Submitted by Tyler Durden on 11/15/2012 17:32 -0500
As has been widely reported previously, while the NY Fed's deep underground gold vault remained dry during the Sandy flooding in downtown NY, one institution which got badly hurt was the DTCC, aka Cede & Co (profiled here in July of 2009 in " The Biggest Financial Company You Have Never Heard Of"), which is the entity serving as custodian of virtually every electronically traded security in the modern marketplace (equity, debt, derivative, synthetic, in fact anything which is not a physical asset in itself and is not in the hands, or safe, of the rightful owner). We put the emphasis on electronically, because DTCC is also the actual custodian of all physical proof of stock ownership, such as certificates, bond deeds, and the like. It is the largely irrelevant latter (because it has been several decades since anyone actually demanded a physical copy of the stock certificates backing their shares of company XYZ) [??Eliminating a Financial Intermediary??] that the DTCC got in trouble for when its securities vault got flooded, and in the process destroyed countless physical stock certificates. Note we did not use the word electronicbecause those are there and accounted for in numerous back up data sites, with full designation and attribution. In other words anyone who made a mountain out of this particular mole hill sadly has no idea how modern markets operate, since all that the DTCC needs to do to remedy the flooding damage is to notify transfer agents of this natural disaster, and then have duplicate stock certificates printed at a cost of 1 cent for every thousands or so print outs. Which is more or less what the DTCC also just said in its press release.
DTCC Statement on Condition of Securities Vault
NEW YORK--(BUSINESS WIRE)--The Depository Trust & Clearing Corporation (DTCC) has begun the initial phase of recovering the contents of its securities vault. Our analysis of the condition of the vault, once we were able to open it, was that significant flooding and water damage occurred throughout the facility. While it is premature to determine the full extent of the damage, it is essential to begin the restoration process to avoid further deterioration.
DTCC has retained highly-recognized, well-respected disaster recovery and expert restoration firms to work with on this important effort in order to carefully and diligently address the challenges resulting from the damage caused by Superstorm Sandy.
DTCC expects to have a more accurate assessment of the condition of the physical securities within a week’s time. It is too early to determine how many of the physical certificates can be restored. The restoration process will take some time, possibly months.
DTCC maintains a robust certificate inventory file with ownership information that can be replicated from our multiple data centers. The company’s computer records are fully intact, including detailed inventory files of the contents of the vault. This effort is more of an administrative and logistical challenge than an economic issue. DTCC is engaged in active discussions with representatives of various transfer agents for the purpose of establishing a protocol for the issuance of replacement certificates, without requiring the presentation of the original certificates.
Cataclysm averted.
Or maybe not. Because at the end of the day, it is not whether or not the physical stock certificate for a given holding was damaged in the flood. What is far more troubling, and has been since the advent of Cede & Co as master custodian, is that regardless of the content of its securities vault, it is the DTCC that is the rightful and ultimately legal owner of every security. Or would be in case Cede & Co decided to make it a legal matter of assigning ownership: good luck in a legal battle with a company that is owned by every major financial institution in the US [← ??This is the DTCC board.] (including Goldman, JPM, the NYSE and of course, the Fed).
In other words, it was not DTCC's flooding that was the issue: that is largely irrelevant. It is the fact that DTCC, and its "partnership nominee" exist, and that they are in effect, the default custodians of every transaction. Because if the day comes when all securities-based property has to be "sequestered", all that would be needed is one quick phone call to DTCC and it's done and done.