What is a chill (at DTC)?

A ‘chill’ is the limitation of one or more services placed on a security at the Depository Trust Company (DTC). 

The New York-based DTC was established in 1973, and was created to provide clearing and settlement services for the securities market. DTC’s core services include settlement services, corporate actions processing, securities processing, issuer services, underwriting services and global tax services.

According to the US Securities and Exchange Commission (SEC), DTC is the largest securities depository in the world, which includes securities issued in the US and 131 other countries. As of July 2017, DTC retained custody of more than 1.3 million active securities issues valued at $54.2 trillion.

What does chill mean?

When DTC imposes a ‘chill’ on a company’s securities, the chill status means that the participating company is restricted from one or more of DTC’s services.

Under the chill status definition, participating companies will be limited to one or more of DTC’s services such as making a deposit or withdrawal of the deposited security. This prevents the electronic trading of a public company’s shares.

When a chill is imposed on a security, DTC will issue a Participant Notice to its participants. These notices are publicly available on DTC’s website.

How long do DTC chills last? One can be imposed on a security for a few days or for an extended period of time, depending on the reasons for the restrictions, and whether the issuer or transfer agents rectify the problem.

What causes a DTC chill?

The DTC can impose a chill on securities for various reasons, including legal, regulatory or operational problems with a security or its related clearing transactions.

The DTC may impose a chill if it suspects the issuers’ securities were issued or transferred in violation of state or federal securities laws. According to the Florida, US-based corporate finance lawyer Brenda Hamilton, DTC does not always disclose the reason for a chill or the duration of its effect.

DTC chills are often imposed on securities following reverse mergers, where public shell companies issue or exchange large numbers of unregistered ‘free trading’ securities. In reverse mergers, issuers must satisfy the criteria set by DTC to obtain initial eligibility and maintain the eligibility. If they fail to do so, the securities could be subjected to a DTC chill.

DTC will also temporarily chill the security for book-entry activities when there is a corporate reorganisation.

The solution to lifting the chill and restoring DTC’s services will vary depending on the particular facts causing the restriction. “Often it is necessary to trace the issuance and tradability of all shares in the issuer’s public float and explain how the shares became free-trading securities,” wrote Hamilton.