Strip bond information
CDS's strip services enable the financial community, such as banks, investment dealers and trust companies, to create new investment products that match investors' objectives.
Since 1987, The Canadian Depository Services Limited has been reducing risk and costs to the financial markets through the electronic stripping of debt securities.
Through CDS Clearing and Depository Services Inc., Canada's financial community can separate or strip many securities into component parts that can be held and traded separately. These parts are used to create new investment products that:
- Reduce reinvestment risk
- Increase yields
- Raise the potential for capital gains
- Produce cash flow.
Once strip components have been created or acquired by a participant, they can be packaged or reassembled into new combinations to create packages with different characteristics. The book-entry strip components can also be reconstituted into the original security.
What securities are eligible for strip services?
CDS's broad eligibility criteria enables us to strip the following security types:
- Straight, callable and retractable bonds (including bonds that have features such as inflation indexation, multiple rates, long and short coupons and structured payments)
- All domestic bonds (federal, provincial, municipal and corporate) as well as Canadian issuer bonds issued outside of Canada.
How are securities stripped?
Participants initiate the process by instructing CDS to strip securities that they own into component parts. CDS then transfers the components of the underlying securities to the ledger position it manages for each component – principal, interest, entitlements, etc.
As the underlying original security receives income and other entitlements, CDS distributes them to the holders of the specific components.
What strip components can be stripped?
CDS's strip services include book-entry stripping and reconstitution, physical strip bond deposits and book-entry strip bond packages. CDS strips the following instruments (subject to the underlying securities meeting specific requirements):
- Discount notes
- Asset-backed securities
- CDSX-restricted issues.
Once strip bond components are created as book-entry positions, they may not be withdrawn as physical certificates.
What strip components can be created?
CDS creates the following strip components:
- Generic principal (residual)
- Interest (coupon)
- Payment (interest and/or principal).
What are the main features of the strip service?
- Certificates of securities stripped in book-entry form are maintained in their original form
- Exchanges from underlying securities and packages into strip components and from strip components into underlying securities and packages are permitted
- Equivalent components (i.e., having the same issuer, payment date, currency, component type and no other distinguishing features) are blended into a single generic component
- Deposits of physically stripped coupons and residues (principal components) are accepted and physical strip bonds are blended with book-entry strip bonds from the same issue into a single component for each payment date
- Book-entry strip components may be reconstituted into any related original-issue security that is eligible for deposit at CDS
- Periodic reports on stripped underlying securities, strip bond issues and packages are available.