The processing of corporate actions remains one of the biggest obstacles between the securities industry and higher levels of automation, according to new research from TowerGroup. It finds that, despite some progress toward greater processing efficiency in corporate actions, the challenges of disparate, unreliable data as well as manually-intensive processes are likely to persist for many years to come.
A corporate action may be loosely defined as any event a corporation initiates that affects the company’s shareholders. There are currently 67 corporate action types defined and used globally, according to the International Securities Association for Institutional Trade Communication.
“The best possible solution to the corporate actions issue starts with bilateral industry-wide adoption of data standards, and ends with industry-wide agreement on best practices,” says Matt Nelson, a senior analyst in the Investment Management research service at TowerGroup. “By collaborating to achieve a single, central set of best practices, the industry can move toward STP in corporate actions.”
Highlights of the research include:
– While the complexity of the data and the large number of communication points have long been the biggest corporate actions pain points, the emergence of data standards has made improvements in automation possible. However TowerGroup believes that in North America, custodians of all sizes – not just the top 10 – must opt for data standardization and accept common message formats, if corporate actions automation is to improve in the securities industry.
– The fact that only two percent of SWIFT network traffic consists of instruction messages from investment managers back to their custodians underscores a major problem namely that many custodians cannot or will not accept message-based instructions.
– TowerGroup estimates that globally, securities firms will spend US$75 million in 2006 on third-party software solutions for automating corporate actions processing. This number will increase to roughly $120 million by 2010, as institutions shift their focus from complying with midterm regulations to mitigating operational risk and achieving more process efficiencies.
“The primary factor motivating securities firms to improve their corporate actions processing is risk mitigation,” continues Nelson. “However, TowerGroup does not expect that corporate actions automation will be a top priority for the securities industry any time soon, because there is no immediate regulatory driver forcing the industry into action.”
The two new TowerGroup reports on corporate actions by Nelson are called “Update on Corporate Actions: Progress in the Face of Apathy on the STP Battlefront” and “Corporate Actions Automation Software: Tools for the March Toward STP.”