The Stockholders' Ledger
The Stockholders' Ledger
In the world of securities trading, especially in the context of public equities, many transactions occur electronically and involve various intermediaries. The Depository Trust & Clearing Corporation (DTCC) is a central player in this ecosystem in the United States. Let's break down how securities are held in street name and other mechanisms:
Street Name Registration: When an investor buys securities, they can choose to have them registered either in their own name (known as "certificated" or "in-house" registration) or in the name of their brokerage firm or a nominee of the brokerage firm (known as "street name" registration). The vast majority of investors opt for street name registration because it's more convenient and offers certain benefits.
DTCC and Centralized Clearing: When securities are bought or sold, DTCC's subsidiaries, such as the National Securities Clearing Corporation (NSCC) and the Depository Trust Company (DTC), play crucial roles in facilitating the transaction. DTCC, for instance, acts as the central securities depository, holding electronic records of securities ownership and facilitating the transfer of these securities between brokerage firms.
Book-Entry System: Securities held in street name are typically recorded electronically in a book-entry system maintained by the brokerage firm or its clearing agent, with DTCC acting as the central hub for these records. This electronic recordkeeping system eliminates the need for physical stock certificates to change hands with each transaction.
Beneficial Ownership: Even though securities are held in street name, the investor retains beneficial ownership and all associated rights, such as voting rights and entitlement to dividends. The brokerage firm or nominee holds the securities on behalf of the investor.
Stockholders' Ledger Maintenance: In the case of securities held in street name, the brokerage firm or its clearing agent maintains the stockholders' ledger. The brokerage firm keeps track of the ownership of shares on behalf of its clients who own those shares in street name. When an investor buys shares through a brokerage account, the brokerage firm records the transaction in its internal systems, updating the investor's account to reflect the new holdings. While the company whose stock is being traded does maintain its own records of shareholders, these records typically only reflect shares held in certificated form (i.e., directly registered in the shareholder's name). Shares held in street name are not directly recorded on the company's books, as they are held by the brokerage firm or its nominee.
Settlement Process: When a trade occurs, DTCC's subsidiaries facilitate the settlement process, which involves the transfer of securities from the seller's brokerage account to the buyer's brokerage account and the transfer of funds in the opposite direction. This process typically occurs a few days after the trade date (T+2 settlement cycle in the US as of my last update).
Risk Management and Efficiency: Holding securities in street name offers several advantages, including increased efficiency in trading and settlement processes, lower risk of loss or theft of physical certificates, and easier participation in corporate actions such as mergers, acquisitions, and stock splits.
Overall, the system of holding securities in street name and utilizing centralized clearing mechanisms provided by entities like DTCC streamlines the process of trading and settling securities in the modern financial markets. It enhances liquidity, reduces risk, and provides convenience for investors and market participants.