Dividend Arbitrage Reporting

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Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
For dividend arbitrage transactions: do lenders and borrowers expect to book these with a maturity date? If yes, and in a situation where the loan is moved to open, do lenders and borrowers expect to modify the loan (MODI) to open by removing the maturity date?

Furthermore, for fixed income borrowers; how are they going to handle UTI generation on pair offs/ Returns?

For example: If we have 100k shares on loan with a borrower and there is a partial return of 20k shares, we will book the partial return versus the 100k shares and reduce it to 80k shares (keeping the initial UTI). All borrowers will close the 100k shares and re-open 80k shares and therefore create a 20k return. In this example as the borrower is closing and re-opening the position.

Best Practice:
It has been unanimously agreed that where a maturity date field within participant's trading systems are commonly misused to create a flag or reminder to users, to address the commercials of a transaction, i.e. a div-arb trade, and therefore the date is not a contractual one, but one used for alternative purposes, the lending system should hold this notification date elsewhere.

Where transactions are paired-off then participants are advised to ensure that they can supress the default reporting template for the closing and opening legs and instead send a modification for partial returns. To do this successfully, they will need to append the UTI from the original loan position, to the rebooked one. (SFTR-265)