Established in 1999, the DTCC is a holding company that consists of five clearing corporations and one depository, making it the world's largest financial services corporation dealing in post-trade transactions.
Breaking Down Depository Trust & Clearing Corporation (DTCC)
Owned by its principal users, the DTCC's function is to integrate the National Securities Clearing Corporation (NSCC) and DTC, streamlining clearing and depository transactions in attempts to reduce cost and increase capital efficiency. Clearing corporations handle the confirmation, settlement, and delivery of transactions. They fill the core mission of ensuring that transactions are made promptly and efficiently. They achieve this by taking offsetting positions with clients in every transaction.
Clearing brokers are critical links between clearing corporations and investors. Clearing brokers are exchange members, who help ensure that trades settle appropriately and transactions are successful. Clearing brokers are also responsible for maintaining paperwork associated with the clearing and executing of a transaction.
At times, clearing corporations may earn clearing fees when they act as a third-party to a trade. In this case, the clearinghouse receives cash from the buyer and securities or futures contracts from the seller. The clearing corporation then manages the exchange, collecting a fee for doing so. This is a variable cost, dependent on the size of the transaction, the level of service required, and the type of instrument being traded. Investors who make several transactions in a day can generate significant fees. Specifically, in the case of futures contracts, clearing fees can pile up for investors as long positions spread the per-contract fee out over a longer period of time.
Depository Trust & Clearing Corporation: DTCC and National Securities Clearing Corporation (NSCC)
The National Securities Clearing Corporation is a subsidiary of the DTCC and was established in 1976. The U.S. Securities and Exchange Commission (SEC) regulates the NSCC. Before the NSCC’s inception, stock exchanges would close once a week, due to the huge demand of paper stock certificates. To overcome this problem, multilateral netting was proposed. In multilateral netting, multiple parties arrange for transactions to be summed, rather than settled individually. All netting activity is centralized to avoid a myriad of invoicing and payment settlements. This can occur between one or multiple organizations. This subsequently leads to the formation of the NSCC.
The NSCC today serves as a seller for every buyer, and a buyer for every seller for trades settled in U.S. markets.