The COVID-19 lockdowns have highlighted the inefficiencies with the payment of dividends through conventional means like cheques or bank mandates. These experiences have given renewed impetus to distribute dividends via CREST (UK’s Central Security Depository) instead. As a result, Euroclear UK & International, the owner and operator of CREST, has launched a campaign aimed at both corporates and intermediaries to employ CREST for this purpose.
There are benefits for both a corporate and its shareholders to jumping on this bandwagon. However, before doing so, it is key to understand how the CREST distribution mechanism works. There are different approaches a corporate can take and a few approaches introduce significant exposures for a corporate. For instance, some set-ups elevate the corporate’s counterparty risk upon its registrar. In other set-ups the corporate could even risk funding somebody else’s dividend and consequently not fully paying one’s own dividend.
This article explains all of this from the perspective of Shell plc, one of the FTSE 100’s largest dividend payers. These perspectives may help fellow FTSE constituents to follow suit. Equally it may serve others that are already distributing their dividends via CREST to recalibrate their set-up after considering the pros and cons of different approaches.
Currently, around 95% (by value) of FTSE’s equity is held by intermediaries that are already set up to automatically receive their dividends via CREST. However, around 60% of all members and about 40% of accounts in CREST (both by number) cannot yet be paid via this route. Across the FTSE 100 and FTSE 250, roughly half of corporates, representing around 75% of total FTSE dividend value, employ CREST for their dividend distributions. It takes two to tango: a member can only receive its dividend via CREST if both the corporate and the member have opted in.
While distribution of dividends via CREST can make profound sense for both the corporate and its investors, there are still various aspects a corporate should carefully consider. As with any other payment channel, it all centres on parcelling out a dividend robustly and swiftly in a cost-efficient manner while minimising risks.
Pound sterling, euro and dollar backed by Central Bank money: CREST provides a central bank-backed cash distribution capability across pound sterling, euro, and dollar. This currency range meets the needs of most FTSE corporates and in any case covers the lion’s share of their dividends. While Euroclear UK & International may consider adding other currencies to its capability, in the interim a corporate can continue distributing its dividend in other currencies through its existing means (for example, bank transfers).
Ability to always pay holders in CREST their whole dividend: A key benefit compared with cheques and bank mandates is that via CREST a shareholder arranges its ability to be paid upfront. Therefore, a shareholder can always be paid a dividend by any corporate in which it may hold shares at a certain moment in time in any of its CREST Member Accounts. This eradicates the endless, typically still paper-based, updates of bank mandates and all associated risks and nuisances for both the corporate and its shareholders. Equally, it removes the mutually cumbersome and time-consuming follow-ups on missed payments.
Full integrated electronic messaging operated by registrar: Dividend distributions via CREST automatically provide a dividend confirmation, representing a valid tax voucher, to each holder in electronic form. This removes the need for the corporate sending any additional (paper) dividend notifications to its dematerialised holders.
Regardless the specific set-up chosen, in practice, a corporate’s share registrar will operate the distributions via CREST. All three main UK share registrars have such a capability and are actively distributing dividends via CREST for various of their corporate issuer clients.
Swift and instant electronic settlement removing the need for any prefunding: Payments through CREST help to remove the need for a corporate to prefund its registrar, while its holders can still be confident of receiving their dividends first thing in the morning. This avoids any yield losses and credit risks for the corporate.
In turn, holders in CREST can immediately apply the funds received to settle subsequent transactions, improving settlement and cash efficiency. Distributions via CREST tend to start at 6am UK time in all three currencies and dividend distributions are usually completed within 30 minutes. This is quicker, earlier, and more predictable than one would be able to achieve via bank transfers.
Distributions via CREST represent a form of electronic cash distribution. While it is worthwhile to validate one’s articles of association, typically the articles allow a corporate employing any form of electronic cash distribution for its dividends and thus accommodate distributions via CREST.
Reasonable cost for the dividend paying corporate: Euroclear UK & International currently charges around 6.56p per CREST Member Account paid (covering making the payment, sending the input message, and receiving the response message). FTSE corporates face a similar direct holder base in CREST. Shell has around 550 CREST Members holding their shares in around 3,500 CREST Member Accounts. This results in a total charge for Shell of around £230 for each of its quarterly dividends (including all dividend confirmations/tax vouchers).
The aspects discussed so far hardly depend upon the specific implementation set-up chosen. However, this is not the case when it comes to exposures upon intermediaries during transfers. Here, different set-ups come with radically different risks. To appreciate this, one must first understand how cash distributions via CREST work.
Distributing dividend via CREST involves a Receiving Agent and a CREST Settlement Bank.
A Receiving Agent is a specific type of CREST participant that any legal person can request Euroclear UK & International to set up in its own name. The legal person acting as Receiving Agent is the debit party in the same way as the holder of a bank account is, used alternatively for dividend distributions.
A CREST Settlement Bank is a commercial bank that the Receiving Agent selects as the party supplying the liquidity in the relevant currency and thus enabling the payments. Most banks providing cash management services to UK corporates also act as CREST Settlement Banks. It is possible to select different banks for one or more of the currencies.
For each currency, the Receiving Agent sets up a Cash Memorandum Account (CMA) with a CREST Settlement Bank. It is this CMA that is used to record any payment in a certain currency made by the Receiving Agent. The CREST system credits and debits, instantaneously and irrevocably, the CMAs of the CREST Member and the Receiving Agent, respectively. This makes a CMA like a bank account that otherwise would have been used to distribute dividends.
To control the maximum amount that an individual Receiving Agent can distribute, its CREST Settlement Bank will impose a CMA Cap. This CMA Cap represents the maximum cumulative net debit position that the Receiving Agent can run on a dividend payment day. The CREST Settlement Bank tends to raise the CMA Cap before 6am UK time when CREST opens for payments. As soon as dividends start to settle, this CMA Cap will automatically be lowered accordingly. Once all dividends in a certain currency have settled, the CMA Cap will be back to zero.
It is key to note that this CMA Cap cannot distinguish dividend payments made on the same day for different corporates. Therefore, if a Receiving Agent queues up dividend payments for multiple corporate clients that are all due for the same payment day, raising the CMA Cap will automatically cause dividend payments of all these corporates to start settling.
If corporates opt to employ the same Receiving Agent, they create an interdependency between themselves and an elevated exposure to their registrar operating the Receiving Agent. As such, a company runs the risk of accidentally funding another company’s dividend and therefore not fully paying out its own dividend. Alternatively, its own dividend distribution may be held up, while awaiting all other companies to provide their funding too.
As mentioned, about half of the companies across the FTSE 100 and 250 already distribute dividends via CREST. Among this group three different implementation set-ups are applied in practice. These three set-ups differ in the choice made for the parties that serve as Receiving Agent and CREST Settlement Bank.
Registrar’s omnibus Receiving Agent and registrar’s generic CREST Settlement bank: In this set-up, the corporate allows its registrar to utilise the same Receiving Agent its registrar employs for various other corporate clients to distribute dividends and potentially distributions related to other type of corporate events. In this set-up, the registrar is the Receiving Agent and therefore also selects the CREST Settlement Bank it uses for these distributions.
One could compare this set-up with corporates collectively using one and the same bank account from which to distribute their dividend. The registrar, as account holder, selects the associated bank.
Registrar’s personal Receiving Agent and registrar’s specific CREST Settlement Bank: Like the previous set-up, the corporate allows its registrar to employ one of the Registrar’s Receiving Agents. However, in this variant the corporate and its registrar agree that this Receiving Agent can only be used to distribute dividend payments of this corporate. As a consequence, this variant also allows the corporate to specify which CREST Settlement Bank(s) this Receiving Agent must employ.
This set-up compares to each corporate distributing its dividend from a personal bank account held by the registrar. The personal nature allows the corporate to specify at which bank the registrar must hold this account.
Issuer’s Receiving Agent and its own CREST Settlement Bank: Finally, in the third variant, the corporate sets up a Receiving Agent in its own name and as a consequence also contracts its CREST Settlement Bank(s) itself. It must be stressed that also in this set-up the registrar continues to operate the dividend distributions via CREST.
Here, the set-up compares to dividend distributions being made from a bank account held by the corporate, but still operated by the registrar. It is the corporate that contracts the bank.
Each of the three set-ups come with their own characteristics. The following aspects are relevant for any corporate that considers paying its dividend via CREST or is already doing so.
Convenience to implement: Employing the registrar’s omnibus Receiving Agent and its generic CREST Settlement Bank tends to be the easiest to employ. In practice, it merely requires the corporate to consent to its registrar employing such practice. Requiring a specific Receiving Agent and employing a specific CREST Settlement Bank may require some more engagement with one’s registrar. Setting up its own Receiving Agent and contracting its own CREST Settlement Bank will be more onerous upfront. Doing so will require filing some paperwork with Euroclear UK & International and opening the Cash Memorandum Accounts at the CREST Settlement Bank the corporate prefers.
Once each of these three set-ups have been put in place, the corporate’s registrar can operate them in an identical fashion representing no real difference to the corporate. Furthermore, Euroclear UK & International currently charges each Receiving Agent a small amount (currently £20 per month), making the associated cost arguably not the most relevant factor of consideration. Furthermore, in all three set-ups, the registrar can connect the Receiving Agent to CREST via the registrar’s User (being the party providing the gateway connection).
Execution risk on the dividend payment day: As explained above, employing an omnibus Receiving Agent creates an interdependency between corporate issuers and an elevated exposure to their registrar operating this Receiving Agent. With more corporates paying their dividends via CREST, this exposure will increase. Being served through a personal Receiving Agent or setting up a Receiving Agent in one’s own name removes this downside risk for a corporate.
Alternatively, a corporate could consider accepting this downside risk if a) it trusts its registrar to always manage this inherent exposure effectively, b) it believes it is sufficiently covered under the terms and conditions it has agreed with its registrar and c) it finds its registrar sufficiently solvable and liquid to compensate for any damages suffered swiftly and fully. In addition, the corporate should consider its comfort to see its dividend distribution be held up by other corporates. The corporate may also want to reflect what it anticipates gaining from accepting these downside risks.
Counterparty risk on registrar: Employing a Receiving Agent held by the registrar, omnibus or personal alike, will inevitably place upon the corporate a counterparty risk versus its registrar. For this very reason, various corporates have traditionally opted to set up bank accounts in their own name, segregated from their group cash pool, that their registrar could still operate on behalf of the corporate to distribute its dividends.
Extending such approach towards distributions via CREST can only be achieved by setting up a Receiving Agent in the corporate’s own name. This is the only way via which the corporate can hold the CMAs at a CREST Settlement Bank in the corporate’s own name. It should also be noted that an alternative acknowledgement of trust cannot be arranged effectively around the CMAs of an omnibus Receiving Agent.
Employing corporate’s own principal cash management bank(s): Contracting the CREST Settlement Bank(s) in the name of the corporate allows selecting the principal cash management bank(s) for this purpose. As explained in an earlier article, doing so represents three main benefits.
First, it allows the corporate to employ the very same payment technologies, proven global product capability, execution track-record and balance sheet strength that underpinned the corporate’s choice for its principal cash management bank(s).
Second, it allows for contracting these services under existing framework agreements, capturing economies of scope and scale for the corporate’s benefit.
Third, extending the involvement of a corporate’s principal cash management bank up to its shareholders’ doorstep makes all associated transfers intra-bank and intra-issuer. This allows for overnight processing and thus facilitates earlier settlement on payment day, while avoiding any credit concerns for both the bank and the corporate.
It is an individual corporate’s full and exclusive prerogative to select and refine the set-up it suits best. Obviously, both the size and the frequency of corporate’s dividend is highly relevant. Therefore, it will not be a surprise to hear that Shell, currently paying a dividend worth around $2bn per quarter in pound sterling, euro, and dollar, has opted for setting up a Receiving Agent in its own name, operated by its share registrar Equiniti, and employing its principal cash management bank Citi as its CREST Settlement Bank.
In (re)considering the optimal set-up, it is advisable that the treasury team and the company secretariate team up and jointly discuss options with both their principal cash management bank(s) and their registrar.
In addition, Euroclear UK & International has launched a helpful webpage with ample reference materials, including the CREST Reference Manual and tariff brochure, which can be found here (click on “access as a guest”). Finally, it never hurts to consult one or more peers working for similar corporates to hear their perspectives and experiences.
This article is a follow-up of earlier article that was published in the Treasurer in June 2021, which can be found here.
More information can be found at Euroclear UK & International (click on “access as a guest”)
Paul Vos FCT is senior manager of treasury and corporate finance at Shell (paul.vos@shell.com)
Anthony Clarke FCIS is deputy company secretary at Shell (anthony.clarke@shell.com)