Alan Lawman, Management Consultant, TCS BaNCS
So, what is the answer to the question – How will CSDR impact the processing of corporate actions?
Would it be positive, or would it create further work and possibly increase risks for the end user?
If you look at the efficiency pillar of the directive and the settlement discipline in particular, while there isn’t necessarily any direct impact, some form of indirect impact may exist.
It would look to improve settlement rates, reduce the number of failed trades, encourage partial settlements and offer automatic buy-ins - all of which may actually strengthen the corporate actions process with a reduction in the number of claims and election protection requests.
This would be beneficial for end users as well and reduce some of the processing risks.
However, these actions also raise a few points and considerations, which can be best illustrated with an example:
Your client buys 10,000 shares cum event and you show this as a pending receivable in the eligibility, after which you credit the entitlement to the client in full and claim it from the seller.
However, the trade is partially settled for 6,000 shares and an automatic buy-in is made for 4,000 shares. The position keeping system would reflect this by reversing/cancelling the original trade and re-booking it for 6,000 shares and the automatic buy-in separately. The impact of trades being put on hold may also have an additional bearing here.
You would now receive the entitlement on 6,000 shares through your custodian and the entitlement on 4,000 shares would have to be claimed from the new counterpart or it would get auto compensated.
In terms of eligibility, there may not be much change – only that a new counterpart would be included in the buy-in trade and for payments, possibly some extra reconciliations and splitting of cash proceeds when bundled up as part of the fine/buy-in expense amount and paid in a single instance.
But what will happen in an elective event? What if an election protect has been passed to a seller, who is no longer involved in the process? In such a scenario, the request would need to be re-sent to the new party in the buy-in trade.
If the buy-in trade is made ex-event, who would take the election protect? Can there even be one?
While the enforcement of CSDR could reduce the number of failed trades, it may inadvertently lead to increased operational efforts when it comes to unravelling and correcting eligibility, payments and reconciliations. Plus, it may cause further risks when making elections with counterparts and addressing client issues.
So while the implementation of CSDR has been delayed, our thoughts on it needn't be. It should be seen as an opportunity to consider these scenarios, assess their impact and ensure our corporate actions processes are ready.
Disclaimer: Views or opinions represented in this blog are based on the author’s own research and does not represent TCS BaNCS.