3. Making Corporate Action Change Self-funding
The impact of manual errors in sourcing and processing corporate actions is huge and universal. It impacts our cost, our risks and our customer revenues.
But what is the quantifiable case that justifies large corporate action transformation projects across our industry? What options do we have available and what returns can we expect that would make our corporate action projects 'self-funding'?
Solution 1:
Golden copy markets
35% cost savings and 60% risk reduction
"Surely the CSDs should just own the problem and sort it out?"
Many of us have heard or said this over the last few decades. Centrally placed as they are between corporate event initiators (i.e. issuers) and those making their elections on the events (i.e. investors), CSDs have the potential to radically re-shape the extent to which event notifications are "investor-ready".
But realising this potential is an expensive task - requiring CSDs to restructure every step of their own processes. They need to source complete, logicised and accurate event information from issuers; they need to resolve the question of liability for the data (in order to ensure trust in the data); and they need to deliver it to downstream intermediaries and investors in a way that can be automatically consumed. to do this they need not only technological support but also engagement from diverse regulatory authorities and market participants.
It is worth the effort though and our research shows that the potential returns on this investment are highly compelling. We estimate that market participants can tap a transformational 35-40% saving in the cost of a corporate action and a 60% risk reduction when CSDs do take the initiative to be the "golden source" of corporate action notifications.
Based on the example of Switzerland (a "golden-copy" market), market participants are faced with 20% lower data sourcing costs (including the costs of verification and enrichment) and 16% lower event processing costs. Through greater trust in the underlying data, the need for multitudes of feeds, data cleaning engines and people to verify data falls away. Through data standardisation the cost of augmenting and processing data diminishes significantly. With these key areas addressed, the human contribution quickly comes to centre on the event interpretation and election - as it should.
On a market level this means that one decision by a CSD (to publish golden-copy event notifications) can help potentially hundreds of brokers, custodians, banks and investors to remove about one-third of each of their corporate action costs. The potential economies across the full breadth of any single market are immense.
Partick Barthel, DTCC
"Delivering ISO20022 has helped us to save time, effort and risk - and it has helped us to kick off new conversations with the agent and issuer community"
"As CSDs, we know we need to do more - but where do we start?"
Regulatory challenges in aligning corporate action risk
The idea of pushing CSDs to take greater ownership of their corporate action data is not a new one.
But behind every CSD is a community of issuers who play a critical role in facilitating any CSD-led solution and, after decades of resistance to change, the key question today is why these issuers would ever choose to improve their event messaging - when there is no clear financial or regulatory incentive to do so.
Surely we just call the regulator?
Quickly the question of accountability for corporate action data becomes mired in a complex regulatory web: CSDs are regulated by Banking and Monetary aurthorities, Exchanges are regulated by Securities regulators and issuers are (at best) governed by Listings authorities.
Without a single point of regulatory focus and accountability, it has so far been nearly impossible to realise meaningful change across the entire spectrum of market participants.
Time for SRD-III?
So who do we call to trigger the right response? Until recently this question quickly led to a stale-mate between authorities that interacted little with each other.
The recent implementation of the Shareholder Rights Directive II (SRD-II) has arguably changed that.
As a single (multinational), parliamentary regulation, this act brought together all players in the corporate action lifecycle for the first time - all focused on a single, statutory objective. Required by law to cooperate in order to meet specific limits on the timeliness and levels of disclosure for shareholder meetings, issuers have finally found themselves at the same table as financial intermediaries and investors.
As painful as the implementation may have been, a clear regulatory driver has finally delivered an industry-wide result. Is it now time to move beyond proxy voting?
Solution 2:
Automated data feeds
25% improvements
50% reduction in issues
50%
reduction in corportate action issues in Europe
Thanks to removal of language barriers across multiple markets and standards
27%
reduction in corportate action issues in Asia-Pacific
Thanks to removal of language barriers across multiple markets and standards
-12%
reduction (i.e. a growth) in corportate action issues in North America
As strange as this is, this growth seems to be driven by short-term migration challenges as the US market transfers to ISO20022 messaging
Whilst we advocate for change at the CSD level, there is also scope for parallel efficiencies in the messaging space.
Even without golden-copy notifictions emanating from a central source, there are efficiencies of up to 50% to be gained from simply receiving and processing automated corporate event notifications (as opposed to faxes, emails and websites).
Our research shows that those who receive over 50% of their corporate action notifications through logicised or automated mechanisms (including ISO15022 and ISO20022-format messages, APIs, proprietary data feeds or DLT) are up to 25% happier with their end-to-end event management than those who receive their data manually.
Importantly, these gains are not limited to the processing of simple, mandatory events (such as dividends). The benefits of automated messaging are in fact largest for highly complex event types (such as Spin offs, Exchange offers, etc.) which would traditionally be assumed to be too difficult to automate. This is explained partly by the fact that every single data element that is sent automatically for a complex event is time and risk avoided (from re-keying emails); and partly by the fact that automating messaging across even simple event types can free up essential resources to focus on high-risk, complex events.
The benefits of message-automation are equally evident in the downstream issues that participants face every day. Across the world, those receiving automated corporate action data face fewer negative outcomes from their event processing - around 23% less regulatory penalties (on average), 10% fewer Client SLA breaches, fewer internal audit issues and fewer reputational issues versus their manual-peers. Put together, this makes European participants 50% better off (in terms of issues experienced) when they automate and Asian participants 27% better off. (Only those in North America claim to have a negative 'automation dividend' - owing to short term considerations around ISO20022 message migration in the US).
Automation doesnt just reduce processing costs and risk - it helps to empower the customer relationship and keep compliance happy.
Foundations of change:
the cost of risk
the immediate cost of downside
USD 43.4 million
Cost of Northern Trust Corporate Action processing error in 2020 (SEC filing)
Only 54% of our respondents are tracking the cost of corporate action risk today - despite errors costing 70% of us over USD 2 million. Those that do track a cost of risk estimate it to be a mere 9% of the total cost of a corporate action. Yet despite this minority cost, respondents see the cost of risk as a central pillar in their automation plans (looking to reduce it by 10% on average).
Put together these numbers don't make sense on first view. But they do point to one key conclusion: we are not quantifying our corporate action risks properly today. Where these USD2 million in errors happen we often track only the cost of remediation (but often without taking into account FX rates or other soft-costs such as management and operations time spent). Where we fail to instruct on voluntary events we rarely track the opportunity cost (giving rise to the "USD9 billion problem" in unclaimed events). Where we choose cash over stocks, for example, we almost never track the P&L impact of our election.
Despite corporate actions being a multi-million-dollar risk centre, it is surprising to see so few participants tracking a transparent and complete cost of risk today. Without this crucial baseline with which to manage the business, we have grown used to less accurate metrics (such as year-on-year change or provisioned funds) as our performance indicators - very few of which tell a complete story.
Yet whatever the baseline cost of risk, there is no doubt that this cost is rising due to a range of factors, including:
- Increasing business investments into banking activities that are high-risk in corporate action terms (including exponential growth in prime brokerage, securities lending, and wealth management)
- Increasing shareholder activism (namely class actions brought against US and Australian institutions' for their management of corporate actions)
- Growing market volumes and volatility leading to increasing losses (such as Northern Trust's USD43.3 million loss in 2020)
- Increasing regulatory focus on shareholder protection (including SRD II)
- Increasing regulatory penalties for poor management of securities positions and data (including CSDR)
- Increasing initiatives to accelerate the speed of securities movements (including the T+1 initiative in the US)
Our 2020 research concluded that last year was a pivotal year in making the case for change based on a growing cost of risk. As each of the above investor, market and regulatory themes continues to evolve, we face a growing and increasingly urgent cost of downside risk in our corporate action departments.
We may not be able to quantify this risk today but there is little chance that it will remain opaque for long.
George Harris, FIS
"The hidden costs of corporate actions data are no longer hidden"