Corporate actions: standard and deliver
The automation of corporate actions continues at a glacial pace; large differences still exist between the progress made by sell side firms compared to buy side firms. Considerable effort, particularly in Europe, has been made to introduce market standards for corporate actions. But 12 years since the Giovannini Group identified differences in national rules relating to corporate actions as a barrier to efficient cross-border clearing and settlement, a lack of standardisation continues to hold back progress.
“Without standardisation, automation cannot proceed, even though the technology exists,” says Alan Jones, head of corporate actions management at financial technology firm SmartStream. “Until there’s enforcement, we’ll never achieve full automation.”
Ostensibly, the main benefits of automation for the customer are greater efficiency, reduced cost and improved reliability. A reduction in human errors associated with manual processes can help to improve risk mitigation and shorten delays, freeing up resources for better client support. Eric de Nexon, head of strategy for market infrastructures at Société Générale Securities Services says corporate actions suffer from short deadlines, high volumes and the risk of significant financial losses in the event of an error. Increasing the processing speed of corporate actions will therefore be of substantial benefit for all parties.
“When things go wrong, the manual process generates delays which inherently increase stress,” he says. “Even when ‘human risk’ is limited with the manual process being achieved correctly, it can still be an expensive process simply by essence of requiring qualified staff capable of handling the complexity involved in an operational environment. It goes without saying that automation limits these aspects and contributes to mitigating operational risk.”
According to Jones, there are 152 different events in a corporate action and each of these has unique workflows, making it complex to automate the complete set. Then there are different workflows for different asset classes. “Manual processes are inherently unreliable; volatility is removed when processes are automated,” he says.
However, part of the problem for corporate actions automation is that many firms, especially on the buy side, are taking a cautious approach to automating the complete corporate actions lifecycle. Many of them have built internal systems and are reluctant to change. For others, corporate actions processing is not a priority and scarce resources are often pulled away elsewhere to concentrate on aspects such as the front office and sophisticated trading technology. For many, the use of fax machines and paper trails is still a reality.
Firms are not willing to write a “blank cheque” when it comes to automation projects, says Charlie Price, senior director, pricing and reference data at Interactive Data. “Furthermore, there aren’t that many solutions out there. A handful of vendors basically own the market and as a result there isn’t much competition. Many of the original solutions were long processes, requiring a lengthy installation and a lot of resources, so that hasn’t helped either.”
Companies also differ in their interpretation of exactly what automation means. Jones at SmartStream cites the example of one firm that simply wanted to replicate its paper processes on a screen, without making any other changes. Other firms take an opposite approach, focusing on achieving high levels of STP rates wherever possible.
“Automation means different things to different clients,” he says. “The firm in the first example tightly controlled every touch point in the corporate actions process. You might question whether that is automation or not, but to them automation meant putting it on a screen. They developed automatic event notifications and they were able to report that a four hour task for two staff every morning now takes no time at all, because it’s fully automated. It depends on the risk appetite, asset class in question, size of organisation and workflow.”
Competing priorities are also a concern, especially when it comes to message types. While many large custodians already make heavy use of ISO 20022, asset managers are typically lagging behind. Whereas US post-trade services utility the Depository Trust and Clearing Corporation began client testing ISO 20022 messages for corporate actions covering distribution events in March, Price says most asset managers use the ISO 15022 message type and have not migrated to ISO 20022. “We just haven’t seen the buy-in from the buy side,” he adds.
Marty Kruse, director of global corporate actions, BNY Mellon, says the evolution of standards is one of two areas that present the biggest opportunities for continued automation of corporate actions. The other area is issuer to investor automation.
“Various regional market standards groups continue to make progress on core standardisation principles,” he says. “Hopefully larger standards bodies, such as the Securities Market Practice Group, can bring those to the broader industry. There’s also been significant progress since Swift 20022 standards were introduced and we expect that to continue with subsequent releases.” Another promising area, says Kruse, is joint collaboration on creating and implementing new standards for a wider spectrum of constituents. Clients and many large industry players are working together to resolve long-standing issues, such as standards for less-complex events. These events (which constitute the highest volume) would require relatively little technology investment and fewer changes to proprietary systems, while benefitting more participants, he says.
On the issuer to investor front, BNY Mellon’s Depositary Receipts (DR) group is part of a pilot based on the extensible business reporting language (XBRL – a freely available and global standard for exchanging business information) to automate issuer to investor notifications and announcements. BNY Mellon is publishing, in XBRL format, announcements about DRs for its depository for downstream processing by stock exchanges, brokerage firms and investors. “As more standards evolve from initiation of a corporate action to the end investor, we’ll see further automation throughout the corporate action lifecycle. Also, as more issuers use new tagging capability, all parties should see improvement in STP capabilities and rates,” Kruse says.
Pressure to increase automation of corporate actions is building, especially in Europe. The Broad Stakeholder Group, for example, was established to inform the European Commission on the state of implementation of the endorsed market standards for corporate actions processing. Members of the group include the European Federation of Stock Exchanges, the European Banking Federation and the European Central Securities Depositories Association. The Group is tasked with steering and coordinating private sector actions to dismantle the corporate actions barrier identified by the Giovannini Group.
The European Central Bank (ECB) is also playing its part. De Nexon says the ECB is a “motor” behind the implementation of the ISO 20022 standard. “Program officers at the ECB monitor harmonisation issues, standard implementation achievements and encourage intermediaries. A substantial amount of work needs to be done until the end of 2013, although all standards have already been endorsed for a while.”
In addition, according to Société Générale, Target2-Securities (T2S), the euro settlement platform, is providing added push towards corporate actions automation. The Corporate Actions Sub-group is supporting the T2S Harmonisation Steering Group and the T2S Advisory Group in formulating and monitoring the implementation of harmonised rules for corporate actions processing, in particular on the rules on corporate actions on pending settlement transactions (flow). While T2S used to be seen as just a pure settlement platform, according to SocGen it is now more than that. Settlement includes on the one hand corporate actions on flows and on the other settlement transactions as a result of the corporate actions themselves.
“Here is undoubtedly the clear link between settlement and corporate actions and this link, from a cross-border common platform perspective, does imply speaking the same language,” says de Nexon. “It means having the same definition for dates, their sequences for a given event, the same rules to process it, the same format to exchange information, the capacity to refer to a unique identifier in order to be able to refer to a given event without any confusion.”
The final push over the line for corporate actions may yet come from cloud solutions, which have started to make inroads into corporate actions in recent years, offering users the promise of low-cost automation. In March, Danish bank Ringkjøbing Landbobank implemented SmartStream’s TLM Corporate Actions, which takes a ‘diary management’ approach, controlling milestone dates and key tasks associated with each event. The key concept is to present a normalised view of corporate actions information from any source in any format, which can be pre-populated with data from a data vendor of choice.
“Cloud has been seen to offer a solution that provides quicker implementation,” says Price. “The scope of projects is greatly reduced and the technical requirements are essentially removed. A box solution is held back by the cost of building a server, so eliminating that is a great step to better, faster, cheaper implementation.”
Before it can automate actions between all participants, the industry must adopt standardised templates so that the information contained can be processed effectively. However, there often seems little sign that this will ever fully take place.
“There is no standardisation at the moment in corporate actions, but there is an attempt to automate some of it,” says Mike Foley, managing director at Peterevans, a supplier of front and back office systems. “Certain corporate actions can be mopped up, but the complexity of others makes it practically impossible.”
Others point out that longstanding moves towards implementation of existing standards have made some progress – so there is still hope. However, the sheer number of standards and the complexity of corporate actions as a topic make for a challenging task.
“Some 130 market standards for corporate actions processing were developed in 2008, endorsed in 2009 and have been in the process of implementation at a national level since then,” says Werner Frey, head of post-trade at trade body the Association of Financial Markets in Europe (AFME). “The implementation process is well advanced to the extent that some 85-90 per cent of standards have been implemented in what AFME has defined as the eight major European markets: France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland and the UK.”
According to others involved in corporate actions processing, while global corporate actions are widely recognised as having some of the highest risks outside of the trading floor – a factor that should help to encourage their automation – the same factor may also lead to reluctance to abandon close manual oversight to the machines.
“There are lots of pits and traps – out of all the back office functions it’s the one where you could lose the most money,” says Rob Hardy, head of governance at JP Morgan asset management. “There are lots of quirks in local legislation and market practice. There are lots of intermediaries; there are brokers and custodians, local agent banks. They all have very tight deadlines, and if you send an instruction five minutes too late it will be done on a ‘best efforts’ basis. If you elect for stock when you meant to elect for cash or vice versa, it can be expensive, so asset managers like us have kept our arms tightly around it.”
For BNY Mellon’s Kruse, to some extent the complexity of corporate action events will always slow overall automation rates. “But if the industry continues to emphasise implementation of flexible and meaningful standards to the largest number of participants for the highest volume event types that can be automated, then implementing those standards into core processing engines will be adapted more quickly and effectively than before.”