DTC: Overview, definition, and example
What is DTC?
DTC (The depository trust company) is a central securities depository in the United States that facilitates the electronic settlement and transfer of securities. It allows financial institutions, brokers, and investors to hold and trade securities in a centralized and efficient manner without needing physical certificates.
For example, when an investor buys shares of a publicly traded company, those shares are typically held in electronic form through DTC, allowing for easy transfer and settlement between brokers.
Why is DTC important?
DTC is important because it streamlines securities trading, reduces settlement risks, and ensures efficient ownership transfers. It eliminates the need for paper stock certificates, making trading faster, safer, and more cost-effective for market participants.
For businesses and investors, being DTC-eligible means that a company’s securities can be traded electronically on stock exchanges, improving liquidity and accessibility for shareholders. DTC services are commonly used in publicly traded securities, bond issuances, and corporate actions such as dividends and mergers.
Understanding DTC through an example
A technology startup completes an IPO and lists its shares on a major stock exchange. To facilitate electronic trading and settlement, the company ensures that its shares are DTC-eligible, allowing investors to buy and sell shares through their brokerage accounts without requiring physical stock certificates.
In another case, a corporate bond issuer registers its debt securities with DTC, enabling institutional investors to hold and trade the bonds electronically. This simplifies settlement and reduces administrative costs for both the issuer and investors.
Example of a DTC clause
Here’s how a DTC clause might appear in a contract:
“The Issuer agrees to take all necessary actions to ensure that the Securities issued under this Agreement are eligible for deposit and transfer through The Depository Trust Company (‘DTC’). The Issuer shall cooperate with DTC and its participants to facilitate the electronic settlement and transfer of such Securities.”
Conclusion
DTC plays a crucial role in modern securities trading and settlement, allowing financial institutions and investors to hold and transfer securities electronically. By ensuring DTC eligibility, companies and issuers increase liquidity, streamline transactions, and reduce administrative burdens in financial markets. A well-drafted DTC clause ensures compliance with market infrastructure requirements and facilitates seamless securities trading.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.