CMI in Focus: Corporate Actions Processing

The processing of corporate actions is well-known to be very complex given the variety of corporate event types and the number of counterparties involved. A corporate event may dictate a mandatory action or offer a voluntary participation with multiple options, the latter being more propitious to errors. Asset servicing carries a high degree of risk given its commercial sensitivities, and in many cases market infrastructures like CSDs provide these services in competition with custodians. It is also the field where the largest potential losses for a CSD may arise, a single missed rights instruction could generate millions of losses.

The main areas where the risk originates is from the collection of corporate actions information from issuers, the dissemination of the information to participants, the receipt of instructions (for voluntary events) and the actual processing of the corporate action.

General Principles of Corporate Actions

Although there will be some variations in the procedures for each type of corporate event and between different markets, the general principles of corporate action processes follow some generic steps.

Firstly, corporate events must be approved by shareholders at either the Annual General Meeting (AGM) or at an Extraordinary General Meeting (EGM). The approval will include details for how the event will be structured and the dates of each stage of the process. After the general meeting, the company will issue a notification to the market with the details of the corporate event. The notification will always be sourced from the issuing company itself, but (for listed companies) is commonly distributed through the stock exchange (to comply with the listing rules that oblige disclosure of any information that might affect the price of the security). Depending on the market, other resources may be used to distribute the corporate action notification, such as the CSD, central information sources (e.g. FinInfo in France), regulators, or information vendors (e.g. Bloomberg, Reuters). Further notifications with additional or changed details may follow the initial notification.

For voluntary events, information will have to be passed through the chain of intermediaries to the investor, who will instruct their intentions back down the chain.

Securities can be traded with the benefit (‘cum-benefit’) of the entitlement between the time of notification and the day before ‘Ex-date’ (the price at this time will reflect the extra value gained from having the right to the entitlement). Ex-date is the first date that securities are traded without the benefit of the entitlement (‘ex-entitlement’) and is normally 2 or 3 days before the ‘Record date’. The Record Date is the date on which ownership in the securities is obtained from the register in order to calculate the corporate action entitlements. Pay Date, which is the date entitlements are credited to beneficiary’s accounts should be shortly afterwards.

For bearer securities, Record date usually does not exist since there is no record of ownership to verify. Instead, securities positions are blocked for a certain amount of time in order to stop changes of ownership between the time the meeting is convened, until the payment of entitlements.

The reason why securities positions are blocked in this way, is for the same reason there is a period of at least the settlement cycle between Ex-Date and Record Date, which is to attempt to ensure that the correct party receives the entitlement. However, should settlement be delayed, meaning that securities have been traded ‘cum-entitlement’ but settle after the ex-date, a ‘market claim’ would be required to transfer the entitlement from the seller to the buyer.

Intermediaries

Although corporate actions are meant to be simple information or cash flows between issuers and investors, there is in reality a long chain of intermediaries, which implicates several transfers of information with deadlines to meet for each intermediary. It is common that the CSD of the market is involved and has a key function, i.e. collect the information, distribute it, receive instructions (in the case of voluntary events) and then process it, although there can be a varied degree of involvement in asset servicing ranging from simple interest payment distribution to complex corporate actions processing. The use of the CSD is regarded as best market practice for securities entitlement processing since the CSD has a central position between issuers and participants rather than issuers dealing directly with each participant or the registrars. There are also markets where the stock exchange is responsible for processing corporate actions, although this is also not ideal since the CSD would have to be involved anyway when a movement of securities balances is required.

Figure 1: CSDs involved in Corporate Actions Process per Region

The above charts show that a majority of markets use the CSD to process corporate actions. This is particularly reflected in Western Europe and the Middle East where only 2 and 1 market respectively do not use the CSD. In Americas, the CSDs are generally involved as well in corporate actions processing (85%).

In Asia Pacific and Eurasia, the proportion drops a bit below 70%, whereas in Africa only a few CSDs process corporate actions, which is also due to the rarity of corporate actions in the small emerging markets.

Collection of Information

One of the key initial components of the process is the collection of corporate actions information and particularly what kind of agreement is in place with the issuers of the market. There are typically 3 possibilities; the most efficient is that the law requires issuers to submit corporate actions to either the CSD or the stock exchange (preferably the CSD). The second is to have a contractual agreement between the issuer and the CSD or stock exchange to provide the information. The third is to have no obligation or requirements for issuers to provide any information, which means that participants do not have any assurance that they will receive the information and that the entity responsible for disseminating the corporate actions information should be more active in obtaining the information.

Figure 2: Agreement for Collecting Corporate Actions Information per Region

The above charts shows that Europe clearly has a more efficient system for collecting corporate actions information with almost 50% of markets where it is mandatory by law for issuers to provide the information (e.g. France, Norway and Spain), and about 20% have contractual obligations, such as Italy and Switzerland.

In Asia Pacific, about 45% of the markets have contractual agreements (e.g. China, India and Australia) or legal requirements (e.g. Indonesia and Singapore). For the rest of the markets, the information has to be pulled proactively by the entities that disseminate it.

In the Middle East, 35% of the markets beneficiates from legal or contractual arrangements for obtaining the information. The law requires issuers to send the information only in Israel and Turkey.

In Americas, the proportion drops to 30%, with only legal requirements in Brazil and Colombia. In Eurasia and Africa, where corporate actions are more rare, there are very few markets where issuers are required to provide the information; only in Mauritius where there are contractual agreements and in Bosnia and Azerbaijan where it is a legal requirement.

Level of Automation

After the corporate actions information has been collected, it has to be disseminated to the participants before being processed, which is where the level of automation between the CSDs (or other stock exchange, registrars on other cases) and the participants becomes critical. The process for mandatory corporate actions is typically straight forward as the participants will receive the corporate actions information and normally a confirmation that the event has been processed. As for voluntary corporate actions, such as right issues or takeovers, the process gets more complicated, as this involves the participants sending back instructions to the CSDs before being processed.

There are different communication channels used in the markets which have different levels of manual intervention and straight through processing (STP) that can increase the risk of errors. The less efficient channels include fax, emails or post whereas the most proficient systems are fully electronic, such as electronic proprietary systems or SWIFT messages (ISO 15022 standards or the new ISO 20022). Although, some markets will have proprietary systems in place which are usually widely used by the local participants, having SWIFT messages is critical for the foreign investor community and cross-border communication.

Figure 3: SWIFT Messages Used for Corporate Actions

Similar to the collection of corporate actions, the European markets are more advanced than in other regions with 60% of the markets having SWIFT messages in place for processing corporate actions, although the proportion get close to 100% if only considering Western Europe.

In Asia Pacific, only the most developed markets have implemented SWIFT, such as Hong Kong and Singapore. The rest of the markets use proprietary systems, fax or mail.

In the other regions, SWIFT is not very developed as it is only available in Canada and the USA in Americas, only in Russia and Kazakhstan (for foreign securities) in Eurasia; and only in South Africa, Egypt, Lebanon (partially available) and Turkey for the Africa/Middle East regions.

Conclusion

The risks involved in the processing of corporate actions can be very significant and result in huge losses when there are errors in any of the links in the chain. Despite this, corporate actions have often been left out when it comes to international standards, e.g. the latest CPSS-IOSCO principles or the proposed CSD Regulation in Europe.

Given the number of intermediaries and the complexity of some corporate events, the CSDs should have a central role in the process and manual intervention should be reduced as much as possible to mitigate the risk. The above analysis shows that there is a lot of progress to be made in many markets, particularly in markets where the CSD is not involved or there are insufficient levels of automation. The implementation of SWIFT messages, which is a fundamental service for transferring financial information, has only been completed in about one third of the markets.

In line with the harmonisation across markets in Europe and the Giovannini barriers identified over a decade ago, the European region is much closer to best market practice than the other regions. Some markets are only just starting using SWIFT messages while the more developed markets are already replacing the ISO 15022 standards with the new ISO 20022 standards which is where the future of corporate actions processing lies.

For further information contact:

Guillaume Viteau
Senior Analyst, W.Europe (incl. EU)
Thomas Murray Data Services
+44 (0) 20 8600 2300
gviteau@ds.thomasmurray.com

Jim Micklethwaite
Director, Capital Markets
Thomas Murray Data Services
+44 (0) 20 8600 2309
jmicklethwaite@ds.thomasmurray.com

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