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DTC Will Expand Existing Systems To Settle New Rule 144A Securities
The Depository Trust Company (DTC) will enhance existing processes to support book-entry settlement for unregistered Rule 144A equity securities in the fourth quarter of 2008, providing asset servicing and centralized settlement. DTC will expand its systems to deliver this service, which will be launched subject to approval by the Securities and Exchange Commission (SEC).
“DTC worked with a number of investment banks over the past year to come up with a way to settle 144A private market securities,” said Ben Bartolotta, executive director, Syndicate Operations, Morgan Stanley & Co. “While several options were under consideration, we are pleased to be working with DTC in providing one central settlement process for the 144A market.”
Who benefits
Under SEC rules, companies can sell 144A securities without registering them with the SEC, provided that certain shareholder criteria are met. The issues must be held by a Qualified Institutional Buyer (QIB), which generally is a large institutional investor with more than $100 million in assets, and the total number of investors for each security is limited to 499 QIBs.
Settling these transactions is complicated by the fact that the issues must be tracked and the shareholder limit must be certified before the securities can settle.
DTC will leverage its Inventory Management System (IMS) – which gives customers control over the order and timing of submission of securities for processing – to settle the 144A securities once a designated third party has certified that the shareholder limit has been met, said Daniel Thieke, DTCC product manger, Asset Services.
“When one of these securities comes to DTC for settlement, the IMS will, in effect, ask for verification of whether it is a valid transaction; if the third-party administrator provides an approval, DTC will proceed to settle the assets through DTC’s settlement system,” said Thieke. DTC will rely on issuer-designated administrators to handle the certification and tracking, allowing issuers to select the third-party vendor of their choice.
“This service will benefit issuers of 144As and the firms that invest in them by allowing the assets to be held and serviced at DTC while the designated administrator will guarantee that the limits on the number of shareholders are met,” said Thieke.
Rule 144A securities will trade on the Nasdaq Portal Alliance, a joint-venture platform formed by Nasdaq and a group of leading investment banks. @