was formed in 1970 and, for two years, it worked to put the basic

process in place. It recommended that stock certificates be held in a comprehensive national securities depository system based in New York. CCS would be the obvious starting place. In 1970, it delivered more than 1.6 billion shares by computerized bookkeeping entry, with 553 million total shares on deposit. Eight clearinghouse banks, which handled the exchange of most payment transactions and served as major securities custodians, began participating in CCS as deliverers and receivers of stock via bookkeeping entry. And in November, CCS began accepting a limited number of AMEX-listed stocks on a trial basis. BASIC had another goal as well: that CCS would be spun out of the NYSE and become its own independent, self-sustaining company with a bank charter. It would not take long for that to begin to take shape, ultimately paving the way for the creation of DTC a few years later. ■

Robert Haack, who served as NYSE president from 1967 to 1972, is pictured here on the Exchange’s trading floor in 1969. By then, Wall Street was getting a handle on the paperwork crisis. On the first day of trading of 1969, the markets had resumed a five-day-a-week, four-hour- a-day trading cycle. (Photo courtesy of Library of Congress Prints and Photographs Division Washington, D.C. 20540 USA. Collection: U.S. News & World Report magazine photograph collection. Reproduction Number: LC-DIG-ppmsca-56737.)

Two 1970–1979

C H A P T E R

In the early days of DTC, it was very much a ground game. It was going firm by firm, going investment manager by investment manager, custodian by custodian and making the case, persuading people, selling people.

Donald Donahue DTCC PRESIDENT AND CEO 2006–2012

Regulation, Regionalization and Reorganization

I n the early 1970s, the Banking and Securities Industry Committee (BASIC) worked on 14 projects, all designed to improve the transfer of securities. Key among these steps would be the establishment of the Comprehensive Securities Depository System, which would be an expansion of Central Certificate Service’s (CCS’) work. In September 1971, BASIC announced a memorandum of understanding signed by the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the National Association of Securities Dealers (NASD) and the 11 member banks of the New York Clearing House Association. Soon, regional banks and markets joined in, and the National Coordinating Group was created, but challenges lay ahead. This process was occurring while Congress was still in its laborious—and eventually five-year—debate for a solution. What was happening in New York could have been upended if Congress went in a different direction.

Soon after its founding in 1973, The Depository Trust Company (DTC) moved into new offices at 55 Water Street in downtown New York City. The move marked a separation from the New York Stock Exchange.

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

Despite the uncertainty, the expanded role for CCS quickly proved its worth. CCS outlined several key facets, including a corporate structure and a commitment to technology investments. Even with those foundations in place, it would still take several years and steps for CCS to fully move into its role as a national depository. To do so meant changing laws on a state-by-state basis while convincing banks and securities dealers to commit to the new process.

Learning the BASICs

BASIC’s leadership was comprised of three large bank CEOs and representa- tives of the three main exchanges. It had its own staff as well. Herman Bevis, who had just retired as CEO of Price Waterhouse, was tapped as executive director. Bill Jaenike, who worked for AMEX, was assigned to handle the technology. Jaenike was up front with Bevis about his knowledge—or lack thereof— about the certificate process. “I said, ‘Mr. Bevis, to tell you the truth, I don’t know the difference between a stock and a bond,’” he recounted in a 2011 interview with the US Securities and Exchange Commission (SEC) Historical Society. “He said, ‘You’re just the guy I want.’ We were off to the races at that point.” Before taking the role, Jaenike had been told that working with Bevis was “like getting a master’s in the securities business.” As the two worked together, Jaenike quickly realized that was incorrect. “It was like getting your Ph.D., not just in the securities industry, but also in how to live your life.”

1971 SEPTEMBER

1972 JUNE William Dentzer is named chairman and CEO of Central Certificate Service (CCS). Dentzer had recently resigned as the New York State Superintendent of Banks.

1972 OCTOBER CCS launches as a subsidiary of NYSE. By the end of the year, CCS would have more than 1 billion shares on deposit, totaling a value of more than $50 billion.

1973 MAY CCS becomes The Depository Trust Company (DTC). In October, DTC would move its offices

The Banking and Securities Industry Committee (BASIC) announces a memorandum of understanding signed by the New York and American Stock Exchanges (NYSE and AMEX), the National Association of Securities Dealers (NASD) and the 11 member banks of the New York Clearing House Association.

to 55 Water Street in New York City.

CHAPTER TWO | REGULATION, REGIONALIZATION AND REORGANIZATION

With Bevis at the helm and young technology experts like Jaenike on board, BASIC began to explore several options for streamlining the handling of stock certificates. CCS would play a large role in developing a solution for BASIC. They would buy out the CCS-type solutions from the stock exchanges, then make them cooperatives owned and controlled by the users, including banks. “The banks said, ‘We’re not going to put our securities into this thing unless we have a voice on the board of directors and the management,’” Jaenike said. Another obstacle that needed to be discussed was what to do with stock certificates in the first place. Some on the committee wanted to move away from stock certificates altogether. At BASIC, “it was a debate that lasted about 15 seconds,” Jaenike said. “It was driven by strong feelings out of Congress that there were too many Americans who wanted to have their physical stock certificate. If we try to legislate it out of business, you’re going to have a lot of angry voters.” A contingent of brokers urged BASIC to move to a punch card stock certificate. “Everybody from the brokerage side saluted this and said, ‘Isn’t it wonderful?’” Jaenike said. “Even some of those people on the BASIC task force, including me, said, ‘Maybe we should go down this path as well, in case something goes wrong, and CCS gets derailed. We’ll have this as a backup.’” As the task force technologist, Jaenike ordered a few thousand punch card stock certificates that had been stored in an ordinary office environment with no special humidity control, the way anyone would assume punch cards could be stored. Jaenike took them to the back office of Shields & Company, one of the leading proponents of the punch cards.

197 4 DTC announces new policies to limit profits and return revenues for excess funds. It would keep half a million in its reserves and return about 10 percent of its total expenses—$2.4 million— to users this first year.

1975 JUNE President Gerald Ford

1975 OCTOBER

1978 DTC begins accepting over-the-counter issues. The move is designed to accommodate a merger of clearing corporations of NYSE, AMEX and NASD that form National Securities Clearing Corporation, centralizing the clearance and settlement of broker- to-broker trades.

The US Securities and Exchange Commission approves NYSE’s proposal to sell DTC. By 1976, broker-dealers would be allowed to purchase shares in DTC directly.

signs the Securities Acts Amendments of 1975. The act establishes a national securities market system and a national clearance and settlement system, among other provisions.

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

They used a Honeywell high-speed reader that had the capability of reading 3,000 cards per minute. As the cards were inserted into the reader, they were supposed to go down a belt and be read by a photocell reader. Instead, all 3,000 cards went flying across the room. Other tests with other readers showed similar problems. “The crushing of the fibers in this card made it something different,” Jaenike said. “We gave it to IBM. IBM put it through their labs and concluded that it was not a punch card. This was a famous story that not many people remember— on purpose.”

Leading the Way

In 1972, William Dentzer was tapped as chairman and CEO as the new entity that would become CCS began its step toward independence. Dentzer had just announced plans to retire from his role as New York State Superintendent of Banks, which regulated the banking industry in the state. Dentzer believed he was nominated for the role as chairman and CEO “because of my background, including a two-year public record as state bank regulator, and because I was not likely to be opposed by the constituencies involved. Many banks thought well of my regulatory tenure, though some felt otherwise. These mixed feelings may have helped assuage securities industry officials who might have opposed appointing a banker as CEO,” Dentzer wrote in a history of The Depository Trust Company (DTC). Diran Kaloostian was named president and chief operating officer, bringing his expertise in depository operations along with him, something Dentzer admitted he knew nothing about.

BILL DENTZER: FOUNDING CEO

When he was named the first CEO of the Central Certificate Service (CCS) in 1972, Bill Dentzer brought a tremendous amount of state, federal and international experience. As student body president at Muskingum College in New Concord, Ohio, he began to work with the National Student Association and later became president after his graduation. Dentzer’s job was to travel to colleges and universities to “help make them more relevant.” He visited more than 30 states, all for the salary of $2,000 per year. Dentzer soon joined the Army and was assigned to the CIA and later worked for the Foreign Aid Task Force overseeing US foreign aid programs. Shaken by the problems

in the United States in the late 1960s, he turned his attention toward home, becoming director of the New York Council of Economic Advisors. In 1970, Dentzer was named New York State Superintendent of Banks, a position he held for two years. One of his signature achievements was the Bank Redistricting Bill of 1971, which allowed banks to expand beyond protected markets. “That was a recipe for a lack of competition, and breaking down those barriers to competition was important to me,” he would later say. In 1972, Dentzer announced plans to retire from the state role and was asked to lead CCS, later The Depository Trust Company, a position he would hold for 22 years.

CHAPTER TWO | REGULATION, REGIONALIZATION AND REORGANIZATION

Dentzer may have known little about clearinghouse operations, but he did know regulations. He began to separate CCS from NYSE, first incorporating CCS, Inc., in October 1972 as a subsidiary of NYSE. By the end of that year, CCS, Inc. had more than 1 billion shares on deposit, with a value of more than $50 billion.

New Name, Broader Mission

In May 1973, DTC was formed. It grew out of Central Certificate Service (CCS).

Incorporating CCS, Inc., was just the first step in true independence. In May 1973, CCS became DTC, which was designed to be owned by the financial institutions that used its services and would operate as a not-for-profit. DTC became a member of the Federal Reserve System. Dennis Dirks, who started with CCS in 1972 and eventually became president and chief operating officer of DTCC, described some of the challenges involved with establishing DTC: DTC was basically such a novel concept that we had many issues that we had to overcome to try to become successful. One was to make more securities issues eligible to DTC services, but more importantly, we needed to get the banks involved. Brokers would actually settle transactions by book entry within CCS, later DTC. But at the end of that process, frequently, it was a bank and a bank’s customer who were the ultimate buyer of the shares. The broker would have to withdraw physical certificates from DTC and send them over to the bank, which basically made the entire process much less efficient. So, part of the planning was to try to come up with ideas as to how we could engage the banks and have them agree to use DTC. The banks were not the only holdouts in those early days. Brokers, transfer agents and banks all had their own communication standards. Getting them all on the same page took some work, Jaenike remembered, because some brokers said they would not convert to the standard format. That quickly became a role for DTC, which would be to standardize the instructions from the broker and format them for the transfer agents. That was enough to get the transfer agents on board as DTC saved them the cost and effort in programming. “The operations people at the time, too many of them, were not farsighted. They couldn’t see that, five years out, this thing was going to save us a lot of money,” Jaenike said. “They had a short-term view of the future, so convincing them took a lot. Gradually, it was such a good idea that enough people signed on to it and it became a great success.”

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

CHAPTER TWO | REGULATION, REGIONALIZATION AND REORGANIZATION

DTC is responsible for providing custody and asset servicing for

securities such as equities, bonds and money market instruments. It is also a central securities depository and central counterparty, settling trades and managing risk for its participants.

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

DTC announced its transition away from CCS through a newspaper advertisement. The ad highlighted CCS’ successes of removing 75 percent of the manual operations of the delivery of stock and money settlement.

CHAPTER TWO | REGULATION, REGIONALIZATION AND REORGANIZATION

Regional Wins

There were more challenges to overcome before DTC could become that “great success.” BASIC and Dentzer had to work state by state to revise laws that would allow full participation by banks in DTC. Article 8 of the Uniform Commercial Code had limited depositories to those owned by stock exchanges and associations. By the end of 1973, some 31 states had adopted the changes, clearing the way for DTC to expand its services. Getting the remaining states on board would take more work, as Dentzer explained: The education process took a while. Some states’ insurance laws required that their state-chartered insurance companies have custody of the securities owned in the state, but we know we can get them if we need them. We made sure to explain that. If the securities are in DTC, you have the legal authority to access them. DTC had competition in the form of regional depositories as well, formed in major financial centers like Chicago, Philadelphia, Boston and San Francisco. “The idea was these depositories would relate to us and we to them,” Dentzer said. “They’re catering to broker-dealers and banks in their area.” Some banks, however, saw the power in DTC and chose to join. Boston’s State Street Bank was one of the first outside of New York to become a member of DTC. “Why shouldn’t they? There was no barrier to them,” Dentzer said. “I was delighted. I did not want to restrict DTC to just New York banks.” The relationship with regional depositories was competitive and cooperative. Depositories also had to make sure their individual technology

DTC’s Expediting Group (from left to right): Sylvia Cherry, Monica Loke, Candice Dalby, Bob Ferreira, Jim Rogers, Robert Melillo, Maureen Sullivan, Angie Williams, Maria Ruiz and Eileen Carriero.

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

interfaces were compatible. “We had to interface with the other depositories because they would make deliveries from their participants to ours and vice versa,” Dentzer said. “The interface was important. On the other hand, we were always concerned about their financial stability.” The concern was what would occur if DTC made a delivery for one of its participants to one of the regional depository participants who did not want to pay for it. Would the regional depository be able to come up with the funds to cover the amount? This was a risk that weighed heavily on the firm. Despite the risks and challenges the firm faced, DTC continued to grow, and in 1973, it took further steps to separate itself from NYSE by moving its offices to 55 Water Street in downtown Manhattan.

Technology and Innovation at the Forefront

From its inception, DTC relied on technology to drive innovation. While the firm drew its initial 800-person staff primarily from CCS, newcomers brought fresh ideas. Thomas Lee was hired to develop a new information technology system, moving DTC away from NYSE’s systems. The Institutional Delivery System (ID) began to operate, processing electronic confirmations for institutional trades, and eventually the stock exchanges required all members to confirm all institutional trades. DTC was charged with training the industry in the new procedures. ID quickly drew a competitor in expanding to processes between broker-dealers and investment managers. Safety and security of technology were always at the forefront. Even in those earliest days, a backup system was in place. “We had the most sophisticated

DTC’s commitment to investing in state-of-the-art technology and security began at the earliest stages of the company as it faced scrutiny from government regulators.

CHAPTER TWO | REGULATION, REGIONALIZATION AND REORGANIZATION

DTC invested in early computer technology to ensure that every transaction was recorded digitally and that backups were available.

backup system you could imagine,” Jaenike said. “As time went on and the stakes became greater, and the oversight from the SEC and the Fed became greater, we introduced additional backup. We installed a backup site as far away as computer-to-computer technology would permit. We wanted to make sure that if there was ever a tsunami in the New York area, it would not reach this backup site.”

Standing on Its Own

In 1974, DTC opted to change its fee structure to one based on service costs, launching a series of annual studies, estimating direct and allocated cost for each service. Each participant, large or small, would pay a fee for each service. Users only paid for the services they used. At year’s end, any excess fees were refunded on a pro rata basis. DTC chose not to pay dividends to its participants. “BASIC had viewed user purchase of depository stocks as a means to participate in DTC’s governance and not as an investment vehicle, but had suggested paying a limited dividend,” Dentzer wrote in his history of DTC. “Even that, however, would require DTC to retain income to pay dividends and pay taxes on that income. It would benefit users, though not the NYSE, to give users refunds of all excess revenues.” DTC repaid NYSE for all start-up costs that had occurred prior to 1972 and, in 1974, announced its new policies to limit profits and return revenues for excess funds. It kept $500,000 in its reserves and returned about 10 percent of its total expenses—$2.4 million—to users that first year.

THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION

DTC had the regulatory pieces in place and had formed the core of its fiscal operations. Now, it was time for the organization to stand on its own. In early 1975, NYSE proposed selling DTC as a separate entity. One final legislative act pushed that sale forward. In 1975, Congress was ready to act on sweeping legislative changes that would impact DTC. The Securities Acts Amendments of 1975, signed into law by President Gerald Ford on June 4, established a national securities market system and a national clearance and settlement system. In October, with the runway cleared by that legislation, the SEC approved NYSE’s proposal to sell DTC. In the beginning, NYSE would maintain 61 percent ownership, with the other 39 percent divided among other exchanges. AMEX and NASD each owned 8 percent, with the remainder offered to entities based on how much they had used DTC’s services in 1974. By 1976, broker-dealers were allowed to purchase shares in DTC directly. At the decade’s end, some 55 entities owned shares in DTC, up from the 24 who initially bought in. With the passage of the Securities Acts, BASIC’s work was complete. Jaenike had returned to AMEX but had continued to serve as the committee’s recording secretary. At one of the final BASIC meetings, Dentzer recruited him to DTC as vice president, Participant Services.

An Immediate Impact

Quickly, DTC had enough participants “that people realized this is viable; this works,” said Donald Donahue, who would later become president and CEO. “After the elimination of fixed commissions, you see the acceleration in volumes that that triggered, and those much higher volumes were being accommodated in a way that, 10 years before, had been impossible and had created incredible

S. E. Canaday Jr. and William Stabenow, both of Nuveen asset management, review the benefits of same-day funds settlement eligibility for variable rate demand obligations with then-DTC Vice President Don Donahue.

CHAPTER TWO | REGULATION, REGIONALIZATION AND REORGANIZATION

disruption. Now it was all happening reasonably smoothly. That let people say, ‘Let’s make a very dramatic shift by using regulatory authority to accelerate this change.’ You saw the balance tilt toward electronic clearance and settlement.” With an increasing number of securities on deposit with DTC as the decade drew to a close, the firm continued pushing to solve other industry problems. Meanwhile, to consolidate clearance and settlement activities for listed and over-the-counter securities transactions, National Securities Clearing Corporation (NSCC) was established and incorporated on March 19, 1976, marking it as the nation’s leading provider of centralized clearance and settlement services to over 1,900 brokers, dealers, and mutual funds. After extensive proceedings on NSCC’s application for registration as a clearing agency, the SEC granted NSCC’s

registration on January 13, 1977. NSCC assumed control and responsibility for the operations of the Stock Clearing Corporation, American Stock Exchange Clearing Corporation and National Clearing Corporation on January 20, 1977. From the earliest days, NSCC’s services complemented those of DTC as both firms worked closely together to deliver securities to and from NSCC to DTC’s broker-dealer accounts. In 1977, DTC developed an automated voluntary offerings service, which allowed participants to accept tender offers and other corporate actions for their customers without having to withdraw the certificates and present them to agents. The next year, book entry became available for initial public offerings and other services. In 1978, over-the-counter issues were added to DTC’s portfolio. This was designed to accommodate a merger of clearing corporations of NYSE, AMEX and NASD that formed NSCC, centralizing the clearance and settlement of broker-to-broker trades. Jack Nelson, NSCC’s first president and director, was a leading proponent in automating the clearance of securities and clearing fixed-income securities within the firm’s Continuous Net Settlement System. His vision would help set the stage for the integration of NSCC and DTC into DTCC two decades later. Together, NSCC and DTC had laid an important foundation for their success, which both firms would enjoy for a short period of time before greater challenges would arise. ■

Jeffrey H. Smith of Salomon Brothers and James P. Mahoney of Morgan Stanley, pictured, with DTC’s Senior Underwriting Clerk Natalie Fiore and Anna Lane, a depository vault clerk. The executives were there to see how DTC handled point-of- issue immobilization.

Three 1980–1989 C H A P T E R

Why would you steal a registered security if you could steal a bearer bond, where the bearer is presumed to be the owner? Crooks very frequently used bearer bonds as a medium of exchange, which is why Congress eventually changed the law to require municipal bonds to be registered. The decision by DTC to make bearer bonds eligible was driven by our participants, who badly wanted us to do that.

William Dentzer DTC CHAIRMAN AND CEO 1972–1994

Technological Revolution

T he first half of the 1980s dawned brightly. The Depository Trust Company (DTC) was expanding on multiple fronts, including holding municipal bearer bonds—and building a 40,000-square- foot vault in Garden City, New York, to do so. Despite sharp volatility in the bond markets—due primarily to a drop in interest rates—DTC filled the Garden City vault quite ably. By the end of the decade, it held 20.6 million bearer certificates and another 6.9 million registered certificates with a total value of $750 billion. However, paper products were falling out of favor. By 1982, bonds were available as book entry only, with many states and local issuers opting for this method. Technology was becoming more readily adopted throughout the broader securities industry, with DTC playing an important role. Same-day settlement of funds was on the horizon.

With the addition of municipal bearer bonds, The Depository Trust Company (DTC) expanded its vault to include 40,000 square feet of space in Garden City on Long Island. By the end of the 1980s, DTC held 20.6 million bearer certificates and another 6.9 million registered certificates.

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