In October of last year, the Boston Consulting Group issued a report of their analysis of the costs 
and benefits of shortening the settlement cycle. The report was funded by the Depository Trust and Clearing Corporation DTCC and estimated that shortening the settlement cycle from the current Transaction Date plus 3 days (T+3) to T+2 would achieve an industry operational payback within 3 years or 10 years for T+1. The major reasons cited are cost savings from Straight Through Processing (STP) and reduced risk.
One of the challenges to moving to STP has been continued delivery of paper certificates for physical securities. I have to confess that I thought paper certificates had disappeared at least a decade ago but, apparently they are still popular in the U.S. and elsewhere. Apparently, since 2000 the number of physical certificates processed has dropped from 8 million to about 1 million but the remaining volume appears to be persistent. Some retail broker dealers continue to process as many as 300 physical certificates per day at significantly higher costs than securities in book-entry form. The delivery of physical prospectuses is also a target for cost savings.
There are many costs beyond the production of the paper itself: vault costs, lost certificate insurance, personnel to process the physical documents and the costs to ship them. And there are many processing charges associated with certificates that one would think would have been onerous enough to make them go away. Here are just a few DTCC certificate related charges:
- General Assets: $8 per side of certificate to photocopy
- Bonds: $1.0f per position to copy and bind certificates in a book.
- Custody: $100 per side of certificate to photocopy and send certificate
There are many places where paper is beneficial – this just doesn’t seem to be one of them. According to BCG, 68% of firms surveyed were in favor of streamlining yet the streamlining initiatives seem to be at risk of fading away again. We may still be passing paper certs in 2020.
Elizabeth Gooding is the editor of the Insight Forums blog and president of Gooding Communications Group www.GoodComm.net
