Corporate Actions in direct holding markets. T2S Info Session Helsinki, January 17, 2013 Christine Strandberg T2S CASG

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1 1 Corporate Actions in direct holding markets T2S Info Session Helsinki, January 17, 2013 Christine Strandberg T2S CASG

2 Introduction A number of groups/organisations are working with development of standards for Corporate Actions - CAJWG - JWGGM - T2S CASG - ISSA - SMPG For this session, the focus is processing of Corporate Actions in Europe, and the CAJWG and T2S CASG standards - The presentation is divided into two parts: Standards for Corporate Action events and Transaction Management standards

3 Standards for Corporate Action events Corporate Actions on stocks The CAJWG standards Categories of Corporate Actions - Distributions - Reorganisations The scope of application of the proposed market standards includes - All types of the above categories of Corporate Actions - All securities deposited and settled in book entry form with an (I)CSD in Europe - All parties involved, i.e. issuers, (I)CSDs and other market infrastructures, intermediaries and investors

4 Standards for Corporate Action events Distributions Distributions are divided into - Cash distributions (e.g. cash dividend, interest payment) - Securities distributions (e.g. stock dividend, bonus issue) - Distributions with options (e.g. optional dividend) - Distributions with options should be represented by an interim security with an official ISIN - The issuance of the interim security and the options attached to it should be operationally treated as two separate events, the first being a distribution, the second a mandatory reorganisation with options. They should be communicated at the same time

5 Standards for Corporate Action events Reorganisations Reorganisations are divided into - Mandatory reorganisations with options (e.g. rights exercise) - Mandatory reorganisations (e.g. stock split, redemption) - Voluntary reorganisations (e.g. tender offer)

6 Standards for Corporate Action events Corporate Actions on stocks Subject matter of the standards - Information flow throughout the chain of parties - Key dates and their sequence - Operational processing

7 Standards for Corporate Action events Information flow The standards for announcements cover the entire chain - Information from issuer to issuer (I)CSD - Information from issuer (I)CSD to its participants - Information flow from (I)CSD participants to end investors The standards are consistent across the different categories, but there are a few differences The focus is the flow of event information sent by the issuer to the (I)CSD and from there forwarded through the chain of intermediaries to the end investor - In formatted electronic form using industry standards to all except end investors - Information to be sent as quickly as possible to the next party in the chain

8 Standards for Corporate Action events Information flow For distributions of cash or securities to end investors, information by means of account statement is deemed sufficient - All reorganisations must be notified in advance, not only elective events The standards for information to end investors apply equally to all account servicers; CSDs and custodians

9 Standards for Corporate Action events Key dates The standards use the record date model, with entitled balance equal to settled balance in the CSD at end of day of record date Ex date does not determine entitlement, but is used in market claims Dependent on event type, payment date is either the business day after record date or as close to it as possible The timeline for distributions is ex date record date payment date - No ex date for nominal amount securities

10 Standards for Corporate Action events Key dates The timeline for mandatory reorganisations is last trading date record date payment date The timeline for elective reorganisations is start of election guaranteed participation date buyer protection deadline market deadline results publication date payment date

11 Standards for Corporate Action events Processing All cash payments (regardless of reason, direction or recipient) are to be made using the CSD s standard payment mechanism for settlement All securities payments should be rounded down to the nearest whole number (using the top-down method) For reorganisations, an ISIN that is different from the ISIN of the underlying security should be allocated to each outturn security

12 Standards for Corporate Action events Processing Elective reorganisations - Each option should have a unique identifier provided by the issuer, that will be maintained by the issuer (I)CSD and all intermediaries - Underlying securities on which an election is made should be separated accounting-wise from non-elected underlying securities by the (I)CSD and all intermediaries - For non-elected underlying securities, the default option as announced by the issuer should apply

13 Standards for Corporate Action events Implications on direct-holding markets Information flow - CSDs need to be able to communicate with end investors through appropriate means (e.g. secure website and/or post) as well as sending formatted ISO messages to intermediaries - This also has an impact on issuers and offerors for information regarding elective events - Events with intermediate securities are to be processed by the CSDs as separate events, but the CSD may find it necessary to combine the events in the communication to end investors whilst sending separate notifications to intermediaries

14 Standards for Corporate Action events Implications on direct-holding markets Processing - Instructions on elective reorganisations are to be sent to, and processed by, the CSD rather than account operators or issuer agents - Central bank money is difficult to use for movements on end investors accounts - CSDs and/or account operators usually only have authority, without specific instruction, to perform credits on cash accounts linked to end investors CSD accounts - Reversals are generally very difficult for CSDs to perform, both for cash and securities, on end investors accounts

15 Transaction Management standards Corporate Actions on flows The T2S CASG standards Transaction Management is divided into - Market Claims (Distributions) - Transformations (Reorganisations) - Buyer Protection (Elective Corporate Actions) The T2S standards are based on the CAJWG standards - They describe how to apply the CAJWG standards for Transaction Management in a T2S context - The CAJWG and T2S standards are aligned

16 Transaction Management standards Corporate Actions on flows The objective of a market claim is to ensure that the proceeds of a distribution reach the entitled party of a pending transaction The objective of a transformation is to ensure that the original transaction impacted by a reorganisation can continue its lifecycle The objective of buyer protection is to ensure that the buyer in a pending transaction, who has acquired the right to elect on a corporate action, will receive the outturn of its choice by instructing the seller specifying the option chosen

17 Transaction Management standards Corporate Actions on flows The scope of application of the standards covers in principle all securities transactions and all financial instruments eligible for settlement in T2S The standards are primarily focused on the need to establish a best market practice framework for transaction management in the cross-csd settlement environment of T2S. Transaction management within a single CSD is the sole responsibility of the CSD in question

18 Transaction Management standards Market claims A market claim should be detected by the two instruction owner CSDs (IOCs), or the CCP(s) where applicable, of the two counterparties in the transaction Market claims should be detected up to a maximum of 20 T2S opening days from record date, starting after c-o-b record date Lifecycle of market claims as per standard T2S rules - The lifecycle of a market claim instruction is not linked to the underlying settlement instruction, but (I)CSDs should provide a facility to enable subsequent linking by the parties Creation of market claims to be reported by the generating (I)CSD/CCP to its participant

19 Transaction Management standards Transformation Transformation of settlement transactions - Applicable settlement transactions should be transformed by the two instruction owner (I)CSDs (IOCs), or the CCP(s) where applicable - Settlement transactions should be transformed up to a maximum of 20 T2S opening days from record date/market deadline - Each IOC should use the terms of the event, as notified via the issuer (I)CSD, in the transformation - The transformed instructions should include at least the reference of the underlying instructions and the reference of the CA event - The transformed instructions must match

20 Lifecycle Transaction Management standards Transformation - The earliest settlement date of the new transaction(s) should be the latest between the payment date of the entitlement and the settlement date of the underlying transaction - The transformed instructions should reflect the underlying settlement instructions to the extent possible - In case of one securities outturn, the exceptions are quantity of securities, ISIN and settlement date - In case of multiple securities outturns, the exceptions are quantity of securities, ISIN, settlement date and allocation of the settlement amount according to the rates provided by the issuer

21 Lifecycle Transaction Management standards Transformation - In case of cash outturn, cash transfer settlement instructions should retain the same characteristics as those of the underlying transaction. If the underlying transaction was against payment, two new instructions, in opposite directions, will be created; one for the settlement amount and one for the cash outturn. If the underlying transaction was free of payment, only one transfer, for the cash outturn, will be created - In case of fractions in the outturn, the number of securities should be rounded down. If the issuer compensates the fractions in cash, an additional cash transaction (PFOD) should be created with the same characteristics as the underlying transaction

22 Transaction Management standards Buyer protection Manual buyer protection - Manual buyer protection in accordance with the CAJWG standards is to be implemented in all European markets - This requirement is recognised and supported by the T2S Advisory Group

23 Transaction Management standards Manual buyer protection Manual buyer protection standards - For a pending transaction, a buyer protection (BP) instruction is to be created by the buyer if the requested option is not the default option, and sent to the seller - The BP instruction should be sent directly from the buyer to the seller - A BP instruction is valid if the information is correct and it is sent before the BP deadline - The seller should acknowledge the BP instruction, but no form of matching is necessary for the instruction to be valid - BP instructions allocated by a CCP against a seller are allowed until close of settlement of the date of the BP deadline plus one hour

24 Transaction Management standards Manual buyer protection Manual buyer protection standards - Once a BP instruction has been sent, settlement of the underlying transaction should be allowed until the BP deadline - If the underlying transaction settles before deadline, the BP instruction is void - If the underlying transaction has not settled by the BP deadline, the respective instruction should be cancelled by the buyer and the seller and reinstructed according to the choice of the buyer Manual buyer protection instruction - The CAJWG has created a template for a manual buyer protection instruction, which is to be used until an ISO message has been created

25 Transaction Management standards Implications on direct holding markets CSDs in direct holding markets currently offer little transaction management support - The business case for a CSD to implement automated market claims and transformations functionality may well be difficult usually, transactions on end investor accounts have an on-time settlement rate very close to 100% - Manual buyer protection is much easier to implement in a market since no functionality in the CSD or its members needs to be developed

26 Standards implementation status CAJWG November 2012 (21 markets) Cash Distr. Secs. Distr. Distr. wo Mand. Reorg. wo Mand. Reorg. Volu. Reorg. All markets 70.13% 66.14% 50% 58.33% 71.06% 59.37% Direct holding markets Indirect holding markets 59.09% 60% 40% 46.88% 60.77% 44% 80.17% 71.72% 59.09% 68.75% 80.42% 73.33%

27 Standards implementation status CASG September 2012 (20 markets, 22 CSDs) Market Claims Transformations Buyer Protection All markets 25.86% 15.32% 1.77% Direct holding markets 11.11% 0% 0% Indirect holding markets 36.08% 24.23% 3%

28 Summary The standards apply equally to all markets, regardless if they are direct holding or omnibus/nominee markets There are no substantial differences in how to implement the standards in direct holding markets - With the obvious exception of payments in central bank money However, direct holding markets have a lower implementation rate than indirect holding markets - Direct holding markets thus have to implement more changes to the processing in their markets and CSD systems in order to be able to comply with the market and the T2S CA standards

29 29 Thank you for your attention