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DRAFT Working Paper as of 8/23/2006

The Asset Managers Forum


Corporate Ations !nitiati"e
Propose# $est Praties Doument
For Comment
This paper is the %orking #raft of the AMF Corporate Ations Committee& an# is
'ase# on #isussions of the Asset Managers an# Custo#ians (u'ommittee& as %e))
as omments from in#ustr* partiipants+ An* omments shou)# 'e sent "ia emai) to
,)isa -uotta.ar"i of the AMF staff at enuotta.ar"i/'on#markets+om+
DRAFT Working Paper
DRAFT
AMF Corporate Ations Committee
P)ain ,ng)ish Doument
0ut)ine
1. Executive Summary of Best Practice Recommendations
2. Background
. !"erationa# Risk
.1. $o#untary
.2. %andatory
&. T'e Asset %anagers Forum (or"orate Action )nitiative
*. +oa#, Best Practices
-. (urrent State
-.1. %andatory vs. $o#untary (or"orate Actions
-.2. Protecting (#ient.s Assets
/. Accounting and Tax )ssues
0. (or"orate Actions Process (ustodian Pers"ective
0.1. (a"turing Externa# %essages
0.2. (reation of (or"orate Action Event
0.. Bui#d and Distri1ute 2otification
0.&. Receiving and Processing Res"onse
0.*. Best Efforts Practices and Defau#t Actions
0.-. Process )nstruction
0./. (o##ect and Process Entit#ement
0.0. Best Practice Recommendations 3 $o#untary and %andatory
4. (or"orate Actions Process )nvestment %anagement Pers"ective
4.1. Recei"t of 2otification
4.2. (onso#idation5 Tracking and (#eansing
4.. Decision %aking and E#ection
4.&. E#ection De#ivery
4.*. Entit#ements
4.-. S6)FT
17. Effecting ('ange 3 Best Practice Recommendations
17.1. Protecting (#ient.s Assets
17.2. Receiving )nitia# )nformation
17.. Terms
17.&. )nformation Received from (ustodians
17.&.1. Pros"ectus
17.&.2. )nstructions and !t'er Su""orting )nformation
17.*. (om"#ete Announcement of $o#untary (or"orate Actions
17.*.1. Timing of "re#iminary notice 3 time#iness vs. accuracy
17.*.2. (om"#ete Announcement
17.-. E#ection (ommunications
17./. %ergers and Ac8uisitions
17.0. Partia# (a##s
17.4. Assets on 9oan 3 Securities 9ending
17.17. (or"oreta Actions on Derivatives and !"tions
17.11. Accounting )ssues
17.12. Proration
17.1. Rounding
17.1&. Portfo#io %anager.s 2eeds vs. Processing Re8uirements
17.1*. Res"onse Dead#ines
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17.1-. Tracking Dead#ines
17.1/. Payment in :ind ;P):< Distri1ution Practices
17.1/.1. Process )ssues
10+18 )nternationa# )ssues
10+12 Staff Education and Training Re#ating to (or"orate Actions (ontent
11. (onc#usion
12. Ex'i1its
12.1. A%F Best Practices )nitiative Time#ine
12.2. 9ist of (or"orate Action (ommittee %em1ers
12.. Diagram de"icting current )nvestment %anager F#o=
12.&. Diagram de"icting current (ustodian F#o=
12.*. Diagram de"icting current De"ository F#o=
12.-. Diagram of "ro"osed trade f#o= as descri1ed in t'e corres"onding 1est "ractices
recommendations
12./. Diagram de"icting current (#ass Action F#o=
12.0. Data Standards

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,3euti"e (ummar* of $est Pratie Reommen#ations
Text to come
$akgroun#
Securities firms today are facing an increasing vo#ume of cor"orate actions. T'is trend is a resu#t
of 'eig'tened mergers and ac8uisitions activity around t'e g#o1e. T'ere 'as a#so 1een an increase
in cross>1order 'o#dings of securities5 ='ic' adds com"#exity to t'e cor"orate actions as
securities may 1e #isted on mu#ti"#e exc'anges and sett#ed in mu#ti"#e #ocations. (or"orate actions
data is a#so 1ecoming increasing#y more time sensitive? and more com"#ex as t'e securities
industry continues to evo#ve and deve#o" more creative transactions and so"'isticated
instruments.
Text to come re, +rou" of 7 recommendation5 +iovannini Re"ort5 Euro"ean 'armoni@ation
efforts5 DT(( re>engineering "roAect5 )S)T( and S%P+ initiatives.
)n t'e "ast fe= years5 t'ere 'ave 1een many nota1#e studies and re"orts of Post Trade Processing5
='ic' 'ave focused on t'e risks and inefficiencies invo#ved in "rocessing cor"orate actions.
T'e +7 re"ort ;B+#o1a# (#earing and Sett#ement, A P#an of ActionC5 Dune 277< cited t'e
im"ortance of accurate and time#y cor"orate actions information for t'e market"#ace em"'asi@ing
fu##y automating t'e communication f#o=.
T'e +iovannini re"ort ;BSecond Re"ort on EE (#earing and Sett#ement ArrangementsC5 A"ri#
277< recommended nationa# ru#es to im"rove consistency governing cor"orate actions if
integration of EE e8uity markets are to 1e ac'ieved.
DT(( s"onsored a researc' study 1y !xera5 a Euro"ean consu#tancy5 conc#uded t'at cor"orate
actions is t'e #ast significant areas of risk associated =it' cor"orate actions citing t'e cause as
manua# and non>standardi@ed "rocessing. T'e !xera re"ort indicated cor"orate actions are not
Aust a 1ack>office issue5 1ut a#so im"act trading strategies in t'e front office5 and t'e efficiency of
t'e ca"ita# markets more 1road#y.
Bot' )S)T(5 an industry association "romoting 1est "ractices5 and S6)FT 'ave studied t'e
cor"orate actions issues and reac'ed simi#ar conc#usions.
Even t'oug' cor"orate actions 'ave 1een at t'e center of t'e industry.s attention for many years5
t'eir "rocessing is sti## in #arge "art a manua# 1usiness. T'ere is an urgent need for furt'er
standardi@ation5 as =e## as uti#i@ation of t'e recent#y deve#o"ed industry standards to ac'ieve
automation and STP. T'ere is a#so a need for 1est "ractice recommendations t'at =ou#d address
o"erationa# "ractices in connection =it' cor"orate actions "rocessing.
0perationa) Risk
T'ere are significant o"erationa# risks attac'ed to cor"orate actions t'at mig't resu#t in si@a1#e
financia# #osses. )n 277& DT(( s"onsored a study5 undertaken 1y t'e economics consu#tancy
!xera in Euro"e5 ='ic' measures t=o ty"es of risk? 1ack>office "rocessing risk ='ic' consists of
#osses resu#ting from mis'and#ing a sing#e5 com"#ex cor"orate action event and front>office
trading risk ='ere a fai#ure to act on information may #ead to su1>o"tima# trading decisions. T'e
study estimates t'at t'e g#o1a# securities industry faces a risk from su1>o"tima# trading decisions
in connection =it' cor"orate actions t'at can 1e u" to 0 1i##ion euros "er year. For individua#
firms5 t'e "otentia# risk can run into mi##ions of euros for one com"#ex cor"orate action event.
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According to t'e study5 t'e o"erationa# risk can 1e divided into t=o "rimary areas ='ic' are
errors in t'e do=nstream f#o= of information ;no standard =ay for issuers to announce events5
mu#ti"#e information sources ='ic' may 1e inconsistent5 "rocessing detai#s and termino#ogy
differ 1y asset c#ass or instrument<5 and errors in t'e u"stream f#o= of instructions ;#arge num1er
of financia# intermediaries invo#ved t'us many instructions for eac' action5 instructions de#ivered
via "'one5 fax5 unformatted emai# and "rocessed manua##y<. T'ese o"erationa# issues are ex"#ored
furt'er in t'e section tit#ed B(or"orate Actions ProcessC.
Voluntary Events
Particu#ar#y in t'e case of vo#untary actions5 ='ere asset managers use cor"orate action
information as =e## as market information to 1ase investment decisions on securities t'at t'ey
'o#d for t'eir c#ients5 t'e risk for a financia# #oss is extreme#y significant. )t is very im"ortant to
'ave time#y and accurate data so t'at correct e#ection decisions can 1e made. (onse8uences of a
=rong decision5 or a decision 1ased on inade8uate or incorrect data may resu#t to a financia# #oss
for mu#ti"#e investors.
Mandatory Events
%ost mandatory actions take "#ace automatica##y5 =it' no action re8uired on t'e "art of
t'e 'o#der of t'e security. )t is t'us im"ortant t'at t'e cor"orate actions systems and "rocesses
o"erate in a manner ='ere t'ese actions are "rocessed a""ro"riate#y.
The Asset Managers Forum Corporate Ations !nitiati"e
)ndustry constituents inc#uding asset managers5 custodians5 industry uti#ities and vendors 'ave
formed a Aoint committee in an effort to reduce t'e risk often encountered in cor"orate action
"rocessing. T'e re#ated risks are often a resu#t of not 'aving time#y and accurate information5 t'e
#ack of standardi@ation and automation 1eginning =it' issuers and agents t'roug' to asset
managers res"onding to vo#untary cor"orate actions =it'in custodian timeframes.
4oa)5 $est Praties
T'e goa# of t'e committee is to educate ourse#ves on t'e current cor"orate actions "rocesses5
1usiness "ractices and risk areas and define recommended 1est "ractices t'at =i## 1e s'ared
across t'e industry. T'e im"#ementation of t'ese 1est "ractices =i## 1e a Aoint effort =it' ot'er
industry trade associations5 industry constituents and vendors. T'ese 1est "ractices refer to 1ot'
fixed income and e8uity securities.
Current (tate
Mandatory vs. Voluntary Corporate Actions
%andatory cor"orate actions do not re8uire asset manager.s o"erations de"artment to o1tain
a""rova# from t'eir "ortfo#io managerFtrader. Rat'er t'ese actions are manua##y "rocessed into
t'e asset manager.s trading and accounting systems to ensure t'at t'e "osition of a "articu#ar
asset is accurate. Time#y information from t'e custodian is critica# to ensure trades are not
executed on incorrect information.
$o#untary cor"orate actions re8uire o"erations to communicate t'e action to t'eir "ortfo#io
managerFtrader and continue to fo##o= u" =it' t'em for t'e re#ated decision to ensure time#y
communication 1ack to t'e custodian.
Protecting Clients Assets
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Best "ractice guide#ines are needed to kno= 'o= to 'and#e trading activity on o#d security as =e##
as ne= security to ensure t'at asset manager.s c#ient is "rotected and to avoid trading issues and
re=ork.
(ustodian Pers"ective, 2eed detai#
)nvestment %anager Pers"ective,
Bot' for investment managers and custodians a 1ig c'a##enge is to track trades on securities
during t'e "rotected "eriod. (urrent#y t'ere a""ears to 1e a ga" ='ere1y trading is not
necessari#y 1eing monitored in t'e same =ay 1y a## custodians. T'us investment managers are
re"orting trading activity to custodians around cor"orate actions. 2atura##y investment managers
'ave access to trade detai#s first 1ut if t'e cor"orate action team at investment manager is not
c#ose#y monitoring for trading activity5 or t'eir systems are not ro1ust enoug'5 t'e cor"orate
actions team mig't not catc' t'e trading activity in time to res"ond on t'e cor"orate action. T'is
can cause t'e )nvestment %anager andFor t'e (ustodian a financia# #oss.
Pain "oints,
Defining ro#es and res"onsi1i#ities of given "arties 3 i.e. )nvestment %anager5 (ustodian5 Broker
6'o s'ou#d "rotect t'e c#ientG
)s instruction from )nvestment %anager to (ustodian enoug' aut'ori@ationG
6'at 'a""ens ='en custodian doesn.t see tradingG
Accounting and Tax Issues
6'i#e t'e industry faces c'a##enges =it' receiving time#y and accurate information re8uired to
"rocess cor"orate actions from a "ure custody or investment management "ers"ective5 t'ere is
a#so a gro=ing c'a##enge 1y do=nstream intermediaries to a""ro"riate#y account for and va#ue
securities undergoing cor"orate actions. )nconsistencies in t'e use of critica# dates across markets
and action ty"es creates additiona# risk of ='en and 'o= to ref#ect events on accounting records.
As investment ve'ic#es suc' as %utua# Funds5 Pension P#ans5 and ot'er "roducts move to=ards a
dai#y "ricing disci"#ine5 t'is as"ect of t'e cor"orate action "rocess 1ecomes more time sensitive.
)n addition5 t'ere is a need to "ro"er#y account for cor"orate actions =it'in t'e guide#ines of t'e
E.S. tax code. T'is "rocess may not carry t'e same time critica# risk as ot'er as"ects of t'e end to
end "rocess? nevert'e#ess5 it can 1e Aust as critica# and carry =it' it financia# risk re#ated to
incorrect treatment.
)n today.s environment custodians5 for exam"#e5 try to ca"ture t'e a""ro"riate accounting and tax
information as "art of t'e data ca"ture "rocess. Ho=ever5 as "ertinent information may not 1e
avai#a1#e from genera# data sources5 or in t'e time frames necessary to ref#ect t'e events from an
accounting "ers"ective5 manua# "rocesses exist to identify and u"date data to core systems =it'
furt'er do=nstream contro#s to ensure va#uation accuracy. Furt'ermore5 t'ere is #itt#e in t'e =ay
of issuer "rovided information on t'is front es"ecia##y for internationa# or cross 1order actions.
As suc'5 entities "erforming t'ese functions must re#y on certain defau#t treatments ='ic' may or
may not 1e consistent across t'e industry.
Fund Accountants
Asset managers need to reconci#e t'eir records re#ating to cor"orate actions =it' fund accountants
as =e## as custodians. )n order to ca#cu#ate t'e correct 2A$ on t'e funds it is im"ortant t'at a##
"arties ref#ect t'e same information. Asset managers need to feed information re#ating to
cor"orate actions to t'e fund accountants 1ecause t'e fund accountant may not 1e a=are of t'e
event or does not kno= 'o= to action it in its 1ooks. %ost fund accountants cannot receive
S6)FT ;)S! "rotoco#< messages5 ='ic' makes t'e information f#o= 'arder. Asset managers try
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to mitigate ga"s in t'e reconci#iation "rocess and t'e information f#o= 1et=een "arties 1y sending
cor"orate actions summaries to t'e fund accountants. )n connection =it' a vo#untary action t'e
fund accountant oftentimes a#so asks t'e asset manager direct#y ='ic' action is 1eing taken.
T'ere are fe=er ga"s in t'e information f#o= ='en t'e custodian acts as a fund accountant5 or
='en t'e asset manager 'as a se"arate entity =it'in t'e firm t'at 'and#es fund accounting5 1ut
asset managers sti## need to ensure "ro"er information f#o= to t'ese entities.
Proration
Text to come.
Corporate Ations Proess 6 Custo#ian Perspeti"e
Capturing External Messages
(ustodians receive cor"orate action information from severa# different sources, vendors5
de"ositories5 su1>custodians5 exc'anges and issuers. %ost info is received in an e#ectronic
announcement format t'roug' a nig't#y feed or S6)FT %T*-& and %T*-0 message ty"es. T'e
information may 1e automatica##y or manua##y fed into a custodian.s cor"orate actions system
de"ending u"on 'o= t'e information is received and t'e #eve# of automation maintained 1y a
given custodian. :ey data e#ements inc#ude dates and rates5 ='ic' are cross c'ecked 1et=een
various sources to ensure accuracy of t'e information.
For g#o1a# issues5 t'e custodians often re#y on #oca# su1>custodians and vendors. T'e dead#ines on
t'ese issues may differ 1et=een t'e de"ository5 su1>custodians5 and g#o1a# custodian eac' "#acing
a 1uffer "eriod to ensure ade8uate time to accurate "rocess c#ient e#ections. Asset managers may
a#so receive mu#ti"#e dead#ines from different custodians5 ='ic' t'ey t'en 'ave to track.
Creation of Corporate Action Event
Positions are ca"tured from t'e custody "#atform taking into account trade date and entit#ement
='ere a""ro"riate. T'e custodian t'en uses t'e critica# data e#ements in eac' announcement ty"e
to determine 'o= e#igi1i#ity s'ou#d 1e structured for t'e announcement and adds any "rocessing
re8uirements.
Build and Distriute !otification
!nce a## t'e information is "rocessed in t'e cor"orate actions system and is c'ecked against t'e
notification detai#s t'at =ere received from one of t'e externa# "arties5 t'e custodian 1ui#ds a
notification document. (ustodians maintain data1ases of c#ient and investment manager static
data suc' as contact information t'at are 'oused and u"dated =it'in t'e cor"orate actions system.
De"ending on t'e c#ient.s c'oice of distri1ution for "articu#ar items5 t'e custodian =ou#d5 u"on
a""rova# of t'e notification5 send t'e notification to t'e c#ients eit'er via e#ectronic means or via
fax.
T'e a1ove "rocess =i## 1e re"eated if any amendments or c'anges occur to t'e offers5 and
su1se8uent#y are transmitted to c#ients u" to and inc#uding t'e a""ro"riate entit#ement date. T'e
custodian strives for time#y distri1ution of t'e cor"orate action information so t'at c#ients and
investment managers are a1#e to make an informed decision.
"eceiving and Processing "esponse
As t'e entit#ement date a""roac'es for t'ose actions t'at re8uire a res"onse5 t'e custodian =ou#d
1e canvassing investment managers ='o 'ave not "rovided res"onses 1y custodian.s stated cut>
off date. T'e cut>off date can vary in t'e E.S. market from 2& to &0 'ours "rior to t'e market
ex"iration5 and from &0 to 4- 'ours in t'e g#o1a# market. As res"onses are received t'ey are
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va#idated against t'e "arties #isted on t'e custodian.s investment manager or c#ient fi#e to ensure
t'at t'e res"onding "arty is aut'ori@ed to instruct on a cor"orate action. T'e custodian a#so
c'ecks t'at a## re#evant information t'at =as re8uired for t'at "articu#ar cor"orate action is
inc#uded in t'e res"onse. )nvestment managers 'ave t'e o"tion of res"onding via severa#
communication c'anne#s. (ustodians acce"t res"onses via )nternet res"onse modu#es5 via FAI5
or via S6)FT. Automated res"onses may u"date a custodian.s cor"orate action systems in
straig't t'roug' manner. De"ending u"on t'e c#ient and t'e custodian5 furt'er confirmation may
1e "rovided to investment managers confirming recei"t of res"onses. !t'er do=n stream
"rocesses inc#ude a fu## reconci#iation of c#ient res"onses to custodian5 de"ository5 andFor su1>
custodian records in order to account for a## c#ient "ositions.
An encum1rance is t'en "#aced on t'e assets t'at are surrendered to t'e de"ository or su1>
custodian to ensure t'at no trading activity =ou#d affect t'e account.s "artici"ation in t'e
cor"orate action.
Best Efforts Practices and Default Actions
T'ere may a#so 1e instances ='en a custodian does not receive a res"onseFinstruction from t'e
asset manager 1y t'e custodian.s stated dead#ine. Some custodians 'ave @ero to#erance "o#icy5
='ere t'ey =i## not take any action =it'out getting instruction from t'e c#ient. %ost custodians5
'o=ever5 do a""#y a defau#t instruction de"ending on event ty"e. For exam"#e5 custodians =i##
'ave a defau#t on c#ient instructions to a#=ays exc'ange 1&&As5 on an o"tiona# stock cas'
dividend it cou#d 1e to take cas'. T'e defau#t action is usua##y 1ased on a standard o"erating
mode# across a## c#ients. )t may a#so 1e defined in t'e c#ient contract.
T'e custodians are a#so faced =it' receiving mu#ti"#e instructions on cor"orate actions at t'e
a1so#ute dead#ine. %ost instructions are sent via fax t'ere1y re8uiring t'e custodian to manua##y
"rocess eac' action. T'is often #eaves t'e custodian =it' minima# time to "erform t'e necessary
ste"s to time#y and accurate#y instruct #oca# market agents "rior to t'e fina# market cut>off times.
(ustodians 'ave esca#ation "o#icies5 and do send out reminders to t'e asset managers to send in
t'e instructions. T'e 1est efforts recommendation may vary 1ased on 'o= an asset manager
su1mits t'eir instructions to a custodian ;i.e. Fax5 emai#5 standardi@ed automated format<. T'is
cou#d 1e an incentive to asset managers to automate and standardi@e communications of t'eir
cor"orate actions systems.
T'e industry s'ou#d 1e moving to=ard dead#ines t'at are c#oser to t'e end market dead#ine5 1ut
unti# t'e necessary automation is in "#ace t'is =i## 1e difficu#t to ac'ieve. DT((.s re>engineering
"roAect5 once com"#eted5 =i## 1e 'e#"fu# in t'is regard. T'e 1est efforts "rocess5 or 'aving c#oser
dead#ines ='ic' give t'e asset manager more time to decide 'o= to res"ond5 may 1ecome a
com"etitive advantage 1et=een custodians.
Process Instruction
As t'e instructions are "rocessed over to t'e de"ository5 t'e custodian a#so sends instructions to
a## t'e #ocations ='ere t'e asset may 1e 'e#d ensuring t'at a## reconci#ements for a## outstanding
trading activity can 1e corro1orated. T'is inc#udes 1rokers o=ing outstanding trades5 or fai#ed
trades5 #oan "ositions =it' #ending "arties etc. )n t'ese instances t'e custodian =i## de#iver
instructions to t'e 1roker to act on t'e "osition via a B#ia1i#ity #etterC. T'e #ia1i#ity #etter =i##
instruct t'e 1roker to return ;for #oans< or de#iver ;for trades< t'e s'ares due. !t'er=ise5 t'ey =i##
1e 'e#d res"onsi1#e to ensure t'at t'e c#ient.s instruction is executed and t'e entit#ement is
received in accordance =it' t'e instructions "rovided. After t'e su1mission of t'e instructions t'e
custodian ex"ects a confirmation t'at instructions =ere in fact received. Su1>custodian sends
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confirm via a S6)FT %T*-/ res"onse5 t'e de"ository via PT!P ticket or simi#ar faci#ity t'roug'
DT((5 and issuer gives a =indo= ticket if certificates =ere "'ysica##y "resented to issuer.
Collect and Process Entitle#ent
T'e o"en entit#ements are tracked for mandatory and vo#untary "ayment dates as o"en items in
t'e custodian.s cor"orate actions system to indicate ='ic' items are coming due on any "articu#ar
date to ensure "ayment is 1eing a##ocated. Su1>custodians and de"ositories a#so notify custodian
on "ayment recei"ts. !nce a "articu#ar sett#ement comes in5 a reverse 1a#ancing is done to ensure
t'at a## c#ients t'at received instructions 'ave actua##y received t'e correct amount announced in
t'e custodian.s cor"orate action event. T'e custodian a#so takes into account any c'anges t'at
'ave occurred during t'e "rocess andFor "ro>ration5 and 1a#ances t'e ex"ected amount 1ased on
an adAusted rate. Prior to "osting t'e amount to t'e account5 t'e custodian notifies t'e c#ient t'at
t'e fina# rates 'ave 1een announced and "rovides c'anges from t'e origina# announcement. As is
necessary t'e custodian =i## c#aim counter"arties for entit#ements due on s'ares on #oan or in
custody e#se='ere due to "ending or fai#ing trades. (ustodians confirm "ayment recei"t via a
S6)FT %T*-- message. T'is message is used to confirm to t'e investment manager t'at
securities andFor cas' 'ave 1een creditedFde1ited to t'eir account as t'e resu#t of a cor"orate
action event.
Corporate Ations Proess 7 !n"estment Manager Perspeti"e
"eceipt of !otification
)nvestment managers receive most notifications for cor"orate actions via fax5 emai#5 or custodian>
1ased a""#ication. T'ere is #imited automation 1ecause on#y some custodians are a1#e to de#iver
t'e information in an STP format and t'ere are a#so investment managers ='o are not a1#e to
receive t'e notifications in STP format.
Consolidation$ Trac%ing and Cleansing
Hardco"y notifications ;faxes5 e>mai#s5 etc.< are manua##y entered to a centra# #ocation at t'e asset
manager.s cor"orate actions system5 ='ere an event is created for t'e "articu#ar cor"orate action.
6'en avai#a1#e5 e#ectronic notifications are automatica##y a""#ied. (or"orate actions are divided
into t=o categories5 mandatory and vo#untary events. T'e investment manager co##ects a##
necessary information needed for a "articu#ar cor"orate action event5 inc#uding a "ros"ectus.
Some custodians automatica##y send t'e "ros"ectus a#ong =it' t'e cor"orate action notification5
1ut most custodians "rovide t'e "ros"ectus on#y 1y re8uest from t'e asset manager. A cor"orate
action on 1&& A securities creates an exce"tion ='ere t'e "ros"ectus is a#=ays de#ivered =it' t'e
notification. Esua##y t'e "ros"ectus is de#ivered e#ectronica##y. T'e asset manager a#so uses ot'er
sources to searc' for "ertinent information5 and to c'eck t'at received information matc'es. Suc'
sources as DT(5 B#oom1erg5 data vendors5 information agent and com"any =e1sites are used.
Decision Ma%ing and Election
For mandatory cor"orate actions t'e asset manager enters t'e information direct#y to t'e
accounting and or "ortfo#io management "#atform.
For vo#untary cor"orate actions a "ackage is "ut toget'er for t'e "ortfo#io manager for investment
decision. T'e "ackage inc#udes information on t'e cor"orate action5 a "ros"ectus5 day record or
"osition of ='at t'e asset manager.s 'o#dings are and a re"#y date. T'e asset manager usua##y
uses t'e custodia# cut>off date ='ic' is t=o days "rior to t'e cor"orate action event.s ex"iration
date5 1ut t'at "ractice is de1ata1#e. !nce t'e "ortfo#io manager 'as revie=ed t'e materia#s5 t'ey
re"ort 1ack to t'e cor"orate actions de"artment =it' an investment decision.
4
DRAFT
Election Delivery
T'e asset manager de#ivers t'e e#ection to t'e custodian. T'is "rocess is sti## very manua# across
t'e 1oard5 even t'oug' some custodians do offer automated "#atforms or =e1 1ased "roducts. T'e
custodian sends t'e asset manager a recei"t confirmation to confirm t'at t'e custodia# 1ank 'as
received t'e instructions. Some custodians send an automated res"onse t'at is faxed to t'e asset
manager? some custodians sign t'e asset manager.s form and send it 1ack to t'e asset manager.
Entitle#ents
T'is is t'e stage ='en t'e offer actua##y "ays out. T'ere is no standard notification "rocess. Some
custodians do notify t'e asset manager 1ut t'ese notifications come in various =ays and formats.
Some custodians =i## announce a su1se8uent cor"orate action notice =it' t'e detai#s of t'e
entit#ement5 ='ereas ot'er custodians give t'e asset manager access to re"orting of entit#ements
t'roug' t'e custodian.s =e1 1ased "roduct.
&'I(T
Some asset mangers use S6)FT for cor"orate actions messaging. Some asset managers receive
notifications from custodians5 1ut are not ca"a1#e of sending S6)FT messages out. Asset
managers may a#so use vendors to ma" t'e S6)FT messages to t'eir cor"orate actions system
interna##y.
,ffeting Change
$est Pratie Reommen#ations
Protecting Clients Assets
Ho= to 'and#e trading activity on o#d security as =e## as ne= security to ensure t'at asset
manager.s c#ient is "rotected and to avoid trading issues and re=ork.
Best Practice recommendation, %ake 1&&A Exc'ange %andatory
T'e recommendation is to make 1&&A exc'anges mandatory as it a""ears to 1e a
standard industry 1usiness "ractice t'at e#ection 1y investment managers is to a#=ays
exc'ange. %any asset managers "rovide t'eir custodians standing instructions to a#=ays
"erform t'e exc'ange. T'is =ou#d reduce risk on trading issues.
%any of t'e risks invo#ved in trading and conse8uent o"erationa# #ogistica# issues =ou#d
1e e#iminated. Bot' for investment managers and custodians a 1ig c'a##enge for 1&&A
exc'anges is to track trades on t'ese securities during t'e "rotected o"en "eriod. )f t'ere
is a fai# c#ose to t'e end of t'e "rotected "eriod5 and a "osition is not exc'anged5 an asset
manager cou#d 1e una1#e to exc'ange t'e unregistered security to a registered security.
T'is can cause t'e )nvestment %anager andFor t'e (ustodian a financia# #oss. T'ey =ou#d
1e una1#e to exc'ange t'e asset unti# t'e next o"en "eriod takes "#ace. De"ending on t'e
nature of t'e issue5 t'ere may not 1e an o"en "eriod for an extended time5 if at a##. )n t'at
case5 t'e asset manager is #eft =it' an i##i8uid "osition unti# t'e issue matures or t'ey can
find a "arty =i##ing to "urc'ase t'e asset at a discount. )n some cases t'e asset manager
may 'ave to "ay fees to t'e issuer to get t'at #eftover "osition registered as t'e ne=
security. T'e asset manager or t'e custodian may try to get t'e issuer to o"en u" t'e
exc'ange again5 or to 1uy 1ack t'e "osition. )f t'e "iece t'at 'as 1een #eft out of t'e
exc'ange is very sma##5 it may not 1e'oove t'e issuer to o"en u" t'e exc'ange again5 in
='ic' case it 1ecomes a #oss to t'e asset manager5 or t'e "arty taking t'e #ia1i#ity of it.
17
DRAFT
%andating 1&&A exc'anges =ou#d 1enefit t'e 1uyside5 se##side and custodians.
Securities traded andFor out on #oan =ou#d automatica##y 1e exc'anged 1y t'e 'o#der of
t'e security at t'at time5 t'us e#iminating t'e need for 107 #etters5 as =e## as e#iminating
risk of #oss.
As "art of t'e BBest PracticeC for "rotecting c#ient.s assets5 s"ecifica##y as it re#ates to
o"en trades5 it is im"ortant to ca"ture and understand a given "arties re#ations'i" to t'e
trade. T'e use of cover "rotects and 107 #etters is an acce"ted "ractice =it'in t'e
industry. Ho=ever5 ='en "erformed 1y a custodian5 it cou#d "#ace "rinci"a# risk on t'e
custodian if transactions fai#. (ustodians are genera##y not "rinci"a#s to a trade. %arket
so#utions must account for t'e different res"onsi1i#ities of "arties so as not to s'ift risk
furt'er do=n t'e investment "rocess.
"eceiving initial infor#ation
T'e initia# cor"orate action information is received 1y custodians from many different sources
and in many different formats from issuers5 de"ositories5 data vendors and ot'er sources.
Standardi@ation of t'is information is needed. T'ere are current#y at>source standardi@ation
efforts 1eing #ed 1y DT((5 )S)T( and S%P+ in t'e E.S. )n Euro"e t'ere are 'armoni@ation
efforts under=ay and many industry organi@ations are =orking Aoint#y. T'e goa# is to receive t'e
data from t'e source5 i.e. t'e issuer5 in a standardi@ed format. Enti# t'is 'a""ens5 t'e current
"rocess =i## remain. Data =i## continue to 1e received from mu#ti"#e sources and it is cross
c'ecked for accuracy. (ustodians and Asset %anagers =i## continue to manage different
dead#ines 1y su1>custodian and custodian and t'e risk of missed or incorrect information =i##
remain.
Best Practice recommendation, (ustodians s'ou#d use at #east t=o sources for cor"orate
actions information and a t'ird source to cross c'eck for accuracy.
.
Best Practice recommendation,
%arket "artici"ants s'ou#d fo##o= market guide#ines and standards set out 1y )S)T(FS6)FT
for (or"orate Actions. )S)T( 'as "u1#is'ed market "ractice guide#ines for t'e announcement
of a cor"orate action. (ustodians s'ou#d #ook to t'ese market "ractice guide#ines and use
recommended codes for eac' action ty"e so t'at formats =ou#d 1e standard across t'e
industry.
Ter#s
(a"ture t'e meaning of terms re#ated to cor"orate actions to ensure t'at a## "#ayers are using t'e
same and correct terms. A#so revie= DT((.s draft event matrix to ensure t'at it conforms.
Best Practice recommendation,
A## "arties s'ou#d conform to S%P+ Event )nter"retation +rid, 'tt",FF===.sm"g.info5 under
Documents5 2< (or"orate Action5 A. Fina# +#o1a# Documents5 Event )nter"retation +rid v
&.7.
Infor#ation "eceived fro# Custodians
Prospectus
For asset managers5 t'ere is no need for receiving "ros"ectuses for 1&&A issues. For ot'er
issues5 "ros"ectuses may 1e needed5 "articu#ar#y in t'e case of com"#icated offers5 to
ensure fu## and accurate information a1out t'e issue on ='ic' to 1ase decisions on. %ost
11
DRAFT
asset managers do not re8uire "ros"ectuses as "art of t'e genera# cor"orate actions
information f#o= from custodians5 and not many custodians "rovide t'e "ros"ectuses as
"art of t'at f#o=. Ho=ever5 ='ere "ros"ectuses are desired5 1ot' asset managers and
custodians "refer e#ectronic de#ivery. %anua##y distri1uting "ros"ectuses is a time consuming
"rocess t'at s'ou#d 1e e#iminated across t'e 1oard. Esua##y5 custodians do not receive 'ard co"y
"ros"ectus as a genera# course of information f#o=5 and if a "ros"ectus is "rovided5 it is not in an
e#ectronic format. )n t'e E.S5 for actions registered =it' t'e SE(5 most "ros"ectuses can 1e
retrieved on t'e internet from t'e ED+AR data1ase. A 1est "ractice t'at =ou#d re8uire a
custodian to o1tain and distri1ute "ros"ectus to a## c#ients =ou#d actua##y move a=ay from STP
and create additiona# time to "erform t'e necessary data distri1ution "rocess5 t'us efforts s'ou#d
1e focused on 'aving Binternet #inksC avai#a1#e to asset managers re8uiring t'is information.
Suc' B#inksC cou#d 1e "rovided e#ectronica##y t'us kee"ing =it' t'e s"irit of STP. Anot'er area
of focus =ou#d 1e to ensure t'at issuers "rovide suc' #inks at time of announcement regard#ess of
='et'er an offer is registered =it' t'e SE(.
Pros"ectuses outside of t'e E.S. are some='at "ro1#ematic. For exam"#e5 in France t'ere is a ru#e
t'at "ro'i1its "ros"ectus de#ivery to t'e E.S.5 ='ic' "oses c'a##enges to custodians. Anot'er
c'a##enge is t'e #anguage 1arrier as "ros"ectus is usua##y =ritten in t'e #anguage of t'e country
='ere t'e security is registered.
Best Practice recommendations,
1. E#iminate t'e dissemination of "ros"ectuses for 1&&A issues.
2. For a## ot'er issues5 ='en t'e asset manager re8uires "ros"ectus materia#5 it s'ou#d 1e
distri1uted 1y t'e custodian to asset manager in a standard e#ectronic format ;a "df
fi#e< or via an e#ectronic #ink to a "ros"ectus avai#a1#e on t'e internet. T'e A%F
su""orts efforts to standardi@e e#ectronic "ros"ectuses and encourages issuers to
"rovide "ros"ectuses in t'e standardi@ed e#ectronic format. )n t'e interim5 unti# fu##
e#ectronic de#ivery can 1e rea#i@ed5 custodians are on#y re8uired to distri1ute
"ros"ectuses ='en t'e e#ectronic formats are avai#a1#e.
Instructions and ot)er supporting infor#ation
Asset managers "refer to receive instructions from custodians via automated e#ectronic format or
S6)FT ;)S! "rotoco#< messages. Esing t'e standardi@ed formats for cor"orate actions
information is essentia#. %any custodians offer =e1 1ased a""#ications5 1ut t'e asset managers
are s#o= to ado"t t'ese systems 1ecause t'ey are "ro"rietary and may 1e non>standardi@ed. !t'er
su""orting documentation5 in addition to "ros"ectus5 s'ou#d a#so 1e distri1uted e#ectronica##y
from custodian to asset manager. Again5 SE(.s ED+AR data1ase contains information for SE(
registered issues. T'ere may a#so 1e issuer =e1 sites for non>registered cor"orate actions ='ic'
may 1e uti#i@ed for information dissemination. T'ere are a#so vendor so#utions avai#a1#e to get
su""orting information.
Best Practice recommendation re#ating to ot'er market information received from custodians,
T'e asset manager may need ot'er market information "rior to making a decision re#ating to a
vo#untary cor"orate action. T'is market information s'ou#d 1e sent in a standardi@ed
e#ectronic format. Asset managers in turn =ou#d 'ave to educate t'eir ana#ysts and "ortfo#io
managers on t'e use of t'e e#ectronic systems and standards for market information.
Co#plete Announce#ent of Voluntary Corporate Actions
12
DRAFT
Ti#ing of preli#inary notice * ti#eliness vs. accuracy+
(ustodians strugg#e =it' t'e 8uestion of ='en is t'e 1est time to send t'e first noticeG )s it
immediate#y ='en t'e ne=s comes out5 even if t'e facts are incom"#ete5 or ='en t'ere is more
verified information avai#a1#eG (ustodians use ne=s services to receive information on cor"orate
actions5 and t'en verify t'e information to create a go#den co"y of t'e action. %any times t'e
detai#s of t'e cor"orate action c'ange after t'e first instance of ne=s a1out it. Some asset
managers =ant to receive t'e information a1out an u"coming cor"orate action event immediate#y5
='ereas ot'ers "refer to receive t'e more com"#ete and verified information. (ustodians may
'ave to send t'e information to a## t'eir c#ients5 if it is 1eing sent to one. T'is is a service>#eve#
agreement issue and s'ou#d 1e defined in t'e agreement =it' eac' c#ient.
Co#plete Annouce#ent
T'e asset managers =ou#d #ike to receive standardi@ed information from custodians to ensure t'at
critica# data is covered on ='ic' t'e asset manager.s investment team can 1ase decisions on. T'e
items 1e#o= are t'e minimum re8uired data e#ements of a cor"orate action annoucement. ;T'ere
may 1e ot'er additiona# data im"ortant to a "articu#ar cor"orate actions event.<
Best Practice recommendation, )nc#ude t'e fo##o=ing :ey Data Attri1utes for
Announcements as standard data re8uirements,
(ES)P
Security Descri"tion
(ustodian Dead#ine
Tender Dead#ine
(onsent Dead#ine
(onsent Detai#s
%arket Ex"iration Date
Rates
%et'od of "ayment ;cas' or stock or 1ot'<
Su""orting documentation t'at is re8uired ;e.g. "roof of 1eing a J)B<
Restrictions
Proration
2e= )dentifiers ;exc'ange to ne= (ES)P or ='at is t'e ne= issue<
Ex"ected Pay Date or Effective Date
Election Co##unications
(ustodians do 'ave =e1 1ased a""#ications for voting "ur"oses5 1ut asset managers find mu#ti"#e
systems cum1ersome.
Best Practice Recommendation,
Standardi@e communications 1et=een asset managers and custodians on t'e e#ection.
Mergers and Ac,uisitions
+etting information on mandatory cor"orate actions in a time#y manner is sometimes
"ro1#ematic5 es"ecia##y on mergers and ac8uisitions on e8uities5 ='ere t'e initia# notification
inc#udes on#y an indicative timeframe for t'e effective date ;suc' as 1
st
8uarter<. T'e asset
manager can not "rocess t'e action unti# t'e date is kno=n. T'is "oses c'a##enges to asset
restrictions for trading etc. T'e effective date may 1e communicated at t'e #ast minute5 or after
t'e fact5 ='ereas t'e asset manager needs to 'ave t'e asset avai#a1#e for trading in t'eir system
under t'e ne= name immediate#y after t'e effective date.
1
DRAFT
Best Practice recommendation,
Re8uire u"dated notification u"on com"#etion of mergerFac8uisition. Recommend at>
source standardi@ationG
Partial Calls
Time#y recei"t of information for "artia# ca##s? "u1#ication dates 'ave fre8uent#y "assed ='en )%
receives t'e information. )% re#ies 'eavi#y on custodia# information and some custodians do not
"rovide t'e information on a time#y 1asis5 nor is t'e information format consistent 1et=een
custodians. (ustodians in turn re#y on DT( for t'e "artia# ca## information. Time#iness of #ottery
resu#ts and 1eing a1#e to restrict t'e asset from trading is a#so an issue.
Best Practice recommendation, Re8uire notification u"on recei"t of #ottery resu#ts
Assets on -oan * &ecurities -ending
Determining entit#ements on assets out on #oan s'ou#d 1e a trans"arent "rocess 1et=een t'e
custodian and t'e asset manager. Ho=ever5 sometimes it may 1e c'a##enging for t'e custodian to
determine t'at an asset is #oaned out5 1ased on systems functions. T'e asset manager.s cor"orate
actions team may not 1e a=are t'at t'e "articu#ar asset 'as 1een given out for #ending. Some asset
managers do not track ='ic' assets are on #oan5 nor do t'ey kno= ='ic' accounts #end "ositions.
6'en t'e cor"orate action notice is received from t'e custodian5 t'e asset manager needs to
confirm c#ient "ositions =i## a## t'e custodians to deve#o" t'e entit#ement 1y c#ient and 1y
custodian. T'e custodian is re8uired to send a 107>#etter to t'e 1orro=ing 1roker 2& 'ours "rior to
t'e ex"iration date to "rotect t'e c#ient.s entit#ement on t'e asset on #oan. Reconci#iation and
"ayment matc'ing are sometimes a#so 'am"ered due to systems s'ortfa##s in t'is area. )ncreased
or more accurate communication on #oan "roducts is needed. T'e S6)FT messages cou#d
"ossi1#y inc#ude a #oan "osition and sett#ed>sett#ed "osition. Asset managers =ou#d #ike to receive
t'e com"#ete entit#ement notices on 1ot' mandatory and vo#untary actions5 and t'ese notices need
to indicate ='en t'e distri1utions are ex"ected to 1e distri1uted ;"ayment date<.
Some asset managers use dea#er managers on Bdutc' auctionsC 'ence t'ey do not 'ave to reca##
stock #oans as t'e asset manager commits to t'e dea#er manager t'e amount of securities to 1e
su1mitted.
Best Practice recommendation, )m"rove (ommunications Re#ating to Assets on 9oan.
(ustodians s'ou#d send asset managers t'e com"#ete entit#ement notice inc#uding
"ayment date.
Corporate Actions on Derivatives and .ptions
As t'e o"tions and derivatives market"#aces 'ave ex"#oded in t'e "ast fe= years5 asset managers
find t'at t'ere are many more cor"orate actions affecting t'ese instruments. For exam"#e5 an asset
manager may 1e 'o#ding an o"tion and t'e "arent com"any is going t'roug' a stock s"#it. T'e
contract needs to 1e adAusted to ref#ect t'e stock s"#it and t'e cor"orate action needs to 1e
initiated on t'e o"tion. %ost custodians do not "rovide a se"arate cor"orate action notice on t'e
o"tion c'anging or t'e contract 1eing adAusted. As asset managers 'and#e more vo#ume in !T(
derivatives t'ese issues are 1ecoming more common"#ace and a 1est "ractice guide#ine is needed
to advise 'o= to "rocess t'e cor"orate action. T'ere are a#so re#ating custody and accounting
issues5 as =e## as do=nstream va#uation issues. Some asset managers run 8ueries on a## cor"orate
actions events on e8uities to see ='et'er an event 'as an im"act on a security t'at is underneat'
an o"tion. Ho=ever5 not a## o"tions are simi#ar#y affected 1y cor"orate actions 1ecause at times
t'e contract =i## get adAusted 1ut at ot'er times t'e factor =i## get adAusted.
1&
DRAFT
Best Practice recommendation, )s neededKK
Accounting Issues
Accounting issues im"act some 1ut not a## "artici"ants invo#ved =it'in t'e cor"orate action
"rocess. Areas t'at can and s'ou#d 1e focused on from an industry "ers"ective =ou#d 1e to ensure
consistency in 'aving time#y issuer "rovided information5 avai#a1i#ity of data sources for non>
E.S. 1ased securities and an agreement on industry acce"ted defau#t treatments for certain action
ty"es. Asset managers need time#y and accurate information in order to "ost to t'e c#ient
accounting records. (urrent#y custodians use t'e record date for a cor"orate action as t'e
e#igi1i#ity date 1ut for t'e asset manager t'at may not 1e t'e effective date of ='en t'e "rice
adAusts in t'e market"#ace. T'us custodians s'ou#d communicate at #east t=o fie#ds to ensure
accurate accounting5 cost 1asis and effective date. T'ese fie#ds need to 1e communicated
"articu#ar#y for mandatory actions.
)t s'ou#d a#so 1e "ointed out t'at as ot'er as"ects of t'e cor"orate action "rocess im"rove5 suc' as
DT((.s re>engineering "roAect5 some of t'e timing and consistency issues =i## im"rove.
Best Practice recommendation, )n connection =it' mandatory actions5 custodians s'ou#d
communicate to asset managers t'e cost 1asis and effective date.
Proration
Proration takes "#ace ='en t'ere are not enoug' s'ares to satisfy t'e offers tendered 1y
s'are'o#ders and a "ro"ortion of cas' and s'ares is granted for eac' offer tendered. !ne of t'e
"ain "oints for asset managers re#ating to "roration is t'at t'e "roration rates are not announced
ear#y enoug' in t'e "rocess. Eac' offer is different and market va#ue at t'e time of t'e offer 'as
maAor im"act on t'e "roration. )f one offer is over>tendered5 t'e "urc'aser needs to decide
='et'er t'ey =ant to take t'e extra s'ares or not5 de"ending on t'e market.s va#ue at t'e time. )f
t'e "urc'aser takes a## t'e s'ares5 t'en no "roration factor is invo#ved.
%any times "roration is not announced unti# after t'e cor"orate action 'as taken "#ace5 ='ic'
essentia##y #ocks u" a## t'e s'ares. Ho=ever5 asset managers a#so need to manage account
#imitations on contract "rovisions for various 'o#dings. Some c#ients may indicate in t'eir
indentures t'at t'e asset manager may not 'o#d e8uity or ot'er ty"e of securities for t'e c#ient. )n
t'ese cases5 ='en t'ere is an e8uity distri1ution on a cor"orate action5 t'e asset manager tries to
se## t'e rest of t'e s'ares as soon as t'e "roration rates are announced. T'us asset managers
=ou#d "refer to find out "roration rates sooner so t'at t'ey can decide ='at to do =it' t'e
unacce"ted s'ares.
To mitigate t'is "ro1#em5 some custodians use "re>announcements5 'o=ever5 as t'e information
in t'e "re>announcements is "re#iminary information5 it may not 1e com"#ete#y accurate 1ut is
instead indicative. T'is may a#so cause "ro1#ems for t'e asset manager as t'e asset manager.s
ex"ectations are not in #ine =it' ='at t'e custodian eventua##y "osts.
Best Practice recommendation, (ustodians s'ou#d strive to find out t'e timing of t'e
"roration announcement sooner and t'en distri1ute to asset managers t'e fina#i@ed terms
immediate#y ='en t'ey are kno=n.
"ounding
T'ere is current#y no uniformity 1et=een custodians re#ating to 'o= t'e "roration rates are
a""#ied to t'e c#ient #eve#? custodians may round different#y even ='en t'e c#ients 'ave t'e same
ratio of s'ares. !ftentimes it is t'e agent for t'e offer t'at decides 'o= to a""#y rounding5 i.e.
1*
DRAFT
='et'er to round u"5 do=n5 or at a##. T'ese agent rounding ru#es are distri1uted to custodians via
t'e DT(( re>org feed. (ustodians su1mit s'ares for t'e tender to DT((5 1ut t'ey may a#so 'ave
to su1mit a "'ysica# "iece direct#y to t'e agent5 t'ese o1vious#y need to 1e in sync. Asset
managers confirm =it' t'eir custodians ='ic' =ay t'ey rounded eac' account. T'is is done
manua##y5 usua##y over t'e "'one. +oing for=ard5 custodians s'ou#d announce at t'e time of t'e
"ayment 'o= "roration factor =as a""#ied and 'o= rounding =orked. )t =ou#d 1e 'e#"fu# to a##
"arties if t'e "roration factor =as mandated5 i.e. ='et'er to round u" or do=n. T'at =ay5 ='en
t'e entit#ement rate comes out5 t'e a##ocation is c#ear and asset managers =ou#d kno= ='at 'as
1een tendered.
Best Practice recommendation, (ustodians s'ou#d announce at t'e time of t'e "ayment
'o= "roration factor =as a""#ied and 'o= rounding took "#ace. T'e industry s'ou#d a#so
investigate =ays to im"#ement an overa## industry guide#ine on rounding u" or do=n on a
"articu#ar event.
Portfolio Managers !eeds vs. Processing "e,uire#ents
!ne of t'e "ain "oints from t'e "ortfo#io manager.s "ers"ective is t'e timing of t'e
announcement. (ustodians may take too #ong to create t'e Bgo#den co"yC of t'e cor"orate action
event5 or =ait unti# information is fina#i@ed in t'e fina# announcement of t'e action5 ='ic' may
create a s'ort =indo= of time to res"ond. Sometimes t'e res"onse dead#ine may 1e #ess t'an a
day. Particu#ar#y on com"#ex scenarios5 asset managers need more time to res"ond. (ustodians5
es"ecia##y on internationa# issues ='ere su1>custodians are "roviding t'e origina# information5
may 1e "us'ed to re8uest res"onse very 8uick#y after information is 1eing sent. Particu#ar#y5
re#ating to Brady Bonds. Dutc' Auctions5 t'e foreign "ress re#ease announcement5 on ='ic' t'e
asset manager =ou#d 1ase t'eir decision on5 is not made unti# t'e actua# date of ex"iration5 ='ic'
"revents t'e asset manager to make t'e e#ection 1y t'e custodian dead#ine.
Best Practice recommendation, Press #oca# markets to announce information sooner. T'is
issue needs to 1e raised =it' agents and issuers.
"esponse Deadlines
Ty"ica##y t'e #ate or non>res"onses occur on com"#icated #ate "riced issues ='ere t'e asset
manager may not kno= 'o= to res"ond 1ecause market conditions are difficu#t. Asset %anagers
may 1e =aiting on "ricing information 1efore making an investment decision on a cor"orate
action. T'e de#ay in t'e decision making "rocess "uts a significant 1urden on t'e custodian.s
o"erationa# "rocess t'at needs to take "#ace in order to execute t'e action.
T'e industry issue is ='et'er t'is risk is in'erent investment risk re#ated to t'e "articu#ar security5
or ='et'er it is an o"erationa# and "rocessing risk. For eac' cor"orate action ty"e t'ere are
in'erent dead#ines t'at need to 1e ad'ered to. )n order to cut do=n on t'e o"erationa# risk5 t'ese
investment decision dead#ines s'ou#d 1e =e## kno=n in advance.
Ho=ever5 ='i#e t'e committee ackno=#edges t'e in'erent risks =it' res"onse dead#ines5 after
furt'er revie= and discussion5 it =as agreed t'at no recommendation can 1e made at t'e event
#eve# as suc'. )t is fe#t t'at eac' custodian creates a com"etitive advantage 1y a##o=ing ever
s'orter res"onse dead#ines. To a certain extent5 t'is can 1e S9A driven. Ho=ever5 as a genera#
guide#ine5 t'e committee =ou#d advocate t'at t'e res"onse dead#ine date for a## event ty"es
s'ou#d 1e t'e DT(( ex"iration date > 2 days. For g#o1a# cor"orate actions t'e res"onse dead#ine
s'ou#d 1e 2 days "rior to t'e dead#ine im"osed 1y do=nstream market intermediaries5 ='ic' may
1e a foreign su1>custodian or internationa# de"ository.
1-
DRAFT
Best Practice recommendation, For domestic cor"orate actions5 t'e genera# res"onse
dead#ine for a## event ty"es s'ou#d 1e DT(( ex"iration date 3 2 days. For g#o1a#
cor"orate actions t'e genera# res"onse dead#ine s'ou#d 1e 2 days "rior to t'e internationa#
su1>custodian or de"ository.
Trac%ing Deadlines
Tracking dead#ines for accounts. res"onse to cor"orate actions is a c'a##enge to asset mangers.
Some asset managers 'ave a cor"orate actions system t'at tracks t'e dead#ines5 ot'ers "erform
tracking manua##y. (ustodians may a#so send reminders to asset managers ;ex"iration date 3 < to
res"ond 1y t'e dead#ine day. )f t'e industry =ou#d fo##o= t'e a1ove recommendation and use t'e
standard guide#ine for res"onse dead#ine of ex"iration date 3 25 t'e tracking of dead#ines 1et=een
custodians =ou#d 1ecome muc' easier. Ho=ever5 for some action ty"es t'ere mig't sti## 1e
differing dead#ines.
Best Practice recommendation, Ese t'e genera# res"onse dead#ine of ex"iration date 3 2
='ere "ossi1#e.
Pay#ent in /ind 0PI/1 Distriution Practices
T'ere is a need to 'armoni@e market "ractices of various custodians 'o#ding P): "aying
securities. %arket va#ues for some P): securities can 1e t'ousands of do##ars "er 1ond ;"axson<
making t'e reconci#iation "rocess vita# to t'e cor"orate actions "rocess. T'e (or"orate Actions
(ommittee recommends t'e fo##o=ing distri1ution "ractices.
Best Practice Recommendation,
Ese dua# security setu" to ref#ect t'e 1est "ossi1#e record kee"ing "rocess. T'e setu"
incor"orates t=o se"arate securities to ref#ect t'e c#ient.s entire 'o#dings5 t'e ='o#e s'are
#ine and t'e fractiona# s'are #ine ;& decima# "#ace system<. T'e fractions are maintained
on an in 'ouse B(ES)PC identifier. T'is "rocedure ena1#es a firm to kee" an u"dated and
accurate 'o#ding record ='en a""#ying t'e P): "ayments from stock dividends to t'e ex>
date "ositions. !nce fractiona# #ine e8ua#s one ='o#e s'are5 t'ey are transferred to t'e
='o#e s'are #ine5 in turn? fractions received from t'e ='o#e s'are #ine5 due to stock
dividends5 are transferred to t'e fractiona# s'are C(ES)PC identifier. Bot' t'e fractiona#
#ine and ='o#e s'are #ine accrue additiona# entit#ements.
DT(( ref#ects t'ese P): securities in a dua# security setu"5 using an in>'ouse
B(ES)PF)S)2C identifier to ref#ect t'e 1a#ances in mu#ti"#es of 1775777. %any custodians
use t'e same in>'ouse B(ES)PF)S)2C identifier to ref#ect t'e 1a#ances on t'eir 1ook5
making t'e in 'ouse B(ES)PF)S)2C identifier "ractica##y a market identifier.
2ote, T'e dua# security setu" may 1e a#tered 1y DT(( once t'ey decommission t'e
contra (ES)P5 as P): securities are often "aid in a BdummyC num1er at DT(( for
recordkee"ing "ur"oses on#y.
Process Issues
)f fractiona# 'o#dings are so#d 1y issuer or DT(( t'e a1ove "rocess is not a""#ica1#e.
(ustodian may automatica##y se## a## fractiona# s'ares ;S9A driven<. 2ot a## custodian
systems may a##o= for & decima# "#aces5 ='ic' resu#ts in rounding differences. Some P):
securities may not fit into t'is mode# and =i## re8uire s"ecia# 'and#ing and "rocessing.
T'is "rocess re8uires constant revie= to ensure fractions are transferred to ='o#e s'are
C(ES)PC identifier in a time#y manner.
1/
DRAFT
Esing a & decima# system a##o=s for 1etter contro# and reconci#iation of t'e various
"osition structures 1et=een t'e custodians5 ='i#e maintaining an u" to date va#ue for t'e
"ortfo#io trading and accounting systems.
International Issues
(ustodians 'ave c'a##enges to ca"ture cor"orate action information time#y and accurate#y outside
t'e E.S. market. (ustodians may 1e more de"endent on t'e #oca# su1>custodians5 and t'e
information may not 1e in a format suita1#e for E.S. )t.s assumed t'at most custodians =ou#d
'ave service #eve# agreement =it' #oca# su1>custodians re8uiring t'em to 1e S6)FT com"#iant. )n
t'e E.S. DT(( may not a#=ays "rovide information in a standard format. As t'e industry around
t'e g#o1e continues to evo#ve and 'armoni@e t'e =ays cor"orate actions are announced and
"rocessed5 1ot' custodians and asset managers =i## see "rogress5 1ut at t'is "oint t'ere is no 1est
"ractice t'at can 1e recommended.
&taff Education and Training "elating to Corporate Actions Content
Some cor"orate actions are very com"#ex and re8uire t'at t'e asset managers staff understands
='at is invo#ved in different ty"es of cor"orate actions. T'e information inc#udes #ega#ese? and
key "ieces of information may 1e 1uried in non>standardi@ed and non>formatted data. )t is
im"ortant to understand ='ic' accounts are restricted and ='ic' are 8ua#ified to "artici"ate and
on ='at #eve#. )t is a#so im"ortant to kno= t'e re8uirements on J)B 9etters. )t is assumed t'at
1ot' custodian and asset manager staff =i## receive a 1ase>#eve# education re#ating to cor"orate
actions5 1ut t'ere are com"#ex issues t'at re8uire continuing education fo##o=>u" as t'e cor"orate
actions environment c'anges. )t is t'e res"onsi1i#ity of eac' organi@ation to ensure t'at training is
taking "#ace to mitigate dissatisfaction of c#ients and o"erationa# #osses t'at may occur due to #ack
of training.
T'ere are a num1er of forma#i@ed training o""ortunities avai#a1#e5 suc' as t'e "rogram offered 1y
t'e )nstitute of (ertified Bankers5 ='ic' 'as a designation and testing for certified securities
o"erations "rofessiona#s. T'e Securities !"erations Forum a#so "rovides training c#asses on
cor"orate actions.
,ffiienies gaine# an# risks minimi8e#
Cost $enefit 9if app)ia')e:
Definitions
$enefits to the !n#ustr*
Costs
,3hi'its
10
DRAFT
S"ecia# t'anks to t'e fo##o=ing "eo"#e for dedicating t'eir "recious time to assisting t'e
industry move for=ard 1y recommending and im"#ementing 1est "ractices t'at =i##
u#timate#y reduce t'e risks invo#ved in (or"orate Action "rocessing.
9isa )#aria5 2e= Lork 9ife )nvestment %anager
9orraine %orrison5 De"ository Trust (om"any
E#i@a1et' :ro=5 B#ackRock
Tina Davis5 %e##on )nvestors Bank
%ic'ae# Stern5 %organ Stan#ey )nvestment %anagement
Brian (on=ay5 Prudentia# )nvestment %anagement
%e#issa S'i##ing5 Federated )nvestors5 )nc.
E#isa 2uottaAarvi5 T'e Asset %anagers Forum
Steven +a#e5 2ort'ern Trust
Dames Ryan5 State Street
An* omments an#/or ;uestions re)ating to this #oument& or the AMF<s Corporate
Ations Committee& shou)# 'e #irete# to ,)isa -uotta.ar"i of The Asset Managers Forum
staff at enuotta.ar"i/'on#markets+om or 6=6663>62266+
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