Chapter 5: Asset Servicing Flashcards
Income payments- listed companies:
- Dividend payments are not guaranteed
- If paid typically twice a year in the UK
- Bonds pay coupons both Government and Corporate
What is a CUM-DIV PERIOD?
Buyer of security will be entitled to receive the next dividend payment
EX-DIV Period is when?
Buyer of the security will not be entitled to the next dividend payment.
Entitlement to next dividend payment remains with the seller
What day is a “Record date”?
Friday
Is it possible to buy/sell dividend entitlements as part of tax planning?
YES
When are income payments- CIS paid and who are they calculated by?
They are commonly paid half yearly and are calculated by manager on an accounting reference date.
Who are income payments paid by ?
Paid by trustee/depository to nominee
Equalisation rate calculation
Aggregate income included in the creation price of units issued or re-issued during the accounting period / total number of units purchased by investors during the period
Fund mergers: what information is required for a meeting of holders?
- Rationale for merger
- Date of meeting and proposed merger
- First date of dealing in new merged fund
For a UCITS scheme holders must receive info on: in terms of mergers
- Rights before and after merger
- Comparison of charges
- Whether after the merge, the fund will be rebalanced
- Date of merger
Company mergers is where ?
- Where two companies combine
- Typically by using a share swap
What might a bidder offer in company takeovers?
- Cash
- Securities
- Both
In an exchange only shares are offered- there is no cash alternative
How may a Scrip dividend be offered?
- May be offered as new shares (scrip) rather than cash.
- Scrip is a mandatory event with options
Definition of a DRIP (Dividend re-investment programme)
Cash dividend used to purchase shares in the market
What is a bonus issue?
Free of shares, and lowers an expensive share price
What do stock splits do?
Split same effect as bonus
What is a Rights issue?
Shareholders are offered the right to buy shares in proportion to existing holdings. Shares are offered at a discount.
Alternative options of Rights issue to shareholder?
- Take up rights
- Sell rights
- Splitting
- Lapse (do nothing)
What corporate action classes are there?
Mandatory and Elective
What pricing are CIS based on:
- NAV of fund calculated by manager
- Feed through to the platform via the messaging services (e.g. EMX or Calastone).
Pricing of Exchange traded products.
Typically supplied by the exchange to data providers e.g. Bloomberg who feed the platforms
Pricing errors (FCA Rules)
Pricing errors that disadvantage investors must be corrected and any loss including lost of interest must be restored.
How do you monitor potential errors?
Regular tolerance checking
Off platform assets can
- Either allow the financial adviser to edit the price free text or
- Pay for third party data to provide the information
Mandatory and elective corporate actions
Memorise table
How are details entered in a ‘Notepad’ option?
Where the details are entered as free text and the adviser is responsible for manually updating valuations
When is a notepad option is typically used?
Where the assets are illiquid and or are rarely traded.
Three broad categories of corporate actions:
• Income
• Structural changes of an asset
• Matters on which each registered investor is asked to give their opinion
Example of structural changes to the asset held?
• mergers
• conversions
• rights issue
• split issue
• closure of a fund
How often are dividends paid in the UK and how are often in the US
In the UK, dividends are usually paid twice a year (bi annual) and in the US they are paid quarterly.
When a dividend is announced, it will specify a ?
EX-dividend date
What happens on the Ex dividend date?
The value of the share will decrease by the value of the dividend as purchases on, or after this date will not be entitled to receive the dividend.
What is the coupon rate?
Is a percentage of the bonds face value
When a coupon is paid, what will this depend on?
The rules laid down in the bonds prospectus
Under COLL, up to how long is allowed between the accounting reference date and the actual payment date, to enable validation and processing?
4 months
Ex distribution is used to note?
That the unit price excludes the income payment that will be paid out in the following months.
AFMs can enable investors to receive the value of distribution in what three ways?
• Income units/classes
• accumulation
• fund distributions
What occurs with fund distributions?
Additional units are being bought with the distribution payment.
What are units/shares purchased during the accounting period referred to ?
Group 2 units/shares
Units/shares already held at the beginning of the period are referred to as ?
Group 1 unit/shares
Which group receives the smaller amount of taxable income?
Group 2 units/shares
Will holders of group 1 and 2 units/shares receive the same value of distribution?
Yes
What is a receipts basis for income
income arising on an investment will be made available to the investor only once the platform provider has received the income amount and disaggregated it
What is a contractual basis for income
the platform will guarantee to provide the income amount to the client as of the official pay date of the dividend (regardless of whether the income sum has actually been received).
One reason for why a fund merger may occur?
• Existing funds may be too small to operate efficiently
• changes in investor sentiment might mean that the investment objectives of separate funds no longer match to a target market
Can a investor continue with their existing holding when a merger occurs?
No, that asset will simply cease to exist when the corporate actions takes effect.
What arises when a company is changing its capital structure?
Bonus issue and stock split
Why would a stock split occur?
A company wants to reduce the current price of each share
What is a scrip dividend
Additional shares are paid to the shareholder instead of a cash dividend
When a structural event affects an asset that is held by or available on a platform, the platform needs to start by?
Making any relevant updates to its asset master file, to ensure reflection of new/continuing asset and that no instruction will be issued in respect of an asset that no longer exists.
What is another occurrence that must take place for mergers?
The platform should ensure that their custodian postion reflects the new holdings, and the CASS 6 asset reconciliation performed.
What is proxy voting?
When a platform operator receive notice of a meeting, it must pass on the details to investors and their advisers and ask for their instructions before attending the meeting and voting on their behalf.
What is an ‘election’?
Each investor can make their own decisions as to how their holding will be impacted
What are examples of elective actions:
• drip dividends
• right issue
• class action
What is ‘tail swallowing’
Involves selling the portion of rights necessary to pay for the rights take up. So investors gain new shares without paying with their own money.
Disadvantage of ‘tail swallowing’
The investors proportionate ownership in the company will reduce
What does a class action do?
Permits shareholders to group together and seek legal proceedings against a company when they all share the same issue.
What is a benefit of a class action?
Enables many small shareholders to litigate claims that would be prohibitively expensive for an individual or a few of them to prosecute alone.
For example, the platform might identify any cases where the following scenarios arise, in order that a manual check can be performed to confirm that the price file received was correct:
• Static/stale prices - ie, cases where today’s price is the same as the price from the prior day.
• Large movements
Pricing errors is generally used to refer what situation?
Where a AFM or CIS fund has incorrectly valued a fund at a given valuation point.
FCA considers what exceeding percentage as an error?
0.5% of the price material
When compensation is given for pricing errors, who first receives this?
Platform operator who then forwards to underlying clients
The platform must, therefore, consider how prices of such off assets might be obtained, as it will not wish to subject to increased risk of a reliable price source cannot be identified. What are the two broad approaches?
• notepad option
• live version
What is the notepad option typically used for?
Illiquid rarely traded assets such as property or holdings in private companies
What is the live version often used for?
Value instruments traded on Oversees stock exchanges
Record date is also known as?
Books closed day
What is equalisation?
The concept designed to recognise that investors will have effectively ‘bought’ a portion of the income received- which has tax implications.
What are mandatory corporate actions?
Requires no intervention from shareholders/bond holders.
Voluntary corporate action requires?
Shareholders to make a decision.
What is a corporate action by which a company splits off a section to be an independent company and issue shares in that new company?
De merger
How will a platform typically meet its obligation to identify any errors made in the processing of a bonus issue?
By performing periodic asset reconciliations
Live version explained:
Where the platform operator does not have the capacity to execute transactions (probably because of very little client demand), but does have the capacity to capture price information.
Coupons will be paid in relation to the?
Bond prospectus
In relation to income payments, will equity and bond holders known in advanced?
Only bond holders will know
The contract note for a bond purchase/sale will distinguish between what?
The capital value of the bond itself and the value of the interest already accrued during the current coupon period.
Collective investment schemes earn income from what assets?
Held within in the scheme property- primarily equities and bonds.
Most funds will also have at least one interim accounting references date, enabling what?
A portion of the income to be distributed more frequently then annually.
The equalisation amount is deemed by who to be what?
HMRC to be a return of capital rather than earned income.
Which actions affects all shareholders drip or scrip?
Scrip
Advantage of drip dividend?
Broking chargers are reduced by being part of the company bulk transaction.
Large movements is where?
The percentage movement in the price exceeds a particular tolerance defined by the platform
