Interest payments are based on the nominal value of a Financial Instrument (FI)/security. Within the electronic Strate Bond System, one interest rate for each interest payment date is stored for each security. The CSD is responsible for maintaining this information.
On the interest payment date, the system calculates the interest payable per depository account. Interest is calculated on the Participant’s securities balance as at LDR (last day to register) for the security. The issuer and transfer secretary are responsible for reconciling interest payments on LDR for securities holdings bearing interest on LDR. Interest payment amounts are credited to the depository’s account on interest due date (payment date). The depository in turn will credit the various Participants’ funds accounts with the interest payment amounts. Participants are responsible for paying the interest payment monies to the relevant securities holders in their books.
The interest calculated for a security may be based on several types of coupon rates, namely:
- Fixed Coupon Rates. The coupon rate does not change throughout the life of the security.
- Variable Coupon Rates. Quarterly on the day after interest date, the coupon rate will be changed according to a formula declared when the security was issued. The new coupon rate is declared by the issuer.
- Zero Coupon Rates. This security is sold at discounted rates and no interest is paid during the life of the security.
Securities redemptions are processed on redemption date as allocated in the Strate Bond System. The percentage recorded on the security for the redemption date is paid to the relevant securities holders. The issuer and transfer secretary are responsible for reconciling redemption payments on LDR for the total holding of securities that are redeemed.
Redemption payment amounts are credited to the depository’s account on payment date. The depository in turn will credit the various Participants’ funds accounts with the redemption payment amounts. Participants are responsible for paying the redemption monies to the relevant securities holders.
The redemption of a security may be governed by different criteria. The redemption type indicates these, which is one of the following:
- Fixed Redemption date, which falls on an interest date, 100% of the nominal value will be redeemed on the redemption date. Interest will be paid on the redemption date.
- Fixed Redemption date, which does not fall on an interest date, 100% of the nominal value will be redeemed on the redemption date. Pro rata interest may or may not be paid on the redemption date.
- Variable Redemption - Holder on interest date, 100% of the nominal will be redeemed on the final redemption date. The holders of the security may opt to redeem their holdings on one of several redemption dates, which are declared when the security is issued. Notice must be given to the issuers, by the holders of the security, of their intent to redeem. The required notice period is declared when the security is issued.If the holders of the security wish to exercise this option on redemption dates prior to final redemption, the Participant, on behalf of the holder of the security, will withdraw their holdings from the depository and the redemption will be conducted outside the CSD system. Interest will be paid on the redemption date.
- Variable Redemption – holder not on interest date, as above, but pro rata interest may or may not be paid on the redemption date.
Capital repayments are performed on amortised securities that are in a dematerialised or immobilised form in the CSD. Amortised securities have no fixed time schedule of capital repayments. This is dependent on the capital amount repaid on the underlying assets and the issuer is only in a position to confirm the capital repayment amounts, if any, closer to the interest repayment dates. It is quite possible that the first few interest payments will be paid without any capital being repaid at the same time.
Although most interest rates linked to these securities are variable, the interest rate is known in advance. Repayment of securities can be done on a quarterly, half-yearly or yearly basis. During Books Closed Period (BCP):
- For immobilised securities, the issuer notifies the CSD of the capital repayment, and the CSD in turn, calculates the repayment per Participant account and the issuer’s amount will be reduced when books re-open.
- For dematerialised securities, the Strate Bond System will reduce the individual Participants securities balances by the payment amount and reduce the issuer’s account by the total equivalent amount on payment date.
CSD conversion is the process whereby the CSD and issuer convert immobilised securities certificates and TS receipts into an electronic securities register format i.e. dematerialisation. Although the CSD initiates the conversion process it is the issuer’s confirmation that updates the electronic record known as the ‘issuer’s account’. The conversion process is not bound by any restrictions, and conversion can take place at any time during books closed period.
Only dematerialised securities may be marked as split-able. These are bonds that are actually made up of three separate bonds but grouped together on issue date. They were all issued on the same date and have the same attributes but redeemed one year apart. The CSD has the functionality to split the Standard Coupon Bearing Bond (SCBB) into its three principal securities. This function will automatically create the three new securities within the system according to the principle data of the SCBB. The issuers will, at their discretion, perform buybacks on the SCBB and top ups to the Principal securities as required and authorised.
Top-Ups and Buy-Backs
The top-up function allows the issuer to place, electronically, new or additional securities into the market via the CSD system. The process involves the issuer capturing an electronic top-up list and the issuer’s Participant ‘confirming’ the individual items on the top-up list. The CSD system automatically sends a 'notifying’ message to the relevant Participant advising them that items are pending ‘confirmation’ once the issuer ‘stores’ his electronic deposit list. When the individual items have been ‘confirmed’ by the Participant, the Participant’s free balance securities account and their current LDR balances are updated immediately. The issuer’s account balance is also updated at the same time by the same amount. The ‘confirm’ process will automatically update the ‘amount on issue’ balance held on the CSD system.
The ‘buy-back’ function allows the issuer to electronically reduce the amount of securities on issue to the market via the CSD system. The process involves the issuer capturing an electronic Buy-Back list and the issuer’s Participant ‘confirming’ the individual items on the buy-back list. The CSD system will ‘verify’ that the issuer’s buy-back amount does not exceed the amount held by the Participant in their free securities account.
The CSD system automatically sends a ‘notifying’ message, to the relevant Participant advising them that items are pending ‘confirmation’ once the issuer ‘stores’ his buy-back list. When the individual items have been ‘confirmed’ by the Participant, the Participant’s free securities account and their current LDR balances are reduced immediately. The issuer’s account balance is also reduced at the same time by the same amount. The ‘confirm’ process automatically reduces the ‘amount on issue’ balance held by the CSD system.