Swift’s corporate actions message testing service, launched in April this year, has gained significant backing from the custodian community, says Max Mansur, senior product and markets manager at Swift. The Simulation Test and Qualification Service (STaQS) allows Swift’s customers to see how their usage of corporate action messages compares to market practice guidelines established by global and local business standards groups. According to Mansur, a number of custodians have indicated that they will be cascading the service down to their sub-custody networks.
“STaQS allows customers to self-evaluate or police the compliance of messaging they send and receive to key market practice elements. These are defined by market practice groups – the Securities Market Practice Groups (SMPGs) – that produce documents like the Event Interpretation Grid (EIG). This validates the right options for the right events and the right countries and markets,” explains Mansur.
The service enables customers to test MX and MT industry standards in the scope of SwiftSolutions and Swiftnet FIN.
“We came up with a service to take these published guidelines and allow customers to test their messages against them and be able to identify where the problems lie,” he says. “This whole market practice area has been about guidelines, rather than anything enforceable, but we are trying to make them more practical.”
Swift has been piloting a prototype of the service with a group, including several large custodians, for about a year, says Mansur. “These custodians are now planning to cascade it down to their sub-custody networks to drive quality across the business,” he explains.
“The investment managers are also on board with this as they think it is important to know how good the quality of the messages they receive from their custodians is,” adds Mansur’s colleague and senior manager at Swift, Linda Bookheim.
There was much praise for the service at Swift’s corporate actions conference this year, which was held in New York in June. Ted Rothschild, executive director at JPMorgan, highlighted the benefits of STaQS to the delegation, but also stressed that the work of SMPGs in setting market practice guidelines must be extended beyond the current global coverage. Large financial institutions are active in around 80 to 100 markets, but SMPGs are only present in around 35 of these and not all of these groups have contributed to the EIG.
Version 2.1 of the service was released at the end of July, which included adding new points of access such as support for Alliance WebStation in a multi-user environment and with Internet Explorer 7.0. It also includes the addition of a summary of the events tested in the message, and the resolution of various issues that were present in version 2.0 related to areas such as particular SEPA messages.
“STaQS is used as part of out Business Assessment Programme (BAP), which provides a sort of consultancy to our customers,” says Mansur. “We send experts with 20-30 years of experience on our staff to sit with our customers and the processors to talk through all the different options and talk about the details of the system. They talk though the specifics and then come up with a set of recommendations to make the best use of Swift.”
He reckons customers are starting to take some of these recommendations and make some serious improvements in their corporate actions processing. “It is a fairly small team and they are mostly working with our big clients at the moment, although it is expanding quickly with a variety of clients interested.”
This is all part of Swift’s attempt to address the issue of quality in the market, says Mansur. “The main challenge in the corporate actions space boils down to quality. Quality tends to drive most of the factors around corporate actions, whether it’s spending on staff, or maintaining budgets or efficiency of an operation,” he explains.
“There is tremendous risk involved – one of our custodians said that if he had a dollar mistake on one corporate event for which he had six million shares held in custody, it would be a serious issue to handle the loss resulting in US$6 million in claims. The risk is proportionate to the size of the business – the top 20 custodians have 90% of the world’s assets under custody,” he continues. Potential losses such as these mean that corporate actions automation is unlikely to fall off the C-level radar any time soon.
As part of its drive to improve automation in general, proxy voting has also been a key area for Swift’s corporate actions team over the last few years. It launched its ISO 20022-based proxy voting messages on the network at the end of last year and Bookheim expects a lot of developments in 2009 for the 2010 proxy season.
“One of the main things that we hope will get the end investors in the process is that we will be able to provide a confirmation that the investor votes were received and lodged at the meetings and the end results of the meetings,” she says.
Take up of the service should also be buoyed by the rising profile of proxy voting in the market and the adoption of ISO 20022 standards for proxy voting by Euroclear as part of its migration to a single platform and the Common Communication Interface.
But the work does not stop there; Swift is also looking at other problematic corporate action types including those around tax processing and class actions. “The community is seemingly unaware of the amount of money that is involved around cross border tax withholding,” says Bookheim. “Today every market is different and variations in procedures, tax treaties and tax rates makes the process extremely burdensome, costly and complex for custodians that have to perform these reclaim services for their clients.”
Swift is therefore looking to see where it could harmonise some of these communications and standards. “One thing we have initiated is working with GlobeTax to provide a tax reclaim service bureau. The service bureau provides a route to automate tax processing, while significantly reducing operating costs. Custodians can send information directly to the service bureau over Swift and then GlobeTax will go out to do reclaim process,” she explains.
“We are also looking at the European Union’s tax model discussions and will hopefully get engaged with regards to harmonising the messaging space in this market,” she adds.
The impact of class actions has also been a significant issue for the market, says Bookheim. “There has been a lot of talk about how the global community is being affected by class actions via cross border investments. It has historically been a US based phenomenon but, again, the community may not be aware how much money is being left on the table due to manual processing
There are a lot of service providers jumping into the fray and Swift wants to make sure that it is engaged in the process and understands where it can add value in regards to messaging and standards, she clarifies. There are still a number of questions to be answered and that has given Swift plenty of grist for the corporate actions processing mill. Bookheim ponders: “As with proxy voting, do we investigate new standards and process flow for class actions under ISO 20022?” Perhaps you can let her know what you think at Sibos in September.