Despite huge technological advances, firms still issue clunky, non-standardised activity announcements – that can be misinterpreted. Frances Maguire assesses the industry’s attempts to automate the process.

In the fast-moving securities industry of electronic trading and automated pricing, the announcement process of an event initiated by a company that affects its shares – a corporate action – borders on the archaic.

At present, corporate action announcements can be buried in the company’s report and accounts, in the chairman’s statement or in the annual general meeting minutes. This information must then be stripped out, interpreted (or misinterpreted), checked and double checked, and put into an electronic format for processing.

There is thought to be more than 70 different types of corporate actions yet there is no standard format for announcing a corporate event on paper, let alone electronically. As a result, the securities industry has invested heavily in data scrubbing and validation techniques which could be vastly improved, or even removed, if companies and issuers presented corporate actions in more structured formats.

Nat Sey, reference data business manager at Interactive Data (Europe), which distributes advance notifications of corporate actions, says that although structuring announcements would inevitably add cost to the process, it would be a cost that could easily be justified in terms of transparency and benefits to shareholders.

He says: “Where there is some level of interpretation, validation is needed, because issuers do not release actions in a structured format. If the issuer or the corporate presented the event in a structured form there would be no need to create a ‘golden copy’ and it would mean we could get on with adding value by aggregation and restructuring that content for our customers in processing actions – rather than doing the interpretation where much of the focus has been.”

He adds that an intelligent document format or web portal that simplifies the input process makes a lot of sense and that Interactive Data has held off re-engineering its systems in order to give it the flexibility to adopt incoming standards.

Automation pilots

David Kane, operations executive for securities processing at JPMorgan and location head of JPMorgan’s technology and operations centre in the UK, says the custodian has taken matters into its own hands by partnering with a technology vendor to build a robust and all-encompassing announcement-capture-reconciliation engine, to be piloted in June. Additional markets and instrument types will be added so that by the end of the year, JPMorgan will have a much higher level of automation around producing the golden record of each corporate action.

He says: “Our announcement capture engine represents a substantial investment in technology which, combined with our team’s extensive market expertise, provides an important service to our clients.

“It will take in-between five and 10 different source feeds of information covering 90 markets globally to give us a powerful database that cross-compares the underlying details of each corporate action announcement and spotlights discrepancies. A team of specialists will quickly handle the automation exception process and talk directly to the issuers to get 100% clarity. This is absolutely critical in establishing the golden record for JPMorgan clients to make informed investment decisions.”

As a large custodian, JPMorgan feels responsible for creating a golden record of corporate actions and automation has been essential. Mr Kane adds: “The challenge for a global custodian is staying on top of evolving event information, up to and including the terms and conditions included in the formal prospectus.”

JPMorgan, and the industry groups it is part of, have historically invested and made considerable progress in communications between the custodian and the fund manager and are now focusing on the information sources – the issuers and registrars – and on the need to agree common formats and a dictionary of key corporate action terms across all markets. There is a common understanding that automation of announcement information from issuers is one of the last links in the chain needing attention.

Information flows

Euroclear has already taken the first steps in producing commonly agreed definitions and classifications of corporate actions to harmonise corporate actions processing in the five markets in which it operates. Edwin De Pauw, director, business model and harmonisation division at Euroclear, says it is now recognised that the information flow from issuer to investor should go via the central securities depository (CSD). He says: “This is an important agreement [that] enabled us to automate communication between the issuer or its agent and the CSD.”

Last year, Euroclear submitted the business justification for a new set of messages for issuer-to-CSD communications to the International Standards Organisation (ISO), which approved the creation of a standard. Euroclear has spent a year with the issuers and their agents from its markets defining the format and content of these messages. This is now being finalised and the standards will be discussed with issuers and CSDs in other markets.

The newly defined message standards should be registered with the ISO by the end of the year. They will be in ISO 20022 – a new universal financial industry message format.

Mr De Pauw says: “These standards will allow straight-through processing between the issuer or its agent, and the CSD. If the issuer, at the start of the process, communicates corporate action information electronically in the new ISO format with the CSD, then there will be an efficient, automated process.”

It has been decided that the issuer will announce a new corporate action to the CSD at the same time as the stock exchange. “We are agreed there will still be two types of messages – the operational messages needed by stock exchanges, central counterparties, CSDs and custodians to process the corporate action – and there will still be a legal notice to allow an issuer to announce a general meeting through an officially appointed mechanism. It is too early in the process to consider changing listing regulations,” says Mr De Pauw.

However, Gary Wright, CEO of BISS Research in the UK, is close to finding a practical and workable solution that would use an open standard in electronic readable format for corporates and issuers that would be widely available to all firms in the data supply chain over the web.

He says: “The problem cannot be resolved by scrubbing data and issuing standards in the middle market, it has got to be resolved at source. The only way to do this is to provide business incentives to corporates. Only by engaging and showing them that it is in their interests to change and adopt a standard way of issuing corporate actions data will the huge costs burden for the securities industry be relieved.”

In the US, the Asset Managers Forum (AMF) Corporate Actions Committee has published a draft of best practice recommendations for processing mandatory and voluntary corporate actions and is creating a consistent, standard set of information for corporate action announcements. The committee is close to finalising the minimum required data elements that should be included in corporate actions announcements to create a golden copy of the corporate action event from the issuer.

Elisa Nuottajarvi, director at the AMF, says the forum is drawing up a series of templates that it would like to see used by issuers for voluntary corporate actions as part of its best practice guidelines. “The templates are designed to ensure the necessary information is available. If this information is missing it heightens the risk of a corporate action. Once we have a standard format it will make automation easier.”

Wrong end of the stick

The AMF’s members manage $16,000bn in assets and have experienced losses as a result of misinterpreted corporate actions. The AMF says issuers will have to help take the risk out of the process if they are to make investment more attractive. While the decision to approach the Securities & Exchanges Commission (SEC) to get regulatory backing for the initiative will not be taken lightly, it will be considered if needed.

Until now, the regulators have steered clear of the problem but Bob Cumberbatch, director of business lines, pricing and reference data at Interactive Data (Europe), says the strong relationship between corporate actions and equities pricing means the risk of misinterpretation becomes more apparent under the Markets in Financial Instruments Directive (MiFID), due to the required transparency in pre-trade prices.

He says: “A corporate action can affect the pre-trade price. If companies trading or quoting away from an exchange were to do so without knowledge of an impending corporate action, they may quote at the wrong price or even trade at the wrong price.”

He points out that post-MiFID, there is more chance of this happening – and also more chance of being caught trading or quoting at the wrong price because of the obligation to publish the details of the transaction so that corporate actions just might get caught in the regulatory spotlight, by default, in the very near future.

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