BDUG Annual Conference DRS and Dematerialization

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BDUG Annual ConferenceDRS and Dematerialization

• BDUG September 2008

The Depository Trust Clearing Corporation
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Agenda

• DRS 101
• Exchange listing requirements
• State of DRS
• DRS Move-All Shares
• Remuneration
• Elimination of Certificated WTs

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DRS 101

• Market Break of 1987
• Risk in the trade and settlement of assets in
  physical form
• 2001 WTC attack
• 2003 G30 Recommendation
• Eliminate Paper!!!
• Eliminate the issuance, use , transfer and
  retention of paper securities certificates
  without delay
• Catch up to our international friends

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DRS 101

• Introduced 1996
• SEC request,
• The objective
• Eliminate the issuance, transfer and retention of
  paper securities certificates

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DRS 101

• Create An Alternative Ownership Option for
  Securities Assets
• Registered Stockholder - physical certificate
• Street Name Registration account with
  broker-dealer/custodian
• DRS security registered on books of issuer in
  book-entry form
• Enhance the mobility of the securities assets
• Electronic movement of asset between investors
  account on the books of the issuer and investors
  financial intermediary

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DRS 101

• Direct Registration System (DRS)
• Held in book-entry form (DRS)
• Security is registered in customer name
• Book-entry isnt new (corp. debt, reg. munis,
  governments, options, etc.)
• Customer receives mailings directly from issuer
• Statements, transaction advices, dividends,
  proxy, 1099s, etc. of ownership

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DRS 101

• Fast forward to 2006
• Slow growth
• 2,400 issues DRS eligible
• Most due to corporate actions
• Exchanges take the lead

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Exchange Listing Requirements

• DRS eligible
• January 1, 2007 - NEW ISSUES
• January 1, 2008 - ALL ISSUES - extended
• March 31, 2008 - ALL ISSUES
• DRS eligible vs. participating

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Exchange Listing Requirements

• Current Stats
• gt 7,537 issues DRS eligible
• gt50,000 transactions a month
• lt 1,549 eligible only
• gt391 no longer offer certs.
• Intel, UPS, MetLife, Nuveen, CBS, Sun Micro

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State of DRS

• DRS Education Efforts
• SIFMA BDUG, DTC, NASD, SEC, SIFMA, STA, SSA
• Licensing requirements Series 7, 24, Continuing
  Education
• DRS Working and Ad Hoc Groups
• DRS Move All
• Dual SS/TIN
• Comprehensive DRS information for firm

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State of DRS

• Educate Issuers, Exchanges, Broker/Custodians,
  Investors
• Assist Issuers in complying with Exchange
  requirements
• DRS statement only
• Remove certificates from circulation

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DRS Move-All

• Two major enhancements
• Option to move-all shares
• Dual SS/TIN
• Eliminate 7,000 rejects monthly

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DRS Move-All

• Agent Remuneration
• Ad Hoc Group
• 75 of agent cost (max 200k per TA)
• 1.5 million in total cost
• Nov 1, 2009 implementation

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Insurance/Surety

• Profile Insurance
• 25 million per transaction (25 per trans.)
• Profile Surety (One)
• 3/6 million (3150 a year)
• NEW Profile Surety (Two)
• 7.5/15 million (6,000 a year)

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Elimination of Certificated WTs

• What we are NOT doing
• Eliminating withdrawals
• What we ARE doing
• Certificate proliferation

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Elimination of Certificated WTs

• Why get rid of certs?
• Delays in trading/risk
• Industry costs gt 250 million
• Inherent risk gt 63 million
• Catch up to our international friends
• India, France, China, Australia, Argentina

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Elimination of Certificated WTs

• Ctfs. in DTCs vault
• 20 years ago 20.0 MM
• Today 2.3 MM
• WTs processed
• 20 years ago 27,000 ADT
• Today 1,200 ADT
• Deposits processed
• 2002 12,000 ADT
• Today 4,500 ADT

75 of certificates presented for transfer were
issued in customer name within the previous 6
months
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Physical Securities

• DTC WTs Cost 2008

DRS Statement WT 5.00 _______________________
Total 5.00
Certificate WT 66.00 Avg Agent fee
(DMA) 14.00 Surcharge 45.00 ____________________
_____ Total 125.00
Additional cost for physical securities when DRS
is available - 120.00
Annualized - 25.7 million
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Elimination of Certificated WTs

• Request for physical certificates is
  diminishing
• 88 of WTs are for DRS eligible issues
• DTCC participants voluntarily default WTs to
  direct registration statements
• gt 45 of all WTs are in DRS statement form
• Investors that receive a statement stay in
  statement
• lt2 of investors that receive a statement request
  a certificate
• Over 40 million shareholders

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Elimination of Certificated WTs

• DTCCs Ops and Planning Committee
• Jan 1, 2009
• Eliminate certificated WTs for DRS
  eligible/participating issues
• Exception/Rush WTs
• After July 1, 2009
• Eliminate certificated WTs for all DRS issues
• 4Q09 Sunset DMD Service
• Continuing efforts to eliminate physical
  certificate processing

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Elimination of Certificated WTs

• After 1/12009, can you get a certificate?
• Bearers
• From the TA
• If issuer allows, through Exception WT Processing
• Costly

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Going Forward

• By 2011
• Immobilization complete
• Dematerialization 90 implemented
• Little to no Physical Withdrawals Less Deposits
• Explore new processing models
• Few certificates in system
• Listed issues participating in DRS
• Bearers matured
• Non-Transferables destroyed

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Questions/Comments?
QA
QA
QA
QA
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Resources

• Hand-outs in the back of room
• www.bdug.org
• www.dtcc.com/nomorepaper.com
• www.sec.gov
• www.sifma.org
• www.shareholderservices.org
• www.stai.org

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