Despite the efforts of industry groups and standardisers in recent years, the job of processing corporate actions is getting harder, not easier. Greater levels of international investment and the growing complexity of the products in which clients are investing are key reasons for this, suggested Justin Chapman, senior vice president at Northern Trust, during a panel session on the globalisation of corporate actions at Swift’s Sibos conference in Boston earlier this month.
Fellow panellist Bernard Lenelle, vice president at Clearstream Banking and co-chair of the Securities Market Practice Group, agreed “the global nature of the business is leading to a multiplicity of instruments, which makes life difficult”. “In addition, the financial engineering we are seeing is going to a different level now. This makes the life of the standardisers very difficult. In the recent past, during the restructuring of Argentine debt, we saw Argentine firms and their lawyers being very creative, offering 18 different options. Everybody was really struggling to cope with this,” he added.
For Northern Trust, the solution has been a major four-year, multi-million dollar programme covering both technology and staffing, and resulting in the creation of â€œcentres of excellence for supporting complex events”, Chapman said.
Lenelle reckoned there are two strands of activity required to “limit the impact” of globalisation on the ability to efficiently process corporate actions. “One is to continue the work started on the SMPG side, to gather and synthesise requirements (of different national markets) and formulate recommendations (for best practice),” he said. “The second thing is for institutions internally to implement flexible, rules-driven systems in order to cope with increasing complexity.” Clearstream is implementing such a system, he said. “Even within the two-to-three year timeframe, it would be untrue to say there is a prospect of all corporate actions being harmonised. That is just not possible.”
He made reference to the strong message new Swift CEO Lazaro Campos was broadcasting throughout Sibos about the importance of collaboration among the Swift community to address ongoing challenges. “This is really key in the business we’re addressing,” Lenelle said. “It’s not about competition, it’s about collaboration. From an internal perspective, you have to ensure all your inhouse developments respect the standards and the SMPG recommendations. Also, you have to push your counterparts to adopt standards.” This could be done by exerting pricing pressure, he suggested. “And to customers, give incentives. At Clearstream we give special deadlines to people instructing in a structured way: the STP deadline is different from the normal deadline.”
Chapman suggested the carrot/stick approach is somewhat flawed however because “the corporate actions chain is broken in terms of counterparties contracting with each other”. “Incentives such as timeliness offer a carrot but no stick,” he said. “We need responsibility to be taken in the chain of contracting parties.”
Inevitably, the discussion moved on to the role of standards – the ISO 15022 formats for corporate actions, which Swift has now undertaken to migrate into the newer XML-based ISO 20022 format (Reference Data Review, August 2007). For Patrick Colle, global head of product for clearing, settlement and custody at BNP Paribas, “a lot of maturity is still needed for 15022”. “For example, we hardly ever see use of the MT567 – the status of the instruction – and that would really help,” he said. He also made mention of the fact that the ISO 20022 issuer/issuer agent to central securities depository messages developed by Euroclear (Reference Data Review, March 2007) will be channelled via Swift from 2009. Much of the success of Swift’s efforts in the corporate actions processing chain will depend though on “the extension of Swift to more players”, an area in which “there is still work to do”, Colle added.
Nat Sey, reference data business manager, Interactive Data (Europe), made the point that rigorous adherence to standards may not always be appropriate for the delivery of corporate actions data. “We seek to establish agreements with customers about when and when not to use standards,” he said. “There are some instances where customisation, flexibility, ingenuity and creativity have a role to play.” The data vendor’s work with its clients around corporate actions is “very much a two-way process”, he continued. “Often our clients’ workflow is very opaque. We work with them to understand that workflow, to help enable them to make better use of the content we are supplying.”
On developments from Swift around corporate actions, Sey called on the co-operative to make its marketing message on migration to the ISO 20022 messages – which are scheduled to be available from Q4 2009 – very clear.
All the panellists were agreed that greater engagement of issuers is vital for ongoing improvements in corporate actions processing. If the issuers can be persuaded to provide corporate actions information in some kind of structured format from the outset, then the downstream processing challenges faced by all the intermediaries between the issuer and its shareholders could be minimised. The calls for issuer involvement are not new – but the impetus behind engaging the issuers could be stronger. Chapman said “there is some traction in the UK issuer community” – he referred to a recent meeting between 40 issuers and some global custodians – “but it is limited”, he added.
Lenelle reckoned it is all about having the issuers represented in the numerous working groups and industry bodies addressing the corporate actions space. “You have got to involve these guys in the first place,” he said. “Otherwise it is very difficult to impose things on them later.” Colle pointed out that involving the right people from within the issuer community is vital. “There are communities within the issuers who have a vested interest in this,” he said, “namely the heads of investor communications.”
While the speed of progress with involving the issuer community in STP efforts may have been lacking, it is clear that issuers are being drawn into the debate. In Europe, for example, the European Association of Listed Companies (EALIC) is heavily involved in the efforts under way to dismantle the Giovannini Barrier – number three – relating to corporate actions.
Speaking separately to Reference Data Review, its secretary general Dorien Fransens confirmed that “harmonising corporate actions across the EU is a project that is of great interest to issuing companies, especially as they include general meetings”.
The challenge for the issuers is that they “cannot disseminate information about themselves without the help of intermediaries in the process of communicating that information”, she says. “There are so many member states in the EU, and so many different ways of doing things, it can be confusing for shareholders. In the old days people tended to be shareholders just in a couple of companies, based in their own country. That is not the case now – everything has become cross-border. It is much more difficult to have a dialogue between the issuer on one hand and the shareholder on the other. That is why we need to streamline and standardise the way we communicate things. It is very important for issuers to get information to their shareholders as quickly as possible. Issuers can’t talk directly to shareholders anymore because there are a dozen intermediaries in the way – in fact it’s a great frustration for issuers that they don’t know their shareholders. This means issuers depend on the intermediaries to push the information forward and get it through to the shareholders and back up again to the issuers.”
The Giovannini barrier three efforts will not seek to impose technical solutions on the marketplace, Fransens explains. “We will set standards around business practices – for example, the issuer has to give the information about a dividend to a CSD and the CSD will then need to forward that information in a very short time period to the relevant party.” With these business practice standards set, it will then be the markets themselves that “have to work out how to adapt their national practices in order to comply”, she continues. “We are looking at the message standards in the market – such as ISO messages – that could possibly help with the implementation of our standards and there could also be other initiatives,” she adds.
Meanwhile, another recently announced European initiative spearheaded by international CSDs Euroclear and Clearstream is targeting information provision for corporate actions, as well as new issues, in what is now being dubbed the “international securities market” – and was formerly known as the Eurobonds market. Under the auspices of the International Securities Market Advisory Group (ISMAG), working groups are about to kick off analysis of existing information flows, according to Euroclear’s Inge Billiau.
“The overall timeframe for ISMAG’s initiative is three years,” she says. “We are looking at delivering “quick-win” solutions, which we intend to put in place by mid-2008. This will involve clarifying existing flows, looking at the gaps and how to make the flows more efficient, and clarifying the roles and responsibilities of different participants in the chain. This is likely to touch on existing standards in the marketplace. We will not reinvent the wheel. With existing standards and guidelines, we will validate if they are currently applicable to the international securities market. If the answer is yes, we will reuse them. If the answer is no we will retune them to fit or look into developing new standards in conjunction with the market.”
Mindful that asking a market participant today to put a significant amount of money on the table for such an initiative “might prove to be a blocking factor”, in the medium term, ISMAG’s aim is to “bring further automation which does not require any significant IT development or significant costs”, Billiau says. “We are looking at limited STP enabled by templates: for example, what can we do to make a security more easily accepted in the marketplace? How can we issue an ISIN more quickly? Is there any way in a corporate actions document we can agree key terms and conditions, for example, have a template for a put option?” True STP throughout the investment chain is “more of a long term goal” for the initiative, she adds.
What the prospect of issuers pumping out corporate actions information in standardised, structured formats might mean for the data vendors who’ve built nice businesses around gathering this hard to find data and normalising it for delivery to clients is another question. It seems likely that given the number of issuers and intermediaries in the market, there will always be a role for aggregators of data to streamline the provision of this data to consumers of it. And of course these initiatives for Europe – even taken in conjunction with similar efforts being spearheaded for the US market by the DTCC, provider of the Global Corporate Actions Validation Service – won’t do much to save market participants from the horrors of 18 options on events associated with the restructuring of Argentine debt.