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International Securities Lending Association

SFTR Corporate Actions Working Group #6

James Langlois, Lewis Nicholson

18 Sep 2019

SFTR Corporate Actions: Approach for this Working Group

1- Plan and Scope of the SFTR Corporate Actions Working Group 2- Meetings to Date and Pending 3- Progress Review ✓ Corporate Actions Universe ✓ Cluster Analysis ✓ General Industry and SFTR Specific Issue Analysis 4- Future Activities

• Continue CA Issue Analysis – next steps
• Best Practice Draft
• SFTR Report Testing
• Connect with ESMA & Wider Industry

SFTR Corporate Actions: Overall Scope and Plan

1- Define Corporate Actions Universe (Q2 2019)

• Form a distinct list of all CAs
• Align with the ISO 15022 (SWIFT) and 20022 (STP) standards
• Determine attributes and effects of each CA on SFTs

2- Stratify the CAs into Clusters by their effects on SFTs & booking models (Q2

2019)

• Review groups of CAs which can be processed similarly
• Confirm CAs which have no material effect on SFTs
• Confirm booking models for clusters
• Define the SFTR reports that each Cluster of CAs affects

3- Agree an SFTR related Best Practice for each CA Cluster (Q3 2019)

• Reach agreement on specific booking models which enable SFTR compliant reporting
• Determine universal procedures (Best Practice) for processing and communicating CAs on SFTs

4- Connect the SFTR CA WG’s output with the wider industry discussion (Q4 2019)

• Contribute to the Securities Lending industry’s general policy (beyond of SFTR)

SFTR Corporate Actions: Timeline

Workshops, Surveys, Direct Member Firm Meetings Reaching out for Industry-wide best practice acceptance SFTR Report Testing, Developing Solutions not defined in 2019, Support for SFTR GO LIVE

Membership & Responsibilities Objectives & Scope Methodology & Plan Baselining Information

JUL 19 OCT 19 JAN 20 APR 20 APR 19

1-2-1s

SFTR Corporate Actions: Meetings Q2 & Q3 2019

SFTR Corporate Actions: Working Group #3/4

Stratify the CAs into Clusters by their effects on SFTs & booking models

• Review groups of CAs which can be processed similarly
• Review CA Clusters as proposed in SFTR CA WG #2
• Discuss impact of CA types in the CA Cluster to the SFT
• Conducted a survey Questionnaire with 13 firm’s responses
• Agreed CAs which have no material effect on SFTs (39)
• Information Only/ Non-Economic CAs (27)
• Cash/ Economics outside of the SFT (11)
• Agreed CAs which cause direct downstream effects on SFTR

reports and must therefore be aligned by best practice:

Cluster # of CAs Full or Partial Return 8 Full Return 5 Addition Sec on Loan 12 Return and New Trade 13 38

SFTR Corporate Actions: Working Group #5 & Discussion

Agree an SFTR related Best Practice for each CA Cluster (Q3 2019)

• Reach agreement on specific booking models which enable SFTR compliant reporting
• Determine universal procedures (Best Practice) for processing and communicating CAs on SFTs

Full and Partial Returns Cluster

• Effects on the SFTR reports agreed
• Booking activities reviewed for each CA type
• Corporate Action issues identified

Future Activities Agreed

• Resolution to define all CA issues both SFTR and general

SFTR Corporate Actions: Information Only - Cluster

ISO Code ISO Name ISO Description

Cash Movement (Y/N)

SFT Booking (Y/N) EQ FI Status

ACCU Accumulation

Funds related event in which the income (for example accumulation units) that accrues during an accounting period is retained within the fund instead of being paid away to investors. The retained income is nonetheless deemed to have been distributed to investors for tax purposes.

N N Y Y Corum Agreed ACTV Active Trading Status

Trading in the security has commenced or security has been re-activated after a suspension in trading.

N N Y Y Corum Agreed BMET Bond Holder Meeting

Physical meeting of bond holders.

N N N Y Corum Agreed BRUP Bankruptcy

Legal status of a company unable to pay creditors. Bankruptcy usually involves a formal court

• ruling. Securities may become valueless.

N N Y Y Corum Agreed CAPI Capitalisation

Increase of the current principal of a debt instrument without increasing the nominal value. It normally arises from the incorporation of due but unpaid interest into the principal. This is commonly done by increasing the pool factor value, for example, capitalisation, and negative amortisation.

N N Y Y Corum Agreed CERT Non USTEFRAD Certification

Non-US beneficial owner certification requirement for exchange of temporary to permanent notes.

N N N Y Corum Agreed CHAN Change

Information regarding a change further described in the corporate action details.

N N Y Y Corum Agreed CLSA Class Action Proposed Settlement

Situation where interested parties seek restitution for financial loss. The security holder may be

• ffered the opportunity to join a class action proceeding and would need to respond with an

instruction.

N N Y Y Corum Agreed CMET Court Meeting

Announcement of a meeting at a Court.

N N Y Y Corum Agreed CREV Credit Event

An occurrence of credit derivative for which the issuer of one or several underlying securities is unable to fulfill his financial obligations (as defined in terms and conditions).

N N Y Y Corum Agreed DLST Trading Status Delisted

Security is no longer able to comply with the listing requirements of a stock exchange and is removed from official board quotation.

N N Y Y Corum Agreed DSCL Disclosure

Requirement for holders or beneficial owners to disclose their name, location and holdings of any issue to the issuer.

N N Y Y Corum Agreed

SFTR Corporate Actions: Information Only - Cluster

ISO Code ISO Name ISO Description

Cash Movement (Y/N)

SFT Booking (Y/N) EQ FI Status

EXTM Maturity Extension

As stipulated in a bond's Terms and Conditions, the issuer or the bond-holder may prolong the maturity date of a bond. After extension, the security may differ from original issue (new rate or maturity date). May be subject to bondholder's approval.

N N N Y Corum Agreed INCR Increase In Value

Increase in the face value of a single security. The number of circulating securities remains unchanged.

N N Y Y Corum Agreed MEET General Meeting

Annual general meeting.

N N Y Y Corum Agreed MTNG Securities Holders Meeting

Ordinary or annual or extraordinary or special general meeting.

N N Y Y Corum Agreed OMET Ordinary General Meeting Ordinary general meeting. N N Y Y Corum Agreed OTHR Other Event

Other event, use only when no other event type applies, for example, a new event type.

N N Y Y Corum Agreed PLAC Place Of Incorporation

Changes in the state of incorporation for US companies and changes in the place of incorporation for foreign companies. Where shares need to be registered following the incorporation change, the holder(s) may have to elect the registrar.

N N Y Y Corum Agreed REDO Redenomination

Event by which the unit (currency and/or nominal) of a security is restated, for example, nominal/par value of security in a national currency is restated in another currency.

N N y y Corum Agreed REMK Remarketing Agreement

Purchase and sale of remarketed preferred equities/bonds through the negotiation of interest rate between the issuers and the holders.

N N Y Y Corum Agreed SMAL Smallest Negotiable Unit Modification of the smallest negotiable unit of shares in order to obtain a new negotiable unit. N N Y Y Corum Agreed SUSP Trading Status Suspended Trading in the security has been suspended. N N Y Y Corum Agreed TNDP Tax On Non-Distributed Proceeds

Taxable component on non-distributed proceeds, for example, Australian deemed income or US 871m income regulation.

N N Y Y Corum Agreed TREC Tax Reclaim

Event related to tax reclaim activities.

N N Y Y Corum Agreed WTRC Withholding Tax Relief Certification

Certification process for withholding tax reduction or exemption based on the tax status of the holder.

N N Y Y Corum Agreed XMET Extraordinary or Special General Meeting

Extraordinary or special general meeting.

N N Y Y Corum Agreed

SFTR Corporate Actions: Information Only - Cluster

Effects on the SFTR reports:

• 1. Standard SFT conventions as dictated by the Global Master Securities Lending Agreement are

followed for all of the activities relating to the processing of these Corporate Actions.

• 2. None of the Information Only Cluster Corporate Actions require changing the existing SFT

booking or necessitate a new SFT booking.

• 3. As none of the Information Only cluster CAs will necessitate a new SFT booking, there will be no

SFTR issues related to new trades i.e. fractional ratios, UTI generation, etc.

• 4. As value of the security on loan will may change, collateral will move to reflect the new value.

These are business as usual changes, which will be reported via the daily COLU (Collateral Update) report.

SFTR Corporate Actions: Economic Outside of Trade - Cluster

ISO Code ISO Name ISO Description

• 1. Mand Cash Distribution
• 2. Mand Securities Distribution
• 3. Mand Reorganisation
• 4. Mand Reorg w/ Options
• 5. Voluntary Reorganisation
• 6. Information

Cash Movement (Y/N)

SFT Booking (Y/N)

EQ FI Status CAPD Capital Distribution

The Corporate event pays shareholders an amount in cash issued from the Capital account. There is no reduction to the face value of a single share (or the share has no par value). The number of circulating shares remains unchanged. Mandatory Cash Distribution

Y N Y Y Corum Agreed CAPG Capital Gains Distribution

Distribution of profits resulting from the sale of company assets, for example, Shareholders of Mutual Funds, Unit Trusts, or Sicavs are recipients of capital gains distributions which are often reinvested in additional shares of the fund. Mandatory Cash Distribution

Y N Y Y Corum Agreed CONS Consent

Procedure that aims to obtain consent of holder to a proposal by the issuer or a third party without convening a meeting. For example, consent to change the terms of a bond. Information

Y N Y Y Corum Agreed DECR Decrease In Value

Reduction of face value of a single share or the value of fund assets. The number of circulating shares/units remains unchanged. This event may include a cash payout to holders. Mandatory Cash Distribution

Y N Y Y Corum Agreed DRCA Cash Distribution From NonEligible Securities Sale

Distribution to shareholders of cash resulting from the selling of non-eligible securities, for example, in the frame of a depositary receipt program. Mandatory Cash Distribution

Y N Y Y Corum Agreed DVCA Cash Dividend

Distribution of cash to shareholders, in proportion to their equity holding. Ordinary dividends are recurring and regular. Shareholder must take cash and may be offered a choice of currency. Mandatory Cash Distribution

Y N Y N Corum Agreed DVOP1 Dividend Option

Distribution of a dividend to shareholders with a choice of benefit to receive. Shareholders may choose to receive shares or cash. To be distinguished from DRIP as the company creates new share capital in exchange for the dividend rather than investing the dividend in the market. Mandatory Reorganisation with Options

Y Y Y Y Corum Agreed INTR Interest Payment

Interest payment distributed to holders of an interest bearing asset. Mandatory Cash Distribution

Y N Y Y Corum Agreed PPMT Instalment Call

Instalment towards the purchase of equity capital, subject to an agreement between an issuer and a purchaser. Mandatory Cash Distribution

Y N Y Y Corum Agreed PRED Partial Redemption With Pool Factor Reduction

Securities are redeemed in part before their scheduled final maturity date without reduction of the nominal value of the securities. This is commonly done by pool factor reduction. Mandatory Reorganisation

Y N Y Y Corum Agreed PRII Interest Payment With Principal

An event which consists of two components, the decrease of the amortized value of a pool factor security and an interest payment. Mandatory Cash Distribution

Y N Y Y Corum Agreed SHPR Shares Premium Dividend

This corporate event pays shareholders an amount in cash issued from the shares premium reserve. It is similar to a dividend but with different tax implications. Mandatory Cash Distribution

Y N Y Y Corum Agreed

SFTR Corporate Actions: Economic Outside of Trade - Cluster

LENDER BORROWER Collateral Securities Economic outside of a trade on a security which is lent against collateral. Corporate Action Effect Economic outside of a trade on a security which is the Collateral, against a loaned security. LENDER BORROWER Collateral Securities Corporate Action Effect

Collateral is returned in line with drop in value of the security on loan Dividend payment is received and passed to the lender Dividend payment is received and passed to the borrower More Collateral is sent to cover the decrease in value of the security collateral

SFTR Corporate Actions: Economic Outside of Trade - Cluster

Effects on the SFTR reports:

• 1. Standard SFT conventions as dictated by the Global Master Securities Lending Agreement are

followed for all of the activities relating to the processing of these Corporate Actions

• 2. All Economic Outside of the Trade cluster Corporate Actions require a cash payment which

does not affect the existing SFT booking or necessitate a new SFT booking

• 3. As none of the Economic Outside of the Trade cluster CAs will necessitate a new SFT booking,

there will be no SFTR issues related to new trades i.e. fractional ratios, UTI generation, etc.

• 4. As value of the security on loan will likely change, collateral will move to reflect the new
• value. These are business as usual changes, which will be reported via the daily COLU

(Collateral Update) report

SFTR Corporate Actions : Full or Partial Returns - Cluster

ISO Code ISO Name ISO Description

• 1. Mand Cash Distribution
• 2. Mand Securities Distribution
• 3. Mand Reorganisation
• 4. Mand Reorg w/ Options
• 5. Voluntary Reorganisation
• 6. Information

Cash Movement (Y/N)

SFT Booking (Y/N)

EQ FI Status DFLT Bond Default Failure by the company to perform obligations defined as default events under the bond agreement and that have not been remedied. Mandatory Reorganisation N Y N Y Corum Agreed MCAL Full Call Redemption of an entire issue outstanding of securities, eg, bonds, preferred equity, funds, by the issuer or its agent, for example, asset manager,before final maturity. Mandatory Reorganisation Y Y Y Y Corum Agreed ODLT Odd Lot Sale Purchase by Issuer Sale or purchase of odd-lots to/from the issuing company, initiated either by the holder of the security or through an

• ffer made by the issuer. Initiated by Issuer

Voluntary Reorganisation Y Y Y Y Corum Agreed REDM Final Maturity Final maturity of a security. The redemption of an entire issue outstanding of securities, for example, bonds, preferred equity, funds, by the issuer or its agent, for example, asset manager, at final maturity. Mandatory Reorganisation Y Y Y Y Corum Agreed WRTH Worthless Booking out of valueless securities. Mandatory Reorganisation N Y Y Y Corum Agreed

SFTR Corporate Actions : Full or Partial Returns - Cluster

ISO Code ISO Name ISO Description

• 1. Mand Cash Distribution
• 2. Mand Securities Distribution
• 3. Mand Reorganisation
• 4. Mand Reorg w/ Options
• 5. Voluntary Reorganisation
• 6. Information

Cash Movement (Y/N)

SFT Booking (Y/N)

EQ FI Status DRAW Drawing

Securities are redeemed in part before the scheduled final maturity date. It is done without any pool factor reduction. The redemption is reflected in a debit of the face amount (FAMT). Drawing is

Mandatory Reorganisation Y Y Y Y Corum Agreed PCAL Partial Redemption Without Pool Factor Reduction

Securities are redeemed in part before their scheduled final maturity date with reduction of the nominal value of the securities. The outstanding amount of securities will be reduced proportionally. It is done without any pool factor

• reduction. The redemption is reflected in a debit of the face amount (FAMT).

Mandatory Reorganisation Y Y Y Y Corum Agreed PDEF Prefunding

Also called partial defeasance. Issuer has money set aside to redeem a portion of an issue and the indenture states that the securities could be called earlier than the stated maturity.

Mandatory Reorganisation Y Y Y Y Corum Agreed TEND Tender

Offer made to holders by a third party, requesting them to sell (tender) or exchange their securities. When a tender reaches the squeeze out stage, it will be mandatory.

Mandatory Reorganisation Y Y Y Y Corum Agreed TEND2 Takeover for shares

Offer made to holders by a third party, requesting them to sell (tender) or exchange their securities. When a tender reaches the squeeze out stage, it will be mandatory.

Mandatory Reorganisation Y Y Y Y Corum Agreed BIDS Repurchase Offer

Repurchase offer/Issuer Bid/Reverse Rights. Offer to existing holders by the issuing company to repurchase its own securities. The objective of the offer is to reduce the number of outstanding securities.

Voluntary Reorganisation N Y Y Y Corum Agreed BPUT Buy Back

Early redemption of a security at the election of the holder subject to the terms and condition of the issue with no reduction in nominal value.

Voluntary Reorganisation Y Y Y Y Corum Agreed DTCH Dutch Auction

An action by a party wishing to acquire a security. Holders of the security are invited to make an offer to sell, within a specific price range. The acquiring party will buy from the holder with lowest offer.

Voluntary Reorganisation Y Y Y Y Corum Agreed

SFTR Corporate Actions: Full or Partial Returns - Cluster

LENDER BORROWER Collateral Securities Full or partial return on a security which is lent against collateral. Corporate Action Effect Full or partial return on a security which is the Collateral, against a loaned security. LENDER BORROWER Collateral Securities Collateral Corporate Action Effect Some form of bilateral return Some form of bilateral exchange

SFTR Corporate Actions: Full or Partial Returns - Cluster

Effects on the SFTR reports:

• 1. Standard SFT conventions as dictated by the Global Master Securities Lending Agreement are

followed for all of the activities relating to the processing of these Corporate Actions

• 2. All Full or Partial Returns Cluster Corporate Actions require either:
• Full closing out of an SFT to be reported via an ETRM (Termination / Early Term)
• Partial close out of an SFT to be reported via a MODI (Modification)
• 3. None of the Full or Partial Returns Cluster CAs will necessitate a new SFT booking.
• There will be no SFTR issues related to new trades i.e. fractional ratios, UTI generation, etc.
• 4. Some of these CAs will require an exchange (or reduction) of the Collateral if the collateral security is

the subject of the Corporate Action. These will be reported via the daily COLU (Collateral Update) report.

SFTR Corporate Actions: Full or Partial Returns - Cluster

ISO Code ISO Name ISO Description

• 1. Mand Cash Distribution
• 2. Mand Securities Distribution
• 3. Mand Reorganisation
• 4. Mand Reorg w/ Options
• 5. Voluntary Reorganisation
• 6. Information

Cash Movement (Y/N)

SFT Booking (Y/N)

EQ FI BONU Bonus Issue

Bonus, scrip or capitalisation issue. Security holders receive additional assets free of payment from the issuer, in proportion to their holding.

Mandatory Reorganisation Y Y Y Y LIQU Liquidation Dividend

Distribution of cash, assets or both. Debt may be paid in order of priority based on preferred claims to assets specified by the security.

Mandatory Reorganisation Y Y Y Y SOFF Spin Off

Spin off. A distribution of subsidiary stock to the shareholders of the parent company without a surrender of shares. Spin off represents a form of divestiture resulting in an independent

• company. Eg. demerger, distribution, unbundling.

Mandatory Reorganisation Y Y Y Y DRIP Dividend Reinvestment

Dividend payment where holders can keep cash or have the cash reinvested in the market by the issuer into additional shares in the issuing company. To be distinguished from DVOP as the company invests the dividend in the market rather than creating new share capital in exchange for the dividend.

Mandatory Reorganisation with Options Y Y Y Y DVOP2 Dividend Option

Distribution of a dividend to shareholders with a choice of benefit to receive. Shareholders may choose to receive shares or cash. To be distinguished from DRIP as the company creates new share capital in exchange for the dividend rather than investing the dividend in the market.

Mandatory Reorganisation with Options Y Y Y Y DVSC Scrip Dividend

Dividend or interest paid in the form of scrip - the company creates new share capital in exchange for the dividend.

Mandatory Reorganisation with Options N Y Y Y RHTS Rights Issue

Offer to holders of a security to subscribe for additional securities via the distribution of an intermediate security. Both processes are included in the same event. *please see RHDI and EXRI

Mandatory Reorganisation with Options N Y Y Y DVSE Stock Dividend

Dividend paid to shareholders in the form of equities of the issuing corporation.

Mandatory Securities Distribution Y Y Y Y PINK PayInKind

Interest payment, in any kind except cash, distributed to holders of an interest bearing asset.

Mandatory Securities Distribution N Y N Y RHDI Intermediate Securities Distribution

The distribution of intermediate securities that gives the holder the right to take part in a future event.

Mandatory Securities Distribution N Y Y Y COOP Company Option

A Company Option may be granted by the company, allowing the holder to take up shares at some future date(s) at a pre arranged price in the company.

Voluntary Reorganisation Y Y Y Y PRIO Priority Issue

Form of open or public offer where, due to a limited amount of securities available, priority is given to existing shareholders.

Voluntary Reorganisation Y Y Y Y

SFTR Corporate Actions : Full or Partial Returns - Cluster

LENDER BORROWER Collateral A-Shares Corporate Action Effect Additional Security on Loan CA on a security which is the Collateral, against a loaned security. LENDER BORROWER Collateral A Securities Corporate Action Effect Additional Security on Loan CA on a security which is lent against collateral. Y-Shares Collateral Y

SFTR Corporate Actions: Additional Security on Loan - Cluster

Effects on the SFTR reports:

• 1. Standard SFT conventions as dictated by the Global Master Securities Lending

Agreement are followed for all of the activities relating to the processing of these Corporate Actions

• 2. All Additional Security on Loan Cluster Corporate Actions require:
• A new SFT to be booked (in addition to the existing trade) which is reported

under a NEWT template

• 3. Some of these CAs may trigger a resulting value change of the SFT - these will be

reported via the daily COLU (Collateral Update) report.

SFTR Corporate Actions: Return & New Trade - Cluster

ISO Code ISO Name ISO Description

• 1. Mand Cash Distribution
• 2. Mand Securities Distribution
• 3. Mand Reorganisation
• 4. Mand Reorg w/ Options
• 5. Voluntary Reorganisation
• 6. Information

Cash Movement (Y/N)

SFT Booking (Y/N)

EQ FI CONV1 Conversion

Conversion of securities ( generally convertible bonds or preferred shares) into another form of securities ( usually common shares) at a pre-stated price/ ratio. (initiated by the issuer)

Mandatory Reorganisation N Y Y Y DETI Detachment

Separation of components that comprise a security, for example, usually units comprised of warrants and bond or warrants and equity. Units may be broken up at the request of the security holder or based

• n market convention.

Mandatory Reorganisation N Y Y Y EXOF1 Exchange

Always initiated by the issuer. Exchange of holdings for other securities and/or cash. The exchange can be either mandatory or voluntary involving the exchange of outstanding securities for different securities and/or cash. For example "exchange offer", "capital reorganisation" or "funds separation".

Mandatory Reorganisation Y Y Y Y PARI Pari Passu

Occurs when securities with different characteristics, for example, shares with different entitlements to dividend or voting rights, become identical in all respects, for example, pari-passu or assimilation.

Mandatory Reorganisation N Y Y Y SPLF Stock Split

Increase in a corporation's number of outstanding equities without any change in the shareholder's equity or the aggregate market value at the time of the split. Equity price and nominal value are reduced accordingly.

Mandatory Reorganisation N Y Y Y SPLR Reverse Stock Split

Decrease in a company's number of outstanding equities without any change in the shareholder's equity or the aggregate market value at the time of the split. Equity price and nominal value are increased accordingly.

Mandatory Reorganisation N Y Y Y EXRI Call On Intermediate Securities

Call or exercise on nil paid securities or intermediate securities resulting from an intermediate securities distribution (RHDI). This code is used for the second event, when an intermediate securities' issue (rights/coupons) is composed of two events, the first event being the distribution of intermediate securities.

Mandatory Reorganisation with Options Y Y Y Y

SFTR Corporate Actions: Return & New Trade - Cluster

ISO Code ISO Name ISO Description

• 1. Mand Cash Distribution
• 2. Mand Securities Distribution
• 3. Mand Reorganisation
• 4. Mand Reorg w/ Options
• 5. Voluntary Reorganisation
• 6. Information

Cash Movement (Y/N)

SFT Booking (Y/N)

EQ FI EXWA Warrant Exercise

Option offered to holders to buy (call warrant) or to sell (put warrant) a specific amount of stock, cash,

• r commodity, at a predetermined price, during a predetermined period of time (which usually

corresponds to the life of the issue).

Mandatory Reorganisation with Options Y Y Y Y MRGR Merger

Exchange of outstanding securities, initiated by the issuer which may include options, as the result of two or more companies combining assets, ie an external third party company. Cash payment may accompany equity exchange. Mandatory Reorganisation without Options

Mandatory Reorganisation with Options Y Y Y Y ATTI Attachment

The combination of different security types to create a unit. Units are usually comprised of warrants and bond or warrants and equity. Securities may be combined at the request of the security holder or based on market convention.

Mandatory Securities Distribution N Y Y Y CONV2 Conversion Option

Conversion of securities ( generally convertible bonds or preferred shares) into another form of securities ( usually common shares) at a pre-stated price/ ratio. (initiated by the investor)

Voluntary Reorganisation N Y Y Y EXOF2 Exchange (Voluntary)

Always initiated by the issuer. Exchange of holdings for other securities and/or cash. The exchange can be either mandatory or voluntary involving the exchange of outstanding securities for different securities and/or cash. For example "exchange offer", "capital reorganisation" or "funds separation".

Voluntary Reorganisation Y Y Y Y NOOF Non Official Offer

Offers that are not supervised or regulated by an official entity and being offered by a party, for example a broker, usually at a discount price, for example broker offer, mini-tender, mini odd lot offer

• r third party offer.

Voluntary Reorganisation Y Y Y Y

SFTR Corporate Actions: Return & New Trade - Cluster

LENDER BORROWER Collateral A Shares Corporate Action Effect Return and new trade on a security which is the Collateral, against a loaned security. LENDER BORROWER Collateral A Securities Collateral Corporate Action Effect Some form of bilateral return Some form of bilateral exchange Z Shares Collateral Z

SFTR Corporate Actions: Return & New Trade - Cluster

Effects on the SFTR reports:

• 1. Standard SFT conventions as dictated by the Global Master Securities Lending

Agreement are followed for all of the activities relating to the processing of these Corporate Actions

• 2. All Return and New Trade Cluster Corporate Actions require either:
• Full closing out of an SFT to be reported via an ETRM (Termination / Early Term)
• Partial close out of an SFT to be reported via a MODI (Modification)
• A new SFT to be booked (in addition to the existing trade) which is reported

under a NEWT template

• 3. Some of these CAs may trigger a resulting value change of the SFT - these will be

reported via the daily COLU (Collateral Update) report

SFTR Corporate Actions: Specific Issue Analysis

General Industry Issues SFTR Specific Issues

• Fractional Rounding
• Final Maturities
• SSIs Exchange
• Netting of Cash Payments
• Disbursement of Securities Post CA
• Omni Bookings
• Booking Dates
• UTIs for CA bookings
• Non-Tradable Securities
• Execution Timestamp

SFTR Corporate Actions: ESMA Guidance

ESMA makes reference to Corporate Actions under it’s May 2019 consultation paper: Guidelines for reporting under Articles 4 and 12 SFTR:

“31. The loans described above may be captured under the definition of margin lending to the extent that the loan is used to buy (and sell) securities which may or may not subsequently be posted as collateral. Many types of corporate actions that involve a corporate loan may potentially fall under the definition of an SFT, such as:

• a. Mergers, acquisitions and takeovers
• b. Joint Ventures
• c. Spin-offs and carve-outs
• d. Divestiture
• e. Reduction of capital
• f. Share buy-backs”

ISLA’s analysis and best practice considers this guidance.

SFTR Corporate Actions: ESMA Guidance

From the above statement and the otherwise complete lack of guidance on corporate actions it is clear that the regulator is not overly concerned with their reporting or processing.

• ESMA has not specified any reporting fields which could identify specific corporate

actions or events

• Nor do they require any flags which denote that an SFT activity is the downstream

consequence of a corporate action. Instead, what is clear from examination of the SFT Corporate Actions landscape is that the differences in processing these events (from one firm or type of firm to another) will cause these downstream two-sided reports to break for a number of reasons, as detailed in the Specific Issue Analysis section. Therefore a major objective of this working group is to define Best Practice which will ensure firms are prepared to distribute matching reports, even if their booking methods remain differing.

SFTR Corporate Actions: UTIs for CA bookings

Issue:

• Some Corporate Actions will require an Unique Trade Identifier to be assigned to

the new trade for SFTR reporting.

• This applies to all new trades which are then subsequently reported under a

NEWT message to the Trade Repository. Best Practice: ✓ The same practices applied to the creation of a UTI on the parent SFT trade, are to be applied to the corporate action. ✓ If a firm has created the UTI for the parent, they will be responsible for the UTI

• n the new corporate action effected trade.

✓ SUGGEST: The CA’s NEWT is enriched by the same process as the parent trade so there is not a bifurcated approach.

SFTR Corporate Actions: Omni Bookings

LENDER BORROWER FUND A OWNER FUND B FUND X

3,000 1,000 1,000 1,000

Issue:

• Often, corporate actions are booked at ‘block level’ where the individual funds split is not applied.
• This saves time if bookings are manual and is simpler as splits do not need to be calculated.
• When SFTR reporting is required, the block bookings will not match on Qty with the fund levels.

Best Practice: ✓ SFT’s Corporate actions lowest level detail must now be booked by all parties. ✓ Where allocations are not known and block booking can be used temporarily or no report can be sent until the split is clarified. ✓ However, all efforts should be made to book and report on time.

SFTR Corporate Actions: Non-Tradable Securities

Issue:

• ESMA have specified that ineligible or non-tradable securities (temporary lines

issued as a effect of the CA) are not to be reported the Trade Repositories.

• The greater percentage of firms do not book the ineligible securities in their

systems, accounting for them in other ways.

• Some firms do book the ineligible securities and if this is reported to the TR,

there will be a single sided trade. Best Practice: ✓ Firms should not be required to change their existing processes with regards to booking or representing non-tradable securities as a result of corporate actions. ✓ Firms that do book these ineligible securities should create a method for suppressing these temporary trades from being reported to the TR.

SFTR Corporate Actions: Execution Timestamp

Issue:

• All new trades will require a NEWT message to be sent which includes an Execution Timestamp

to be applied.

• The execution timestamp must be matched to within an hour to the timestamp on the
• pposite side.
• Currently (and foreseeably) CA bookings are created at the times that the separate CA teams

are processing them – in isolation from each other.

• There is no execution time for a CA booking because it is a downstream effect of an event and

not a new ‘trade’ – however these effects are reported as trades to the TR Best Practice: ✓ OPTION 1- All mandatory CA bookings are have the timestamp overwritten with a time as agreed between the two firms – e.g. this could be standardised to be 10:10:10 ✓ OPTION 2- The UTI generator also sends a timestamp to the other firm to enrich their trade with for reporting purposes.

SFTR Corporate Actions: Booking Dates

Issue:

• Typically, corporate actions for SFTs are either booked on the announced Ex-Date or Pay

Date, with the Trade and Settlement dates inline with the Pay Date of the event.

• As SFTR reporting is driven buy Trade Date (T+1) different firms booking different trade

dates will cause SFTR reports to be sent on different dates so they will not match.

Best Practice:

✓ Booking methodology to be agreed by discussion in following Working Groups. ✓ SUGGEST– Regardless of internal booking practices and decoupled from the legal opinion of when does a loan become a loan: one constant is that the Pay-date for all in-scope event types, for all markets, is the settlement date of the loan or SFT. ✓ The trade date determination becomes convoluted as it is variable dependant on the event type and/or market traded and can be either attributed to either the Record or Pay-Date. ✓ IF a firm usually books on EX or Record Date a forward-dated or pending trade could be booked at this time for Trade and Settlement date on the Pay Date.

SFTR Corporate Actions: Fractional Rounding

Issue:

• Differences in calculating the rounding of shares is one of the most frequently occurring issues

for CA teams to manage.

• This occurs where multiple fund positions require a ratio to be applied to the bonus share
• ffering but the number of shares held yields a fraction of a share.
• Firms must agree how to apply the bonus shares or compensate with cash for fractions.

Best Practice: ✓ Fractional positions; in most markets it is best practice for both the lender and borrower to round down when calculating entitlement positions. ✓ New share entitlements should be calculated on the whole lent position (per MDR), rather than per loan. ✓ Fractional cash should be paid based on the market price for the whole share or if minimal, bilateral agreement to write of this payment.

SFTR Corporate Actions: Final Maturities

Issue:

• Typically, bonds stop earning interest after they mature.
• Bonds are usually de-listed from the exchanges ahead of their expiry date.
• Issuers return the holders of the bonds their face value after expiry.
• The unwinding of an expired bond position could take weeks or even months

during which time the collateral (and capital) are tied up. Best Practice: ✓ SFTs with bonds and other expiring securities on loan (and as non-cash collateral) are closed out or exchanged a full week before de-listing date. ✓ It may not always be possible to do this due to market liquidity, holding an

• verall short position or other trading obligations, however a reduction of the

number of expired securities on loan would be very beneficial.

SFTR Corporate Actions: Cash SSIs Exchange

Issue:

• SSIs or Standing Settlement Instructions are account numbers and other details which have been

agreed in advance, and that are to be used every time a trade is made.

• Cash payments are sometimes paid late because the SSIs are not kept updated by counterparties or

have not been pre-agreed before settlement date.

• Updating SSIs can take more time than available on payment date as often firms require manual

processing: Fax and call backs as well as senior signoff.

• Some firms procedures insist on completing a call back for every cash payment, even if the account

and currency have already been paid multiple times on the same day. Best Practice: ✓ Firms must ensure that they have adequate processes and systems in place to manage SSIs to avoid the requirement for call backs to be performed. ✓ Counterparties should establish processes to monitor the SFTs trading on new accounts or currencies and agree cash SSIs ahead of payment date. ✓ Third party providers such as Pirum and Alert offer comprehensive services to exchange and confirm cash SSIs for subscribers.

SFTR Corporate Actions: Netting of Cash Payments

LENDER BORROWER Cash Collateral Capital Distribution

£10,000,001 £10,000,000

Issue:

• Netting of payments (in this context) represents the ability for a firm to agree to offset the cash collateral
• wed in return against the cash realised from a variety of corporate actions.
• From member firms survey, it seems to suggest that under 40% of counterparties are currently willing or

able to net these payments, this indicates that in the region of 15% of SFTs would qualify for this activity. Best Practice: ✓ Netting of payments can be a useful way to facilitate the balance of large positions, it is clearly advantageous to be able to perform, however there is extra operational risk and manual work to perform as different departments and accounts have to work in symmetry. ✓ Best practice is for firms to agree these nettings bilaterally and look to implement the ability in the future. Corporate Action Effect

SFTR Corporate Actions: Disbursement of Securities Post CA

Issue:

• Bonus shares and temporary transferable certificates are usually valued highest
• n the Ex-Date and then the price tends to slowly fall over the following days.
• Owners of parent shares not loaned (on an SFT) can sell their bonus shares on

Ex-date and to settle when the shares are received on payment date.

• SFT borrowers are unable to sell until payment date as they will not hold the

bonus shares until this time.

• SFT borrowers will therefore miss the opportunity to sell at the unusual optimal

market price achieved on an ex-date sale. Best Practice: ✓ We have no suggestions from the CA WG at this time.

SFTR Corporate Actions: Best Practice

Working Group Packs Best Practice PowerPoint

Best Practice Draft Document

Best Practice Proposal Doc European Standards SFTR CA Universe ECB Harmonisation Evolution of the best practice Internal ISLA Approval ISLA Member Firm Approval Global Standards European Industry Review Global Review Industry Adoption

SFTR Corporate Actions: Connect with ECB & Wider Industry

PASLA ECB RMA ISLA ALFI CASLA EFAMA

Pan Asia Securities Lending Association Risk Management Association European Central Bank Association of the Luxembourg Fund Industry Canadian Securities Lending Association European Fund and Asset Management Association

SFTR Corporate Actions: SFTR Report Testing

Firm 1 Firm 2 Simulated Bi-lateral Firm 1 Firm 2 Vendor Integration Platforms Firm 1 Firm 2 TR Integration Platforms TR There are three distinct phases of testing for the Corporate Actions bookings – we can explore if ISLA can facilitate some of the initial activity.

SFTR Corporate Actions: Next Steps for Best Practice

Proposed meeting structure for forming Best Practice for SFTR Specific Issues:

• Working Group 7: Mon 30 Sep
• Omni Bookings
• Booking Dates
• UTIs for CA bookings
• Working Group 8: Mon 7 Oct
• Non-Tradable Securities
• Execution Timestamp

ISLA MEMBER FIRMS IT / FO / OPS / COLLATERAL LEGAL / COMPLIANCE ISLA WORKING GROUP