With millions of dollars at stake in every-day global transactions, the need to process corporate actions correctly is paramount
The riskiest business line for custodians is corporate actions. The current approach inserts risk deep into the system at a sizeable cost to deal with risk consequences. This is driven by the need to multi-source, scrub, reconcile, and often manually re-enter data. So why do we find, in 2011, in a world full of iPads, iPhones, and all this other great technology, that processing corporate actions announcements is fraught with problems?
It seems so simple, but corporate actions processing remains one of the last bastions of manual processing in financial services. It is a horror show of paper and the related misinterpretation about what is on the paper, accompanied by manual processing and near zero straight-through processing rates.
What is the challenge?
Stock split, dividend, merger, acquisition… the list goes on. Each of these is a type of corporate action. Any time an issuer, which is any publicly traded company – GE, Rio Tinto, Royal Dutch Shell, Tesco – takes an action that impacts its financial stakeholders or investors, it must notify them of all of the details. This ranges from simple dividends or stock splits, to mergers and complex reorganisation events. Issuers must share this information about the company and engage the shareholder to maintain or expand their holdings, as well as positively influencing potential investors.
Basically, there are a lot of these happening on a daily basis and the problem in this market is when you get it wrong, you get it late, or you mis-type, you end up in serious trouble – there are no two ways about it. There are millions of dollars at stake!
No other action touches the entire financial supply chain like corporate actions. From corporations which announce a dividend to the pensioners which receive them, corporate actions have a multiplier effect on the financial services industry. When processed correctly, corporate actions can enhance the value of the corporation by strengthening the connection between issuer and investor. When processed incorrectly, the cost can exceed the proceeds of the event or be in the millions of pounds.
Worldwide, there are about one million announced corporate actions every year, not to mention the millions of scheduled fixed income payments that happen as well. Each year, upwards of approximately £1bn is lost to error and inefficiency during the processing of these actions. That is because the lack of a standardised way to generate corporate actions data immediately at the time of an issuer’s announcement effectively delays the communication of this information to investors, burdens their intermediaries, and maximises the possibility for erroneous or inaccurate communication of the necessary details. In a global interconnected world the problem is especially acute, as remedies are hindered due to the constraints of time zones, language barriers and jurisdictional differences.
Despite the large costs associated with errors in corporate actions processing, up to now the process by which corporate actions are filed and processed has been largely manual and lacking a global standard for communication. This is surprising. We live and work in an age of asset class automation. Straight-through processing initiatives have taken hold in clearing and settlement, and other operations; but corporate actions processing seems confined to a life in the shadows – lurking in a system of paper-based regulatory filing and newspaper-to-custodian notifications.
Financial messaging standards
Created as a way to standardise communications between counterparties, both ISO 15022 and the newer ISO 20022 have set the industry on the right path in terms of the automation of corporate actions. ISO 15022 was great, and got us part of the way there, but ISO 20022 – with its flexibility and ability to link messages to business processes – will help get our heads around the corporate actions problem.
SWIFT remains committed to working with the industry to roll out ISO 20022 on a global basis, and intends to build onto the efficiencies gained through the adoption of ISO 15022. (Note: ISO 20022 messages for core corporate actions have been developed in such a way to make them backwards-compatible with ISO 15022 messages, which means for those not ready to move to ISO 20022, those messages will continue to be supported by SWIFT).
No one organisation is going to solve the corporate actions problem alone. Market infrastructures have an important role to play in helping to solve the issues with corporate actions. Many of the market infrastructures will drive the implementation of ISO 20022 and we’re already seeing this with a number of key players across the globe. The Depository Trust and Clearing Corporation (DTCC) in the US market would be one example of a market infrastructure taking a leadership position by announcing its plans to migrate from its proprietary formats to ISO 20022 standard for corporate actions. There are also ongoing discussions with some MIs in eastern Europe regarding ISO 20022 adoption for corporate actions.
Custodians have a big role to play as well, and should be applauded for their leadership position to help improve the corporate actions process between depositories and custodians and their investment management customers. In the US, for example, BBH, J.P.Morgan, and Bank of New York Mellon are piloting SWIFT’s new ISO 20022 corporate actions messages to receive corporate actions announcement messages from the DTCC.
Investors are not to be forgotten, and as shareholders are in a great position to help educate the issuer community. Investors can help their investor relations people better understand how the many manual steps have created an error-prone process with the potential for heavy losses at all levels. In a global economy where investors have many investments to choose from, companies should recognise that the small investment required to upgrade their corporate actions notices in a standardised format will be recognised and applauded by their investors.
Capturing data at the source
The only way to completely solve this problem is by capturing information directly from the source of the corporate actions announcement – the issuer. The best way to do that is to turn free-form text – as the corporate actions announcements are issued today – into computer-readable and easily consumed information. By standardising the information at the source, it is believed that the industry can realise reduced errors, cost and risk as well as increased transparency. This creates a seamless process that eliminates manual data re-entry and ensures that the issuers’ data is passed directly to an investor, thus enabling timely and well-informed investment decisions.
Can we do it?
By working together and with the right mix of elements – messaging standards, industry collaboration and technical solutions to capture corporate actions data at the source – the industry may very well be on the path towards eliminating one of the last bastions of risk in financial services, saving the industry millions of pounds every year.
This is a global industry challenge. It has implications in all major markets around the world. It is not limited to one country or jurisdiction. In an increasingly interconnected world, with an ever-rising number of cross border investments, corporate action initiatives will only continue to grow, resulting in more complexity and more information distributed. Failing to take definitive and positive steps together as an industry means that the problems will not be resolved and companies may begin turning more directly to investors as they look for better ways to tap into the global capital markets.