Market Claim

A market claim is, in securities operations, the process of reallocating the proceeds of a distribution to the party that was contractually entitled to them when the issuer's payment went to someone else. It arises around dividends, bond coupons, bonus issues and similar events, when a trade was agreed with the entitlement attached but the securities had not changed hands in the books of the depository by the time holdings were recorded. The issuer pays whoever is on the record; the market claim then moves the cash or securities to the rightful counterparty.

The term is used mainly in European post-trade standards. It should not be confused with a legal claim or an insurance claim: a market claim is a routine operational adjustment between trading counterparties, usually generated automatically by a central securities depository (CSD), a central counterparty or a custodian.

Entitlement to a distribution between buyer and seller is decided by the trade date relative to the ex-date. A buyer who trades before the ex-dividend date buys the security with the distribution, which is known as cum-dividend trading. The issuer, however, pays according to settled positions at the close of the record date. The two tests normally give the same answer, because the ex-date is set so that a trade made on the last cum day settles by the record date under the standard settlement cycle.

They diverge in a few situations:

• Late settlement. A cum trade that should have settled by the record date fails or is delayed, so the seller still holds the securities and receives the payment.
• Non-standard settlement periods. A trade is agreed cum but with a longer settlement period that runs past the record date, or agreed ex but settled early so that the buyer is on the record.
• Open securities financing. Securities out on loan or repo over the record date leave the borrower receiving the distribution, which is passed back as a manufactured payment under the lending agreement rather than through the market claim process.

Detection compares each pending or recently settled instruction with the key dates of the event. Where the trade date is before the ex-date and the settlement date actually achieved is after the record date, a claim is raised from seller to buyer. The reverse case, an ex trade that settled on or before the record date, produces a claim from buyer to seller, sometimes called a reverse market claim. Matching fields on the settlement instruction can state whether a trade was dealt cum or ex, and an opt-out indicator lets counterparties agree that no claim should be generated.

The claim itself is a new settlement instruction for the amount of the distribution on the unsettled quantity. For a cash dividend it is a payment in the currency of the distribution; for a securities distribution it is a delivery of the new securities. Under the harmonised standards used on the Eurosystem's TARGET2-Securities platform, the depository of the counterparties detects claims for a fixed period after the record date, twenty business days, and creates the instructions for the parties. Tax is a recurring complication, because the seller may have received the dividend net of withholding tax at a rate different from the buyer's.

In Europe the rules were written by industry working groups as part of the effort to remove barriers to cross-border securities settlement, and they are monitored by the European Central Bank's market advisory groups. The standards specify that claims are detected by the depositories and settle independently of the underlying trade unless the market chooses otherwise.

In the United States the same economic problem is handled through due bills. Where a security trades with the distribution after the record date, the trade carries a due bill, a promise to pass the distribution on, and the depository tracks these obligations through an interim accounting process during the due bill period and settles them on due bill redemption. Elsewhere, where no central detection exists, counterparties or their custodians raise claims bilaterally, which is slower and depends on each side's records.

For custodians and brokers, market claims are part of corporate action processing. Teams reconcile the entitlements credited by the depository against clients' traded positions, book expected claims as receivables or payables, and chase items that the automatic process did not cover. The follow-up work is described under corporate action claims processing, and unmatched items are picked up in corporate action reconciliation.

The main risks are delay and counterparty exposure. Until the claim settles, the entitled party is an unsecured creditor of the counterparty for the amount, and clients may have been credited contractually by their custodian before the money arrives. Where the benefit cannot be passed on in kind, for example because an election deadline has passed, the parties may agree cash compensation instead. Shorter settlement cycles reduce the number of claims by narrowing the gap between trade and settlement, and settlement discipline measures that reduce the rate of settlement failure have the same effect.

• European Central Bank
• Depository Trust and Clearing Corporation (DTCC)