Going paperless in the Canadian securities market Going paperless Going paperless in the Canadian securities marketin the Canadian securities market
Alberta Chapter – Canadian Bar Association
January 12, 2011
© 2011 CDS Clearing and Depository Services Inc.
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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 securities
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CDS participants and owners
CDS is owned by six Schedule A banks, TSXand IIROC
Offices in Toronto, Montreal, Calgary, Vancouver
96 participants
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7 4 4 118
51Banks (11)Trust companies (8)Investment dealers (51)Other (11)Transfer agent limited participants (7)ATON limited participants (4)ACT limited participants (4)
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CDS - a top-rated central securities depository
AA Public DepositoryRating (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 Murray
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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 sector
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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 securities
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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, USA
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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 change
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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"
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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 amended
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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 funds
Electronic Entitlement Payments and TRAXElectronic Entitlement Payments and TRAXElectronic Entitlement Payments and TRAX
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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 form
Sample Trust Indenture – Uncertificated DebenturesSample Trust Indenture Sample Trust Indenture –– Uncertificated DebenturesUncertificated Debentures
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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.ca
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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 funds
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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 $1,000BEO Global certificates held by CDS $500Uncertificated, 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 invoices
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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 certificate
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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– Issuer's bank enters a deposit request for the new issue security– Issuer's 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 issuer's 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 funds
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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)
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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 restrictions
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Eligibility criteria for private placements
Private Placement Eligibility RequirementsReporting Issuer
Non-Reporting Issuer
Apply online for ISIN through CDS Securities Management Solutions Inc (Available in April 2009) Required Required
Temporary ISIN assigned if there are freely traded shares Required Not Required
After 4 months and 1 day (end of the “hold” period) CDS runs an automated process to move all positions from the temporary ISIN to the unrestricted ISIN Required N/A
Attach necessary documentation regarding issue (Offering Memorandum, Subscriptions Agreement) Required Required
Book-entry-only (held by CDS or a TA in NCI format) Required Required
Register via recognized transfer agent Required Required
Confirmation letter from the issuer on when the hold period should be lifted Required Required
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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
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CDS Contact Information
Al-Karim NanjiManaging Director,Customer Service and Operations416 [email protected]
Dawn DaviesManager, Alberta Region403 [email protected]