Corporate actions models at a tipping point
Achieving the kinds of efficiencies that can only come from scaling up is critical if the corporate actions operating model is to survive. Why now?
It costs up to USD 5 million to run a regional corporate action business today
Corporate actions are costing us much more than we think. Given that they are often hidden amongst back office (or middle office) costs in many firms, the end-to-end costs of processing corporate actions are not known to many - and when they are they are much bigger than most expect.
That a custodian spends up to USD 5 million on a regional custodian business is perhaps not surprising - given that they are the 'engine rooms' to the asset servicing industry today. But the fact that brokers and then investors are also spending over USD 3 million each on average raises some series concerns - not only about our present-day costs but also about our underlying cost structures.
And where should those concerns focus? On our people. With an average of 32 people employed in a regional broker or investor's corporate actions department, it is clear that our people costs are central to our ability to manage and scale our processing. Simply put, we are too reliant on people today.
Higher volumes and costs are forcing a rethink in managing corporate actions
The past 24 months have seen widespread growth in volumes of securities for corporate actions - and hence huge pressures on these overloaded infrastructures.
Importantly, growth is strongest in the world's core markets - with portfolio growth in North America reaching almost 30% year-on-year, followed by the UK, Hong Kong and Singapore (at 21% growth).
Not only are our corporate action businesses overloaded but they are growing in all of our core markets. Far from being a minor Emerging Market play, the growth in our major markets means that our core portfolios are under heavy stress, driven both by growth in cross-border flows as well as by domestically driven investments.
Scaling challenges across the industry
Everyone across the industry is struggling to scale - albeit for different reasons
Given their existential focus on asset servicing, custodians appear to be coping with record volume growth better than most - but even they can't keep up with the ever-growing complexity of investment products, corporate event types and optionality.
But beyond the more automated areas, the lack of underlying scale becomes more clear. Whilst investors struggle with all elements of volume growth, brokers are seeing the costs of their manual processing manifest now as as concrete obstacles to scale.
Growth + Manual processing = Negative scale
The costly and excessively manual nature of corporate actions is weighing on brokers as they faced diseconomies of scale in 2022.
But why should any of this surprise us? We have relied on people as the backbone of our corporate action processing for decades and so why should we believe that this time will lead to any other outcomes than before?
The problem today appears to be that we have run out of scale in our corporate action processes - especially amongst brokers. Whilst those who have invested in automation over the last decade (notably custodians) are seeing some returns on scale, those who have often seen themselves as "too small to automate" are beginning to see negative returns on scale. Brokers' costs are rising at twice the rate of their volumes today - in a strikingly clear statement that their current, manual operating models are simply no longer viable. Change is urgent and inevitable.
Errors are showing across the organisation
Within all types of organisations, across the front, middle and back offices nobody is left unaffected by issues that arise in relation to corporate actions data.
Our ability to scale is evident in more than just our costs. Corporate actions risk is also becoming a very serious issue, as over 45% of brokers pay out over USD1m in errors per year.
As the cost of errors continues to rise, the true burden of the corporate action challenge is increasingly clear to stakeholders well beyond the back office. Ten years ago, we may have been able to see corporate action risk in isolation but today these risks are triggering regulatory impacts, project delays, audit risks and even failing trades - and hence touching everyone from Compliance to Sales. Unfortunately, the corporate action problem is spilling well past the boundaries of the back office.