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VAULT UPDATE AND DEMATERIALIZATION

BDUG

September 24, 2013

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Sandy Aftermath and Recovery

Super Storm Sandy hit us H A R D!

• Knocked out headquarters at 55 Water Street for months

• 1.8 million certificates underwater for 3 weeks

• Staff left with destroyed homes

• Others with no power for weeks

• Postal, Fed Ex and UPS facilities closed

• Local transfer agents were also hit

• Delayed implementation of important product upgrades

• Staff worked 6-7 days/week for months

• Irony: Occurred 3 months before Jersey facility was ready to open

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Business Contingency Plan

The plan worked as noted:

• Immediately transferred all settlement and asset servicing functions to Tampa

• Temporarily suspended physical processing

• Activated the contingency facility – DTCC Brooklyn

• Staffed DTCC Brooklyn as authorities and conditions permitted

• Contacted Balfor to recover certificates

• Negotiated with transfer agents to use LOI & attestation in lieu of unavailable certificates

• Support staff worked “remotely”

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The Results

What happened and where we are now:

• Tremendous industry support – our thanks to all!

• Back to “business as usual” , with few exceptions

• Moved to the Jersey City Facility in January

• All non-contingency Operations have left DTCC Brooklyn

• Balfor did a great job on the certificate recovery

• Working on completing the Vault certificate audits

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Why Bring This Up?

The costs to restore the physical securities is staggering:

• 1.8 million total certificates: 1.2 million Cede and 600,000 Custody

• 99.9% of all certificates recovered with… 2,426 still pending recovery – a great story!

• 344,000 of the 1.2 million (30%) are “non-transferable”

• 365,000 equity certificate. Many could have been dematerialized.

• This hurricane hit NY. Could have been a flood in Colorado, fire in California, tornado in Texas, etc.

• Did not learn enough from 9/11

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Dematerialization: Recap

• DTCC issued an industry white paper, “A Proposal to fully Dematerialize Physical

Securities, Eliminating the Costs and Risks they Incur”, on July 3rd, 2012.

• DTCC proposed alternatives to its physical processing model to promote feedback

about DTCC’s role as central service provider for physical certificates while

highlighting the need to reduce the costs and risks associated with them.

• DTCC received strong overall support for advancing dematerialization as well as

confirmation of DTCC to continue as central immobilization provider.

• Over the last several months DTCC has been promoting the white paper with key

stakeholders including SIFMA, STA, SSA, AGC, ISITC and the ABA.

• A Cross Stakeholder Forum on Dematerialization was formed in April 2013 to begin

the process of identifying the steps the industry can take to further reduce and

eliminate certificates.

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Four Main Pillars of Dematerialization

• Mandate DRS “Statement Only” Form

• Expand DRS for “Restricted Equities”

• Accelerate the destruction of non-transferable securities

• New Issues– Pursue an electronic Certificate “e-Cert” or concept to eliminate the need for the

issuance for a physical certificate at the time of issuance for certain outlying asset types.

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Direct Registration System (DRS)

• DTCC in conjunction with industry stakeholders proposes changes to DRS to further the securities industry’s goal of full dematerialization of U.S. Equities.

• DRS uses “statements” as an alternative to physical certificates that reflect beneficial owner registration details as recorded on the books of the issuer/transfer agent.

• All listed U.S. equities were mandated to be DRS eligible in 2008.

• DRS has three forms of eligibility/participation. Issuers select an “eligibility type” that governs the handling of the respective issuance.

– Issues eligible in certificate or statement form– Issues eligible in statement only form– Issues eligible in certificate only form, aka “DRS eligible but not participating”.

• These choices of eligibility were introduced to help encourage DRS usage in its early

days.

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Mandate DRS Participation

• New Issues - for any new listed equity seeking DTC eligibility, modify DTC eligibility requirements to include DRS participation and statement-only as a requirement. This also addresses "eligible but not participating" status for all new issues.

– Allow for an exception for:• Restricted Shares • Certain foreign issues from countries whose laws don’t allow for book-entry ownership such as DRS

and allows for the right to obtain a certificate. – Participants in the Cross Stakeholder Forum generally are supportive of DTCC moving forward on this.– The NYSE is in support of this but feels that a change to their listing requirements and a rule filing will be

required.– NASDAQ is also supportive.

• Existing Issues- Leverage the Cross Stakeholder Forum to put forth recommendations to convert existing issues to “statement only” form.

• Look to expand on DRS to implement DRS +- Broker controlled DRS

- Exchange of files

- DTC as “hub”

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Direct Registration System (DRS) by Eligibility Type

DRS Eligible Issues As of 4/28/08 As of 12/28/12 As of 9/16/13

Total Number of DRS-Eligible Issues 7,456 7,131 7,327

Issues Eligible in Certificate or Statement Form 5,491 5,921 6,042

Issues Eligible in Statement Only Form 344 788 892

Issues Eligible in Certificate Only Form (Not Participating) 1,621 422 393

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2012 Physical Deposits by Type

84%

6% 7%

3%

Deposits

FAST DRS Eligible FAST Non DRS EligibleNon FAST Deposits FAST DRS Not Participating

Deposit Category Deposits Daily Ave.FAST DRS Eligible 387,172 1542.52FAST Non DRS Eligible 27,515 109.62Non FAST Deposits 34,255 136.47FAST DRS Eligible not participating 11,889 47.37

Total 460,831 1835.98

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Deposit & Withdrawal Average Daily Activity 2000-2012

12

20002001

20022003

20042005

20062007

20082009

20102011

20120

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

DepositsWithdrawals

Deposits down16% on averageAnnually.

WT’s down 23%on average Annually.

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Withdrawals and Deposits

Withdrawals vs Deposits

Category

Withdrawal (Thru Dec.

2012) Daily Avg.

W/T

Deposits (Thru Dec.

2012)Daily Avg. Deposits

FAST DRS Eligible – Certificate or Statement Form 123,109* 490 387,172 1,542

FAST Non DRS Eligible - Certificates 6,955 27 27,515 110

Non FAST Eligible - Certificates 411 2 34,255 136

FAST DRS Eligible not Participating 11,889 47

Total 130,475 519 460,831 1,835

All of the above deposit volume is in physical form. Each deposit includes an average of 3 certificates per deposit. * All FAST DRS Eligible WT’s default to “Statement Only” form.

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Next Steps

• Continue to build consensus through the Cross Stakeholder Forum

• Confirm “proof of concept” for an expanded “DRS like” capability for Restricted Equities: DRS +

• Collaborate with SIFMA CAS to develop a plan to accelerate the destruction of Non-Transferable securities

• Work with DTCC’s Legal to identify ways to eliminate paper certificates for outlying asset types (e.g. CD’s and Global BEO’s).

• Continue to expand FAST – more TAs and issues

• Look at pricing options

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Questions