Central Securities Depository: Functions, Examples

What is a Central Securities Depository?

A Central Securities Depository (CSD) is a specialized financial institution that serves as a central hub for the safekeeping, settlement, and management of securities in electronic or dematerialized form. These securities can include stocks, bonds, treasury bills, and other financial instruments.

A Central Securities Depository (CSD) is also referred to as a Securities Depository or simply as Depository. In some countries they are also known as National Securities Depository (NSD), when they operates at the national level within a specific country. The term national indicates that the CSD serves as the primary depository for the nation’s securities.

CSDs provide a secure and centralized location for the safekeeping of various types of securities, including stocks, bonds, government securities, and other financial instruments. Securities are held in electronic form, eliminating the need for physical certificates.

During securities transactions, CSDs facilitate the transfer of ownership of securities from sellers to buyer. This process ensures that the legal ownership of the securities is accurately recorded and transferred.

CSDs maintain comprehensive records of all securities held within their depository. This includes information on the owners, issuers, and the history of transactions for each security. This record-keeping function ensures transparency and legal certainty in ownership rights.

CSDs work closely with other components of the financial market infrastructure, such as stock exchanges, securities regulators, brokerage firms, and other market participants. This integration is crucial for the seamless operation of the entire market ecosystem.

Similar to the other stock market participants, CSDs also are subject to regulations and oversight by government and financial authorities to ensure that they operate in a safe and reliable manner. Compliance with regulations is essential to maintain the trust of market participants.

Additionally, CSDs also assist in the processing of corporate actions such as mergers, acquisitions, stock splits, and rights issues. They help ensure that shareholders’ rights are properly exercised during such events. They also often handle the distribution of dividends and interest payments to the owners of the securities and ensure that payments are made accurately and promptly to the registered holders.

Role of Central Securities Depository (CSD)

Central Securities Depositories (CSDs) play an important role in the post-trading phase of securities transactions, ensuring the safe and efficient transfer of ownership and the maintenance of records. Here’s a brief breakdown of what happens in the market and the role of CSDs in the process:

1. Securities Transaction

The process begins when an investor decides to buy or sell securities, such as stocks, bonds, or other financial instruments. The investor places a buy or sell order with their broker or financial institution, specifying the type and quantity of securities they want to trade. The broker or financial institution forwards the investor’s order to the stock exchange or trading platform, where the exchange matches the buy and sell orders and executes the trade.

However, the mere execution of these orders doesn’t immediately alter the ownership of the securities involved. This is where the post-trading phase comes into play.

2. Clearing & Settlement

After the trade execution, the financial transaction must go through the settlement process. This entails transferring the buyer’s payment to the seller while simultaneously transferring the ownership of the securities from the seller to the buyer.

Trade details, including the buyer’s and seller’s information, the quantity of securities, and the agreed-upon price, are collected and compiled for clearance. The clearing house receives this trade data and verifies its accuracy to ensure it matches the records of both the buyer and the seller.

The clearing house takes on the role of novating the trade, effectively becoming the counterparty to both the buyer and the seller. This eliminates counterparty risk because the clearing house guarantees the trade’s successful completion.

3. Ownership Transfer & Records Maintenance

The CSDs come into play after the trade has been cleared and settled by the clearing house. They ensure the proper transfer of ownership of securities from the seller to the buyer.

Once a trade is settled, the Central Securities Depository (CSD) ensures that the legal ownership of securities is accurately updated by debiting the seller’s securities account and crediting the buyer’s securities account. This ownership transfer is recorded electronically within the CSD’s systems.

4. Records Maintenance

Beyond settlement and ownership transfer, the Central Securities Depository (CSD) continues to play a role in the safekeeping of securities. They store electronic records of ownership and manage the custody of securities to ensure their security and integrity. These records include information such as who owns a particular security at any given time and the history of securities transactions.

Functions of Central Securities Depository

The Central Securities Depository (CSD) performs a range of functions critical to the efficient and secure operation of financial markets.

Securities Safekeeping: CSDs act as secure custodians for a wide range of financial instruments, including stocks, bonds, and other securities. They hold these assets in electronic form, eliminating the need for physical certificates, which reduces the risk of loss or theft.

Settlement of Securities Transactions: Along with clearing houses, CSDs play an important role in the settlement of securities transactions. They ensure the orderly transfer of ownership from sellers to buyers, coordinating the movement of securities and funds between market participants.

Dematerialization: CSDs support the process of dematerialization, converting physical securities into electronic or dematerialized form. This enhances security, reduces administrative burdens, and streamlines the trading process.

Book-Entry System: CSDs maintain a centralized book-entry system that records and updates ownership information for securities. This electronic record-keeping system allows for easy and efficient transfers of ownership without the need for physical certificates.

Corporate Actions Processing: CSDs handle various corporate actions on behalf of investors, including dividend payments, interest payments, stock splits, mergers, and acquisitions. They ensure that shareholders receive the benefits and entitlements associated with their holdings.

Issuance of New Securities: CSDs facilitate the issuance of new securities by ensuring that the registration, allocation, and distribution of new securities are carried out accurately and in compliance with regulatory requirements.

Securities Lending and Borrowing: Some CSDs offer securities lending and borrowing services, enabling market participants to lend or borrow securities for short selling, hedging, or other purposes.

Collateral Services (Pledge or Hypothecation): Some CSDs provide collateral management services, allowing market participants to use securities holdings as collateral for various financial transactions, including margin requirements for derivatives trading.

Investor Services: CSDs offer a range of services to investors, such as providing account statements, dividend payouts, and tax-related information.

Global Connectivity: Many CSDs establish links and partnerships with other CSDs and international clearinghouses to facilitate cross-border trading and settlement.

How Central Securities Depositories (CSDs) Work?

1. Creation of Securities Accounts & Dematerialization

Investors do not directly interact with the Central Securities Depository (CSD) but instead work through an intermediary. Intermediaries can be stock brokers, banks, or other financial institutions that are members of the CSD. These intermediaries facilitate the account opening process.

The investor (retail or institutional) submits an application for a securities account to their chosen intermediary. The application typically includes personal or organizational information, such as legal name, contact details, tax identification number (for individuals), business registration documents (for institutions), and any other information required by the Central Securities Depository (CSD) or local regulations.

The intermediary reviews the application and verifies the provided information. Once the application is approved, the securities account is activated by the intermediary, and the account holder receives a unique account number or identifier. Whenever an investor buys securities, the Central Securities Depository (CSD) records the ownership of those securities in this securities account.

CSDs also support the dematerialization of securities. This process involves converting physical certificates into electronic records. Dematerialization enhances security, reduces the risk of loss or theft, and streamlines the trading and settlement processes. Once dematerialized, securities exist only as electronic entries in the CSD’s records.

2. Ownership Records, Securities Safekeeping & Book-Entry System

The Central Securities Depository (CSD) maintains a central registry of securities and their ownership records. Ownership records are continually updated to reflect changes in ownership due to securities trading, corporate actions (e.g., dividends, stock splits, mergers), or any other events that affect the ownership structure.

When a securities trade occurs, the Central Securities Depository (CSD) records the details of the trade, including the security name, quantity, price, and the buyer’s and seller’s account numbers. Once the trade is settled by the clearing house, the CSD updates its ownership records to reflect the transfer of ownership from the seller to the buyer. This ownership transfer is done electronically and is reflected in the CSD’s database.

CSDs act as secure depositories for various financial instruments, including stocks, bonds, and other securities. They hold these securities in electronic book-entry form. They employ rigorous security measures to protect against unauthorized access, fraud, or data breaches. This ensures the safekeeping and security of the assets.

The centralized book-entry system enables CSDs to record the ownership of securities electronically. Instead of paper certificates, investors’ ownership is represented by digital entries in the CSD’s database. Each book-entry record corresponds to a specific quantity of a security and is associated with the owner’s account. This system enables efficient transfers of ownership without the need for physical certificates.

3. Securities Issuance, Corporate Actions Processing & Dividend and Interest Payments

A Central Securities Depository (CSD) facilitate the issuance of new securities (e.g., corporate bonds, government bonds, and equities) into the market. They ensure the accurate registration, allocation, and distribution of newly issued securities. This includes recording the initial ownership and maintaining the records throughout the security’s lifecycle. They also assist in the redemption or retirement of securities when they reach maturity.

CSDs support various corporate actions, such as stock splits, rights offerings, mergers, and other corporate events. They ensure that these actions are accurately applied to the accounts of the corresponding security holders and accordingly adjust these ownership records.

CSDs also handle the distribution of dividend payments and interest payments to the registered holders of securities. They ensure that these payments are made accurately and promptly. When companies distribute dividends or pay interest on bonds, the CSD records these payments in the ownership records. Account holders receive the corresponding dividend or interest payments in their linked cash accounts.

4. Investor Services, Transparency & Trust

CSDs provide regular statements and reports to account holders, summarizing their securities holdings, transaction history, and other relevant information. They also assist in resolving issues related to securities holdings and reconciliation of entitlements like dividends.

Since CSDs maintain precise and time-stamped records of when securities belong to whom and when ownership changes occur, it enhances market transparency and serves as an authoritative source for verifying ownership.

The presence of a reliable Central Securities Depository (CSD) within a financial market plays a major role in bolstering investor confidence and ensuring the integrity of the financial system. For both individual and institutional investors, knowing that their assets are held in a secure and regulated environment is essential. This peace of mind is invaluable in preserving and enhancing investor confidence. Institutional investors, such as mutual funds or pension funds, manage the wealth of many beneficiaries. Their ability to assure these beneficiaries that their investments are held securely is a fundamental aspect of their trustworthiness.

Benefits of Central Securities Depository

Central Securities Depositories (CSDs) offer several benefits to the financial markets and market participants.

Dematerialized certificates are more secure than paper certificates

CSDs enable the conversion of physical securities (paper certificates) into electronic form, making it more secure and efficient. This eliminates the risk of loss, theft, or damage associated with physical certificates.

Settlement process is faster and efficient

CSDs streamline the settlement process by facilitating the electronic transfer of ownership and funds. This results in faster and more efficient settlement of securities transactions, reducing the risks and costs associated with delayed settlement.

Proper risk management practices reduce default risks

CSDs implement risk management practices to minimize counterparty risk. They often require participants to provide collateral, reducing the risk of default and ensuring the stability of the settlement process.

CSDs help save on operational costs

By eliminating the need for physical certificates and reducing settlement times, CSDs help market participants save on operational and administrative costs.

CSDs enhance market transparency

CSDs provide transparency in securities transactions. Investors can access their account statements, transaction history, and other information, contributing to greater trust and understanding of their holdings.

Reliable CSDs enhance investor confidence

The presence of a reliable CSD in a market can enhance investor confidence. Investors and market participants have assurance that their securities are held securely and that transactions will be settled promptly.

Examples of Central Securities Depository

Each country has its own Central Securities Depository (CSD), which facilitates the secure and efficient transfer of ownership, securities safekeeping, maintenance of records, and the functioning of financial markets in accordance with local regulations and market practices.

In the United States, the primary entity responsible for securities depository services is the Depository Trust Company (DTC), a subsidiary of the Depository Trust & Clearing Corporation (DTCC).

While the United States doesn’t have a single CSD for all securities, the DTC serves as a central securities depository for a substantial portion of the U.S. securities market. It is responsible for maintaining records of ownership, facilitating the transfer of securities, and ensuring the efficient settlement of securities transactions.

“DTC brings efficiency to the securities industry by retaining custody of more than 1.4 million active securities issues valued at US$87.1 trillion, including securities issued in the US and more than 131 countries and territories,” as per the DTCC website.

Some regions and countries have more than one central securities depository. This can happen for various reasons, including historical developments, and regulatory changes. For example, the European Union (EU) and India.

In the European Union, there are two major CSDs:

• Euroclear: Euroclear is one of the largest CSDs in the European Union and is responsible for the settlement and safekeeping of a wide range of securities, including stocks, bonds, and other financial instruments.
• Clearstream: Clearstream, a subsidiary of Deutsche Börse Group, is another prominent CSD in the European Union. It offers international central securities depository services, clearing, and settlement services.

The major CSDs in India are:

• Central Depository Services Limited (CDSL): CDSL is one of the two government-authorized CSDs in India. It maintains electronic records of various financial instruments, including equities, debt securities, and mutual fund units.
• National Securities Depository Limited (NSDL): NSDL is the other government-authorized CSD in India. Similar to CDSL, it provides services for the electronic holding and transfer of securities.

Central Securities Depository List

Central Securities Depository (CSD) organizations have different names in various countries and regions. Here are some examples of CSD organizations by country or region:

Country/Region	Central Securities Depository (CSD) Organization Name(s)
United States	Depository Trust Company (DTC)
United Kingdom	CREST
European Union	Euroclear, Clearstream
Canada	The Canadian Depository for Securities Limited
Australia	ASX Settlement & Transfer Corporation Pty Limited,
Japan	Japan Securities Depository Centre (JASDEC)
India	Central Depository Services Limited (CDSL), National Securities Depository Limited (NSDL)
Singapore	The Central Depository (Pte) Limited
New Zealand	New Zealand Central Securities Depository
Brazil	B3 S.A. – Brasil, Bolsa, Balcão
Mexico	Instituto para el Deposito de Valores (S. D. INDEVAL)
South Africa	Strate Limited