2.1 Chapter 2 defines securities, debt securities, and equity securities; sets out the criteria for distinguishing securities from other types of financial instruments; and outlines the main features of debt and equity securities.
2.2 Securities include debt securities, equity securities and, to some extent, investment fund shares or units. Financial instruments can be distinguished on the basis of negotiability. A financial instrument is negotiable if legal ownership of the instrument can be easily transferred from one institutional unit to another by means of delivery or endorsem*nt (or be offset in the case of financial derivatives). While any financial instrument can potentially be traded, negotiable instruments are designed to be traded on an organized exchange or over-the-counter (OTC), although actual trading is not a necessary condition for negotiability.
2.3 The criteria for a financial instrument to be considered negotiable are: (1) the ability to be transferred to another person’s legal ownership (or offset in the case of financial derivatives); (2) standardization (often evidenced by fungibility) and an eligible International Securities Identification Number (ISIN); and (3) no right of recourse against previous holders of the relevant asset.
2.4 Currency and deposits, loans, money market fund (MMF) shares or units, open-ended investment fund shares or units, other equity, and other accounts receivable or payable are not typically negotiable—neither are insurance, pension, or standardized guarantee schemes. Securities, financial derivatives, monetary gold, and special drawing rights (SDR) are all negotiable financial instruments.
2.5 Debt securities are negotiable financial instruments serving as evidence of a debt (2008 SNA, paragraph 11.64). Equity securities, which are also called shares (both listed and unlisted), are securities acknowledging claims on the residual value of a corporation after the claims of all creditors have been met (2008 SNA, paragraph 11.83). Investment fund shares or units are issued by investment funds: collective investment undertakings through which investors pool funds for investment in financial and nonfinancial assets (2008 SNA, paragraph 11.94).
2.6 The different types of security can also be distinguished by type of income. While debt securities accrue interest, equity securities pay dividends, and investment fund shares or units pay investment fund income (see Table 2.1).
Table 2.1
Types of Security
Table 2.1
Types of Security
| Main characteristics | Issuer is obliged to pay a specified amount of principal and interest to the owner | Acknowledgement of claims on the residual value of a corporation after the claims of all creditors have been met | Issued by collective investment undertakings and represent a share in an investment portfolio |
| Type of income | Interest receivable | Dividends | Investment fund income |
Table 2.1
Types of Security
| Main characteristics | Issuer is obliged to pay a specified amount of principal and interest to the owner | Acknowledgement of claims on the residual value of a corporation after the claims of all creditors have been met | Issued by collective investment undertakings and represent a share in an investment portfolio |
| Type of income | Interest receivable | Dividends | Investment fund income |
2.7 Financial derivatives are not classified as securities even if they are negotiable financial instruments. No principal amount is advanced that has to be repaid and no investment income accrues (MFSM, paragraph 176). Financial derivatives are instruments linked to specific financial or nonfinancial assets or indices through which specific financial risks can be traded in their own right in financial markets.1
Debt Securities
Quantitative Features
2.8 Debt securities should display all, or most, of the following quantitative characteristics: (1) an issue date; (2) an issue price; (3) a redemption price (or face value); (4) a maturity (or redemption date); (5) the coupon rate that the issuer pays to the holders; (6) the coupon dates; and (7) the currency of denomination and settlement.
Issue date
2.9 The issue date is the point in time at which the debt security is issued.
Issue price
2.10 The issue price is the price at which investors buy the debt securities when first issued. The issue price can be at par, above par, or below par.
Redemption price
2.11 The redemption price, or face value, is the amount to be paid by the issuer to the holder at maturity.
Maturity
2.12 The redemption (or maturity) date is the point in time at which the final contractually scheduled repayment of the principal is due.2 There are two different concepts of maturity: (1) short- and long-term maturity; and (2) original and remaining maturity. These concepts can be used to analyze debt securities issuance and holdings activity, the debt position of issuers, and their debt servicing capacity. Statistics on debt securities issues and holdings classified by maturity are also helpful for liquidity analysis.
Short-term and long-term maturity
2.13 Debt securities can be issued with a short- or long-term maturity. A debt security with a short-term maturity is defined as one that is payable on demand3 or in one year or less. A debt security with a long-term maturity is defined as one that is payable in more than one year or that has no stated maturity (BPM6, paragraph 5.103).
Original and remaining maturity
2.14 Original maturity is the period from the issue date until the final contractually scheduled payment (BPM6, paragraph 5.104 (a)). Debt securities that have an original maturity of one year or less, or that are payable on demand, are classified as short-term, even if they are issued under long-term facilities, such as note issuance facilities (NIF). Debt securities that have an original maturity of more than one year are classified as long-term. This category also covers debt securities with optional maturity dates, the latest of which is more than one year away, and those with indefinite maturity dates (2008 SNA, paragraph 11.71).
2.15 Debt securities giving the creditor the option of early redemption are classified according to the original maturity date, but additional information on payments on the basis of the earliest repayment date should also be provided. Debt securities in which a certain portion of the issue is retired periodically (sinking fund provision) are classified according to the earliest date that the debt security can be completely repaid. Debt securities that do not mature at all, that is, have no stated maturity date (perpetual securities and some preferred shares) are classified as long-term.
2.16 Remaining (or residual) maturity of a debt security is the period from the reference date until the final contractually scheduled payment (BPM6, paragraph 5.104 (b)). In this case, short-term debt securities comprise those securities with an original maturity of one year or less, and those with an original maturity of more than one year that will mature within one year.
Coupon rate and dates
2.17 Debt securities generate property income in the form of interest receivable. Owners of debt securities are entitled to interest receivable as a result of having placed funds at the disposal of the issuers.
2.18 Interest payable and receivable is determined by: (1) the coupon that the issuer pays to the holders, which may be fixed throughout the life of the debt security or vary with inflation, interest rates, or asset prices;4 and (2) the coupon dates on which the issuer pays the coupon to the securities’ holders.
2.19 Accordingly, debt securities may be fixed interest rate, variable interest rate, or mixed interest rate debt securities.
Currency
2.20 The issue price, redemption price, and coupon may be denominated (or settled) in either domestic currency or foreign currencies.
2.21 Domestic currency is that which is legal tender in an economy and issued by the monetary authority for that economy, that is, either that of an individual economy or, in a currency union, that of the common currency area to which the economy belongs. All other currencies are foreign currencies (BPM6, paragraph 3.95). Statistics on debt securities issues can therefore be classified according to whether the issues are denominated in domestic currency or foreign currencies. These data can be aggregated to show debt securities issued in all currencies.
2.22 Debt securities with both their principal and coupon linked to a foreign currency are classified as though they are denominated in that foreign currency (BPM6, paragraph 11.50 (b)).
Qualitative Features
2.23 Qualitative features of debt securities include:
The documents specifying the rights of debt securities issuers, in the form of indentures or covenants. The contract terms may be changed only with great difficulty, with amendments generally requiring approval by a majority vote of the debt securities’ holders.
The default risk attached to debt securities, which is the creditworthiness of individual debt securities issues assessed by credit rating agencies.
Equity Securities
2.24 From an assets perspective, equity securities are a form of financial investment. The following types of financial investment can be distinguished based on the kind of investor involved: (1) portfolio investment, involving widely held equity securities (most of which are listed); (2) intercompany equity securities, involving ownership links between related units and which are associated with direct investment, with a mixture of listed and unlisted shares; and (3) equity securities relating to privately owned corporations. Privately owned corporations are owned by a single shareholder or a small group of shareholders—typically from the household sector—and are not generally listed.5
2.25 From a liabilities perspective, equity securities are a form of “external” corporate finance. Raising equity capital through the issuance of shares is an alternative to borrowing. In contrast to debt securities, equity securities do not generally give their owners the right to a predetermined amount or an amount determined in accordance with a fixed formula (2008 SNA, paragraph 11.81). Moreover, equity securities are a measure of the value of a corporation—the market value of outstanding shares being related to perceptions of future earnings—and a measure of net worth.
2.26 The main features of equity securities are: (1) they are claims by shareholders on the net worth of the issuing corporation; (2) they are either listed on a stock exchange or unlisted; (3) they are issued on a specific issue date with a specific issue price; (4) they do not usually have a stated maturity; (5) they are usually issued in the domestic currency; and (6) they generate income in the form of dividends.
Residual Claim
2.27 The main feature of equity securities is that holders have a claim on the residual value of the corporation that issued those securities, after the claims of all creditors have been met.
Marketplace, Listing and Delisting
2.28 Listed equity securities are listed (or “quoted”) on a stock exchange. A corporation is said to be “listed” or “quoted,” or “have a listing” if its shares can be traded in a marketplace or a stock exchange, which can be a recognized stock exchange or any other form of organized secondary market. The issuing corporation usually applies to be listed, but, in some countries, a stock exchange can itself decide to list a corporation (e.g., because its stocks are already actively being traded via informal channels).
2.29 Inclusion in the official share register is a prerequisite for trading on a stock exchange. Initial listing requirements usually include:
Recent years’ financial statements
Placement among the general public of a sufficient amount of stocks, both in absolute terms and as a percentage of total outstanding stocks
An approved prospectus (usually taking account of the views of independent assessors).
2.30 Corporations may be listed in more than one marketplace through secondary listings or the more complex dual-listing procedure.
2.31 It is common for one such listing to be a primary listing and the others secondary listings. Having multiple listings (i.e., being entered in multiple share registers) gives an issuer access to a wider pool of investors. Although there are mechanisms that allow multiple primary listings, these are more complex and expensive. Moreover, a corporation entered on one single share register can still access multiple trading platforms in order to widen the marketplace for its equity securities. Secondary listings may be direct listings of the equity securities concerned, or they may be listings of depository receipts (see paragraphs 3.26 to 3.32).
2.32 A dual listing enables a corporation to have two equal listings in different marketplaces. This is usually done by creating an ownership structure comprising two holding companies, each of which is listed in a different marketplace. Each of these then owns a percentage of the corporation. Dual listing may be the result of a merger of two corporations listed in different countries, or it may stem from a new listing aimed at gaining access to capital in a larger market. Trading restrictions (e.g., capital or currency controls) can also create the need for a dual listing.
2.33 Specific corporate governance requirements apply to dual-listed corporations. Equal rights in terms of voting and dividends for the shareholders of the two listed corporations must be guaranteed and supported by an appropriate management structure.
2.34 “Dark pools” are platforms for market participants who want to carry out major transactions not visible to other market participants. Such transactions are conducted outside the stock exchange.
2.35 “Delisting” refers to the practice of removing a corporation’s shares from a stock exchange. This occurs when a corporation goes out of business, declares bankruptcy, no longer satisfies the listing requirements of a stock exchange, or becomes a quasi-corporation or unincorporated business, often as a result of a merger or acquisition. Delisting may also involve a corporation being taken into private hands (e.g., by a private equity fund). It then remains incorporated.
Issue Date
2.36 The issue date is the date on which a corporation issues equity securities to the public. The issuance of equity securities is usually recorded at the point when payment is made.
2.37 If this is the first such offering, it is called an “initial public offering” (IPO), or simply an “offering” or “flotation.” If not, it is called a “follow-on offering.”
2.38 Where unlisted shares are issued, the issue date corresponds to the date when the corresponding capital is paid up.
2.39 In an IPO, the issuer may obtain the assistance of an underwriting entity, which helps to decide what type of equity security to issue, what the best offering price is, and when to bring it to market. The underwriting entity can also help to place the offering with individual and institutional investors.
2.40 An IPO is often facilitated by the issuance of allotment certificates representing the corporation’s shares, which are traded on the stock exchange.6 These certificates expire and are converted into shares on a one-to-one basis without any additional payment when the underlying share issue is registered.
2.41 The widely used “greenshoe” option (or “over-allotment” option) allows an issuer to sell additional shares if the demand for newly issued equity securities exceeds the original offering. This practice is often important in order to provide liquidity and stabilize the share price after the IPO.
Issue Price
2.42 An equity security’s issue price (or “public offering price”) is the price at which it is taken to market at the time of issue.
2.43 When an equity security goes public in an IPO, the underwriter sets a price per share. Subsequent share offerings are also introduced at a specific price.
2.44 The issue price is based on the amount of capital to be raised and the number of shares to be issued. The issue price is set close to the expected market price or the prevailing market price for secondary offerings. When the equity security begins to trade, its market price may be higher or lower than the issue price.
No Stated Maturity
2.45 Equity securities do not usually have specific maturity dates.7 Corporations (and therefore equity securities) have no set lifespan, but can be dissolved by means of a statutory operation, an order of court, or a voluntary action on the part of shareholders. Insolvency may result in a form of a “corporate death,” where creditors force the liquidation and dissolution of the corporation under a court order.
Currency of Denomination
2.46 As equity securities are traded on national stock exchanges, their prices are usually expressed in the domestic currency, the currency of issue.8
2.47 There may be cases in which corporations choose to be listed in a country other than their country of residence for strategic or tax reasons, but continue to be listed on their own national stock exchange, with prices expressed in the domestic currency. Alternatively, a corporation may choose, as a resident entity, to be listed on the national stock exchange of another country, but with shares in that corporation traded via depository receipts on the stock exchange of its country of origin.
2.48 Financial investors may hold share portfolios denominated in both their domestic currency and foreign currencies.
Property Income
Equity securities generate property income in the form of dividends. Owners of shares are entitled to dividends as a result of having placed funds at the disposal of corporations (2008 SNA, paragraph 7.128).
1
Listed financial derivatives (such as warrants) are sometimes regarded as securities (BPM6, paragraph 5.15).
2
The maturity date may coincide with the conversion of a debt security into an equity security. In this context, convertibility means that the holder may exchange a debt security for the issuer’s common equity. Exchangeability means that the holder may exchange the debt security for equity securities of a corporation other than the issuer. Perpetual securities and some preferred shares, which have no stated maturity date, are classified as debt securities.
3
Payable on demand refers to a demand for payment issued by the creditor.
4
Some debt securities have no coupon payments during their life, with the full return being paid at maturity (zero-coupon bonds), while some structured debt securities pay no coupon at all (see Annex 2).
5
These three different types of financial investment in equity securities are not reflected in the presentation tables in Chapter 9 of the Handbook.
6
Allotment certificates may be issued in the event of secondary listings.
7
“Genußscheine” (or “Genußrechte”) are a type of participation certificate issued mainly in European countries such as Germany, Austria, and Switzerland. They sometimes have a stated maturity.
8
Corporations can issue equity securities on foreign stock exchanges (e.g., American depository shares), but these are fully indexed to the domestic currency of the country of residence of the issuing corporation, so it is not “foreign currency” (BPM6, paragraph 11.50). In some cases shares are issued in a currency other than the domestic currency (e.g., in euro in non-euro area European Union (EU) Member States).
