Corporate actions have long been the thorn in the sides of market participants espousing the need for straight-through processing across the industry.
Readers familiar with our articles are aware of the problems. Corporate actions are the last bastion of the securities services industry to be overrun by the drive to automation (XBRL: Patch or panacea? Winter 2010); there is a lack of global standardization and a boom in corporates from developing regions using paper-based systems (Struggling with corporate actions, Fall 2008); and 10% of financial intermediaries’ operational budgets are held against corporate actions claims by investors for losses (Standardizing corporate actions, Fall 2009), to name a handful of the issues.
And those are just the recently highlighted ones. TARGET2-Securities working groups have addressed the corporate actions problem for several years, as did the Giovannini Group long before them, focused not even on streamlining the process but at the very least standardizing it across (European) markets.
The XBRL initiative driven by SWIFT and the Depository Trust & Clearing Corporation (DTCC) in the U.S. would solve downstream problems by getting issuers on board in tagging key points at the start of the process, but there is as yet little incentive for corporates to spare the expense of adapting their business practices to accommodate the new processnot to mention the added difficulty the concept would face outside the States, where familiarity with XBRL is scant.
On Wednesday, October 31, at Sibos, panelists at the Issuer to Investor: Corporate Actions Will We Ever Crack This? session will discuss progress being made in downstream communications between depositories and their custodians. At the same time, those institutions are bearing in mind that seamless communication between issuers and investors may never be achieved at all.
Its wrong at the start of the process, and its manual, then its sort of not looking very good towards the end of the process, says Virginie OShea, an analyst at Aite Group, who will participate in the panel. OShea says the panel will focus on what various markets are doing to get issuers on board at the start of the corporate actions chain. Experts say that is the key to ensuring corporate actions are accurate from the start of the process through to intermediaries such as custodians and depositories and on to investors.
Italys Monte Titoli, which will also participate in the panel, has taken the most advanced approach to this concept. The Italian securities regulator mandated that issuers must input announcements into a front-end system at Monte Titoli, capturing key information in a standardized form that follows the action through the stream, ensuring the accuracy of the announcement by the time it reaches investors. No other jurisdiction has that kind of regulatory backing, OShea says.
If engaging issuers is the solution to the corporate actions problem, then regulatory backing may be imperative. As evidenced with the XBRL initiative in the U.S., the benefits of getting issuers involved is obvious, but getting them on board, at least voluntarily, is another matter.
OShea says there may be an appetite on the part of some regulators in certain markets to mandate a change to the corporate actions process, but concedes that regulators generally havent expressed much concern about the corporate actions process. And it may be better to leave initiatives such as these to the industry to solveshe cites the industry-led move from T+5 to T+3 settlements as one such successbearing in mind that sometimes the best intended regulation can cause untold misery for some people, she says.
For now, the industry largely relies on vendors offering golden copy corporate action data, which takes out the heavy lifting from the process, as OShea puts it. A lot of data vendors are sourcing that information from issuers directly and providing it to the market in a feed rather than [market participants] having to go directly to the source, OShea says. But obviously that cant cover everything. Not all corporate action types are even capable of being automatedparticularly complex or custom eventsand standards vary widely depending on the market. Some issuer announcements are made in newspapers, for example, OShea says. And they dont even have to be national newspapers; they can be local newspapers. Its very difficult in certain countries.
For now, corporate actions remain highly manual, error-prone and costly when they go wrong. The industry has long discussed hypothetical solutions to ameliorate the aforementioned facts, but for once there are a handful of fledgling courses of action being carried out in certain markets to accomplish the task. Which model, or models, ultimately work will take some time to evaluate, but at least there is progress on the corporate actions front.
Christopher Gohlke