Late Rights Issue Instruction and CHF Funding

Entitlement: 1,200,000 multiplied by 5/7 = 857,142.857. Rights are usually rounded down to the nearest whole right, so 857,142 rights.

Subscription cost: 857,142 multiplied by CHF 4.20 = CHF 3,599,996.40. The fund also needs cash for fees and any FX costs.

The instruction sent at 16:30 CET on 15 April is after the custodian's 12:00 CET deadline. The custodian is entitled to reject it and has done so. A late instruction is not automatically effective; the custodian's deadline is usually earlier than the market deadline so that it can instruct its own agent in turn. The fact that the rights remain tradable until 16 April does not automatically revive the subscription. The fund should not assume it has the new shares.

The key distinction is between the custodian's client deadline and the market or agent deadline. If the custodian's own upstream deadline is later, it may sometimes accept a late instruction on a best-efforts basis, but it is not obliged to and may already have blocked the position. The fund should ask for written confirmation of the position's status immediately.

The first step is to establish whether the rights have already lapsed, been sold or are still held. Ask the custodian for the current position and the upstream deadline.

Options:

• Sell the rights in the market before the 16 April close. If the fund still holds the rights, selling them captures value and avoids the CHF 3.6m subscription funding.
• Ask the custodian to sell any lapsed rights on a best-efforts basis. The fund may receive net proceeds, but this is not guaranteed and may be less than the theoretical value.
• If the custodian can still accept an instruction, pre-fund the CHF subscription immediately. The plan to fund via FX on 17 April is too late for a 15 April instruction; FX should have been pre-funded or the fund should have used an existing CHF balance.
• Do not buy the new shares in the market on the assumption that the subscription will settle. That creates a naked position.

The fund should also notify the investment committee and document the expected loss or opportunity cost. If the rights are worthless after lapse, the loss is the value of the rights, not the full subscription amount.

Failures:

• The corporate action notification went to a distribution list containing former staff, so the fund may not have received or actioned the notice.
• There was no acknowledgement or instruction-tracking workflow. The team discovered the deadline only when the instruction was rejected.
• The custodian's deadline was not loaded into the fund's corporate action calendar.
• The FX funding was arranged after the instruction deadline.
• The decision was taken on 14 April, leaving only one day, which is tight for a cross-border rights issue.

Controls:

• Maintain a current notification matrix with named recipients and backups, tested quarterly.
• Use SWIFT MT564 notifications and MT565 instructions, with a custodian portal and automatic acknowledgement.
• Create a corporate action calendar that records both the custodian deadline and the market deadline, with alerts at T-5 and T-2.
• Require pre-funding confirmation before sending a subscription instruction.
• Apply a four-eyes check to voluntary corporate action instructions.
• Reconcile entitlements against the custodian's statement.

The broader lesson is that voluntary corporate actions are deadline-driven operational events, not only investment decisions.