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Leslie Kramer
Leslie Kramer
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Conquering Corporate Actions

A number of industry bodies are looking into ways to streamline the byzantine process of disseminating and deciphering corporate actions.

The industry, tired of talking about the problems presented by corporate actions, is now focused on solving them.

If only solutions to dealing with the tangle of information known as corporate-actions communication could be developed as fast and furiously as the overload of information they carry, there would be a lot less frustration and miscommunication in the industry.

The major problem surrounding corporate-actions communication stems from the fact that notification, culled from numerous sources, gets passed through a long chain, namely to sub-custodians, global custodians, the Depository Trust Company, vendors, broker/dealers, and investment managers. The information is often varied, confusing and sometimes incorrect. This causes problems for money managers who need to react quickly to stock-splits, dividend announcements and mergers, and for the custodians, which bear the burden of providing accurate information and response instructions.

Nonetheless, the industry is attacking the problem from all ends. A leader in providing solutions has been the Belgium-based industry-led Society for Worldwide Inter-Bank Financial Telecommunication (Swift), which went live with ISO 15022 in November 2002. The ISO 15022 system enables financial institutions to construct and send messages about corporate actions in a standardized, automated form and has become the defacto messaging standard for communicating corporate-actions events and entitlements, says Tim Lind, senior analyst with the Massachusetts-based TowerGroup. Lind helped develop the product while working for Swift.

Standardized messaging is indeed an important first step, but most firms still rely heavily on a variety of disparate sources to get their corporate-actions information. And collecting this still data remains a challenge.

"A data vendor may use 500 sources of information globally, whether it be from stock exchanges, depositories, other commercial vendors, and even newspapers. There is a massive amount of information that needs to be collated, validated, captured in codes and then put into a structured syntax that can be processed by a software application," Lind says.

Fortunately, the Depository Trust Corporation is addressing this problem. It is currently developing a real-time, Internet-based software system called the Global Corporate Actions Hub, due out in 2003. The hub will create a centralized communications conduit for custodians, broker/dealers and investment managers to receive corporate-action messages and provide instructions on how to respond to the actions, using the ISO 15022 format.

The benefits could be huge, including reduced risk of missed or inaccurate information, computer-generated audit trails, and the elimination of faxes and manual keying.

In the meantime, a number of software vendors have already developed their own versions of a hub. They include N.Y.-based Financial Technologies International, London-based HelioGraph, Boston-based Fidelity Enterprise Data Systems, Riverwoods, Ill.-based CCH, London-based SmartStream, and N.Y.-based Xciteck Solutions Plus, to name a few.

Some investment houses have also developed their own in-house systems to work in accordance with these outsourced systems.

CS First Boston opted to go with the Xciteck's (XSP) corporate-actions-processing system, rather then build its own. "We didn't want to rebuild the wheel," says Jim Captain, director of shared services at the firm.

The XSP hooked into CS First Boston's in-house system and has been up and running since the first week of November. The firm uses the system to track and automate corporate-actions events, provide client notification, solicit secure Web responses, and store an audit trail of communication.

No manual intervention is needed. Most importantly, Captain notes, "It reduces risk for our clients and for us."

But portfolio managers have their own set of needs surrounding corporate actions. "From our perspective the issue is about timing," says Stewart Pemberton, vice president of business management for U.S. equity at JPMorgan Fleming Asset Management.

Portfolio managers are directly affected by corporate actions, such as stock splits, rights issues and mergers, and they need to react quickly, he says. "We need the information by the start of the day, so we can put it in front of the portfolio manager. He needs to see that he has two times the amount of shares to trade with that day," Pemberton adds.

JPMorgan Fleming chose Fidelity's ActionService as its automated information provider, "partly because it offers verified and unverified data," Pemberton says. The firm then combines Fidelity's data with the data it receives from its own custodians. It recycles the information and verifies what is correct.

The firm is still in the process of building its own automated system to streamline this process, Pemberton notes. "Fidelity provides a great service, but we put an added layer of valuation over and above what they provide," he says.

Northwestern Mutual needed a corporate-actions information provider, as well as a centralized system to reduce investor risk and exposure, increase the consistency of information, achieve straight-through processing, and meet auditory and regulatory requirements, says Don Forecki, director of investment operations at Northwestern Mutual.

The firm decided to use two vendors. "We wanted Fidelity's system, which provides quality scrubbed data, loaded into the processing software designed by Xciteck Solutions Plus," he says. The XSP system shows the firm how its corporate actions are affecting its mutual funds, general accounts, and variable annuities. As part of its push for complete automation, Northwestern Mutual hopes to incorporate its custodian banks' feeds into the solution.

Sometimes, however, the best way to solve a problem is by starting at its source, says the Bank of New York's senior vice president Kevin Smith. "Information management, or how the information gets from the issuers to everyone who needs it, is a big part of the problem," he says.

To date, issuers are not using a standardized system to report corporate actions. Smith is less than optimistic that this will change. "Trying to lend a standard format to the front end of the process is unlikely, because issuers have little incentive to do so," he says.

Currently, there are over 50 different types of corporate actions that can occur, and different laws dictate how each company must report this information. "Business law across different countries is not harmonized, so the rights of shareholders pursuant to an event are not the same across different markets, which makes the communication of corporate events hard to standardize globally," says TowerGroup's Lind.

Nonetheless, industry organizations are tackling these challenges. Swift is facilitating an industry-led white paper, which will go to the U.K-based Financial Services Authority by end of March 2003.

"The paper will outline the risks associated with processing corporate actions and make some recommendations on ways to mitigate this risk, specifically concentrating on the format and timetable of issuers' announcements," says Catherine Marks, manager of securities markets at Swift.

In the United States, the Securities Industry Association's (SIA) corporate-actions division has developed recommendations which are under review by the SEC.

Also on the agenda are global recommendations related to use of standard formats, such as ISO 15022. Implementation of those recommendations, however, will still need to be addressed by local markets, says Judy Smith, managing director of institutional securities at Morgan Stanley and a member of the International Securities Services Association (ISSA) board.

"The accuracy, timeliness, clarity and completeness of corporate-actions data present problems to global investors and securities-services providers, because the terminology, as well as the processes for capturing and distributing that data, differ by local market and by corporate-action-event type, so there is no global solution," Smith says.

Firms will also need to look at the cost/benefit analysis of introducing corporate-actions-automation systems.

"Fundamental changes will requires new software, which is expensive and time consuming," says Swift's Marks. "The driving force to change will be when errors occur due to miscommunication and lost financial information."

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