Market claims in T2S

Transcription

1 Market claims in T2S Introduction This document aims at clarifying the market claim models in the context of the T2S implementation and recommending a course of actions. Much has been discussed in various fora on this issue. This issue can be considered from two angles: the functional angle and the commercial/service level angle. This note focuses on the technical aspects of the market claims processing, i.e. the functional angle. The second angle belongs to a wider perspective, i.e. what will be the service levels in T2S and is driven by expected competition between service providers, including CSDs. Therefore, this aspect is not dealt with in this paper. Transformations processes are out of scope of this analysis. However, in order to foster efficiency, we should avoid as much as possible divergence in approach and processes between market claims and transformations unless such divergences are justified by clear benefits outweighing the loss of efficiency arising from diverging processes. The analysis done in this document relies on some assumptions, the most important ones being that: a) the CAJWG standards are fully implemented by all relevant stakeholders for all markets joining T2S, b) without any reference to the legal and fiscal compliance context in which these standards will operate and are to be understood as best market practices with the aim of introducing harmonisation in cross-csd settlement; c) all participating CSDs in T2S offer market claims services in the way described in the CAJWG standards, d) the functional reference point is the current version of the T2S URD (v4.1); e) it is possible to distinguish functionally between the processing related to a corporate action on stocks or holdings (for example, the distribution of a cash dividend to record date holders) and the processing related to a corporate action on flows (for example, the generation and processing of a market claim). The validity of the assumptions has to be tested as we progress towards 2013 and should these conditions not be met, the result of this analysis may need to be reviewed. This note is structured in four main chapters: The first considers the existing model in the pre-t2s area. The second highlights the changes that T2S will bring. The third analyses the various possible situations/scenarios in T2S. The fourth constitutes the summary of the findings and presents the recommendation and way forward. 1

2 1. What is the traditional way of doing market claims? Domestic In the domestic environment, the situation is very diverse. Market claims is not a mechanism supported by some markets and very common in other ones, yet using various methods. We will not give here a full description of the current situation as this is beyond the scope of this document and as the CAJWG should bring a great level of harmonization in domestic market claim processes. However, when market claims services is offered by the CSD, the CSD detects and raises the claims centrally on behalf of its participants. Cross-Border Looking at the traditional model for performing market claims in the current situation is much more useful as it provides a starting point to define the impact of T2S implementation on this current model 1. Cross-border CSD links in Europe are characterized by a link between the Issuer CSD and another CSD (usually referred to as Investor CSD). In reality, the Investor CSD has opened one (or several) accounts with the Issuer CSD. When it comes to market claims, if the service is offered by the Issuer CSD to its account holders, compensations are initiated, like in any other corporate action by the Issuer CSD. The model does not differ from the ECSDA DvP model for settlement activities. The Issuer CSD is treating the Investor CSD as any of its account holders (as per Code of Conduct) and performs the same tasks for it then for any of its account holders. It will notify it of any corporate actions. It will also raise and affect market claims for the account(s) held by the Investor CSDs with the Issuer CSD. The Investor CSD will in its turn notify its own participants of the corporate actions and reflect the claims in its own books. One of the two key conditions for the Issuer CSD to raise market claims is that the Issuer CSD must be aware of a pending settlement transaction to consider it in its claim detection framework (the other key condition being that the CSD is aware of the corporate event, condition being always met for the Issuer CSD). Today, the Issuer CSD is aware of the transaction when this transaction is between one of its participants and one of the Investor CSD participants. This is materialized by a settlement instruction in the books of the Issuer CSD between one of the Issuer CSD participant account and the account of the Investor CSD with the Issuer CSD. If a transaction takes place between two of the Investor CSD participants and both participants holdings are within the same account at the Issuer CSD, the practice of the Investor CSD is often to internalize the settlement in its books. In that case, the Issuer 1 THE EUROPEAN CENTRAL SECURITIES DEPOSITORIES ASSOCIATION S RESPONSE TO THE GIOVANNINI REPORT BARRIER 3, CORPORATE ACTIONS - PART 2 MARKET CLAIMS July 2006 ECSDA REPORT OF WORKING GROUP 5 ON CROSS BORDER CORPORATE ACTIONS AND EVENTS PROCESSING Updated: November 2002 (issue 6.0) 2

3 CSD is not aware of the transaction and therefore can not take it into consideration for market claim services. It would be up to the Investor CSD to detect the claim on the basis of the rules of the Issuer CSD. The Investor CSD is in any case aware of the corporate actions details as it has holdings on its account with the Issuer CSD and the Issuer CSD would have notified every holder of the corporate actions details. Finally, today transactions between two different Investor CSDs participants will lead to a transaction in the Issuer CSD between the two accounts of the two Investor CSDs in the books of the Issuer CSD. Raising and processing market claims in that situation is no different than the normal procedures between two normal participants of the Issuer CSD. 2. What changes with T2S? Obviously, a major change will be the implementation of the CAJWG harmonized standards for market claims. However, this is not attributable to T2S but need to be kept in mind to perform our analysis. The main change introduced by T2S is that T2S will foster cross-border ( cross-csd ) settlement and create a single harmonized settlement framework for both domestic and cross border ( cross-csd ) settlement. This has little impact for a domestic transaction. However, it introduces changes for cross-border (( cross-csd ) settlement especially for the scenario related to a transaction between two participants of two different Investor CSDs. Firstly, this case is very infrequent in today s world but may be very frequent in the T2S era. Secondly, T2S introduces a specific central mechanics to deal with these cases and for the related realignment arising from such transactions. Therefore, we will consider in more details the T2S impact and for each scenario consider the two key conditions for market claims processing : a) be aware that a corporate actions taking place on the underlying securities, and b) be aware that there is a matched unsettled transaction on this underlying security to include it in the claim detection process (and be aware of its relevant details including the eventual ex/cum indicator presence and value in order to properly raise or not the claim). 3

4 3. The various scenarios in T2S. 3.1 Intra-CSD Settlement (Domestic Settlement) This scenario is very simple. The CSD detects and raises claims between two of its participants. In that case, the Issuer CSD is the same as the Investor CSD. So, there is no issue related to the choice of the model used for claims. From a domestic transaction (i.e. between two participants of Issuer CSD, or between two participants of the same Investor CSD), T2S does not make any real difference from a technical perspective. T2S will be used as the settlement engine by the CSD and the CSD will detect and raise the claim 3.2 Cross-CSDs Settlement When all the involved CSDs are CSDs in T2S ( Cross-CSD Settlement ), T2S will profit from having all the securities accounts (as well as all the dedicated cash accounts) on a single platform and settle the transaction as domestic transaction from the perspective of the parties. Let s consider the various example and for each example, the market claim model impact. These examples are the ones described in the T2S URD V4.1. The same terminology (such as Investor CSD, Issuer CSD, Technical Issuer CSD) is used for the sake of consistency. However, we would like to introduce the term Instruction Owner CSD (IOC). This is defined as the CSD on whose accounts the underlying instruction is pending. This entity can be the Issuer CSD or the Investor CSD. 4

5 Example 1: transfer of securities from (to) an Investor CSD in relationship with the Issuer CSD to (from) the Issuer CSD (most common case of Cross-CSDs Settlement), where participant A of CSD A sells security to participant I of CSD I (Issuer) with the following links From the participant A and from the participant I perspective, the settlement takes place between their respective accounts with their respective CSDs. In reality, T2S generates movements 1 and 2 (as shown in the above flow) to perform the bookings. Let s test the two key conditions to raise claims: - aware of the transaction Both CSDs (Investor CSD A and Issuer CSD/investor CSD I) are aware of the transaction as they have a matched settlement instructions for one of their participants. The two Instruction Owner CSD are CSD A and CSD I and are in all cases aware of the transaction. - aware of the corporate actions The Issuer CSD is aware of the corporate actions. 5

6 The issuer CSD has informed the Investor CSD A of the corporate actions details provided that the Investor CSD A already has a position on the underlying securities of the corporate actions in its omnibus account with CSD I or has a pending transactions (as per the CAJWG standards). In the above example, a receipt, there could be a chance that there is no position on the omnibus account of CSD A with CSD I. However, in any case, the Investor CSD I should be able to pick up that there is a transaction on the underlying securities from the matched instructions sent by his participant I and advise the Investor CSD of the corporate actions details as soon as matching occurs. Note that Issuer CSD would however have to derive from the instructions the Investor CSD to which to send the CA notification. So in this scenario, both the Issuer CSD and the Investor CSDs are able to raise and detect the claim. Processing Issuer Model CSD I would need to send to T2S a settlement instruction to book a movement between its participant I and : - Option 1 the omnibus account of CSD A with CSD I That implies the CSD A would further have to associate this instruction against the underlying instructions and in its turn generate a movement between the mirror account and its participant (as T2S will create automatically the movement in the mirror a/c A/I as a result of the booking against the omnibus account of CSD A with CSD I but will and can not create the instruction against the relevant participant A account in Investor CSD A) - Option 2 the participant A in CSD A The option 2 is probably easier to reconcile for CSD A, as T2S will generate all the movements in the mirror and omnibus account on the basis of the instructions. The instructions could be sent already matched as the Issuer CSD instructs for both parties in both options 1 and 2. However, in option 2, it implies that CSD I has a limited power of attorney in T2S to be able to instruct on the account of participant of another CSD in another CSD (e.g. participant A in CSD A) Investor CSD Model In this model, both CSDs would generate an instruction to T2S on behalf of their respective account owner and T2S would then match these instructions. CSD A would send an instruction to debit his participant A account to credit participant I account in CSD I; CSD I would instruct to debit participant I account in CSD I and credit participant A account in CSD A. T2S will generate the relevant bookings in the omnibus account A in CSD I and mirror account A/I in CSD A as per the settlement of the market claims instructions. Investor CSD Model seems some simpler in this situation. 6

7 Example 2: transfer of securities from an Investor CSD in relationship with the Issuer CSD to another Investor CSD in relationship with the Issuer CSD, where participant A of CSD A sells security to participant B of CSD B with the following links From the participant A and from the participant B perspective, the settlement takes place between their respective accounts with their respective CSDs. In reality, T2S generates movements 1, 2 & 3 (as shown in the above flow) to perform the bookings. This scenario is more complex and somewhat different than in today s world. In today s world CSD A and CSD B would instruct CSD I for a settlement between their omnibus account while in T2S this mechanics is transparent to them and to the Issuer CSD. Let s test the two key conditions to raise claims: - Aware of the transaction Both Investor CSDs (Investor CSD A and Investor CSD B) are aware of the transaction as they have a matched settlement instructions for one of their participants. CSD A and CSD B are the two Instruction Owner CSD s and are in all cases aware of the transaction. The URD v4.1 (chapter 9 or Annex 10) does not define when the movement 2 (i.e. the realignment between the omnibus accounts of the Investor CSDs in the Issuer CSD) takes place. If movements are created upon matching of the settlement instruction between participant A and B, then the issuer CSD is aware of the transaction as from 7

8 this moment. If the movement 2 is created upon settlement attempt (or successful settlement), the Issuer CSD won t know about the transaction between participant A and B until that point in time. The only CSDs that are in all cases aware as early as possible of the transaction are the CSD A and CSD B being the two Instruction Owner CSDs. - Aware of the corporate actions The Issuer CSD is aware of the corporate actions. The issuer CSD has informed the Investor CSD A and B of the corporate actions details provided that the Investor CSD A and B already have a position on the underlying securities of the corporate actions in their omnibus account with CSD I or have a pending transactions known by the Issuer CSD I. The issue in this example is that if issuer CSD I is not aware of the transaction between participant A and B until it settles, and one of the Investor CSD (A or B) doesn t have already a position in the underlying securities, the Issuer CSD won t be able to send the corporate actions details to the Investor CSD. So in this scenario, the Issuer CSD and the Investor CSDs may not be able to raise the claims, the Issuer CSD because it is not aware of the transaction and the Investor CSDs because they may not be aware of the corporate actions. Processing Issuer Model CSD I would need to send to T2S a settlement instruction to book a movement between - Option 1 the omnibus account of CSD A with CSD I and the omnibus account of CSD B with CSD I; As in the previous scenario, this implies the CSD A (and CSD B) would further have to associate this instruction against the underlying instructions and in its turn generate a movement between the mirror account and its participant (as T2S doesn t create these instructions against the participant account). - Option 2 the participant A in CSD A and participant B in CSD B. The option 2 is probably easier to reconcile for CSD A and B, as T2S will generate all the movements in the mirror and omnibus account on the basis of the instructions. The instructions could be sent already matched as the Issuer CSD instructs for both parties in both options 1 and 2. However, in option 2, it implies that CSD I has a limited power of attorney in T2S to be able to instruct on the account of participant of another CSD in another CSD (e.g. participant A in CSD A and participant B in CSD B) Investor CSD Model In this model, both Investor CSDs would generate an instruction to T2S on behalf of their account owner and T2S would then match these instructions. 8

9 CSD A would send an instruction to debit his participant A account to credit participant B account in CSD B; CSD B would instruct to debit participant I account in CSD B and credit participant A account in CSD A. T2S will generate the relevant bookings in the omnibus account A and B in CSD I and mirror account A/I in CSD A and mirror account I/B in CSD B as per the settlement of the market claims instructions. The Issuer CSD I will have to exclude from its market claims detection mechanism the booking # 2 of the flow, i.e. the realignment settlement related to the settlement of the market claims transaction to avoid raising a claim when it is no needed. 9

10 Example 3: transfer of securities from an Investor CSD in relationship with a Technical Issuer CSD to another Investor CSD in relationship with a different Technical Issuer CSD, where participant C of CSD C sells security to participant D of CSD D with the following links This scenario is very much like the previous scenario but with an additional layer of complexity. From the participant C and from the participant D perspective, the settlement takes place between their respective accounts with their respective CSDs. In reality, T2S generates movements 1, 2, 3, 4 & 5 (as shown in the above flow) to perform the bookings. 10

11 Let s test the two key conditions to raise claims: - Aware of the transaction. Both (end) Investor CSDs (Investor CSD C and Investor CSD D) are aware of the transaction as they have a matched settlement instructions for one of their participants. The two Instruction Owner CSD are CSD C and CSD D. The URD v4.1 (chapter 9 or Annex 10) does not define when the movement 2, 4 and 3 (i.e. the realignment between the omnibus accounts of the Investor CSDs A and B in the Issuer CSD I) takes place, nor when movements 2 and 4. If these movements are created upon matching of the settlement instructions between participant C and D, then the issuer CSD I is aware of the transactions as from this moment. If the movements 2,4 and 3 are created upon settlement attempt (or successful settlement), the Issuer CSD, nor Investor CSD A or Investor CSD B won t know about the transaction between participant C and D until that point in time. The same applies to Investor CSD A and Investor CSD B. They won t know about the transaction between participant C and D until movements 2 and 4 are generated by T2S. So, the only CSDs aware in all cases as early as possible of the transaction are CSD C and CSD being the two Instruction Owner CSD s. - Aware of the corporate actions The Issuer CSD is aware of the corporate actions. The issuer CSD has informed the Investor CSD A and B of the corporate actions details provided that the Investor CSD A and B already have a position on the underlying securities of the corporate actions in their omnibus account with CSD I or has a pending transactions known by the Issuer CSD I. The issue in this example is that if issuer CSD I is not aware of the transaction between participant C and D until it settles, and one of the CSD (A or B) doesn t have already a position in the underlying securities, the Issuer CSD won t be able to send the corporate actions details to the Investor CSD A and B. Investor CSD A and B won t therefore in that case be able to notify Investor CSD C and D of the corporate action event details or advise them with delays. So in this scenario, the Issuer CSD and the Investor CSDs (A and B, or C and D) may not be able to raise the claims, the issuer CSD because it is not aware of the transaction, and the Investor CSDs C and D because they may not be aware of the corporate actions and Investor CSDs A and B because they may not be aware of both (the transaction, and the corporate actions). Processing Issuer CSD Model CSD I would need to send to T2S a settlement instruction to book a movement between - option 1 the omnibus account of CSD A with CSD I (that implies the CSD A would further have to associated this instruction against the underlying instructions and in its turn generate a movement between the mirror account and its participant (as T2S doesn t create these instructions)) and the omnibus account of CSD B with CSD I; 11

12 - Option 2 the participant C in CSD C and participant D in CSD D. Option 1 implies that CSD A and B would in their turn need to instruct T2S to do the respective bookings to replicate these movements in their relationship respectively with Investor CSD C and Investor CSD D. The option 2 is probably easier to reconcile for CSD C and D, as T2S will generate all the movements in the mirror and omnibus account on the basis of the instructions. However, reconciliation in Investor CSD A and B may not be very easy. The instructions could be sent already matched as the Issuer CSD instructs for both parties in both options 1 and 2. However, in option 2, it implies that CSD I have a limited power of attorney in T2S to be able to instruct on the account of participant of another CSD in another CSD (e.g. participant C in CSD C and participant D in CSD D) Investor CSD Model In this model, both Investor CSDs C and D would generate an instruction to T2S on behalf of their account owner and T2S would then match these instructions. CSD C would send an instruction to debit his participant C account to credit participant D account in CSD D; CSD D would instruct to debit participant C account in CSD C and credit participant D account in CSD D. T2S will generate the relevant bookings in the omnibus account C and D in CSD A and B and omnibus account A and B in Issuer CSD I, plus the related mirror account accounting movements. The Issuer CSD I will have to exclude from its market claims detection mechanism the booking # 3 of the flow, i.e. the realignment settlement related to the settlement of the market claims transaction to avoid raising a claim when it is no needed. Similarly, Investor CSD A and B have to do the same with the movement # 2 and 4 of realignment settlement related to the settlement of the market claims transaction 12

13 Example 4: transfer of securities from (to) the Issuer CSD to (from) an Investor CSD in relationship with a Technical Issuer CSD, where participant I of CSD I (Issuer CSD) sells security to participant D of CSD D with the following links From the participant I and from the participant D perspective, the settlement takes place between their respective accounts with their respective CSDs. In reality, T2S generates movements 1, 2 & 3 (as shown in the above flow) to perform the bookings. 13

14 Let s test the two key conditions to raise claims: - Aware of the transaction Both CSDs (Investor CSD D and Issuer CSD/investor CSD I) are aware of the transaction as they have a matched settlement instructions for one of their participants. Instruction Owner CSD s are CSD I and CSD D. However, Investor CSD B may not be aware of the transaction, depending on how T2S generates the realignment movements, especially movement 2. So, the only CSDs aware in all cases as early as possible of the transaction are CSD D and CSD I being the the two Instruction Owner CSDs. - Aware of the corporate actions The Issuer CSD is aware of the corporate actions. The issuer CSD has informed the Investor CSD B of the corporate actions details provided that the Investor CSD B already has a position on the underlying securities of the corporate actions in its omnibus account with CSD I or has a pending transactions. When it comes to pending transaction, Issuer CSD I doesn t know about a transaction on the omnibus account of Investor CSD B on its books until T2S generates movement 1. Obviously, CSD B has to inform CSD D of the corporate actions details upon being informed by the Issuer CSD I. Again, this will be the case only if Investor CSD D has already a holding in its omnibus account with CSD B or if CSD B knows about any pending transactions (depending on when movement 2 is generated as Investor CSD B is not at all aware of transaction between participant I and participant D). There is no contractual relationship or account servicing relationship between Issuer CSD I and Investor CSD D. Therefore, Issuer CSD I will in theory not inform Investor CSD D of the event details as per the CAJWG. However, one could consider a similar approach as with scenario 1. The Investor CSD I should be able to pick up that there is a transaction on the underlying securities from the matched instructions sent by his participant I with participant D (in Investor CSD D) and advise the Investor CSD D of the corporate actions details as soon as matching occurs. Obviously, this leads to the possibility of Investor CSD D to be informed of the corporate actions twice, one by the Issuer CSD I and one by the Investor CSD B, with different references but hopefully with the same event details. It may however create some extra complexity for CSD D as if the transaction between participant I and participant D is known to CSD B; CSD B may have taken it into account to calculate the entitlement of the omnibus account D in its books. (Note: this was also true in the previous scenario) Processing Issuer CSD Model CSD I would need to send to T2S a settlement instruction to book a movement between its participant I and - Option 1 the omnibus account of CSD B with CSD I Again, that implies the CSD B would further have to in its turn generate a movement between the mirror account and the omnibus account of D in its book, and further on 14

15 CSD D do the same for participant its own books (as T2S doesn t create these instructions) - Option 2 the participant D in CSD D In option 1, CSD B would then have to reinstruct T2S for a booking between mirror account B/I and omnibus account D in CSD B. Finally, CSD D would have to do the same at his level to reach participant D. The option 2 is probably easier to reconcile for CSD D, as T2S will generate all the movements in the mirror and omnibus account on the basis of the instructions. The instructions could be sent already matched as the Issuer CSD instructs for both parties in both options 1 and 2. However, in option 2, it implies that CSD I has a limited power of attorney in T2S to be able to instruct on the account of participant of another CSD in another CSD (e.g. participant D in CSD D) Investor CSD Model In this model, both CSDs (Issuer CSD I Investor CSD D) would generate an instruction to T2S on behalf of their account owner and T2S would then match these instructions. CSD I would send an instruction to debit his participant I account to credit participant D account in CSD D; CSD D would instruct to debit participant I account in CSD I and credit participant D account in CSD D. T2S will generate the relevant bookings in the omnibus account B in CSD I and mirror accounts and omnibus accounts between Investor CSD B and Investor CSD D per the settlement of the market claims instructions. CSD B remains unaware of the transaction yet will have received on its omnibus account in the Issuer CSD I the distribution proceeds as proceeds of the corporate actions will be distributed by the Issuer CSD I on its participant s accounts. This may create issue to settle market claims as the out turn of the event may need to be distributed before being given back via the settlement of the market claim. The Issuer CSD I will have to exclude from its market claims detection mechanism the booking # 1 of the flow, i.e. the realignment settlement related to the settlement of the market claims transaction to avoid raising a claim when it is no needed. Similarly, Investor CSD B has to do the same with the movement # 2 of realignment settlement related to the settlement of the market claims transaction. 15

16 Example 5: transfer of securities from an Investor CSD in relationship with a Technical Issuer CSD to another Investor CSD in relationship with the same Technical Issuer CSD, where participant C of CSD C sells security to participant D of CSD D with the following links From the participant C and from the participant D perspective, the settlement takes place between their respective accounts with their respective CSDs. In reality, T2S generates movements 1, 2, 3, 4 & 5 (as shown in the above flow) to perform the bookings. 16

17 Let s test the two key conditions to raise claims: - Aware of the transaction Both CSDs (Investor CSD C and Investor CSD D) are aware of the transaction as they have a matched settlement instructions for one of their participants. The two Instruction Owner CSD s are CSD C and CSD D. Investor CSD A and Issuer CSD I are unaware of the transaction until movements are done by T2S. So, the only CSDs that are in all cases aware of the transaction as early as possible are CSD C and CSD D being the two Instruction Owner CSDs. - Aware of the corporate actions The Issuer CSD is aware of the corporate actions. The Issuer CSD has informed the Investor CSD A of the corporate actions details provided that the Investor CSD A already has a position on the underlying securities of the corporate actions in its omnibus account with CSD I or has a pending transactions. In this example, it is very likely that Investor CSD A has a holding on one of its omnibus account with Issuer CSD I. However, there is no guarantee that it is the case as the transaction between participant C and D may be linked to other transactions leading to actually crediting omnibus account 1 of CSD A with the Issuer CSD I. In the above example, the Issuer CSD I is not able to pick up that there is a transaction on the underlying securities as it is not aware of any matched instructions sent by his participant or on its participant accounts. Issuer CSD I is only aware of the transaction between participant C and participant D at the moment movement 3 is known to him. Investor CSDs C and D have no direct relationship with the Issuer CSD I. Therefore, they would only be aware of the corporate actions because Investor CSD A would have informed them on the event. In its turn, CSD A can only inform CSDs C and D if these have either a holdings in their omnibus accounts with CSD A, or because CSD A is aware of the transaction between participant C and participant. The first element is not guaranteed in all cases (none or only one of the CSD may have holdings in their omnibus account). The second aspect is not met either as Investor CSD A is not aware of the transaction until movements 2 and 4 are generated by T2S. So in this scenario, both the Issuer CSD I and Investor CSD A may not be able to detect the claim as it doesn t know about the transaction and Investor CSD A, C and D because they may not be aware of the corporate actions. 17

18 Processing Issuer CSD Model CSD I would need to send to T2S a settlement instruction to book a movement between omnibus account 1 and omnibus account 2 of CSD A in its book. In this case, Investor CSD A would have to instruct the bookings on omnibus account C and D within its books and finally, CSD C and CSD D the final bookings against their own participants. Investor CSD Model In this model, both Investor CSD C and D would generate an instruction to T2S on behalf of their account owner and T2S would then match these instructions. T2S will generate the relevant bookings in the omnibus account C and D in CSD A (and the linked mirror accounts entries) and CSD I as per the settlement of the market claims instructions. CSD A remains unaware of the transaction yet will have received on its omnibus accounts in the Issuer CSD I the distribution proceeds as proceeds of the corporate actions will be distributed by the Issuer CSD I on its participants account. This may create issue to settle market claims as the out turn of the event may need to be distributed before being given back via the settlement of the market claim. The Issuer CSD I will have to exclude from its market claims detection mechanism the booking # 3 of the flow, i.e. the realignment settlement related to the settlement of the market claims transaction to avoid raising a claim when it is no needed. Similarly, Investor CSD A has to do the same with the movement # 2 and 4 of realignment settlement related to the settlement of the market claims transaction. 18

19 Example 6 (multi-issued securities): transfer of securities between two Investor CSDs, each of them is using a different Issuer CSD as Technical Issuer CSD, where participant A of CSD A sells security to participant B of CSD B with the following links We haven t consider this case in our analysis as we have assumed it is irrelevant for the purpose of this paper focusing on Issuer or Investor CSD model for market claims. To be fully completed, we have to indicate that other scenario involving a CSD outside T2S do exist. However, we have assumed that the same kind of mechanics is followed (with the exception of the involvement of the CoSD) and therefore the situation is mutatis mutandis, the same. Finally, this chapter has focused on the securities side. The cash element has not been considered so far. 19

20 However, the cash aspect is not neutral for the detection and the processing of market claims as a) cash only transaction can also be subject to claim (to be validated- e.g. claim on claim for cash distribution) so it needs to be detected as well), b) the processing implies cash account (and funding and risks) attached to omnibus and mirror account in certain scenario (Issuer model 1 for most scenario) which is not a given. 4. Conclusion and options It would be wrong to antagonize models. In reality, the analysis demonstrates that in reality nor the Issuer CSD model nor the Investor CSD model are perfect in their current state. The Issuer CSD model is closer to the cascading principle according to which entitlements are distributed. The Investor CSD model is closer to the cross-csd settlement logic of T2S. The challenge we are faced is to bridge these two worlds and models and forge recommendations that will deliver an efficient T2S. 1. Issuer Model The logic of this model is aligned with the logic of corporate action processing on stock. The CSD is always aware of the corporate actions details by its very nature of Issuer CSD. Therefore, details applied are always correct for both parties to the transaction as generated by the same central party (Issuer CSD) However, the Issuer CSD may not be aware of the underlying transaction (and all its relevant details such as the ex/cum details) sufficiently on time to raise market claims as from record date. In reality, only two Instruction Owner CSDs are in all cases aware of the transaction as early as possible. Cash arrangements can also be an issue in some scenarios (e.g. the need for CSD to establish cash arrangements in some scenarios and the related funding and risks issue related to such arrangements). In order to work, several options can be considered to tackle the principal problem with this model, i.e. the Issuer CSD being aware of the underlying transaction: Option 1 - make sure T2S creates the realignment transaction upon matching of the underlying transaction, allowing all Investor CSDs and the Issuer CSD to be aware of the underlying transaction to perform market claims detection as from record date on matched unsettled transactions. Option 2 drop the requirement at least for cross-csd settlement to raise market claims as from RD on unsettled but simply have the Issuer CSD raise the claims upon settlement of the underlying transaction if the settlement takes place within 20 days of the RD. Option 3 allow the Issuer CSD to query for all participants of all Investor CSDs matched unsettled transaction as of RD to raise market claims. Option 2 will possibly result in a downgrade of service in some circumstances and goes against the CAJWG. 20

21 Option 3 seems rather unrealistic for obvious commercial reasons. In any case, the issue of the cash arrangement needs also to be resolved, implying the willingness of Issuer CSD and Investor CSDs to establish proper cash arrangements for the bookings of the claims via the respective accounts rather than directly between the underlying transaction participants cash arrangements. Alternatively, it requires the Issuer CSD to have a Power of Attorney on participant accounts of other CSDs to instruct the claims directly between the participant accounts even if they are held with other (Investor) CSDs. This is unlikely to reach broad consensus amongst the T2S stakeholders. 2. Investor CSD model The Investor CSD model is more aligned with the short circuit way of T2S mechanics for cross-csd settlement. This mechanics is different than the corporate action on stock processing flow, flowing down from the Issuer CSD. Different mechanics for corporate actions on flows and on stock may create issues, especially if the timing of the bookings (and cascading down bookings) of distribution of corporate actions on stock is delayed compared to the corporate actions on flows (e.g. market claim settling before the proceeds of the corporate action on stock are distributed down to the last participant). In case there is a chain of Investor CSD, the intermediary Investor CSD is as blind as the Issuer CSD in the Issuer CSD model. So, we should rather consider calling the model Investor CSD of the transaction participants. This model leverages T2S ability to generate the interim movements and manage the realignments. Since both Investor CSDs will generate the market claims instructions and T2S match them, there is always a risk that such instructions don t match. However, the anticipated harmonization brought by the CAJWG and other Giovannini related harmonization results are likely to reduce the risk of unmatched, even if this risk can never be totally excluded. In order to work, several options can be considered to tackle the major problem with this model, i.e. the ability of the Investor CSD to be aware of the corporate action and its actions to kick off detection and input of market claims. Option 1 Investor CSD(s) can rely on other sources than the normal notification service of Issuer CSD based on distribution of info to holders and pending transactions to be aware of the corporate actions. Option 2 Issuer CSD being able to pick up the Investor CSD from the settlement instruction he receives from his participant. Option 3 Make sure that the Issuer CSD is aware of the transaction so notification of the corporate actions can be sent to the Investor CSDs. Option 1 can be risky as the Issuer CSD is the main and official source of information distribution of corporate actions (as per the CAJWG, its role is even reinforced). Investor 21

22 CSDs generating claims on unconfirmed events or on the basis of inexact details coming from other sources than the Issuer CSD can lead to a great quantity unmatched instructions or worst. Obviously, an alternative would be for the Investor CSDs to agree specific service levels (i.e. notification service beyond the prescripts of the CAJWG) with the Issuer CSD to receive corporate event information. Option 2 answer mostly scenario 1& 4. In scenarios 2.3 & 5, we will have to assume that there are holdings on the omnibus account of the Investor CSD with the Issuer CSD allowing the Issuer CSD to distribute the information properly. Option 3 in effect is the same as option 1 of the Issuer CSD section. Final recommendation From a pure functional perspective, the analysis demonstrates that the Investor CSD is the best option. Therefore, we recommend taking this approach bearing in mind the associated side effects it can have (e.g. the need to fine tune the claims detection rules to exclude the realignment movements born by the settlement of the market claims). Finally, if we consider that T2S will increase competition amongst service providers, we can assume that proper service levels will mitigate the issues related to dissemination of corporate actions from the Issuer CSD to Investor CSDs and the issues related to the possible asynchronization of processes of corporate actions on flows and stock. 22