The custodial bank community has often been blamed for ongoing inefficiencies in corporate actions processing as a result of supposed reluctance among custodians to adopt standardised messaging. The allegation has been that they would prefer asset managers to communicate with them via proprietary mechanisms, rather than using standardised ISO 15022 messages for corporate actions. Now the Association of Global Custodians is calling on its member banks to “demonstrate clear leadership by using ISO 15022 messaging for all aspects of… communications on corporate action matters”.
In its recently released Statement on the Need for Universal, Standardized Messaging in Corporate Actions, the association – an informal group of 10 global banks (Bank of New York, Brown Brothers Harriman, Citibank, HSBC Securities Services, Investors Bank and Trust, JPMorgan Chase, Mellon, Northern Trust, RBC Dexia Investor Services and State Street) – suggests that one of the reasons for ongoing inefficiencies in corporate actions processing is that ISO 15022 “still is not universally employed across the communications chain”.
The association lays the lion’s share of the blame for this state of affairs at the door of the issuers and their agents. “This shortcoming is most evident at the beginning stage of an event, where issuers and servicing agents typically initiate the process using non-standard, often paper-based communications. In turn, these non-standard messages are then subject to non-uniform interpretation as downstream processors attempt to leverage standard communication protocols,” its white paper states. As well as calling for action by the banks, the association “supports immediate actions by other organizations – notably issuers and servicing agents – that would lead to universal use of electronic facilities and universal messaging protocols”.
The association accepts that the custodians need to act as well – though some of the terminology in its statement could be said to let the banks off the hook. In its paper it calls for its member banks to use the Global SMPG Corporate Actions Market Practice and Event Interpretation Grid (grid guidelines) for all global custodian to custodian traffic “wherever ISO 15022 messaging is used”; similarly, the banks should use the grid guidelines for all outbound global custodian to institutional investor/investment management traffic “where ISO 15022 messaging is used”. It also suggests the banks should use ISO 15022 messaging and the grid guidelines in lieu of proprietary messaging formats “whenever feasible”.
But the main message from the association is that the really significant benefits could be reaped by the industry if the issuers/issuers agents were to adopt ISO 15022 – possibly after a transition period involving using formats like XBRL. “In particular, issuers’ use of ISO standards would dramatically reduce variations in messaging and would alleviate the need to interpret announcements,” the white paper says. The association marshals some heavyweight evidence to support this assertion, including ECSDA’s proposals to address the elimination of Giovannini Barrier 3 (Standard 12 – the use of formatted electronic messaging throughout the communications chain), a similar call from the Banking Federation of the European Union in the views it expressed to the EC on the Giovannini Barriers, and the work being undertaken by Euroclear to create ISO 20022-based messaging for use by issuers in announcing event details to CSDs (Reference Data Review, March 2007).
The association also asserts that it “supports common solutions globally”. Interestingly, a degree of diversity in the approach to bringing the issuers to the standardised messaging party is already emerging. Euroclear has opted for ISO 20022 rather than ISO 15022 messages, and in the US DTCC is working on its own programme to involve the issuers. DTCC is also developing its own XML-based format for corporate actions announcements information, because, it says, the ISO 15022 format does not have the capacity to handle all the information required (Reference Data Review, February 2007).
In closing its statement the association recommends a number of action steps. It encourages its member banks to continue to participate in national market practice groups and the Global SMPG, and to use ISO 15022 “as universally as feasible”. Banks are also encouraged to interact with their internal issuers’ agent operations to assist them in understanding the recommended solutions and benefits. The ICSDs and CSDs are encouraged to work together to examine the opportunities and resolve common issues through harmonised approaches globally. The association intends to sponsor and work with other parties to arrange industry forums for issuers and other relevant participants to discuss issues and find ways to facilitate solutions, and says it will undertake periodic reviews of progress and formulate new action items when appropriate.
Data from Swift shows that use of its ISO 15022 formatted messages is growing – indeed volumes tripled between 2001 and 2006, with 53 million messages sent last year, and more than 60 million predicted to be sent in 2007. Between 2005 and 2006 use of the MT567 – the corporate action status and processing advice sent from account servicer to account owner – grew by 30 per cent. Between 2006 and 2007 (based on a comparison between year to date in April 2007 and the same period last year) use of the MT567 grew by 26 per cent. Use of the MT565 – the corporate action instruction sent by account owner to account servicer – grew by 28 per cent.