Stock and bond certificates held in an underground Manhattan vault owned by the Depository Trust & Clearing Corp. were damaged by flooding in Hurricane Sandy, according to the DTCC.
The New York-based company that processes transactions in U.S. equities and government, municipal and corporate bonds said it’s too early to determine how many of the 1.3 million physical certificates can be restored, according to a statement. The 40- year-old vault was submerged when the Atlantic Ocean’s largest-ever tropical storm slammed New York City. DTCC has hired “disaster recovery and expert restoration firms” to work on the project, the firm said.
“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,” DTCC said of the 10,000-square-foot storage chamber at 55 Water Street in lower Manhattan. “While it is premature to determine the full extent of the damage, it is essential to begin the restoration process to avoid further deterioration.”
Computerized ownership records for the company’s holdings of certificates are “robust,” DTCC said. The company called the effort of sorting through the damage “more of an administrative and logistical challenge than an economic issue” and said it’s talking to transfer agents about determining the process for issuing replacement certificates without requiring the originals, according to the statement.
The DTCC processes the underwriting of stock and bond offerings, electronically registers securities and ensures that dividend payments are accurate, according to the company. It also manages transactions and payments in equities and fixed income and guarantees that trades settle. Purchases and sales are mainly handled through electronic book entry, with the securities registered in the name of DTCC unit Cede & Co.
The company’s subsidiaries processed about $19 trillion in securities trades the week of Oct. 29, compared with an average of $23.1 trillion this year. It handled transactions from the previous week by moving people to its Brooklyn data center, Michael Bodson, president and chief executive officer, said in a phone interview on Nov. 7. About 600 of the 2,000 employees at the company’s headquarters, which were shut, were working in the Brooklyn facility last week, he said.
The DTCC is owned by banks, brokers, mutual funds and other financial institutions.
The destruction or damage of certificates won’t hurt investors and is mainly a “nuisance” for the DTCC, James Steven Rogers, a professor at Boston College Law School, said in a telephone interview. He was the principal drafter of the 1994 revision to the commercial law of investment securities that deals with issues such as what happens when a person has lost a certificate.
“In equity securities the presence or absence of the piece of paper is essentially irrelevant,” Rogers said. “If someone can by other means prove the ownership, they can work it out. It might just be a nuisance to replace the certificates. It has no systemic impact on markets.”
Problems could occur in instances such as a municipal bond issued in the form of bearer certificates in 1920 that matures 99 years later, Rogers said. Bearer securities don’t have a record of ownership other than the certificate. Still, the law offers a way for people to establish ownership of lost or destroyed certificates, making the original pieces of paper less important, he said.
“People theoretically might have problems demonstrating their positions,” he said. “On the other hand, DTCC has scads of other records of the fact that it had these certificates.”
Certificates in the vault have been recorded electronically with the data accessible from multiple locations, Bodson said. DTCC also has images of all bearer stocks and bonds in the vault, he said last week.
The weekend before Sandy hit the East coast, DTCC switched day-to-day command of its operations to its office in Tampa, Florida, and moved control of the technology that runs its clearing and settlement business and record-keeping to its Dallas data center, Bodson said. The organization has had a disaster recovery center outside New York since 1980, according to a report published that year.
“Over the weekend we saw flooding would hit lower Manhattan and declared we were going into recovery mode,” Bodson said. “Given our criticality to the U.S. financial system, we have very, very robust disaster-recovery plans that have been built up over the years. We kept operations going. We did not have any significant issues other than the vault.”
The company occupies eight of the 54 floors at 55 Water Street, according to Bodson. The vault, three levels below ground and built on bedrock, contains 1.3 million stock and bond certificates and other securities stacked on shelves like in a library, he said.
The DTCC said in 2009 it would relocate about 1,600 employees to offices in Jersey City, New Jersey, in the beginning of next year. The contents of the vault were going to be moved to a vault in the new location, Bodson said.
In 1987 the DTCC doubled the size of its largest storage facility, in Garden City, Long Island, and said it would close two smaller chambers, according to its annual report that year. The vault at 55 Water Street is now the company’s main facility.
A more accurate assessment of the condition of the damaged securities may be available within a week, while the restoration process may take months, DTCC said yesterday. The company’s subsidiaries processed trades valued at about $1.7 quadrillion last year and provides custody and asset servicing for securities issues valued at $39.5 trillion, the DTCC said.
The DTCC has been working on a plan to eliminate physical securities in U.S. markets to make processing more efficient and reduce risks. In a July report the company said there were 86 percent fewer certificates in its vault than there were in 2000. The inability to cope with the growing number of certificates in 1968 and 1969 led to the New York Stock Exchange closing every Wednesday and subsequently operating with shortened hours to allow member firms to process the backlog.
What came to be known as Wall Street’s paperwork crisis drove a legislative overhaul of the securities industry and the creation of a national market system through the Securities Acts Amendments in 1975. The Depository Trust Co. was formed in 1973 to deal with the problems of the certificates. The creation of the U.S. national clearance and settlement system followed to allow brokers and banks to keep securities in a centralized depository and settle trades by computerized book entry.
Security certificates are no longer vital even though paper certificates haven’t been eliminated, Rogers of Boston College Law School said.
“We might look at this event in five years as a blessing,” he said. “All these old pieces of paper were destroyed and people realized it didn’t make any difference.”
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