Corporate actions are an expression of the business laws of individual countries and will never be completely standardized across all markets. They are a reflection of the artistic creativity and financial obfuscation that can only come from a perfect storm of bankers, accountants, and lawyers. Given these facts, protecting the rights of investors in the complex corporate legal structures of public companies will always be subject to some degree of interpretation risk, making humans an integral and necessary part of the corporate actions workflow.
Even knowing that complete automation is unrealistic, the corporate actions industry never stops in its pursuit of greater efficiency, better customer service, and its fiduciary duty to ensure shareholders are advised of all rights and outcomes that result from a corporate action. Such fiduciary obligation should not just be applied for appropriateness of investments or asset allocations, but should be pervasive across all functions where investment returns are impacted. Providing timely and accurate information to shareholders is certainly among these functions and is consistent with the type of accountability the industry needs to take to restore investor confidence.
For 15 years SWIFT, working groups of the International Standards Organization and industry participants have been working to define and implement a standard messaging protocol called ISO 15022. When it was born in the mid 1990s, ISO 15022 represented an opportunity to automate and create greater efficiency in the processing of notifications, entitlements, and elections. Today, ISO 15022 has achieved the designation as the undisputed standard for corporate actions and has been adopted globally by banks, broker dealers, investment managers, and market infrastructure.
For many years, ISO 15022 also enjoyed no legitimate competition in terms of messaging standards. That was until ISO 20022 was created to address the same business processes.
ISO 20022 was crafted by the same community and process that developed ISO15022, all under the careful governance and bureaucracy of the ISO financial message registration process. The initiative was widely publicized and any bank active in standards or the SWIFT community was aware of the effort. The development of ISO 20022 was supported tacitly by this community or passively through indifference.
To those in the industry, ISO 20022, represented a technical evolution in corporate actions standards and held the promise of being a foundation for even greater automation and sophistication. It was positioned as a leap forward in terms of functionality over the incumbent messaging standard
Based on a modern XML syntax, a formal modeling technique, and a comprehensive data dictionary, ISO 20022 promised increased rates of automation and an overall lower cost of integration and maintenance. Designed as a framework or “recipe” for making financial messages ISO 20022’s flexibility, also allowed for reusable components, and could potentially support a wider range of data attributes, not to mention take advantage of ubiquitous editing and document management tools that natively speak XML. Conversely, ISO 15022 was based on an older syntax and lacked flexibility when it came to introducing new requirements.
While ISO 20022 was clearly created with the best intentions, something very bad occurred along the way. The business case to migrate from ISO15022 to ISO 20022 was always challenged in terms of articulating tangible benefits. How much additional automation would it support? If there were gaps in ISO 15022, why wasn’t the standard enhanced to close those gaps? What about legacy systems and the costs of migration? Even now, years after its introduction, the business case for ISO 20022 is still being compiled.
One thing we know for sure, the corporate actions industry must choose between the unpopular approach of a forced migration to ISO 20022 or managing a prolonged period of fragmentation between two “standards.” This is the financial messaging equivalent of being between a rock and a hard place.
Yes, ISO 20022 may represent an upgrade over ISO 15022 but the initiative has thrown the future state of corporate actions standards into a troubling state of uncertainty. The lack of consensus on how ISO 20022 will be adopted is invariably creating a state of fragmentation, ironically from the very process designed to create harmonization. The situation puts us at a critical crossroads and requires an escalation on the debate regarding the potential “co-existence” of two standards.