Failed Delivery, Buy-In and Dividend Claim on Mongol Telecom
On 10 April a foreign institutional client buys 200,000 shares of Mongol Telecom (MTL) through a local broker at MNT 3,500. Settlement is T+2. The seller's shares are pledged to a bank; the pledge release instruction reaches the seller's custodian after the 12 April cut-off, so the seller fails to deliver. The clearing house initiates a buy-in on 13 April at MNT 3,800, costing an extra MNT 60 million. MTL had set a dividend record date of 13 April and an ex-date of 11 April, with a dividend of MNT 150 per share. The buyer's cash was ready, but its global custodian's FX conversion missed the deadline; the local broker nevertheless confirmed the trade. The buyer's account is not credited with MTL until the buy-in settles on 15 April. The buyer claims the dividend and the buy-in loss.
1. Who is entitled to the dividend, and who should bear the buy-in loss? Explain the record date, ex-date and settlement mechanics.
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Dividend. With a record date of 13 April and an ex-date of 11 April, a trade on 10 April is cum-dividend economically and would normally settle on 12 April, before the record date. But the seller failed delivery, so the buyer was not registered on 13 April. Legal entitlement follows the register: the seller receives the dividend of 200,000 × 150 = MNT 30 million. The buyer has a contractual or market claim for dividend compensation, typically handled through the buy-in or clearing rules; it should not assume the issuer will pay it directly. Buy-in. The extra MNT 60 million is a settlement failure loss. Under clearing rules, the failing seller and its clearing member bear the buy-in cost. The local broker should pass the cost to the seller's broker, not to the innocent buyer. Custody. The buyer's FX delay is a separate custody issue. It may give the buyer a claim against its global custodian, but it did not cause the seller's delivery failure.
2. Evaluate the custody and settlement controls that should have prevented the failure.
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Pre-settlement. The seller's custodian should have confirmed the pledge release before trade date. A release instruction received after the 12 April cut-off is a control failure: pledged positions should be flagged and not sold unless released. The broker should pre-match settlement instructions on T+1 and check available, unencumbered positions. Cut-offs. The buyer's global custodian missed the FX cut-off; that is a separate control failure. The local broker confirmed the trade despite the cash timing issue, which increased settlement risk. Controls. Set hard cut-offs for FX and cash, require buy-in insurance or collateral, reconcile record-date positions, and monitor corporate actions. The seller's custodian should not have confirmed a trade without a released pledge. The broker should have a clear escalation path when a client's funding is late.
3. If the buyer's global custodian caused the FX delay, does that change the allocation of the buy-in loss? What remedies should the buyer pursue?
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Allocation. The seller's failure to deliver is the primary cause of the buy-in. The seller and its clearing member remain liable to the clearing house and the buyer's broker. The buyer's global custodian's FX delay may be a breach of its custody agreement, but it does not shift the seller's delivery obligation. The buyer may have two separate claims: one against the seller's side for the shares and dividend shortfall, and one against its global custodian for the FX delay. Remedies. The buyer should demand the shares plus the MNT 30 million dividend equivalent, less any agreed costs. It should document the buy-in, claim compensation from the seller, and review the global custodian's service-level agreement. Broker. The local broker should make the buyer whole under market rules, then recover from the seller's clearing member. It should report the incident and preserve records for the FRC.