ETF Basics

An Exchange Traded Fund (ETF) is a portfolio of securities that trades on an exchange as an equity that seeks to replicate the performance of an index without the need to purchase the underlying components. The NSCC process for clearing ETFs includes the ability to review, either on-line or in a data file, the ETF portfolio constituents, thus automating the creation and redemption of ETF shares and their subsequent settlement. The ETF processing service includes a web-based tool displaying the ETF portfolio constituents and relevant cash amounts.  ETF processing also includes a nightly distribution of domestic, foreign, and fixed income portfolio information.

DTCC works diligently to innovate and modernize its ETF offerings. As exchange-traded products expand and become more complex, the central counterparty (CCP) clearing of ETFs continue to provide centralization, standardization, risk reduction, and operational efficiency.

Regulating ETFs

ETFs are regulated by the Securities and Exchange Commission (SEC) and were granted exemptive relief under the following acts:

• Securities and Exchange Act of 1934
  • Enables broker/dealers and others to bid and offer shares in the secondary market.
• Investment Company Act of 1940
  • Enables shares to trade on an exchange at prices other than the net asset value (NAV).
  • Enables ETF shares to be redeemed at the NAV in creation units only.

NSCC's Role

The National Securities Clearing Corporation (NSCC), a subsidiary of DTCC, provides an ETF process to automate the creation and redemption of ETF securities. NSCC reports, clears, and settles ETFs and their underlying securities through its creation/redemption process. NSCC supports ETF processing when the underlying security is ineligible at NSCC (for ETFs that have been created and redeemed against cash, in lieu of securities). ETF processing also includes a nightly distribution of domestic, foreign, and fixed income portfolio information. Participants can customize portfolios by excluding specific securities and replacing them with cash. 

Number of ETFs

At the time of this writing approximately 2,000 U.S. listed ETFs and their components are distributed daily to more than 70 customers. Approximately 58% of these ETFs are eligible for create and redeem processing through NSCC. A complete list of ETFs are available at: http://www.dtcc.com/en/charts/exchange-traded-funds.aspx.