Depository Trust Company (DTC): Definition, How It Works, History, and Services 

Depository Trust Company or DTC is a securities depository in New York, USA. The depository trust company is one of the largest securities depositories in the world. It was established in the year 1973, as a helping hand to New York Stock Exchange. Before DTC’s establishment, The New York Stock Exchange was facing a lot of trouble in handling its voluminous trades each day. With the help of the Depository Trust Company, it has taken a load of services and responsibilities from the NYSE.

That is not to say that NYSE is the only stock exchange that seeks DTC’s services. A majority of stock exchanges in the USA render their services from DTC. The best part about DTC is that it is automated and therefore their service charges can be very cheap. Therefore, their clientele is huge and is considered trustworthy as well, as they are looked over by the Securities Exchange Commission.

The Depository Trust Company acts as a custodian for financial bonds and instruments of various companies and corporations. Another service of the Depository Trust Company includes acting as a clearing house for trades that happen each day in various stock exchanges. Furthermore, it also keeps records of trades and balances of corporations and exchanges.

It should be noted that individuals do not interact with the DTC, it is only the dealers, institutional investors, banks, brokers, and other entities which are related to the financial market. Apart from the mentioned functions the Depository Trust Company also provides services like underwriting, safekeeping, dividend allocation, etc. 

What is a Depository Trust Company (DTC)? 

Depository Trust Company is a New York-based securities depository that acts as a clearing house and custodian for issues, bonds, and other financial institutes of various companies and corporations as well as banks and investors. DTC is one of the largest in the world and it provides different types of services which enable the smooth processing of trades that happen every day in stock exchanges. With the help of DTC, all the transactions are now recorded and kept in an electronic format. 

A depository is a place where companies safe keeps their securities and issues and transfer them as and when needed accordingly. Central Securities Depositories are places where transfers are recorded using a financial ledger. Since the Depository Trust Company is an automated entity that uses Fedwire fund services which is a system operated by the United States Federal Reserve Banks. 

What does DTC stand for? 

DTC stands for Depository Trust Company. DTC comes under Depository Trust and Clearing Corporation which is a private entity regulated by the Securities Exchange Commission. DTCC is also a member of the United States Federal Reserve Bank. Since Depository Trust Company is a subsidiary of Depository Trust and Clearing Corporation, DTC is also regulated by DTCC. 

How does a Depository Trust Company (DTC) work? 

A Depository Trust Company works as a custodian of bonds and securities for various business ventures, corporations, and venture capitalists. A DTC only interacts with companies and not individuals. Individuals can use the services provided by the stock exchanges themselves. But there are certain things that a stock exchange has delegated the DTC to do.

For example, suppose a company announces its dividends, and the depository distributes the dividend among the company’s shareholders. 

The Depository Trust Company also provides cheap automated services which can be considered more accurate than what was being done manually by the stock exchanges. 

What is the History of the Depository Trust Company (DTC)? 

The Depository Trust Company was founded in the year 1973. The Depository Trust Company was formerly an independent entity that was established by the New York Stock Exchange (NYSE). The NYSE was facing increased trade traffic in those years and created the Central Certificate Service or CCS. The CCS was the name for the current DTC in the earlier period before it was brought under the umbrella of Depository Trust and Clearing Corporation.

The Depository Trust and Clearing Corporation are not owned by the government, instead, it is owned by several banks and companies. They are considered to be shareholders of DTCC. Therefore, it is safe to say that the depository trust company is an entity that was created by the companies for the companies themselves. 

How does the Depository Trust Company (DTC) relate to the Depository Trust and Clearing Corporation (DTCC)

The Depository Trust Company is a subsidiary of the parent company called the Depository Trust and Clearing Corporation. The DTCC was created in the merger of the Depository Trust Company and the National Securities Clearing Corporation or the NSCC. The Depository Trust Company was formed in the year 1973 and the National Securities Clearing Corporation was formed in the year 1976.

Both of these entities had many services and responsibilities. When in the year 1999, both DTC and NSCC were merged creating DTCC. Furthermore, now DTCC is considered as the parent entity which has numerous subsidiaries like the DTC and the NSCC. 

What is the function of the Depository Trust Company (DTC)? 

The Depository Trust Company provides services for many companies and corporations as well as for banks and brokers. As a depository, the DTC acts like a custodian for money market securities, bonds, and other financial instruments. At the end of each trading day, the DTC creates an account of the day’s trades and creates an electronic ledger.

The Depository Trust Company also provides other services for the participants like bookkeeping, underwriting, proxy, and dividend distribution. The DTC also helps the smooth working of the stock exchanges by letting the companies know about any issues arising in the market. 

What are the services offered by Depository Trust Company (DTC)? 

The Depository Trust Company offers services that allow risk-free settlement of trades after a day’s financial activities.

The DTC provides post-trade services which are as follows: 

1. Global Tax Services: The Depository Trust Company has got clients globally. This means that global tax services can be used by both domestic as well as international clients. This service includes tax relief to clients that have securities deposited in DTC. Similarly, they also have services to withhold United States tax on non-US financial institutions, but only if they are members of the DTC. 

2. Settlement Services: Settlement services are those services that are done at the end of a trading day. Under this service, there are numerous systems and pro services which cater to the needs of different types of investors. For example, there is the DTC’s IMS or Inventory Management System, which helps financial institutions to manage their finances and deliverables. 

3. Corporate Actions Processing: This is one of the selling points of DTC for investors because this service gives the firms the needed information and lets the companies know if there is any new activity going on in the market. This service also lets the investors know about the issuer’s dividends and other announcements. 

4. Underwriting Services: The underwriting service helps the companies to get eligibility in the DTC. They are the first step after the approval. The underwriting service gives the securities the legitimacy for them to be traded electronically and efficiently. This step also gives the investors trust and can also be considered a protected way to go. 

5. Securities Processing: There are different types of participating firms and there are different types of securities as well. The services which come under securities processing help the depositors to safe keep their securities and do further processes accordingly as well. There are many services that are cost-effective and can be chosen according to the need of the investor.  

6. Issuer Services: This service allows the issuer to contact and communicate with the security holders in an organized manner. Because it is all controlled from one centre and can be done on a large scale. They may be automated and time bound which lets the investors get timely and accurate information. 

These services are that of Depository Trust Company. And yet this is just the tip of the iceberg. There are many sub-clauses and services underneath these broad topics and it is an exhaustive list that caters to almost all the major financial issues that an investor come across in the stock market. The DTC provides solutions to such issues and also offers its services to all the participants globally.  

What various methods do investors use to determine the outcomes of purchases and sales of assets, as well as dividend payments? 

There are certain methods the investors use to ascertain the outcomes of the buying and selling of securities and the risk associated with them as well as how the dividend is distributed. The following are the methods used:  

1. Physical Certificate – Holding a physical certificate as proof of the securities that the investor owns is the riskiest as well as the most expensive option. Choosing this method would mean that the investor would be registered with the nominee of the depository. In the case of Depository Trust Company, the nominee is Cede & Co. Having a physical certificate can be expensive in many ways if it gets lost, to get a duplicate is going to be troublesome as well as costly. 

2. Direct Registration – In the case of direct registration, the investors will be having their names on the records of the depository. Direct Registration is a much more expensive method since the issuer of the security will have the responsibility to transfer the dividends and the proxy and all the necessary documents and information required by the investor. Furthermore, investors are supposed to go through the direct registration system which would give them proof of ownership of securities instead of a security certificate. 

3. Street Name – The street name method is the least expensive as well as the limited risk method of all others. In this method, the investor is a member of the brokerage firm and in turn, the brokerage is a member of the depository. In this way, the investor’s name isn’t directly given in the records of the depository but it is the name of the firm that is given. Therefore, the investor is indirectly associated with the depository. 

Each of these methods would give different outcomes. And investors use different methods depending on what kind of investors they are. 

What methods do DTCC and DTC use to check for money laundering? 

DTCC and DTC have formulated and established global standards to prevent money laundering and other illegal financial activities. The DTCC has written policies regarding money laundering and they are rigorously upheld.

They also have Know Your Customer (KYC) programs in place which are safe and protect customer data and privacy. The DTC also does regular training and independent testing to be ready for any unforeseen event. 

What does DTC Eligibility mean? 

The Depository Trust Company is a custodian for securities and issues of its participants. Therefore, DTC eligibility means the right to deposit issues and securities with the DTC. This eligibility is difficult to attain as investors cannot directly be interacting with the DTC if they don’t have a street name associated with them. Moreover, DTC eligibility would mean that the firm or the company would get the privilege to trade freely and use the services provided by the Depository Trust Company.

The DTC already has got some members who are shareholders of the company. The investors can deposit their shares through these members. DTC only allows the participants to deposit their issues. 

If the Depository Trust Company rejects the eligibility of an issue, then that security might face some troubles while trading electronically. Usually, all the major stock exchanges and banks are participants of DTC and their approval is needed. Having DTC eligibility would mean that the investors get to enjoy all the services provided by it. Which includes on-time dividends and timely information among other factors. 

What is DTC Number? 

A DTC number is a number that facilitates the process of transactions between the investor and exchanges or brokers. A DTC number is usually like an identification number for firms that interact with investors, traders, or in general, individuals who are participants in the stock market.

These firms are also known as clearing firms which are in turn regulated by clearing houses like the National Securities Clearing Corporations which come under the Depository Trust and Clearing Corporation. Therefore, DTC numbers are that with which clearing firms are recognized. 

What happens when the Depository Trust Company imposes a Chill on an Investors’ securities?  

The Depository Trust Company imposes a ‘Chill’ when it requires a pause in one or more services provided by the DTC to the securities. This pause may be established if the security faces destabilization or if the issuer of the security is not following the security laws.

These pauses or restrictions may be temporary or may last longer depending upon the severity. Chills can be rectified as soon as they are announced by the DTC. They are publicly stated in the forum for all the participants to see. 

What happens when the Depository Trust Company imposes a Freeze on a company’s securities? 

The Depository Trust Company imposes a ‘Freeze’ on a security if it goes against the rules and policies of the DTC. A freeze would mean the discontinuation of all the services rendered by the DTC on the security on which the freeze is imposed.

The frozen security if not found to be proper and legal may find itself lose its DTC eligibility. The firm whose securities are frozen may get a participant’s notice which states the reason for the freeze. This notice is given publicly so that other participants may also be made aware of it under the corporate action processing service. 

What is the difference between a Chill and a Freeze in securities?

A Freeze and a Chill are two types of restrictions that the Depository Trust Company imposes on its securities. The two major differences are as follows:

• A Chill is imposed to restrict the securities from having two or more services of the DTC. They are temporary most of the time. Although there have been instances of some ‘chills’ which has lasted longer. Chills can be rectified almost immediately. Unlike ‘Freeze’, where the restriction is imposed on securities that stop the usage of all the services indefinitely. 
• A ‘Chill’ restriction isn’t that detrimental to the eligibility of the security when compared to a ‘Freeze’ restriction. When the securities are frozen and if the reasons behind them are not rectified soon, that security may lose its DTC eligibility and cannot be traded with the rest of the participants anymore. 

Both are a kind of policies that are implemented by the DTC to prevent illegal activities within the organization and in the money market. 

Is DTC a government company? 

The Depository Trust Company is not a government-owned company although, it is a company that is regulated by a government-owned entity. The DTC comes under the Depository Trust and Clearing Corporation which is a member of the United Nations Federal Reserve Bank.

They are also regulated by the Securities Exchange Commission. The Depository Trust Company is an entity that provides financial services to stock exchanges and companies and corporations. 

On the other hand, the parent organization, the DTCC does not have a single owner. Instead, it is owned by a group of banks, corporations, and companies. The New York Stock Exchange is also one of the biggest shareholders of DTCC. 

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.