The two key success factors to effectively tackling the basic inefficiencies of the corporate actions space are ensuring that issuer announcements are submitted in a standardised format and that corporate actions events are compliant with key dates and these are in the correct sequence, said Werner Frey, managing director of the Association for Financial Markets in Europe (AFME). Elaborating on some of the recent work of the Corporate Actions Joint Working Group (CAJWG) at yesterday’s AFME seminar, Frey noted that these are two priorities that have been highlighted by the group as part of its market standards endeavours.
“Rather than focusing on workarounds to achieve STP for the corporate actions lifecycle and the messaging further down the chain, CAJWG is focused on the standardisation at the source: the issuer announcement itself,” explained Frey. “By getting the issuer to use ISO message formats at the start, then there is a higher STP rate and less cost and risk of error.”
He also elaborated on the benefits of getting the key dates and their sequence right, noting that this ensures that payment is made directly to the entitled party rather than via the costly process of market claims or buyer protection claims. “Adherence to the correct sequence of dates, especially the record date, will reduce the number of market claims significantly,” he contended.
Billions of pounds, euros and dollars have been spent on these claims annually and they are often cited as a key driver for corporate actions standardisation. Frey pointed to research by AFME conducted a couple of years ago that indicated these claims cost the industry around £10 million on an annual basis.
The CAJWG began the drafting process for its market standards back in 2007 and it released the final version in 2009, following the necessary input from issuers, market infrastructures and banks. These 130 standards cover all types of corporate action (including distributions, reorganisations and transaction management) and all securities deposited and settled in book entry form with a central securities depository (CSD) in Europe.
Frey noted that the original driver for the work, much the same as many of the other similar endeavours going on across the market, was to reduce cost and risk within the corporate actions processing lifecycle. Although there was agreement on the need for standards, the road to agreeing on what those standards should be was far from smooth, however. Frey explained that there was an initial lack of alignment between parties and a degree of “horse trading” was required over the two year development and revision period for the standards.
However, the development of these standards is only the first step towards tackling the corporate actions inefficiencies out there. The next is to get theory put into practice via implementation, said Frey. To this end, the group has developed an implementation governance framework, of which the most important level is the national market implementation groups who are charged with leading the on the ground, practical challenges.
In order to support these national groups, CAJWG has established a European market implementation group, which monitors progress across the region and, in turn, is supported by an expert pool from the CAJWG membership to deal with consultative work and revisions. Above this, sits the European broad stakeholder group, which feeds information back to the European Commission to ensure that it is on the same page as the standards efforts.
Frey stressed the importance of communication in these endeavours and noted that the framework is one way in which to keep everyone reading from the same hymn sheet.
Looking at the wider picture, a sister group to the CAJWG is focused on developing standards for general meetings and Frey indicated that although their work was conducted separately, both groups have developed complementary approaches. The work of the CAJWG is also, in turn, being slotted into the global best practices matrix being revised by the International Securities Services Association (ISSA).