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DTCC Underwriting Procedures The Depository Trust & Clearing Corporation (DTCC) through its subsidiaries provides clearance, settlement, custody, STP and information services for various types of securities, including corporate bonds. The Depository Trust Company (DTC) is one of DTCC’s subsidiaries. DTC retains custody of some two million securities issues and provides services necessary to the maintenance of those securities. All securities offerings at DTC begin with DTC underwriting services.
Corporate Bond Operational Underwriting Process 6 Business Practices in “Plain English” December 9, 2004 DTC's Underwriting Department qualifies the eligibility of both new and old issues for DTC services and is responsible for maintaining DTC's CUSIP master file. The Eligibility section permits underwriters to distribute both new and secondary offerings of securities quickly and economically through electronic book-entry delivery and settlement while making the issue available for depository services. DTC’s Eligibility area reviews new issue documentation (such as prospectuses, official statements or offering memoranda) for corporate and municipal issues submitted by underwriters for distribution and settlement at DTC. DTC requires submission of this documentation at least 10 business days before the closing date. DTC will, however, work with underwriters when these events occur fewer than 10 business days before the closing date. For each new corporate or municipal issue being considered for eligibility, DTC
requires the following documentation:
• Preliminary offering document. The lead underwriter submits a copy of the prospectus or offering statement to DTC for initial review of eligibility criteria.
• Eligibility Questionnaire. The lead underwriter submits to DTC an Eligibility Questionnaire specifying the basic details of the issue. The questionnaire requests specific information about the issue. FAX submissions are acceptable, although electronic formats are clearly preferable to avoid re-keying and the potential of input errors. PUND, a function available through DTC's Participant Terminal System (PTS), allows participants to input issue information directly into DTC's underwriting database, expediting the approval of new issues and reducing paperwork and phone communication with DTC. The Eligibility Questionnaire can also be submitted electronically through the Web Underwriting (WUN) application on DTC's Web site (www.dtc.org) Issues are reviewed to determine whether they meet the standards of DTC's Operational Arrangements (OA) to qualify for DTC's full services. The OA specifies the requirements for an issue to become eligible for DTC services and incorporates standards for income, reorganization, and redemption payments ("Principal and Income Payments"), adopting the guidelines set by the U.S. Working Committee Group of Thirty (G-30) Clearance and Settlement Project Same-Day Funds Task Force (P Task Force).
For issues in book-entry-only (BEO) form, the issuer authorizes the deposit at DTC of one or more "global" certificates for each tranche of an issue. Ownership positions and transactions in each security are reflected in DTC's records and in the records of participating banks and brokers. For issues in book-entry-only (BEO) form, DTC requires that a Letter of Representations (LOR) be signed and submitted to DTC by the issuer and issuer's agent or agents.
Upon determining an issue can be made DTC-eligible, the securities records are added to the DTCC master file. A download of all newly eligible securities is available to DTC participants daily through a computer-to-computer facility (CCF).
Corporate Bond Operational Underwriting Process 7 Business Practices in “Plain English” December 9, 2004 Before a non-FAST issue closes, DTC updates the Underwriting database by creating a long position in Underwriting's internal account. Packaging staff verifies the amount, CUSIP numbers, form of registration, and interest rates and maturity dates, if applicable.
For a FAST issue, the transfer agent confirms the CUSIP number and the amount of the issue via the PTS function FRAC (FAST Reject and Confirmation). The FAST agent must confirm the balance as early as the opening of business, but no later than noon, for DTC to credit securities to a participant’s account on the closing date of the issue. FAST is an arrangement between DTC and transfer agents to eliminate the movement of securities certificates. By signing an agreement with DTC (the Balance Certificate Agreement), agents agree to maintain DTC-eligible inventory in the form of jumbo certificates registered in the name of DTC's nominee name, Cede & Co. DTC and FAST agents electronically reconcile the results of participants' daily deposit and withdrawal activities. Over 90% of corporate bond deals are done as FAST issues.
The lead underwriter's participant account is credited on settlement date with the position for the new issue. Position is moved from a DTC internal account to the lead underwriter's participant account for book-entry delivery and settlement upon notification by both the issuer (or its agent) and the underwriter that an issue has closed.
In a one to two week period following closing, DTCC verifies all the details of the new securities against the final official statement and Bloomberg’s system, paying particular attention to the data related to asset servicing. Any discrepancies found are resolved with DTCC calling the issuer’s paying agent.
In establishing a new issue under DTC’s book-entry process, DTC effectively becomes the single registered bondholder to whom the issuer’s assigned paying agent will make all interest and principal payments on the bonds, according to the issuer’s instructions.
Therefore, DTCC requires a high degree of accuracy on all information that will impact its ability to service the beneficial bondholders over the life of the securities, including providing correct and timely payment of interest, redemption at maturity, calls and refundings.
SEC Exempt Issues Securities eligible for resale under Rule 144A are exempt from registration with the SEC.
These securities can be sold (under Rule 144A) exclusively to qualified institutional buyers (QIB). To make a Rule 144A issue eligible for DTC services, the lead underwriter
• Submit the appropriate Letter of Representations, including a rider titled “Representations for Rule 144A Securities.”
• If the security is not investment grade debt or preferred stock, the issue must be made eligible with the National Association of Securities Dealers' (NASD) PORTAL system.
• If a Regulation S offering is made in conjunction with a Rule 144A offering and the securities are not subject to precisely the same restrictions on transfer, obtain separate
International Depositories: Euroclear and Clearstream Procedures The choice of where to deposit securities depends on both the target investor base and the features of the securities offering. U.S. debt securities targeted at an international investor base in addition to U.S. investors necessitate that the securities be made eligible for Euroclear and Clearstream, two International Central Securities Depositories (ICSD) based in Belgium and Luxembourg, respectively. The ICSD support two structures: a) deposit of securities with a local depository or Central Securities Depository (i.e., DTC);
and b) deposit of securities with a Common Depository, a bank jointly selected by the ICSD to hold securities in global form on behalf of the participants of both systems.
Regardless of the structure chosen, lead managers and issuing agents use their New Issues Distribution Accounts at the ICSD to facilitate the distribution of new securities.
For securities deposited with DTC, ISIN numbers are assigned by the CUSIP Bureau.
(See next section for background information on ISIN.) ISINs generally have a “U.S.” prefix and contain the CUSIP in the body of the 12 alpha-numeric code. In these cases, Euroclear and Clearstream will only allocate Common Codes. (“Common Codes” is a 9 digit numbering system for internationally-traded securities which are specific or “common” to both Euroclear and Clearstream.) For securities targeted to an international investor base and deposited with a Common Depository, an ISIN number with a prefix of “XS” and a Common Code will be assigned by Euroclear and Clearstream. As soon as eligibility has been established, the Lead Manager will communicate these codes to its direct counterparts for trading.
Euroclear and Clearstream perform legal, fiscal and operational eligibility reviews prior to accepting securities into their systems. In addition to pricing details and other security specific features like options, corporate actions, income events, etc, special attention is paid to the tax treatment of a security for non-resident holders. It is therefore crucial to send a draft Offering Memorandum that is sufficiently explicit on the above-mentioned elements. For a security being distributed through DTC, the draft Offering Memorandum should be sent to Euroclear and Clearstream no later than three business days before closing date to new_issues@Euroclear.com and email@example.com.
An electronic copy of the final Offering Memorandum needs to be provided to Euroclear and Clearstream within five days following the closing date.
In certain cases, Euroclear and Clearstream may require specific indemnification such as in a situation where a U.S. issuer will solely target Qualified Institutional Buyers via a security issued under Rule 144A.
ISIN ISIN (International Securities Identification Number) is a unique international code which identifies a securities issue. The Association of National Numbering Agencies (ANNA) is an organization of international members that handle the functions of various Corporate Bond Operational Underwriting Process 9 Business Practices in “Plain English” December 9, 2004 national numbering agencies that assign ISINs to securities and other financial instruments. Specifically in the U.S., it is the ANNA Service Bureau that is charged with the responsibility of assigning ISINs. The ANNA Service Bureau was developed and is currently managed by Standard & Poors and Telekurs. In addition to assigning ISIN numbers, the Service Bureau is tasked with improving upon all aspects of the timely, accurate and standardized identification of securities as well as the equitable distribution of this information. Accordingly, the Service Bureau is a step toward facilitating the bond industry’s movement toward straight through processing (STP).
The ANNA Service Bureau operates as a central hub to receive and consolidate ISIN data from its members and disseminates this information to the market via FTP and web-based solutions. The ISIN number is the only ISO-certified (ISO 6166) securities identifier for cross-border transactions and is supported and maintained by the recognized global numbering agencies that comprise ANNA. ANNA ISIN products were created in order to provide the financial industry with the most comprehensive and timely ISIN data for financial firms’ STP processing needs.
CUSIP A CUSIP number identifies most U.S. securities, including stocks, government, municipal and corporate bonds. The CUSIP numbering system is owned and was developed by the Committee on Uniform Securities Identification Procedures of the American Bankers Association. The purpose of the CUSIP number is to aid in accurate and efficient clearance and settlement of securities as well as back-office systems. The CUSIP Service Bureau, which is operated by Standard & Poor’s, assigns and distributes the CUSIP numbers.
NSCC Procedures National Securities Clearing Corporation (NSCC), a wholly owned subsidiary of DTCC, is a central counterparty that provides centralized clearance and settlement for virtually all broker-to-broker equity, corporate bond and municipal bond, exchange-traded funds and unit investment trust (UIT) trades in the U.S.
To begin the clearance and settlement process, the managing underwriter submits corporate syndicate trades to an automated comparison system that is operated by NSCC.
This NSCC system is known as the Fixed Income Transaction System (FITS). FITS prepares the trade for settlement and reports the results of that process to the appropriate counterparties. In this capacity, FITS standardizes and automates the processing of transactions for both corporate and municipal bonds and Unit Investment Trusts (UITs).
By standardizing and automating the transaction process, FITS is able to provide participants with timely trade comparisons. In addition, FITS helps reduce risk and inefficiencies in the settlement process by identifying and then resolving any discrepancies early in the settlement process.
NSCC also assists dealers in satisfying the NASD requirements for transaction reporting.
Presently, the NASD requires transmission of all secondary corporate bond trades into its Corporate Bond Operational Underwriting Process 10 Business Practices in “Plain English” December 9, 2004 Trade Reporting and Compliance Engine (TRACE) within 30 minutes of the trade. The NASD is planning to reduce the time period for reporting transactions in TRACE-eligible securities from 30 minutes to 15 minutes effective July 1, 2005.
NSCC plans to implement a Real-Time Trade Matching (RTTM) system in the future to provide participants with Straight Through Processing (STP) capabilities and to meet T+1 settlement initiatives. RTTM has been developed by the Government Securities Clearing Corporation (GSCC) and is in production for U.S. government securities that settle in a T+1 cycle. RTTM will provide a single pipeline to the clearing corporations and use standardized, interactive messaging formats via an MQ communications link.
Information / Service Vendors
There are several commercial vendors that have developed products and services that the corporate bond underwriting community utilize to facilitate the issuance, syndicate process, sale and settlement of corporate securities. Several service vendors and information providers are used in effect, as standard business practices for the securities industry.