“Subsection II.B. The Paperwork Crisis and the Birth of the NSCC and DTC” (pages 127 - 131) relates to “Taking Stock, Episode 14: The Birth of the DTC”.

“When we think of securities markets, we imagine crowded trading floors, electronic trading screens, brash cable-news hosts, and titans of industry ringing the opening bell at the New York Stock Exchange (NYSE). But the institutions that really move money on Wall Street reside around the corner –– quite literally –– at 55 Water Street. This is the home of DTCC and its twin subsidiaries, NSCC and DTC. Today, NSCC is America’s only securities clearinghouse, and DTC its only securities depository.” (pages 122 - 123)

“NSCC guarantees that funds will be delivered to the seller and that purchased securities will be delivered to the buyer. If a counterparty defaults, NSCC will first use the collateral that the defaulting party posted as margin against its outstanding obligations. If those funds prove insufficient, NSCC can tap into a dedicated default fund financed by mandatory contributions from market participants as a condition of their membership. NSCC employs similar mechanisms to guarantee the delivery of purchased securities.” (page 131)

“There is relatively little publicly available information about these regional clearinghouses and depositories. Other than the descriptions that follow, it is not known how they were governed, how much the regional exchanges invested in them, or how much money they made or, more likely, lost.” (page 133)

“Importantly, the existence of these regional players prompted Congress to list ‘competition among … clearing agencies’ as one of the primary goals of the newly created Section 17A.” (page 133)

“As it encouraged the development of a ‘National Market System,’ the SEC repeatedly pointed to Congress’s desire to facilitate competition among the clearing agencies. On multiple occasions, the SEC even stated that ‘clearance and settlement is not a natural monopoly.’” (page 134)

“The SEC’s emphasis on promoting competition was also reflected in the concerns among market participants and other regulators that NSCC and DTC would abuse their growing market power. In the late 1970s, the SEC received comments from the regional clearinghouses and DOJ’s Antitrust Division challenging the SEC’s approach to the National Market System on the ground that it was anticompetitive and would open the door for NSCC and DTC to obtain monopolies.” (page 134)

“Yet, just twenty years after Congress amended the Securities Exchange Act to create the National Market System and only fifteen years after the SEC first granted registration to NSCC, DTC, and other clearing agencies, all the regional players had halted their clearing and depository businesses and transferred their operations to NSCC and DTC.” (page 137)

“Predictably, once DTCC acquired complete control over U.S. securities clearing and depository markets, evidence began to emerge that it might have been abusing its dominant position.” (page 155)

“They did so by imposing high fixed costs to connect to the new market infrastructure, by allowing NSCC and DTC to dictate the direction and pace of innovation, and by preventing the regional players from differentiating their products and services from those of their larger competitors.” (page 138)

“The NYSE, Amex, and NASD appear to have used this position to advance their broader business interests. For example, in 2006, DTC proposed a rule that made it extremely difficult for nonmember transfer agents, regional exchanges, and brokers that were not members of the NASD to hold securities recorded on DTC’s book-entry system.” (pages 155 - 156)

“In effect, the proposed rule, which the SEC approved in amended form, forced these firms to choose between opening an account with DTC, creating their own infrastructure for electronically recording securities ownership, or simply exiting the marketplace.” (page 156)

“This bleak calculus prompted at least one competitor to object that DTC was ‘seeking to become a de facto regulator of the entire transfer agent industry’ and to argue that DTC was using its position as ‘a monopoly [to] engage[] in predatory, anti-competitive conduct with respect to its direct competitors.’” (page 156)

Awrey, D., & Macey, J. C. (2022). Open access, interoperability, and DTCC’s unexpected path to monopoly. Yale Law Journal, 132(1), 96–170.