As noted by Reference Data Review back in April this year, the European Central Bank’s (ECB) Target2-Securities (T2S) settlement system could have a significant impact on the area of corporate actions and some progress has already been made by the Corporate Actions Sub-group (CASG) in defining the issues that need to be tackled in this respect. Last month, the group, which was established back in 2008 and is chaired by Paul Bodart, executive vice president and head of EMEA global operations at Bank of New York Mellon Asset Servicing, discussed the status of its recent gap analysis work and outlined its recent discussions with central securities depositories (CSDs) on the subject of corporate actions.
The CASG has been liaising with a group of European CSDs to gather input into its work around assessing the potential corporate actions processing issues within the ECB’s T2S system. To this end, the group’s 21 members have agreed three areas of concern: the model for the cross border securities and cash distributions in the context of T2S; the use of T2S dedicated cash accounts for corporate actions cash payments; and the T2S night time sequencing for corporate actions instructing and processing.
The goal of the CASG is to gather and analyse more potential issues within the sphere of corporate actions processing and produce dedicated business process descriptions for the T2S project team. The mandate of the group, as provided by the T2S advisory group, is therefore to be the “experts group for the T2S stakeholders to analyse any issues on corporate actions processing and management in the context of T2S”.
The increased cross border activity that will likely result from the introduction of T2S is of particular concern, as the group has noted it may have a knock on effect on the risks associated with securities distributions. This means that increased standardisation is needed across European member states ahead of the implementation of T2S in order to ensure risks are kept to a minimum, according to the group.
There are a whole host of other issues that must also be decided upon before T2S goes live, such as determining who should be in charge of the omnibus and mirror consistency process for distributions, for example.
The Shareholders Transparency Sub-group is also looking at the establishment of a technical solution for the transmission of the shareholder information once T2S has gone live, which is currently scheduled for September 2014. The transmission of this data could be centralised via T2S or it could be decentralised via the links between individual CSDs.
In January, the CASG launched a standards monitoring exercise to provide a gap analysis of where CSDs currently sit with regards to corporate actions standardisation. It hopes to use this information to determine a clear implementation path for T2S agreed corporate actions standards for these CSDs under the new settlement environment. The standards cover the three areas of: market claims rules, transformations rules and buyer protection rules.
The initial response to the exercise was fairly poor, according to Bodart, with only eight out of the 22 participants responding by the end of February deadline. Moreover, 11 CSDs have still not provided feedback, despite an extension, and the group is considering next steps to compel these firms to engage.
“The gap analysis shows that majority of CSDs are currently not compliant with the standards, or only very partially. The analysis indicates that the gap is largest for buyer protection, followed by market claims and then transformations,” notes the CASG in its status report. “Several of the responses from the smaller markets stated that the CSD does not currently provide market claims detection and, in particular, buyer protection services, and it is not likely to do so in the future. They therefore saw no need to implement the CASG standards. Given that the project is still at an earlier stage, it is not surprising that the vast majority of CSDs currently have no implementation plans, even at a high level.”
The group has agreed, however, that CSDs must be made to understand the obligation to implement the standards ahead of T2S testing, which is scheduled for January 2014.
CASG has also finally produced its business process description document, which aims to describe how CSDs and central clearing counterparties (CCPs) will interact with T2S for settling entitlements in T2S. The document covers three categories of corporate actions events: distributions, reorganisations and transaction management.
For more information on the group’s other activities see here.