Please find below a brief description of the Corporate Actions industry structure. It is a list of all market players that get involved in every Corporate Actions event. It can be read as a chain from the top to the bottom. In case of voluntary events, there will be a ripple effect from the top to the bottom and back again.
Accountants advise companies about when to start a Corporate Actions event. Often there will be management consultants and notaries involved as well. The Corporate Action Events suggested are often part of the wider Corporate Strategy.
Corporate Action events take place under the tax laws of the country where the company is domiciled. Tax needs to be paid on several corporate action and is often deducted at source. So local Tax Authorities will often get involved with the Corporate Action Event
Issuers of securities represent the DEMAND site of the financial markets. They issue securities that are being traded on exchanges where they are bought by investors who represent the SUPPLY side. It is at this level where Corporate Action events are being initiated.
This is where DEMAND and SUPPLY for money meet. Companies and governments issue securities that will be listed on the exchanges where they can be traded by investors. Corporate actions will have effects on the share price. Also, this is a central place where information about the corporate action often is published.
Although securities are listed and traded on exchanges, the securities are acually being held at Central Security Depositories (CSD’s). Every country has its own CSD (they can have more than one). It can be compared with what was called “the vault” in the past and where the securities where physically kept safe. It is just that almost all securities are now “dematerialised”, meaning that they have become positions in a computer system. First ring market participants will have safekeeping accounts and currency cash accounts with the CSD. A CSD’s currency accounts will be linked to the “national banks”.
This is where the total amount of outstanding securities are administrated. The total amount of outstanding shares should equal the amount of shares that are kept at CSD level. Any corporate action event needs to be reflected in the share register before it takes effect from a legal perspective.
The lead agent in any corporate action event is often a first ring direct market participant. Whenever an issuer of a security plans to start a corporate action, it will typically appoint a market player who will organise the whole process for them. Often, the lead agent is specialised in organising these projects and they will be able to give legal advise and advise about how best to organise the event. The lead agent will also take care of all the communication up and down the chain and they will take care of initiating all stock and cash movements as a result of the event. For some corporate actions like IPO’s and Rights Issues, companies will need somebody to “underwrite” the shares that don’t get subscribed to. In that way the company can be sure that the corporate action will be successful, because the risk is taken over by the underwriters. The underwriter will charge the company for taking over this risk.
These are platforms through which investors can trade anonymously with each other via a Central Counter Party (CCP). Clearing means that sell instructions are linked with buy instructions. So for example, if there are 10 investors who each want to sell 10 shares at EUR 25 and there is one investor who is willing to buy 100 shares for EUR 250 then the Central Counter Party will bring these together. Benefits of trading via CCP include: anonymity, no counter party risk, higher liquidity, possibility to do “netting” and cost effectiveness. These parties should in theory not have any stock positions for themselves and therefore Corporate Actions affect these parties mainly on open transactions.
This is the first layer that represents the DEMAND side of the money markets. Custodians are the first ring direct market participants that will have safekeeping- and currency accounts at the CSD. Custodians “service the assets of their clients”. This means they take care of the settlement in the accounts, collect the dividends and interest payments, organise stock lending and collateral, collect information and advise clients about corporate actions events, generate daily performance reports, facilitate forexing and organise the tax side of holding securities on behalf of their clients.
Typically, global custody clients can hold one safekeeping account with their global custodian in which they can hold securities from around the world. Attached to the safekeeping account they will have several currency cash accounts. Global Custodians will calculate all currencies back into one base currency (the currency of the client) and Global Custodians will make use of a network of Sub-Custodians at which they will have their accounts.
When trading on behalf of their customers, these companies act in the role as a broker and when trading on their own behalf these companies are acting in the role of a dealer. Often these companies are subsidiaries of investment banks. They will process Corporate Actions Events either for themselves or for the clients that they are trading for.
This is the array of services that investment banks offer to hedge funds. Services include; enabling borrowing of securities and cash in order to create leverage in their investments, clearing, settling, providing collateral, and netting.
A hedge fund is similar to any other fund, with the exception that it is not regulated. Therefore, they are able to use a larger amount of methods to invest, including more risky and complex ones. Because of the higher risks and complexity, hedge funds are only allowed to offer their service to professional investors. When corporate actions are concerned, they need to know how the corporate actions will affect the price of the security and carefully consider what decisions to make.
An investment bank is a bank that unlike commercial banks does not (primarily) take deposits from savers or companies. Their operations focus on trading in equities, bonds, derivatives, foreign exchange, comodities and giving advise about it to companies and investors. Their clients have a trading account with them. Since investment banks are directly holding huge quantities of securities, they need corporate actions specialists to analyse and process the events.
Fund managers often act on behalf of collective investment schemes or mutual funds. They sell fund units to their clients and with the money the buy securities in asset classes according to their investment stategy. The securities they buy are called the underlying securities. In that way the client can hold a relatively small amount of units but still be able to spread their risk. When Corporate Action Events take place in the underlying securities, the fund manger will make the decisions with regards to those events. Fund managers must have a thorough understanding about corporate actions, something for which the can hire the help of corporate actions analysts.
The entity appointed by the fund to maintain records of investors and account balances and transactions, to cancel and issue units, to process income distributions or accumulations.
Pension funds have got vast amounts of money that need investing. Often they will use external fund managers to do so, or they employ them inhouse. All corporate actions decisions taking place on the securities they hold will be taken by the fund managers on behalf of the owners of the pensions.
Insurance companies also have vast amounts of money that need investing. They too will use fund managers to take care of all corporate action related activity.
These funds are often held by governmental bodies that invest a country’s money in the global money markets. They act in the same way as pension funds, with the difference that they might make investments that are not purely driven by the need to maximise return on investment. In case of for example a rights issue, they might want to exercise all their rights, just because they can’t afford to lose their relative stake in the company for political reasons.
Due to variations in cash flow, companies can (temporarily) end up with quite substantial sums of money. These sums of money need investment. In the case of corporate actions events in the securities they invest in, they need to take the right decision. At the same time, in case these companies are listed themselves, the fact that they have a surplus of money might very well lead to them having to call for a corporate actions event (for example a Return of Capital event).
Local Governments and charities often hold large amounts of money that they are unable to spend straight away and therefore they have to (temporarily) invest it. When Corporate Actions impact the securities they hold, they need to understand the events and process them.
Retail banks need to invest the deposits of their clients. Often, they will use investment banks or fund managers to do so. When it comes to corporate actions, retail banks will be less involved. Often Corporate Action Processing is offered on a “reactive basis”.
Please note their double role. Directors and members of supervisory board of companies need to hold the stakes they hold in their own company and their options packages somewhere. Usually they will have their accounts with Investment Banks. Corporate Actions event will affect their holdings as well.
The local tax authorities will tax the benificial owner of the security for any capital gains as a result of a corporate actions event. Most custodians and investment banks will automatically provide tax vouchers stating that the shareholders has paid their tax. The shareholder needs to provide these vouchers to their local tax office.
So called “high net-worth individuals or families” will often become a client of private wealth managers or even hedge funds. Depending on what service level they agree with their fund manager, they will be required to make decisions regarding corporate action events in the securities they invest in.
The average citizen having a securities trading account will, depending on the level of service they agreed, in general have to understand the effect of corporate actions on the share price and make decision on voluntary events. It’s a shame that for most individuals trading securities is something that will only be reached in the later stages of their lives (when they may have sufficient money they can use to invest). This is probably why Corporate Actions are relatively unknown to the wider public.
So in conclusion, it’s fair to say that Corporate Actions – through their ripple effect – often impact on quite a number of people working at different organisations in the industry. Having said that, Corporate Actions remain relatively “out of sight” for the wider public.