The Pledge Service, offered by DTC, facilitates the pledging of collateral and the return of collateral pledged between the pledgor and the pledgee to which the collateral is being pledged.
The Pledge Service facilitates the pledging of collateral and the return of collateral pledged between the pledgor (a DTC participant) and the pledgee (which may be a DTC participant or just a pledgee under an agreement with DTC; typically, a bank or clearinghouse) to which the collateral is being pledged. The Pledge Service permits DTC participants and their customers to use the securities they hold at DTC to finance their day-to-day activity in an efficient and effective manner. Pledges permit participants to retain all Asset Services benefits, e.g., still receive dividends or interest, while providing lenders or other pledgees assurance that the pledgee has control over the disposition of the pledged securities.
Who Can Use the Service
All DTC participants eligible to settle can use the Pledge Service; please consult DTC membership guidelines for details. A Pledgee that is not otherwise a DTC Participant must be determined to be eligible for this status and execute an appropriate Pledgee Agreement with DTC.
How the Service Works
Pledges differ from other position movements processed at DTC in that the pledgor participant retains an interest in the securities pledged, including the rights to receive P&I and to vote (if those securities generate P&I payments and/or include voting rights). However, the pledgor cannot make any further delivery of the securities. The pledgee has control of the securities including the right to transfer the securities to its participant account (if it is a DTC participant) or to the account of another participant. Pledgors cannot gain access to pledged securities without consent from the pledgee.
Generally, pledgors pledge collateral to three types of pledgee:
- The Federal Reserve: All DTC participants that are also members of the Federal Reserve are eligible to use the service. Collateral pledged to any of the Federal Reserve Banks can be used to secure discount window advances. Pledges to Federal Reserve Banks are free of payment only.
- Commercial Banks: All full service DTC participants are eligible to pledge securities via book-entry, to a pledgee. This type of pledge typically is used to secure loans – both bilateral and triparty. Pledges to commercial banks may be processed free or versus payment.
- A Clearing House: Pledgors may pledge collateral as a means to meet the clearing house requirements. For this type of pledge, DTC supports two process flows. At this time, DTC only supports free of payment movements between the pledgor and the clearing house.
- Two party pledges: All DTC participants that are also members of the clearing house are eligible to use the service. Collateral pledged to the clearing house can be used by the pledgor to meet both initial margin requirements imposed by the clearing house as well as variation margin requirements triggered by market fluctuations.
- Three party pledges: This type of pledge is available to support Options Clearing Corporation (OCC) requirements for its members and their customers, when the underlying customer of the OCC member (CM) holds its collateral at a custodian. Since the custodian is not an OCC member, it is not responsible for meeting the OCC’s requirements. However, because it holds the position for the customer, the custodian may, on behalf of the customer, pledge collateral to the OCC and identify the interested CM. CMs must approve the release of all pledge prior to the collateral being released to the custodian (on behalf of the customer).
- Affords a low cost efficient method for the pledge of collateral in a variety of transactions.
- Maintains Asset Servicing benefits for the pledgor until the pledgee exercises control over the pledged securities.
- Links with Clearing Corporations (e.g., OCC) and Federal Reserve Banks.
For More Information
To request additional information, please click here.