SEPT 2020

FROM PHYSICAL TO DIGITALADVANCING THE DEMATERIALIZATION
OF U.S. SECURITIESA WHITE PAPER TO THE INDUSTRYDear Colleagues and Stakeholders,
APPLICATION PROGRAMMING INTERFACE (API) VALUE STORY
Resilience is a term often used to describe the ability to respond to adversity, and DTCC has long-considered
resilience an integral part of our values and guiding principles. We are proud of how the industry has demonstrated
extreme resilience and agility throughout the extraordinary events of the past several months, managing
unprecedented market volatility and transaction volumes.
Without question, however, supporting physical securities – a very small piece of the industry’s business – has beena distraction from an otherwise very resilient response to the Covid-19 pandemic. Today, the industry has reached
an inflection point, highlighting the compelling need to move forward to full dematerialization. The costs and risks
incurred by processing physical securities are no longer acceptable.
DTCC has outlined a roadmap toward dematerialization. We are now embarking on building consensus among thestakeholders on critical next steps and engagement, much in the way the industry worked together cooperatively to
successfully implement T+2 settlement in 2017.
Without question, there are operational hurdles within this area of the industry, including issues related to businessmodels, record-keeping, inventory, resilience and controls. However, the complete dematerialization of physicalsecurities, fully transitioning away from paper to electronic records, will contribute to a more cost-effective,
efficient, transparent, secure, competitive – and above all, resilient – marketplace for all.
The world of online – not only cashless but contactless – commerce has accelerated and has forever reshaped every
aspect of consumer behavior. Physical securities processing is no different, and it is well past the time we, as anindustry, should all agree to move forward together toward a better solution.

Murray Pozmanter
Head of Clearing Agency Services andGlobal Business Operations, DTCC

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Advancing the Dematerialization of U.S. Securities

CONTENTS

APPLICATION PROGRAMMING INTERFACE (API) VALUE STORY

Executive Summary .................................................................................................................... 4
Dematerialization Today ........................................................................................................... 6
Scope, Size and Dimension of the Challenge....................................................................6
Stakeholders..................................................................................................................................6
Dematerialization Goals ........................................................................................................... 7
Cease Creating New Certificates..........................................................................................7
Automate High Touch Processes Through FAST............................................................7
Reduce Existing Inventory in the Industry’s Vaults.......................................................8
What Remains to be Physically Processed.....................................................................10
Next Steps ...................................................................................................................................113

Advancing the Dematerialization of U.S. Securities

APPLICATION PROGRAMMING INTERFACE (API) VALUE STORYEXECUTIVE SUMMARY
The Covid-19 pandemic of 2020 has highlighted the need for continuity and resiliency in the securities market,
including the post-trade lifecycle. The intention of this paper is to mobilize the industry to aggressively
streamline one aspect of the post-trade lifecycle – the servicing and processes of physical securities.
Through the dematerialization of physical securities, the industry can significantly reduce touchpoints andautomate processes.
There has been a long-standing movement to achieve full
dematerialization in the U.S. financial markets and to finally transition
away from physical certificates to electronic records. In fact, those outsideof the immediate industry might not realize that while firms today are
investing hundreds of millions of dollars into modernizing processing
systems – enhancing electronic trading technology to shave milliseconds
from trades and exploring cutting-edge fintech innovations like distributed
ledger technology, and digital and tokenized securities – physical securities
processing still exists.
The management and processing of physical securities are industrywide
challenges. Yet there is strong precedent for the success ofdematerialization. Dozens of countries across Europe, Asia-Pacific, Africa
and Latin America have stopped issuing physical certificates altogether.
Currently, most U.S. securities, including municipal and corporate bonds,
U.S. government and mortgage-backed securities, commercial paper andmutual funds are offered only in paperless form. Certain asset classes,
such as listed and unlisted equities, have largely achieved
dematerialization through the Fast Automated Securities Transfer
Program (FAST)1 and Direct Registration System (DRS)2. However, even in
the current state of dematerialization, it is often still possible to obtaincertificates – which continues to result in multiple handling touchpoints
between beneficial owners and financial intermediaries and to pose risks
associated with physical securities processing.

The Fast Automated Securities Transfer (FAST) program minimizes and streamlines certificate movements between DTC and transfer agents by the maintenance of a single balance certificate registered
to DTC (in its nominee name, Cede & Co.) of a security by the transfer agent, as custodian for DTC.
The transfer agent also records the securities ownership of DTC in book-entry form on the books andrecords of the transfer agent. This reduces the costs and risks associated with the creation, movement,
and storage of certificates, including, but not limited to, costs of insuring, handling and shipping physicalcertificates, and the risks associated with lost or damaged certificates.
1

The Direct Registration System (DRS) allows registered owners to hold shares of a security on the records of the transfer agent in book-entry form rather than in certificate form. Ownership is reflected on
the books and records of the transfer agent, as well as by the DRS statements provided by the transfer
agent to the owner. DRS leverages DTC’s connectivity with DRS/FAST transfer agents. Through the DRS
service, assets can be electronically transferred to and from the transfer agent and broker/dealer toeasily move shares in and out of DRS.
2

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Advancing the Dematerialization of U.S. Securities

INDUSTRY CRISIS:COVID-19 AND PHYSICALSECURITIES PROCESSING
While DTCC operated seamlessly
throughout March and April 2020,
managing record-breaking volumes
and unprecedented market volatility,
COVID-19 did disrupt one area of
business: physical securities processing.
Throughout this time, industry
stakeholders who worked withphysical securities or in physicalprocessing across the industry
were unable to be on premises tohandle certificates, stamp and sign
documents, receive checks andprocess paper.
With little to no access to vaults and/orwith limited personnel, DTCC and theindustry had to look for alternatives
and creative workarounds.
When the pandemic hit, DTCC
implemented various complex
processes and regularly communicatedthese stop-gap solutions to industry
participants. These workaroundsolutions were inconvenient, butnecessary, to allow for limited
processing with an elongated cycle.

With this paper, DTCC and its APPLICATION
depository subsidiary,
The Depository
Trust(API)Company
PROGRAMMING
INTERFACEVALUE(DTC),STORYseek the partnership andparticipation of all industry stakeholders, including banks, brokers/dealers, transfer agents, issuers, regulators, industry
associations, and exchanges, in the effort to achieve full dematerialization in the U.S. financial markets. We need to form
active working groups and collaborate to set aggressive,- but realistic, goals and a timeline.
Together, we will forge a plan to achieve the following goals within the next three to four years:• Eliminate new issuances of securities in physical form;• Establish a streamlined process for the conversion of existing physical securities to electronic form;• Promote DTCC’s FAST Program by supporting the conversions of non-FAST agents to FAST in order totransition away from high-touch processing;• Incentivize participation in DRS;
• Deliver low-touch processing of restricted equities securities.
The success of this plan will require strong support from industry organizations. It will also require a full-scale andcommitted adoption by stakeholders of new business practices, changes in technology platforms, and shifts in thelegal landscape. And it will require support from regulators. The benefit of achieving complete dematerialization –reducing and ultimately eliminating paper – will lead to a significantly more efficient and resilient U.S. marketplace.

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Advancing the Dematerialization of U.S. Securities

APPLICATIONPROGRAMMING INTERFACE (API) VALUE STORY
DEMATERIALIZATIONTODAY
For several years, the processing of physical securities has lagged behind the efficiency and resiliency of servicing
dematerialized securities and has posed myriad challenges for the industry and for the investing public.
While the crushing mountain of paper of the paperwork crisis in the 1960s and 1970s was addressed by thetwo-pronged approach of immobilization and dematerialization, there continues to be certain risks associatedwith physical securities, such as delays in issuing or delivering physical certificates, as well as disruption from loss,
theft, and natural disasters.

SCOPE, SIZE AND DIMENSION OF THE CHALLENGE
Physical securities have not been a growth area for the securities
industry for many years.
Over time, the economies of scale for physical securities processing
have been completely reversed: the costs incurred in supporting
physical certificate processing remain fixed, even though the numberof physical transactions is dwindling. Right now, the amount of effort
required to support physical securities processing is significantly
disproportionate to its actual value.

STAKEHOLDERS
As with each past crisis or market downturn, re-examining industry
practices and processes can lead to opportunities to improve theperformance of the industry and businesses.
Dematerialization is a complex industry issue that will require
collaboration and consensus among all industry stakeholders to forge
a realistic plan, set achievable goals, and determine a timeframe forthe adoption of dematerialization proposals.
DTCC, banks, brokers/dealers, transfer agents, issuers, and industry
associations, among others, each have their own roles andresponsibilities for the success of the dematerialization plan. Finally,in order to achieve success, it is critical that the industry has the
support of regulators.

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Advancing the Dematerialization of U.S. Securities

INDUSTRY CRISIS:A SOARING VOLUME OF PAPERWORKIn the late 1960s, Wall Street had
a paper problem. By 1967, trading
averaged 10 million shares per day.
Three months later, that number had
doubled to 20 million shares per day.
The soaring volume buried workers
in paper and resulted in hundreds ofthousands of transactions remaining
unsettled every day. The exchanges
had to cease trading on Wednesdays,
shorten trading hours on other days,
and extend settlement by a day to T+5
just to give a reprieve to catch up on thebacklog of paper.
The industry’s solution was topool securities in a single location– immobilization in the vaults ofdepositories such as the newly-created
DTC – followed by substituting physicalcertificates with electronic records of“book-entry” securities on the booksof the depository, a process known asdematerialization.

DEMATERIALIZATIONGOALSAPPLICATION PROGRAMMING INTERFACE (API) VALUE STORYCEASE CREATING NEW CERTIFICATES
The first step toward full dematerialization is to eliminate the creation of any new issues in physical form. This
will require the engagement and partnership of the industry, particularly, issuers, agents, and trustees.
In terms of equity securities, all exchange-listed issues are required to have a FAST Agent that is also a DTC DRS
Limited Participant, who, in conjunction with DTC, provides access to the Direct Registration System (DRS). In
order to be DRS eligible, the issuer must be authorized to issue the security in book-entry form under its
corporate governing documents. DRS provides for an individual investor to have its shares registered in its namedirectly on the books of the issuer/transfer agent. The investor’s ownership of the shares is reflected in a DRS
statement that is provided by the transfer agent to the investor.
In addition, an investor, through a DTC Participant, can request that its beneficially owned securities bewithdrawn electronically from DTC and be registered in the investor’s name directly on the books of the transfer
agent. The investor, through a DTC Participant, can also request that its shares be transferred from the books ofthe transfer agent to the account of its securities intermediary at DTC, at which point the securities will becredited to Cede & Co. on the books of the transfer agent
Currently a security that is DRS eligible is not required to participate in DRS. If an issuer wishes to participate in
the DRS program, it can choose between two options:
1. DRS Participating/DRS Statement or Certificate Form –The security is not fully uncertificated. By default, aholder will receive a DRS statement of its ownership of shares from the transfer agent. However, the holder
could also obtain a certificate from the transfer agent upon request.
2. DRS Participating/DRS Statement Only form – The security is fully uncertificated. A holder can only receive a
DRS statement and cannot obtain a certificate from the transfer agent.
To cease the creation of new physical certificates, exchanges should
continue their efforts to amend their listing requirements to mandate
DRS Statement Only form for all newly listed issues. This will be a criticalstep toward full dematerialization of new equity issuances. DTCC is fully
supportive of further collaboration with issuers and transfer agents toencourage existing issuing companies to no longer offer certificates. In
terms of debt issuances, there are already dematerialization initiatives
being implemented or discussed, including e-CDs and uncertificatedcorporate debt. These initiatives, as well as further expansion of
uncertificated debt issuances, will also require collaboration andcooperation among industry stakeholders.

AUTOMATE HIGH TOUCH PROCESSES THROUGH FAST
The FAST program minimizes the movement of physical securities between
DTC and transfer agents by reducing the number of physical certificates thatneed to be cancelled, re-registered, deposited, or withdrawn.
The FAST program eliminates recordkeeping redundancies and manual
processing, facilitates the industry’s dematerialization efforts, and plays a

7Advancing the Dematerialization of U.S. Securities

NOTHING IS FASTER THAN FAST
With FAST, transfer agents currently
maintain a jumbo balance certificate —one for each issue — registered in thedepository’s nominee name, Cede & Co.
Balances are automatically adjusted eachday based on deposit and withdrawal
activity at DTCC, and FAST transfer agents
electronically confirm balances daily. A
transfer agent for a DRS-participating
security that is listed on an exchange is
not required to maintain a jumbo balance
certificate for Cede & Co.
DTC is exploring ways to add more
efficiencies to the FAST Program that
could encourage greater participation
by transfer agents and issuers.

significant role in reducing thecosts associatedwith shipping
certificatesand from
APPLICATIONPROGRAMMING
INTERFACE(API) toVALUE
STORYagents, as well as the costs
related to printing and processing certificates. FAST, introduced in 1975 with a few hundred issues and several

agents, was critical to helping the industry reduce the number of physical certificates being created and moved
between DTC and the transfer agent community.
Transfer agents play a central role in driving dematerialization and helping educate issuers and investors on thebenefits of dematerialization. DTCC will work to promote the efficiencies of the FAST process, with the goal of
converting all non-FAST processing to FAST. This is a critical step in dematerializing physical certificates and will
position the transfer agent to support DRS for all equity issues. Today, there are over 135 FAST agents with over
1.2 million issues valued at over $60 trillion.

Deposit & Withdrawal Average Daily Activity 2000-2019

REDUCE EXISTING INVENTORY IN THE INDUSTRY’S VAULTS
To date, many millions of share certificates in the U.S. capital market have been dematerialized. With concerted
effort and the help of the transfer agent community, DTCC believes a realistic target in the next three years
would be the full dematerialization of 98%+ of all physical stock certificates.
A big step toward reducing the number of existing physical certificates held by industry participants is to convert
non-FAST transfer agents to FAST agents, as mentioned above. However full dematerialization of equities will
require full participation in DRS. i.e. DRS Statement Only. The conversion of existing physical inventory to DRS
Statement Only will take collaboration among the issuers and their transfer agents, custodians, broker/dealers,
exchanges, and regulators.
DTC currently only allows for the withdrawal of DRS participating issues in Statement Only form. However,certificates for DRS eligible issues that are not Statement Only may still be obtained at the issuer’s transfer agent.

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Advancing the Dematerialization of U.S. Securities

DTCC believe this practice isAPPLICATION
an obstacle todematerializationand thatultimately,
the only option for DRS should
PROGRAMMING
INTERFACE(API)
VALUE STORY
be DRS Statement Only form.

To move toward that goal, DTCC believes that now is the time to begin to minimize physical securities transactionsof DRS issues that are not Statement Only. Specifically, DTC believes that holders should be discouraged fromrequesting physical certificates and should be encouraged to deposit physical certificates for a DRS participating
issue with the transfer agent for conversion back to DRS, whereby they can be electronically deposited into DTC
in the event of sale. DTCC and industry stakeholders must collaborate and set a target for a date by which DTC
would no longer negotiate physical certificates for book-entry services.
DTCC recognizes that issuers may have chosen to make physical securities available for various business reasons.
However, these issuers may not be aware of the cost benefits and efficiency that dematerialization offers. It is the
responsibility of industry stakeholders, particularly transfer agents and underwriters, to educate these issuers
and address concerns.

Cede & Co. Vault Inventory as of 2012 and 2020 by Asset Class(reduction of 33%)
Certificates as of 20129

Advancing the Dematerialization of U.S. Securities

Certificates as of 2020

APPLICATIONPROGRAMMING INTERFACE (API) VALUE STORYWHAT REMAINS TO BE PHYSICALLYPROCESSEDWe know there is a shrinking inventory of Cede & Co. physical certificates in the DTC vault; today, less than 1%of assets serviced by DTCC – valued at approximately $780 billion dollars – are still in physical form.
While there has been progress toward dematerialization, as evidenced by the decreasing volume of traditional
physical certificates stored and processed in DTC’s vault for book-entry services, there has not been meaningfultraction in certain other areas. In particular, there has actually been an increase in the deposit of restrictedsecurities into the DTC Custody Service. By utilizing the Custody Service, a client can benefit from, among otherthings, cost savings from the economies of scale offered by DTC, and the added efficiency of the limited depository
services offered by DTC with respect to securities held in its Custody Service. Further industry collaboration isneeded to address the asset classes held in DTC’s Custody Service; restricted equities presents an optimal starting
place to endeavor toward reducing these assets held.

Physical Certificate Cede Vault 2000-2019

The above describes the physical processing at DTCC, but it should be noted that the physical securities held in vaults ofbanks and firms across the industry must also be addressed. With the help of all stakeholders and the support ofregulators, DTCC is optimistic that together the industry can eliminate much of the remaining physical inventory.

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Advancing the Dematerialization of U.S. Securities

NEXT STEPSAPPLICATION PROGRAMMING INTERFACE (API) VALUE STORY

The drive to fully dematerialize U.S. financial markets has lagged the rest of the industry’s modernization during
this era of unprecedented economic and technological growth. The goal of this dematerialization effort is toeliminate both the issuance and handling of physical securities, which will result in a more cost-effective, efficient,transparent, secure, competitive, and resilient marketplace.

1. Form working groups and collaborate with industry organizations and regulators to set a timeline. With thesupport and participation of these industry working groups, the first step will be to determine dematerialization priorities based on complexity and impact.
Dematerialization is a complex industry issue that will require coordination and consensus among all
stakeholders. The formation of working groups will help set the forum for partnering across stakeholders.
Stakeholders will help to set priorities, build consensus, and set realistic targets for adoption. We must be
united in this effort to eliminate all new issuance in physical form, and ultimately, convert existing inventory todematerialized form.
2. Automate high-touch processes by converting non-FAST agents to FAST.
• We must agree on a timeline for converting non-FAST agents to the FAST program. DTC suggests a
36-month (3 year) target to eliminate non-FAST transfer agent participation. This will require changing
DTC rules, subject to regulatory approvals, to require a FAST relationship, affecting all existing certificates
except non-transferable and bearer issues.
• Coordinate activities to convert existing physical inventory in DTC’s vault with non-FAST agents into FAST.
We recognize this is not an insignificant effort: DTC currently has 188,849 issues presenting 491,844
certificates to convert to FAST.
• Convert existing non-FAST certificates in DTC’s vault to FAST.
3. Continue to execute on DTCC’s Underwriting (UW) Rewrite project.
To eliminate the need for physical certificates at the time of issuance, these proposals will pursue themodification of DTCC’s new issuance eligibility process and recommend new business practices for the
primary issuance of securities.
• Continue to build out digital certificates for retail CDs, transforming paper into electronic records for thisasset class. There are approximately 30,000 retail CD issuances per year that are issued in physical form.
The roll-out of electronic CD issuances is scheduled for end of 2020.
• Leverage the new issuance process to include an uncertificated distinction for debt issuance. Continue
work with the STA Debt Committee to recognize this new form of issuance in the indenture of the issuanceand modify DTC’s issuance governing documentation for alignment with this new form of debt issuance.
• Work with industry stakeholders to determine how best to transition away from the current physicalmunicipal issuance process to uncertificated issuance.

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Advancing the Dematerialization of U.S. Securities

4. Require all newly listed equities
to conformto DRS Statement
convertAPPLICATIONPROGRAMMING
INTERFACEOnly(API)andVALUE
STORYall existing equities to DRS
Statement Only.
As a central depository, DTCC is in the middle of every depository eligible physical transaction between its clientsand transfer agents, and from that position has identified all non-DRS Statement Only equities as the number one
priority to address and convert to DRS Statement Only. DTCC Securities Processing team has estimated they
spend almost 30% of their time processing DRS eligible physical deposits. To stop the creation and issuance ofphysical certificates for all new equity listings and to convert existing equities, DTCC recommends:•

DTC should no longer negotiate certificates except through DRS Statement Only.

• Continuing to work with exchanges to encourage rule filing and accelerate the process to amend listing rules
requiring all new equity listings, including OTC and Pink Sheet Issuers, to conform to DRS Statement Only.
• Work with transfer agents and Issuers to implement a mandatory conversion of all certificates issued to
DRS Statement Only. DTC processes approximately 80,000 physical deposits on an annual basis.
Converting to DRS Statement Only will reduce, and eventually eliminate, processing these deposits.
• Determine a date whereby DTC will no longer accept physical deposit of DRS eligible issues, establishing
the transfer agent as the sole recipient of certificates with further deposit to DTC in electronic form. DTC
suggests January 2022 as the target, allowing time for firms to adjust to this new requirement andnecessary rule amendments, subject to regulatory approval.
5. Optimize processing of restricted securities to manage remaining inventory.
This workstream will require stakeholders to evaluate how the model for the issuance and custody ofrestricted shares can be made more efficient, and perhaps dematerialized.

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Advancing the Dematerialization of U.S. Securities

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Advancing the Dematerialization of U.S. Securities