Slow and Steady

Although corporate actions automation has been talked about for years, most of the industry has yet to make progress toward achieving it.

Though notable strides have been made toward straight-through processing in many areas of the transaction life cycle, when it comes to automating corporate actions, the progress is more akin to staggering into a headwind - slow and hard. As Pamela Brewster, senior analyst with Boston-based Celent Communications, points out, a number of obstacles have inhibited progress, including the fairly high price associated with automating corporate actions processes and competing IT initiatives. Brewster notes that "the number of firms in the industry that have achieved substantial automation hovers around the 20 to 25 percent mark."

Yet, more attention inexorably is turning to corporate actions automation, and with good reason. The vast number of corporate actions that occur worldwide each year, combined with their potential complexity and the manual processes involved, make this a costly business. "In larger organizations, staff can reach in the hundreds and the cost can be upwards of $20 million just in personnel," says Brewster. "As such, firms are looking at ways to reduce such operating costs." Then there is the cost of getting a corporate action wrong, which can run into millions of dollars - not to mention the reputational damage a custodian, whose role includes safeguarding assets, can suffer from an error.

Not surprisingly, then, global custodians have been in the vanguard of corporate action automation efforts. "Most, at this juncture, have some automation - at least 70 percent or more," speculates Brewster. "Broker-dealers have been the second most ambitious to automate, with a number of leading firms, such as CSFB, HSBC and Daiwa Securities, taking some action," she continues. "A few of the largest asset managers have also focused on automation, including Fidelity and T. Rowe Price, but, in general, [members of] the asset management community have been laggards in this area. Price is a big consideration, and all firms are looking at the cost benefit/ROI to take on these projects."

The SIA Takes Charge

The SIA's Corporate Actions Division is focusing on two points of action - getting better information from the source and improving the liability notification process.

To improve information from the source, the SIA has started an initiative to standardize the data content of corporate actions notifications and facilitate timely data provision to the industry specifically related to mergers and acquisitions. It is doing so by lobbying the SEC to make changes to an existing rule, Regulation M&A, that governs the documents that must accompany such transactions. The goal: To push the SEC to mandate that specific data elements be included in M&A offering documents, such as cusip numbers. The SIA has developed a list of critical data elements - that embrace the use of ISO 15022 messaging standards - which it will suggest the SEC include. It plans to team with the New York Bar Association and petition the SEC for a change to the regulation in May or June, says John Wagner, a director with Morgan Stanley and president of the SIA's Corporate Actions Division.

The association's other key initiative focuses on automating liability notifications. Corporate actions liability notices come into play when a seller fails to deliver its securities to a counterparty during a voluntary corporate action. Today, the recourse is to send a fax message to the seller putting them on notice that they are failing to complete their contract and the steps that need to be taken as a result, according to Wagner. "So we recognized we needed an electronic methodology in the liability process," he says.

To that end, the SIA approached the Depository Trust & Clearing Corporation to build a notification service, relates Wagner. The result was the development in December of SMART/Track, a Web-based system that automates the creation, delivery and tracking of corporate actions liability notices.

In addition, the industry is hoping to change an NYSE rule, Rule 180, that governs counterparty liability for securities that are not delivered. Currently the rule does not specifically refer to liability as a result of a corporate action, which the industry would like to change.

The SIA has been in talks with the NYSE to change Rule 180. The exchange hasn't "totally accepted whether they will consider or implement a rule change, but they made it clear they agree with the concept and would consider our petition to change Rule 180 to mandate this SMART/Track system as the methodology for all industry groups to use to transmit liability notifications amongst themselves," says Wagner.

Assuming the exchange's board approves the rule change, it could take effect sometime in September or October, suggests Wagner. The SIA also plans to apply to the Amex and Nasdaq for a similar change to their rules, which it hopes could come into effect at the same time or shortly after the NYSE change, he adds.

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