Scorpeo, the firm behind the Euroclear Cash+ solution, says more developments in the CSD space should be expected as stakeholders including investors, pension fund trustees, and CSD operators themselves recognise the value that can be unlocked from corporate actions.
Euroclear’s new Cash+ service ensures this value is captured and returned to the investors. Cash + was a response to analysis of how voluntary corporate actions are inefficient. For example, where investors are defaulting to cash rather than electing for securities in scrip dividends means they lose out on significant value. Scorpeo puts the losses attributable to sub optimal elections on scrip dividends at $1bn annually, or some $14bn since 2011 – according to figures referenced by Euroclear Cash+.
As outlined by Scorpeo’s Matt Ruoss, CEO, and Shivesh Jha, CIO the outcome of the work that has been put into delivering this solution is ultimately an opportunity for greater alpha generation, delivered through creating efficiencies.
Having started with three markets served by Euroclear (France, Belgium and the Netherlands), Ruoss (pictured right) comments that finding the solution has been driven by the available empirical evidence identifying the size of the suboptimal elections.
“What do we mean by that? Well, with a scrip dividend, you have a cash and stock option. But at the point you make your decision whether to take more shares or the cash, they are not equal in value. One is worth more than the other, as the underlying stock price moves. As much as 80% of the market takes the cash option irrespective of the value in the alternate. So where stock is better, investors are missing this value. This value just dissipates into the ether.”
Tackling this status quo approach is therefore interesting for multiple stakeholders, he adds.
“It returns intrinsic value to where it should reside – to the shareholder, be that the pension fund or the asset manager. By implementing Cash+ at the CSD level, it leverages Euroclear’s market infrastructure. As a systemically important institution they recognise that they can provide value added services through the ecosystem in their robust framework. Obviously, it requires adoption throughout the ecosystem. Everyone has frustrations about how a fragmented ecosystem creates inefficiencies. Everyone on that chain needs to work together to create these better outcomes.”
The positioning of Scorpeo’s core technology in Cash+ within the CSD service is like the “Pentium processor” identifying missed value and facilitating the the process to retrieve any additional value from the alternate stock election.
“This is very niche,” Ruoss says, “in terms of expertise and product offering, when people talk about corporate actions they’re usually citing the ‘golden record’ or operational efficiencies – creating fixes to minimise manual inputs. Nobody was looking at addressing the billions of dollars a year that are missed globally because of suboptimal elections on corporate actions. That’s an issue, particularly at a time when there are pension fund deficits, when everyone is trying to do more with less and when asset managers are under pressure on their fees.”
“The need to find innovation in terms of extracting greater alpha from their portfolios has never been more necessary. Cash+ offers exactly that – a very simple tickbox that guarantees additional cash with no hidden catches: it is cash or more cash. That is quite simply what is on offer.”
Ruoss confirms that developments will be considered both in product offering and jurisdictonal reach.
“In terms of CSDs and the different challenges they’re facing, the world is moving very quickly. Over the last 10 years regulatory pressures have been prevalent – Brexit, Basel II, MiFID and now we have considerable geopolitical uncertainty. T+1 is currently using up sizeable operational resource and everyone on the value chain from the issuing company right through to the beneficial owner – we’re talking about sub-custody, agents, intermediaries, CSDs – are all grappling with multiple demands whilst striving to deliver excellence.”
“With all these parties often self-solving inefficiencies, Cash+ can be seen as a universal solution open to everyone. For example, a CSD is the only point of contact to democratise this solution, making it available to all beneficial owners.”
Global view
Picking up on the global perspective, Jha (pictured left) adds that the missed value identified in the scrip dividend 
issue is not specific to Europe.
“In fact, investor behaviour is pretty normalised across the globe when it comes to voluntary corporate events, where in most instances, they don’t even realise that there is value that they are missing.”
“We are going to try and capture as much of that as possible to return to the investors. CSDs have a very important role to play in that, particularly as one of their roles is to help create efficient capital markets for investors. Cash+ is one more step to help them achieve that goal.”
There is also an eye to the future. Markets are shifting towards tokenisation and on-chain distributions.
Jha adds that this has been factored into the Scorpeo approach. For example, when tokenisation becomes a common feature,the technology can adapt to take advantage of that change.
From the Scorpeo perspective, the partnership with Euroclear means that they can handle the distribution and the market infrastructure aspects, while Scorpeo is positioned to react to “nuances in the market” based on the technology and experience in the field.
“Certain issuers are looking at on-chain distributions in future .and it would be extremely simple for us to connect to various exchanges to be able to take advantage of such technological innovation.”
