The Depository Trust & Clearing Corp. has begun testing an enhanced version of its cost-basis reporting service to help financial intermediaries pass cost-basis information to each other when customer assets move from one firm to another.
The enhanced Cost Basis Reporting Service (CBRS) is set to go live on Dec. 10, three weeks before the Internal Revenue Service’s new requirements for financial firms to report cost basis information for equities to the federal government and investors take effect. The deadline for mutual funds is Jan. 1, 2012 and for debt, options and other securities it is Jan. 1, 2013.
Using CBRS allows financial firms to eliminate potential errors associated with sending paper documents and creating proprietary electronic links to transmit information in disparate formats by creating a centralized and standardized communications hub.
The enhanced CBRS expands the types of firms that can send cost basis information on asset movements from brokerage firms to mutual fund companies, transfer agents, and custodian banks. Financial firms will also be able to update the original record with new cost basis information resulting from a corporate action or other event, and the system will allow the receiving firm to reject erroneous cost basis information. In addition, the new CBRS will allow a firm to request cost basis information from another firm.
Testing ensures that firms’ internal processing systems can interact correctly with DTCC’s enhanced CBRS and that their data input can be accepted by another firm. “We want to give our customers sufficient time to test various scenarios and resolve any potential issues they may experience well in advance of the new regulations taking effect,” said Thomas Sakaris, vice president of clearance and settlement for equities at DTCC in New York. “Because the enhanced CBRS service will connect all financial intermediaries in the market, some of which are new to DTCC, we’re encouraging firms to begin testing as quickly as possible so they can become acquainted with the service and experience a seamless transition.”
So far, more than 60 firms have signed up to participate in the enhanced service. Of those, about three-quarters are broker-dealers and the remainder are custodian banks and transfer agents.
The IRS is hoping it can raise $1.6 billion in additional revenues over the next decade by forcing financial firms to calculate the price a customer paid for its account. While many financial firms did provide their customers with cost-basis information on a voluntary basis, they did not have to ensure its accuracy. Now they will have to or face some stiff penalties.