New on FinoLib · Volume IV: Finance Careers
My latest article is now live on FinoLib, the free finance library I write: Corporate Actions and CASS Client Asset Safeguarding Explained, from Volume IV: Finance Careers. Read the summary below for the substance of the topic, then continue to FinoLib for the complete treatment.
E.3 Corporate Actions
The idea in plain words
Corporate actions are events that a company causes, such as dividends, splits or takeovers. The Corporate Actions team turns each event into what every holder is entitled to, and for voluntary events it collects each holder’s choice before the deadline. A missed election is usually a loss the firm has to repay.
Key points
■Mandatory events happen to every holder; voluntary ones need a decision.
■Deadlines shorten at every link in the custody chain.
■Entitlements are fixed on the record date position.
A closer look
Corporate Actions (part of asset servicing) captures every event an issuer applies to its securities, works out what each holder is entitled to, collects elections from clients or portfolio managers, and books the result. Events split into mandatory ones, which happen to every holder (cash dividends, stock splits, mergers for cash or stock, coupon payments), and voluntary ones, which need a decision by an election deadline (rights issues, tender offers, dividend reinvestment, conversions). The function exists because these events change positions and cash without any trade, so nothing else in the firm will catch them.
A worked example
Worked Example: An Entitlement and a Missed Election
The process: capture the announcement; validate terms against a second source; on record date, fix the eligible position (settled holdings plus or minus pending trades); calculate the entitlement; notify and collect elections for voluntary events; instruct the custodian before its deadline; book and reconcile the payment or new shares on pay date. A fund holds 12,000 shares. The issuer pays a $0.85 dividend and launches a one-for-five rights issue at $40.00 while the shares trade at $52.00.
Why It Matters
A missed voluntary election is a loss the firm usually owes the client in full, and on a large holding one missed deadline can cost more than a year of the team’s small errors. Deadlines compress at every link: the issuer’s agent sets a deadline, the depository sets an earlier one, and each custodian sets an earlier one still, so the client may have a day or two to decide.
Recap
Corporate Actions turns issuer events into each holder’s entitlement and collects elections on voluntary events before the deadline. A missed election is usually a loss the firm repays.
E.4 Client Assets and Safeguarding (CASS Oversight)
The idea in plain words
Client Assets keeps customers’ money and securities separate from the firm’s own, and proves it every day. In the US, the rule is SEC Rule 15c3-3. In the UK, it is CASS 6 and CASS 7.
Key points
■CASS 7: daily internal client money reconciliation; any shortfall funded by close of business.
■Larger US broker-dealers compute the customer reserve daily, others weekly.
■Under SM&CR a named senior manager is accountable for CASS.
A closer look
Client Assets makes sure that money and securities the firm holds for clients are kept apart from the firm’s own, recorded client by client, and reconciled often enough that clients would get them back in full if the firm failed. It exists because a broker that mixes client cash with its own can lose it to its creditors in an insolvency. The US rule for broker-dealers is the SEC’s customer protection rule, Rule 15c3-3: securities held for customers must be in the firm’s possession or control, and customer cash, net of what customers owe, sits in a special reserve bank account. In the UK the equivalent is the FCA’s Client Assets Sourcebook (CASS): CASS 6 for custody assets and CASS 7 for client money. This is the only chapter covering UK rules, because many firms run UK entities from the same teams.
A worked example
Worked Example: The Daily Client Money Reconciliation
The process (CASS 7 standard method): take yesterday’s close-of-business records; compute the client money requirement (what the firm should hold for clients, built client by client); compare it with the client money resource (the balance in client bank accounts per the firm’s records); fund any shortfall or withdraw any excess the same day; separately, at least monthly, reconcile the firm’s records of client bank accounts to the banks’ statements.
Recap
Client Assets keeps client money and securities apart from the firm’s own and proves it daily, under SEC Rule 15c3-3 in the US and CASS 6 and CASS 7 in the UK.
What the full article covers
In the full article I take you through these sections:
■E.3 Corporate Actions
■E.4 Client Assets and Safeguarding (CASS Oversight)
It includes worked examples, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume IV: Finance Careers
Read the full article on FinoLib
The complete article, Corporate Actions and CASS Client Asset Safeguarding Explained, with every worked example, diagram, quiz and source, is free to read in Volume IV, Finance Careers on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance