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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,
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