The Physics of Cross Border Success
As a foreign issuer lists on OTCQX or OTCQB, it’s absolutely critical to become DTC eligible. The Depository Trust Company or DTC is the unseen and often unsung hero that allows the modern infrastructure of cross border trading to function easily and cost-effectively. In the U.S., DTC eligible shares are qualified for electronic clearing and settlement through the Depository Trust & Clearing Corporation, a U.S. company that manages the process for publicly traded companies. Securities that are eligible to be electronically cleared and settled through DTC are considered "DTC eligible" which enables a seamless trading process, resulting in enhanced liquidity.
DTC eligible is akin to fluid dynamics. Fluid dynamics sounds complicated but really isn’t. Once a tap is turned on and the water starts flowing in a steady or turbulent state, pipes are needed to manage the volume. Think of it as the modern electronic highway that allows two parties to easily trade with each other using a licensed dealer-broker as an intermediary.
Using our physics analogy, a steady flow of trading implies that the stock maintains velocity, whereas a turbulent flow implies the stock changes speed. To increase your company’s exposure in the U.S. markets, obtaining steady flow with a certain velocity is the objective. That means U.S. investors need direct access that is cost-effective and runs smoothly if you’re to gain any traction in the markets.
The benefits of DTC eligibility cannot be overstated. DTC eligible shares trade more quickly, with lower costs. Most often, the mere status of the shares as “DTC eligible” increase a company’s stock trading volume. The cost of trading and clearing non-DTC eligible stock can oftentimes run ten times what it would cost to execute a trade with a DTC eligible stock. Investors also benefit from transparent pricing with real-time quotes, and trusted disclosure that is made broadly available to broker-dealers and market data providers.
If an issuer is not DTC eligible, then its shares cannot be transferred between brokerage accounts electronically, which basically means shares cannot be settled easily and will cost more often prompting a pause by broker/dealers who are not inclined to pick up the extra costs for their clients. Some U.S. broker/dealers even have firm-wide policies that prohibit the broker/dealer from trading any shares that are not DTC eligible.
Once an issuer has been approved for trading by FINRA, they must apply to DTC for their initial eligibility to trade. If DTC approves the application, they will hold all of the issuer’s free-trading street name shares on deposit. More exposure, smoother trading and reduced costs add up to a win-win. Do not forget to obtain it. If you do, it’s like having an old leaky pipe that’s expensive to maintain and impossible to fix. And who wants that?
