The Depository Trust & Clearing Corporation (DTCC) today announced it would automate and streamline the processing of a popular estate planning feature that allows beneficiaries to sell bonds and debt instruments back to their issuers at par value, helping reduce the risk and the cost associated with manual processing.
The feature, called the "survivor option" or "death put," allows the beneficiary of an estate to sell or "put" bonds back to their issuer for the original principal investment, rather than holding on to the bonds until maturity or selling them in the secondary market.
Processing a death put remains a costly, labor-intensive procedure. It begins with a flow of paperwork and documentation starting with the beneficiary, continuing with the broker or estate planner, and finally landing with the issuing and paying agent (IPA). Currently, when survivor options are paid, brokers and IPA's must conduct a manual trade in order to complete settlement.
DTCC will automate the survivor option in two stages, with completion scheduled for year-end 2009. In the first stage, which is currently in a pilot program, brokers will continue to forward physical documentation directly to the issuing and paying agent, but The Depository Trust Company (DTC), a DTCC subsidiary, will accept electronic instructions from the IPA and allocate payments through settlement as maturity presentments, providing a centralized source for processing medium-term notes with the survivor option.
In stage two, DTCC will automate the entire survivor option system by immobilizing paper documents sent to the IPA from the broker and enabling them to certify electronically that they are in possession of the required documentation.
"The problem with the survivor option is that it's a manually intensive process," said Douglas Reed, vice president of Citibank's Agency & Trust. "For example, the existing process does not ensure that bonds are presented on the put payment date. As the popularity of the option has increased, we, as an IPA, have wanted an automated, industry-wide solution for survivor option processing for some time. That's why we turned to DTCC." Reed said that Citibank has started processing transactions as part of the pilot.
With the dramatic increase in sase in survivor options in recent years, Edward Jones had developed its own tracking system and used both in-house staff and outside contractors to process two types of survivor option submissions - those submitted through DTCC or via the paying agent. "Streamlining these processes and leveraging paperless legal submission of survivor option requests with the enhanced DTCC system is expected to significantly free up staff and reduce costs," said Jennifer Willingham, estates department leader at Edward Jones.
"With the manual system, our staff spent a significant amount of time collating and preparing legal documents to be mailed to agents along with the submission requests. Elimination of the collation and mailings steps may result in as much as a 60% manpower savings as well as eliminating mailing costs," Willingham added.
"Automating the survivor option benefit of medium-term notes will help eliminate manual processing, reduce errors and rejections and speed up the process for beneficiaries, broker/dealers, banks and paying agents," said Patrick Kirby, DTCC managing director, Asset Services.
DTC customers, including brokers and IPAs, who wish to use the automated system must have access to DTC's Participant Terminal System or Participant Browser System and the new enhancements to process instructions and handle payments through DTC's settlement system.