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Rising Costs of Corporate Actions Processing Means Firms Must Move to ISO 20022, Says Aite Group

The industry still has a long way to go towards achieving automation in the corporate actions space, says Phillip Silitschanu, senior analyst with Aite Group and author of its recent report into corporate actions standards. “While I knew from personal experience just how ‘manual’ corporate actions processing can be, I was quite surprised how some firms who deal with corporate actions on a daily basis are still clinging tenaciously to their old manual ways, either too complacent or too stubborn to upgrade their technology to the 21st century, and the inevitable acceptance of new messaging standards,” he tells Reference Data Review.

The recent report examines the challenges and benefits of corporate actions standards and makes a case for a move towards ISO 20022 in the long term. It explores various aspects of the corporate actions lifecycle, including associated costs and available solutions, says Silitschanu.

It also examines the remaining barriers to corporate actions automation within financial institutions and why the industry has been so slow to move to ISO standards in particular. “One reason is simple complacency,” he explains. “A firm has a manual or faxed-based, or similar type of corporate action process in place, and they feel there are other, more pressing issues to address.” Corporate actions are therefore typically a subject that many in the investment industry prefer to avoid.

Silitschanu reckons this may be changing however, because as world markets have imploded, firms are now refocusing their energy on improving internal efficiencies and reducing costs. This is especially the case since it is so hard now to actual produce revenue, he adds. “Firms felt that if corporate actions weren’t broken, why fix it? Well, corporate actions were broken; most firms’ corporate actions processes were being held together with duct tape, string and crossed fingers. With an ever greater focus now on risk, and costs, you will see a much greater rush towards adopting the new standards and upgrading corporate actions systems,” he predicts.

The current market environment has also had an enormous impact on the complexity of the space, according to Silitschanu. “As companies are merging, spinning off divisions, going bankrupt, and (the lucky ones) devising new ways to raise capital, the volume, urgency and complexity of corporate actions has skyrocketed. The complexity of corporate actions is at a level that as recently as five years ago no one in the industry could of imagined,” he elaborates.

The industry largely recognises the importance of getting corporate actions right but the ball is yet to get rolling in some quarters. “100% recognise it, but there is a big difference between recognising that something is critically important, and actually doing something about it. Everyone realises driving drunk is wrong – but every day there are still people who do it,” he says. “The better question is: ‘What percentage are actually doing something about getting corporate actions right?’ That is a hard number to pin down, but from what we have seen and heard from speaking to people in the industry, people are beginning to realise that addressing corporate actions problems is no longer something which can be put off any longer. Even in the current environment, where budgets are being slashed, corporate actions expenditures are still climbing.”

Spending may be gradually rising but there are many challenges ahead. Silitschanu reckons the biggest challenge is in actually getting the end users of corporate actions information, the investment firms, to accept the new messaging systems and standards. “These firms are the ones who write the cheques to all the other users of corporate actions systems, and until investment firms realise that it is in their best interest to give up their archaic (yet comfortable) ways of receiving and processing corporate actions (for example, faxes), custodians will be shackled to the whims of investment firms,” he says.

The report also identifies the challenge that is posed by accurately translating corporate actions data into an electronic format. This is where it suggests ISO 20022 should play a role by removing the potential for misinterpretation due to differing messaging terminology or protocols.

“The risks associated with not adopting a messaging standard are too great to mitigate, as miscommunication in corporate actions messaging can cause major financial losses,” says Silitschanu. “Aite Group believes that the best solution for corporate actions will be to implement ISO 20022, which is a more advanced, flexible, and widely usable messaging standard both now and long term.”

However, given the failure of ISO 15022 to gain significant traction in the market, market participants can be forgiven for scepticism about the future of ISO 20022. The take up of this standard needs to be closely monitored in order to judge whether it will achieve success where its predecessor did not.

Silitschanu has a lot of respect for the vendor community in their efforts towards increasing automation. “Vendors really need to be commended in the corporate actions space. They have been the flag bearers, leading the charge to better and more reliable corporate actions systems, and for years they have been expounding the virtues of advanced corporate action systems,” he explains.

He reckons that corporate action system users are finally listening, and making the move to newer systems. “There is a growing field of firms who specialise in ‘golden’ corporate action information, this is the perfected and accurate information for a corporate action. Users of corporate action systems are now looking towards these information providers to deliver absolutely accurate and timely corporate action information notification, in order to prevent missed actions, or incorrect or incomplete (or incongruent) information,” he adds.

The time is nigh for corporate actions projects, according to Aite Group. Vendors go forth and conquer.

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