prepared by jorge h jaramillo ossa breakout session leaders deceval colombia ceo october 27 th 2005 n.
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ACSDA SEMINAR “Central Securities Depositories, Settlement Systems and Central Counterparties as Relevant Entities in the Securities Markets”.

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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”

Corporate Actions ProcessingThe Globalisation ChallengeCSD8 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 27th/2005

slide2

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

  • 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
Stylised process of the corporate action chain (based on the UK model)

ISSUER

Service-level agreement

REGISTRAR

Registers as

Appointed by issuer

shareholder

CUSTODIAN’S

to maintain register

NOMINEE

Registers as shareholders (via nominee);

Name on register

notifies changes in ownership to registrar

CSD

BROKER/DEALER

Ownership

Where shares are

Execution of trades

Account

Service-level agreement

ultimately held

where necessary

Account

Service-level agreement

?

(or operational relationship if both appointed by investor)

CUSTODIAN

FUND MANAGER

?

Appointed by investor

Appointed by investor

?

INVESTOR

Service-level agreement

Mandate/service-level agreement

slide4

Stylised illustration of main information and instruction flows between participants in the corporate action chain

ISSUER

Originator of

CA. Event

Information

Instruction

Information

CUSTODIAN´S

NOMINEE

REGISTRAR

Instruction

Sends information on to

Registered shareholders

Misma Firma

BROKER/

DEALER

CSDs

Information

FUND MANAGER

CUSTODIAN

Processes Information

And Instructions

Makes decision on CA

Processes Information

And Instructions

Instruction

Information

INVESTOR

Instruction (If not delegated to fund manager)

Fuente: Corporate Action Processing - What are the risks ? Oxera Report

us corporate action flow for tender merger
US Corporate Action flow for Tender/Merger

Source: DTCC/Global Corporate Action Validation Service

corporate action acsda fiab model information flow

I1

I2

I3

I4

Notifies corporate actions and asks for instructions* [Ta](4)

Foreign

Broker

Confirms voluntary corporate action processing [Ta, Tr](7)*

Notifies corporate actions and asks for instructions* [Ta] (3)

Notifies corporate action [Ta] (1)

Instructs voluntary corporate action [Ta, Tr] (5)*

Notifies corporate actions and asks for instructions [Ta] (2)

Local CSD

Foreign CSD

Instructs voluntary corporate actions [Ta, Tr] (6)*

Confirms voluntary corporate action processing [Ts] (8)*

Corporate Action – ACSDA – FIAB – Model Information Flow

Local Issuer

Ta – notification date

Tr – record date

Ts – payment date

* In case of voluntary corporate actions.

corporate action in cash acsda fiab model payment flow for dividends and interests

I1

I2

I3

I4

Credits financial resources(5)**

Foreign

Broker

Credits financial resources (1)*

Credits financial resources(4)**

Local CSD

Foreign

CSD

Informs cash dividend/interests payment (2b)

Instructs FOREX transaction(2a)*

Bank

Effects FOREX transaction (3)

Corporate Action in Cash – ACSDA – FIAB model Payment Flow for Dividends and Interests

Local Issuer

Foreign Broker

* Local Currency

** Foreign Currency

Settlement date

slide8

Credits financial resources (1)**

Local Issuer

Foreign Broker

Credits financial resources(5)*

Credits financial resources (2)**

Local CSD

Foreign CSD

Informs subscription payment (3b)

Instructs FOREX transaction (3a)

Bank

Effects FOREX transaction (4)

Corporate Action in Cash ACSDA- FIAB - model Payment Flow for Subscriptions

I1

I2

I3

I4

* Local Currency

** Foreign Currency

Settlement date

slide9

I1

I2

I3

I4

Credits securities (5)

Foreign

Broker

Credits securities (1)

Credits securities (4)

Local CSD

Foreign

CSD

Informs credit of securities (3)

Credits securities (2a)

Foreign

CSD

Foreign

CSD

Sub-account credit of securities (2b)

I1

I1

I2

I2

Corporate Action in Stocks – ACSDA-FIAB model Securities Flow

Local Issuer

Settlement date

corporate action voting rights information flow acsda fiab model

I1

I2

I3

I4

Notifies General Meeting (3b)

Foreign Broker

Delivers statement of holdings (7)

Asks for statement of holdings (4)

Notifies General Meeting (3a)

Notifies General Meeting (1)

Local CSD

Foreign CSD

Notifies General Meeting (2)

Asks for statement of holdings (5)

Blocks securities and issues statement of holdings (6)

Corporate Action – Voting Rights Information FlowACSDA –FIAB model

Local Issuer

Foreign Broker

slide11

Example taken from the Oxera Report - -DTCC 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.

Fuente: Corporate Action Processing - What are the risks ? Oxera Report

corporate action processing key factors for the diagnosis

Expensive

Intensive

manual

labor

Multiple

information

flows

Multiple

Layers

Multiple

time zones/

Continents

Multiple

languages

Important

losses /

Reputational

risk

Multiple

Regulations

Increasing

volumes

and values on

custody

Cross

borders

trades

Investor

protection

Multiple

information

sources

Corporate Action Processing Key Factors for the Diagnosis

"FORCES AGAINST US"

"HOW CAN WE AVOID TO COLLAPSE ? "

slide13

Exchanges

Fund

Managers

Custodians

Issuers

Investment

Managers

Industry

Groups

Agents

Regulators

CSDs

Broker/

Dealers

The parties seeking to obtain the cure

Investor

Rights

slide14
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

Some principal CA Shock Factors : Over a million in a year

  • 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

the ca disease multiple risk sources

Lack of

Uniformity

Capacity

Planning

Information

consistency

Delay

Payments

Replacement

cost

Cross Border

and Foreign

Exchange

Sub-optimal

trading

Decisions

Multiple

Layers

Lack of

Standards

and Securities

identification

Failure

to Process

voluntary C.A.

Greater

events

Complexity

Inaccurate

misinterpreted

data

New and

Complex

Instrument

types

Use of

Certificates

Communication

errors

up-down

Who is Liable ?

Means of

Communications

Paper-base

The CA Disease : Multiple risk sources
the specialists opinion
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

the doctors prescription not only one medicine

Standardization

Automating

information

flows

Development of

Best Practices

Changes in

Laws and

Regulations

STP

processing

New Industry

arrangements

Globally

The doctors’ prescription : Not only one medicine

Risk and Cost Reduction

Investor Protection

Efficiency

slide18

Risks in

Processing

Automation

and

Standardization

CSDs

Role

Process

That should be

automated

Business

Opportunities

For CSDs

Value

Propositions

From

CSDs

Corporate Events : CSD analysis

CSD8 topics

slide19
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

Announcements

Payments

Proxy Voting

  • 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
slide20
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 …….

Payments

Proxy Voting

Announcements

  • 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
slide21

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

slide22

CSDs roles in Corporate Actions

  • Entitlement Processing
  • Improve Books/Records
  • Automation
  • Commoditization
  • Cost and Risk Mitigation

Oportunidades de Negocio

  • 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)
slide23

CSDs roles in Corporate Actions

CSDs interposing themselves between Issuers and Market Participants and/or Investors to deliverTimely, accurate and automated data

  • Lower Cost
  • Higher Efficiencies
  • Reliability
  • Reduction in some Level of Liability
slide24

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