Clearstream consortium seeks to resolve historic Reg S and Rule 144A bond inefficiencies

Dan Barnes
Adrian Dacruz, VP strategic market development, Clearstream.

In October, the international central securities depositary (ICSD), Clearstream, has its seventh meeting of its business consortium to reduce operational risks and time delays when issuing bonds under the Regulation S or Rule 144A formats.

Reg S and Rule 144A bonds are types of bonds allowing the issuer to issue these securities without the need to register them under the Securities Act of 1933 in the US. The two rules are defined as follows:
• Under the Rule 144A, qualified institutional buyers (QIBs) can trade debt securities without registration and review by the Securities and Exchange Commission (SEC).
• The Reg S bond type is available for offers and trades of securities outside of the USA to US and non-US QIBs.

Adrian Dacruz, VP of strategic market development at Clearstream and founder of the new consortium says, “The main objective is reducing operational risks and time delays when issuing bonds under the Regulation S or Rule 144A formats’ – meaning reducing both buy-side and sell-side risks in the primary and secondary markets. The sell side is involved in the processing of conversions, in partnership with agent banks and underlying CSDs. These conversions currently take days to complete due to high administrative burdens that have been built into processes over decades. The time needed directly impacts the buy side, who is left with holding bonds that are in a kind of purgatory, unable to transact or utilise the assets during this period.”

The consortium, launched in January of this year, includes investment banks, bond issuers, data vendors, numbering agents, CSD’s and asset managers seeking to resolve existing operational inefficiencies within the international bond market.

We are adopting a multi-faceted approach to resolve these deep-rooted challenges; working together with trading operations, traders, legal counsels, CSDs and market infrastructures, bond issuers and data vendors to promote changes in the areas of business where they have the power to do so,” says Dacruz.

Clearstream supports the issuance of Reg S and 144A securities in a bifurcated structure:
• Two separate global securities in registered form which are deposited directly with a common depositary, held via Clearstream and Euroclear, one global note evidencing the Reg S portion and the other the 144A portion.
• Both global securities are registered in the nominee name of the common depositary.
• Exchange from one global note to the other is restricted.
• Two distinct ISIN codes are allocated to the global notes: the 144A receives one XS ISIN, the Reg S receives another XS ISIN

“Within the upcoming October session, the consortium is connecting with agent banks in the United States who will help us speed up the security conversion process between securities held in Europe and North America,” says Dacruz. “This boost in processing speed aims to create a higher functioning bond market for all.”

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