Going paperless alta cba presentation

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Al Nanji, managing director, clearing and settlement operations, and Dawn Davies, manager, Alberta region, delivered a presentation on dematerialization to the Canadian Bar Association, Securities Subsection (South).

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Going paperless alta cba presentation

  1. 1. Going paperlessin the Canadian securities market Alberta Chapter – Canadian Bar Association January 12, 2011 © 2011 CDS Clearing and Depository Services Inc.
  2. 2. Points to cover today CDS overview Dematerialization Book-Entry-Only Securities Services Agreement Electronic entitlement payments and TRAX Sample trust indenture – uncertificated securities Issue eligibility Electronic closings Private placements U.S. restricted securities2
  3. 3. CDS participants and owners 4 CDS is owned by six 7 4 11 8 Schedule A banks, 11 TSX and IIROC 51 Banks (11) Offices in Toronto, Trust companies (8) Montreal, Calgary, Investment dealers (51) Other (11) Vancouver Transfer agent limited participants (7) ATON limited participants (4) ACT limited participants (4) 96 participants3
  4. 4. CDS - a top-rated central securitiesdepository AA Public Depository Rating (Thomas Murray) retained in 2010 “CDS remains one of the top rated CSDs in the world. The strength of CDS confirms the excellence of Canada’s capital market infrastructure.” ~ Simon Thomas, Thomas Murray4
  5. 5. Bank of Canada Mandate CDS is recognized as – Critical infrastructure to the financial sector – (provinces of ON & QC, and federal government) – of systemic importance (BoC, OSC, AMF) Reliability is essential in terms of the services we provide and role we play in the financial sector5
  6. 6. Dematerialization
  7. 7. Steps to dematerialization Immobilization – CDS & Co. registered positions represented by certificated securities held at CDS Non-certificated inventory (NCI) securities – CDS & Co. registered positions represented by electronic records on security holders’ register at issuer or transfer agent; other positions may be certificated Book-entry-only (BEO) securities – 100% of security’s issue held by CDS is registered in CDS & Co.; no certificates available outside CDS; may be global certificate or uncertificated Uncertificated – Term used in provincial Securities Transfer Acts (STA) to represent either NCI or BEO holdings Dematerialization – Company board or legislation determines that no certificates to be issued to represent company’s securities7
  8. 8. Examples of dematerialization Canada Bonds and T-bills are fully dematerialized Fully dematerialized countries: – Australia, Denmark, France, Japan, New Zealand, South Africa Countries initiating some form of dematerialization: – Belgium, India, Ireland, Italy, Netherlands, Norway, South Korea, Spain, Sweden, UK, Ukraine, USA8
  9. 9. Impediments to dematerialization In absence of legislation mandating dematerialization, CDS has been pursuing changes to market practice to eliminate certificates and cheques for entitlement payments Documentation, such as trust indentures, requiring certificates for debt issuance Reliance on paper for evidentiary purposes Related processes are typically certificate-based (i.e. issuer buy-backs and stock options) replaced now with TRAX Resistance to change9
  10. 10. Paper handling – it costs all of us! Few participants in the securities industry benefit from paper certificates (e.g. couriers, printers) Investors who report lost, stolen or fraudulent certificates have to pay to replace the certificate Other costs are borne by issuers, brokers and financial intermediaries via: – custody and vault costs, audits, file maintenance – surety bonds – transporting physical certificates – loss replacements, clerical processing Education and co-operation are needed to change this outdated "tradition"10
  11. 11. BEO Securities Services Agreement
  12. 12. BEO Securities Services Agreement BEO Securities Services Agreement (BEO SSA) has replaced Letters of Representations (LORs) Once signed, BEO SSA replaces the LOR for all securities held at CDS BEO SSA comprises: – A short Agreement requiring signature by issuer and electronic delivery to CDS – Issuer Procedures incorporated by reference as part of the Agreement – BEO Acknowledgment, as part of the Procedures, for signature by issuer and electronic delivery to CDS for each deposit of a new issue Posted on www.cds.ca, as periodically amended12
  13. 13. BEO Securities Services Agreement BEO SSA and Issuer Procedures: – Set out general provisions for making an issue eligible for deposit and use of BEO services at CDS – Permits CDS to replace a lost or stolen certificate without a bond of indemnity – Eligible BEO securities now include uncertificated securities – CDS holdings can be evidenced by entries of a CDS recognized agent without any certificates being delivered to CDS – CDS recognized agent to provide daily closing balance confirmation of registered holdings in CDS nominee name – Securities represented by a global certificate may be converted to uncertificated issues with issuer agent’s agreement – Requires electronic payment of entitlements in same-day final and irrevocable funds13
  14. 14. Electronic Entitlement Payments and TRAX
  15. 15. Electronic Payments for Entitlements Effective November 1, 2011 all entitlement payments paid to CDS must be in electronic form and must be final and irrevocable Transfer agents acting as paying agent in CDSX – TA assumes role or designates a CDS participant to act on their behalf – TA provides CDS with payment details – CDS matches TA payments to events in CDSX to ensure accuracy – Once funding is in place, TA releases the funds in CDSX for allocation to participants’ ledgers or advises its paying agent to release the funds – CDS will work with TAs who wish to assume this role LVTS payments also acceptable CDS will be analyzing the cheques still received to determine how to move these payments to electronic form15
  16. 16. Sample Trust Indenture – Uncertificated Debentures
  17. 17. Uncertificated debentures:Key concepts Trust indentures typically require paper certificate to be signed and delivered before debenture can be duly issued or a binding obligation Certificates are used as evidence of ownership and are endorsed and given to the trustee to effect a transfer CDS worked with the main corporate trustees to develop a sample indenture with provisions enabling issuance of uncertificated debentures – Use of master record and internal procedures of trustee for authentication, issuance and record-keeping – Transaction statements and statements of account to reflect transfers, payments, other changes pertaining to holders – Preferred form of global debentures deposited with CDS and payments must be paid in electronic form Sample trust indenture posted on www.cds.ca17
  18. 18. Issue Eligibility
  19. 19. General eligibility criteria General eligibility criteria for deposit of issues in CDS (requirements may vary depending on particulars of issue): – A transfer agent recognized by CDS – No requirement for CDS to sign any documentation to effect a transfer of a security – If there are features that require special procedures, CDS may not make the issue eligible – The security must be defined in documentation, for example: offering circulars, final prospectuses, offering memorandums, copies of certificates, statement of material facts, information circulars, shelf prospectuses and for name changes or reorganizations articles of amendments – Denominated in Canadian or US funds19
  20. 20. Eligibility Fees CDS has instituted a new fee for eligibility of all certificated issues (money market issues are exempt from the fee): Definitive certificates held by CDS $1,000 BEO Global certificates held by CDS $500 Uncertificated, no certificates held by CDS $0 Web-based process, similar to the ISIN issuance process, for requesting eligibility, collecting information and billing of the fees – The firm that requests the issue’s eligibility will pay the fee – By credit card if a non-participant – CDS participants can choose to pay via credit card or via monthly CDS invoices20
  21. 21. Electronic Closings
  22. 22. Electronic closings Closings usually still rely on issuance of one or more certificates for exchange between issuer’s legal counsel and underwriter’s legal counsel Exchange of payment typically done by wire transfer between closing parties’ financial institutions Inefficient, risky and unnecessarily costly to still require certificate to be produced for exchange and then subsequently cancelled CDSX functionality enables new issues to be closed in an electronic format All parties involved in the closing must agree to manage the process without requiring a certificate22
  23. 23. Using CDSX to settle funds Instead of wire transfers (LVTS), funds for closings can be exchanged in CDSX, provided issuer’s banker: Prior to the closing – Issuers bank enters a deposit request for the new issue security – Issuers bank enters a CDSX trade against the underwriter, where the quantity and value equal that of the new issue, with the trade’s value date equal to closing date – Underwriter confirms the trade At closing, after all documentation is accepted: – Transfer agent/custodian or CDS, as a custodian, confirms the deposit – The trade between the bank and underwriter settles in real-time – Bank credits the issuers bank account based on funds received in CDSX Bank will settle its daily activity, including these funds, at CDS’s payment exchange, where settled funds are final and irrevocable funds23
  24. 24. Private Placements
  25. 25. Private placements More private placements than IPOs year over year – In the last year 2,320 common equity private placements were brought to market (statistics are from IIAC’s website) – As of November 30, 2010, there were 62 issues still in the hold period and 111 issues where the hold period had expired Participants are seeking ways to reduce certification and increase deposits in CDS – Certificated issuance of private placements has high costs and risks – Average number of certificates held in CDS participant vaults: 800 (for smaller firms) to 25,000 (for larger firms)25
  26. 26. Possible impediments Why are private placements not being made eligible in CDSX? – Lack of understanding of CDS eligibility criteria which allow deposits of private placements – Belief that physical certificates provide issuers and transfer agents better control on trading restrictions and provide a cross guarantee at closings Since late 2009, when NI 45-102 and 45-102CP were amended, issuers are no longer required to obtain regulatory comfort to have their issues brought into CDSX and CDS has ceased applying settlement restrictions26
  27. 27. Eligibility criteria for private placements Reporting Non-ReportingPrivate Placement Eligibility Requirements Issuer IssuerApply online for ISIN through CDS Securities Management SolutionsInc (Available in April 2009) Required RequiredTemporary ISIN assigned if there are freely traded shares Required Not RequiredAfter 4 months and 1 day (end of the “hold” period) CDS runs anautomated process to move all positions from the temporary ISIN tothe unrestricted ISIN Required N/AAttach necessary documentation regarding issue (OfferingMemorandum, Subscriptions Agreement) Required RequiredBook-entry-only (held by CDS or a TA in NCI format) Required RequiredRegister via recognized transfer agent Required RequiredConfirmation letter from the issuer on when the hold period should belifted Required Required 27
  28. 28. U.S. Restricted Securities
  29. 29. U.S. Restricted Securities (144A, Reg S & D)  Non-reporting issuers bringing an issue to market in the US face restrictions (mandated by the SEC) on potential purchasers: – 144A – Qualified Institutional Buyers – Reg S – Non-U.S. purchasers – Reg D – Accredited investors  In 2009 CDS implemented a new bulletin type for restricted securities whereby participants can advise others about requirements/processes for removing restrictions 29
  30. 30. CDS Contact Information Al-Karim Nanji Dawn Davies Managing Director, Manager, Alberta Region Customer Service and 403 232-5676 Operations ddavies@cds.ca 416 365-8631 ananji@cds.ca30
  31. 31. Going paperlessin the Canadian securities market

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