Legal Definitions - when-issued security

A when-issued security refers to a financial instrument, such as a stock or bond, that has been authorized for issuance but has not yet been officially delivered to investors. It trades in the market based on the expectation that it will be issued at a future date. This allows investors to buy or sell these securities before they formally exist, with the understanding that the transaction will be settled only once the securities are actually issued and delivered.

Here are some examples to illustrate this concept:

• Initial Public Offering (IPO): Imagine a rapidly growing renewable energy company announces its plan to go public. Before the official listing date on the stock exchange and the physical or electronic delivery of shares to investors, investment banks might begin taking orders for these shares. Investors can agree to buy or sell these shares on a "when-issued" basis. The trades are recorded, but the actual exchange of money and shares only occurs once the IPO is finalized, the shares are officially issued, and the company is listed on the exchange. If the IPO is unexpectedly canceled, these "when-issued" trades would be voided.

• Government Bond Auction: Suppose a national treasury announces an upcoming auction for a new series of long-term government bonds. Even before the auction takes place and the bonds are formally issued to the winning bidders, financial institutions and traders might begin quoting prices and making agreements to buy or sell these bonds. These are "when-issued" trades, reflecting the market's anticipation of the bonds' official issuance. Once the auction is complete and the bonds are delivered, these pre-arranged trades are settled.

• Corporate Merger Shares: Consider a scenario where Company A is acquiring Company B, and as part of the merger agreement, shareholders of Company B are set to receive new shares of Company A. Before the merger is legally finalized and the new Company A shares are actually distributed to Company B's shareholders, these future shares of Company A might trade on a "when-issued" basis. Investors can buy or sell the right to receive these new shares, with the understanding that the transaction will only be completed if and when the merger closes and the shares are officially issued and delivered.