1c. Corporate actions:
what is the problem?
Events are getting more complex and more difficult to process
If corporate actions are already highly diverse and subject to significant risks in interpretation and consolidation, the future outlook is not cause for optimism.
Across the industry, the single biggest challenge that market participants have faced in their corporate actions is increased product complexity - as new asset classes, event types and structures have entered the back office, breaking existing processes and creating new risks.
This growth in complexity is driven by a number of factors.
1. Problem asset classes
Certain asset classes and activities have never been easy to handle from a corporate actions perspective - and unfortunately these same activities are increasingly central to investors' growth strategies.
At the top of the complexity list are securities lending (including manufactured dividends) and structured products - both of which present unique challenges to their holders in data mapping, standardisation and validation.
A manufactured dividend will trigger significant intervention for both the investor and the prime broker - as the two organisations seek to align their holdings and their exact understanding of the event details. That this process (and the mapping to underlying event data) is almost entirely managed by email highlights the significant cost and risk that each such event triggers on both sides of the investment spectrum.
Similarly, any derivative or structured product presents major challenges in data mapping. If a corporate event happens on an underlying security, how can the value and composition of the structured product be seamlessly updated? Not easily and - most often - not outside of a spreadsheet and a four-eye check.
That both of these products are central to many investment strategies today is cause for significant concern in the back office.
2. SPACs
The recent growth of SPACs (Special-purpose Acquisition Companies) as a new, alternative round for venture capital funding has also had an impact in the back office.
Similarly to structured products, SPAC-holders often struggle to manage the data mapping bridge between the underlying companies and the SPAC itself. Investors see multiple events come through over a period of time on underlying companies (that are seemingly disconnected from the SPAC security) and it is often only through manual data mapping that they are able to track the impact and consequence at the level of the SPAC security.
Without a SPAC-flag in their data feeds, investors have to create manual work-arounds to link underlying events back to the SPAC stock (creating a cost and human risk of errors).
On this basis, each additional SPAC that turns up in an investor's portfolio is causing more breaks in STP every day.
3. Overstock and digital securities
And when will the much-publicised world of digital assets begin to enter our back office processing? For many investors we already have.
Despite varying degrees of investor interest, the payment of Overstock's dividend in the form of a digital security in 2020 created significant ripples across the industry - as investors struggled to deal with the core, operational consequences of receiving and holding a digital asset.
Although this was likely the first of many such events, this single announcement on a single stock triggered a disproportionate scramble to build transaction, safe-keeping and oversight procedures for an asset that few had ever seen or dealt with previously.
Across the industry, digital dividends have already created a huge range of tactical work-arounds and manual processes: triggering not only costs but also significant oversight risks (i.e. entirely new procedures for only 1 line of stock)
4. Event innovation and optionality
Aside from digital and product innovation, we can never overlook the continuing desire by issuers to increase the efficiency and appeal of their corporate events to investors - particularly from a tax perspective. Every year, we see new options being added to corporate events in order to maximise returns for different profiles of global investor - such that even a simple dividend can now become a highly complicated rules-based challenge.
But this innovation is clearly a double-edged sword. Whilst the positive impacts of these options may be clear from a security performance and portfolio perspective, these metrics do little to account for the significant costs that this growing optionality creates in the back office.
For every new or unique event a new series of bespoke procedures needs to be introduced from the issuer all the way to the investor - and often in very short time-frames. Options will be written into PDF-based disclosures (and not systematically communicated), meaning that investors need to build small-scale procedures based on manual workarounds and spreadsheets. In very few cases are these procedures ever integrated into core operating models - leaving a continuing risk and cost footprint for corporate action departments across the industry.
The risks of an overly-diverse corporate actions landscape - and the costs that this growing diversity is creating - have already begun to attract the attention of global regulators. In the short term though, the cost of managing the complexity (of these different options) falls on the investor.
