Depository Trust & Clearing Corporation (DTCC)
What it is:
The Depository Trust & Clearing Corporation (DTCC) is a subsidiary of the National Securities Clearing Corporation (NSCC). The DTCC, established in 1973, settles transactions between buyers and sellers of securities.
How it works/Example:
When an investor sends an order to his or her broker and the trade is made with another broker/dealer or specialist, that trade information is sent to a clearing house such as the NSCC. The NSCC processes and records the trade, issues a report to the broker/dealers involved that includes their net securities positions and the money to be settled among the parties.
The NSCC forwards settlement instructions to DTCC, which electronically transfers the ownership of the securities from the selling broker's account to the buying broker's account. The DTCC also transfers funds from the buying broker's bank account to the selling broker's bank account. The brokerages then adjust their clients' accounts accordingly. The process is similar for institutional investors.
For most securities and trades, this occurs the same business day the trade occurs (this is called "T+0"), although not long ago it took one to three days (referred to as "T+3").
Source: The Depository Trust & Clearing Corporation
Why it matters:
Settlement is an important "back-office" function, and the faster it occurs, the more it reduces market risk by ensuring that trades are executed properly. Fast funds settlement also increases investor confidence in the markets by ensuring that their trades are completed on time and that they won't lose their funds to bankrupt brokerage firms or intermediaries. It also requires participants to have the money in their accounts as their trades are made (or arrange for credit before the trade is placed).