Global harmonisation: Defining the new norm in corporate action management going forward

As the financial world enters the new norm as a result of the COVID-19 pandemic Jim Monahan, partner in the operations practice at consultancy Sionic, argues corporate action processes will also have to wake up to the new way of working.

Defining the new norm will most certainly extend across all facets of our personal and professional lives as an event of this scale will create a change in the preferences and expectations of employees, employers and clients.

These shifts and their impact on how we commute, how we work, and how we leverage technology will emerge more clearly over the coming months. Those industries and firm’s that reinvent themselves to make the most of this “socially distant” driven evolution toward the “new” norm will have a foothold in defining their success tomorrow. 

Unmistakably, the world of online consumption and contactless commerce will be increased in ways that reshape consumer behaviour forever. But the potential for changes within the financial services industry could prove even more significant as both regulators and industry participants push for real-change from existing conventions that I personally often deem archaic to a more digitalised infrastructure that will achieve everyone’s desired goals of a more efficient, transparent and now equally important, as evident in the current crisis, a more resilient post-trade support process.

I recently read an article that looked at the new norm and questioned whether several pre-pandemic activities were still actually needed or whether regulation change was needed to move the process forward in our efforts to define the new norm. 

In the same manner of posing those questions on our everyday life, I would ask whether the current crisis could provide the corporate action leadership the opportunity to reshape aspects of the financial services industry and move toward a more globally harmonised model that will permit efficiency, transparency and in the end produce a model for greater resiliency going forward. 

The issues the industry is facing today are those that have been outstanding for years and have been topics discussed by participants at conferences or other industry gatherings. They often stem from past practices that have simply not evolved with the introduction of new products, processes and / or technology. The question to be asked is whether now is the time to revisit those discussions and move the industry forward in addressing the needs for improvement.

My thoughts on some key topics are:

  • Dematerialisation: First, it was Hurricane Sandy and now the Covid-19 pandemic that have demonstrated the proverbial weakest link in our post-trade lifecycle process management-physical certificates. Dematerialisation has been a long-standing goal within the Industry; unfortunately, with little traction due to what are perceived hurdles driven by competing forces within the industry. It is time to agree to move forward together toward a better solution for all. 
  • Wet signature requirements: Wet signature and an original medallion stamp are still being required by transfer agents across the Industry in order to facilitate transactions, specifically those in the voluntary corporate action space. In today’s pandemic crisis mode, this process requires either a direct physical interaction amongst parties to execute the papers correctly or poses a potential delay (and monetary loss) in delivering the signed paperwork due to the remote access requirements in place across the industry. eSignature tools have been in place for years – there must be a collective electronic solution that provides both convenience and assurances to those parties involved in the transactions.
  • Corporate action claims management: Physical check processing in the current crisis; as well as, the extensive reliance on offshore teams to settle industry dividend/interest claims remains a concern across many firms within the industry, with many having to recently add additional onshore resources to the claims process to ensure collections remained timely as their offshore teams struggled with internet access in the mandatory remote access environment. However, I believe there is hope on the horizon. In this case, there is an industry solution in the works with a Q4 2020 delivery date- DTCC’s Claims Connect solution will allow participants to settle claims systemically via their DTCC participant accounts.  The model delivers a systemic claim settlement model through an industry trusted utility that be leveraged by all participants. 
  • Eliminating the guarantee delivery process: A long standing practice that started in the 80’s when physical securities were prevalent across every broker-dealer’s corporate action departments, its sole purpose was to simply permit firm’s to submit a “letter of protection” for physical securities that were in transit from one of part of the country to New York with a seven-day commitment to deliver the shares when they arrived. However, this process has evolved over years to be synonymous with late trading by institutional clients during a voluntary corporate action, which under the best of circumstances poses significant risk to broker-dealers; and its evolved name (guarantee delivery) is a misnomer in of itself, as no one can guarantee the actual delivery of the shares in the end.  The time consumed in managing this process under the best of circumstances warrants consideration alone and in the current crisis remote access mode, the risk is exponentially higher.

The industry needs to move away from the current model which is overly risk prone and I have advocated moving toward an ex-date model (similar to dividends) with dual trading lines representing those shares tendered and not tendered to permit Institutional Investors to properly hedge their positions throughout the event lifecycle with no risk to the various operations teams impacted by the process today.

As with each past crisis or market downturn, the vulnerabilities revealed by the pandemic will lead to opportunities to improve the performance of our businesses. The opportunities to push the envelope of technology adoption will be accelerated by the Industry desire to remain efficient, provide greater market transparency and above all remain resilient in the face of a global crisis.