The depository system involves the participation of a depository, depository participants, company/registrars, and investors. The company is also called the issuer.
The depository system operates in the ones of a banking system.
A bank holds funds in its accounts and transfers funds between accounts whereas a depository holds securities in accounts and transfers securities between accounts.
In both systems, the transfer of funds or securities happens without the actual handling of funds or securities. Banks and the depository are accountable for the safekeeping of funds and securities respectively.
The benefits accruing from the depository system are as follows:
Benefits of Depository System To the Nation
- Growing and more liquid capital markets to provide financing and development stemming from more efficient post-trade systems with reduced transaction costs.
- Increase in competitiveness in the international marketplace and attracting investors and fund managers by complying with stipulated international standards calling for an efficient and risk-free trading environment.
- Improve prospects for the privatization of public sector units by creating a conducive environment.
- Restoration of faith in the capital markets and the participants with systems to minimize settlement risk and fraud.
- Considerable reduction in the delay in registration, which currently impacts the trading of the investing public.
- Reduction of risks associated with loss, mutilation, theft, and forgery of physical scrip.
- Elimination of financial from speeder settlements and a reduction in delays in registration.
- Greater liquidity from speeder settlements and a reduction in delays in registration.
- Greater opportunities for investment offered y new instruments and services that can be provided only when NCDS is implemented.
- Faster receipt of benefits and rights resulting from corporate action.
- Improved production of shareholders’ rights resulting from more timely communications from the issuer.
- Reduced transaction costs through greater efficiency.
Related: Key Pros and Cons of Credit Rating (With Examples).
Benefits of Depository System to Issuers
- Up to date knowledge of shareholders’ names and addresses.
- Savings in costs of new issuers from a reduction in printing and distribution costs.
- Increased efficiency of registrar and transfer agent functions.
- Better facilities for communication with shareholders, conveying benefits of corporate actions, and information notices.
- Improved ability to attract international investors without having to incur the expenditure of issuance in overseas markets.
Related: Services Offered by International Banking to Their Customers.
Benefits of Depository System To Securities Industry Intermediaries
- The less risky settlement with the implementation of collateral-based payment systems.
- Greater profits from increased trading volume made possible by NCD systems with reduced operational cost per transaction and reduced risk.
- Improved cash flow from not having funds tied up for long periods.
- Elimination of forgery and counterfeit, with the attendant reduction in settlement risk from bad deliveries.
- Opportunity for development of retail brokerage business.
- Opportunity for the development of more sophisticated custodial services, which can be offered to the small investor.
- Standardized communications between depositories, registers, and other intermediaries.
- Ability to arrange pledges without movement of physical scrip and further increase overall level of trading activity, liquidity, and profits.
- Improved protection of shareholders’ rights resulting from more timely communications from the issuer.
- Reduced transaction costs through greater efficiency.
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