Adoption of Corporate Actions Standards Are Improving

Slow and Steady" was the title of an article in the December 2005 issue of WS&T that described the industry's progress toward straight-through processing (STP) of corporate actions. Nearly a year later, the industry has made inroads to alleviate pain points associated with corporate actions, including more-widespread adoption of the SWIFT-supported ISO 15022 messaging standard. But the high costs associated with implementing that standard and the lack of automation and accurate data still are proving to be difficult hurdles to overcome.

Any event a corporation initiates that affects its stock is considered a corporate action, such as interest payments, dividends and other complex financial transactions that retain various options, cash, stock or fractional amounts. Because of the lack of technology and standards, most investment managers or custodian banks can't handle this high degree of complexity in an automated fashion. Rather, corporate actions data is keyed in manually to create exception reports. "Custodians collect this information, apply it to client portfolios to determine who receives the corporate action, and they distribute the announcements back out to their customers," explains TowerGroup analyst Matt Nelson.

The inherent problems with manually entering data -- such as misplaced decimals and transposed numbers -- obviously increase the likelihood of failure. Investment managers often receive the wrong share information and the wrong notification information, according to Nelson. "They can't make a properly informed election," he says. "Not only is the custodian bank at risk, but its customer is exposed as well."

According to Nelson, who authored the May 2006 TowerGroup report "Update On Corporate Actions: Progress in the Face of Apathy on the STP Battlefront," the industry needs a common communication standard -- "something that the industry buys into that says, 'This is how we're going to transmit and notify of corporate actions,'" he says. Still, given the current lack of a communication standard, Nelson notes, the industry is "doing the best it possibly can right now to implement improvements to better the process."

A SWIFT Course of Action

Linda Bookheim, senior business manager, North America, for the securities industry division of SWIFT, agrees. "We really are making progress, especially compared to a few years ago," she says, pointing to the adoption of ISO 15022.

The ISO 15022 standard sets the principles and tools necessary to design message types to support specific information flows. Tools consist of a set of syntax and message design rules, a dictionary of data fields, and a catalog for present and future messages built by the industry. Since its adoption in 2002, the volume of ISO 15022 messages that flow through SWIFT has tripled, according to Bookheim. "We're seeing increases year over year on the average of about 20 to 25 percent increase in the volume of messages," she says. The SWIFT network validates ISO messages to ensure required corporate actions fields are present and formatted in the proper syntax.

To refine the messaging process, Bookheim adds, SWIFT's Securities Market Practice Group created an Events Interpretation Grid (EIG) that identifies the appropriate corporate actions for corresponding event types. This fall, SWIFT began a proof of concept around the EIG to develop a SWIFT testing and certification service. "This proof of concept is to look at messages and have them tested against the EIG," explains Bookheim. "We might even launch a service that then certifies an application vendor's messages or even particular customer or custodian's messages. If we get good results and people seem happy, we will develop a full-fledged service."

For Northern Trust, the most difficult aspect of corporate actions processing is announcement gathering, which involves aggregating and comparing corporate action announcements, according to Thomas Jaeggin, the firm's VP of worldwide operations and technology. "The sources of the announcements typically aren't automated, but companies like SWIFT are making great strides to move toward more standardization," says Jaeggin. "But as of today, the industry is still setting their formats and fields differently."

Northern Trust's proprietary, Web-based corporate actions and delivery response tool (CDR) allows the firm to electronically capture 80 percent of the decisions that previously were faxed to the firm, according to Jaeggin. "This automation allows us to capture the corporate actions announcements, notify our clients, receive a payment from DTCC [Depository Trust and Clearing Corp.] and pay our clients without any manual intervention," he explains. "More automation means more time and money is saved from manually inputting information ... into the CDR system. Whether a client accesses our CDR Web tool and enters a decision or they send us a SWIFT message, we can process those without manual intervention."

While manual procedures are reduced using CDR, they are not eliminated completely, Jaeggin acknowledges. He says both large investment managers and small boutique firms all employ different faxing schematics, and it's not uncommon to receive hand-written notes via fax. As a result, many of the faxes received by Northern Trust must be interpreted and input into the CDR tool manually, a procedure that requires a system of checks and balances so that responsibility isn't limited to a single employee, Jaeggin notes.

DTCC Follows Different Path to STP

To achieve true straight-through processing of corporate actions, the quality of the data needs to improve dramatically, according to Brett Lancaster, VP, product development and marketing, global corporate actions, DTCC. "The information that vendors provide is not necessarily accurate or correct," he contends.

According to Lancaster, two of the largest financial services companies in the U.S. approached the DTCC about this same topic, concerned that their 40-person teams to cleanse error-ridden data coming in from vendors was an inefficient corporate actions strategy. "They wanted to know if DTCC could actually do the corporate actions data cleansing process for them," he says. The program developed for the two firms has become the DTCC's Global Corporate Actions Data Service. "We take vendor data and scrub it to create the one single golden copy for our clients," says Lancaster.

At the end of the day, the current ISO 15022 standard is not extensive enough to fully automate corporate actions processing, Lancaster contends. "What we're trying to do at the DTCC is short circuit all of that and really go down an XML or XBRL route," he says. "That's a much faster way of getting to the right answer, rather than waiting around every five to 10 years for a new ISO standard," Lancaster asserts. "You can't do this in isolation. You have to solve the problem when you swim upstream to those that are actually creating the announcement. That is the big, driving nirvana that we're all trying to march toward over the next three to four years." <<<