Direct Holding System - Indirect Holding System

Indirect Holding System

Because of these disadvantages, the "direct holding system" has been replaced by the indirect holding system.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

Although the indirect or multi-tiered holding system has increased settlement speed, thus reducing the risk that the counter-party in the relevant transaction will fail before the transaction is settled, it effectively cuts off the issuer of shares from the shareholders. This is because either a central securities depository or a financial institution becomes the recorded shareholder on the books of the company and the real, or beneficial shareholder is known only to the financial institution with which he or she has an account. The result has been to drastically complicate communication between shareholders and their companies, and increase the cost of such communication.