The depository, DTC, and the oldest of our clearing subsidiaries, NSCC, were both created in response to the paperwork crisis that developed in the securities industry in the late 1960s and early 1970s. At that time, brokers still exchanged paper certificates and checks for each trade, sending hundreds of messengers scurrying throughout Wall Street clutching bags of checks and securities.

Wall Street's "Paperwork Crisis"

With the New York Stock Exchange (NYSE) handling 10 to 12 million shares daily, brokers were literally buried in paperwork, and concern about risk was growing in Congress, the Securities and Exchange Commission, and elsewhere.

The crisis became so severe that, in order to help reduce the backlog, the exchanges closed every Wednesday, shortened trading hours on the other days, and extended settlement to T+5 from T+4. Eventually the industry developed two separate and distinct approaches to solve the paperwork problem.

One Solution: Immobilization

The first solution was to immobilize physical stock certificates by maintaining them in a central location or depository, and to record changes of ownership using "book-entry" accounting methods where no certificates actually change hands. Initially, this was done by the NYSE and its Central Certificate Service. That led to the creation of DTCC's depository subsidiary in 1973.

Another Solution: Netting

The second approach to solving the paperwork crisis involved a concept called multilateral netting. If one broker does 100 trades in IBM, both buying and selling at different prices with a variety of different brokers, there are few opportunities for netting. By interposing a central organization as the counterparty to all trades, all that broker's trades in IBM can settle to one net position, and all money for trades in all securities can settle to a single dollar figure owed to or from the central counterparty.

Today, with net money settlement, only a single money transfer is required, reducing the dollar amount of financial obligations by as much as 98%.