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Corporate Actions Processing The Globalisation Challenge CSD8 Results International trends and requirements to improve efficiency for information, cash.

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Presentation on theme: "Corporate Actions Processing The Globalisation Challenge CSD8 Results International trends and requirements to improve efficiency for information, cash."— Presentation transcript:

1 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 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 27 th /2005 ACSDA SEMINAR “Central Securities Depositories, Settlement Systems and Central Counterparties as Relevant Entities in the Securities Markets” ACSDA SEMINAR “Central Securities Depositories, Settlement Systems and Central Counterparties as Relevant Entities in the Securities Markets”

2 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 Compulsory With Options Compulsory 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

3 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 Mandate/service-level agreement

4 BROKER/ DEALER Originator of CA. Event ISSUER INVESTOR FUND MANAGER CUSTODIAN 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 Instruction Information Misma Firma Processes Information And Instructions Sends information on to Registered shareholders CUSTODIAN´S NOMINEE Information Instruction Information Instruction Information Processes Information And Instructions Makes decision on CA Instruction (If not delegated to fund manager)

5 US Corporate Action flow for Tender/Merger Source: DTCC/Global Corporate Action Validation Service

6 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) * I4 I2 I3 I1 Notifies corporate actions and asks for instructions * [Ta] (4) Notifies corporate actions and asks for instructions [Ta] (2) Foreign CSD Instructs voluntary corporate action [Ta, Tr] (5) * Notifies corporate action [Ta] (1) Local CSD Confirms voluntary corporate action processing [Ta, Tr] (7) * Confirms voluntary corporate action processing [Ts] (8) * * In case of voluntary corporate actions. Local Issuer Ta – notification date Tr – record date Ts – payment date

7 Corporate Action in Cash – ACSDA – FIAB model Payment Flow for Dividends and Interests Foreign Broker Local Issuer Credits financial resources (1) * Local CSD Bank 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) I1 I2 I3 I4 Credits financial resources (5) ** * Local Currency ** Foreign Currency Settlement date

8 Local Issuer Credits financial resources (5) * I1 I2 I3 I4 Foreign Broker Credits financial resources (1) ** Foreign CSD Credits financial resources (2) ** Instructs FOREX transaction (3a) Bank Effects FOREX transaction (4) Local CSD Informs subscription payment (3b) Settlement date Corporate Action in Cash ACSDA- FIAB - model Payment Flow for Subscriptions * Local Currency ** Foreign Currency

9 Corporate Action in Stocks – ACSDA-FIAB model Securities Flow I1 I2 I1 I2 Sub-account credit of securities (2b) Local Issuer Credits securities (1) Local CSD Foreign CSD Foreign CSD Informs credit of securities (3) Foreign Broker Foreign Broker Credits securities (4) I1 I2 I3 I4 Credits securities (5) Foreign CSD Foreign CSD Foreign CSD Foreign CSD Credits securities (2a) Settlement date

10 Corporate Action – Voting Rights Information Flow ACSDA –FIAB model Foreign Broker Local Issuer Asks for statement of holdings (5) Notifies General Meeting (2) Foreign CSD Foreign Broker Notifies General Meeting (3a) Asks for statement of holdings (4) Notifies General Meeting (1) Local CSD Blocks securities and issues statement of holdings (6) Delivers statement of holdings (7) I1 I2 I3 I4 Notifies General Meeting (3b)

11 Example taken from the Oxera Report - -DTCC Potencial risk and Loss Valuation France Telecom : Rights issue. Latest date of acceptance 4/4/ x20 shares. Offer Price: EU $ per share. Fuente: Corporate Action Processing - What are the risks ? Oxera Report

12 Corporate Action Processing Key Factors for the Diagnosis Intensive manual labor Multiple information flows Multiple Layers Expensive Multiple languages Important losses / Reputational risk Multiple Regulations Multiple time zones/ Continents Cross borders trades Investor protection Multiple information sources Increasing volumes and values on custody

13 The parties seeking to obtain the cure Issuers Industry Groups Regulators Fund Managers Exchanges Custodians Investment Managers CSDs Broker/ Dealers Agents

14 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

15 The CA Disease : Multiple risk sources Replacement cost Cross Border and Foreign Exchange Sub-optimal trading Decisions Multiple Layers Lack of Standards and Securities identification Inaccurate misinterpreted data Failure to Process voluntary C.A. Greater events Complexity New and Complex Instrument types Communication errors up-down Who is Liable ? Means of Communications Paper-base Use of Certificates Lack of Uniformity Capacity Planning Information consistency Delay Payments

16 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

17 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

18 Automationand Standardization Standardization Risks in Processing Process That should be automated CSDs Role Business Opportunities For CSDs Value Propositions From CSDs Corporate Events : CSD analysis

19 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 AnnouncementsPaymentsProxy Voting

20 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 Factors How 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 PaymentsProxy Voting Announcements

21 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

22 CSDs roles in Corporate Actions  Entitlement Processing  Improve Books/Records  Automation  Commoditization  Cost and Risk Mitigation  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) Oportunidades de Negocio

23 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

24 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


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