DTCC Connection

Mar 01, 2010 • DTCC Connection

Saying Goodbye to Worthless Certificates

by Michael Scholl


The Depository Trust Company’s (DTC) effort to destroy worthless, non-transferable paper certificates held in its vaults will reach a milestone in April when the number of certificates scheduled for shredding tops the one million mark.


DTC has been destroying non-transferable certificates since August 2004 as part of an initiative to reduce the certificates held in its vaults. When the shredding program began, DTC’s vault inventory totaled 4,213,278. At the end of January 2010, this number was down to 1,686,517, thanks in part to the one million-plus certificates DTC has destroyed since 2004. The ongoing reduction is part of DTC’s overall dematerialization plan aimed at eliminating all paper certificates in the securities industry.


Non-transferable certificates are those for which the service of a transfer agent is no longer available. Although they make up about one-third of the current inventory in DTC’s vaults, the vast majority of them are worthless because they were issued by companies that are out of business.


A voluntary program

DTC destroys certificates only after obtaining permission from the participant that holds a position in that security. “Destruction is voluntary on the part of the participant,” said Joseph Clemente, DTCC product manager, Asset Services.


DTC has regularly moved to destroy certificates that have been non-transferable for at least six years. Clemente added that six years was deemed an appropriate waiting period by the industry to make sure the issuer of a non-transferable security does not become active again.


Once six years have passed and the positions have been moved to DTC via its “position removal” or PREM function, the security is automatically placed on a list of issues that are eligible for destruction. This list is then distributed via an Important Notice to DTC participants, who have three months to review and determine if there is any reason for not destroying the listed certificates.


Benefits of destruction

Destroying certificates benefits customers by allowing them to avoid the $11 per security, per month surcharge DTC assesses firms having a position in a security that’s been non-transferable for more than six years. It also allows firms to remove the position from their books and records as well as eliminate the security from the statements they send to their customers.


While $11 may not seem like a lot, those surcharges can accumulate quickly. Clemente said one major brokerage firm was assessed more than $1 million in surcharges in 2008 because it failed to authorize destruction of its non-transferables. “Cost-saving is a great incentive to get rid of these worthless certificates,” said Clemente.


After the three-month review period passes, all of the certificates with a PREM designation are removed from the vaults’ shelves, placed in boxes and scheduled for destruction.


The shredder awaits

The certificates are eventually shredded by a huge machine inside a tractor-trailer by an outside firm hired by DTC. The company brings its truck to DTCC headquarters to conduct the shredding, which is overseen by DTCC Operations and Security staff. The truck visits DTCC about three times a year, depending on when a sufficient inventory of shredder-ready certificates builds up.


DTC destroyed approximately 22,000 certificates during the most recent shredding last December, according to Thomas Joyce, DTCC director, Securities Processing. The resulting shredded paper was then recycled.


Here’s an illustration of how the shredding process works. In January, DTC released a list of a new batch of 107 issues that have been non-transferable for six years. By the end of January, a total of 11,123 certificates belonging to those issues had been authorized for destruction. These certificates will be removed from the vaults’ shelves in April and will be shredded some time after that. Before they are destroyed, electronic records of destroyed certificates are created and stored in case the securities they represent become active again.


With this new batch of 11,123 certificates, the total number of certificates that have either been shredded or removed for shredding will reach 1,006,352. @


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