Corporate Actions: Nature, Types And EntitlementFabian Banchiero, VP and Regional Manager

Latin America & Caribbean Division

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October 27, 2005

Corporate Actions: The Main Custodian Workload And Risk Why is it an issue ? General flow Definition and volumes Possible event types Computation of entitlement The proposed matrix most frequent and cumbersome events Record and ex-date. Is 15022 the solution ?

Corporate Actions: Why Is It An Issue ?The main operational risk linked to:

- Global securities position (not individual entries)

- Complex timetable, with no international standard

- Multiple dead lines along the chain

- Clarity of notification : type, wording , language

- Lack of STP due to numerous possibilities

- Lack of rules regarding dates

A cumbersome, risky and manual process highlighted in all market WGs: Giovannini rule 3, G 30 rule 8…etc...

Corporate Actions: General Flow

Client

Clients of Client Custodian

VendorCarrierIssuing Company

Domestic/Foreign Reg. Central

BankSub

Custodian

Tax Authorities

Central Depositary

Corporate Actions: Definition And Volumes Definition: any event of any interest potentially involving existing holders of a

securities, with or without impact on securities or cash position. i.e.: no precise and agreed definition

U.S. Definition: A change to the capital structure or the financial organization of a company that results in a change to the securities of the company.

Main issuers/issues : still Governments and public companies- Equities: 50,000 worldwide for USD 37 billion. Latin America- 5%; Europe- 10%

- Bonds, MMI and short term instruments : near to 10,000,000 different issues for $44 billion. Latin America- 1-2%; Europe- 10%. More on specific instruments.

- From 100,000 to 1,000,000 events a year to monitor for a large Custodian : if no automation ==> no efficient deliveries

- Equities often more complex/risky to handle than bonds

- Using mainly, not only, manual process : far from 100% STP

Corporate Actions: Possible Event TypesAn huge number of possible combination with new types of events created every year. Example : Tax treatment as client election.

Depending on :

Issuers decisions ex : dividend payment

Issuer bylaws ex : disclosure

Investor decision ex : class action, squeeze out

Markets decisions, ex : market split, de-listing, active...

Third party decision ex : hostile take over

Legal and regulatory ex : meeting, bankruptcy, tax

Corporate Actions: Possible Event TypesWith minimum 218 possibilities (more than 200,000 types) with old securities Y/N ex : merger with new securities Y/N ex : rights with new shareholder Y/N ex : subscription tradable/not tradable Y/N ex : odd lots, rights with cash Y/N ex : income with tax on cash Y/N ex : redemption of ZC with Tax on Securities Y/N ex: stock div with sec client election Y/N ex: right issues with cash client election Y/N ex : currency option with restrictions/exclusion Y/N ex : US investors with entitlement limits Y/N ex : privatization with dead line Y/N ex : convertible, warrants with prior-announcement Y/N ex : hostile bid

Spreading Clear Information All Along The Chain

Issuer Investor

Issuer Central Depo sub custo global cus client clients

From simple situation...

…to pure nightmare

CB

Registrar

Paying agent

Same entitlement rules and time table

Data Vendors

B/S

Tax Authorities

Trade date

Contractual

settlement date

Actual

settlement date

Record date

ex date

time

Event date

Issue : define an entitled position in the book of the Custodian

Announcement date

What if…..?

What if…..?

When does transfer of ownership and entitlement occur ?

Computation Of Entitlement: Rules Depend On Regulation

In other words : when and for which positions does transfer of ownership and related entitlements occur for positions- settled

- to deliver

- to receive

- registered/out for registration

- on loan/borrowed/collateral/pledge

An example on the French market for the most frequent Equity event : general ordinary and extraordinary meetings- announcement is done 1 month before event

- entitlement is blocking of shares, settled positions, 5 days before meeting if the share is bearer (99% of listed Equities) for any Traded positions

- or any traded (i.e. post trade date) positions recorded in issuer book for registered securities . No blocking of position. Issue : non domestic custodian do not monitor registration.

Computation Of Entitlement: Rules Depend On Regulation

Corporate Actions: The Matrix To Build Up

BE CH DE DK EI ES FI FR GB GR IT LU SE SP PT

ACTVATTIBIDSBONUBPUTBRUPBSPLCAPGCHANCLSACONSCONV……....…etc…

100 eventtypes

Unclear scope of Corporate Event (ex: EU class action)

Taxable income

Meetings-proxy

Restrictions and disclosures

Standard timeframe for any event

Computation of entitlement = ownership and record date

Main common issues

Corporate Actions: Frequent Events

Focus on 3 frequent events: more than 80% of eventsTaxable income and related processes

- With or with out currency option

- With or without stock option (optional div)

- With withholding tax or reclaim

- With certification, i.e. non-us certification

RedemptionsMeetings : lot of issues around proxy due to lack of agreement on

record date entitlement

Corporate Actions: record and ex-date Is harmonization of ex date and record date a priority for CA STP

processing ?Record date is linked to registration and rules for transfer of

ownership. Record date does not exist everywhere. Is 15022 FIN the answer, or migration to XML necessary ? If vendors are on SWIFT, could we envisage any changes ?Dematerialization could be the first long term target to achieve if

it clarifies transfer of ownership ?

Corporate Actions at BNY

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Corporate Actions - Market Players

Data Vendors

Issuing Companies

Sub-custodians

BNY Global Custodian

Central Depository

Central Bank

Tax Authorities

- Access to CB/CD

- Market Info

- Notice of Event

- Projections

- Instructions Chasing and Processing

- Booking and Reporting

- Proxy Voting

BNY’s ClientsClients of

BNY’s Clients

- Market Info

- Notice of Event

- Projections

- Instruction Chasing and Processing

- Booking and Reporting

- Brokerage

Corporate Actions - Mission (Information Management)

Notification

Local custodians

Third Party Custodians

Vendors

CorporateAction

NotificationSystem

SWIFT (MT564)

Fax

INFORM

iCANS

Information Sources

Corporate Actions - Mission (Information Management)

Notifications: What?

All information on:

Corporate events (mandatory - elective)

Redemptions (partial - early - drawings)

Corporate Actions - Mission (Information Management)Notifications: When?

Upon announcement : Preliminary

On ex-date: Interim definitive / Definitive

Client deadline -2: Reminder

Client deadline: ReminderAutomatic

Manual

Corporate Actions - Mission (Information Management)

Notifications: To whom?

Holder

Pending receipt

New Holders

Corporate Actions - Mission (Information Management)

Notifications: How?

Standardized - use of templates

Highlight options for elective events

Corporate Actions - Mission (Instruction Management)

Instructions ReceiptCommunication

- iCANS

- SWIFT (MT 565, 599)

- Fax

Format ISIN, sec. description, account number, event number, entitled

position, optionStanding Instructions

Corporate Actions - Mission (Transaction Management)Transactions Reporting

How?

- INFORM

- SWIFT (MT 566)

- Fax

What?

- Pending Corporate Actions reporting

- Settled Corporate Actions reporting

iCans- Interactive Corporate Action Notification SystemMainframe application related to BNY Corporate Action Services for Global custody clients accessible via BNY’s mainframe.

Clients can: Receive CA notifications electronically Receive intra-day notification updates Receive a consolidated notification for all accounts holding a position at same sub-custodian Send authenticated electronic responses Instructions processed real-time and STP Create special instructions Track status of responses Override standing instructions Choose several authorization levels Reduce processing risks