corporate actions: nature, types and entitlement fabian banchiero, vp and regional manager latin...
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Corporate Actions: Nature, Types And EntitlementFabian Banchiero, VP and Regional Manager
Latin America & Caribbean Division
1
October 27, 2005
Corporate Actions: The Main Custodian Workload And Risk Why is it an issue ?
General flow
Definition and volumes
Possible event types
Computation of entitlement
The proposed matrix
most frequent and cumbersome events
Record and ex-date. Is 15022 the solution ?
Corporate Actions: Why Is It An Issue ?The main operational risk linked to:
- Global securities position (not individual entries)
- Complex timetable, with no international standard
- Multiple dead lines along the chain
- Clarity of notification : type, wording , language
- Lack of STP due to numerous possibilities
- Lack of rules regarding dates
A cumbersome, risky and manual process highlighted in all market WGs: Giovannini rule 3, G 30 rule 8…etc...
Corporate Actions: General Flow
Client
Clients of Client Custodian
VendorCarrier
Issuing Company
Domestic/Foreign Reg. Central
BankSub
Custodian
Tax Authorities
Central Depositary
Corporate Actions: Definition And Volumes Definition: any event of any interest potentially involving existing holders of a
securities, with or without impact on securities or cash position. i.e.: no precise and agreed definition
U.S. Definition: A change to the capital structure or the financial organization of a company that results in a change to the securities of the company.
Main issuers/issues : still Governments and public companies
- Equities: 50,000 worldwide for USD 37 billion. Latin America- 5%; Europe- 10%
- Bonds, MMI and short term instruments : near to 10,000,000 different issues for $44 billion. Latin America- 1-2%; Europe- 10%. More on specific instruments.
- From 100,000 to 1,000,000 events a year to monitor for a large Custodian : if no automation ==> no efficient deliveries
- Equities often more complex/risky to handle than bonds
- Using mainly, not only, manual process : far from 100% STP
Corporate Actions: Possible Event Types
An huge number of possible combination with new types of events created every year. Example : Tax treatment as client election.
Depending on :
Issuers decisions ex : dividend payment
Issuer bylaws ex : disclosure
Investor decision ex : class action, squeeze out
Markets decisions, ex : market split, de-listing, active...
Third party decision ex : hostile take over
Legal and regulatory ex : meeting, bankruptcy, tax
Corporate Actions: Possible Event TypesWith minimum 218 possibilities (more than 200,000 types) with old securities Y/N ex : merger with new securities Y/N ex : rights with new shareholder Y/N ex : subscription tradable/not tradable Y/N ex : odd lots, rights with cash Y/N ex : income with tax on cash Y/N ex : redemption of ZC with Tax on Securities Y/N ex: stock div with sec client election Y/N ex: right issues with cash client election Y/N ex : currency option with restrictions/exclusion Y/N ex : US investors with entitlement limits Y/N ex : privatization with dead line Y/N ex : convertible, warrants with prior-announcement Y/N ex : hostile bid
Spreading Clear Information All Along The Chain
Issuer Investor
Issuer Central Depo sub custo global cus client clients
From simple situation...
…to pure nightmare
CB
Registrar
Paying agent
Same entitlement rules and time table
Data Vendors
B/S
Tax Authorities
Trade date
Contractual
settlement date
Actual
settlement date
Record date
ex date
time
Event date
Issue : define an entitled position in the book of the Custodian
Announcement date
What if…..?
What if…..?
When does transfer of ownership and entitlement occur ?
Computation Of Entitlement: Rules Depend On Regulation
In other words : when and for which positions does transfer of ownership and related entitlements occur for positions
- settled
- to deliver
- to receive
- registered/out for registration
- on loan/borrowed/collateral/pledge
An example on the French market for the most frequent Equity event : general ordinary and extraordinary meetings
- announcement is done 1 month before event
- entitlement is blocking of shares, settled positions, 5 days before meeting if the share is bearer (99% of listed Equities) for any Traded positions
- or any traded (i.e. post trade date) positions recorded in issuer book for registered securities . No blocking of position. Issue : non domestic custodian do not monitor registration.
Computation Of Entitlement: Rules Depend On Regulation
Corporate Actions: The Matrix To Build Up
BE CH DE DK EI ES FI FR GB GR IT LU SE SP PT
ACTVATTIBIDSBONUBPUTBRUPBSPLCAPGCHANCLSACONSCONV……....…etc…
100 eventtypes
Unclear scope of Corporate Event (ex: EU class action)
Taxable income
Meetings-proxy
Restrictions and disclosures
Standard timeframe for any event
Computation of entitlement = ownership and record date
Main common issues
Corporate Actions: Frequent Events
Focus on 3 frequent events: more than 80% of eventsTaxable income and related processes
- With or with out currency option
- With or without stock option (optional div)
- With withholding tax or reclaim
- With certification, i.e. non-us certification
Redemptions
Meetings : lot of issues around proxy due to lack of agreement on record date entitlement
Corporate Actions: record and ex-date Is harmonization of ex date and record date a priority for CA STP
processing ?
Record date is linked to registration and rules for transfer of ownership. Record date does not exist everywhere.
Is 15022 FIN the answer, or migration to XML necessary ?
If vendors are on SWIFT, could we envisage any changes ?
Dematerialization could be the first long term target to achieve if it clarifies transfer of ownership ?
Corporate Actions - Market Players
Data Vendors
Issuing Companies
Sub-custodians
BNY Global Custodian
Central Depository
Central Bank
Tax Authorities
- Access to CB/CD
- Market Info
- Notice of Event
- Projections
- Instructions Chasing and Processing
- Booking and Reporting
- Proxy Voting
BNY’s ClientsClients of
BNY’s Clients
- Market Info
- Notice of Event
- Projections
- Instruction Chasing and Processing
- Booking and Reporting
- Brokerage
Corporate Actions - Mission (Information Management)
Notification
Local custodians
Third Party Custodians
Vendors
Corporate
Action
Notification
System
SWIFT (MT564)
Fax
INFORM
iCANS
Information Sources
Corporate Actions - Mission (Information Management)
Notifications: What?
All information on:
Corporate events (mandatory - elective)
Redemptions (partial - early - drawings)
Corporate Actions - Mission (Information Management)
Notifications: When?
Upon announcement : Preliminary
On ex-date: Interim definitive / Definitive
Client deadline -2: Reminder
Client deadline: ReminderAutomatic
Manual
Corporate Actions - Mission (Information Management)
Notifications: To whom?
Holder
Pending receipt
New Holders
Corporate Actions - Mission (Information Management)
Notifications: How?
Standardized - use of templates
Highlight options for elective events
Corporate Actions - Mission (Instruction Management)
Instructions ReceiptCommunication
- iCANS
- SWIFT (MT 565, 599)
- Fax
Format
ISIN, sec. description, account number, event number, entitled position, option
Standing Instructions
Corporate Actions - Mission (Transaction Management)
Transactions Reporting
How?
- INFORM
- SWIFT (MT 566)
- Fax
What?
- Pending Corporate Actions reporting
- Settled Corporate Actions reporting
iCans- Interactive Corporate Action Notification SystemMainframe application related to BNY Corporate Action Services for Global custody clients accessible via BNY’s mainframe.
Clients can:
Receive CA notifications electronically
Receive intra-day notification updates
Receive a consolidated notification for all accounts holding a position at same sub-custodian
Send authenticated electronic responses
Instructions processed real-time and STP
Create special instructions
Track status of responses
Override standing instructions
Choose several authorization levels
Reduce processing risks