DTCC says AIP service boost will help broker-dealers with possession and control

Source: Depository Trust & Clearing Corporation

The Depository Trust & Clearing Corporation (DTCC) announced today that its Alternative Investment Product service (AIP) is now able to facilitate the custody of uncertificated alternative investments for broker/dealers who process these securities on AIP.

This development follows a recent Securities and Exchange Commission (SEC) rule filing by DTCC's subsidiary, National Securities Clearing Corporation (NSCC), aimed at providing greater efficiency, standardization, automation and improved transparency for the custody of uncertificated alternative investments.

"AIP continues to bring much needed operational relief to the alternatives marketplace with this latest breakthrough," said Ann Bergin, managing director and general manager, DTCC Wealth Management Services. "AIP was designed as a single-source solution that could handle myriad processing challenges. Now that we have extended the platform's capabilities to address custody and possession requirements, we anticipate adoption of the service to accelerate."

Since inception, AIP has standardized the way the alternative investment industry communicates information related to these investments. The AIP service links global market participants, including broker/dealers, fund managers, administrators and custodians, providing an end-to-end processing solution for alternative investment products such as hedge funds, funds of funds, private equity funds, managed futures, and non-traded real estate investment trusts.

Traditionally, investment in alternatives has been handled through hard copy, fax, email, phone calls and spreadsheets. This lack of automation and centralization prolongs the transaction process, making these methods inefficient and expensive. Leveraging DTCC's infrastructure, the AIP service streamlines, automates and centralizes all the processes related to trade order initiation, money settlement and post-trade reporting, bringing significant operational efficiencies, risk mitigation and transparency to the alternative investments community while facilitating market growth.

Background on Broker/Dealer Possession and Control Requirements and NSCC's SEC Rule Filing
SEC Rule 15c3-3 generally provides that registered broker/dealers are required to establish physical possession or control of all fully-paid securities and excess margin securities carried by the broker/dealer for the account of customers. In general, however, the securities of alternative investment products are uncertificated securities. Because uncertificated securities cannot be physically held in a broker/dealer's possession, broker/dealers often rely on SEC Rule 15c3-3(c), which provides that securities can be held in other locations that the SEC designates to be adequate for the protection of customer securities.

Over the years, SEC staff has permitted broker/dealers to designate certain entities as good control locations for uncertificated securities, subject to certain conditions, where the entity is obligated to create and maintain the ownership records with respect to the uncertificated securities. Among these conditions, the broker/dealer must obtain certain assurances and representations from the related good control location entity. In light of NSCC's recent SEC rule filing, AIP can now offer an industry-wide solution that standardizes and automates how participating broker/dealers obtain these assurances and representations from their designated participating good control locations.

NSCC filed its rule change on March 7, 2012 in response to a recent No-Action letter issued by the Division of Trading and Markets of the SEC to Charles Schwab. The rule change was immediately effective. 

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