Intensive work on the Corporate Actions reform.
The activities started in May, when KELER, the Hungarian CSD, along with the Budapest Stock Exchange (BSE) and the Central Bank of Hungary issued a joint proposal on corporate actions reform to ensure international compliance in the framework of T2S. The preparation of the regulatory change proposals and new market procedures is now the duty of working groups established at the 4th Hungarian National Stakeholder Group (HU-NSG) meeting held on 16 November.
The three working groups are the following:
Business Working Group – has the goal to work out the frameworks and specifications of a Golden Source and set up the market claim process.
Regulatory and Tax Working Group – has the objective to standardise income payment and tax related processes, clarify the paying agent status and make proposals to change the Nominee Concept. Led by the Association of Investment Service Providers and the Banking Association the working group is having regular meetings. For the next session planned to be held in January 2019, the Banking Association invited tax experts and representatives of the Ministry of Finance to present their understanding of the applicable regulations and their views on the planned corporate action reform.
Shareholders Rights Directive Working Group – will operate in collaboration with the Regulatory and Tax Working Group in order to properly interpret the regulations and set up efficient procedures for shareholder identification and general meetings.
GSS Hungary is an active member of all the working groups, and so far, participated in all consultations.
Progress made since spring
The objectives to optimise and increase the effectiveness of the current Corporate Action procedures applicable on the Hungarian Market were first drawn up during the market consultations held in relation to KELER’s system change project. At the second meeting of the HU-NSG held on 14 March, it took over the duty of overseeing the corporate action harmonisation project. KELER, BSE and CBH undertook the responsibility to prepare comprehensive conceptual material summarising the reforms, based mainly on the CAJWG and CASG mandatory recommendations. The joint proposal was submitted to the stakeholders (issuers, financial intermediaries, infrastructures and issuers) for written consultation, in May.
The document, amongst others, provided a detailed description of the proposed changes, highlighted the importance of the reforms for the national economy, listed the advantages and anticipated the impact on the market participants.
The main proposals were the following:
- The creation of a central corporate action database that improves the availability of Corporate Action information. After a corporate event announcement, market players shall be informed about the details of the event quickly and from a reliable source.
- In accordance with international standards, payments related to securities (such as dividends) are to be processed uniformly and in a swift manner - as early as the next business day after record date - instead of today's ownership identification procedure.
- In relation to payments, a single, more automated, shorter process to be developed for all types of securities, allowing the reduction of personal data flow between service providers.
- The paying agent role is to be moved to investment service providers for each security.
- In accordance with international standards, the introduction of the automatic market claim, transformation and buyer protection in the market practice.
- Institutionalised tax refund procedure to be introduced (quick refund).
- Expansion of the nominee concept for all types of securities.
- Improve the efficiency of general meeting related procedures.
Parallel to the written consultation, the Banking Association and the Association of Investment Service Providers hosted several meetings with the participation of the affected parties, mainly custodian banks and tax experts. As a result of the discussions, further recommendations and concerns were submitted at the third HU-NSG meeting held in June. It became clear during the discussions, that the market welcomes the majority of the initiatives such as the simplification of the income payment processes, the new nominee concept and the establishment of a Golden Source.
The biggest debate between the stakeholders and KELER was caused by the proposal to move the paying agent role to the investment service providers. Stakeholders expressed their need to further analyse the current regulatory requirements and procedures and work out a more suitable proposal on the paying agent role and the related tax reporting procedures.
Further meetings led by the Banking Association were held during the summer with the participation of custodian banks with international clients. In light of the 2018/1212 Regulation to the Shareholders’ Rights Directive (published on 13 September 2018 and coming into force in September 2020), the participants agreed that strict reporting requirements are expected, thus shareholders’ data will be available for issuers to process the dividend payments. Moreover, the issuers already have the infrastructure and procedures for handling shareholders’ data and tax reporting making the modification of the paying agent role in case of dividend payment unnecessary.
The participants were on the same page that income definitions should be clarified and standardised, dividend payment process similar to the current interest payment practice, quick refund implemented together with simplified tax reporting procedures and the nominee concept modified as previously proposed by the Nominee Lobby Group during 2017.
On the way towards international standards
The market expects the reforms to be finished within the next 2-3 years. By introducing simplified payments, tax processes and standardised documentation requirements, investors will have the chance to operate on a safe, investor-friendly market aligning with international requirements.
Global Securities Services Hungary