Processing Corporate Actions White Paper

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Processing Corporate Actions White Paper
Introduction
“Corporate actions are a nightmare to deal with and they take the number one position in
Operational Manager’s risk dashboard”
Corporate Actions processing is fraught with problems. Many of these problems derive
from the complexity of delivering information from issuers/offerors to the ultimate
investors. The current delivery process does not rely on standard information generated
electronically. Instead, intermediaries are responsible for manually generating the
electronic records of Corporate Actions documentation that investors need. As a
consequence, intermediaries create multiple versions of the same information and pass
these to subsequent intermediaries along the chain. The creation of each new version
inherently carries the risk of inaccuracies, event misidentification and delays. These
errors are compounded by the keying and re-keying of information as it passes between
intermediaries.
There is hope! Over the last few years the number of touch points required for
processing corporate actions has come down considerably such that end-to-end straight
through processes (STP) is becoming a real possibility. Technology has evolved over
the years to standardise and automate many components in the process, however the
inherent unstructured nature of corporate actions and the fragmentation of the
stakeholder information chain still makes it difficult to see how true STP can be
achieved. The recent move towards the use of eXtensible Business Reporting
Language (XBRL) for financial reporting for every public company, has established a
disclosure requirement for the 21st century. Recent reports from the DTCC, Swift and
XBRL US advocate that Corporate Actions documentation should also be tagged using
XBRL technology, which is fully compatible with the global ISO20022 data standard
used for data exchange among financial services organisations. The purpose of this
paper is to outline the actions that firms can take to streamline their use of corporate
actions information and to propose the use of a new digital notary service from Codel
that will allow data to be verified automatically as corporate actions information is
consumed.
Risk & Cost
The following diagram shows the typical life cycle of a corporate action:
Corporate Actions – Typical Life Cycle
Announcement Entitlements
Instruction
Settlement
Processing
Management
Processing
Raw Info
Position &
Act on
Process
Benefits
Instructions
Receipts
Cleanse Info
Source of
Account
Receivable
Dues
Store Info
Notification Process
Receivable
Management
Follow up on
Dues
Write offs/
Pay offs
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Each stage in this life cycle is filled with operational risk:
 Interpretation risk: The issuer (or offeror) typically announces the corporate
action in a news release or regulatory filing, using unstructured text that must be
interpreted, transformed and summarized by the financial services industry,
generally with no input from the issuer on the data conveyed. Multiple messages
from numerous intermediaries transmitted to the investor can result in a lack of
consistent, accurate communication of the issuer message;
 Timing risk: The need for manual interpretation and intervention by
intermediaries results in delays in communicating information to the investor,
which reduces the amount of time investors have to make informed investment
decisions;
 Accuracy risk: Multiple parties extracting, manually rekeying and disseminating
the same information increases the potential for errors in data delivered to the
investor. Often errors are not recognized until near instruction deadlines, and
 Significant costs in the current process: The lack of straight-through
processing (STP) throughout the corporate action chain results in cost and
liability. These are sometimes absorbed directly by investors. More frequently,
they are directly absorbed by financial intermediaries, but then indirectly
absorbed by investors in the form of higher fees for other services. These costs
are in incurred in the current process as a result of unnecessary repeat ‘handling’
and modification of data.
System Interoperability
A corporate action system cannot operate as a standalone system, irrespective of
whether the firm is an investment manager or a custodian. Tight integration with other
systems leads to better STP and fewer touch points, however there is always going to
be a requirement for these systems to import data from other systems so that in time the
data can be consumed automatically for STP purposes.
Existing Systems Architecture
Systems currently incorporate key functions including;
 Managing the event calendar, as most corporate actions are sequentially driven
processes,
 Managing the communication with a potentially large number of stake holders,
 the ability to provide bespoke services for specific markets that may differ in the
way they handle corporate actions,
 Reconciliation and error handling,
Future Systems Architecture
To maximise the benefit of using corporate actions information published in XBRL format
future systems will need to include all of the above functionality together with the
following additions:
 Systems should support ISO global information standards for Corporate Actions
data, including the messaging standard ISO 20022, whilst continuing to support
the current disclosure process;
 Systems should be able to interpret information assimilated in XBRL format so
they can use the metadata tags inserted by issuers at the source (normally a
limited set of key Corporate Action information data points);
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Systems should also be able to verify corporate actions received in either XBRL
or legacy formats by reference to the cloud-based digital notary provided by
Codel. Codel provides this service to issuers, depositories and exchanges for
them to notarise or ‘codelmark’ all their corporate actions data, a process
whereby a unique digital fingerprint of the Corporate Action is filed with Codel’s
searchable registry (see diagram below). Users can then use the Codel registry
to determine authenticity retrospectively. Codelmarking can be done by the
issuer themselves or on their behalf by depositories, custodians or exchanges.
For more information on Codel for Corporate Actions see: Processing Corporate
Actions Data and Managing Reference Data (2)
If corporate actions information has not been codelmarked at source, systems
should allow the codelmarking of existing formats and legacy information that
they receive to provide onward traceablity for audit and compliance
Systems should be able to seamlessly disseminate, without alteration, the
issuer’s electronic original version and optionally an additional version that has
been codelmarked, in as close to real time as possible or within a timeframe as
requested by the end investor
Systems should also allow, where necessary, the ability to keep an audit trail of
data that is converted from one format to another (for example when information
is extracted or compiled) and optionally for this process to be codelmarked so
that an independent record is kept as to integrity and faithfulness of transposition
– ‘codelmasking’.
Proposed Corporate Action Ecosystem
Trading
Systems
Tax
Systems
Lending
Systems
Reconciliation
Systems
Cloud Registry for
External systems and
messaging infrastructure
Verifying Data **
Position Management
System
Corporate Actions
System
Accounting &
Valuations
** Proposed
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Complex Financial Instruments
The evolving nature of financial instruments over the years has posed new challenges to
the corporate actions process. A classic example is that of structured instruments. Given
the highly customised nature of transactions in these instruments, corporate actions on
the underlying nature of these securities can change their very nature and in varying
ways. Often, there are no precedents on how to account for valuations, or changes in
terms, for example long-term instruments may be negotiated between the beneficial
parties and often there are no precedents on how to account for the revised valuation
that arises. In addition a corporate action change might affect an underlying security or a
component of a structured instrument, for example in the case of credit default swaps.
An institution might purchase protection on an index and a component of that index
could be acquired by another organisation that is outside the index, so fundamentally
changing the value of the instrument. Capturing the announcement of the change is one
thing, knowing how to deal with the derived contract or position for valuation purposes is
another!
In a climate where the bespoke nature of the instrument can prevent automation and
limit STP, it is essential to be able to establish the relationship between the instrument,
index and legal entity/owner so that an accurate position can be established and to
prevent failures. The ability to check the integrity of corporate actions information as it is
processed through a verification registry such as Codel allows users at the same time to
establish the identity of the originator of the corporate action and quickly to establish the
relationship between the issuer and the group relationships that exist in aggregations of
companies and individuals for example in an index or total return swap where the
income is determined on a basket of securities and where even one corporate action
such as a cash dividend can affect the total returns and the payment structure of the
swap.
The corporate actions process has to be flexible and the system configurable to
accommodate these instruments. Manual intervention may be necessary in certain
circumstances. Codel provides a manual inter-phase that can be used to register and
verify non- standard instruments and to provide an initiation point for their potential future
assimilation through automated processing and consumption.
Measurement and containment of risk through Key Risk Indicators (KRI’s) and analytics
enables the operations manager to trace risk and take corrective action. However
dashboard analytics that provide advance warning can be enhanced by quick referral to
corporate actions identity through the Codel registry and that use a pre-set identity
profile and rules for funds or indexes can ensure that analytics flags up the affect on
positions.
Conclusion
It is now a given that financial institutions will embrace corporate actions automation
however it is the approach to this automation that will determine success. Securities
processing has become commoditised. The key differentiator will be how well companies
manage this change and how flexibly they can accommodate the emergence of new
financial instruments and the affect that corporate actions has upon them. Codel has a
significant role to play in helping firms to assert their worth in an extremely competitive
and challenging environment.
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