Stock Split

Which would you prefer? 1x10-pence coin or 10x1-pence coins?

Short Description

A Company can decide to increase the amount of its outstanding shares while at the same time decreasing the nominal share price proportionally.

Definition

A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. This is because the market price will decrease. Although the number of shares outstanding increases by a multiple (the ratio of the event), the total market capitalisation of the company remains the same compared to pre-split market capitalisation, because the split does not add any real value.

Asset Classes that can be affected / involved

    • Equities

Longer Description from the point of view of different market participants

Assumption:

Technically a stock Split can be processed in 3 ways:

  1. No ISIN Change – base security not debited and difference credited. So for example, in a 2 for 1 stock split, each investor keeps their 1 base share and gets 1 additional base share → this way of processing a stock split is very similar to a stock dividend.
  2. No ISIN Change – base security debited and full new quantity according to the event ratio is credited, So for example, in a 2 for 1 stock split, each investor loses their 1 base share and receives 2 new base shares (of the same ISIN).
  3. ISIN Change – base security debited and full new quantity according to the event ratio is credited. So for example, in a 2 for 1 stock split, each investor loses their 1 base share on the old ISIN and receives 2 new shares (of the new ISIN).

Under SMPG Guidelines, the 3rd alternative was chosen and agreed upon as the best alternative and most countries are now processing a stock split in this way. For the remainder of this page, the assumption is that the 3rd alternative is chosen and that there will be a new ISIN for the post split positions.

The issuer will see the base security ISIN being debited from their Issuer Account at the CSD (if they have one) and the new ISIN being credited with the event ratio applied. The issued amount of both securities will be amended correspondingly, ie the old one to “0” and the new one to the new amount.

The Registrar will need to record all the eligible positions as per close of day Record Date. On the Effective Date of the event they will need to close the register for the old ISIN and update the register with the new security identifier and the new amount of outstanding shares.

First, the agent bank will have to request a new ISIN which can be done online here.

It can be that other security identifiers like Sedol, Ticker, WKN etc which may have to be requested anew from different Security Identification Providers. A similar request will have to be submitted to the exchanges at which the stock is listed.

The Agent Bank (Paying Agent of the event) will credit the shares under the new ISIN onto the issuer account at the CSD (if they have one) and debit the shares under the old ISIN that will be taken out of circulation. The issued amounts of each line of securities will be amended accordingly. It will often be the Paying Agent who triggers the payment downstream. This means that the transactions will be effected in the accounts of the CSD participants and messaging is sent.

Numbering Agencies need to update the status of the old ISIN to “extinct”, “deleted” or “pre-split” or something that reflects that the transaction has taken place. Equally, the issued amount of the shares under the new ISIN needs to be increased and the nominal value decreased and it will probably need a status update as well (something like “post-split”).

Any exchange that was listing the base security will need to delist the old ISIN and list the new ISIN. Trading status of something along the lines of “post-split” needs to be assigned to the new ISIN.

Any index that included the base security will need to exclude the old ISIN from the index and include the new ISIN.

At CSD level the base shares under the old ISIN need to be booked out and the new shares under the new ISIN need to be booked in the accounts of the market participants. To effect this, bookings (free of payment) need to be made. Trades on the base line under the old ISIN that are in “matched” status as of Record Date of the Stock Split event need to be cancelled and reinstated on the new ISIN. Messaging is initiated and sent down the chain.

At Custodian level the base shares under the old ISIN need to be booked out and new shares under the new ISIN need to be booked in the accounts of clients. To effect this, bookings (free of payment) need to be made. Trades on the base line under the old ISIN that are in “matched” status as of Record Date of the Stock Split  event need to be cancelled and reinstated on the new ISIN. Messaging is received from the Issuer CSD and (often ingested by automated systems) and subsequent messaging is generated and sent further down the chain.

At Broker Dealer level the base shares under the old ISIN need to be booked out and the new shares under the new ISIN need to be booked in the account of clients. To effect this, bookings (free of payment) need to be made. Trades on the base line under the old ISIN that are in “matched” status as of Record Date of the Stock Split event need to be cancelled and reinstated on the new ISIN. Messaging is received from the Custodian and ingested by automated systems after which – in turn – messaging is sent further down the chain.

If the stock is on loan, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) need to effect the transaction in their books. Stock may have to be recalled. The same applies to stock that is held as collateral.

Fund Manager need to include the change in the fund accounting

  • In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the transactions as a result of the Stock Split event and update their systems accordingly.
      • These transactions need to be included in investment statements that are sent to investors also.

Vendors will have to update their systems with the correct information for both securities (old and new ISIN) and send messaging to their clients about it.

  • At Retail Bank level the base line shares under the old ISIN need to be booked out and the new shares under the new ISIN need to be booked in with the event ratio applied. To effect this, bookings (free of payment) need to be made. Trades on the base line under the old ISIN that are in “matched” status as of Record Date of the Stock Split event need to be cancelled and reinstated on the new ISIN. Messaging is received from the Custodian/Broker and ingested by automated systems after which – in turn – messaging is sent further down the chain.
  • When the beneficial owner holds the absorbed securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event.

Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable)

Background

  • A Company may try to increase liquidity (100 shares of USD 2,00 are easier to trade than 1 share of USD 200) and as such it Increases their perceived attractiveness for small investors
  • People believe that it has a psychological effect – it is perceived by some as a statement of confidence.
  • In itself a stock split can only be called after a period during which a company has performed very well – leading to a rise in the share value. In that light a share split can be seen as an accolade that the company gives itself.
  • It is believed that it is a signal that the board of directors believe that the company is going to perform well in the future.
  • Some people believe that share splits will result in higher share prices (although this is never proven)
  • Make itself better comparable with its peer group (ie other companies in the same industry whose shares are trading at lower prices)
  • CAEV
    • SPLF
  • CAMV
    • MAND
  • CAEP
    • REOR
  • CAOP
    • SECU
  • Qualifier CAEV = SPLF
  • CAOP = SECU 
  • Mandatory event => field 22F: CAMV = MAND

As soon as it is known, the date of the split is reported to the account holders. Qualifiers used will be either XDTE or EFFD according to SLA. The split ratio is given using qualifier NEWO.

A stock split requires Shareholder approval at an Annual General Meeting pursuant to the Board’s proposal. The proposal includes a resolution on a change in the articles of association with regards to the highest and lowest number of shares that may be issued.

A share split will result in all shareholders holding more shares in the company. However, the STAKE in the nominal value of the company per share will remain the same (the share’s portion in the share capital). The nominal value per share will decrease. Each new share will carry the same rights as the pre-reverse-split shares (including voting rights and dividend entitlements).

Example 1: a 4 for 1 stock split (from an issuer’s point of view)

BEFORE THE STOCK SPLIT:

Amount of outstanding shares: 1,000,000

Nominal value per share: EUR 0.50. 

Total nominal value of the company: 1,000,000 x EUR 0.50 = EUR 500,000

AFTER THE STOCK SPLIT

Amount of outstanding shares: 4,000,000

Nominal value per share: EUR 0.125

Total nominal value of the company: 4,000,000 x EUR 0.125= EUR 500,000

Example 2: An investor experiences a 4:1 stock split (from an investor’s point of view)

BEFORE THE STOCK SPLIT:

A shareholder holds 500 shares of company ABC

Nominal Value per share: EUR 0.50

Market Value per share: EUR 0.60 (this is an assumption)

Total value of his holdings: 500 shares x EUR 0.60 = EUR 300

AFTER THE STOCK SPLIT:

The shareholder holds 2000 shares

Nominal Value per share: EUR 0.125

Market value per share: EUR 0.15 (the market value of the shares does not have to equal the nominal value of the shares)

Total value of his holdings: 200 shares x EUR 0.15 = EUR 300

  • Ex Date (or Effective Date, depending on industry SLA’s)
  • Record Date
  • Pay Date
  • Seev.031
  • Seev.036
  • Sese.025

Apple’s stock has split four times since the company went public. The stock split on a 7-for-1 basis on June 9, 2014 and split on a 2-for-1 basis on February 28, 2005, June 21, 2000, and June 16, 1987.*

Claims and transformations

DATES FOR TRADING

When trading securities in general, an investor needs to consider 3 dates: 

  • Trade date

the date at which the securities change legal ownership

  • Contractual settlement date

the dates at which the securities need to be physically settled out of and into the safekeeping accounts of the trading partners and on which the money needs to be debited from the buyer and credited to the seller.

  • Actual settlement date

the date at which the trades actually get settled (should in theory be the same as contractual settlement date)

This means that there is a difference between purchasing the shares (and gaining ownership of them) and the date at which the shares actually physically settle in their safekeeping account and the money is debited from their cash accounts. This phenomenon is also called a settlement cycle.

However, in 2015, most of the countries who were still on a T+3 Settlement Cycle have moved to a T+2 Settlement cycle.

For readers who are interested in the history of the settlement cycles, please find an interesting article here. From the 1700’s onward there has been a push to decrease the settlement cycle from 14 days to 2 days at present. This is because new technology is able to facilitate ever faster settlement cycles.

This process applies to both On-Exchange Trades as well as OTC trades.

DATES FOR STOCK SPLITS

When dealing with transformations on stock splits, an investor needs to consider 3 dates: Ex Date and Record Date and Pay Date.

The Ex Date is the date at which the shares start trading at post split prices.

The Record Date is used by the CSD/Custodian/Broker to establish whom to debit and credit the shares from and to.

Stock Splits are now being processed with the Ex Date before the Record Date and the Pay Date 1 day after the Record Date.

With the introduction of the T+2 Settlement Cycle in 2015 as a result of the Giovannini barriers program, many countries changed from being using a Record Date followed by an Effective Date to an Ex Date followed by a Record Date and Pay Date. This eliminated about 95% (this is my own guesstimate – I have no actual figures on this) of the transformations. This made things a lot easier. Concurrently, the Corporate Actions Event Date Sequences were also made one day shorter (meaning Ex date was now 1 day before Record Date).

With the migration of most of the countries in the world to T+2, the Corporate Actions Event Date Sequence was also amended to: Ex-1, Ex, RD, PD.

When combining the settlement cycles with the different market principles there are several possible scenarios. However for the purpose of this page, I will only consider the T+2 Settlement Cycle and Record Date driven markets for transformations as most markets in the world have now adopted this practice.

Change of ISIN

On some occasions the ISIN will change along with the ratio being applied – it can also remain the same. The examples below assume the Isin is changed.

In the below examples Trader A buys 100 securities from Trader B.

SCENARIO 1 – Equities – Settlement Cycle = T+2 and Market = RECORD DATE Driven (the most prevalent scenario).

In the example above there is NO NEED to transform trades. All trades that were traded before the Ex Date (at pre-split prices) have settled on the Record Date. The buyer will have the shares in their account at the close of business on the Record Date. So the new shares will be credited to the buyer. This is the way it is intended to go; the ideal scenario is that no trades need to be transformed.

 

SCENARIO 2 – Equities – Settlement cycle is T+2 and Market is RECORD DATE driven – parent trade settles late

In this Scenario trader A buys the shares before the Ex Date and will therefore be entitled to the proceeds of the Corporate Actions Event. There could be several reasons why a trade is settling late, for example the buyer has not got enough cash in their cash account or the seller is short on stock (i.e. has sold more shares than they have). It can also be that the matching instruction for the other leg of the trade gets stuck somewhere. Since the shares on the parent line are settling late, the shares will still be on trader B’s (the seller’s) account on record date and therefore the custodian will credit the Corporate Actions Proceeds to Trader B on record date+1 (the Pay Date). Trader A needs to claim the entitlements from Trader B. 

A new trade needs to be created to replace the parent trade. The new trade needs to be created from both sides and should be a Delivery versus Payment (and matching Receive versus Payment) instruction whereby the ISIN is changed to the new ISIN in the event, the quantity of stock is increased in proportion with the event ratio and the total cash consideration of the original (which should be the same). The earliest settlement date (SD) of the new transaction(s) should be the latest between the payment date (PD) of the entitlement and the SD of the underlying transaction.

To Illustrate this a bit further:

Stock split on ISIN NL0000001234NEW ISIN: NL00005678RATIO: 10:1 (10 new for 1 old)

Nominal value per share pre-split: EUR 0.20

Nominal value per share post split: EUR 0.02

Market price per share Pre-split: EUR 5.00

Market price per share Post-split: EUR 0.50

Ex Date of the Stock Split = 29OCT2019

Record Date of the Stock Split = 30OCT2019

Trader A buys 100 Shares with ISIN NL0000001234 from Trader B at a price of EUR 5.00 per share. So total cash consideration in the trade is EUR 500.

Trade Date = 28OCT2019

Contractual Settlement Date = 30OCT2019

Trader A instructs a Receive versus Payment instruction –> 100 shares NL0000001234 versus EUR 500 (100 x EUR 5.00).

Trader B instructs a Delivery versus Payment instruction –> 100 shares NL0000001234 versus EUR 500 (100 x EUR 5.00).

The trades were supposed to settle on the Record Date of the Stock Split Event. However, the scenario is that at the close of business on the Record Date they will still be pending and they are in “matched” status. On the Pay Date the CSD/Custodian/Broker will debit the 100 shares NL0000001234 from Trader B’s account and credit them with 1000 new shares NL00005678. After the Record Date no trades will get settled anymore on the old ISIN NL00001234. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000005678 with the ratio applied.

Unless the Traders have opted out of the auto-transformation services that CSD’s/Custodians/Brokers offer, the old trades will be automatically cancelled and there will be 2 new trades instructed at each level in the chain of market players in the industry:

For Trader A a Receive versus Payment –> 1000 shares NL000005678 versus EUR 500 (1000 x EUR 0.50).

For Trader B a Delivery versus Payment –> 1000 shares NL0000005678 versus EUR 500 (1000 x EUR 0.50).

The earliest settlement date (SD) of the new transaction(s) should be the latest between the payment date (PD) of the entitlement and the SD of the underlying transaction. In this case the Settlement Date of the new trade should be the same as the Pay Date of the Event (this is because the intended settlement date of the original trade was on Record Date).

(Note the total consideration of the trades does not change does not change).

Conclusion about Transformations

 Whenever shares are bought before Ex Date the buyer will buy the shares at pre-split quantities, ISIN and prices. If the settlement date of the trades between the traders is after the record date of the event, the old trades have to be cancelled and re-instructed on the new ISIN with the ratio applied.

Fractions

t’s been estimated that 3 out of 2 people have problems with fractions…

However, as there is a ratio in Stock Splits, fractions will pretty much unavoidable.

There are two types of fractions in Stock Splits:

  • Fractions on settled balances (also referred to as “positions”)
  • Fractions on pending positions (also referred to as “flows”)

The agent has three options when it comes to fractions handling:

  • Round Up
  • Round Down
  • Cash in lieu (round down, but fractions are being paid out at a certain cash rate)

Under the T2S market standards for Corporate Actions additional PfoD transactions need to be generated by the Investor CSD.

Tax Handling

It’s not really possible to say anything specific about taxation of Corporate Actions Events, but 

Stock Splits will generally not trigger Income Tax, but they will affect the adjusted cost base of the shares for Capital Gains Tax which will become due upon sale (in part or in full) of the shares. More about Tax and Corporate Actions can be found here.

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