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Prepared by: Jorge H. Jaramillo Ossa – Breakout Session leaders DECEVAL - COLOMBIA - CEO October 27 th /2005

ACSDA SEMINAR “Central Securities Depositories, Settlement Systems and Central Counterparties as Relevant Entities in the Securities Markets”.

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Prepared by: Jorge H. Jaramillo Ossa – Breakout Session leaders DECEVAL - COLOMBIA - CEO October 27 th /2005

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  1. ACSDA SEMINAR “Central Securities Depositories, Settlement Systems and Central Counterparties as Relevant Entities in the Securities Markets” Corporate Actions ProcessingThe Globalisation ChallengeCSD8 Results “International trends and requirements to improve efficiency for information, cash and securities flows as a result of corporate actions “ Prepared by: Jorge H. Jaramillo Ossa – Breakout Session leaders DECEVAL - COLOMBIA - CEO October 27th/2005

  2. Corporate Events “They take place whenever changes are made to the capital structure or financial position of an issuer of a security that affect any of the securities it has issued Compulsory Voluntary Compulsory With Options • The most common types • Cash dividend: 26.9% • Income Distributions:16.4% • Partial Call redemption: 14.6% • Full call : 12.5% • Meeting: 7.1% Fuente: Corporate Action Processing - What are the risks ? Oxera Report

  3. Stylised process of the corporate action chain (based on the UK model) ISSUER Service-level agreement REGISTRAR Registers as Appointed by issuer shareholder CUSTODIAN’S to maintain register NOMINEE Registers as shareholders (via nominee); Name on register notifies changes in ownership to registrar CSD BROKER/DEALER Ownership Where shares are Execution of trades Account Service-level agreement ultimately held where necessary Account Service-level agreement ? (or operational relationship if both appointed by investor) CUSTODIAN FUND MANAGER ? Appointed by investor Appointed by investor ? INVESTOR Service-level agreement Mandate/service-level agreement

  4. Stylised illustration of main information and instruction flows between participants in the corporate action chain ISSUER Originator of CA. Event Information Instruction Information CUSTODIAN´S NOMINEE REGISTRAR Instruction Sends information on to Registered shareholders Misma Firma BROKER/ DEALER CSDs Information FUND MANAGER CUSTODIAN Processes Information And Instructions Makes decision on CA Processes Information And Instructions Instruction Information INVESTOR Instruction (If not delegated to fund manager) Fuente: Corporate Action Processing - What are the risks ? Oxera Report

  5. US Corporate Action flow for Tender/Merger Source: DTCC/Global Corporate Action Validation Service

  6. I1 I2 I3 I4 Notifies corporate actions and asks for instructions* [Ta](4) Foreign Broker Confirms voluntary corporate action processing [Ta, Tr](7)* Notifies corporate actions and asks for instructions* [Ta] (3) Notifies corporate action [Ta] (1) Instructs voluntary corporate action [Ta, Tr] (5)* Notifies corporate actions and asks for instructions [Ta] (2) Local CSD Foreign CSD Instructs voluntary corporate actions [Ta, Tr] (6)* Confirms voluntary corporate action processing [Ts] (8)* Corporate Action – ACSDA – FIAB – Model Information Flow Local Issuer Ta – notification date Tr – record date Ts – payment date * In case of voluntary corporate actions.

  7. I1 I2 I3 I4 Credits financial resources(5)** Foreign Broker Credits financial resources (1)* Credits financial resources(4)** Local CSD Foreign CSD Informs cash dividend/interests payment (2b) Instructs FOREX transaction(2a)* Bank Effects FOREX transaction (3) Corporate Action in Cash – ACSDA – FIAB model Payment Flow for Dividends and Interests Local Issuer Foreign Broker * Local Currency ** Foreign Currency Settlement date

  8. Credits financial resources (1)** Local Issuer Foreign Broker Credits financial resources(5)* Credits financial resources (2)** Local CSD Foreign CSD Informs subscription payment (3b) Instructs FOREX transaction (3a) Bank Effects FOREX transaction (4) Corporate Action in Cash ACSDA- FIAB - model Payment Flow for Subscriptions I1 I2 I3 I4 * Local Currency ** Foreign Currency Settlement date

  9. I1 I2 I3 I4 Credits securities (5) Foreign Broker Credits securities (1) Credits securities (4) Local CSD Foreign CSD Informs credit of securities (3) Credits securities (2a) Foreign CSD Foreign CSD Sub-account credit of securities (2b) I1 I1 I2 I2 Corporate Action in Stocks – ACSDA-FIAB model Securities Flow Local Issuer Settlement date

  10. I1 I2 I3 I4 Notifies General Meeting (3b) Foreign Broker Delivers statement of holdings (7) Asks for statement of holdings (4) Notifies General Meeting (3a) Notifies General Meeting (1) Local CSD Foreign CSD Notifies General Meeting (2) Asks for statement of holdings (5) Blocks securities and issues statement of holdings (6) Corporate Action – Voting Rights Information FlowACSDA –FIAB model Local Issuer Foreign Broker

  11. Example taken from the Oxera Report - -DTCC Potencial risk and Loss Valuation France Telecom : Rights issue. Latest date of acceptance 4/4/2003 19x20 shares. Offer Price: EU $ 14.50 per share. Fuente: Corporate Action Processing - What are the risks ? Oxera Report

  12. Expensive Intensive manual labor Multiple information flows Multiple Layers Multiple time zones/ Continents Multiple languages Important losses / Reputational risk Multiple Regulations Increasing volumes and values on custody Cross borders trades Investor protection Multiple information sources Corporate Action Processing Key Factors for the Diagnosis "FORCES AGAINST US" "HOW CAN WE AVOID TO COLLAPSE ? "

  13. Exchanges Fund Managers Custodians Issuers Investment Managers Industry Groups Agents Regulators CSDs Broker/ Dealers The parties seeking to obtain the cure Investor Rights

  14. Compulsory Cash Distributions Cash Dividends Interest payments Capital repayments Redemptions Partial Redemptions Compulsory Stock distributions Bonus issues (capitalisations) Conversions Consolidation / reverse splits Enfranchisement Open offers ( Entlitlements) Pari Passu Rights issue Subdivisions - split Some principal CA Shock Factors : Over a million in a year • Optional Stock Distributions • Subscriptions • Optional conversions • Optional redemptions • Other Corporate Action events • Compulsory call payments • Enhance scrip dividends • Optional call payments • Mergers • Schemes of arrangement • Scrip dividends • Takeovers • Resale ( With Suscription) • Demergers / division / fission / spin - off • Other payments • Early redemptions • Close offers • Redemption of the share minority Source : ECSDA - Cross border Corporate Action and events processing - Report from WG5 - No. 2002

  15. Lack of Uniformity Capacity Planning Information consistency Delay Payments Replacement cost Cross Border and Foreign Exchange Sub-optimal trading Decisions Multiple Layers Lack of Standards and Securities identification Failure to Process voluntary C.A. Greater events Complexity Inaccurate misinterpreted data New and Complex Instrument types Use of Certificates Communication errors up-down Who is Liable ? Means of Communications Paper-base The CA Disease : Multiple risk sources

  16. The Specialists’ opinion: • “Automate and standardize asset servicing processes, including corporate action, tax relief arrangement and restrictions on foreign ownership”(1) • Principles • Timely, complete and accurate CA announcements • Manageable Information flows • Investor decisions must be protected • Protection of the beneficial owner • Automation (1) G30 Global Clearing and Settlement : A plan of Action 2003

  17. Standardization Automating information flows Development of Best Practices Changes in Laws and Regulations STP processing New Industry arrangements Globally The doctors’ prescription : Not only one medicine Risk and Cost Reduction Investor Protection Efficiency

  18. Risks in Processing Automation and Standardization CSDs Role Process That should be automated Business Opportunities For CSDs Value Propositions From CSDs Corporate Events : CSD analysis CSD8 topics

  19. Diverse media Free format Different languages Large number of corporate action events Late, lack and lost information in the flow from the issuer to the beneficial owner Degree of Complexity Cross border activities High Volumes Corporate action processing: Risks Factors Announcements Payments Proxy Voting • CSD credit exposure. Principal risk can arise from advance payments either to participants and issuers • CSD errors or omissions transferring payment from issuer to wrong beneficial owners • Not many CSDs are involved in proxy voting instruction processing • Mostly paper based process • Possibility of delay or lost in the mail • Lack of centralization • Multiple languages

  20. Centralized and standardized channel of communication Standardized format for information contents Regulators should participate more actively Issuers should be obligated to notify immediately the CSD holding the issue in standard format and automate means. CSDs should be obligated to make this information available in timely fashion and automated manner to, at minimum, all participants that have position in the issue In order to avoid human errors by having the data touched as few times as possible Corporate rights and standardization of formats should facilitate STP, leading to risk and cost reduction Corporate actions processing : Risks FactorsHow to mitigate them ……. Payments Proxy Voting Announcements • CSDs and other participants should NEVER pay without first receiving the money! • Paying agents should provide clear, standardized and timely payment instructions • Finality and irrevocability of payment should be legally enforceable • Electronic and internet based system • Integration with depository system

  21. What are the most important processes that should be automated and/or standardized in the corporate action operational flows? The Announcement process is the core one to be standardized and automated Issuers should be forced to deliver Standardized Information (Security, Type of event, Record date, Pay Date, etc), and Guarantee the Information. In order to Improve speed, accuracy, access to relevant parties (trades, etc), permit full STP (no re-keying), Implementation Alternatives: Changes in Laws and regulations, CSDs funding issuers, Ratings

  22. CSDs roles in Corporate Actions • Entitlement Processing • Improve Books/Records • Automation • Commoditization • Cost and Risk Mitigation Oportunidades de Negocio • Services that Disinter mediate Custodian Functions (downward and upward flow) • Non-eligible Announcements • Deriving Commercial Value in Data Distribution • Expanded Asset Servicing (Tax Reclaim, Interpretation)

  23. CSDs roles in Corporate Actions CSDs interposing themselves between Issuers and Market Participants and/or Investors to deliverTimely, accurate and automated data • Lower Cost • Higher Efficiencies • Reliability • Reduction in some Level of Liability

  24. How can CSDs work together to create a value proposition for the market? • Leverage Existing Industry Groups • Find them and interpose ourselves to ensure our markets’ interests are protected. • Pursue At Sourcing Initiatives • Continue to Drive with Automation • The Value Proposition may be to Issuers and Investors but may not be to the Custodians. • Corporate Actions are a Core Competency • Opportunities Exist for market Efficiencies and commercial Value • CSDs can be a Central Repository for the Unique Local Market Practices and Sourcing • Find and Leverage “Standards Bodies” • Put Ourselves in a Position to Implement Standards • True STP Starts with the Issuer

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