This week’s post is on “stripping” in the Dominican Republic. But don’t get too excited. Nobody will drop his or her trousers. I am referring to the segregation of coupons or dividend payments from securities. This practice is commonly called (bond, securities) “stripping”. The resulting financial products are often called “strips”. Stripping is one of the novel practices included in the new Securities Market Regulations (Reglamento del Mercado de Valores) in the Dominican Republic.

In this brief series of posts I will explain what stripped securities are. I will discuss the business side of striped securities using an example from a leading textbook. I will then review the legal underpinnings that might stifle this practice from emerging with complete legal certainty.

1. Stripped Securities.  

 The first paragraph of Article 345 of the new Securities Regulations defines securities stripping as the ability to segregate coupons or other ancillary economic rights from securities. Warrants, interests, dividend payments, are all examples of the economic rights that can be “stripped” from a main security and traded independently as new securities in their own right.

Securities and interests in securities (like bonds or stocks) are bundled economic rights. These baskets of economic rights include principal repayment, and very often, a right to perceive regular streams of interest payments (in the case of bonds and preferred shares) or dividends (when they exist), in the case of common shares. Not too long ago, these economic rights were contained in a written document or certificate. These certificates often had small coupons attached, which allowed the proprietor of the security to demand payment of the corresponding economic rights whenever they were due.

Looked at from a business perspective, each coupon or dividend payment could be considered as an independent right to payment against the issuer of the security. Soon enough, some owners of securities sought to assign these coupons or pledge them for a different number of reasons: including temporary liquidity needs or simply because of business opportunities. The possibility of segregating coupons from the security allowed owners to tap into credit without necessarily assigning or trading the security.  However, because the coupons were associated with a main security and were mostly in paper form, their independent assignability was impaired.

This would later be resolved through technological advancements as we will discuss in the next post.


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