| February 8, 2012 | Client segment: Funds, Insurance, Investment Counsellor Services, Pensions |
Update
New Canadian Due Bill process
| Impact: | Canadian Due Bill processing will align with US practices, effective February 2012 |
The Financial Administrators Section (FAS) of the Investment Industry Association of Canada (IIROC) has endorsed a Canadian Due Bill initiative which was brought forward by member firms. The new initiative will align the Canadian process with the US market. FAS is currently working with members from the Investment Industry Association of Canada (IIAC) and the Canadian Depositary for Securities (CDS), to implement the new system, effective February 21, 2012.
Due bills are share or cash entitlements (e.g., in the case of a stock split, the split shares) that are attached to trades that settle between the record date and the due bill redemption date (ex-date plus 2).
Due bill tracking refers to the methodology that allows securities to carry their appropriate value until entitlement events have been processed.
Currently, in Canada, events such as stock splits, spin-offs, stock dividends and stock distributions cause security holders’ positions to be undervalued for the period between the ex-date and the payable date, which could range from a few days to several weeks depending on the entitlement type. For clients who track book costs, valuation issues occur because the market price drops to the reduced price on the ex-date, but the security holder does not receive the entitlement until the payable date.
In addition, the current processing of entitlement events in Canada is different from that of the United States. In the US market, an exchange sets the ex-date for an entitlement event after the record date, where as in Canada the ex-date is set before the record date. This means that the ex-date for events in the Canadian and US market are not synchronized.
Because the dates are not the same in the two markets, discrepancies in entitlement will occur if shares held in CDS on record date are moved to DTC and not returned by due bill date. Short sales may result with a claw back of the entitlement by the depository. This difference also creates significant valuation challenges in the case of interlisted securities. Interlisted securities will trade in the Canadian market at a different price than the US market during this period.
The new initiative will align the Canadian process with the US market. Synchronization of the markets will reduce problems arising from interlisted securities and will reduce the number of manual claims, as any adjustment that is required following an entitlement will be processed automatically under the new due bill system.
Where due bill processing applies to an event, our notification will provide the due bill date as announced by the Depository. SWIFT MT564 corporate action notifications will include a new field in sequence D (Corporate Action Details) to indicate the due bill redemption date. The format of this field will be as follows:
For more information on this initiative, please visit CDS’s, IIROC’s or IIAC’s website.
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This information is provided for the general information of RBC Investor Services™ clients from sources reasonably believed to be reliable. However, RBC Investor Services accepts no responsibility or liability of any kind for the accuracy, reliability or completeness of the information, or for any action taken, or results obtained, from the use of the information.
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