Gone are the days when Wall Street runners used to shuttle to and from the offices of share subscribers, carrying information and instructions. Though the methods have since changed, corporate actions processing, for many financial institutions, remains a manual endeavor, where decisions must be made and acted upon in far more complex situations.
Corporate actions are events that result in a material change to a security, and may be broadly classified as "mandatory" or "voluntary." Mandatory corporate actions may seem straightforward – after all, they must be implemented. But there may be choices within the mandatory corporate actions, such as whether to accept a benefit in the form of cash or in new shares. Dividends are increasingly offered in alternative currencies or with stock options, complicating even what was once the simplest event type.
Yet it is voluntary events that have the most potential for significant losses for financial services companies. For instance, a company seeking to raise capital from the market may introduce a rights issue, offering shareholders an opportunity to buy additional shares at a discounted rate. There's a deadline for such an offer, so if a client elects to purchase shares but the operations team doesn't send on the instructions, the deadline may pass, and the shares must then be purchased at full value.
Minimizing such costly errors requires accurate tracking of deadlines and other key dates in corporate actions. Typically, this means that managing corporate actions involves multiple sources of information, pressures regarding compliance, and a host of manual processes and procedures, each of which may increase the potential for mistakes. Little wonder, then, that corporate actions processing is seen as one of the riskiest areas of back office operations. In fact, a survey of 42 fund management firms found corporate actions was ranked as the biggest operational risk.
Corporate action volumes have increased with the growth in the financial markets and the number of companies listed on stock exchanges, as well as the increase in the number of debt instruments and secondary listings since the global financial crisis. At the same time, complexity has increased as issuers look to raise capital through corporate actions, and sometime even engage in multi-legged events, where a number of mandatory and voluntary events occur simultaneously or concurrently on a particular security. Complexity has also increased as firms look to invest in exotic instruments, which require operational teams to extrapolate the effect of a corporate action on their underlying security or securities.
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In the Asia-Pacific region, we have seen financial firms progress rapidly in terms of corporate actions standardization. Well-organized regional and national market practice groups have also accelerated best-practice adoption. However, while markets such as Australia and India have achieved a high degree of automation through adoption of SWIFT for their corporate action announcements, and with Japan soon following, regional harmonization is still not yet a reality.
There are also challenges in that certain markets continue to have their own legislation and languages. For example, in Indonesia, issuers are permitted to announce corporate actions in local newspapers, and they tend to select this option if they want to minimize the coverage of the event. In Taiwan, financial institutions have various options available to them when announcing rights issues, as the rights securities are not usually available for trading on the stock exchange and hence do not have a standard code that can be used to identify them. Anomalies such as these make corporate actions processing in Asia a challenging task.
The global trend towards messaging standardization opens up the possibilities of automating the rest of the corporate actions process. If all sources for corporate action notification (clearing houses, exchanges, market data vendors, custodians, brokers) issue the information in the same or similar formats, comparisons can be easily run between the different sets of data to create a “golden copy.” Any discrepancies can be highlighted to operations users for investigation.
Once a golden copy has been created, the agreed key dates can also allow operational teams to calculate eligible units for the event and the interested parties who should be notified. To take this a step further, operational departments should be able to specify what information is sent and in which format. Such automation requires integration of existing back-office platforms and static data repositories, as well as a definition of templates that would be used, for example in case of letter notification, or adherence to existing standards, such as SWIFT ISO 15022.
After notifications are sent out, elections need to be sent by the financial institution’s clients on the voluntary or mandatory with choice events. Custodians are already beginning to offer web portals through which you can view corporate action information and elect on events. While this targets the institutional investor, retail investors are also beginning to see such offerings in their space, to the extent that smartphone apps are also being offered to high-net-worth individuals by private banks. How long before we see the average person on the street not only know what a corporate action is, but also make an informed decision on events that affect his portfolio with his mobile phone?
The web portals and apps used for electing need to be linked back to the golden copy that was originally created to allow instructions to go back to the source of the event. Automation on this part of the process resolves the first risk we mentioned about the potential for an instruction to be missed. Finally, the entitled accounts can be credited with the proceeds from the event, possibly using the same channels that highlighted the eligible positions.
As we can see, the technology and standards already exist to automate much of the corporate actions process. Achieving high straight-through processing rates on the simpler events allows operational teams to concentrate on the more complex events. As large operational teams become financially unsustainable, even in Asia where the tendency has historically been to help manage risk by increasing headcount, automating back-office processes has been a key focus of financial institutions. Corporate actions, despite its history as a labor-intensive area, should be no exception.
Harry Rana is director, business development, Asia-Pacific, SunGard’s XSP.