HM TREASURY FINANCE BILL 1997
NEW CLAUSE 3
EXPLANATORY NOTE
NEW CLAUSE 3: EX-DIVIDEND ARRANGEMENTS FOR GILT-EDGED SECURITIES
SUMMARY
1. This clause enables changes to be made to the
arrangements for paying dividends on gilt-edged
securities.
2. The Bank of England currently have discretion to
strike the balance on their Register for the purpose
of paying dividends on a day before the actual
payment. The day must be the same for all investors
for a given stock. This clause provides for an order
made by the Treasury to prescribe more flexible
conditions.
DETAILS OF THE CLAUSE
3. Subsection 1 substitutes a new section 2 in the
National Debt (Stockholders Relief) Act 1892. In
particular it provides for the Bank of England to
strike the balance on different days for different
holdings of the same stock according to criteria laid
down in an order made by the Treasury. It reduces the
maximum limit on striking the balance from 37 calendar
to 10 business days before payment date and allows a
shorter maximum to be specificied by order.
4. Subsection 2 provides that the new section 2 will
apply for the purpose of making dividend payments
payable after the day the Act receives Royal Assent.
BACKGROUND
5. Currently, dividends are paid to the person
recorded as holding the stock on the Bank of England's
register on a day (the striking date) before the
prescribed payment date. It has been necessary to
strike the balance on the Bank's register for dividend
payments in this way to allow time for the preparation
and despatch of dividends so that payment reaches
investors on the prescribed payment date. Current
practice is for this day to be close of business five
working days before the payment date. Legislation
gives the Bank the discretion to do this (see above).
6. In practice the ex-dividend period starts two
days before the striking date to allow necessary time
to ensure transfers of stock are recorded on the
Bank's register. During the ex-dividend period the
stock is said to trade "ex-div" as purchasers do not
acquire the right to the next dividend. The ex-dividend
arrangements are an undesirable feature of
the gilts market and are not in line with
international best practice and may be a disincentive
to international investor interest in gilts.
7. The Treasury and the Bank of England are
considering making improvements to the ex-dividend
period. In January 1996 it was reduced from 37
calendar to 7 working days (it remains at 10 days for
3½% War Loan because of the large number of holders).
Systems developments in settlement and registration
processes opens up the possibility of abolishing the
ex-dividend period for gilts held in dematerialised
form - that is on the Central Gilts Office (CGO - the
computerised settlement system for gilts). However,
for holders of gilts in certificated form or on the
National Savings Stock Register (NSSR) it will
continue to be necessary for there to be an ex-dividend
period to allow time for registration of
transactions and physically paying dividends.
8. [The effect of this disparity would be that
investors still covered by an ex-dividend period would
not be able to settle trades in a stock bought or sold
during its ex-dividend period until the end of the
period. They would have to trade forward for
settlement between 1 and 7 days in the future rather
than automatic next day settlement. As a result they
would receive the proceeds of a sale or their
certificate from a purchase a few days later than is
currently the case. This would only be true where a
transaction was undertaken during the ex-dividend
period (7 days out of every six months). Furthermore,
if these investors did not want to face this
inconvenience they could chose to hold their gilts in
dematerialised form through nominee accounts or
sponsored membership facilities in the Central Gilts
Office (CGO).]
9. The Bank are consulting the market on these
proposals. A final decision awaits the outcome of the
consultation process. The purpose of the current
clause is to enable the Treasury to bring forward the
necessary legislative requirements in secondary
legislation if a decision to implement is taken.