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Shark’s Tooth Volatility of the Market is Raising the Risk Profile of Corporate Actions Dramatically, Says JPMorgan’s Kane

“We are living in unprecedented times,” explained David Kane, senior vice president of securities and operations at JPMorgan Worldwide Securities Services, to the Securities and Operations Forum’s CorpActions 2009 Europe delegation in London this month. The extreme volatility in the market over such a sustained period is exaggerating the risk profile of corporate actions and this is not likely to change any time soon, he continued.

“The general trends in the market this year are a high level of capital markets activity, lots of rights issues, an uptick in mergers and acquisitions and the restructuring of a high number of debt instruments. This combined with the shark’s tooth volatility in the market will prove to be a real challenge for the corporate actions market,” Kane told the delegation during his keynote speech.

Sophie Bertin, head of asset servicing at Swift, added that the current investment climate might also provide difficulties for the sector, as institutions hold off on spending to ride out the financial storm. However, she stressed that many financial institutions recognise that corporate actions is an area that involves high levels of risk if it is left to manual processes.

“In the current climate, investment in automation of corporate actions is even more important as it is an easy way to reduce both cost and risk for an institution,” she explained. “Investors are nervous and their faith in the system has been shaken, so tackling areas such as corporate actions is vital in contributing to the perception that the industry is moving towards risk reduction.”

The global industry update panel supported this notion of corporate actions automation as a risk reducing measure. Linda Bookheim, senior manager at Swift, explained that these projects could play a vital part in the market initiatives to limit risk. “The area of corporate actions presents many opportunities for misinterpretation if the processes are not standardised and automated, and this can cost custodians around US$500 million. They don’t often go wrong, but when they do, it’s a big deal,” she said.

Bookheim elaborated on the endeavours that Swift has been involved in over the last year or so with regards to improving standardisation in the corporate actions market, including its Simulation Test and Qualification Service (STaQs). She also indicated that Swift has seen a steady increase in corporate actions messaging traffic across the network over the last five years, although the increase this year has been slightly smaller than usual. This may signal that corporate actions projects have been stalled by the current market conditions, she added.

Most of the growth of this messaging year on year is coming from the emerging markets, said Bookheim, including markets such as Northern Asia, Latin America and some of the European markets. “They appear to be adopting the messages more quickly as they have fewer legacy systems to contend with and therefore can adopt new technology faster,” she said.

Bookheim and, later on, David Hands from DTCC, elaborated on the work that Swift, ISO, XBRL and DTCC are engaged in with regards to mapping XBRL to ISO formats. They explained that the idea behind the work was to make sure that harmonisation of formats is possible across markets in the future. The focus is getting issuer data into an XBRL readable format so that automation of corporate actions data begins at the source, said Bookheim.

Edwin de Pauw, director of product management at Euroclear, also discussed the work the European ICSDs are involved in with a view to improving issuer agent messaging. “If the format is right at the start, at the issuer level, then this reduces risk and the need for manual intervention,” he explained.

He also highlighted a trend in the market towards using corporate actions data for event driven trading purposes. “The prime brokers servicing hedge funds are looking for corporate actions data to trigger a decision to buy securities,” he said. “This involves a big change in the data we are required to provide because we need to give them access to data on securities regardless of who is holding them. This has also put pressure on servicing levels as we have to focus on timeliness and provide the data more quickly.”

Over 2008, Euroclear has therefore been focusing on shorter deadlines for data and providing more data around these events, de Pauw said. There is also a greater requirement to be closer to your customers and bring on board more specialists, he added. “This year will see continued focus on harmonisation and especially around respecting the key dates within a corporate actions lifecycle,” he said.

DTCC’s solutions director David Hands elaborated on his firm’s reengineering endeavours to adopt ISO standards across its infrastructure. However, he stressed that due to market conditions, the DTCC is allowing its customers to “take a bit of a breather”, rather than forcing them to adopt the standards under the current market conditions.

Justin Chapman, senior vice president at Northern Trust, gave his perspective from the front lines as a custodian and service provider to the market. He seconded Kane’s earlier highlighting of the current market focus on risk and cost reduction and the impact of volatility in magnifying problems within corporate actions. He also supported the idea of tackling the problem at the “capture point”. “If you get the data right at the start, then the rest should follow,” he said.

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