What is the core issue?
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Lack of trust, lack of clarity, and lack of accuracy
Our STP rates are low and declining.
At the root of our industry's inability to scale are our straight-through-processing (STP) rates for all types of corporate event.
Whilst many would expect core, mandatory events to be processed with automation levels of over 90%, our research highlights a major gap between expectation and reality. If only two-thirds of dividends, stock splits and other mandatory events are being processed without manual intervention today, it is no surprise that our (human) costs are spiraling with our volumes.
At the other end of the event spectrum, low STP rates for voluntary events are perhaps less surprising but all the more concerning. Whilst less frequent, events such as spin-offs and rights issues are invariably very high-value events, with significant portfolio impact if anything goes wrong. And with manual handling needed to support more than one in every two voluntary events, the likelihood of error are high.
Across both of these event types though there is clearly a common, underlying theme. What is it that means that brokers, custodians and investors are all compelled to manually intervene in handling even the most standardised event types today?
“Our clients are starting to complain that we keep bringing innovative new solutions to them, but we can't even process a simple income payment on time and accurately.”
(Operations head, global custodian)
Even more concerning, rates are declining - particularly in the markets that are growing the fastest.
In an era of digitisation and data transformation, the fact that our (already surprisingly low) automation rates are in decline is alarming. With APIs, tokenisation and data lakes all offering new possibilities across the industry, a 30% decline in automation rates across the world's developed markets is difficult to understand.
What is driving this decline?
One operations manager indicated that the decline in STP rates is partly due to internal control processes, which intentionally cause corporate action messages to fail STP in order to allow for accuracy checks. In certain markets (and under SRD II), regulatory requirements dictate specific formatting for events, which can disrupt STP protocols as legacy systems struggle to translate and bridge from one format to another. Another firm highlighted internal debates over the definition of STP even, with some arguing that any human intervention disqualifies a process as STP whilst others argue that it is more nuanced.
These issues are then compounded as events reach investors. Issues such as multiple custodians, varying notification formats, and events that do not conform to standard processes all necessitate manual handling. And if beneficial owners then provide instructions manually via email, websites, or even fax (as many still do), what hope is there for STP across the chain?
Automation is about much more than the message format - it's about trust.
“We spend a lot of money second sourcing and revalidating data, only for our custodian to tell us they aren’t accepting all options anyway.”
(Operations head, European fund manager)
Whilst 15-23% of market participants today receive their event notifications in a non-STP format (i.e. by email, fax or through a website), 61-81% are today compelled to manually revalidate and verify those announcements.
The primary issue affecting our STP rates today is not the format of the automated, standardised messages, but rather the lack of trust in the information received. The distrust that necessitates revalidation and the sourcing of additional data, significantly impacting STP rates appears three to four times more significant than the simple message structure.
Multiple touchpoints, including several layers of manually-driven data revalidation, additional data sourcing, and election decision management introduce inefficiencies that create cumulative risk across the board —from announcement through to instruction. Even if they arrive in a standardised (and STP-enabling format), we simply do not believe the integrity of the announcements that we receive - making any prospect of automation impossible.
Multiple touchpoints, including several layers of manually-driven data revalidation, additional data sourcing, and election decision management introduce inefficiencies that create cumulative risk across the board —from announcement through to instruction.
Even if they arrive in a standardised (and STP-enabling format), we simply do not believe the integrity of the announcements that we receive - making any prospect of automation impossible.
Fund managers face the brunt of these inefficiencies as they are left to revalidate data up to 75% of the time, which severely slows down the notification process to beneficial owners. Additionally, they must manage the influx of manual notifications from these beneficial owners, further straining their resources.
Is the vast amount of money spent on sourcing additional data, and revalidating announcement a worthwhile expense?
Some fund managers are starting to believe that the process of second sourcing and revalidating data might be unnecessary. They argue that no single source of data is superior to another and suggest that simply relying on notifications from their custodian, who ultimately processes the event, is sufficient. They contend that even if a second source suggests an alternative option for an event, it doesn't matter if the custodian isn't offering it.
Event interpretation is the #1 driver of high-value errors
On the theme of trust, the highest value errors today are being caused not by format but by a lack of clarity on event details. This stands alone as the single largest contributor, accounting for 20% - or USD 5.3M - of all errors.
Usually in the case of complex, voluntary events, event details can often be unclear, scattered as they may be within an 80-page document online. And as one person (in a custodian, for example) interprets an event differently from their peer, then downstream notifications will differ and trigger risk. Add to that specific tax conditions, for example, and you have a highly subjective and multi-dimensional event that breaks almost all automated processing models today.
In these highly complex and conditional events, absence of clarity is forcing firms to use interpretive judgement on event information, which can only be achievable with a team of highly skilled and experienced talent. Absent that, the risk of interpreting incorrectly is huge, and so are the cost of errors.
This issue is further compounded by our inability to hire and retain talent capable of interpreting the event information. As previous ValueExchange reports have identified, hiring staff with over 10 years of corporate actions experience is the leading workforce challenge in the industry
Manual risk is much higher for instructions than for announcements.
Risk is higher for instructions than notifications, which is not surprising given that the notifications follow a fairly prescribed (if low STP) outbound path from a single issuer through its partners and intermediaries to the investor. Once it reaches the investor and ultimately, the beneficial owners, the inbound path is more complicated.
Nearly 80% of all beneficial owners provide manual instructions back to the investor for any event, with an additional 36% using non-standard formats. These have to be consumed through multiple intermediaries, and often interpreted or re-keyed, until they reach a level of aggregation at the custodian(s) and are communicated back to the issuer.
Some of these manual instructions are due to a lack of alternative options. Some events require beneficial owner or constitutional documentation which has to be sent manually. For other events, global custodians are having to provide excel spreadsheets to the local custodians to provide additional beneficial owner details when they are using an omnibus account structure.
Asset Servicing Automation 2024:
Survey key findings and expert insights
What is the case for asset servicing automation in 2024 and where are firms focusing today in reducing cost and risk across corporate actions and proxy voting? Drawing on the latest statistical insights from our “Asset Servicing Automation 2024” industry research campaign (led by Broadridge, DTCC and ISSA), John Kirkpatrick (of Broadridge), Scott Grant (of Broadridge) and Patrick Barthel (of DTCC) discuss today’s challenges, ambitions and change journeys in the specific context of spiraling volume and cost growth in 2024