1. Today's legacy model
A uniquely complex market landscape
The legacy model for Australian corporate actions is unique in the world in terms of its complexity – as is the infrastructure that supports it
“Corporate Actions in Australia are like a ‘choose your own adventure’ book"
(Global Custodian)
The Australian market is unique in its range and complexity of corporate events
Investors around the world know Australia to be unique when it comes to corporate actions. From RAPIDs to Schemes of Arrangement; and from JUMBOs to Deferred Settlement securities, the huge range of possible event types in Australia presents education and processing challenges every day for participants.
Yet whilst market participants in Australia have shaped numerous processes to deal with this complexity on a daily basis, the efficacy of those processes varies significantly.
Amongst the high-volume events in Australia, dividends and stock splits appear easy to automate (even easier than the global average in fact). Yet investors seem to find the limits of their straight-through processing when faced with takeovers, mergers and share buy-backs – many of which are harder to manage in Australia than elsewhere.
Beyond these, accelerated settlements and RAPIDs appear to cause significant headaches for Australian participants – creating short-fuse events and massive time pressures around each event. At the other end of the time spectrum, deferred settlement securities are a “nuisance” for investors.
Add to this the inevitable complexity of dual-listings, FX management and operational considerations such as rounding practices (especially for ETFs) and you have a corporate action landscape that resembles few others.
"It’s not unusual for us to face more than 30 options on a single corporate event"
(Karen Webb, Senior Manager, Issuer Services, Securities and Payments, ASX )
...and then comes the tax
The diversity of events is not the only – or even the most significant – challenge today. Despite efforts to simplify the market in the past, the complexity of tax eligibility rules around specific events in Australia creates an exponential multiplier in the challenges that investors face every day.
With a single event carrying more than 30 different options (depending on investor eligibility and treatments), the burden on those processing corporate actions is huge.
For those handling the events (i.e. custodians and brokers, often running omnibus accounts), large amounts of manual resources are needed to research and verify each event's conditions; to exchange and reconcile detailed beneficial owner information for each instruction; and to manage and reconcile the respective entitlements.
Our study shows that intermediaries are highly concerned by these processes - rating their ability to source the data they need to support franking credits and withholding tax conditions at only 2.5 out of 5 today.
Australian market participants are clearly struggling to manage the significant workflow risks and costs of tax efficiency in today's corporate actions.
Sub-registries, CHESS et al...
If Australia’s multi-dimensional event landscape creates operational risk and cost, then the multi-layered structure of the Australian marketplace only serves to exacerbate the problem – with every corporate event reliant on practitioners’ ability to manage interactions with ASX and multiple issuer sub-registries each time.
The market may hear about an event from ASX and they might use ASX data to reconcile the event against (client) holdings – but they will not be able to process the event in its entirety without recourse to the share registries. Only they hold the full depth of event information (including event eligibility rules, etc.) and only they are able to accept instructions for each investor.
In daily practice, this means that investors (or their intermediaries) have to manage between positions in one system and then event data in a range of other systems (all of whom maintain their own formats and portals) before they can form a full picture of each event. Practitioners have to hop from one sub-registry’s PDF to another’s as they source event data that can then be the basis for instructions across their portfolios. Equally, each event will need to have instructions uploaded and reconciled via a different sub-registry portal before the entitlements can even be disbursed.
The operational risks and costs of this multi-layered, duplicative market structure are obvious and have historically made STP a distant possibility for many Australian events.
Proxy, bonds and funds: a patchwork quilt of niche data for each portfolio
Even having handled all of these legacy challenges, what is an Australian investor to do when a (local) bond or a managed investment trust appears in the client portfolio? And how do they manage their proxy vote when the next AGM is called? All of these areas sit outside of the core, established corporate actions infrastructure in Australia today. Coupon payments and maturity extensions, for example, are delivered via a separate data channel from ASX's Austraclear, whilst managed investment trust information needs to be sourced from specialist providers. Proxy voting stands out perhaps as the most acute of these outlier areas – with Australian market participants viewing their ability to source proxy event data as significantly worse than the global average. Sitting outside of CHESS and the ASX infrastructure, the reconciliation of (intraday) portfolio holdings requires large volumes of emails and phone calls between counterparties today – a challenge that is only added to by the absence of standardised record dates for meetings and votes across the market. Today, these areas mean additions and tactical extensions to the operating model – as well as large volumes of manual processing and communication. Yet tomorrow, as ESG and corporate governance pressures drive a significant increase in shareholder participation, these niche areas risk becoming fundamental to the efficiency of the overall corporate action operating model.
Local problems, local solutions?
A unique diversity of events, a huge amount of tax-driven optionality and multiple counterparties to interact with in sourcing key event information every day. How does an Australian market participant derive STP from that mixture? Not by using SWIFT (ISO 15022) messages ostensibly. Owing to all of the complexities above, Australians’ use of global-standard MT564 messages stands at only 14% of total messaging across the market (8% lower than the global average). The highly localised and rapidly evolving corporate event structure clearly does not lend itself to yesterday’s global standards - or to global operating models that rely on these standards. Not surprisingly, just over one in five market participants is unable to manage this complexity – choosing instead to source their event information from consolidated data providers who can offer a single, standardised source of information. This outsourcing, and the willingness of large parts of the market to pay a premium for data consolidation, is evidence of how acutely organisations feel these challenges every day.
If you would like to learn more from ASX about how the Real Time Corporate Actions Service can simplify your operations then please reach out!
