Corporate Action Claims Processing

Corporate action claims processing is the set of procedures by which custodians, brokers and depositories recover or pay over the proceeds of a corporate action that reached the wrong party. Issuers distribute dividends, coupons and other entitlements to whoever holds the security in the depository's records on the record date. When a trade has been agreed but has not settled by then, the holder on record may not be the party entitled under the trade. A claim moves the proceeds to where they belong.

The claim itself is known as a market claim. Processing claims is part of asset servicing and involves the settlement, corporate actions and reconciliation teams of each firm in the chain.

Entitlement under a trade depends on the trade date in relation to the ex-date. A buyer who trades before the ex-date buys with the entitlement, which is called cum-dividend trading; a buyer who trades on or after it buys without, as described under ex-dividend trading. The issuer, however, pays according to settled positions on the record date. The two can diverge in several ways:

• Late settlement. A cum trade that should have settled by the record date fails, so the seller receives the payment that belongs to the buyer.
• Non-standard settlement. A trade is agreed with a longer or shorter settlement period than usual, placing settlement on the other side of the record date.
• Trading conventions. In some markets, a trade is explicitly flagged as cum or ex, overriding the default.
• Securities financing. Securities out on loan or sold in a repo over the record date generate a payment to the borrower, who compensates the lender with an equivalent amount.

A reverse claim arises in the opposite case, where the buyer receives proceeds on an ex trade that settled early.

Claims are identified by comparing, for each event, the trades open or recently settled around the record date with the positions on which the payment was made. Each pending or settled securities settlement instruction is examined for trade date, intended settlement date, actual settlement date and any cum or ex indicator.

In many markets, the central securities depository performs this detection automatically for transactions on its books and generates the compensating movements. European market standards provide for detection to continue for 20 business days after the record date, to capture late-settling trades. Where the depository does not offer the service, or where trades settle on the books of an intermediary without reaching the depository, each custodian bank and broker must detect and raise claims bilaterally.

A cash claim is settled by a payment from the party that received the proceeds to the party entitled, in the currency of the original payment. Market standards call for the gross amount to be transferred, with tax handled separately, although in practice the amount often reflects the tax rate applied to the recipient. This is a frequent source of dispute, because the dividend withholding tax position of the party that received the payment may differ from that of the party entitled, leaving the latter with less than it would have received directly and without the documents needed for a reclaim.

Securities claims, for example on a bonus issue or spin-off, are settled by delivering the securities distributed. Fractions are generally rounded down or compensated in cash.

Related processes apply to events other than distributions. In a reorganisation, such as a merger or redemption, a pending trade in the old security is cancelled and replaced by an instruction in the new security or cash, which is called a transformation. For an elective event, a buyer whose purchase has not settled can require the seller to elect on its behalf, a mechanism called buyer protection, operated with reference to the guaranteed participation date.

The main risks are missed claims, duplicate claims, claims for the wrong amount and delay. A firm that fails to claim loses income for its client or for itself; a firm that fails to pay a valid claim is holding money that belongs to another party. Controls include:

• Daily matching of open and failed trades against the events calendar.
• Reconciling entitlements expected with amounts received, as part of corporate action reconciliation.
• Tracking each claim to settlement and escalating by age.
• Checking incoming claims against trade records before paying.
• Recording provisional credits to clients as conditional until the claim is collected.

Claims are linked to settlement efficiency. Reducing fails through settlement fail management reduces the number of claims, and shorter settlement cycles narrow the window in which they can arise while leaving less time to resolve exceptions before the record date.

Industry standards specify that claims should be detected by depositories, generated as separate settlement instructions, and settled without affecting the underlying trade, though adoption is uneven. Accurate figures depend on correct corporate action entitlement calculation at each level of the chain.