Earlier this year the International Securities Market Advisory Group (ISMAG) released its Operational Market Practice Book, which details the roles and responsibilities of the participants in the end to end corporate actions chain. John Gubert, chairman of the association, explained at this week’s Association for Financial Markets in Europe (AFME) seminar why his association has taken a bottom up approach to establishing best practices in the space via the signing of letters of representation by industry stakeholders.
Gubert, who is a frequent speaker on standards issues, stressed that with such high volumes and values at stake with regards to corporate actions, inefficiencies in this space could effectively add systemic risk into the wider market. This imperative has therefore focused the minds of the senior advisory group within ISMAG that has been engaged in developing its market practice guidelines. This work resulted in the publication of the group’s Operational Market Practice Book for corporate actions in February this year.
“The guidelines in the Market Practice Book do not change or affect the terms and conditions of issuers with regards to corporate actions, but instead define the roles and processes right from issuer to end investor to enable the processing of those corporate actions,” Gubert explained. “The objective being to address the current high inefficiencies, costs and risks related to new issues, corporate action and income information coverage, timeliness and quality of data.”
The focus of the group has therefore been on understanding and defining the downstream processes within the corporate actions lifecycle to facilitate higher levels of STP. Essentially, who needs to whom and by when in terms of information and processing of these corporate actions. For example, it recommends the submission of final terms and conditions from the issuing and paying agent to the central securities depository (CSD) no later than the closing date plus one business day.
The guidelines also include a taxonomy in the form of a data checklist and specific recommendations for templates for information transmission. Gubert noted that this includes: a data dictionary for the common understanding of terms to clarify what they mean such as ‘paperless instructions’ or ‘record date’.
The checklist covers 30 events and has been developed in accordance with the security in question’s lifecycle, explained Gubert. As such, “static data” items, which are contained within the security’s terms and conditions at issuance, and “dynamic data” items, which are transmitted post-issuance, are both provided on the checklist. The static, or reference, data includes the usual suspects: ISIN, security name, maturity, currency and instrument type. The dynamic data relates to events unforeseen in the terms and conditions, such as tender offers, and notifications that affect the underlying static data, such as rate fixing notifications.
“The framework aims to increase transparency and to optimise the end to end operational efficiencies and reduce risks. The focus will also be to move from a downstream parties pull model to an upstream parties push model for corporate actions data,” he elaborated. To this end, issuers and their agents ensure the efficient and timely transmission of data by using the correct templates and checklists.
To ensure buy in, the association is asking issuers and other parties to sign letters of representation and indicate that they are willing to adhere to the standards. Gubert noted that this is currently a voluntary and non-legally binding document that uses the wording “seek” to comply rather than “must” comply. “We have found that there is some concern about the legal implications of signing from some corners of the market but we have made it clear that it is currently a voluntary option. However, we might consider the mandatory route in future,” said Gubert.