Factored Securities Market Practice

Transcription

1 Factred Securities Market Practice Disclaimer The Securities Market Practice Grup is a grup f experts wh devte their time n a vluntary basis t define glbal and lcal market practices fr the benefit f the securities industry. The market practice dcumentatin and recmmendatins prduced by this rganizatin are intended t slve cmmn prblems acrss the securities industry, frm which financial institutins can derive clear benefits, t harmnize business prcesses and t facilitate the usage f message prtcls ISO and ISO While the Securities Market Practice Grup encurages the implementatin f the market practices it develps, it is up t the financial institutins within each market t implement the market practices accrding t their needs and agreements with their business cunterparts t supprt their businesses as efficient as pssible. Althugh the SMPG has used all reasnable effrts t ensure accuracy f the cntents f this dcument, the SMPG assumes n liability whatsever fr any inadvertent errrs r missins that may appear theren. Mrever, the infrmatin is prvided n an "as is" basis. The SMPG disclaims all warranties and cnditins, either express r implied, including but nt limited t implied warranties f merchantability, title, nninfringement and fitness fr a particular purpse. Neither the SMPG, nr any f its members and/r cntributrs shall be liable fr any direct, indirect, special r cnsequential damages arising ut f the use f the infrmatin published in this dcument, even if the SMPG r any f its members have been advised f the pssibility f such damage. Status: Final Preparatin date: June 2010 Update date: April, 2015 Authr: SMPG - 1 -

2 I. SCOPE AND DEFINITIONS:... 4 II. ACTORS AND ROLES:... 4 III. ACTIVITY DIAGRAM:... 5 IV. SEQUENCE DIAGRAMS:... 5 V. BUSINESS DATA REQUIREMENTS:... 6 A. GENERIC INSTRUCT SETTLEMENT:... 6 B. SPECIFIC INSTRUCT SETTLEMENT:... 7 VI. MARKET PRACTICE RULES:... 7 VII. ISO ILLUSTRATION:... 8 VIII. MESSAGE USAGE RULES:... 9 SAMPLE MESSAGE FORMATS: A. LINKER/TIPS FACTORED SECURITY B. CORPORATE W/ SINKING FUND C. MBS FACTORED SECURITY D. FACTOR UPDATE EXAMPLE CANCEL - POST SETTLEMENT E. FACTOR UPDATE EXAMPLE REBOOK FEDWIRE POST SETTLEMENT F. FACTOR UPDATE EXAMPLE REBOOK DTC POST SETTLEMENT Changes t previus versins Versin 1.0 August 2010 Versin 1.1 Nvember, 2010 Update market practice int SMPG frmat Update t Cash Party sequence recmmendatin fr US DTCC and Fedwire payments/receipts - 2 -

3 Versin 1.2, December, 2010 Versin 1.3, February 2010 Update t Cash Party sequence recmmendatin based n discussins at ISITC December, 2010 cnference Open questin listed n DTC SPO charge credits Additin f market practice disclaimer Versin 1.4, Nv, 04, 2014 Edits based n review by SWIFT standards as part f SMPG MyStandards usage guidelines Definitins sectin in scpe updated with rate indicatr used in message samples CMOs added t the Business Date Elements Sectin B Remval f cntradictry wrding in market practice rules sectin VI Additin and Subtractin sign added t Net mney calculatin in market practice rules sectin Lcal market identifier frmat ptin R added t Client f Receiving/Delivering Agent field table n page 8 Message Usage Rules Linkers/TIPs updated t clarify recmmended as mandatry Remval f 70E::PACO in sample F Additin f INTM intermediary cash party recmmendatins n page 9 as well as further clarity n PAYE vs. BENM usage Remval f 13B::POOL field frm samples as nt part f the recmmendatin Remval f the 12A::CLAS field frm the samples as ISITC recmmendatin nly applicable when nn-street recgnized security ID is ppulated Expansin f definitin f a Bnd with Sinking Prvisin t include ther bnd agreements such as CMOs and MUNIs. Previusly nly referenced Crp. Bnds with Sinking Fund Prvisin. Versin 1.5 Inclusin f statement n IBAN usage after review at April, 2015 SMPG meetings - 3 -

4 I. Scpe and definitins: This dcument is intended t define and describe the settlement instructins relating t factred securities. This market practice addresses instructins and cmmunicatin between Investment Managers and their Custdian and/r Accunting Service prviders. Factred securities are debt instruments that have a factr that is used in the calculatin f net mney and market value. Hw the factr is used depends n the prduct type. It shuld be nted that each prduct type requires different prcessing apprpriate t its categry. Examples f Factred Securities: Asset Backed Securities (ABS) Bnd Agreements with Sinking Fund Prvisins Cllateralized Mrtgage Obligatins (CMO) Mrtgage-Backed Securities (MBS) Treasury Inflatin Prtected Securities (TIPS) issued by the U.S. Treasury Linkers Any type f Inflatin Prtected Security issued by the U.S. Treasury r ther entity Definitins Factr Index Rate r Rati Factr Pay dwn Factr Sinking Fund Factr Inflatin Linked Bnds r linkers Unit Bnds Original Face Current Face TIPS A number that is used in the calculatin f net mney r market value fr a debt instrument. Identified as interest rate. The factr used t adjust the principal in a TIPS r Linker security. Identified as index factr. The factr used t dente the amunt f principal paid dwn by the brrwer f the lan r mrtgage. Identified as current factr. The factr used t dente the amunt f debt that has been called back t the sinking fund. Identified as current factr Usually treasury bnds where the principal is indexed t inflatin A bnd that trades in units, nt in face amunt Face amunt r quantity f a debt instrument nt adjusted by a factr The prduct f the riginal face multiplied by the factr fr a debt instrument Treasury-Inflatin Prtected Securities (TIPS) are securities whse principal is tied t the Cnsumer Price Index (CPI). With inflatin, the principal increases. With deflatin, it decreases. When the security matures, the U.S. Treasury pays the riginal r adjusted principal, whichever is greater TIPS pay interest at a fixed rate. Hwever, fr cupn payments, the rate is applied t the adjusted principal, s interest payments can vary in amunt frm ne perid t the next. If inflatin ccurs, the interest payment increases. In the event f deflatin, the interest payment decreases. II. Actrs and Rles: Accunt Trade Executing Custdian Service Depsitry Accunting Manager Party Prvider Service Prvider Investment Manager/ Hedge Funds Brker Dealer Glbal Custdian Prime Brker Sub-Custdian Securities Depsitry Accunting Agent - 4 -

5 III. Activity Diagram: Accunt Manager Custdian Service Prvider Instructin Prcess Settlement Instructins Settlement Instructin Prcess Yes Reinstruct? N Prcessed? N Yes Matched? Settled? Trade Mnitring / Matching Update Status Reinstruct Instructin Prcess Instructins Depsitry Yes Update Inventry Matching / Settlement Prcess Matching / Settlement Update Matched? Settled? Trade Instructins Accunting Service Prvider Accunting IV. Sequence Diagrams: Accunt Manager Trade Executr Trade Order Accunt Manager Custdian Service Prvider Trade Settlement Instructins - 5 -

6 Cancel and New Trade Settlement Instructins Reprt matching and Settlement Status Trade Executr Depsitry Custdian Service Prvider Trade Settlement Instructins Cancel and New Trade Settlement Instructins Reprt matching and Settlement Status Accunt Manager Prvider Accunting Service Trade Instructins Cancel and New Trade Settlement Instructins Psitin Reprting and Pricing and Valuatin V. Business data requirements: A. Generic Instruct settlement: Business elements Message reference Trade Date Settlement Date Quantity f Financial Instrument Financial Instrument Settlement Amunt Safekeeping Accunt t be credited r debited Place f Settlement Receiving/Delivering Agent Additinal infrmatin ISO 8601 Date/Time ISO 8601 Date/Time See specific instructing settlement sectin belw (B) ISO 6166 Internatinal Securities Identificatin Number [ISIN] Currency and amunt ISO 9362 Bank Identifier Cdes [BIC] taken frm the list f PSET s BIC published n See als Place f Settlement MP. ISO 9362 Bank Identifier Cdes [BIC] r CSD Lcal Cde - 6 -

7 Client f Receiving/Delivering Agent Cuntry specifics as per lcal market practice (if any) ISO 9362 Bank Identifier Cdes [BIC] B. Specific Instruct settlement: Mrtgage / Asset Backed Securities and CMO Business elements Original Face Mandatry Current Face Cnditinal* Additinal infrmatin Pay dwn Factr Optinal *Current face has been agreed t be mandatry when the instructin is being sent by the Investment Manager t the Glbal Custdian wh is als acting as their fund accuntant. Otherwise, the field is cnsidered ptinal. Bnd Agreement w/ Sinking Funds Business elements Original Face Current Face Mandatry Cnditinal* Additinal infrmatin Sinking Fund Factr Optinal *Current face has been agreed t be mandatry when the instructin is being sent by the Investment Manager t the Glbal Custdian wh is als acting as their fund accuntant. Otherwise, the field is cnsidered ptinal. TIPs/Linkers Business elements Original Face Units Current Face Additinal infrmatin Mandatry fr par bnds Mandatry fr unit bnds Cnditinal* Index Rate /Rati Factr Mandatry *Current face has been agreed t be mandatry when the instructin is being sent by the Investment Manager t the Glbal Custdian wh is als acting as their fund accuntant. Otherwise, the field is cnsidered ptinal. VI. Market Practice Rules: If bth riginal and current face are prvided in a message using prper frmats, it is the respnsibility f the receiver t use the prper ne fr any dwnstream prcessing (e.g. sending t lcal CSD) The price used fr TIPS is the un-inflated price. This is als knwn as the clean r market price. This price des nt include the factr. (D nt use the inflated price.) - 7 -

8 The index rate/rati r inflatin factr used fr Linkers is the factr assciated with settle date f the trade. Net Mney = ( Original Face x Un-inflated Price x Settle Date Inflatin Factr ) +/- Accrued Interest VII. ISO illustratin: Accunt Manager Custdian Service Prvider MT 54x MT 54x (Cancel & New Instructins) MT 548 Trade Executr Depsitry Custdian Service Prvider MT 54x MT 54x (Cancel and New Instructins) MT 548 Accunt Manager Prvider Accunting Service MT 54x (Trade Instructins) MT 54x (Cancel and New Trade Instructins) MT 535 Psitin Reprting, Pricing, and Valuatin Data ISO Instructin Identificatin :20C::SEME//16x Trade Date :98A::TRAD//YYYYMMDD - 8 -

9 Settlement Date Quantity f Financial Instrument Quantity f Financial Instrument Financial Instrument Settlement Amunt Safekeeping Accunt t be credited r debited Place f Settlement Receiving/Delivering Agent Client f Receiving/Delivering Agent :98A::SETT//YYYYMMDD :36B::SETT//FAMT/15d :36B::SETT//AMOR/15d :35B:ISIN1!e12!c [4*35x] :19A::SETT//[N]3!a15d :97A::SAFE//35x :95P::PSET//4!a2!a2!c :95P::REAG//4!a2!a2!c r :95R::REAG/8c/34x :95P::DEAG//4!a2!a2!c r :95R::DEAG/8c/34x :95R::BUYR//4!a2!a2!c r 95R::BUYR/8c/34x :95P::SELL//4!a2!a2!c r 95R::SELL/8c/34x VIII. Message Usage Rules: Linkers/TIPs The Original Face r Units and Current Face shuld be prvided. The use f 92A::INDX is recmmended as mandatry fr Linkers/Tips Mrtgage / Asset Backed Securities Factr Updates The Original Face and Current Face shuld bth be prvided, even if the factr is equal t ne. When trading factred securities, the current factr is nt always knwn at the time f the trade, even thugh this current factr may be effective. When this is the case, the market cnventin is t initially settle the trade with the previus r mst current knwn factr and then adjust fr the difference when the current factr becmes available. It is the net amunt f the trade that needs t be adjusted due t the updated factr: Original face * current factr = current face Current face * trade price +/- interest = net amunt f trade Bnd Agreement with Sinking Fund Prvisins: The Original Face and Current Face shuld bth be prvided, even if the factr is equal t ne. Any bnd issue that is backed by a sinking fund prvisin t lessen interest rate and default risk by setting aside a pl f funds t repurchase a prtin f the existing bnd/debt. Ultimately, resulting in a smaller final repayment at maturity. Mst cmmnly applied t crprate bnds, but als can apply t ther bnd agreements such as Municipals (MUNIs) and Cllateralized Mrtgage Obligatins (CMOs). Pre-settlement Fr the scenari in which the current factr becmes knwn n r prir t cntractual settlement date, the nrmal cancel and rebk prcess shuld be fllwed. In this case, the Accunt Manager will cancel the trade and send acrss new trade and settlement instructins. This new trade will have the new current factr and additinally reflect the new net amunt. N special prcessing by the Custdian Service Prvider is required, and n special (pst settlement) factr update identifiers shuld be used. Pst-settlement The mre cmplex scenari is in which the current factr des nt becme knwn until after cntractual settlement date f the trade, in this case, specific prcessing is required since the securities (the trade) wuld have already settled

10 Once a trade has been settled is nt able t be cancelled, therefre the nrmal cancel and rebk messages are nt apprpriate. In this scenari, the riginal face amunt f the trade has been settled crrectly, but because f the recent factr update, the net amunt f mney assciated with the trade is incrrect, and needs t be adjusted. Because f this, the Accunt Manager will need t cancel the previusly sent settlement / trade instructins, and resend new settlement / trade instructins t bth the Custdian and Accunting Service Prviders (mst times the same party). The fllwing additinal business elements are required t be included in the cancel and new settlement / trade instructins fr pst settlement factr updates: 1) Qualifier t indicate that the cancel and new trade are part f a factr update 2) Reference number t link the new instructins (which include the new factr) t the riginal instructins (which reflected the ld factr) 3) The new settlement / trade instructins als need t include the instructins t mve cash, reflective f the difference in the net amunt f the trade. Nte: A factr adjustment is nt a crprate event. Messaging Sequence 1. Send a cancel fr the riginal trade a. Identify the cancel as a Factr Update (In ISO FCTA). This allws the receiving party t knw yu aren t really canceling a settled trade, rather that a new instructin with a factr update is being prvided. 2. Send the rebk trade (with the prper net mney) a. Include a link t the riginal trade that has settled, s the receiving party can adjust their recrds apprpriately b. Identify it as a Factr Update. c. Identify the directin f cash mvement as a gain r lss (19A::ANTO) i. Hw t use the N in ANTO 1. :19A::ANTO//USDxxxx,xx (fr a gain, receipt) 2. :19A::ANTO//NUSDxxxx,xx (fr a lss, payment) d. Include a Cash Sequence t prvide instructins f where t pay the cash difference. i. If the trade riginally settled DTCC, then yu will be using an SPO charge 95R ::ACCW/DTCYID/<DTC Identifier> If the trade riginally settled Fedwire, then yu will be using ABA Number 95R ::ACCW/USFW/<ABA Number> e. Prvide a secnd ccurrence f the cash party sequence t include the Beneficiary BIC (95P::BENM), r if nt available then Beneficiary Name (95Q::BENM) in Sequence E2 alng with the Cash Accunt (97A::SAFE) n a delivery. f. Prvide a secnd ccurrence f the cash party sequence t include the Paying Institutin BIC (95P::PAYE), r if nt available then Paying Institutin Name (95Q::PAYE) in Sequence E2. g. Intermediary Institutin (95a::INTM) is ptinally allwed n bth the delivery and receipt cash party sequence if applicable. Belw are examples f the Cash Party Sequence fr bth payments and receipts respectively Fedwire Delivery DTCC SPO Charge Debit :95R::ACCW/USFW/XXXXXXXXX :95R::ACCW/DTCYID/ Clearing Party n behalf f beneficiary :95P::BENM//BICAUS33 :95P::BENM//BICAUS33 Beneficiary BIC r Name If nt available, then 95Q::BENM with name If nt available, then 95Q::BENM with name

11 :97A::CASH//XYZZY :97A::CASH//XYZZY Cash Accunt f Beneficiary :95P::INTM//BICAUS33 :95P::INTM//BICAUS33 Intermediary Fedwire Receipt DTCC SPO Charge Credit :16R::CSHPRTY :16R::CSHPRTY :95R::ACCW/USFW/XXXXXXXX :95R::ACCW/DTCYID/ Additinal Infrmatin :16S::CSHPRTY :16S::CSHPRTY :95P::PAYE//BICAUS33 :95P::PAYE//BICAUS33 Paying Institutin If nt available, then 95Q::PAYE If nt available, then 95Q::PAYE :95P::INTM//BICAUS33 :95P::INTM//BICAUS33 Intermediary ADDITIONAL NOTE: In sequences C and E2, fr field 97a::CASH, when IBAN is used (either thugh mandate r therwise2) then this shuld be ppulated as frmat E as dcumented within the SWIFT user handbk frmat ptin recmmendatin. Frmat A shuld be reserved fr prprietary accunt identifiers

12 Sample Message Frmats: A. Linker/TIPS Factred Security :16R:GENL :20C::SEME//12345TIPS :23G:NEWM :16S:GENL :16R:TRADDET :98A::SETT// :98A::TRAD// :90A::DEAL//PRCT/99, :35B:ISIN US TREASURY (CPI) NOTE :16R:FIA :98A::MATU// :98A::ISSU// :92A::INTR//2, :92A::INDX//0, :16S:FIA :16S:TRADDET :16R:FIAC :36B ::SETT//FAMT// ,0000 :36B::SETT//AMOR/ ,4000 :97A::SAFE//TEST ACCOUNT :16S:FIAC :16R:SETDET :22F::SETR//TRAD :95P::PSET//FRNYUS33 :95R::DEAG/USFW/ :97A::SAFE//TSY :95R::SELL/DTCYID/ :19A::SETT//USD ,16 :19A::DEAL//USD ,59 :19A::ACRU//USD1070,57 :16S:SETDET Uninflated price Index Factr assciated with settle date fr current face calculatin

13 B. CORPORATE w/ SINKING FUND :16R:GENL :20C::SEME//12345SINK :23G:NEWM :16S:GENL :16R:TRADDET :98A::SETT// :98A::TRAD// :90A::DEAL//PRCT/104, :35B:ISIN US CORPORATE BOND :16R:FIA :98A::MATU// :98A::ISSU// :92A::INTR//7, :92A::CUFC//0, :16S:FIA :16S:TRADDET :16R:FIAC :36B::SETT//AMOR/72450,0000 :36B ::SETT//FAMT//100000,0000 :97A::SAFE//TEST ACCOUNT :16S:FIAC :16R:SETDET :22F::SETR//TRAD :95P::PSET//DTCYUS33 :95R::REAG/DTCYID/ :95R::BUYR/DTCYID/ :19A::SETT//USD76949,00 :19A::DEAL//USD75710,25 :19A::ACRU//USD1238,75 :16S:SETDET

14 C. MBS Factred Security :16R:GENL :20C::SEME//12345MBS :23G:NEWM :16S:GENL :16R:TRADDET :98A::SETT// :98A::TRAD// :90A::DEAL//PRCT/100, :35B:ISIN US GNMA 30YR :16R:FIA :98A::MATU// :98A::ISSU// :92A::INTR//6, :92A::CUFC//0, :16S:FIA :16S:TRADDET :16R:FIAC :36B::SETT//AMOR/161735,3400 :36B::SETT//FAMT/220538,0000 :97A::SAFE//TEST ACCOUNT :16S:FIAC :16R:SETDET :22F::SETR//TRAD :95P::PSET//FRNYUS33 :95R::REAG/USFW/ :97A::SAFE//MBS :95R::BUYR/DTCYID/ :19A::SETT//USD163567,92 :19A::DEAL//USD163055,76 :19A::ACRU//USD512,16 :16S:SETDET

15 D. Factr Update Example Cancel - Pst Settlement :16R:GENL :20C::SEME//12345CANCEL :23G:CANC :16R:LINK :20C::PREV//INITIALTRADE :16S:LINK :16S:GENL :16R:TRADDET :98A::SETT// :98A::TRAD// :90A::DEAL//PRCT/100, :35B:ISIN US FGOLD 30YR GIANT :16R:FIA :98A::MATU// :98A::ISSU// :92A::INTR//6, :92A::CUFC//1, :16S:FIA :16S:TRADDET :16R:FIAC :36B::SETT//FAMT/ ,0000 :36B::SETT//AMOR/ ,0000 :97A::SAFE//TEST :16S:FIAC :16R:SETDET :22F::SETR//FCTA :95P::PSET//FRNYUS33 :95R::DEAG/USFW/ :97A::SAFE//MBS BROKER :95R::SELL/DTCYID/ :19A::SETT//USD ,83 :19A::DEAL//USD ,50 :19A::ACRU//USD23333,33 :16S:SETDET

16 E. Factr Update Example Rebk Fedwire Pst Settlement :16R:GENL :20C::SEME//REBOOK :23G:NEWM :16R:LINK :20C::PREV//ORIGINAL TRADE :16S:LINK :16S:GENL :16R:TRADDET :98A::SETT// :98A::TRAD// :90A::DEAL//PRCT/100, :35B:ISIN US FGOLD 30YR GIANT :16R:FIA :98A::MATU// :98A::ISSU// :92A::INTR//6, :92A::CUFC//0, :16S:FIA :16S:TRADDET :16R:FIAC :36B::SETT//FAMT/ ,0000 :36B::SETT//AMOR/ ,2500 :97A::SAFE//TEST :16S:FIAC :16R:SETDET :22F::SETR//FCTA :95P::PSET//FRNYUS33 :95R::DEAG/USFW/ :97A::SAFE//BROKERMBS :95R::SELL/DTCYID/ :95R::ACCW/USFW/ :95P::BENM//BICAUS33XXX :97A::CASH// :19A::SETT//USD ,65 :19A::DEAL//USD ,96 :19A::ACRU//USD23209,

17 :19A::ANTO//NUSD187271,18 :16S:SETDET F. Factr Update Example Rebk DTC Pst Settlement :16R:GENL :20C::SEME//REBOOK :23G:NEWM :16R:LINK :20C::PREV//ORIGINAL TRADE :16S:LINK :16S:GENL :16R:TRADDET :98A::SETT// :98A::TRAD// :90A::DEAL//PRCT/104, :35B:ISIN US CORPORATE BOND :16R:FIA :98A::MATU// :98A::ISSU// :92A::INTR//7, :92A::CUFC//0, :16S:FIA :16S:TRADDET :16R:FIAC :36B ::SETT//FAMT//100000,0000 :36B::SETT//AMOR/60000,0000 :97A::SAFE//TEST ACCOUNT :16S:FIAC :16R:SETDET :22F::SETR//FCTA :95P::PSET//DTCYUS33 :95R::REAG/DTCYID/ :95R::BUYR/DTCYID/ R ::ACCW/DTCYID/<DTC Identifier>) :19A::SETT//USD63938,75 :19A::DEAL//USD62700,00 :19A::ACRU//USD1238,

18 :19A::ANTO//NUSD :16S:SETDET