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Creating strip bonds and strip bond packages

Depository procedures

The procedures used by depository participants to strip bonds, reconstitute bonds, create packages, and separate packages are similar to each other. The means for instructing the depository will vary (some accept electronic instructions while others may require paper or fax input), but the principles are the same. In some countries (such as Germany), there may be additional restrictions on which depository participants are eligible to use these procedures.

Procedures for creating receipt security strip bonds may vary, depending on the market and the institutions involved, and therefore are not described here.

Creating depository book-entry strip bonds

To create depository book-entry strip bonds,

when a bond becomes eligible for stripping, the depository assigns the security numbers (ISINs) for each future interest and principal payment on the underlying bond (In most countries, this is done automatically when the bond is first issued. In Canada, a request from the participant is required, since Canada accepts a much broader range of bonds and issuers.)
the participant acquires the position, within their depository ledger account, in the underlying bond that they wish to strip
the participant instructs the depository to exchange the position in the underlying security for the equivalent positions in the related strip bonds
the depository processes the exchange, debiting the participant for the underlying bond and crediting the participant for the related strip bonds.

After the exchange, the strip bonds are held and traded separately from the underlying bond.

For example, if a participant instructs the depository to strip $100,000 of a bond paying 10% semi-annually and maturing in one year, the depository will debit the participant's account for the $100,000 in the underlying security and credit the participant with $5,000 of the strip bonds representing the 2 remaining interest payments and $100,000 in the strip bond representing the principal payment.

NOTES:

In New Zealand, the bonds are first stripped into two parts - the principal piece and a single piece representing all the coupons. The participant can separate the coupon piece into the individual payments by sending in a second set of instructions.
If a trader purchases the underlying bond for stripping, the stripping of the bond and the delivery out of the strip components often will be delayed by various operational issues specific to the dealer and its local market. Usually a minimum of one full business day will be required.
In Canada, some additional time may be required if the issue is being stripped for the first time, as the trader must allow time for the strip ISINs to be assigned and set up.

Reconstituting underlying bonds

To reconstitute an underlying bond,

a participant acquires the position, within their depository ledger account, in each strip bond related to the underlying bond that they wish to reconstitute
the participant instructs the depository to exchange the position in the related strip bonds for an equivalent position in the underlying bond being reconstituted
the depository processes the exchange, debiting the participant for the strip bonds and then crediting the participant for the underlying bond.

NOTES:

In New Zealand, if the coupons were separated into individual payments, the participant first reconstitute the coupon piece and then submit a second set of instructions to reconstitute the underlying bond.
When reconstituting a bond, depending on how the strip components were obtained and local processing requirements, the reconstituted bond may not be available for delivery immediately. A delay of one or two business days is quite possible.

Creating strip bond package securities

NOTE: This procedure applies only to Canada, as no other depository offers this service.

To create a book-entry strip bond package,

on receipt of a request from a participant, the depository assigns the security number for the strip bond package security
the participant acquires the position, in the strip bonds that are to be included in the package
the participant instructs the depository to exchange the positions in the related strip bonds for the equivalent position in the package security
the depository processes the exchange, debiting the participant for the strip bonds and crediting the participant for the package security.

After the exchange, the package security may be held and traded separately from the strip bonds.

NOTE:

In Canada, some additional time may be required if the package is being created for the first time, as the trader must allow time for the package ISIN to be assigned and set up.

Separating strip bond package securities