Ensure timely, accurate and complete identification of events, timely decisions on voluntary events and timely settlement of all entitlements
Service providers must have a reliable, comprehensive source of information on forthcoming corporate actions. This usually comprises a combination of their sub-custodian network and multiple third-party securities data vendors. Information should be matched across two independent sources (subject to the availability of multiple reliable sources). Validated events data must be matched to a client's holdings and each event tracked through to confirmation that the resulting entitlement has been received for the client and settled. The process should include pre-matching of entitlements (whether or not this is standard market practice) with exceptions pursued vigorously as settlement date approaches. Ideally, the entire process should be automated, with manual effort focused on resolving exceptions. Events must be notified to clients - and event status reported - with clarity and timeliness, preferably in real time.
IT is good practice for a transaction bank or global custodian to apply common internal formats to the processing of corporate actions, as a means of insulating clients from the varying practices from market to market.
The processing of mandatory events (eg. bonus issues) should be straightforward, as no decision is required on the part of the client or its fund managers. Voluntary events (eg. rights issues, takeovers) can be considerably more demanding and must be tightly managed. Errors and omissions can lead to significant losses, so reliability and accuracy are crucial. The options available to the client, which may be non-standard, must be communicated clearly and promptly. The service provider must be pro-active and able to act in a short time-span, as certain events (such as a hotly contested takeover) may entail a client making their decision at the very latest opportunity. Deadlines should be set according to the nature of the event and, as expiration of the deadlines approaches, there should be a series of communications: reminders, warning messages, telephone follow-up and, ultimately, escalation within the client organization. Processing of corporate actions has become increasingly demanding in recent years, with takeovers and other corporate events becoming more commonplace across Asis Pacific and the sheer complexity of corporate actions in markets such as Australia.
Contractual Corporate Actions
Several service providers offer "contractual corporate actions". This is a cash management tool: any cash component is applied to the client's cash account on the due date for settlement, in place of when the securities component actually settles. This can greatly assist clients in managing available funds. An important downside is that it masks settlement problems because it hides what is actually happening - so it is preferable for clients to be provided with information on actual settlement.
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