Direct Registration System Guidance

1. Background

1.1 Direct Registration Systems (DRS)

DRS is an electronic system that records securities held directly with an issuer.

Historically, investors holding securities registered directly with the issuer (that is, in client-name) were issued physical certificates. DRS was developed with the aim of dematerializing physical certificates and is generally considered to have the following benefits:

• DRS services are often more economical for the issuers than issuing physical certificates because DRS reduces or eliminates the costs of replacing and insuring certificates that are lost, damaged, or stolen.
• Securities registered in DRS form are easier and faster to sell or transfer than physical certificates.

DRS positions are evidenced on statements known as a DRS advice. A DRS advice provides an investor with point-in-time information regarding the DRS positions that they hold directly with the issuer. A DRS advice is not a negotiable instrument and does not constitute proof of ownership.

1.2 Parties involved in DRS

The following parties are involved in providing DRS services:

• Issuer of securities – An issuer is an entity that develops and sells securities to raise funds for its operations. The issuer is ultimately responsible for the registry of outstanding positions.
• Transfer agent – The issuer often contracts a transfer agent, typically a trust company, to maintain the ledger that records their DRS positions. The transfer agent acts on instructions from registered holders of the securities under the terms of their contract with the issuer.

1.3 DRS positions in transfer

A DRS position is “in transfer” when it is sent to a transfer agent with instructions to re-register the position.

• When depositing the DRS position into The Canadian Depository for Securities Limited (CDS) or The Depository Trust Company (DTC), it is “in transfer” when the transfer agent acknowledges receipt of the deposit 3 . Once recorded in the CDS or DTC ledger, the position is no longer “in transfer”, and no longer a DRS position.
• When a Dealer Member must re-register the position, but intends to hold the position in DRS form, the position is “in transfer” once the Dealer Member has delivered the required data and evidence of authorization to the transfer agent. When the Dealer Member receives the DRS advice acknowledging the change in registration, the position is now a DRS position with the issuer.

1.4 Client-name versus Nominee-name

Like physical certificates, DRS positions can be registered in the client’s name (client-name) or in the name of the Dealer Member (nominee-name) in trust for the client.

While most DRS positions are client-name, some of the ways that Dealer Members become nominee-name holders of DRS positions are as follows:

• Clients holding security positions that are only available in DRS form may wish to deposit them into their account with a Dealer Member. The client may request the transfer agent to re-register the security in nominee-name.
• During corporate actions or reorganizations, the issuer may dematerialize the positions and issue the new securities in DRS form 4 .
• During a private placement distribution, the issuer may use DRS services to maintain the registry for the newly issued securities and warrants during the mandatory hold period.

Depending on their internal risk management policies, Dealer Members may choose to not hold DRS nominee-name positions that are restricted and ineligible for deposit with the central depository (like CDS or DTC).

2. Regulatory treatment

2.1 Books and records

DRS is an external securities location where the custodian of a DRS security position is the issuer of the securities. Accordingly,

• DRS positions registered in nominee-name must be recorded in the Dealer Member’s books and records.
• DRS positions registered in client-name must not be recorded in the Dealer Member’s books and records except while “in transfer” pending registration into nominee-name.
• DRS advice or statements are not physical certificates or negotiable instruments. They do not give the Dealer Member physical control over the security and are not certified legal proof of ownership. Therefore, a vault or other storage facility on a Dealer Member’s premises is not the location of a DRS position even if that’s where the Dealer Member stores their DRS advices.

2.2 Securities location

The IDPC Rules prescribe conditions and internal control requirements for holding securities. These include the requirements to assess the risk of any securities location, and to hold securities, including book-based securities, in an acceptable securities location.

The Dealer Member must assess whether the issuer meets the requirements to be an acceptable securities location (as outlined in the General notes and definitions of Form 1). If the issuer does not meet the requirements to be considered an acceptable securities location, then the Dealer Member must include a capital charge of 100% of the market value of these securities in the risk adjusted capital (RAC) calculation 5 .

2.3 Custody agreement

The Dealer Member must enter into a valid custody agreement with the issuer. A valid agreement includes minimum terms of segregation prescribed by IDPC Rules.

If the issuer is an acceptable securities location but has not executed a valid custody agreement with the Dealer Member, the Dealer Member must deduct 10% of the market value of the securities held when calculating its Early Warning Reserve 6 .

2.4 Reconciliations

At least monthly, Dealer Members must reconcile their records of nominee-name DRS positions to the issuer’s records. If the Dealer Member does not reconcile the DRS position records, the Dealer Member must include in the RAC calculation, a capital charge 7 equal to the market value of the DRS position.

When calculating RAC, Dealer Members must also include any capital charges for unresolved differences identified in these reconciliations.

2.5 DRS positions in transfer

For DRS positions that are “in transfer”, Dealer Members must track the aging of positions and confirm those outstanding longer than the prescribed period. The Dealer Member must move any unconfirmed positions to a difference account and include in the RAC calculation, any capital charges related to the difference account.

3. Effective Date

The guidance is effective April 30, 2024.

4. Applicable Rules

IDPC Rules this Guidance relates to:

• Rule section 4425 Protecting securities
• Rule section 4342 Hold securities in an acceptable securities location
• Rule section 4345 Acceptable internal storage location requirements
• Rule section 4346 Acceptable transfer locations
• Rule sections 4357 through 4359 Confirmations from transfer locations
• Rule section 4348 Entities that may be external acceptable securities locations
• Rule section 4353 Agreement with each external securities location
• Form 1 – General notes and definitions
• Form 1, Part 1 – Statement B Notes and instructions, specifically Note (6) - Line 20 and Note (7) - Line 22

5. Related Documents

This Guidance was published under Bulletin of Approval/Implementation 23-0146.

• 3Transfer agents typically acknowledge or reject CDS deposit requests within minutes of entering the data into CDS’s online deposit facility.
• 4If the position is in a client’s registered account, dematerializing the position (into either physical form or DRS directly) could be deemed a withdrawal and result in adverse tax consequences for the client.
• 5Dealer Members involved in distributions of private placements that become nominee-name holders of DRS positions should consider the capital implications during the mandatory hold period.
• 6There may be additional capital requirements if set-off risk is present.
• 7If the issuer does not qualify as an acceptable securities location, the capital requirement for unresolved differences does not need to be included in the RAC calculation. (since the capital charge for a custodian that is not an acceptable securities location would already be included in RAC and is 100% of the market value of all holdings).