How will corporate actions entitlements be treated under T2S?
Although Target-2Securities (T2S) is a settlement platform, it will have to deal with corporate actions as soon as an entitled transaction is pending (ie, matched but not settled) at or after the record date. In such cases, when the transaction finally settles, a mechanism has been created within T2S so that the entitled party receives the proceeds of the corporate action (cash and/or securities). These proceeds will be credited to the T2S account of the counterparty.
How will cross-border scenarios affect the servicing of corporate actions entitlements?
T2S is one of the European Commission’s initiatives to suppress the barriers to cross-border trading in European (the so-called Giovanninni barriers).
A single settlement engine with common rules and market practices in Europe stands to make cross-border movements easier and cheaper, so that the activity will eventually rise significantly. As far as corporate actions are concerned, the most important initiative centred on eliminating the third Giovanninni barrier, related to corporate actions. The European Commission set up a group of experts, the corporate actions joint working group (CAJWG), including members of the main European professional organisations, to define the market standards for corporate actions processing and for general meetings.
A first report was published in 2008, with the outcome known as the ‘standards’, tackling the three main topics of (i) information management throughout the chain, (ii) key dates and their sequence, and (iii) operational processing. These would become a kind of ‘10 commandments’ for corporate actions processing, endorsed by all the markets in Europe, applicable for corporate actions on stock and corporate actions on flows.
When standards are implemented in Europe, there will be less room for misinterpretation on how to process an event, so an investor in Poland should get the same timing for announcements and for payments, and same key rules, whether they are involved in a corporate action on a French or a Slovenian security. This is a great step ahead, as it was often considered a hassle for investors in a foreign country. However, there will still be a need for expertise at the local level to understand and convey the right information on a corporate action. Most frequently, key information is contained in the narrative part of the announcement, which will still be a key differentiator for custodians.
So coming back to the question, processing of corporate actions will be made easier with the implementation of common rules and it is a real opportunity to increase the size of cross-border trading in Europe. However, as settlement is becoming more and more ‘industrial’, business expertise remains key on the corporate actions side, to make sure that correct and useful information flows from the issuer to the end-investor. To win this game, you must be able to comply with a standard way of processing events across Europe, combined with a strong local presence to understand the ever-growing complexity of each event. You need to be a global and a local player.
What must CSDs do to harmonise this aspect of asset servicing?
Central securities depositories (CSDs) were very much involved in the definition of the corporate actions standards. They have to comply with the standards because they have endorsed them, but also because most of them have decided to join T2S. Indeed, although it is a settlement platform, T2S must manage corporate actions on flows, and in that respect, it must comply with the standards. To protect the investors’ entitlement (to ensure the success of T2S), market claims, transformations and buyer protection, the three streams of corporate actions on flows, must be managed in a harmonised way by all the different participants of T2S.
To reach that objective, in the mid 2000s, the European Commission set up another group of experts within T2S governance, the corporate actions sub group (CASG), which, starting from the work of the CAJWG, defined a set of standards to manage corporate actions on flows within T2S. The standards were issued and endorsed by all future T2S participants in 2009, and complying with these standards has now become a mandatory step for any institution that would like to join T2S.
However, two important elements must be understood. Firstly, CSDs are only a piece of the puzzle, providing the IT infrastructure at the local level, and a gateway to T2S. They must provide each market with the means to apply the standards, but they are not responsible for changing market practices or local rules. For instance, implementing a record date requires a law change in some markets. This is the reason why Market Implementation Groups (MIGs) has been implemented locally, with the responsibility to implement the standards in each nation.
Secondly, some markets decided not to join T2S, but they will implement the CAJWG standards anyway. The timeframe will just be different, as they do not see T2S as their milestone for change. This is the case for the UK where no one is certain when the recommended sequence of key dates will be implemented, in part because the UK isn’t joining T2S for the foreseeable future, and also because this would necessitate a change to the regulation locally.
What did the T2S CASG formulate in terms of standards for corporate actions on flows?
The CASG standards were built after those of the CAJWG, to define the impacts of a corporate action on pending transactions in T2S. They were approved by the T2S Advisory Group, so that all market infrastructures or intermediaries now have to comply before they join T2S. The scope of the standards covers all securities transactions. Their objectives were to harmonise the processing so as to ensure efficient settlement, and to protect the rights of both counterparts. The CASG issued standards related to (i) market claims, resulting from a distribution of cash or securities, (ii) transformations, resulting from a reorganisation, and (iii) buyer protection, resulting from an elective event.
Market claims: the objective is that the proceeds of a distribution should reach the entitled party of a pending transaction. To achieve that goal, the CASG standards define who should issue a market claim and when, if and how a transaction should be included in the process or not, with cum/ex and opt out indicators. Standards also set up rules with regards to the intended settlement date of a transaction, the detection period, the independence of the claims to the original transaction, and the reporting in ISO format.
Transformation: the objective is that the original pending transaction continues its lifecycle even while being affected by a reorganisation. To reach that goal, the CASG standards define who should identify, cancel and replace the transaction and when, what dates should be used, if and how to opt out, how to manage multiple outturns, and what reporting should be used.
Buyer protection: the objective is to ensure that the buyer in a pending transaction, who has acquired the right to elect on a corporate action, actually receives the expected outturn, with a possibility to provide its choice to the seller. To reach that goal, the CASG standards define rules on who should be passing the information and when, what mechanism should be used, automated or otherwise, and how and when the transformation process should take place.
After the standards were defined and endorsed, the CASG mandate changed from defining to monitoring implementation and providing support to the industry on how these standards would apply in a T2S environment. The CASG provides a yearly implementation progress report to the T2S advisory group. BNP Paribas Securities Services is a member of the CAJWG and the CASG.
Where are CSDs with implementing these standards?
This must be looked at on a market-by-market case—there is no one blanket view on this. Some markets may not implement the recommended standards before their final migration to the T2S platform. However, these same markets might already be prepared to put them into practice. Some of these may have all the regulatory, legal and technology issues solved but are simply choosing to synchronise their adoption of the CAJWG standards with their T2S migration. Other countries may very well be almost entirely compliant to the CAJWG standards but are very far from implementing the remaining standards for legal or structural reasons.
We are confident, however, that solutions for these cases will be forthcoming in good time to ensure smooth processing on corporate actions on flows, as these issues are being considered at the highest levels of T2S governance.
Our view is that ‘the glass is much more than half-full’. We are very close, in fact, to achieving our goals and it is good to note that the standards have been endorsed universally, which is impressive in itself. Of course, issues may yet arise as we progress with implementation, but as long as all the stakeholders are well aligned and focused on finding common solutions, then we should be able to overcome these.
The CAJWG standards should not be seen as a readymade road-map to European harmonisation, but as a sophisticated tool kit to help us enable smooth, low cost, low risk corporate actions processing.
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