5 - Asset Servicing

• Main corporate actions

  1. Payment of income

  2. Fund mergers

  3. Closure

  4. Conversions

  5. Terminations

  6. Corporate actions on listed securities
• Financial Conduct Authority (FCA) permission relating to custody


  Described as the ‘safeguarding and administration’ of assets
• Platform model

  Enables the transactions necessary to acquire a portfolio of assets within the intended wrappers and achieves the ‘safeguarding’ of those assets by the platform’s nominee
• Administration of assets

  Includes the various behaviours that different types of assets might exhibit
• Corporate actions


  Behaviours referred to as corporate actions occur at the corporate level of the issuer and involve action in the form of change or movement relating to the asset
• Categories of corporate actions

  • Income
  • Structural changes to the asset held
  • Matters on which each registered investor is asked to give their opinion
• Platform operators need to be aware of types of corporate actions and establish processes necessary to engage in these events, including obtaining input from relevant clients
• Income Payments by Listed Securities

  Equities usually pay dividends to shareholders out of the profits made by the company. Dividends are usually paid twice a year in the UK and quarterly in the US. Government and corporate bonds pay interest known as coupons at regular intervals
• When a dividend is announced, it will specify an ‘ex dividend date’. On this date, the value of the share will decrease by the value of the dividend as purchases on, or after, this date will not be entitled to receive the dividend
• Government and corporate bonds pay interest, known as coupons, at regular intervals. The coupon rate is a percentage of the bond’s face value. Coupons may be paid annually, semi-annually, or less commonly quarterly or monthly according to the rules laid down in the bond’s prospectus
• Bond payments are generally known in advance, which allows the market price to reflect the income coupon being accrued
• The contract note for a bond purchase/sale will distinguish between the capital value of the bond itself and the value of the interest already accrued during the current coupon period
• A platform operator that enables investors to trade in such ‘accrued interest’ securities must have the administrative capability to handle these transactional and income implications
• As the holder of the shares/bonds, the platform needs to understand the corporate actions that arise, determine whether the underlying client can make any choice regarding any particular action, liaise with its custodian/subcustodian, and update its investor records accordingly
• Income Distributions Overview

  • Collective investment schemes (CISs) earn income from the assets held within the scheme property – primarily equities and bonds
  • Income accrued during the accounting period is included within the valuation process
  • At the end of each annual accounting period, accrued income is removed from the valuation, causing the fund’s price to drop slightly
  • Income will be paid to registered unitholders at a specified point during the following months
  • Income payments to registered unitholders are known as a ‘distribution’
  • Most funds have at least one interim accounting reference date for more frequent distributions
  • COLL allows up to four months between the accounting reference date and the actual payment date
  • Scheme documentation should state the specific timing of distributions for the fund
• AFMs can enable investors to receive the value of distribution in three ways: distribution payment, accumulation, or reinvestment
• Income classes pay income sums as cash, while accumulation classes move income allocation to the capital account for investment purposes
• Reinvestment of the distribution results in additional units being bought with the distribution payment
• If a fund operates both income and accumulation classes, a difference opens up between the prices over time, reflecting the income sums retained within the value of accumulation units
• Accrued income is stripped out of the unit price when the fund ‘goes ex-distribution’
• Equalisation and Group 2 Units

  1. Accrued income is stripped out of the unit price when the fund ‘goes ex-distribution’

  2. Equalisation recognises that investors effectively ‘bought’ a portion of the income received, which has tax implications

  3. Equalisation amount is deemed by HM Revenues & Customs (HMRC) to be a return of capital, not earned income, and is deducted by investors for capital gains tax (CGT) purposes

  4. Equalisation rate is calculated by the fund accountant based on the aggregate amounts of fund income included in the price of units bought by investors during the period

  5. Group 1 units/shares are those held at the beginning of the period, while Group 2 units/shares are purchased during the accounting period

  6. Holders of Group 1 and Group 2 units/shares receive the same cash value of distribution, but Group 2 units/shares receive a smaller amount of taxable income due to equalisation
• Asset Servicing

  1. The platform holds assets on behalf of its underlying clients and ensures correct receipt of all income sums arising on the portfolio

  2. Decides whether to process income payments or restrict CIS share classes to those that accumulate income

  3. Decides on supporting automatic reinvestment of income for clients buying income units

  4. Determines whether to pass income to clients on a ‘receipts’ basis or a ‘contractual’ basis, affecting cash flow and client money processes

  5. Reports to clients the income earned and any tax already suffered for completion of their tax affairs
• Some corporate actions give investors something extra, while others result in a change in the asset held
• Funds can implement events relating to their structure, which are less frequent and complicated than corporate actions affecting equities
• Many corporate actions require formal agreement/approval of shareholders, usually obtained through a vote among shareholders
• Termination/Wind Up/Liquidation involves a company/fund ceasing operation, selling off assets, determining value due to each unit/share, and ceasing existence of units/shares with investors receiving a payment representing their portion of the company’s assets
• Liquidation of assets

  1. A formal process is undertaken to sell off the corporate assets and determine the value due to each unit/share

  2. The units/shares held cease to exist, and the investor receives a payment representing their portion of the company’s assets
• As liquidation of the assets can take time, there may be a period during which trading of the assets is suspended, or any market listing might be withdrawn
• The units/shares remain in place until the company/AFM pays the relevant sum to the investor
• Once the decision has been taken to terminate/wind up/liquidate a fund or company

  The event will take place and all investors will be impacted in the same way
• Fund Mergers


  1. A fund manager may choose to merge multiple funds into one larger fund

  2. Reasons for fund mergers: existing funds might be too small to operate efficiently, or changes in investor sentiment might mean that the investment objectives of the separate funds no longer match to a target market
• Once the decision to merge the funds has been taken

  All investors in the funds will be affected in the same way
• As with a liquidation event

  It is not possible for an investor to continue with their existing holding as that asset will simply cease to exist when the corporate action takes effect
• Conversions can arise any time the company wants to change its corporate structure
• Bonus Issues and Stock Splits

  1. Arise when a company is changing its capital structure

  2. Original shares continue to exist, and the investor gains some new holding in addition to the shares already held
• A stock split occurs if the company wants to change the number of shares in issue
• The ongoing value of the assets held will be determined by market sentiment and the supply/demand for those assets
• Scrip Dividends


  A company might choose to create additional shares which are ‘paid’ to its shareholders instead of a cash dividend
• Obligations of a Platform in Respect of Structural Events

  The platform needs to make changes to its asset master file and actual holdings of investors that own the affected assets when a structural event occurs
• The platform should ensure that their custodian position reflects the new holdings