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Corporate Actions has rightfully been in the limelight of late. The RDUG Corporate Actions Working Group has just released an Interim White Paper with the assistance of both practitioners and suppliers which examines the benefits of automation and presents a breakthrough in mapping electronic document templates upstream to ISO 15022 messaging downstream, comments Dr Anthony W Kirby, Founder of RDUG & Member of the BSI Technical Standards Committee

The RDUG Corporate Actions Working Group (CAWG) was formed in March 2004 in order to examine the process deficits of current market practices, as well as the business case benefits associated with the end-to-end automation of corporate action processing. Since then, it has kept itself busy by publishing documents such as the Fund Manager and Custodian surveys (July 04), a Vendor survey covering policies, products and product plans (Nov 04) and a survey of automation benefits per each category of practitioner drawing data from 15 firms (Nov 04). All these documents are available on the website (www.isitc.org).

The latest release is an Interim White Paper summarizing the work done to date in corporate actions processing practices, and containing indications of areas where more work is needed. In particular, it identifies the specific data elements needed in downstream automation, and assembles the benefits case for issuers and their agents. The Interim White Paper also contains details of a prototype XML-based solution for issuer notifications capable of translating documents formatting in XML/XBRL into the ISO 15022-formatted messages exchanged downstream.

Corporate action servicing traditionally suffers under the twin pressures of its relative complexity, and the potential losses and reputation risk. Firms need to automate their data loading, workflows, diaries, their entitlement calculations and their messaging to cater for more than 66 different types of corporate action event. Any combination of inaccurate or incomplete announcement data, missed deadlines, human error or other operational problems (such as incomplete or faulty data) has the potential wreak havoc, not just to budgets but to reputations also.

It is clear from studies conducted by RDUG and other industry bodies that consistent definitions of reference data elements and a consistency in processing is needed before downstream market entities can begin to take full advantage of standards such as ISO 15022. Thus a key consideration is to ensure that systems built to automate corporate actions processing do not have to be re-written once standards and processes are agreed at an EU-wide level once platforms such as the Single Application Platform (SAP) are introduced to ensure harmonization of corporate action processing within the next few years.

It is well recognised that automating the upstream end has been the missing link to date. For corporate action processing to be successful end-to-end, every entity has a key role to play in ensuring that information is captured electronically as close to the source as possible in a quality manner that is not only electronic, but also timely, accurate and non-discriminatory. The situation would be different if issuers, issuers’ agents and actuaries were persuaded of the business case for ensuring that corporate information is entered electronically at source. This would permit intermediaries downstream to receive information in a formatted manner, and save a good deal on both operational work-arounds and delays.

It is therefore envisaged that the opportunity to “de-risk” corporate actions and “dematerialize” – or remove unnecessary paper flows – will prove attractive to issuers wishing to lower their costs and demonstrate a greater attractiveness to the end investor, irrespective of the domicile of the issuer.

RDUG’s CAWG announced a breakthrough last November in examining the potential for issuers to file company reports within an easy-to-complete electronic form that could function as a “master XML container”. The electronic form could contain three distinct areas – one to hold free text, another to hold XBRL content relating to interim or final accounts and a third to hold the corporate action information in XML format. The form could be presented to company secretaries in an easy-to-use web-based form for completion and submission to their RNS agent.

Upon submission a server would automatically extract the XBRL and XML for downstream publication. Thence the corporate action in the XML file would be automatically converted into an ISO 15022-structured MT564. By way of example, the XML formatted templates could be mapped with the elements within the MT 564 data field dictionary for cash dividend (DVCA) and dividend with options (DVOP) messages. These already represent over 51% of all corporate action messages exchanged, and the next step will be to examine the interest messages during Phase II.

Whilst XML is an ideal standard for transactional content such as corporate actions, the more specialized Extensible Business Reporting Language (XBRL) is required to describe the complexities found in interim and final reports and accounting information generally (See www.xbrl.org for more).

The extension of both XML and XBRL into the corporate actions world is a relatively new prospect although the potential has been there for issuers and their agents to file prospectuses and company reports in extensible electronic formats. A precursor intelligent document will simplify the way business information is produced, consumed and exchanged. Because the business information is created once in XML/XBRL formats and can reside in a database or on a website, this will eliminate many intervening reports or paper-based activities by enabling other applications to process the data without the need for manual intervention. An electronic master form being developed by Adobe is the first “fit for purpose” entity that seems to fit the bill – more about that shortly.

RDUG’s CAWG also carried out a survey to gauge the business benefits of corporate action automation for the fund manager, custodian and broker/dealers within the Interim White Paper. It is understandably difficult to place exact figures per each type of firm given the intangible nature of some of the more qualitative benefits but below indicates the benefits and savings ranges recorded across the different firm types as below:

Custodian banks can derive benefits from the following areas:
1. A reduction in maintaining databases and cleansing information from agents (10-30%)
2. Savings associated with a reduction in multiple data sources from vendors and the need to reformat to internal databases (5-25%)
3. A reduction in data inconsistencies associated with option or event numbering (5-30%)
4. A reduction of interpretation risk associated with narrative or other free text (30-40%)
5. Service quality improvements associated with instruction capture/execution and entitlement completion (5-45%)

Fund managers derive benefits from typically four areas:
1. Savings in handling reference data from consolidating databases, identifying

“best in class” vendors, and improvements in maintaining market and static data (15-25% benefit)
2. Savings associated with trade processing from STP process improvements, improved exception management and a reduction in interest claims (25-30% benefit)
3. Savings from workflow improvements to reduce risks, such as attention to corporate action entitlement automation, savings at event level etc. (10-40% benefit)
4. A reduction in system redundancies and costs associated with system components or related FTEs. (10-40% benefit).

Broker/dealers can derive tangible benefits from typically four areas:
1. Savings from reduction in FTEs involved in collecting, loading and scrubbing data (5-25%)
2. Savings associated with a reduction in vendor costs and/or maintaining databases (5-30%)
3. Improvements in operational risk cover, capital adequacy and overnight funding (20-60%)
4. Savings from capacity handling, such as volume sensitivity and latency (15-35%)

Additionally, there are less tangible benefits associated with improved operational controls, reductions of uncertainty, network effects, and more importantly, the opportunity costs of non-compliance with regulatory directives and the potential for reputation risk including fines.

RDUG CAWG has reported results back to the RDUG Executive and ISITC-Europe, and interfaced with several relevant industry bodies mentioned in the Interim White Paper. Moving forward, it is hoped that the work of CAWG will therefore complement that occurring at the EU-level involving bodies such as the European Securities Forum (ESF), the European Banking Federation (EBF), the European Central Securities Depositories Association (ECSDA), the European Central Bank (ECB) and CESR (Committee of European Securities Regulators).

The RDUG CAWG also plans to liaise with other groups in the UK with a view to fostering a greater understanding of the issues concerning the Issuer/Lead-Agent communities and to arrive at a set of compelling business cases for automation. This will include the Financial Services Authority UK Listing Authority (UKLA), the Financial Reporting Council (FRC) and the Institute of Chartered Secretaries and Administrators (ICSA).

It is envisaged that the work from these collaborative and investigative efforts will be published in a sequel to the Interim White Paper, representing a more complete and comprehensive appraisal of the reference data environment across all the parties and the business cases for change inclusive of the upstream parties. The results, expected in between six and nine months, will be presented at various industry events. Stay tuned!
© AWK 050105 (awkirby@aol.com)

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