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Frequently Asked Questions

Exposure Management

Description

Should outstanding corporate actions be included within exposure management?

Best Practice

Outstanding COACS should be included in exposure figures because they represent an exposure risk.

However, where corporate action activity changes the loan value, that should flow naturally into exposure management. (COAC-112)

Non-Tradable Lines

Description

How should non-tradable lines be processed in corporate action systems?

Best Practice

TBC (COAC-150)

Netting of Cash Payments

Description

Netting of payments (in this context) represents the ability for a firm to agree to offset the cash collateral owed in return against the cash realised from a variety of corporate actions.

From member firms survey, it seems to suggest that under 40% of counterparties are currently willing or able to net these payments, this indicates that in the region of 15% of SFTs would qualify for this activity.

Best Practice

Netting of payments can be a useful way to facilitate the balance of large positions, it is clearly advantageous to be able to perform, however there is extra operational risk and manual work to perform as different departments and accounts have to work in symmetry.

Best practice is for firms to agree these nettings bilaterally and look to implement the ability in the future. (COAC-140)

Disbursement of Securities Post COAC

Description

Bonus shares and temporary transferable certificates are usually valued highest on the Ex-Date and then the price tends to slowly fall over the following days.

Owners of parent shares not loaned (on an SFT) can sell their bonus shares on Ex-date and to settle when the shares are received on payment date.

SFT borrowers are unable to sell until payment date as they will not hold the bonus shares until this time.

SFT borrowers will therefore miss the opportunity to sell at the unusual optimal market price achieved on an ex-date sale.

Best Practice

(COAC-139)

Fractional Rounding

Description

Less than one full share of equity is called a fractional share. Such shares may be the result of stock splits (SPLF), dividend reinvestment plans (DRIPs), or similar corporate actions. How should fractional shares be rounded within corporate action management?

Best Practice

Fractional positions; in most markets it is best practice for both the lender and borrower to round down when calculating entitlement positions. Rounding down should be considered the default practice unless otherwise stated.

New share entitlements should be calculated on the whole lent position per manufactured dividend rate (MDR), rather than per loan.

Fractional cash should be paid based on the market price for the whole share. If the fractional payment is of minimal value, the lender and borrower can agree to write of this payment.

In markets such as Korea, where loans are tracked, segregated and fractions accounted for, entitlements should be rounded down per specific loan and fractional cash claimed and paid for per transaction. (COAC-138)

Cash SSI Exchange

Description

SSIs or Standing Settlement Instructions are account numbers and other details which have been agreed in advance, and that are to be used every time a trade is made.

Cash payments are sometimes paid late because the SSIs are not kept updated by counterparties or have not been pre-agreed before settlement date.

Updating SSIs can take more time than available on payment date as often firms require manual processing: Fax and call backs as well as senior signoff.

Some firms procedures insist on completing a call back for every cash payment, even if the account and currency have already been paid multiple times on the same day.

Best Practice

Firms must ensure that they have adequate processes and systems in place to manage SSIs to avoid the requirement for call backs to be performed.

Counterparties should establish processes to monitor the SFTs trading on new accounts or currencies and agree cash SSIs ahead of payment date.

Third party providers such as Pirum and Alert offer comprehensive services to exchange and confirm cash SSIs for subscribers. (COAC-137)

Final Maturities

Description

Typically, bonds stop earning interest after they mature.

Bonds are usually de-listed from the exchanges ahead of their expiry date.

Issuers return the holders of the bonds their face value after expiry.

The unwinding of an expired bond position could take weeks or even months during which time the collateral (and capital) are tied up.

Best Practice

SFTs with bonds and other expiring securities on loan (and as non-cash collateral) are closed out or exchanged a full week before de-listing date.

It may not always be possible to do this due to market liquidity, holding an overall short position or other trading obligations, however a reduction of the number of expired securities on loan would be very beneficial. (COAC-136)

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