Transcript CORPORATE ACTIONS BREAKOUT SESSION

ACSDA SEMINAR
“Central Securities Depositories, Settlement Systems and Central
Counterparties as Relevant Entities in the Securities Markets”
Corporate Actions Processing
The Globalisation Challenge
CSD8 Results
“International trends and requirements to improve
efficiency for information, cash and securities flows as a
result of corporate actions “
Prepared by: Jorge H. Jaramillo Ossa – Breakout Session leaders
DECEVAL - COLOMBIA - CEO
October 27th/2005
Corporate 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
Compulsory
Voluntary
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
Compulsory
With Options
Stylised process of the corporate action chain (based
on the UK model)
ISSUER
Service-level agreement
Registers as
shareholder
CUSTODIAN’S
NOMINEE
REGISTRAR
Appointed by issuer
to maintain register
Registers as shareholders (via nominee);
notifies changes in ownership to registrar
Name on register
CSD
Ownership
Where shares are
ultimately held
Account
CUSTODIAN
?
BROKER/DEALER
Execution of trades
where necessary
Account
Service-level agreement
(or operational relationship if both appointed by investor)
FUND MANAGER
?
Appointed by investor
Appointed by investor
INVESTOR
Service-level agreement
Service-level
agreement
?
Mandate/service-level agreement
Stylised illustration of main information and instruction flows
between participants in the corporate action chain
ISSUER
Originator of
CA. Event
Information
Misma Firma
CUSTODIAN´S
NOMINEE
Information
Instruction
Instruction
REGISTRAR
Sends information on to
Registered shareholders
BROKER/
DEALER
CSDs
CUSTODIAN
Information
FUND MANAGER
Processes Information
And Instructions
Instruction
Processes Information
And Instructions
Makes decision on CA
INVESTOR
Information
Instruction (If not delegated to fund manager)
Fuente: Corporate Action Processing - What are the risks ? Oxera Report
US Corporate Action flow for Tender/Merger
Issuer
Legal Counsel
Data
Vendors
Investment Banker
Transfer Agent
(Tender/Exchange
Agent )
Press
Release
DTC
Listing
Information Agent
Eligibility
DTC
Custodian or Broker/
Dealer
SEC
Filing
Stock
Exchange




Prospectus
Proxy
Tombstone
Letter of transmittal
Beneficial Owner
EDGAR
KEY
Stock Exchange
Notice
Primarily Paper (inc Forms)
Electronic Data
(Propriority or ISO)
Source: DTCC/Global Corporate Action Validation Service
Corporate Action – ACSDA – FIAB – Model
Information Flow
I1
I2
Notifies
corporate
actions and asks
for instructions*
[Ta] (4)
Local Issuer
I3
I4
Foreign
Broker
Notifies
corporate
action [Ta]
(1)
Confirms
voluntary
corporate
action
processing
[Ta, Tr] (7)*
Notifies
corporate
actions and asks
for instructions*
[Ta] (3)
Instructs
voluntary
corporate
action
[Ta, Tr] (5)*
Notifies corporate actions and asks for instructions
[Ta] (2)
Local CSD
Foreign CSD
Instructs voluntary corporate actions [Ta, Tr] (6)*
Confirms voluntary corporate action processing [Ts] (8)*
* In case of voluntary corporate actions.
Ta – notification date
Tr – record date
Ts – payment date
Corporate Action in Cash – ACSDA – FIAB model
Payment Flow for Dividends and Interests
I1
I2
I3
I4
Credits financial
resources (5)**
Foreign
Local Issuer
Foreign Broker
Broker
Credits financial
resources (1)*
Credits financial
resources (4)**
Local CSD
Informs cash dividend/interests payment (2b)
Foreign
CSD
Instructs FOREX
transaction (2a)*
Bank
Settlement date
Effects FOREX transaction (3)
* Local Currency
** Foreign Currency
Corporate Action in Cash ACSDA- FIAB - model
Payment Flow for Subscriptions
I1
I2
I3
I4
Credits financial
resources (1)**
Local Issuer
Foreign Broker
Credits financial
resources (5)*
Local CSD
Credits financial
resources (2)**
Informs subscription payment (3b)
Foreign CSD
Instructs FOREX
transaction (3a)
Effects FOREX transaction (4)
Settlement date
Bank
* Local Currency
** Foreign Currency
Corporate Action in Stocks – ACSDA-FIAB model
Securities Flow
I1
I2
I3
I4
Credits
securities (5)
Foreign
Local Issuer
Broker
Credits
securities (1)
Credits
securities (4)
Informs credit of securities (3)
Local CSD
Foreign
CSD
Foreign
CSD
Foreign
CSD
Credits
securities
(2a)
I1
I1
I2
I2
Sub-account
credit of
securities
(2b)
Settlement date
Corporate Action – Voting Rights Information Flow
ACSDA –FIAB model
I1
I2
I3
I4
Notifies
General
Meeting (3b)
Local Issuer
Foreign Broker
Foreign Broker
Notifies
General
Meeting (3a)
Notifies
General
Meeting (1)
Notifies General Meeting (2)
Local CSD
Foreign CSD
Asks for statement of holdings (5)
Blocks securities and issues statement of holdings (6)
Asks for
statement of
holdings (4)
Delivers
statement of
holdings (7)
Example taken from the Oxera Report - -DTCC
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.
Riesgo Potencial de Pérdida para acciones de France Telecom
Precio de la Oferta
14.50
t+1
t+3
t+6
t+12
T+1
Precio France Telecom
19.34
20.55
20.70
20.54
21.45 Precio Oferta
Valor de las
Número de acciones acciones al
Riesgo Potencial
de tenencia
dia T
100,000
1,934,000
121,000
136,000
120,000
211,000
605,000
500,000
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
6,050,000
10,000,000 193,400,000 12,100,000 13,600,000
12,000,000 21,100,000
60,500,000
25,000,000 483,500,000 30,250,000 34,000,000
30,000,000 52,750,000
151,250,000
50,000,000 967,000,000 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
Fuente: Corporate Action Processing - What are the risks ? Oxera Report
Corporate Action Processing
Key Factors for the Diagnosis
Intensive
manual
labor
Multiple
information
flows
Multiple
time zones/
Continents
Multiple
languages
Important
losses /
Reputational
risk
Multiple
Regulations
Increasing
volumes
and values on
custody
Cross
borders
trades
Investor
protection
Multiple
information
sources
Expensive
Multiple
Layers
The parties seeking to obtain the cure
Fund
Managers
Exchanges
Custodians
Issuers
Investment
Managers
Industry
Groups
Agents
Regulators
CSDs
Broker/
Dealers
Some principal CA Shock Factors : Over a million in a year
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Compulsory Cash Distributions
Cash Dividends
Interest payments
Capital repayments
Redemptions
Partial Redemptions
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Compulsory Stock distributions
Bonus issues (capitalisations)
Conversions
Consolidation / reverse splits
Enfranchisement
Open offers ( Entlitlements)
Pari Passu
Rights issue
Subdivisions - split
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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
The CA Disease : Multiple risk sources
Lack of
Uniformity
Capacity
Planning
Replacement
cost
Cross Border
and Foreign
Exchange
Lack of
Standards
and Securities
identification
Inaccurate
misinterpreted
data
New and
Complex
Instrument
types
Communication
errors
up-down
Who is Liable ?
Information
consistency
Delay
Payments
Sub-optimal
trading
Decisions
Multiple
Layers
Failure
to Process
voluntary C.A.
Greater
events
Complexity
Means of
Communications
Paper-base
Use of
Certificates
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
The doctors’ prescription : Not only one medicine
Standardization
Automating
information
flows
Development of
Best Practices
Changes in
Laws and
Regulations
STP
processing
New Industry
arrangements
Globally
Corporate Events : CSD analysis
Risks in
Processing
Automation
and
Standardization
CSDs
Role
Business
Opportunities
For CSDs
Process
That should be
automated
Value
Propositions
From
CSDs
Corporate action processing: Risks Factors
Announcements
•
•
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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
Payments
•
•
Proxy Voting
CSD credit exposure.
Principal risk can arise
from advance payments
either to participants and
issuers
•
Not many CSDs are
involved in proxy
voting instruction
processing
•
Mostly paper based
process
CSD errors or omissions
transferring payment
from issuer to wrong
beneficial owners
•
Possibility of delay or
lost in the mail
•
Lack of centralization
•
Multiple languages
Corporate actions processing : Risks Factors
How to mitigate them …….
Announcements
•
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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
Payments
•
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
Proxy Voting
•
Electronic and internet
based system
•
Integration
with
depository system
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
Entitlement Processing
Improve Books/Records
Automation
Commoditization
Cost and Risk Mitigation
Oportunidades de Negocio
Services that Disinter mediate Custodian Functions
(downward and upward flow)
Non-eligible Announcements
Deriving Commercial Value in Data Distribution
Expanded Asset Servicing (Tax Reclaim, Interpretation)
CSDs roles in Corporate Actions
CSDs interposing themselves between Issuers
and Market Participants and/or Investors to deliver
Timely, accurate and automated data
Lower Cost
Higher Efficiencies
Reliability
Reduction in some Level of Liability
How can CSDs work together to create a value
proposition for the market?
Leverage Existing Industry Groups
Find them and interpose ourselves to ensure our markets’ interests are
protected.
Pursue At Sourcing Initiatives
Continue to Drive with Automation
The Value Proposition may be to Issuers and Investors but may not be to the
Custodians.
Corporate Actions are a Core Competency
Opportunities Exist for market Efficiencies and commercial Value
CSDs can be a Central Repository for the Unique Local Market Practices and
Sourcing
Find and Leverage “Standards Bodies”
Put Ourselves in a Position to Implement Standards
True STP Starts with the Issuer