Changes to the handling of the corporate actions requiring payment of exercise price - Update
Note: This announcement, originally published on 28 October 2019 and updated on 26 November 2019, has been further updated to provide additional information on situations where the customer fails to provision their account with the exercise price of a corporate actions event on the payment date.
Clearstream Banking1 informs customers of the changes to the handling of corporate actions requiring payment of exercise price which become effective
18 May 2020
Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on the European Central Securities Depositories Regulation (CSDR), introduces several measures to prevent and address unsecured exposures. To facilitate the implementation of the credit prudential requirements set out in the CSDR, Clearstream Banking will adapt and introduce changes to the handling of corporate actions requiring payment of exercise price as described below.
Impact on customers
For corporate action events requiring payment of exercise price, and in line with Article 18 of CBL’s General Terms and Conditions for CBL customer accounts as well as German law for CBF customer accounts, customers who have given their instruction to exercise should ensure their account is sufficiently provisioned on the payment date.
Impacted corporate action events include, but are not limited to, priority issue, warrant exercise and exercise of rights.
The following changes will be introduced to the current process:
- Debit of customer accounts with the exercise price on the payment date will be subject to a cash provisioning check based on the available cash or credit line of the customer;
- The unsuccessful cash provisioning of the account on the payment date will lead to:
- Daily penalties2 for late cash provisioning;
- A retention of the securities proceeds by Clearstream Banking and other actions as per Article 21 of CBL’s General Terms and Conditions for CBL customer accounts and as per German law for CBF customer accounts.
Customers failing to fund their account on the payment date will automatically be granted a grace period by Clearstream Banking to provide the required funds. The grace period will be activated on the payment date and will end either on the payment date and within two business days or on the securities proceeds distribution date, whichever occurs later. The credit of securities proceeds to the customer’s account will be dependent on the settlement of the cash debit instruction during this grace period.
If the customer fails to fund their account by the end of the grace period, starting from the next business day, Clearstream Banking will reject the corporate action instruction of the customer, the pending cash debit instruction will be canceled and the proceeds will be sold on the market3 The resulting cash difference (a difference between the amount due to be paid by the customer and the market price of proceeds), if any, will be booked to the customer’s account through Clearstream Banking S.A. (CBL) via cash instruction with an appropriate narrative to ease the cash reconciliation. No credit of securities proceeds will follow.
To facilitate the proper handling of the impacted corporate action events by customers, the following enhancements will be implemented to the current reporting:
- The MT564 Corporate Action Notification will include a narrative ADTX reminding customers of a timely cash provisioning of the account on the payment date “By submitting your instruction, you commit to timely fund your account as required per corporate action terms to support the debit of the exercise amount in order to receive the proceeds";
- If there is insufficient cash provisioning of the account on the payment date, customers will receive an MT567 Corporate Action Instruction Status Advice with a status IPRC//PEND and a new reason code PEND//MONY, as well as reporting via MT940/942;
- Failed cash debit instructions will be recycled during the grace period until the account is successfully provisioned or until the instruction is cancelled by Clearstream Banking at the end of the grace period as explained above. If the settlement is successful, customers will receive an MT567 Corporate Action Instruction Status Advise with a status IPRC//PACK followed by an MT566 corporate action confirmation for debit of cash and credit of securities proceeds. If there is a cancellation, the customers will receive an MT567 Corporate Action Instruction Status Advice with a status IPRC//REJT and a new reason code REJT//NARR “Rejected due to failed cash provisioning, distribution of resulting proceeds will not take place”.
There will be no other changes to the processing and reporting of these corporate action events and instructions.
Further information
For further information, customers may contact Clearstream Banking Client Services or their Relationship Officer.
-----------------------------------
1. Clearstream Banking refers collectively to Clearstream Banking S.A., registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Trade and Companies Register under number B-9248, and Clearstream Banking AG (for Clearstream Banking AG customers using Creation Accounts), registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500.
2. The implementation date of the daily penalties is still to be determined. In the meantime, any costs incurred by Clearstream Banking caused by a customer who failed their payment obligation will be recharged to the customer via monthly invoice.
3. If the customer failed to fund their account on the payment date, it is important to understand that Clearstream Banking will be debited by the market and will receive the securities proceeds as the corporate action instruction submitted by Clearstream Banking on behalf of the customer would be exercised by the issuer/agent. If during the grace period, the customer account is duly funded, the customer will receive the securities proceeds against debit of its cash account. However, if at the end of the grace period the customer account is still not duly funded, the securities would still belong to Clearstream Banking who will sell them on the market on a best effort basis, and the customer agrees and undertakes to indemnify Clearstream Banking for the cash difference.