Resolving the Corporate Actions Quagmire
February 4, 2008
It's a dirty business, but someone has to do it. Such has been the attitude taken by the financial community when it comes to processing corporate actions. Firms have been willing to spend millions of dollars on cross-asset-class trading platforms and processing engines, but corporate actions until recently has been treated as an ugly stepchild.
Now, many firms are coming around to the fact that their mistakes are costing them money--from thousands to millions of dollars depending on the size of the portfolio involved.
"We initially automated our trade notification and settlements process, followed by our bank reconciliations procedures, before we made a decision to automate the corporate actions process," says Deirdre Walsh, manager of corporate actions for Boston-based fund manager Loomis Sayles & Co., which has $130 billion in assets and processes 2,000 voluntary corporate actions annually.
Prompted in part by a financial loss from errors in its corporate actions processing, Loomis Sayles installed CheckFree Corp.'s eVent software in May to scrub data from disparate sources. Walsh would not elaborate on the size of the loss or the mistakes involved, but said her firm does not consider such errors operationally acceptable. Loomis plans to extend its use of eVent to position capture and reconciliation, and instruction notification to its 100-plus custodian banks worldwide.
Boston-based Aite Group projects that in 2008 financial firms will spend $214.4 billion automating corporate actions, compared to $186.4 billion last year--$107 billion of which was spent on integration, and the rest on hardware and software.
Rekeying corporate actions data on a multitude of internal systems increases the likelihood of error in the notifications process, which depends upon knowing which shareholder holds how many shares on the date of eligibility to vote on the action. Automating the workflow process can cut the number of necessary keystrokes in half.
Custodian banks are expected to shell out the biggest bucks for corporate actions automation, namely integration, while asset managers and broker-dealers are still playing catch up in creating clean data files.
Of the nine software vendors profiled by Aite Group in a report released last month--"Corporate Actions Market Overview: The Back Office Comes to the Fore"--New York's XSP and Boston's Fidelity ActionsXchange have the greatest number of clients: 60 and 44 buy- and sell-side firms, respectively. Dublin-based Information Mosaic, which focuses on custodians, says that its clients include Brown Brothers Harriman (BBH), ING Securities Services, JP Morgan Chase & Co. and Den Norske Bank. CheckFree also counts asset servicing firms and fund managers among its customers.
At a workshop hosted by Swift and CheckFree last month, speakers from organizations such as Swift, CheckFree, Loomis Sayles, BBH and Depository Trust & Clearing Corp. (DTCC) extolled the need to banish paper and incongruous message types in favor of standardized message formats sent through the Swift network.
CheckFree and other vendors say they can map corporate actions data to the International Organization for Standardization's (ISO) 15022 format, for which Swift is the registration authority. Firms that can't handle the message traffic on their own can always outsource to a messaging hub such as BBH's Infomediary. But BBH managing director Christopher Remondi noted that "it's not about whether to in-source or outsource but how to get it right."
Issuers, for example, aren't using standardized formats or practices, leaving market infrastructures and financial intermediaries to figure out what exactly they mean. And not all intermediaries are using the Swift network or the ISO messages. Even those that can normalize corporate actions data from disparate sources into a single, "golden" copy are finding obstacles further down the pipeline.
