Frequently Asked Questions

Exposure Management

Status: Best Practice Finalised, Last Updated: 28/01/2022

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)

Interim Securities

Status: Best Practice Finalised, Last Updated: 28/01/2022

Description:
Many corporate actions which result in a new line of asset or cash payment, will produce a temporary or interim security, as a result of the CA which is replaced by the new asset, or cash on payment date.

As per the ISLA working group, it was noted that a greater percentage of firms do not book interim (ineligible or non-tradable) securities in their internal systems at all, accounting for them in other ways. For firms that do book interim securities, if one firm reports to the TR, it will create a single sided trade and hence a break.

ISLA's working group determined a universe of all types of interim securities, which could be the result or temporary result from a corporate action and agree the reportable characteristics of each type of Interim security as referenced below.

Best Practice:
With reference to the list below, some interim securities will need to be reported and some should be supressed for reporting to the TR. However, the effect on daily collateral will be mitigated by the fact that the total position will comprise the value reported to the TR.

Those parties who book the interim security will reduce the value of the original line, and those firms not booking an additional line will reprice the original SFT until pay date, when the new security line is booked.

Tradable, therefore reported under SFTR.
Spanish Trading Bonus Issues
German Takeover
Swedish Rights
Rapids (Renounceable)
Warrants (Tradable)
CVRS (Tradable)

Transferable, therefore not reported under SFTR
Coupons
CLAIMS (Within CREST)
DIV OP/ DRIPS (Within CREST)
Rapids (Non-renounceable)
Warrants (Non-Tradable)
CVRS (Non-Tradable)
Fixed Income Events (COAC-127)

Non-Tradable Lines

Status: Best Practice Finalised, Last Updated: 29/09/2021

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

Best Practice:
Where possible non-tradable lines should be booked and processed within firms corporate action system.

System limitation for many firms do not allow for non-tradable lines to be booked. Where this is the case an alternative tracking process should be in place. (COAC-150)

Fractional Rounding

Status: Best Practice Finalised, Last Updated: 28/01/2022

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)

Final Maturities

Status: Best Practice Finalised, Last Updated: 28/01/2022

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 7 days prior to the 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)