Corporate Actions: Nature, Types And Entitlement Fabian Banchiero, VP and Regional Manager Latin America & Caribbean Division 1 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 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 ClientCustodian Vendor Carrier Issuing Company Domestic/Foreign Reg. Central Bank Sub 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 Types An huge number of possible combination with new types of events created every year. Example : Tax treatment as client election. Depending on :  Issuers decisionsex : dividend payment  Issuer bylawsex : disclosure  Investor decisionex : class action, squeeze out  Markets decisions, ex : market split, de-listing, active...  Third party decisionex : hostile take over  Legal and regulatory ex : meeting, bankruptcy, tax

Corporate Actions: Possible Event Types With minimum 2 18 possibilities (more than 200,000 types)  with old securitiesY/N ex : merger  with new securities Y/Nex : rights  with new shareholderY/Nex : subscription  tradable/not tradableY/Nex : odd lots, rights  with cashY/Nex : income  with tax on cashY/Nex : redemption of ZC  with Tax on SecuritiesY/Nex: stock div  with sec client electionY/Nex: right issues  with cash client electionY/Nex : currency option  with restrictions/exclusionY/Nex : US investors  with entitlement limitsY/Nex : privatization  with dead lineY/N ex : convertible, warrants  with prior-announcementY/Nex : hostile bid

Spreading Clear Information All Along The Chain IssuerInvestor IssuerCentral 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…..? 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 ACTV ATTI BIDS BONU BPUT BRUP BSPL CAPG CHAN CLSA CONS CONV …….... …etc… 100 event types 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 events  Taxable 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  Redemptions  Meetings : 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 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 14

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 Clients Clients 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 Corporate Action Notification System 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:Reminder Automatic 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 Receipt  Communication -iCANS -SWIFT (MT 565, 599) -Fax  Format  ISIN, sec. description, account number, event number, entitled position, option  Standing 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 System Mainframe 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