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Last week, the SEC posted an order approving proposed rule changes to amend DTC’s Redemptions Service Guide and Operational Arrangements to update its Payment without Presentation process, which, the order explains, “permits Agents to remit maturity or full call proceeds to DTC without requiring delivery of the associated physical certificate and allows them to rely instead on DTC’s book-entry records of entitlements.” This is a technical rule change, but I found there were times in practice when I needed at least a cursory understanding of how DTC processes work. Here’s how the order explains the old process and the new process:

Under the current procedure for redeeming a debt security at maturity, DTC submits a physical debt certificate and a Letter of Transmittal (“LT”) to the Agent prior to the release of redemption proceeds from the Agent to DTC. After receiving both documents, the Agent releases the funds, and DTC then distributes the funds to Participants and deletes the Participants’ positions from DTC’s records. Alternatively, Paying Agents and Issuers currently utilizing DTC’s Redemption PWP process for Fast Automated Securities Transfer (“FAST”) and Book-Entry-Only (“BEO”) issues agree to accept DTC’s automated notifications instead of physical Shipment Control List and Redemption Payment Summary forms for redemption payments. The Agent and Issuer must agree to review relevant details prior to the redemption date and report any discrepancies at the CUSIP level prior to payment. Redemption payments are then remitted to DTC in accordance with the procedures described in the OA.

The Proposed Rule Change seeks to amend the Redemptions Guide and the OA to update the PWP process. The Proposed Rule Change would: (i) eliminate the need for a LT or the presentment of certain other physical documents; (ii) include in the Rules that Agents may receive automated notifications; (iii) make participation in the PWP process mandatory, with optout permitted only where necessary; (iv) establish retention and destruction protocols for physical certificates; and (v) make clarifying and conforming changes.

With respect to items (i), (ii) and (iv) above, the Proposed Rule Change would no longer require a physical certificate presentment or related physical documentation for eligible redemption and maturity events. Agents may continue to receive automated notifications that provide information on the relevant security (including CUSIP), payment date, and amount due. These notifications would be sent electronically to Agents prior to the event. An agent must optin to receive these notifications and does so by sending an email to the redemptions operations team.

Physical certificates related to these events would no longer be delivered to Agents. Agents would remit proceeds to DTC without receipt of a LT or other physical certificates, then DTC would allocate redemption proceeds to Participants based on its book-entry records and remove any positions from its records following payment. The associated physical certificates would be segregated and imaged for record retention purposes, retained for at least ninety days following redemption, and then destroyed according to DTC’s procedures.

With respect to item (iii) above, participation in the PWP process would be mandatory for all eligible fully registered debt securities represented by physical certificates held at DTC and registered under the name Cede & Co. Exceptions to participation are permitted solely to comply with a state statute, court order, or other legal or regulatory obligation, or if the Agent is a governmental entity or authorized representative requiring physical documentation.

– Meredith Ervine