DTC eligibility allows public companies to deposit their securities through the DTC. It is the largest securities depository in the world and holds over thirty-five trillion dollars worth of securities on deposit. The company accepts securities deposits only from its members, primarily clearing firms. Most brokers clear stock in-house or hire a clearing firm to deposit securities on their behalf. All securities transactions are electronic with book-entry adjustments. Non-eligible issuers cannot transfer their shares between brokerage accounts electronically, which makes trading shares more difficult. Larger exchanges such as the NYSE and AMEX require DTC eligibility. Smaller entities such as the OTC Bulletin Board (OTCBB) and other networks run by the over-the-counter markets do not. Only DTC participants can request that the DTC make securities eligible. Most large U.S. broker-dealers and banks are DTC participants.
DTC Eligibility Process
For OTC securities, once an issuer has been approved for trading by FINRA, they must apply to DTC for their initial eligibility to trade securities. If DTC approves the application, they will hold all of the issuer’s free-trading, or street name, shares on deposit. These shares become the company’s “float.” As with a Form 211 submission to FINRA, an issuer cannot make a direct application to the DTC for eligibility. The issuer must first have a relationship with a broker-dealer or other financial institution (called a market-maker) that is a participant and will sponsor the eligibility process. They carry the initial position in inventory on behalf of their firm. Lastly, the issuer must also have a transfer agent that has completed and has on file with DTC a DTC Operational Arrangements Agent Letter (available on the DTC’s website). For NASDAQ and NYSE issuers, the companies must also subscribe to DTC’s FAST (Fast Automated Securities Transfer) and DRS (Direct Registration System) program. Transfer agents that are considered limited participants in DTC’s FAST and DRS systems can submit the FAST and DRS applications. A list of DTC Participants is available on DTC’s website.
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