Corporate Actions: Nature, Types And Entitlement

Fabian Banchiero, VP and Regional Manager Latin America & Caribbean Division
October 27, 2005
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Corporate Actions: The Main Custodian Workload And Risk

Why is it an issue ?

General flow
Definition and volumes Possible event types

Computation of entitlement
The proposed matrix most frequent and cumbersome events

Record and ex-date. Is 15022 the solution ?

Corporate Actions: Why Is It An Issue ?

The main operational risk linked to:
- Global securities position (not individual entries) - Complex timetable, with no international standard - Multiple dead lines along the chain - Clarity of notification : type, wording , language - Lack of STP due to numerous possibilities - Lack of rules regarding dates

A cumbersome, risky and manual process highlighted in all market WGs: Giovannini rule 3, G 30 rule 8etc...

Corporate Actions: General Flow

Client

Clients of Client

Custodian

Issuing Company

Vendor Carrier

Domestic/Foreign Reg.

Central Bank

Sub Custodian

Central Depositary

Tax Authorities

Corporate Actions: Definition And Volumes

Definition: any event of any interest potentially involving existing holders of a securities, with or without impact on securities or cash position. i.e.: no precise and agreed definition U.S. Definition: A change to the capital structure or the financial organization of a company that results in a change to the securities of the company. Main issuers/issues : still Governments and public companies
- Equities: 50,000 worldwide for USD 37 billion. Latin America- 5%; Europe- 10%
- Bonds, MMI and short term instruments : near to 10,000,000 different issues for $44 billion. Latin America- 1-2%; Europe- 10%. More on specific instruments. - From 100,000 to 1,000,000 events a year to monitor for a large Custodian : if no automation ==> no efficient deliveries - Equities often more complex/risky to handle than bonds - Using mainly, not only, manual process : far from 100% STP

Corporate Actions: Possible Event Types

An huge number of possible combination with new types of events created every year. Example : Tax treatment as client election. Depending on : Issuers decisions ex : dividend payment

Issuer bylaws
Investor decision Markets decisions,

ex : disclosure
ex : class action, squeeze out ex : market split, de-listing, active...

Third party decision

Legal and regulatory

ex : hostile take over

ex : meeting, bankruptcy, tax

Corporate Actions: Possible Event Types

With minimum 218 possibilities (more than 200,000 types) with old securities Y/N ex : merger with new securities Y/N ex : rights with new shareholder Y/N ex : subscription tradable/not tradable Y/N ex : odd lots, rights with cash Y/N ex : income with tax on cash Y/N ex : redemption of ZC with Tax on Securities Y/N ex: stock div with sec client election Y/N ex: right issues with cash client election Y/N ex : currency option with restrictions/exclusion Y/N ex : US investors with entitlement limits Y/N ex : privatization with dead line Y/N ex : convertible, warrants with prior-announcement Y/N ex : hostile bid

Spreading Clear Information All Along The Chain

Issuer
From simple situation...

Investor

to pure nightmare

Registrar
Paying agent

Data Vendors

Tax Authorities client clients

Issuer Central Depo sub custo global cus

CB
B/S
Same entitlement rules and time table

Computation Of Entitlement: Rules Depend On Regulation

Issue : define an entitled position in the book of the Custodian
What if..?

Actual Trade date settlement date ex date

Event date

time

Contractual settlement date

Announcement date
What if..?

Record date

When does transfer of ownership and entitlement occur ?

Computation Of Entitlement: Rules Depend On Regulation

In other words : when and for which positions does transfer of ownership and related entitlements occur for positions
- settled - to deliver - to receive - registered/out for registration - on loan/borrowed/collateral/pledge

An example on the French market for the most frequent Equity event : general ordinary and extraordinary meetings
- announcement is done 1 month before event - entitlement is blocking of shares, settled positions, 5 days before meeting if the share is bearer (99% of listed Equities) for any Traded positions - or any traded (i.e. post trade date) positions recorded in issuer book for registered securities . No blocking of position. Issue : non domestic custodian do not monitor registration.

Corporate Actions: The Matrix To Build Up

BE ACTV ATTI BIDS BONU BPUT BRUP BSPL CAPG CHAN CLSA CONS CONV . ... etc 100 event types CH DE DK EI ES FI FR GB GR IT LU SE SP PT

Main common issues

Unclear scope of Corporate Event (ex: EU class action) Taxable income

Meetings-proxy
Restrictions and disclosures Standard timeframe for any event Computation of entitlement = ownership and record date

Corporate Actions: Frequent Events

Focus on 3 frequent events: more than 80% of events
Taxable income and related processes
- With or with out currency option - With or without stock option (optional div) - With withholding tax or reclaim - With certification, i.e. non-us certification

Redemptions Meetings : lot of issues around proxy due to lack of agreement on record date entitlement

Corporate Actions: record and ex-date

Is harmonization of ex date and record date a priority for CA STP processing ? Record date is linked to registration and rules for transfer of ownership. Record date does not exist everywhere. Is 15022 FIN the answer, or migration to XML necessary ? If vendors are on SWIFT, could we envisage any changes ? Dematerialization could be the first long term target to achieve if it clarifies transfer of ownership ?

Corporate Actions at BNY

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Corporate Actions - Market Players

Issuing Companies Data Vendors Sub-custodians
- Access to CB/CD - Market Info - Notice of Event - Projections - Instructions Chasing and Processing - Booking and Reporting

Central Bank Tax Authorities Central Depository

- Proxy Voting

- Market Info - Notice of Event - Projections - Instruction Chasing and Processing - Booking and Reporting - Brokerage

BNY Global Custodian

BNYs Clients Clients of BNYs Clients

Corporate Actions - Mission (Information Management)

Information Sources Local custodians Third Party Custodians Vendors Corporate Action Notification System Notification SWIFT (MT564) Fax INFORM iCANS

Corporate Actions - Mission (Information Management)

Notifications: What?

All information on:

Corporate events (mandatory - elective) Redemptions (partial - early - drawings)

Corporate Actions - Mission (Information Management)

Notifications: When?

Upon announcement : Preliminary

On ex-date: Client deadline -2: Client deadline: Interim definitive / Definitive Reminder Reminder

Manual

Automatic

Corporate Actions - Mission (Information Management)

Notifications: To whom?
Holder Pending receipt New Holders

Corporate Actions - Mission (Information Management)

Notifications: How?
Standardized - use of templates Highlight options for elective events

Corporate Actions - Mission (Instruction Management)

Instructions Receipt
Communication
- iCANS - SWIFT (MT 565, 599)

- Fax

Format ISIN, sec. description, account number, event number, entitled position, option Standing Instructions

Corporate Actions - Mission (Transaction Management)

Transactions Reporting

How?
- INFORM - SWIFT (MT 566) - Fax

What?
- Pending Corporate Actions reporting - Settled Corporate Actions reporting

iCans- Interactive Corporate Action Notification System

Mainframe application related to BNY Corporate Action Services for Global custody clients accessible via BNYs mainframe. Clients can:
Receive CA notifications electronically Receive intra-day notification updates

Receive a consolidated notification for all accounts holding a position at same subcustodian
Send authenticated electronic responses Instructions processed real-time and STP Create special instructions Track status of responses Override standing instructions Choose several authorization levels

Reduce processing risks