Transforming to create scale
Greater efficiencies and lower data-related errors are essential components of market players achieving much-sought after scale. How can the industry move to the next level?
Moving beyond incremental change
While brokers lag in terms of projects to build scale, custodians and investors are showing the way through automation and technology in data management.
Judging by the amount of project activity in the market today, the three most appealing areas for market players to target as they look to build scale are all at the front-end of the event processing (in data sourcing, announcement capture and data validation). As previous ValueExchange reports have highlighted, this is the area where costs and risks are highest and hence where the biggest economies are to be gained.
What is striking though is how much of this project work is now transformational - as opposed to incremental. Up to around three-quarters of all project work going on in the corporate actions space today is intended to fundamentally revise the way that events are sourced and managed - through greater automation, system transformation and deployment of new operating models such as outsourcing. Given the industry's historical preference for incremental change, this level of transformational intent is evidence of how compelling the above challenges are today and of how urgently true solutions are needed.
“Enough is enough. We just don't have time for more minor change projects in corporate actions. We need to change our mindset"
(Head of Operations, North American trust bank)
ISO 20022: a new path to scale?
Can the new, scalable and self-describing ISO 20022 messaging format deliver real scale in the corporate actions world?
If unstructured data and high levels of event complexity are two of the core challenges in corporate action processing, then a new, global standard for event data could well be the solution.
Enter ISO 20022 - a new messaging format that is extendable (i.e. to cater for multiple options and event categories) and self-describing.
Based on our research, these characteristics could deliver automation benefits of over 30% - particularly in the highly problematic area of voluntary events (such as rights offerings, exchange offers and tender offers).
This improvement in STP might not be a silver bullet for the industry, but is expected to produce a 30% reduction in the need for fulltime employees. This reduced pressure on talent is well needed.
As might be expected, brokers will be the main beneficiaries from higher STP rates as a result of ISO20022. However, investors and custodians also have a lot to gain.
"We have invested heavily in preparing our processes for ISO 20022 - which we see as a major driver of automation in the coming few years"
(Head of Program Management, Leading Investment Bank)
Outsourcing is the logical next step for corporate actions to thrive
Corporate action outsourcing (of event data and then of event processing) is fast proving itself to be a dependable enabler to growth.
In an age of increasing market collaboration and focus on core competencies, it is no doubt time for many more organisations to seriously explore the benefits of corporate action outsourcing.
Based on our research, this solution offers market participants protection against many of the key challenges that we face today. Those who have outsourced see the impact of T+1, CSDR, volume growth and people turnover all to be demonstrably less than those who continue to run their corporate actions in house.
Even from a cost perspective, the economies of scale from outsourcing are increasingly evident. In North America, for example, there was 16% growth in spending by those firms that have automated versus 13% for those that have outsourced. This pattern is consistent across investors and brokers.
But most important is the impact of outsourcing on the escalating costs of errors for market participants. Of those who have outsourced their corporate action processing, no respondents reported experiencing any large scale errors (i.e. over USD 5 million) in our survey. By comparison, around 20% of brokers that continue to run their data and processing in house have suffered losses of that scale in the last year.
Similarly, only around 2.5% of companies that have outsourced have seen losses of US$2m to US$5m, compared with around 5.5% for those that have automated.
Given its impact on market dynamics, operating costs and the cost of errors, outsourcing looks to be a critical first step in our efforts to realise scale in our corporate action processing.
“Outsourcing has been an unexpected gift for our customer engagement”
(Head of Corporate Actions, North American Bank)