Template:Voting rehypothecated securities: Difference between revisions
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The question will arise from time to time,<ref>Usually it will arise because the same person, who has been working in the client services team processing corporate actions for twenty years, keeps asking it)</ref> “if we have rehypothecated an asset | === Voting rights and rehypothecation === | ||
The question will arise from time to time,<ref>Usually it will arise because the same person, who has been working in the client services team processing corporate actions for twenty years, keeps asking it)</ref> “if we have [[rehypothecate|rehypothecated]] an asset pledged to us and there is a [[corporate action]] or a shareholder vote on it, then who gets to exercise it?” | |||
To answer this question there are two distinct relationships to consider: | To answer this question there are two distinct relationships to consider: | ||
*'''[[Issuer]] and [[shareholder]]''': Between the security [[issuer]] and the [[Shareholder|holder for the time being of its securities]]; | *'''[[Issuer]] and [[shareholder]]''': Between the security [[issuer]] and the [[Shareholder|holder for the time being of its securities]]; | ||
*'''[[Pledgor]] and [[The Rehypothecator|rehypothecator]]''': between you and the counterparty who pledged the security to you, which you then rehypothecated. | *'''[[Pledgor]] and [[The Rehypothecator|rehypothecator]]''': between you and the counterparty who [[pledge|pledged]] the [[security]] to you, which you then [[rehypothecate|rehypothecated]]. | ||
They play out quite differently. | They play out quite differently. | ||
====[[Issuer]] and [[shareholder]]==== | ====[[Issuer]] and [[shareholder]]==== | ||
As far as the issuer is concerned, whoever is the beneficial owner of the security from time to time has the | As far as the issuer is concerned, whoever is the [[Beneficial ownership|beneficial owner]] of the security [[from time to time]] has the vote. It cares not one whit for private dealings between [[prime broker]]s and their clients, nor ''why'' their securities have changed hands, much less ''how''; only that they ''have''. [[Rehypothecation]] is of no concern to the [[issuer]]: it must listen to the [[Beneficial ownership|beneficial holder]]’s vote, be that the original [[pledgor]] (if not [[rehypothecate|rehypothecated]] at all) the [[pledgee]] (if [[rehypothecated]] but not yet kicked into the market) or whoever winds up with the security on the [[record date]] (once the [[pledgee]] has kicked it into the market). So that’s how the [[issuer]] will look at it. | ||
====Pledgor and rehypothecator==== | ====Pledgor and rehypothecator==== | ||
As between the pledgor and | As between the [[pledgor]] and [[pledgee]] there is a subtler relatiopnship the issuer will not see: | ||
*'''In custody''': as long as the share is in custody, the pledgor, as beneficial owner as the vote. | |||
*'''In the depot''': If the pledgee rehypothecates, the pledgor loses the absolute ''right'' to vote the share, because it doesn’t own it any more, but nor does the ''pledgor'' gain the right to vote the share, because everyone’s expectation is that it will deliver the share outright into the market as soon as it has rehypothecated it.<ref>There’s no point rehypothecating a security if you don’t want to transfer it into the market. You may hold a quantity in inventory as a buffer, but this should really be a transient state of affairs: the expectation is that ''everything'' you rehypothecate goes out the door. If you don’t need to send it out the door, leave it in custody.</ref> | |||
*'''In the market''': Once it is in the market, the security is beyond pledgor’s or pledgee’s control. The holder for the time being, whoever she may be, can vote with it as she wishes (though in some common use-cases for rehypothecated shares, by convention will not).<ref>For example, a, agent lender will not typically vote shares it holds as collateral for stock loans. A lot of these shares are rehypothecated.</ref> | |||
Now just let’s say the [[pledgee]] has rehypothecated the asset out of [[custody]] but for some reason hasn’t yet got round to kicking it out into the market. Here it holds the share in its open depot, beneficially for itself. From the issuer’s perspective, | Now just let’s say the [[pledgee]] has rehypothecated the asset out of [[custody]] but for some reason hasn’t yet got round to kicking it out into the market. Here it holds the share in its open depot, beneficially for itself. From the issuer’s perspective, the [[pledgee]] may vote. The issuer will listen to no-one else. But from the pledgee’s ''contractual'' perspective, it shouldn’t vote, except as directed by the [[pledgor]]. It should treat the share ''as if it were still in custody'', because it ''can''. This may be a stroke of fortune for the pledgor, but from the pledgee’s perspective rehypothecation is a funding optimisation tool, not some right to play with residual optionality on the shares themselves. If the [[pledgor]] can effect a vote on its client’s behalf, it should. If the pledgor is disinclined to vote, nor should the pledgor (this may seem a rather holier-than-thou attitude but candidly, it just aligns you in the right place. [[Bonum ovum esse]]; don’t take advantage of situations like this; it will only lead to trouble in the end. | ||
====Bottom line==== | |||
'''Top tip for pledgors''': If you want to vote your securities, tell your [[pledgee]] to box them out so they are not available for rehypothecation. | |||
Latest revision as of 11:19, 21 April 2020
Voting rights and rehypothecation
The question will arise from time to time,[1] “if we have rehypothecated an asset pledged to us and there is a corporate action or a shareholder vote on it, then who gets to exercise it?”
To answer this question there are two distinct relationships to consider:
- Issuer and shareholder: Between the security issuer and the holder for the time being of its securities;
- Pledgor and rehypothecator: between you and the counterparty who pledged the security to you, which you then rehypothecated.
They play out quite differently.
As far as the issuer is concerned, whoever is the beneficial owner of the security from time to time has the vote. It cares not one whit for private dealings between prime brokers and their clients, nor why their securities have changed hands, much less how; only that they have. Rehypothecation is of no concern to the issuer: it must listen to the beneficial holder’s vote, be that the original pledgor (if not rehypothecated at all) the pledgee (if rehypothecated but not yet kicked into the market) or whoever winds up with the security on the record date (once the pledgee has kicked it into the market). So that’s how the issuer will look at it.
Pledgor and rehypothecator
As between the pledgor and pledgee there is a subtler relatiopnship the issuer will not see:
- In custody: as long as the share is in custody, the pledgor, as beneficial owner as the vote.
- In the depot: If the pledgee rehypothecates, the pledgor loses the absolute right to vote the share, because it doesn’t own it any more, but nor does the pledgor gain the right to vote the share, because everyone’s expectation is that it will deliver the share outright into the market as soon as it has rehypothecated it.[2]
- In the market: Once it is in the market, the security is beyond pledgor’s or pledgee’s control. The holder for the time being, whoever she may be, can vote with it as she wishes (though in some common use-cases for rehypothecated shares, by convention will not).[3]
Now just let’s say the pledgee has rehypothecated the asset out of custody but for some reason hasn’t yet got round to kicking it out into the market. Here it holds the share in its open depot, beneficially for itself. From the issuer’s perspective, the pledgee may vote. The issuer will listen to no-one else. But from the pledgee’s contractual perspective, it shouldn’t vote, except as directed by the pledgor. It should treat the share as if it were still in custody, because it can. This may be a stroke of fortune for the pledgor, but from the pledgee’s perspective rehypothecation is a funding optimisation tool, not some right to play with residual optionality on the shares themselves. If the pledgor can effect a vote on its client’s behalf, it should. If the pledgor is disinclined to vote, nor should the pledgor (this may seem a rather holier-than-thou attitude but candidly, it just aligns you in the right place. Bonum ovum esse; don’t take advantage of situations like this; it will only lead to trouble in the end.
Bottom line
Top tip for pledgors: If you want to vote your securities, tell your pledgee to box them out so they are not available for rehypothecation.
- ↑ Usually it will arise because the same person, who has been working in the client services team processing corporate actions for twenty years, keeps asking it)
- ↑ There’s no point rehypothecating a security if you don’t want to transfer it into the market. You may hold a quantity in inventory as a buffer, but this should really be a transient state of affairs: the expectation is that everything you rehypothecate goes out the door. If you don’t need to send it out the door, leave it in custody.
- ↑ For example, a, agent lender will not typically vote shares it holds as collateral for stock loans. A lot of these shares are rehypothecated.