The recent uptick in the corporate actions world has not gone unnoticed by the Depository Trust & Clearing Corporation (DTCC) and its Global Corporate Actions Validation Service (GCA VS) subsidiary is keen to steal a march on its rivals. Caroline O’Shaughnessy, vice president and global head of sales for Data Solutions, Asset Services, and Stuart Goldstein, managing director of DTCC corporate communications, explain the vendor’s recent progress towards achieving this goal to Reference Data Review.
“Corporate actions used to be lower on the priority list but they have become more and more important, as firms seek to mitigate risk and leverage quality corporate actions data at the trading end,” says Goldstein.
DTCC is not a new entrant to the corporate actions market; its GCA VS offering was initially launched in 2002 and went live with its first clients in July 2003. The vendor developed the offering further in 2006 with the launch of an in-house system and a push into Europe, adding dedicated sales and support staff in the region. Last year, the vendor added ex-Reuters data specialist O’Shaughnessy to the European team in a bid to up its game in the region.
The vendor, which has traditionally been viewed as US focused, is therefore extending its ambitions on a global scale within the world of corporate actions. “DTCC’s depository subsidiary, which has US$27 trillion in securities held in custody, has a long history in the US of handling corporate actions announcements and we are now using our experience to provide capabilities globally,” explains Goldstein.
The service currently has 35 global clients, largely from the custodian community, but has been actively working on making its offering attractive to the buy side and the smaller end of the custodian market. To this end, in the first quarter of this year, the vendor launched a web browser service, offering real-time access to all the global validated corporate actions information in its database. The rationale behind the launch was to provide a low cost entry point to the kind of data once only available to those with a subscription to multiple and expensive data sources.
“The desktop offering was developed in partnership with our clients and the functionality is reflective of the nature of our clients’ business rather than being product driven,” says O’Shaughnessy. It is available as a separate and standalone service for new clients and existing clients of GCA VS and these clients can select as a subscription option whether they wish to view corporate actions against global securities or against US and Canadian securities.
The vendor hopes to reach the smaller players in the market with the appeal of a solution that does not require high integration and implementation costs. O’Shaughnessy is confident that recent signs have indicated the market is ripe for such an offering: “The sales cycle has shortened to such an extent that it has been a very busy time for us and our new desktop offering. GCA Browser has driven interest in the market. There has been significant interest from hedge funds, asset managers and corporates especially.”
Corporate actions automation in general seems to be higher up the priority list than one would traditionally expect. Goldstein reckons there is more recognition of the costs involved in dealing with these events manually: “The focus of the market is not just on mitigation of risks, it is also on reduction of costs via automation of manual processes. Moving from a fixed headcount to a variable cost structure for dealing with this data can result in huge savings.”
“The scale of losses related to corporate actions in this market has also increased due to the extreme volatility in the market,” adds O’Shaughnessy. “This has meant that senior management is a lot more willing to invest in the area of corporate actions to minimise those losses, despite the tough market climate.”
She believes that the timing has therefore been fortuitous for the vendor to up its stakes: “The GCA VS offering has evolved in line with industry developments such as the focus on risk management and transparency. We have been engaged in a huge volume of enhancements to the service to meet the needs of our clients and provide quicker turnaround time on validated data.”
The timing for exponential growth has been good for DTCC because the focus in the market has moved from receiving corporate actions information from a single vendor to moving to multiple sources for this data, she contends. There is also a tendency towards outsourcing non-core competencies in the financial services community to allow banks and asset managers to focus on their customers. Greater costs constraints and decreased budgets pressures mean firms see the benefit of outsourcing activities such as corporate action validation completely, she continues.
O’Shaughnessy is confident that DTCC’s proposition makes it stand out from the competition: “We now cover around two million securities in our validated corporate actions cleansed data service. We provide the only validating service for corporate actions that measures the timeliness and accuracy of the data we qualify.”
At a time when many firms may be nervous about signing contracts with vendors that could potentially be liquidated at a moment’s notice due to the tough economic environment, DTCC Solutions is using its parent company as proof that it is here to stay. “GCA VS is a well established service in the market and is backed by DTCC, an industry owned and governed institution with a solid history in brining efficiency, automation and risk mitigation to the financial markets,” she says.
The competitive environment for corporate actions solutions in general has been fairly healthy with regards to new launches and upgrades, recent launches by Broadridge and Xignite are notable in particular. However, it has been all quiet on the Western front from DTCC’s most direct competitor in the market: Fidelity ActionsXchange. The vendor went through a management change in October of last year with the appointment of Fidelity veteran, Laura Pollard, as its new executive vice president and head of the company. Not a peep has been heard since her instalment, but perhaps after a period of settling in, more news will be forthcoming.
In the meantime, DTCC is focused on making its proposition as attractive as possible. The vendor is currently working on adding new data to its service such as security of interest files, which contain all equity securities that are publically traded on stock exchanges and are due to be added to the service in the second quarter of this year. It is also moving ahead with its wider corporate actions re-engineering project to move from proprietary formats to ISO standards.
“We are looking to evolve to the next set of standards for our offering over the coming years and we have plans to providing pilot testing moving to ISO 20022 from 2010, with decommissioning of the current proprietary formats by 2015,” says O’Shaughnessy.
DTCC has also established itself as a key proponent of interoperability within the corporate actions space by working together with Swift, ISO and XBRL to map XBRL to ISO standards. “DTCC has committed to furthering the industry agenda. We are working with Swift, ISO and XBRL in order to deal with not just the symptoms but also the source of issues within the corporate actions universe. We are demonstrating that we are helping to set industry standards for corporate actions processing,” claims O’Shaughnessy.
Donald Donahue, DTCC chairman and CEO, has been actively in his support of the ISO and XBRL mapping project and gave a speech at the recent XBRL conference in May on the subject, she adds. In his speech, Donahue elaborated on the collaboration that is ongoing between the key players in the standards world to build a common taxonomy and semantic interoperability for corporate actions.
The new taxonomy will be aligned with ISO 20022 repository elements and will aim to support a seamless transition from issuer generated documentation to data, using XRL technology. This is targeted at allowing issuers to tag, or electronically capture and identify, key data such as the terms of a reorganisation when preparing documents for a corporate action. The data ‘tags’ and elements will be aligned with ISO 20022, permitting XBRL tagged data to be readily converted into ISO 20022 messages.
Swift will roll out the new ISO 20022 corporate actions messages on a global basis, which it hopes will build on the efficiencies gained through ISO 15022 adoption. DTCC will accordingly make all corporate action announcements it publishes available in the ISO 20022 format beginning in 2010, as previously noted by O’Shaughnessy.
“Through this joint initiative we have an opportunity, at last, to bring clarity to the often manual, labour intensive and unnecessarily risky business of interpreting information related to corporate action announcements. This is especially critical today when the market is seeking greater transparency of issuer information. DTCC places a high priority on our work with Swift and XBRL US to bring greater certainty and improve the communications chain on corporate actions announcements,” Donahue told the delegation.
While all of this work is going on within its DTCC Solutions subsidiary, the DTCC mothership is faced with the prospect of greater competition within its traditional US clearing and settlement business. The revamp of the regulatory structure in the US has introduced the notion of multiple clearing central counterparties (CCPs) for the settlement of standardised OTC derivatives. Although this poses no significant threat to the clearing and settlement giant’s future (it settled a monumental US$1.88 quadrillion in transactions last year alone), it does mean that some of the clearing flows may be diverted away from its Trade Information Warehouse.
Larry Thompson, DTCC general counsel, gave a Congressional testimony in June warning of the dangers of diverting flow away from the central repository, which handles the calculation, netting, and central settlement of payment obligations between counterparties, and automates the processing of credit events.
“We believe maintaining a single trade repository for OTC derivatives contracts is an essential element of safety and soundness for two primary reasons,” said Thompson. “First, it helps assist regulators in assessing systemic risks, thereby protecting investors and financial markets. Second, as a practical matter, it provides the ability from a central vantage point to identify the obligations of trading parties, which can speed the resolution of these positions in the event of a firm failure, as we found last year in the case of Lehman Brothers.”
Currently, the repository holds approximately 95% of all credit default swap (CDS) contracts and has, so far this year, dealt with more than 30 credit events from this market. If this information flow is diverted away from this mechanism, the DTCC reckons counterparty risk within the market will increase as a result. It is therefore engaged in a lobbying campaign to make sure that this does not happen.
It appears that both parent and child will likely have a busy couple of years ahead.