Founded in 1999, DTCC is a holding company made up of five clearing houses and a depositary, making it the world’s largest financial services company engaged in post-trade transactions.
Breaking Down Depository Trust & Clearing Corporation (DTCC)
Owned by its main users, DTCC has the function of integrating the National Securities Clearing Corporation (NSCC) and the DTC, by rationalizing clearing and deposit operations in order to reduce costs and increase the efficiency of capital. Clearing companies manage the confirmation, settlement and delivery of transactions. They fulfill the main mission of ensuring that transactions are carried out quickly and efficiently. They do this by taking compensatory positions with customers in each transaction.
Clearing brokers are essential links between clearing companies and investors. Clearing brokers are members of the exchange, helping to ensure that transactions are settled correctly and that transactions are successful. Clearing brokers are also responsible for maintaining the paperwork associated with clearing and executing a transaction.
Sometimes clearing companies can earn clearing fees when they act as a third party to a transaction. In this case, the clearing house receives money from the buyer and securities or futures from the seller. The clearing house then manages the exchange, charging a fee for doing so. It is a variable cost, depending on the size of the transaction, the level of service required and the type of instrument traded. Investors who make several transactions in one day can generate significant fees. Specifically, in the case of futures contracts, clearing costs may accrue to investors, since long positions spread the costs per contract over a longer period.
Depository Trust & Clearing Corporation: DTCC and National Securities Clearing Corporation (NSCC)
The National Securities Clearing Corporation is a subsidiary of DTCC and was established in 1976. The United States Securities and Exchange Commission (SEC) regulates the NSCC. Before the creation of the NSCC, the stock exchanges had to close once a week, due to the huge demand for paper certificates. To overcome this problem, multilateral compensation has been proposed. In multilateral clearing, several parties ensure that transactions are added together, rather than settled individually. All clearing activities are centralized to avoid a multitude of billing and payment regulations. This can happen between one or more organizations. This eventually leads to the formation of the NSCC.
The NSCC now serves as a seller for each buyer and a buyer for each seller for transactions settled in the US markets.