By streamlining corporate actions processing through automation and standardization, companies can improve the quality and timeliness of data and enable a move to cloud-based utility services.
The Work Ahead in Intelligent Automation: Coping with Complexity in a Post-Pa...
Transforming Corporate Actions Processing: The Long Road Ahead
1. • Cognizant Reports
Transforming Corporate Actions Processing:
The Long Road Ahead
By streamlining corporate actions processing through automation and
adoption of common messaging standards, companies can improve the
quality and timeliness of data and enable a move to cloud-based utility
services.
Executive Summary question the value of the new standard, and XBRL
As businesses expand into new geographies in is in need of a regulatory push.
search of growth, the volume of corporate actions
is growing exponentially. Advances in communica- Nevertheless, the industry seems convinced of
tions technology allow issuers to send announce- one thing: automating corporate actions process-
ments in a variety of formats; however, the ing is the way forward, as it holds the promise of
processing of these messages by corporations or reducing processing errors by minimizing manual
their financial service providers remains highly intervention and other inefficiencies that are
manual and error-prone. At a time when the known to generate huge annual losses.
business environment is growing in complexity
and volume, these errors are unaffordable. At the heart of improved corporate actions
processing is the quality and timeliness of data,
Straight through processing (STP) of corporate but these benefits depend on multiple factors
action messages is the industry’s holy grail. beyond the control of an individual party in the
Numerous efforts have been made to standard- corporate actions value chain. In some countries,
ize the corporate actions process, with some suc- for example, companies must obtain a physical
cess seen in dividends and income processing. certificate before issuing a corporate action,
For instance, several financial services companies adding to the time required for the message to
have adopted the ISO 15022 messaging stan- flow downstream. Also, given the number of
dard, and the more recent ISO 20022 promises possible intermediaries through which a
even better results. eXtensible Business Report- message passes, the risk of data dilution is high.
ing Language (XBRL) also holds great promise Overcoming these challenges requires greater
for reducing the risks associated with corporate collaboration among industry players, as well as
actions processing. But financial services compa- engagement with the issuer community to help
nies have been slow to adopt ISO 20022 as they facilitate meaningful change.
cognizant reports | february 2013
2. Greater automation needs to be complemented • Adoption of greater and faster automation of
with industry-wide adoption of messaging stan- corporate actions processing.
dards. Achieving this on a global scale will not • Creation and support of initiatives for
come easily, but several initiatives are underway industry-wide adoption of common standards.
that, with support from regulators, could move • Development of risk-sharing models that
the ball forward. On the technology front, growing create a level playing field for vendors.
automation of corporate actions has resulted in the • Engagement with the issuer community to
development of modern solutions that will make make the necessary technological changes.
it easier for both corporations and their financial
services partners to streamline and reduce costs Corporate Actions Blues
for this key process in the coming years. Corporate actions processing has been a
long-term area of concern for financial services
Businesses may increasingly work with part- companies. Action announcements arrive in
ners on activities such as data validation, but various forms and formats, with issuers using
this approach is somewhat risky due to process different terms to describe the same events.
complexity. Repetitive processes are more easily These messages pass through various interme-
entrusted to service partners, as they can be better diaries, including agents and custodians, before
optimized for time savings and, importantly, reaching the investor. A lack of global standards
enable operations teams to focus on business for formatting these messages means that at
outcomes rather than fixing data. various stages, data may be communicated in
paper-based formats, such as fax, thus adding
Advancements in cloud computing will enable to their processing time. This makes the cycle
organizations to access corporate actions process- of information flow risk-heavy and error-prone,
ing solutions on a pay-per-use basis, thereby vari- opening companies to the possibility of huge
abilizing the high fixed costs typically associated losses and reputational damage (see Figure 1).
with this space. Going forward, increased automa-
tion and adoption of industry standards will allow Key issues confronting financial services firms
for the commoditization of corporate actions that process corporate actions include:
processing, thus creating a level playing field for
smaller industry players, many of which cannot • Time-consuming and error-prone manual
afford today’s prohibitively expensive solutions. intervention and paperwork.
• High processing costs.
In sum, we believe the following to be the • Data validation, requiring a high level of skill; in-
industry’s key imperatives: house validation is often costly and error-prone.
• Inefficient processes, increasing the risk of loss.
• Harmonization of market practices at an • Low data reliability, caused by disparate systems
international level. in the processing chain from issuer to user.
Risk and Result
Risk Corporate Action Who is Impacted
Direct risk of Mandatory with Anybody in the corporate action chain
processing failures options; voluntary. (e.g., custodian, fund manager or broker),
with liability depending on which market participant
causes the failure.
Direct cost of Mainly mandatory Investors (interest forgone).
late payments (mostly dividend and
interest payments).
Risk of sub-optimal All Brokers or fund managers involved in trade
trading decisions (if proprietary) or investors (if cost passed on).
Indirect cost of ineffective Voluntary (mainly Issuers (in the long run), investors,
corporate governance proxy voting). the system at large.
Source: “Corporate Action Processing: What Are the Risks?” Oxera, 2004.
Figure 1
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3. • Data conflicts between trusted sources. financial services firms’ top priority (see Figure 2),
as is improving efficiencies. The Aite Group
Typically, financial services companies have teams estimates expenditures on corporate actions
dedicated to corporate actions processing, as mes- processing solutions will grow from $70 million
sage interpretation requires expertise with various in 2010 to $93 million by 2015.2 The level of auto-
rules and regulations. Such expertise comes at a mation is more visible in the more mature U.S.
high cost, due to the growing complexity of corpo- market, which has a homogenous regulatory and
rate actions messages. Firms often use disparate reporting system compared with the diverse and
sources for corporate actions data, and messages emerging systems used in Europe and developing
might vary in completeness and quality, adding to nations (see Figure 3, next page).
the time taken to validate the data and pass the
relevant insight on to the client. Furthermore, The Solution: Automation, Standards,
different departments within a financial services Regulatory Support
firm use data for different purposes, increasing the The challenges facing corporate actions
importance of data integrity. processing start right at the source. Issuers of
corporate actions operate in disparate industries
With businesses expanding their footprint to with different regulations that vary from one
emerging markets in search of growth, the volume country to another. Moreover, issuers are not
of corporate actions has increased rapidly in the legally required to publish announcements in for-
past few years. As recession slowly gives way mats that are compatible with existing standards,
to growth, capital requirements and corporate thus hindering smooth processing. For example,
restructuring will rise, leading to even greater the issuer might make an announcement through
volumes of corporate actions messages. In the a paper-based message, but the investor con-
global marketplace, data is exchanged across sumes this data in an electronic format created
time zones and geographies, placing pressure on by intermediaries.
business operations and increasing risks related
to incorrect and/or delayed communication. More This lack of uniformity percolates down to the
complex instruments, combined with the growing individual entities that process these messages.
complexity of the global business environment, Some of the key challenges related to the
creates additional pressure on resources. With processing of corporate action messages include
nearly one million announced corporate actions the following:
every year, the industry is said to suffer losses of
approximately $1 billion.1 • Growing volume of corporate action announce-
ments, accompanied by growing business
Not surprisingly, mitigating the operational risk complexity.
associated with corporate actions processing is • Complex event types (e.g., derivatives).
Corporate Actions Top List of Operational Risks
Corporate actions
Middle-office functions (allocations, confirmations,
matching/affirmation, presettlement management)
Account opening/client onboarding
OTC derivatives processing
Reference data management
Valuations
Reconciliations
Highest priority Second highest priority Third highest priority
Base: 42 European and U.S. asset management companies
Source: “Assessing Operational Risk in the Securities and Investments Industry Survey,” TowerGroup, 2010.
Figure 2
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4. • Managing different announcement formats. with smaller firms that deal with lower, more
• Improving data quality. manageable volumes.
• Improving timelines.
• Integrating data across platforms and sources. The story changes when it comes to messaging
• Overcoming barriers of legacy systems standards adoption. The large-scale adoption
to enable better data integration and commu- of the ISO 15022 standard reflects the benefits
nication. of this specification in terms of operational
efficiencies and risk reduction. Today, most
In a recent survey by SimCorp,3 78% of mid- and large-sized institutions use ISO 15022 for
respondents said manual processing of corporate corporate actions, and the volume of messages
actions was the top reason for corporate actions in this format is expected to grow. Nevertheless,
failure, despite more than half (58%) having the standard is somewhat inflexible — due to lim-
automated notifications. While automated noti- ited message field parameters and allowance of
fication processing exists in the back office, the free text — which limits the automation of certain
passing of these notifications to the front office message types.
is typically manual. This is a reflection of the
state of automated corporate actions processing, Meanwhile, XBRL4 has emerged as a technologi-
which usually focuses on simple, standardized cal standard bearer for corporate actions process
events, such as dividend announcements. automation. Its benefits include:
Automation priorities vary according to firm size • Clear conveyance of the issuer’s intent, thus
and areas of operation. Top drivers for automa- reducing the risk of misinterpretation.
tion include cost reduction, client demands and • Greater automation.
risk of losses (see Figure 4, next page). Never- • Reduced manual interpretation, re-keying and
theless, the extent of automation tends to be manual exceptions.
dictated by the business benefits of the automated • Timely decisions for investors through reduced
process. Firms that need to process large volumes communication latency.
of corporate actions, such as custodians, dedicate • Extensible tag library, in which issuer
more resources to process automation compared companies can create customized tags.
Investing in the Automation of Corporate Actions
White indicates countries
in which financial institutions
were not part of the survey.
0 - 15% 46 - 70%
16 - 30% 71 - 100%
31 - 45% Percentage of financial institutions in-country
planning to invest in corporate actions automation.
Base: 303 financial institutions in 53 countries.
Source: “AIM Global Reference Data and Risk Management Survey,” Aim Software, 2011.
Figure 3
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5. According to a 2009 survey by the Depository willingness of issuers to adopt XBRL. This makes
Trust & Clearing Corporation (DTCC) and Society the role of the Securities and Exchange Commis-
for Worldwide Interbank Financial Telecommuni- sion (SEC) exceptionally important, since without
cations (SWIFT), the use of XBRL could result in a regulatory push, issuer companies are unlikely to
reductions worth $400 million in wasted costs for voluntarily take up new reporting formats.
the U.S. financial services industry due to a 30%
improvement in STP rates.5 The combination of While the U.S. scenario is promising, the story
ISO 20022 and XBRL, which allows issuers to tag is entirely different in other parts of the world.
important data points at the time of writing the In Europe, the level of standards harmonization
message, holds much promise for creating fur- is not the same as in the U.S., complicating the
ther efficiencies. Financial firms can extract the implementation of ISO 20022. Getting financial
relevant data and pass it on to their clients in the services companies across geographies to adopt
ISO 20022 format. This way, data entered by the any standard is challenging and could require
issuer is much less susceptible to risks imposed several years to achieve. The TARGET-2 Securities
by manual rekeying and allows for easier inter- trading platform is expected to play a key role in
pretation by financial services firms. As a result, the adoption of the ISO 20022 format for corpo-
investors have access to clear and accurate data. rate actions processing. (For more on this, read
our paper, “TARGET2-Securities Platform: Impli-
Embrace of the ISO 20022 standard is highly likely cations for the Post-Trade Arena.”) But repeated
in the near future, especially in the homogenized delays in its implementation are not helping the
U.S. market. The DTCC recently announced that cause. Similarly, the Corporate Actions Joint
ISO 20022 is ready for implementation, follow- Working Group (CAJWG) has taken up several
ing a lengthy pilot implementation that involved initiatives to promote automation. However,
leading industry players, including BNY Mellon, progress has been rather slow, given the fact that
Brown Brothers Harriman, JPMorgan Chase and the corporate actions process has been built over
National Financial Services LLC.6 DTCC plans to decades in a paper-based economy.8
transmit corporate action notifications via the
ISO 20022 XML-based format by 2015, replac- Emerging economies have yet to see widespread
ing existing flat file notifications.7 In the first adoption of standards, although in regions such
quarter of 2013, it plans to send ISO messages as Asia, SWIFT has made inroads. Harmonization
systemically to help participants carry out further of cross-border securities trade in Asia has a long
testing, followed by Elective Dividend Services way to go given the diverse nature of the markets.
(EDS) events messages. Given this scenario, achieving consistently high
STP rates at a global level remains a distant, if
Even as these developments take place, much of not unachievable, dream.
the automation efforts’ success will depend on the
Top Drivers for Automation
Reduced operating costs
Client demands for service quality
Corporate actions losses (or near misses)
Other
Anticipated volume growth
Regulatory pressure
1 2 3
(Respondents were asked to rate the factors driving automation.
A score over 2 indicates strong support.)
Source: “Corporate Actions 2012: A Global Survey of the Corporate Actions Marketplace,” Swift and CityIQ, 2012.
Base: 95
Figure 4
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6. Process Automation Barriers and see” approach given adoption costs. A 2010
Changes in the management of corporate actions survey by A-Team found that 60% of respon-
are progressing at a snail’s pace. The need for dents in the U.S. and Europe were unclear on the
reducing the risks involved in corporate actions benefits offered by the new standard.10
processing has been recognized for several years
now. However, given the deep-rooted nature of A similar situation likely exists in other advanced
the earlier practices, standardized practices have and emerging markets. The benefits of STP
yet to gain a strong foothold. can be realized only when there is wide adoption
of these standards. This will take continued effort
At an organizational level, front-office require- by industry bodies, cooperation from industry
ments or regulatory initiatives typically trump the players and buy-in from the issuer community to
requirements for automating corporate actions create messages in formats that are compatible
processing. While employ- with standards used by downstream organizations.
At an ees at the operational level
organizational tend to be aware of these Legacy systems in individual institutions pres-
level, front-office risks, their voices seldom ent another barrier to effective processing. Most
make it to the boardroom. financial services companies have implemented
requirements A TowerGroup survey found systems with multiple vendors over the years that
or regulatory that 65% of operations are either incompatible or been made to interop-
initiatives professionals plan to invest erate through extensive internal or third-party
in automating corporate effort. A complete overhaul of these systems usu-
typically trump actions processing but fear ally means high Cap-Ex, while sticking with legacy
the requirements that the regulatory squeeze systems presents clear operational disadvantages
for automating could monopolize planning, in the form of high maintenance costs and errors
C-level attention and fund- caused by overreliance on manual intervention.
corporate actions ing.9 A more recent study This can result in hefty performance penalties
processing. by SWIFT and CityIQ affirms enforced through existing contracts between
this (see Figure 5). financial services providers and their clients.
In today’s economic climate, spending con- By automating the corporate actions func-
cerns can trump broad-based automation or tion, organizations can ensure long-term
systems upgrade initiatives. Take the case of operational efficiency and effectiveness. As
migrating to the ISO 20022 messaging format. with most IT-driven projects, ultimate success,
While some organizations have already seen however, depends on how firms plan and imple-
the benefits of this standard and are preparing ment their corporate automation actions
to upgrade, several others have taken a “wait program. Among the key imperatives:
Factors Impeding Corporate Actions Automation Projects
14% Difficulty building business case
19%
Doubts about attaining STP
Cost of SWIFT messaging
11%
No impediments
9%
We are fully automated
3%
3% Lack of management buy-in
2% Competing internal priorities
10% Lack/inadaquacy of solutions
29%
Limited return on investment
Source: “Corporate Actions 2012: A Global Survey of the Corporate Actions Marketplace,“ Swift and CityIQ, 2012.
Base: 95
Figure 5
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7. • Create a clearly defined set of expectations arrangements in which no party in the value chain
between providers and financial institutions, is unfairly burdened.
along with feasibility and cost-benefit analysis.
• Build a plan for integrating the varied sys- Given the high costs involved in automating cor-
tems that must interoperate in an automated porate actions, several smaller players, such as
environment. independent asset managers and broker-dealers,
• Put in place systems to mitigate risks. remain averse to embracing automated solutions.
• Establish a strong working relationship The answer to this may lie in the software as a
between the operations team and technology service (SaaS) model, which enables firms to
providers. access automation solutions as utilities. Cloud
• Enact a phased approach to automation sup- computing has gained popularity among financial
ported by internal audits and management services firms due to the benefits offered in the
reports. form of on-demand availability, fixed-cost vari-
abilization, pay-per-use and scalability. This has
The Case for Corporate Actions as a provided incentives for firms to source middle-
Service and back-office functions to third parties.
Despite increased outsourcing in areas such as
validation, it is still uncommon to work with a There is a long way to go before corporate actions
partner that specializes in corporate actions pro- processing can be offered as a truly commod-
cessing. The chief reasons for this include the itized cloud-based offering, as it is much more
risks involved and companies’ perceived loss of complicated and risk-prone than conventional
control. Large custodians are among the only back-office functions. Challenges exist in the
members of the corporate actions value chain form of data security, integrity and reliability, as
that use third-party services. The primary risks well as the need to integrate these systems with
pivot around third-party interpretation errors, legacy platforms.
which can be traced to the lack of common global
standards. However, it is safe to say that as greater stan-
dardization and automation takes root, corporate
Nevertheless, expert third parties offer clear cost actions processing is likely to evolve to a stage
benefits, and the number of corporate actions where it can lend itself to wide-scale commoditiza-
automation solutions available to financial firms tion. As such, financial services firms and their cli-
has increased over the past few years. By working ents may be more willing to embrace greater levels
closely with service providers, financial services of automation provided as utilities by third-parties
companies could create balanced risk-sharing specializing in the corporate actions function.
Footnotes
“Taking Risk Out of the System: Is It That Easy?” A-Team Group, 2010.
1
2
“Corporate Actions Automation: Making Progress on an Old Problem,” Aite Group, 2009.
3
“SimCorp Poll Pinpoints Lack of Automation as Biggest Cause of Corporate Actions Failure,” SimCorp,
March 7, 2011.
4
XBRL (eXtensible Business Reporting Language) is an open standard that supports information
modeling and the expression of semantic meaning commonly required in business reporting. XBRL is
XML-based. It uses the XML syntax and related XML technologies such as XML Schema, XLink, XPath,
Namespaces, etc.
5
“A Business Case to Improve Corporate Actions Communications,” DTCC, SWIFT, XBRL, 2009.
6
“DTCC Launches Corporate Actions ISO 20022 Pilot For Entire Lifecycle of Distribution Events,”
DTCC, September 2012.
7
“DTCC Launches Corporate Actions ISO 20022 Test Pilot,” DTCC, April 2011.
8
“Changing the Game for Corporate Actions,” A-Team Group, 2010.
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