Corporate actions processing has often been referred to as the ‘final frontier’ of the back office where automation has yet to take hold. And it’s easy to see why. For as long as I can remember there have been thousands or words dedicated to the subject and conference agendas stuffed full of speakers offering an opinion on a way forward.


With risks including misinterpreting events, late announcements, missed instructions and missing data, there is the possibility of significant losses at a time when cost and risk are under even greater scrutiny. Yet here we are in 2010, a world awash with touch screen phones and apps, yet visiting the corporate actions department feels like stepping into the land that time forgot.


While elsewhere in firms paper has disappeared in corporate actions, paper is slowly being phased out but it’s still very much in evidence. Faxes whirring away, papers filed in ring binders, Excel spreadsheets filled with data. Actually that last one isn’t purely a corporate actions department issue but it’s startling that at some firms that is considered ‘modern’.


The continued use of manual processes is due to a mixture of inertia by some market participants around data tagging and standardised formats and out-dated methods by others. We can talk about automation over and over but when many markets still require a physical certificate to be completed and signed for an election alongside the electronic instruction its clear we’re a long way off from removing paper from corporate actions.


While this feature asked me to highlight the risks associated with using paper, I think it has to take a wider view of the entire event management process and understand why paper is still in use. After all the risks of paper-based processes are well documented and known.


The fact is we as a community – be that vendors, data providers, custodians or banks – are acutely aware of the problems and have been working hard to overcome significant hurdles in an attempt to eliminate paper and get closer to STP across the entire process.


Making Progress, Albeit Slowly


So will anything change? The obvious response is ‘it has to’. The business drivers for automating the processes are by and large the same as they’ve ever been, to reduce risk and lower operational cost.


The problem is that what has taken years to evolve will take time to change. Moreover, like an oil tanker attempting to execute a turn, the results will not always been immediately apparent. What is crucial is that we start down the route of modernising their event management processes.


Yet it appears that some firms are reluctant to change and let go of their old processes. Knowledge for event management tends to reside in the heads of skilled employees and not within the rules of an automated solution. What happens to these firms ability to process corporate actions if and when these employees leave? In an industry that is continuously adding resources to overcome the problem, there is a real shortfall in skilled and knowledgeable corporate actions staff, which suggests that throwing more headcount at the problem is not a viable long-term solution.


Perhaps another factor in the ongoing use of manual processes and paper is that as an industry we’ve been pretty good at papering over the cracks to present an acceptable appearance, while beneath the surface significant structural problems remains. Of course while that approach has yielded excellent results in mandatory events such as stock splits and mergers where it’s possible to achieve STP throughout the process, elsewhere the flaws are still evident.


So while some elements of the corporate actions process are highly standardised and some are completely automated, very few are both.


An often cited example is international withholding tax reclamations, where tax needs to be claimed from overseas tax authorities by recipients who have been taxed at a higher rate than required. This process has no standardisation and entirely paper based. Indeed the complexity surrounding many voluntary events will always require some form of manual intervention and processing. Because of that full STP will never be achieved while multiple constituents in the process continue to use faxed confirmations and paper-based documentation.


Getting The Issuers On The Same Page


The crux of this problem is a knock on effect from the moment a corporate action, whatever that may be, is issued. Because announcements have no agreed format there is a lack of clarity, leaving each event open to interpretation by the corporate actions desk. Until such time as the corporate action is announced from the issuer in a clear and standard format this interpretation will always be made and the associated risks will never go away.


As a result firms are forced to use whatever means necessary to process an event due to a snowball effect of propriety formats from issuers, data quality issues and messaging format issues. The use of standard event types from the issuers, based on local market guidelines, would go a long way to resolving these types of problems and again reduce the need for interpretation and the associated risks and inefficiencies that brings.


So perhaps the lesson here is not to talk about corporate actions processing from the perspective of firms attempting to keep their heads above water to cleanse and make sense of the data they’re receiving. In reality, pressure needs to be exerted on the issuer community to ensure they disseminate information in a standardised format.


There is some headway being made, for example the Swiss Exchange has implemented a system issuers can use to submit information electronically. But on a global scale there seems to be a lack of willingness to do this, or a sense of maintaining the status quo. Until that pressure is applied, through regulatory mandated means or otherwise, firms will continue to struggle with corporate actions processing.


It won’t solve all of the issues of course because there are still local market practices that also lead to incorrect interpretations, regardless of the details announced by the issuer. However it would go some way to setting us out on the right path to a true corporate action ‘Golden Record’, rather than feeling like we’re stuck in a maze.


The Adoption Of XBRL And ISO20022


The word ‘standards’ in bandied about when debating corporate actions but it is still only one part of the complex jigsaw. Indeed it’s no longer a case of finding a standard but one that’s adhered to.


We’ve recently seen the emergence of concerted industry drives to move the market towards using these standards. For example, Euroclear’s programme of ISO20022 definition for issuers has raised the prospect of greater harmonisation in Europe, while the SEC and DTCC are jointly pushing the adoption of XBRL in the US.


It could end up that a combination XBRL for tagging data and ISO20022 aids the removal of manual processes from event management. With XBRL providing a common taxonomy and semantic interoperability for corporate actions it should, in theory at least, support the seamless transition from issuer generated documentation to data.


It is far more likely that they will simply aid processes within the corporate actions lifecycle that are already automated. Indeed, despite all the positive noises from the industry as a whole, ISO20022 and XBRL may not deliver on their promise for a number of reasons.


In the case of XBRL it still doesn’t remove the need to multi-source and review the corporate action announcement. It will reduce the risks of misinterpretation of an event and that is a persuasive argument for adoption now rather than adopting a ‘wait and see’ approach that has dogged this industry for years. As event complexity and volumes continue to rise to not do everything to minimise risk through the use of standardisation is short-sighted.


Unfortunately we are already seeing the usual issues of inconsistency even within a pre-defined standard and different rates of adoption based on geography. There is also the cost implication of moving from ISO15022 to ISO20022 when some firms are suggesting they see little additional value in the newer standard.


The one significant flaw of ISO20022 mentioned by these firms is that it does not prevent or remove the use of narrative within messages, which is a huge hurdle to greater automation.  The narrative field serves a useful purpose given the complex nature of certain corporate action events or local market factors that need to be taken into consideration. However, its open nature has left it exposed to abuse as a hold all for information that could and should be provided through standardised fields, formats and tags.


It is precisely those types of market practices that hold back automation, increase the risk of misinterpretation of events and raise processing costs.


Reducing Risk Today


With firms having more than enough on their plate, perhaps the answer lies in the creation and adoption of utilities as muted by a number of banks, the ECB and others to reduce risk. The support of disparate reference data solutions represents a high cost and high risk for data integrity. All processing solutions, including corporate actions require access to reference data in order to support event processing and data validation.


However, even with utilities within such a complex and disparate processing area as corporate actions there will always be the voluntary events that you cannot automate. And without issuers standardising their processes problems will continue to persist throughout the lifecycle.


So in order to reduce risk today, the key is in identifying where the current manual processes can be automated and focusing on those elements. Longer term, the continued drive towards standards that can facilitate automation will be the most effective way to mitigate the risks in corporate actions processing. However it’s clear we’re still a long way from any sort of agreed industry standard and as a result paper will remain in some form for a few more years yet.