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

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




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


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


* Local Currency** Foreign CurrencySettlement date


Credits financial resources (5)*

I1I1 I2I2 I3I3 I4I4

Foreign Broker Foreign Broker




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)


Credits securities (1)

Local CSDLocal CSDForeign

CSD

Foreign

CSD

Informs credit of securities (3)

Foreign

Broker

Foreign

Broker


I1I1 I2I2 I3I3 I4I4


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 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


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

Documents

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