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Difficulty: MediumDepositories, Clearing Corporations, and Settlement Entities

An institutional investor purchases shares of a corporate equity security through a participating broker-dealer. During the post-trade settlement process, how does the Depository Trust Company (DTC) primarily complete the transfer of security ownership between the buyer's and seller's clearing firms?

  1. By adjusting the central electronic book-entry accounting records of the participant broker-dealers' accounts.Answer
  2. B
    By acting as the central counterparty that novates trade obligations and guarantees final settlement payment.
  3. C
    By re-registering physical paper stock certificates directly into the name of the retail client.
  4. D
    By auditing member broker-dealers to enforce compliance with self-regulatory organization capital requirements.

Answer

The Depository Trust Company (DTC) completes ownership transfers by adjusting the electronic book-entry accounting records of participant clearing firms.
The Depository Trust Company (DTC) is a central securities depository that retains physical custody of securities and facilitates settlement by making electronic book-entry adjustments to the accounts of participant broker-dealers and financial institutions, avoiding physical stock movement.

Step-by-Step Solution

1
Identify the primary role of the Depository Trust Company (DTC) in post-trade processing.
DTC acts as the principal central securities depository in the U.S., holding securities in safe custody for participant financial institutions.
DTC's core purpose is custody and book-entry settlement rather than trade matching or clearing.
2
Distinguish DTC's settlement method from physical delivery and clearing clearinghouse functions.
DTC immobilizes physical certificates and processes transfer of ownership purely by updating central electronic participant accounts.
Book-entry movement eliminates the need to physically transport stock certificates between broker-dealers on settlement date.

Key Concept

DTC Central Securities Depository and Book-Entry Settlement
Estimated Time:1m 0s
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Topics

Depositories, Clearing Corporations, and Settlement Entities

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