corporate actions processing the globalisation challenge csd8 results international trends and...
TRANSCRIPT
Corporate Actions ProcessingCorporate Actions Processing
The Globalisation ChallengeThe Globalisation ChallengeCSD8 Results CSD8 Results
“International trends and requirements to improve International trends and requirements to improve
efficiency for information, cash and securities flows as a efficiency for information, cash and securities flows as a result of corporate actionsresult of corporate actions “
Prepared by: Jorge H. Jaramillo Ossa – Breakout Session leaders DECEVAL - COLOMBIA - CEO October 27th/2005
ACSDA SEMINAR ACSDA SEMINAR ““Central Securities Depositories, Settlement Systems and Central Central Securities Depositories, Settlement Systems and Central
Counterparties as Relevant Entities in the Securities Markets”Counterparties as Relevant Entities in the Securities Markets”
ACSDA SEMINAR ACSDA SEMINAR ““Central Securities Depositories, Settlement Systems and Central Central Securities Depositories, Settlement Systems and Central
Counterparties as Relevant Entities in the Securities Markets”Counterparties as Relevant Entities in the Securities Markets”
Corporate EventsCorporate Events
“They take place whenever changes are made to the capital structure or financial position of an issuer of a security that
affect any of the securities it has issued
CompulsoryCompulsory VoluntaryVoluntaryCompulsory
With OptionsCompulsory
With Options
The most common types Cash dividend: 26.9%Income Distributions:16.4%Partial Call redemption: 14.6%Full call : 12.5%Meeting: 7.1%
Fuente: Corporate Action Processing - What are the risks ? Oxera Report
Stylised process of the corporate action chain (based on the UK model)
BROKER/DEALER
Execution of trades where necessary
ISSUER
INVESTOR
FUND MANAGER
Appointed by investor
CSD
Where shares are ultimately held
CUSTODIAN
Appointed by investor
CUSTODIAN’S NOMINEE
Name on register
REGISTRAR
Appointed by issuer to maintain register
Registers as shareholders (via nominee);
notifies changes in ownership to registrar
Registers as
shareholder
Ownership
Account
(or operational relationship if both appointed by investor)
Account
?
??
Service-level agreement
Service-level agreement
Service-level agreement
Service-level agreement
Mandate/service-level agreement
BROKER/DEALER
Originator ofCA. Event
ISSUER
INVESTOR
FUND MANAGERCUSTODIAN
REGISTRAR
Stylised illustration of main information and instruction flows between participants in the corporate action chain
Fuente: Corporate Action Processing - What are the risks ? Oxera Report
CSDs
InstructionInformation
Mis
ma
Fir
ma
Processes InformationAnd Instructions
Sends information on to Registered shareholders
CUSTODIAN´SNOMINEE
Information
Instruction
Information
Instruction
Information
Processes InformationAnd Instructions
Makes decision on CA
Instruction (If not delegated to fund manager)
Issuer
Legal Counsel
SECFiling
EDGAR
Listing
Prospectus Proxy Tombstone Letter of transmittal
StockExchange
Stock ExchangeNotice
Investment Banker
Transfer Agent(Tender/Exchange
Agent )
Information Agent
DTC
Eligibility
DataVendors
DTC
Custodian or Broker/Dealer
Beneficial Owner
PressRelease
US Corporate Action flow for Tender/Merger
KEY
Electronic Data(Propriority or ISO)
Primarily Paper (inc Forms)
Source: DTCC/Global Corporate Action Validation Service
Foreign
Broker
Foreign
Broker
Notifies corporate
actions and asks for instructions*
[Ta] (3)
Corporate Action – ACSDA – FIAB – Model Information Flow
Instructs voluntary corporate actions [Ta, Tr] (6)*
I4I4I2I2 I3I3I1I1
Notifies corporate
actions and asks for instructions*
[Ta] (4)
Notifies corporate actions and asks for instructions [Ta] (2)
Foreign CSDForeign CSD
Instructs voluntary corporate
action [Ta, Tr] (5)*
Notifies corporate action [Ta] (1)
Local CSDLocal CSD
Confirms voluntary corporate
action processing [Ta, Tr] (7)*
Confirms voluntary corporate action processing [Ts] (8)*
* In case of voluntary corporate actions.
Local IssuerLocal Issuer
Ta – notification dateTr – record dateTs – payment date
Corporate Action in Cash – ACSDA – FIAB model Payment Flow for Dividends and Interests
Foreign BrokerForeign BrokerLocal IssuerLocal Issuer
Credits financial resources (1)*
Local CSDLocal CSD
BankBank
Instructs FOREX transaction (2a)*
Foreign
CSD
Foreign
CSD
Informs cash dividend/interests payment (2b)
Foreign
Broker
Foreign
Broker
Credits financial resources (4)**
Effects FOREX transaction (3)
I1I1 I2I2 I3I3 I4I4
Credits financial resources (5)**
* Local Currency** Foreign CurrencySettlement date
Local IssuerLocal Issuer
Credits financial resources (5)*
I1I1 I2I2 I3I3 I4I4
Foreign Broker Foreign Broker
Credits financial resources (1)**
Foreign CSDForeign CSD
Credits financial resources (2)**
Instructs FOREX transaction (3a)
BankBankEffects FOREX transaction (4)
Local CSDLocal CSDInforms subscription payment (3b)
Settlement date
Corporate Action in Cash ACSDA- FIAB - model Payment Flow for Subscriptions
* Local Currency** Foreign Currency
Corporate Action in Stocks – ACSDA-FIAB model Securities Flow
I1I1
I2I2
I1I1
I2I2
Sub-account credit of
securities (2b)
Local IssuerLocal Issuer
Credits securities (1)
Local CSDLocal CSDForeign
CSD
Foreign
CSD
Informs credit of securities (3)
Foreign
Broker
Foreign
Broker
Credits securities (4)
I1I1 I2I2 I3I3 I4I4
Credits securities (5)
Foreign
CSD
Foreign
CSDForeign
CSD
Foreign
CSD
Credits securities
(2a)
Settlement date
Corporate Action – Voting Rights Information FlowACSDA –FIAB model
Foreign BrokerForeign BrokerLocal IssuerLocal Issuer
Asks for statement of holdings (5)
Notifies General Meeting (2)
Foreign CSDForeign CSD
Foreign Broker Foreign Broker
Notifies General
Meeting (3a)
Asks for statement of holdings (4)
Notifies General
Meeting (1)
Local CSDLocal CSD
Blocks securities and issues statement of holdings (6)
Delivers statement of holdings (7)
I1I1 I2I2 I3I3 I4I4Notifies General
Meeting (3b)
Example taken from the Oxera Report - -DTCC Example taken from the Oxera Report - -DTCC Potencial risk and Loss Valuation Potencial risk and Loss Valuation
France Telecom : Rights issue. Latest date of acceptance 4/4/2003 19x20 shares. Offer Price: EU $ 14.50 per share.
Precio de la Oferta 14.50 t+1 t+3 t+6 t+12 T+1Precio France Telecom 19.34 20.55 20.70 20.54 21.45 Precio Oferta
Número de acciones de tenencia
Valor de las acciones al
dia T
100,000 1,934,000 121,000 136,000 120,000 211,000 605,000500,000 9,670,000 605,000 680,000 600,000 1,055,000 3,025,000
1,000,000 19,340,000 1,210,000 1,360,000 1,200,000 2,110,000 6,050,00010,000,000 193,400,000 12,100,000 13,600,000 12,000,000 21,100,000 60,500,00025,000,000 483,500,000 30,250,000 34,000,000 30,000,000 52,750,000 151,250,00050,000,000 967,000,000 60,500,000 68,000,000 60,000,000 105,500,000 302,500,000
Precios Calculados sobre el precio base en día t comparado contra precio en t+n
Riesgo Potencial de Pérdida para acciones de France Telecom
Riesgo Potencial
Fuente: Corporate Action Processing - What are the risks ? Oxera Report
Corporate Action Processing Key Factors for the Diagnosis
Intensivemanual
labor
Multiple information
flows
Multiple Layers
Expensive
Multiple languages
Important losses /
Reputational risk
Multiple Regulations
Multiple time zones/Continents
Crossborders trades
Investorprotection
Multipleinformation
sources
Increasingvolumes
and values oncustody
The parties seeking to obtain the cure
Issuers
Industry Groups
Regulators
Fund Managers
Exchanges
Custodians
InvestmentManagers
CSDsBroker/Dealers
Agents
Some principal CA Shock Factors : Over a million in a year
• Compulsory Cash Distributions• Cash Dividends• Interest payments • Capital repayments • Redemptions • Partial Redemptions
• Compulsory Stock distributions • Bonus issues (capitalisations)• Conversions• Consolidation / reverse splits • Enfranchisement• Open offers ( Entlitlements) • Pari Passu• Rights issue • Subdivisions - split
• Optional Stock Distributions • Subscriptions • Optional conversions • Optional redemptions • Other Corporate Action events • Compulsory call payments • Enhance scrip dividends• Optional call payments • Mergers• Schemes of arrangement • Scrip dividends• Takeovers • Resale ( With Suscription) • Demergers / division / fission / spin - off• Other payments • Early redemptions• Close offers • Redemption of the share minority
Source : ECSDA - Cross border Corporate Action and events processing - Report from WG5 - No. 2002 Source : ECSDA - Cross border Corporate Action and events processing - Report from WG5 - No. 2002
The CA Disease : Multiple risk sources
Replacement cost
Cross Borderand Foreign Exchange
Sub-optimal trading
Decisions
Multiple Layers
Lack of Standards
and Securitiesidentification
Inaccuratemisinterpreted
data
Failure to Process
voluntary C.A.
Greater events
Complexity
New and Complex
Instrumenttypes
Communicationerrors
up-down Who is Liable ?
Means of Communications
Paper-base
Use of Certificates
Lack ofUniformity
CapacityPlanning
Information consistency
Delay Payments
The Specialists’ opinion:
• “Automate and standardize asset servicing processes, including corporate action, tax relief arrangement and restrictions on foreign ownership”(1)
• Principles• Timely, complete and accurate CA announcements • Manageable Information flows • Investor decisions must be protected • Protection of the beneficial owner • Automation
(1) G30 Global Clearing and Settlement : A plan of Action 2003 (1) G30 Global Clearing and Settlement : A plan of Action 2003
The doctors’ prescription : Not only one medicine
Automating information
flows
Standardization
Changes in Laws and
Regulations
Development of Best Practices
STP processing
New Industry arrangements
Globally
Automation Automation andand
StandardizationStandardization
Risks in Risks in ProcessingProcessing
Process That should be
automated
CSDs Role
Business Opportunities
For CSDs
Value Propositions
From CSDs
Corporate Events : CSD analysis
• Diverse media• Free format• Different languages• Large number of
corporate action events• Late, lack and lost
information in the flow from the issuer to the beneficial owner
• Degree of Complexity – Cross border
activities – High Volumes
Corporate action processing: Risks Factors
• CSD credit exposure. Principal risk can arise from advance payments either to participants and issuers
• CSD errors or omissions transferring payment from issuer to wrong beneficial owners
• Not many CSDs are involved in proxy voting instruction processing
• Mostly paper based process
• Possibility of delay or lost in the mail
• Lack of centralization
• Multiple languages
AnnouncementsAnnouncements Payments Proxy Voting
• Centralized and standardized channel of communication
• Standardized format for information contents
• Regulators should participate more actively
• Issuers should be obligated to notify immediately the CSD holding the issue in standard format and automate means.
• CSDs should be obligated to make this information available in timely fashion and automated manner to, at minimum, all participants that have position in the issue
• In order to avoid human errors by having the data touched as few times as possible
• Corporate rights and standardization of formats should facilitate STP, leading to risk and cost reduction
Corporate actions processing : Risks FactorsHow to mitigate them …….
• CSDs and other participants should NEVER pay without first receiving the money!
• Paying agents should provide clear, standardized and timely payment instructions
• Finality and irrevocability of payment should be legally enforceable
• Electronic and internet based system
• Integration with depository system
Payments Proxy VotingAnnouncements
What are the most important processes that should be automated and/or standardized in the corporate action operational flows?
The Announcement process is the core one to be standardized and automated
Issuers should be forced to deliver Standardized Information (Security, Type of event, Record date, Pay
Date, etc), and Guarantee the Information.
In order to Improve speed, accuracy, access to relevant parties (trades, etc), permit full STP (no re-keying),
Implementation Alternatives: Changes in Laws and regulations, CSDs funding issuers, Ratings
CSDs roles in Corporate Actions CSDs roles in Corporate Actions
Entitlement ProcessingImprove Books/RecordsAutomationCommoditizationCost and Risk Mitigation
Services that Disinter mediate Custodian Functions (downward and upward flow)Non-eligible AnnouncementsDeriving Commercial Value in Data Distribution Expanded Asset Servicing (Tax Reclaim, Interpretation)
Oportunidades de NegocioOportunidades de NegocioOportunidades de NegocioOportunidades de Negocio
CSDs roles in Corporate Actions CSDs roles in Corporate Actions
CSDs interposing themselves between Issuers and Market Participants and/or Investors to deliver
Timely, accurate and automated data
Lower CostHigher Efficiencies
ReliabilityReduction in some Level of Liability
How can CSDs work together to create a value How can CSDs work together to create a value proposition for the market?proposition for the market?
Leverage Existing Industry GroupsFind them and interpose ourselves to ensure our markets’ interests are protected.
Pursue At Sourcing Initiatives Continue to Drive with AutomationThe Value Proposition may be to Issuers and Investors but may not be to the Custodians.Corporate Actions are a Core CompetencyOpportunities Exist for market Efficiencies and commercial ValueCSDs can be a Central Repository for the Unique Local Market Practices and SourcingFind and Leverage “Standards Bodies”Put Ourselves in a Position to Implement StandardsTrue STP Starts with the Issuer