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Direct holding system

Direct holding system Definition

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 securities certificates.

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Because of these disadvantages, the "direct holding system" has been replaced by the "indirect holding system".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.

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Indirect holding system




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