Industry Partnership to Automate DR Market Claims

A new service to automate the depositary receipt (DR) market claims process has been launched.

The new service follows a Euroclear-led consultation with DR agents such as BNY Mellon, Citi, JPMorgan and Deutsche Bank, AFME, LCH.Clearnet and the London Stock Exchange. It comes after concerns from investors who were not receiving rights owed to them in an automated manner on transactions that were not settled on record date (the date in issuers’ books that investors are normally entitled to receive dividends).

Specifically, the service aims to automate the manual process of managing market claims, whereby the wrong DR investor has received a cash or stock dividend payment. This happens most often when the trade was executed on a dividend distribution date and the wrong entity is credited with the dividend. In addition, the DR agent’s fee for paying the dividend is debited from the wrong investor’s account.

Euroclear began to enhance its systems to automate the process in November last year. The ICSD’s Mohamed M’Rabti explains how the solution will work in practice: “When settling the DR transaction for bank A and bank B, we will automatically alert both counterparties to any pending trades for which a dividend is to be credited to the entitled counterparty. Even if a dividend is paid to the wrong counterparty, our service will generate an automatic stock or cash reversal, minus the DR agent’s fee.

“We built and enhanced our system to allow the dividend and DR agent’s fees to be reallocated automatically. Today, we already automatically manage market claims on equities via a system we built a few years ago. The DRs have specific market claim requirements, such as managing agent fees as well, so we had to enhance our system to manage this additional feature.”

The likelihood of cash being credited to the wrong counterparty also takes a long time to unwind in the bilateral status quo. Michael Collier, director at Deutsche Bank and a member of the trade body AFME, which was been pushing for further automation in the DR space, explains: “It depends on how each investment house and custodian operates their claim trade process. Automating it in the system means it is processed the same way by each counterparty. So introducing harmonization into the market as well is one of the many benefits but it gets rid of a process where it is not best market practice but is down to individual member firms and how they operate within their internal system.”

In addition, clients of the new service will receive different types of reporting depending on the counterparty. “Once the DR transaction between the two counterparties has been settled, or as an investor I have received the security, we inform the seller that we are going to debit their account the appropriate number of DR shares, but credit them with the dividend less the agent’s fee if they are entitled to it, and credit the investor’s account with the right number of DRs with or without the dividend less the agent’s fee if the buyer is actually entitled to it,” says M’Rabti. “This level of automation and transparency about debits and credits will greatly ease the reconciliation process with regard to DR positions, dividends and agent fees, which is an important feature of the new market claims service.”

Detection of a potential market claim occurs on the ex-date of the dividend distribution. Any transaction occurring OTC or on exchange after the ex-date is traded without the dividend and transactions occurring before the ex-date are with the dividend. On record date, the book of the registrar is opened and it is then determined who is entitled to receive the dividend. “That’s the key date, so we
start detection from ex-date until ex-date + 20 business days,” says M’Rabti.

BNY Mellon’s Alan MacAlpine added: “It’s also important not just to mention the FTE saving but also that counterparty risk is better managed. If market claims are being raised and settled on an automated basis rather than on a manual basis you are mitigating potential risk.”

BNY Mellon serves as depositary for more than 2,700 depositary receipt programmes, acting in partnership with leading companies from 68 countries. “BNY Mellon is hugely supportive of this initiative. Some of the most actively traded securities listed on the London Stock Exchange are in the form of DRs including Gazprom and Sberbank. The implementation of automated market claims on DRs will ensure both stock and cash entitlements move between Euroclear participants in a more efficient manner.”

For Euroclear clients the service is integrated into safekeeping fees.

The certainty is in the distribution of the stock or cash (i.e. the market claim) not the settlement of the underlying securities transaction, which settled after the ex-date, as

Nicolas Bertrand, head of Equity and Derivatives Markets, London Stock Exchange Group said: “Already the world’s most liquid GDR market, ease of trading on London Stock Exchange’s International Order Book will be further enhanced by this new service. It effectively eliminates one of the occasional operational headaches of dealing in depositary receipts and gives participants certainty in the outcome of the settlement process.”