Direct holding system

The direct holding system is a traditional system of securities clearance, settlement and ownership in which owners of securities had a direct relationship with the issuer. Investors would either be recorded on the issuer's register or be in physical possession of bearer .

Within this system, transfers of securities had to be settled through the physical delivery of paper certificates and instruments of transfer. As a result, transactions were expensive in terms of labour and time. They were also risky, especially when transferred over long distances, since paper documents could be lost, stolen or counterfeited. Furthermore, while in transit, securities were not available for use or investment, causing what has been called "pipeline liquidity risk".

Because of these disadvantages, the "direct holding system" has been replaced by the indirect holding system. Settlement by physical delivery of certificates worked adequately until the 1960s, when a sharp increase in trading volumes overwhelmed the system. The amount of paper that physically had to be moved around led to the famous "paperwork crisis" on Wall Street in the late 1960s. This provided the impetus for the introduction of the indirect or multi-tiered holding system.

Although the indirect or multi-tiered holding system has increased settlement speed, thus reducing the risk that the counter-party in the relevant transaction will fail before the transaction is settled, it effectively cuts off the issuer of shares from the shareholders. This is because either a central securities depository or a financial institution becomes the recorded shareholder on the books of the company and the real, or beneficial shareholder is known only to the financial institution with which he or she has an account. The result has been to drastically complicate communication between shareholders and their companies, and increase the cost of such communication.

In the 1990s, the U.S. Securities and Exchange Commission (SEC) working with the securities industry, developed a new form of, "direct holding system" that would allow both the speedy settlement of securities transactions and communication between shareholders and their companies. This new system was a type of book-entry direct registration system (DRS) operated by . This concept would allow any retail investor who wants his or her securities to be registered directly on the books of the issuer, but does not necessarily want to receive a certificate, to register those securities in book-entry form directly on the books of the issuer. The DRS concept has been slow to develop for two reasons. First, many investors do not understand that if they give up paper certificates while joining a DRS, this will return them to the status of direct shareholders of the issuer rather than just customers of a broker (who is the registered shareholder in the eyes of the issuer), and second, once brokers and banks had been inserted as the "indispensable" middlemen between shareholders and issuers, they were not eager to surrender this privileged position of control. As a result, one version of the "direct holding system" is an inefficient relic of the past and a modern DRS form of direct holding remains for most shareholders an unrealized thing of the future.

...
Wikipedia