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"DTC"and CDs

edited December 2023 in Fund Discussions
I periodically have issues with bank CDs, offered through a brokerage, paying CD interest payments on time. When that occurs, I contact my brokerage, Schwab, to determine what is causing the delays. Eventually, they agree to start a formal inquiry/investigation, which almost always gather information from the DTC regarding settlement details.

DTC: "DTCC's subsidiary, The Depository Trust Company (DTC), established in 1973, was created to reduce costs and provide clearing and settlement efficiencies by immobilizing securities and making "book-entry" changes to ownership of the securities. 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.
DTC provides securities movements for NSCC's net settlements, and settlement for institutional trades (which typically involve money and securities transfers between custodian banks and broker/dealers), as well as money market instruments."

All of my CDs are "DTC eligible", but I am not exactly sure how the DTC works regarding an established brokerage CD. I assume the actual bank submits the CD interest payments, established on the distribution schedule in the CD, and then that leads to a settlement in my Schwab Brokerage account. But I don't know if that can be disrupted by the Bank not submitting the CD interest payments on a timely basis, if there can be some breakdowns by Schwab in actually distributing what the Bank has submitted to the DTC, if there can actually be some technical breakdowns by the DTC. Schwab almost always tells me they will gather information from the DTC, but I never hear what they discovered. My Schwab Representative says that banks have up to 30 days beyond the distribution date for the CD to actually submit the interest (really? I have never seen that in my CD documents).

I had one episode about a year ago, in which I actually contacted the bank, and they stated that they had submitted interest payments for my particular brokerage CD on schedule and that it was a "Schwab problem". However I did not have the DTC information to verify that, and Schwab would not provide me the DTC details.

At any rate, if anyone has more expertise and knowledge about the DTC and how it works in conjunction with brokerages for interest payment distributions, I would love to be educated!~

Comments

  • I don't have more expertise or knowledge, but that hasn't stopped me from posting before:-)

    This post of mine from another thread may help. I cite a few different sources. Of particular interest is this little item, essentially confirming your assumption above:
    The financial institution [bank] makes principal and interest payments to the Depository Trust Company (DTC). DTC is responsible for passing the principal and interest to the broker-dealers. The broker-dealer is responsible for passing the correct amount of principal and interest to the owners of the Certificates.
    https://capitalmarkets.fidelity.com/brokered-certificate-of-deposit-underwriting

    The Fidelity site goes on to say that "Retail CDs require one aggregate weekly settlement and one fund's transfer at maturity."
  • Thanks. What I do not see is what Fidelity does, if the bank does not comply with those requirements of a "weekly settlement". My understanding is that the DTC is a placeholder for those bank CD deposits, but is not responsible for active monitoring of bank compliance with the CD terms. If the bank chooses to delay those DTC deposits, and the DTC does not receive CD deposits from the bank, matching the terms of the CD, then what happens? When I ask Schwab what actions they take, if they do not receive the CD compliant settlements from the DTC, my Schwab representative cannot give me an answer. I have asked such simple questions as: "Do you contact the bank to find out why they did not send the CD interest payment to the DTC?", I cannot get an answer? Apparently Banks have some latitude of delaying their interest rate submissions to the DTC, but I fail to see any accounting response to a "delay" by the DTC or the Brokerage.
  • @dt. My experience with Schwab exactly. I cannot get an answer.
  • My suggestion is if you are a Fido customer, and probably even if you are not, call Fido M-F during market hours, and ask to speak to the FI department, nobody else. As I have noted on other CD threads, they have some of the most knowledgeable and helpful FI guys on the planet.

    On one of the other current running CD/FI threads, I stated:

    (4) If not received by the overdue date (Edit add: which is 10 days after the monthly/semiannual interest payment due date), Fido initiates a "service request" at the request of the account holder and contacts the bank to inquire about the late payment and determine if/when it will be received by Fido.

    I have never spoken to them about DTC payments/requirements. My guess though is they wouldn't do anything in relation to DTC weekly payment requirements not being met, as they only noted they will act upon a customer request as noted in the above-excepted post of mine.
  • Stillers. Thanks again for sharing your knowledge and experience.
  • larryB said:

    Stillers. Thanks again for sharing your knowledge and experience.

    You're welcome and thanks for the kind words. Very much appreciated.
  • edited December 2023
    At Schwab, you are assigned, or you choose, an official Schwab employee as your Account Representative. That Account Representative has specific Fixed Income Specialists assigned to that Account Representative. It is my understanding of the Schwab process, is that you contact your Account Representative first, and they do not have the answer, you can request that the designated Fixed Income Specialist assist/lead an official inquiry. I have not seen anything in writing with my CD Certificate, or accompanying documents, about "overdue dates", but my Schwab Representative believes the Banks can "delay" interest payments, up to 30 days, without violating SEC rules. I am not familiar with those SEC rules, but I do believe Schwab and the Bank issuing the CD, are subject to an SEC complaint process if there are violations. However, the investors who purchase a CD, will not be happy customers when they get negatively surprised if the stated terms on the CD certificate are not met. Some depend on timely interest payments to pay ongoing expenses, and expense holders will not be sympathetic to the sad story that a major bank did not send you monthly interest payments on time.
  • At Schwab I have attempted to get answers from my account rep, who is generally helpful and responsive. He had no answers. I spoke to several at “Private Client Services” and got contradictory explanations. Same with Fixed income department including management. Not one person mentioned a ten day or 30 day grace period given to the Banks. Several people revealed that the problem of non payments has become widespread. This is my first experience with a late payment and I am ridiculously overweight CD’s.
  • edited December 2023
    Posters here appear to be at a dead end with Schwab in this regard.

    Again, please see my prior suggestions.

    The Fido FI guys can and will provide FACTS to (at least) their customers (and maybe non-customers and prospective customers-HINT-as well), about all things CDs.

    The agreement and the duties/obligations are yours and the banks. The high level bank manager I spoke to was helpful, appreciative and acted to resolve the issue promptly.

    Also, for clarification...

    NOTE that, as I previously posted, Fido FI guys have told me that a CD interest payment is late (paraphrasing) "if not received by them by within 10 days after the scheduled interest payment date."

    That may very well just be Fido's policy - I never took the conversation past that statement. And, I never posted on MFO that was an SEC Rule or anything other than a Fido FI guy's statement to me. PLEASE don't assume that is an SEC Rule, or worse, infer that I or anybody else said it was. Thanks!

    Overall, the failure to receive a scheduled CD interest payment is a stressful situation for investors who fully expect those payments to ALWAYS be like clock work and ON TIME. But they happen, and they happen for the reasons I've noted. They generally get resolved within days or weeks of the occurrence.
  • Please see my post on the other thread by Larry B, that I just made. There was a technical process issue that occurred between Barclays and the DTC, and Schwab just discovered the issue that involved resolving a "backup documentation problem" on this particular CD. It had nothing to do with the Bank choosing to delay the interest payment to the DTC, so it could be received by Schwab. Supposedly, the resolution is now complete and should be investors accounts by tomorrow.
  • @dt. Thanks for sharing that. Oddly enough I spent too much time talking to Schwab this morning and several folks told me it might take weeks. Then a few minutes I got a call from a guy who called himself a manager to let me know the money might come tomorrow. No other explanation. But I did learn that the owner of a brokered Cd has no standing with the bank or the DTC. And FINRA told me that the fine print on the Schwab consumer contract states that Schwab has no responsibility for the bank not paying. The whole process left me less inclined to purchase another brokerage CD and very unimpressed with knowledge of the Schwab Fixed Income and Private Client teams.
  • My Barclays semi annual interest payment came in today.
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