Global Custodian Market Review | Corporate Actions

Fall 2019 // https://www.globalcustodian.com/features/words-and-actions/

By common consent, the area of corporate actions is one of the laggards efforts to standardise and automate all aspects of post-trade securities processing. While the implications for any one event may be limited, inefficiently costs in aggregate.

“There are over 300 different types of corporate action,” says Jonny Ruck, CEO, Scorpeo, a firm focusing on missed value in corporate events. “In any given year, there are over a million corporate actions across the whole market and around six to seven million corporate actions notices overall across all those events. Our data shows that over $1 billion a year is being missed in just scrip dividends, from not taking the right election at the point that you’re asked to take it. That’s a lot of money.”

Given that for each corporate action, all the necessary data comes initially from one place – the issuer – it may at first glance seem strange that the industry struggles to keep that data consistent along the investment chain.

“There are very few people who will take corporate actions information direct from the issuer rather than from data distributors,” says Jonathan Bloch, CEO, EDI, a provider of financial back-office data. “Most custodians take outside feeds, using a few different feeds to spot anomalies and differences which they will then query.” In addition, he points out, not at all issuer data is in English. ” We translate 36 languages a day.” he points out.

The challenge is really a combination of technology, human behaviour and business process. “Each corporate action is slightly different, says Ruck. “Certain activities are pretty easy to automate, such as dividend processing, because they’re generally similar, but other types of corporate action are very, very difficult to get into one fixed system that can just process everything. Some have choice, some have no choice, some have many choices. And some are choices in equity, some are choices in fixed income, some are choices in FX, some are all three.”

“Automation would be great in this area, reducing risk and cutting some cost, not only for custodians, but also for retail execution-only stockbrokers. They’re on very small margins and can’t really afford to handle much manual processing,” says Mike Foley, chief strategist at UK registrar Equiniti. “The problem always was the quality of data has been perceived to be somewhat less than perfect and once you automate it, if you have an error, you have a real problem.”

To address these risks, intermediaries such as custodians maintain multiple data feeds, which they match in an effort to create a golden copy. “The reason everybody wants some form of technological innovation in this area is because otherwise we have to rely on the efficiency of the human,” says Ruck, “and unfortunately, in many instances, that efficiency isn’t there.”

That’s just the way it is

Automation is, however, difficult to progress without standardisation of the underlying data and there is little incentive for the issuers initiating a corporate action to focus on structuring their
information in a certain way. “There is a complete lack of harmonisation on the issuer side,” admits Goran Fors, deputy head of investor services at SEB. “Format is not a big issuer problem. They produce what they produce and expect someone to take care of it.”

The issuer typically announces the corporate action in a news release or regulatory filing, using unstructured text that must be interpreted, transformed and summarised by the financial services industry, generally with no input from the issuer on the data conveyed, explains James Zorab, chief executive and co-founder, Codel, a digital notary service provider. “Multiple messages from numerous intermediaries transmitted to the investor can result in a lack of consistent, accurate communication of the issuer message.”

Mike Tae, SVP, corporate strategy, Broadridge agrees. “Data providers are still scanning newspapers or perusing trade publications for event announcements,” he says. “So long as that initial event
announcement is a manual one, that’s just the way it’s going to be.”

What makes this inconsistency perplexing is that registrars need to have correct data to act on behalf of the issuer. “Inside Equiniti, there are two teams looking at corporate actions and dividends,” Foley explains. “One set works with the issuer and they tend to pick up the workflow before it’s public. Then another team takes that data and deals with the investor. Once the data is public, we can feed in golden source data at that point. But custodians probably want earlier notice. Because we have the close relationship with the issuer, we know what they’re thinking, but we can’t release that before it’s public. I don’t think technology is a big issue. That’s the easy bit.” At the other end of the chain, asset managers – and more specifically, portfolio managers – do not seem inclined to regard corporate actions inefficiencies as a critical issue. “Unfortunately, what happens is that the PM, more than the back-office, has to make a decision on a corporate action,” says Ruck. “That PM may have a portfolio of 300 to 500 different stocks. When they receive an email 30 days after the dividend-ex date, saying, ‘What do you want to do?’ most of them, unfortunately, just do nothing and hence default the election into what is normally just a straight cash election, irrespective of the value of the other options.”

Significant improvements

Fors notes that corporate actions information processing among custodians has improved significantly in recent years. “The drive to simplify processes between custodians is aided by the fact that we have a mutual interest in reducing cost and increasing efficiency. On the institutional investor side, however, that interest hasn’t been there as they’ve been taken
care of by the custodian.” The industry has certainly invested effort in ISO messaging standards for corporate actions. “The initial aim of ISO 15022 was to allow movement from one data provider to another, but that, and even more so ISO 20022, is a rather ‘unstandardised’ standard,” says Bloch, while Tae suggests that, “Until you get the industry to come together and figure out ways for corporations to comply with these standards, there’s going to be an
issue.”

Most portfolio managers will regard the value they create as residing primarily in their stock selection. “Looking at the corporate action is not for them, a major part of it, but, if you just automated that process, they wouldn’t have to worry about it and would still get the best value,” says Ruck.

Despite ongoing efforts at automation, Fors sees limits to what can be achieved at present. “In general, we at SEB are interested in developing various alternatives using AI in a number of different processes. We’re not there yet with corporate actions,” he says. “Interpretation is still down to the confident experienced staff we have to understand the difficulties in a corporate event.”

In the meantime, commercial solution providers are working on individual elements of the overall challenge on end-to-end corporate actions automation. To ensure that data is current, Codel provides a digital fingerprint that can be stored, separately from the data and registered by the originator of the data. “The service provides the ability for data owners to expire their digital fingerprints and refer people who are verifying data to something that’s more up to date,” says Zorab. “We’ve been working on creating a corporate actions platform for issuers to use to announce structured digitally fingerprinted data to the market.” A joint project between Codel and Equiniti will be discussed at Sibos with custodian participation.

New technologies

Some vendors are leveraging AI to identify and scrub announcement data. “At Broadridge in the Japanese market, we’ve implemented an AI-driven translation interpretation of Japanese proxy notices in partnership with a Japanese exchange,” says Tae. “This technology is able to go through unstructured data and find relevant information; it streamlines the processing of over 2000-plus issuer agenda and meeting announcements that are issued via PDF. If there are other vendor applications that can utilise similar AI, I think that’s a really big opportunity.”

Nevertheless, encouraging engagement along the transaction chain remains a challenge in the absence of sticks or carrots for issuers and asset managers respectively. “The exchanges could solve the problem by making corporate action template use a condition of listing,” says Bloch. Since launching its New York data offering in 2017 as a cost-effective alternative to the NYSE feed, EDI has recorded significant take up, but , says Bloch, that competition has not provoked any innovation in the exchange’s approach.

“Developments in technology could simplify and maybe create opportunities to harmonise how information is distributed. but to be honest it’s probably also down to the CSDs and regulators to place more stringent demands a on how reporting is done,” says Fors. “Obviously, there are harmonised ways of doing things in specific markets, but we are all still handling massive amounts of documentation. Interpretation is still a massive job. Stock exchanges and CSDs all have requirements on their issuers, but it’s not a harmonised global set up. It doesn’t help me if I work in 85 markets.” “You need a regulator and a few large institutions to make things happen,” suggests Paula da Silva, head of transaction services, SEB. “But market imperfection creates business opportunity. When cost exceeds opportunity, something will happen. As long as the different players can make money on the processes there’s no reason to harmonise.”