ARS Reporting Requirements
Dutch auctions are conducted by agents of the issuer, called auction agents. Orders by auction participants are submitted to the auction agent by eligible dealers, called program dealers. Program dealers sign an agreement with either the issuer or the auction agent, giving them the right to submit orders, either on behalf of their customers or for their own accounts.
Orders at an auction come in one of three types:
- 1. Hold orders. Current owners of the security may submit a hold order, indicating the amount of the security they wish to keep, no matter what the clearing rate set by the auction turns out to be.
- 2. Sell orders. The holder of a security may submit a sell order, indicating a desire to sell a specified amount without regard to price.
- 3. Bids. A bid indicates the amount of the security that a holder wishes to keep or a buyer wishes to acquire at or above a specified clearing rate.
- The clearing rate is the lowest bid at which all of the offered shares can be sold at par.
Example: Suppose two securities holders at an auction each own certificates with par value at $10,000 and two bidders wish to buy that amount. Holder A issues a sell order. She will sell her bonds at any price. Holder B submits a bid at 3%. He will sell his securities if the clearing rate is 3% or lower. Buyers C and D submit bids of 2.5% and 2.9%, respectively. They will buy if the clearing rate is equal to or higher than their bid.
After all the bids are counted, the clearing rate settles at 2.85%. How do our four participants make out?
Holder B would sell at any interest rate below 3%. So he will sell his securities. Holder A, who was willing to sell at any price, will sell at 2.85%. Buyer C was not willing to buy at an interest rate of 2.5% or higher. She will be happy to take the higher interest rate. Buyer D wanted 2.9%, so he will go home empty-handed.
Program dealers are required to report information to t