I’m a little obsessed with the Depository Trust & Clearing Corp. One way to think of the financial industry is that it is basically a machine for abstracting real human activity: you buy a house made of bricks and wood and stuff, but the financial industry enters numbers in a computer to represent your mortgage, bundles it with other mortgages, slices up the risks of those mortgages – house price appreciation, credit risk, interest rate risk, prepayment risk – and sells them to different people who never need to care about what your house looks like. There you sit in your house, while the numbers spin unseen around you.

The machine, though, is built out of pretty old-timey materials. Those mortgages are mortgages, recorded on pieces of paper in county records offices somewhere; the securities are securities, scraps of paper that convey rights to whoever happens to hold them. Bonds used to be, and in some metaphorical and legalistic sense still often are, pieces of paper with coupons attached that you tear off and mail to the corporation to get them to send you a check for your interest payment. I think things like that actually happened, in the dark ages. But not for a long time.

At the core of the financial abstraction machine is the engine that turns old-timey scraps of paper and whatnot into abstractions.1 And that engine is an actual thing! It is called DTCC! It’s, like, a building downtown, and all the paper certificates come in, and out come numbers on screens that you can sum and multiply and manipulate and sell derivatives of to your friends. It’s what allows finance to be fast and computerized and high-frequency, so you can buy derivatives and indexes and deltas and exposures rather than, like, ten pieces of paper that give you ownership in Ye Olde Buggy Whips Concern.

Anyway this happened:

Trillions of dollars of stock certificates are feared ruined after Hurricane Sandy flooded a vault at the Depository Trust & Clearing Corp, the Wall Street-owned organisation that manages important parts of the US trading infrastructure.

The DTCC houses 1.3m paper certificates for shares, bonds and other financial instruments, including foreign securities, at the organisation’s headquarters in Manhattan’s financial district.

DTCC tells us that as of year-end 2011 it had 3.69 million certificates total, with a value of $39.5 trillion; if about a third of the certificates were in lower Manhattan then at a guess $10 – $15 trillion worth of securities have vanished.2

Does that matter? I mean, one, obviously, no, though, two, it sort of puts in perspective Germany’s fretting about whether its gold at the Fed is actually at the Fed. You, right now, are walking around as the proud owner of 100 shares of Microsoft or whatever, but actually you are only the proud owner of an electronic chit in your broker’s books, and your broker only owns an electronic chit in DTCC’s books, and it really owns the hell out of that chit, but DTCC meanwhile is the owner of a basement filled with a solution of water, sewage, and dissolved molecules of Microsoft share certificates. DTCC owns, to a first approximation, everything, and it just misplaced all of it.

Still, it’s okay. DTCC assures its participants that “all of DTCC’s computer records are fully intact, including detailed inventory files of all certificates held in the vault,” which is an amazing statement: imagine if the Fed lost Germany’s gold but assured Germany “don’t worry, our computer records of your gold are fine.” Imagine if banks lost their mortgage documents but assured homeowners “don’t worry, our computer records of your mortgage are fine, we’re pretty sure we can foreclose.” Actually that part totally happened and people got really angry about it for quite understandable reasons.

But DTCC is right: their records should suffice. In the securities business, trust plus electronic records have grown to wholly replace the actual things – which, to be fair, were never all that actual or thing-like. Whole bodies of law and custom have grown up around making sure that having chits on the books at DTCC is just as good as having a piece of paper saying “100 shares”; no one is ever actually going to look. Plus, shares are mostly book-entry these days so DTCC can always get a replacement copy of most of their papers from the issuers. Plus, DTCC has for ages been trying to move to the next stage of abstraction and get rid of the paper; this should be a nudge in that direction.

Mostly I just mention this because it is neat; one area of human activity has been rendered relatively safe from weather and accident and put on stable footing through computers and the internet and a really large dose of trust and cooperation.3 Like most things that decrease variance, though, this perhaps fattens the tails: you’re all backed up in the cloud, but if the cloud fails, you’re really quite screwed. In the olden tymes your clerk could lose your stock certificate and you’d be out of luck, but the damage would be limited to you; in the new times that’s impossible but if something did take down DTCC’s computer records that would be absolutely amazingly terrible. So let’s hope that doesn’t happen.

DTCC Resumes Processing of Physical Securities [DTCC]
Stock certificates feared ruined by Sandy [FT]
Swans dematerialise Wall St [The OTC Space]

1. Paul Wilmott has complained about quantitative finance that it is not much of a science because it lacks conservation laws; one might spin from DTCC a law of conservation of abstraction, though I wouldn’t want to build math around it. Exercise for somebody.

2. Incidentally some dividing will tell you that each “certificate” owned by DTCC is worth about $10mm; these are not, like, single shares of stock but rather things like global notes where a $500mm bond issue is written on one piece of paper handed to DTCC.

3. I also point it out because one notable chunk of the financial industry has not gone this way. Opposition to MERS, which you can think of as sort of the DTCC for mortgages, continues unabated, and continues to puzzle me. If a town-hall basement floods, without MERS it will be much harder to figure out who owns what mortgages in that town. Though of course if MERS replaces town halls then you risk losing all the mortgages.

21 comments (hidden to protect delicate sensibilities)
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Comments (21)

  1. Posted by Guesticle | November 2, 2012 at 2:02 PM

    Zerohedge summary: "$10 – $15 trillion worth of securities have vanished."

  2. Posted by Guesteban | November 2, 2012 at 3:08 PM

    "… but if something did take down DTCC’s computer records that would be absolutely amazingly terrible."

    Chuck Palahniuk is way ahead of you here.

  3. Posted by Hobbes | November 2, 2012 at 3:09 PM

    "Like most things that decrease variance, though, this perhaps fattens the tails"

    I think I just got a boner.

    -N. Taleb

  4. Posted by Guest | November 2, 2012 at 3:12 PM

    As is Tom Clancy, Debt of Honor anyone? anyone?……

  5. Posted by Todd | November 2, 2012 at 3:12 PM

    There's mortgage made from trees on my house!

  6. Posted by Incitatus | November 2, 2012 at 2:15 PM

    "There you sit in your house, while the numbers spin unseen around you."

    Best sentence you've ever written, son. Good on ya. I knew you could do it. Communicative, brief, evocative. And not one "like."

  7. Posted by Guest | November 2, 2012 at 3:39 PM

    Stop drinking flood water. It's making you say stupid things.

  8. Posted by UBS Securities, LLC. | November 2, 2012 at 3:45 PM

    See, in retrospect, we haven't lost all that much.

  9. Posted by Dumbo | November 2, 2012 at 3:45 PM

    Is DTCC so fucking stupid and antiquated they have never heard of business continuity or to simplify it for those morons – not putting all your eggs in one basket, in one building, in one city. Why in the fuck would they not maintain some in another location. . .not NYC (or the Jersey Shore).

  10. Posted by duh | November 2, 2012 at 2:50 PM

    Please explain your proposed business continuity plan for paper-based documents, Einstein.

  11. Posted by Guest | November 2, 2012 at 4:02 PM

    Ziploc bags

    -Einstein

  12. Posted by late Esther Penn | November 2, 2012 at 4:17 PM

    I guess I should have pulled the flood alarm instead of the fire alarm, and then I'd still be alive.
    http://www.nytimes.com/2000/07/29/nyregion/woman-

  13. Posted by Einstein | November 2, 2012 at 4:30 PM

    There are such a thing as waterproof vaults. If that doesn't work then, I don't know, don't place your most important documents in a fucking basement in an area so prone to flooding as downtown Manhattan? I don't know, just a thought.

    The same goes for the FRBNY, although the good thing is that gold does not dissolve in water/sewage.

  14. Posted by Guest | November 2, 2012 at 4:35 PM

    DTCC has three other locations for backup computing systems, which is why they were so confident that their (electronic) records are complete and accurate, and which is why they were able to get up and running by Wednesday morning even with power still down in lower Manhattan. They're not that stupid.

    Although they aren't exactly going to win any prizes for not waterproofing the physical securities vault. Am I missing something, or is every other single thing in the world described as a "vault" – including virtually every vault at virtually every bank worthy of the name – effectively waterproof?

  15. Posted by _guest | November 2, 2012 at 4:48 PM

    DTCC CEO: Okay team, so what lessons did we learn from this?

    Intern: Having a basement next to a body of water isn't a good idea?

    CEO: Go on…

    Intern: I mean, we lost a lot of physical documents that form the basis and foundation of our business when the storm surge overran the walls.

    CEO: What do you suggest?

    Intern: I think we should move away from the water to a different location. Maybe still in New York but a few blocks from here?

    CEO: Hmmmm…..I like my ocean view and corner office. That's not going to happen…and…you're fired.

    Intern: Don't be so obtuse…

    CEO: What? What did you call me?

    Intern: Obtuse. Is it deliberate?

  16. Posted by Guest | November 2, 2012 at 5:57 PM

    MERS electronically records the owner of the mortgage and the servicers, but the physical documents are held by custodians – eg
    https://www.wellsfargo.com/downloads/pdf/com/corp

    Not quite the same – for mortgages it's like MERS + custodian does the same job as DTCC

  17. Posted by Bemused | November 4, 2012 at 9:48 PM

    In New York sewage? I wouldn't be surprised…

  18. Posted by Jon Corzine | November 5, 2012 at 10:05 AM

    Hey! That's my shtick!

  19. Posted by MLSentenceGenerator | November 5, 2012 at 11:11 AM

    "There you sit in your house, while the numbers, like, spin unseen around you."

    –There, ruined it for you

  20. Posted by FRNY rep to BUBA rep | November 6, 2012 at 10:24 PM

    no… no …no gold does dissolve in water … honestly, it does. I'll just get that copy of a document that was done by the same people that did the Commission on Terrorist Attacks Upon the United States on 911, to prove it to you. You'll also see proof that only the best gold has mostly tungsten in it too. The report says so

  21. Posted by STEVE | November 6, 2012 at 11:30 PM

    What does the Iraq war, M.F. Global, Libya war, and hurricane Sandy all have in common?

    They were all attempts by our government to destroy wealth. With trillions of dollars of IOUs and cash floating around the world the USA is sitting on a time bomb when all that money comes home to roost.

    Iraq War:
    It was all about invasion to seize the wads of US cash and Treasuries that Saddam was sitting on and shut him up forever about getting away from the dollar as the reserve currency.

    M.F. Global:
    When you have a trillion dollars at a commodities trading firm ready to convert all those deficit dollars into timber, gold, oil, silver, copper, and other hard assets you just send your government hitman into implode the whole firm and wipe out the $ and blame it on gambling and corporate corruption. Instantly 1 trillion of IOUS and fiat goes up in smoke. http://www.futuresmag.com/2012/11/01…eres-the-m…

    Libya:
    With Kadaffi rejecting the US dollar as a reserve currency and preferring gold as his wealth he had a big bullseye put on his back by the country that wants you to deal in their corrupt banking system. http://www.thedailybell.com/2226/Rea…-Currency….

    Hurricane Sandy:
    With a little invention from Nickolas Tesla (HARP) http://www.rumormillnews.com/cgi-bin…mes/read/8… and storm for the record books as hurricane Sandy wipes 1 trillion of US debt off the record books. http://dealbreaker.com/2012/11/hurri…s-no-big-d…

    Expect to see many more stories like these as your government kills and inslaves people so you can get more freebies from them.