Central depository system?

Question

why are debentures listed in the central depository system?
what is the benefit?
how does it work?

Answer 1

I mainly know about US market.

By debentures I guess you mean bonds (fixed income sector in general).

When securities are in the CDS, they are book entry. The alternative to having them in the CDS is to issue them as physical securities. Lots of advantages to holding securities in book entry form--mainly related to efficiency. Physical securities are risky; they can be lost or stolen. Transfer agents and paying agents need to process them manually whenever ownership changes. They need to send out notices whenever bonds are called, keep records of registered holders' names and addresses, then track people down when mailed notices get returned.

Holding securities (including bonds) in a CDS greatly simplifies these processes. Even if the security trades over the counter, the benefits of book entry are there.

If you buy a bond through a broker, the broker will be a a member of the CDS (in the US it is the DTCC for corporate bonds, and the Federal Reserve Bank for Government and agency bonds), or the broker will have a clearing agent who is a member of the CDS. The broker will hold the bond in their account at the CDS, and will reflect the bond as an asset in your account with them.

By the way, in the US elimination of the few remaining physical securities is a pretty hot topic right now. It is estimated that processing of physicals costs the industry USD 250 million per year over what it would cost if there were no physicals at all. Check out the web sites of DTCC (www.dtcc.com) and SIFMA (www.sifma.org) for more info.

Hope it helps.

Answer 2

A debenture is an unsecured bond. Only the most creditworthy entities can issue debentures.

Since the Central Depository System is responsible for the clearing and settlement of financial transactions, it would only make sense that debentures would be listed in the system. For instance, T-Bonds and T-Bills are considered government debentures and if you have Japan buying $750 billion worth of gov't debt instruments, it would make sense they'd pass through the CDS as it acts as a central database to prevent fraud or in case of loss or damage, the CDS can verify ownership, etc.

How does it actually work? Not sure. Sorry.

Answer 3

"Debentures" are a kind of savings bond.

To the company, they're a way of raising capital (they're in the family of debt securities).