Automation, standardisation, harmonisation: these are not terms commonly associated with the vexed business of corporate actions processing. Efforts to improve levels of straight-through processing and the quality of reference data have been high on the industry’s agenda in recent years – except when it comes to corporate actions. Fraught with complexity and ambiguity, their processing consequently ranks amongst the riskiest activities in the securities sphere.
To make matters worse, corporate action volumes are rising steadily – in the US, for instance, the Depository Trust & Clearing Corporation last year processed record volumes in excess of $2.2trn – thus placing existing processing infrastructures under ever greater strain and exacerbating the operational risk with which firms must daily contend.
The corporate actions processing chain is at once long and convoluted. It encompasses both numerous phases – the announcement of an event by the issuing company; discovery of that event by the custodian or its agent; client notification; and receipt of the client’s response. Furthermore, information often has to travel through layers of issuers, agents and custodians before it reaches the investor; voluntary offerings that involve options further add to the complexity and level of risk.
Globally it remains on the whole a highly manual endeavour, predicated on labour-intensive and error-prone practices such as telexing, faxing and rekeying of data. Across national markets there exists a stupefying diversity of procedures, message formats and national nuances. As well as having to translate announcement information from one language to another (usually English), market participants face significant challenges when it comes to interpreting that information, as the meaning of basic terminology can vary from market to market.
Do we not like that, as a former England football manager once remarked, a sentiment echoed by a host of Europe’s great and good. The Giovannini Group identified the lack of standardised national rules for corporate actions processing as one of its 15 barriers to efficiency within European clearing and settlement, bemoaning “the variety of rules, information requirements and deadlines for corporate actions”. The Group of Thirty (G30), meanwhile, has described corporate actions as “the major source of financial losses attributable to operational failure” across the market, no less. Indeed, while no hard figures are available, it is widely accepted that tens of millions of dollars are being set aside for corporate actions related losses each year.
While it acknowledges that it cannot dictate change, SWIFT nevertheless sees a role for itself as a facilitator in this area, particularly when it comes to encouraging vendors to abandon proprietary formats and proprietary transport mechanisms and standardise instead on the new ISO15022 format. Where the previous ISO 7775 messages were not functionally rich enough for use in the corporate actions sphere, the 15022 messages support a much more comprehensive range of activities and thus are seen to be far better aligned with business requirements. SWIFT received a big fillip when the London Stock Exchange agreed to utilise ISO 15022 and the co-operative’s network to communicate corporate actions data.
Public enemy number one amongst corporate actions practitioners is the lack of standardised information ‘at source’. The Depository Trust & Clearing Corporation (DTCC) is one organisation that has been active in this area: last year it set up a wholly owned subsidiary – Global Asset Solutions LLC – with a view to providing high quality reference data to the industry under the GCA (Global Corporate Actions) banner.
Its inaugural offering, the GCA Validation Service, provides an automated, centralised source of corporate action announcement information using ‘scrubbed’ data sourced from vendors such as Telekurs, S&P and FT Interactive Data and covering securities traded in Europe, Asia and the Americas. In January a custodian verification facility was added to the service, whereby custodian records can be compared against the GCA composite record.
Next up will be the GCA Messaging Service, a real-time STP messaging solution focused on the back-end of the processing stream which will automate and centralise those messages exchanged point-to-point – in respect of notifications and elections, for instance – currently communicated by phone, fax, email or over proprietary systems. Ultimately this will link into the GCA validation service to allow scrubbed announcements to be used as input for corporate action notification messages.
Meanwhile, Swiss depository SegaInterSettle (SIS) has just rolled out the second phase of its web-based Corporate Actions Enhanced Services (CAES) offering. Since the beginning of February users have been able to place corporate action related queries and instructions via the Internet. “The new service allows online retrieval and monitoring of open instructions, current positions and pending delivery orders pertaining to corporate actions,” SIS states. “Operational risk is therefore eliminated almost entirely. From now on, a single instruction will suffice for a voluntary action, and format errors in instructions will be a thing of the past.”
o Fortis Bank has launched a corporate actions tool – GCA Web – which enables clients to instruct and validate corporate actions, monitor their processing and check historical data, all in real-time.