Safeguarding Physical Certificates: Why Firms Turn to DTC
If there’s any doubt that more financial firms are outsourcing the custody of their physical securities, look at how The Depository Trust Company’s (DTC) custody service has grown. Created to safeguard several thousand physical certificates for one institutional customer, the service now houses one-half-million certificates for more than 50 customers.
“This is all part of the industry’s drive to reduce costs and mitigate risk,” said Kirk Matthews, DTCC product manager, Securities Processing. “Firms like Pershing, Goldman Sachs and Charles Schwab understand the cost benefits of having DTC safeguard their physical securities.”
Contributing to the growth of the custody service, said Thomas Joyce, DTCC director, Securities Processing, “is the fact that we’re not just a vault. We provide processing services such as a clearance component and offer other capabilities including the Restricted Deposit Service [RDS], Custody Reorganization Services and New York Window Services. We’re giving our clients a range of back-office services they would otherwise have to handle on their own.”
Why DTC
“Twenty years ago, every bank and brokerage had its own vault and staff to maintain and process its physical securities,” said Joyce. “But as the number of physical certificates began to decrease because of dematerialization, and as some firms relocated outside of New York City, many financial institutions had no strategic reason to maintain their own vaults and processing services. They saw DTC as the logical provider of custody services.”
The events of 9/11 also had an impact on safeguarding physical securities, according to Joyce. “Firms saw the risk-reduction benefit of safeguarding their securities with DTC.”
Cost effective, too
Citigroup Smith Barney is the latest customer to transfer its physical securities to DTC. Michael Ward, Citigroup senior vice president, points to the cost-effective benefits of outsourcing the safeguarding of physical securities. But Citigroup had another reason for outsourcing. “We’re moving and if we wanted to keep our physical securities on site, we would have had to build a vault, which doesn’t make economic sense right now.”
“From a brokerage’s perspective, I don’t see why any firm would want to store physical securities on site,” said another customer who works at a major financial institution. “It’s much too expensive. You have the costs of maintaining a vault … and that means guards and alarms, to name the obvious expenses.”
This firm, one of the first customers to outsource physical securities to DTC, today relies on a number of services including RDS, Reorganization and the Branch Deposit Service. Outsourcing physical certificates has proved to be efficient. The firm reports that its RDS process, which once took 6 to 10 days, now is down to 3 days.
“Active and open communication is the key to making the custody relationship work,” said Joyce. @