What’s holding scale back?
The pitfalls of existing operational models are creating burdens and hurdles for those market players that want to grow. Where are the biggest pain points to address?
75% of firms re-validate custodian and exchange data manually
The cost of not trusting our corporate action data is vast and triggering enormous duplication
The volume of duplication across the corporate action lifecycle is enormous.
In the absence of a single, reliable source of event information we are faced with the need to standardise different data sources, to verify and correct differences across different sources and to then enrich event data (by seeking additional data by hand).
As a result we have built an industry infrastructure wherein three-quarters of us are duplicating the work done by our counterparties 'upstream' of us in the event lifecycle. Not only that, but we are also paying the costs of sourcing up to 18 different data sources each (per region, on average) in an effort to forge a comprehensive view.
That much of this is currently done by hand, using "human APIs" to read disclosures online and to enter them into corporate action systems, for example, is a core limitation on scale for everyone across the industry - most notably investors (who are spending more time validating data than anyone, despite their brokers and custodians already having done so).
“The amount of duplication in data processing across our industry is vast and costly to investors"
(Dan Thieke, DTCC)
Worryingly, this duplication is most acute in the areas identified as having the highest levels of portfolio growth in 2022.
Event data from Australia & New Zealand and North America both have the highest levels of manual validation in the world today - despite both regions growing at nearly 30% year on year.
Not only are our volumes growing, but our reliance on manual verification is growing with them.
Voluntary events are at the heart of the manual burden
The struggle to source and verify corporate actions data manually is most pronounced for voluntary events, accounting for roughly half of all efforts.
Whilst this manual effort is not solely driven by any one factor, there is no doubt that voluntary events are at the root of over half of this manual processing and verification today.
Yes, mandatory events do need verification by hand, but the highly complex nature of voluntary events (such as right issues, etc.) means that they are necessarily more "hands on" than any other event - and are responsible for over 50% of all manual processing for most firms, in most regions today.
Where are all the people to meet the demand? Hiring demands to herald a breaking point
A combination of the manual burden along with the focus on growth across the corporate actions landscape are raising questions about how to meet this huge hiring challenge.
And so how do we support record volume growth in an area filled with manual processing? By hiring? Not today.
While custodians have a more measured target of 5% growth in headcount, investors and brokers have bolder goals of 15% and 19%, respectively, in terms of headcount growth.
Yet key people-based risk factors have emerged in corporate action processing. Whilst it may still be possible to hire seasonal resourcing for basic functions, our ability to grow and retain talent with over 10 years of corporate actions experience is fast becoming a key risk factor in our growth plans. Anecdotally, the one or two 'safe pairs of hands' who know how to manage complex events or to deal with rare event conditions (who are usually eligible for early retirement) are at the centre of talent retention plans across the industry. In many cases, offshoring has only grown our reliance on these specialists - who we can not afford to see leave today. Who are we training to replace them?
"People turnover today in our back offices is rapid. We're fighting as hard as we can to keep those few, critical staff - but it's a losing battle"
(Head of Operations, Asian broker dealer)
Broker-dealers are in the eye of the storm
A unique business mix and a continued belief in being "sub-scale" are combining to drive brokers' back offices into a negative spiral
This year brokers have seen their corporate action volumes grow by 10% (on average) whilst their costs grow by 18%. Growth is actually costing brokers today - but what is it about the brokers and their operations that is so uniquely challenging?
First is their lack of automation. Whilst custodians and investors have invested in corporate action platforms over the last five to ten years, most broker-dealers have historically seen their corporate action processing to be sub-scale - and too small to justify significant technology investments. The one or two headcount in each market servicing corporate actions have done a reasonable job for the last few years and so why change?
Second is that brokers are staking their future growth strategies on the most complex and manually intensive activities from a corporate actions perspective - notably securities lending and wealth management. Already the hotspots of the corporate actions landscape, these activities are central to every broker-dealer's strategic messaging - meaning that we are piling more pressure (and more volumes) on some of the weakest areas of our industry. What is already shaky today looks almost certain to break tomorrow.
The result? Negative cost efficiencies and errors of over USD 1 million for 49% of brokers today.
Add to that the fact that brokers are the most impacted segment by trends such as the dearth of talent, increasing product complexity, CSDR, the move to ISO 20022 and T+1.
It seems to be more pressing for brokers than anyone else to revolutionise their approach to sourcing, capturing and validating corporate actions data.
"Managing our derivative positions is by far the biggest challenge for us in corporate actions"
(Head of Asset Servicing, Global Investment Bank)