SFTR Corporate Actions Working Group #5 International Securities Lending Click to edit Master title style James Langlois, Lewis Nicholson Association Click to edit Master subtitle style 18 Sep 2019 1
SFTR Corporate Actions Meetings Q2 & Q3 2019 Date Name Agenda 23/04/2019 #1 Corporate Actions WG General discussion and identification of SFTR CA issues 23/05/2019 #2 Corporate Actions WG Determine Corporate Actions Universe (closed session) 05/06/2019 #3 Corporate Actions WG Agree Corporate Actions Clusters and Booking Activities 27/06/2019 #4 Corporate Actions WG Finalise Corporate Actions Clusters and Booking Activities 09/07/2019 #18 SteerCo. SFTR CA Update 11/07/19 #5 Corporate Actions WG Determine Best practice for CA Clusters: Full & Partial Returns 22/07/19 Corporate Actions Discussion Raise general issues related to settling the effects up CA clusters 31/07/19 #6 Corporate Actions WG Determine Best practice for CA Clusters: TBD
SFTR Corporate Actions: Overall Scope and Plan 1- Define Corporate Actions Universe (Q2 2019) • Form a distinct list of all CAs • Align with the ISO 15022 (SWIFT) and 20022 (STP) standards • Determine attributes and effects of each CA on SFTs 2- Stratify the CAs into Clusters by their effects on SFTs & booking models (Q2 2019) • Review groups of CAs which can be processed similarly • Confirm CAs which have no material effect on SFTs • Confirm booking models for clusters • Define the SFTR reports that each Cluster of CAs affects 3- Agree an SFTR related Best Practice for each CA Cluster (Q3 2019) • Reach agreement on specific booking models which enable SFTR compliant reporting • Determine universal procedures (Best Practice) for processing and communicating CAs on SFTs 4- Connect the SFTR CA WG’s output with the wider industry discussion (Q4 2019) • Contribute to the Securities Lending industry’s general policy (beyond of SFTR)
SFTR Corporate Actions: Working Group #3/4 Stratify the CAs into Clusters by their effects on SFTs & booking models • Review groups of CAs which can be processed similarly • Review CA Clusters as proposed in SFTR CA WG #2 • Discuss impact of CA types in the CA Cluster to the SFT • Conducted a survey Questionnaire with 13 firm’s responses • Agreed CAs which have no material effect on SFTs (39) • Information Only/ Non-Economic CAs (27) • Cash/ Economics outside of the SFT (11) • Agreed CAs which cause direct downstream effects on SFTR reports and must therefore be aligned by best practice: Cluster # of CAs Full or Partial Return 8 Full Return 5 Addition Sec on Loan 12 Return and New Trade 13 38
SFTR Corporate Actions: Approach for this Working Group 1- Progress Update 2- Examination of the CA Cluster Full & Partial Returns 3- Discuss and agree Best Practice booking methodologies for this CA Cluster 4- Open Discussion (time allowing) 5- Agree Next Steps
Full or Partial Returns Corporate Actions Full or partial return on a security which is lent against collateral. Corporate Action Effect BORROWER LENDER Securities Some form of bilateral return Collateral Full or partial return on a security which is the Collateral, against a loaned security. BORROWER LENDER Corporate Action Securities Effect Collateral Some form of bilateral exchange Collateral
Full or Partial Returns Corporate Actions Affects on the SFTR reports: 1. Standard SFT conventions as dictated by the Global Master Securities Lending Agreement are followed for all of the activities relating to the processing of these Corporate Actions 2. All Full or Partial Returns Cluster Corporate Actions require either: • Full closing out of an SFT to be reported via an ETRM (Termination / Early Term) • Partial close out of an SFT to be reported via a MODI (Modification) 3. None of the Full or Partial Returns Cluster CAs will necessitate a new SFT booking. • There will be no SFTR issues related to new trades i.e. fractional ratios, UTI generation, etc. 4. Some of these CAs will require an exchange (or reduction) of the Collateral if the collateral security is the subject of the Corporate Action. These will be reported via the daily COLU (Collateral Update) report
Full or Partial Returns Corporate Actions Mandatory Reorganisations - Cluster Mandatory event - MAND Cash SFT Distribution - DISN ISO Scope Justification/ Mand event w/ options - CHOS ISO Name ISO Description Move Booking EQ FI Reorg - REORG Voluntary event - VOLU Code CA Cluster General - GENL (Y/N) (Y/N) Information - INFO Failure by the company to perform obligations defined as default events under the DFLT Bond Default MAND REORG N Y Full Return N Y bond agreement and that have not been remedied. Redemption of an entire issue outstanding of securities, eg, bonds, preferred equity, MCAL Full Call MAND REORG Y Y Full Return Y Y funds, by the issuer or its agent, for example, asset manager,before final maturity. Final maturity of a security. The redemption of an entire issue outstanding of REDM Final Maturity MAND REORG Y Y Full Return Y Y securities, for example, bonds, preferred equity, funds, by the issuer or its agent, for example, asset manager, at final maturity. WRTH Worthless MAND REORG N Y Full Return Y Y Booking out of valueless securities. Partial Redemption Securities are redeemed in part before their scheduled final maturity date without PRED With Pool Factor reduction of the nominal value of the securities. This is commonly done by pool MAND REORG N Y Partial Return Y Y factor reduction. Reduction Securities are redeemed in part before the scheduled final maturity date. It is done Full or Partial DRAW Drawing MAND REORG Y Y Y Y without any pool factor reduction. The redemption is reflected in a debit of the face Return amount (FAMT). Drawing is Securities are redeemed in part before their scheduled final maturity date with Partial Redemption Full or Partial reduction of the nominal value of the securities. The outstanding amount of PCAL Without Pool Factor MAND REORG Y Y Y Y securities will be reduced proportionally. It is done without any pool factor Return Reduction reduction. The redemption is reflected in a debit of the face amount (FAMT). Also called partial defeasance. Issuer has money set aside to redeem a portion of an Full or Partial PDEF Prefunding MAND REORG Y Y Y Y issue and the indenture states that the securities could be called earlier than the Return stated maturity. Full or Partial Offer made to holders by a third party, requesting them to sell (tender) or exchange TEND Tender MAND REORG Y Y Y Y their securities. When a tender reaches the squeeze out stage, it will be mandatory. Return Full or Partial Takeover for shares Offer made to holders by a third party, requesting them to sell (tender) or exchange TEND2 MAND REORG Y Y Y Y their securities. When a tender reaches the squeeze out stage, it will be mandatory. Return
Full or Partial Returns Corporate Actions Voluntary Reorganisations - Cluster Mandatory event - MAND Cash SFT Distribution - DISN ISO Scope Justification/ Mand event w/ options - CHOS ISO Name ISO Description Move Booking EQ FI Reorg - REORG Voluntary event - VOLU Code CA Cluster General - GENL (Y/N) (Y/N) Information - INFO Odd Lot Sale Sale or purchase of odd-lots to/from the issuing company, initiated either by the ODLT VOLU REORG Y Y Full Return Y Y Purchase by Issuer holder of the security or through an offer made by the issuer. Initiated by Issuer Repurchase offer/Issuer Bid/Reverse Rights. Offer to existing holders by the issuing Full or Partial BIDS Repurchase Offer VOLU REORG N Y Y Y company to repurchase its own securities. The objective of the offer is to reduce the Return number of outstanding securities. Full or Partial Early redemption of a security at the election of the holder subject to the terms and BPUT Buy Back VOLU REORG Y Y Y Y condition of the issue with no reduction in nominal value. Return An action by a party wishing to acquire a security. Holders of the security are invited Full or Partial DTCH Dutch Auction VOLU REORG Y Y Y Y to make an offer to sell, within a specific price range. The acquiring party will buy Return from the holder with lowest offer.
DFLT - Bond Default Failure by the company to perform obligations defined as default events under the bond agreement and that have not been remedied. Default of a bond which is the borrowed security, lent against collateral. 1. “Default” status of the bond may trigger the closure of the SFT. 2. Entire Security position and all Collateral is returned. 3. This is a business as usual (BAU) procedure, initiated by the lender. Corporate Action Effect LENDER BORROWER Return of Security Securities Collateral Return of Collateral
DFLT - Bond Default Failure by the company to perform obligations defined as default events under the bond agreement and that have not been remedied. Default of a bond which is the Collateral, against a loaned security. 1. “Default” status of the bond triggers the requirement to replace the collateral. 2. Collateral is returned and exchanged for a new bond. 3. This is a business as usual (BAU) process, initiated by the borrower. BORROWER LENDER Corporate Action Securities Effect Return of Collateral Collateral Collateral New Collateral
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