Chapter 9 Depository System
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The Depository System in business refers to a method of securities settlement and custody that streamlines the process of buying, selling, and holding financial securities such as stocks, bonds, and mutual funds. Instead of physical certificates, securities are held and transferred electronically.
Here's how it generally works:
Depository: A central securities depository (CSD) acts as a trusted intermediary between buyers and sellers in the financial markets. In many countries, there is a single, centralized depository that oversees the process. Examples include the Depository Trust Company (DTC) in the United States and Euroclear in Europe.
Participants: Financial institutions like banks and brokerages, as well as institutional investors, are participants in the depository system. They maintain accounts with the depository through which they conduct transactions on behalf of their clients or themselves.
Dematerialization: Securities certificates are converted into electronic records, a process known as dematerialization. This eliminates the need for physical handling and storage of paper certificates, reducing the risk of loss, theft, or damage.
Electronic Transfer: When securities are bought or sold, ownership is transferred electronically between the buyer and seller's accounts within the depository system. This transfer is swift and efficient, usually occurring within a few days, which helps expedite transactions in the financial markets.
Custody and Safekeeping: The depository system also provides custody and safekeeping services for securities. Investors' holdings are kept securely within their accounts, reducing the risk of loss or theft.
Corporate Actions: The depository system facilitates corporate actions such as dividend payments, stock splits, and mergers. These actions are automatically processed within the system, and shareholders are notified accordingly.
Overall, the depository system plays a vital role in modern securities markets by providing a secure, efficient, and transparent infrastructure for trading and holding financial assets. It enhances market liquidity, reduces transaction costs, and improves investor confidence.