Transforming Corporate Actions Processing: The Long Road Ahead


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By streamlining corporate actions processing through automation and standardization, companies can improve the quality and timeliness of data and enable a move to cloud-based utility services.

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Transforming Corporate Actions Processing: The Long Road Ahead

  1. 1. • Cognizant ReportsTransforming Corporate Actions Processing:The Long Road AheadBy streamlining corporate actions processing through automation andadoption of common messaging standards, companies can improve thequality and timeliness of data and enable a move to cloud-based utilityservices. Executive Summary question the value of the new standard, and XBRL As businesses expand into new geographies in is in need of a regulatory push. search of growth, the volume of corporate actions is growing exponentially. Advances in communica- Nevertheless, the industry seems convinced of tions technology allow issuers to send announce- one thing: automating corporate actions process- ments in a variety of formats; however, the ing is the way forward, as it holds the promise of processing of these messages by corporations or reducing processing errors by minimizing manual their financial service providers remains highly intervention and other inefficiencies that are manual and error-prone. At a time when the known to generate huge annual losses. business environment is growing in complexity and volume, these errors are unaffordable. At the heart of improved corporate actions processing is the quality and timeliness of data, Straight through processing (STP) of corporate but these benefits depend on multiple factors action messages is the industry’s holy grail. beyond the control of an individual party in the Numerous efforts have been made to standard- corporate actions value chain. In some countries, ize the corporate actions process, with some suc- for example, companies must obtain a physical cess seen in dividends and income processing. certificate before issuing a corporate action, For instance, several financial services companies adding to the time required for the message to have adopted the ISO 15022 messaging stan- flow downstream. Also, given the number of dard, and the more recent ISO 20022 promises possible intermediaries through which a even better results. eXtensible Business Report- message passes, the risk of data dilution is high. ing Language (XBRL) also holds great promise Overcoming these challenges requires greater for reducing the risks associated with corporate collaboration among industry players, as well as actions processing. But financial services compa- engagement with the issuer community to help nies have been slow to adopt ISO 20022 as they facilitate meaningful change. cognizant reports | february 2013
  2. 2. Greater automation needs to be complemented • Adoption of greater and faster automation ofwith industry-wide adoption of messaging stan- corporate actions processing.dards. Achieving this on a global scale will not • Creation and support of initiatives for come easily, but several initiatives are underway industry-wide adoption of common standards.that, with support from regulators, could move • Development of risk-sharing models thatthe ball forward. On the technology front, growing create a level playing field for vendors.automation of corporate actions has resulted in the • Engagement with the issuer community todevelopment of modern solutions that will make make the necessary technological easier for both corporations and their financialservices partners to streamline and reduce costs Corporate Actions Bluesfor this key process in the coming years. Corporate actions processing has been a long-term area of concern for financial servicesBusinesses may increasingly work with part- companies. Action announcements arrive inners on activities such as data validation, but various forms and formats, with issuers usingthis approach is somewhat risky due to process different terms to describe the same events.complexity. Repetitive processes are more easily These messages pass through various interme-entrusted to service partners, as they can be better diaries, including agents and custodians, beforeoptimized for time savings and, importantly, reaching the investor. A lack of global standardsenable operations teams to focus on business for formatting these messages means that atoutcomes rather than fixing data. various stages, data may be communicated in paper-based formats, such as fax, thus addingAdvancements in cloud computing will enable to their processing time. This makes the cycleorganizations to access corporate actions process- of information flow risk-heavy and error-prone,ing solutions on a pay-per-use basis, thereby vari- opening companies to the possibility of hugeabilizing the high fixed costs typically associated losses and reputational damage (see Figure 1).with this space. Going forward, increased automa-tion and adoption of industry standards will allow Key issues confronting financial services firmsfor the commoditization of corporate actions that process corporate actions include:processing, thus creating a level playing field forsmaller industry players, many of which cannot • Time-consuming and error-prone manualafford today’s prohibitively expensive solutions. intervention and paperwork. • High processing costs.In sum, we believe the following to be the • Data validation, requiring a high level of skill; in-industry’s key imperatives: house validation is often costly and error-prone. • Inefficient processes, increasing the risk of loss.• Harmonization of market practices at an • Low data reliability, caused by disparate systems international level. in the processing chain from issuer to user.Risk and Result Risk Corporate Action Who is Impacted Direct risk of Mandatory with Anybody in the corporate action chain processing failures options; voluntary. (e.g., custodian, fund manager or broker), with liability depending on which market participant causes the failure. Direct cost of Mainly mandatory Investors (interest forgone). late payments (mostly dividend and interest payments). Risk of sub-optimal All Brokers or fund managers involved in trade trading decisions (if proprietary) or investors (if cost passed on). Indirect cost of ineffective Voluntary (mainly Issuers (in the long run), investors, corporate governance proxy voting). the system at large.Source: “Corporate Action Processing: What Are the Risks?” Oxera, 2004.Figure 1 cognizant reports 2
  3. 3. • Data conflicts between trusted sources. financial services firms’ top priority (see Figure 2), as is improving efficiencies. The Aite GroupTypically, financial services companies have teams estimates expenditures on corporate actionsdedicated to corporate actions processing, as mes- processing solutions will grow from $70 millionsage interpretation requires expertise with various in 2010 to $93 million by 2015.2 The level of auto-rules and regulations. Such expertise comes at a mation is more visible in the more mature U.S.high cost, due to the growing complexity of corpo- market, which has a homogenous regulatory andrate actions messages. Firms often use disparate reporting system compared with the diverse andsources for corporate actions data, and messages emerging systems used in Europe and developingmight vary in completeness and quality, adding to nations (see Figure 3, next page).the time taken to validate the data and pass therelevant insight on to the client. Furthermore, The Solution: Automation, Standards,different departments within a financial services Regulatory Supportfirm use data for different purposes, increasing the The challenges facing corporate actionsimportance of data integrity. processing start right at the source. Issuers of corporate actions operate in disparate industriesWith businesses expanding their footprint to with different regulations that vary from oneemerging markets in search of growth, the volume country to another. Moreover, issuers are notof corporate actions has increased rapidly in the legally required to publish announcements in for-past few years. As recession slowly gives way mats that are compatible with existing standards,to growth, capital requirements and corporate thus hindering smooth processing. For example,restructuring will rise, leading to even greater the issuer might make an announcement throughvolumes of corporate actions messages. In the a paper-based message, but the investor con-global marketplace, data is exchanged across sumes this data in an electronic format createdtime zones and geographies, placing pressure on by operations and increasing risks relatedto incorrect and/or delayed communication. More This lack of uniformity percolates down to thecomplex instruments, combined with the growing individual entities that process these messages.complexity of the global business environment, Some of the key challenges related to thecreates additional pressure on resources. With processing of corporate action messages includenearly one million announced corporate actions the following:every year, the industry is said to suffer losses ofapproximately $1 billion.1 • Growing volume of corporate action announce- ments, accompanied by growing businessNot surprisingly, mitigating the operational risk complexity. associated with corporate actions processing is • Complex event types (e.g., derivatives).Corporate Actions Top List of Operational Risks Corporate actionsMiddle-office functions (allocations, confirmations,matching/affirmation, presettlement management) Account opening/client onboarding OTC derivatives processing Reference data management Valuations Reconciliations Highest priority Second highest priority Third highest priorityBase: 42 European and U.S. asset management companiesSource: “Assessing Operational Risk in the Securities and Investments Industry Survey,” TowerGroup, 2010.Figure 2 cognizant reports 3
  4. 4. • Managing different announcement formats. with smaller firms that deal with lower, more• Improving data quality. manageable volumes.• Improving timelines.• Integrating data across platforms and sources. The story changes when it comes to messaging• Overcoming barriers of legacy systems standards adoption. The large-scale adoption to enable better data integration and commu- of the ISO 15022 standard reflects the benefits nication. of this specification in terms of operational efficiencies and risk reduction. Today, mostIn a recent survey by SimCorp,3 78% of mid- and large-sized institutions use ISO 15022 forrespondents said manual processing of corporate corporate actions, and the volume of messagesactions was the top reason for corporate actions in this format is expected to grow. Nevertheless,failure, despite more than half (58%) having the standard is somewhat inflexible — due to lim-automated notifications. While automated noti- ited message field parameters and allowance offication processing exists in the back office, the free text — which limits the automation of certainpassing of these notifications to the front office message typically manual. This is a reflection of thestate of automated corporate actions processing, Meanwhile, XBRL4 has emerged as a technologi-which usually focuses on simple, standardized cal standard bearer for corporate actions processevents, such as dividend announcements. automation. Its benefits include:Automation priorities vary according to firm size • Clear conveyance of the issuer’s intent, thusand areas of operation. Top drivers for automa- reducing the risk of misinterpretation.tion include cost reduction, client demands and • Greater automation.risk of losses (see Figure 4, next page). Never- • Reduced manual interpretation, re-keying andtheless, the extent of automation tends to be manual exceptions.dictated by the business benefits of the automated • Timely decisions for investors through reducedprocess. Firms that need to process large volumes communication latency.of corporate actions, such as custodians, dedicate • Extensible tag library, in which issuermore resources to process automation compared companies can create customized tags.Investing in the Automation of Corporate Actions White indicates countriesin which financial institutions were not part of the survey. 0 - 15% 46 - 70% 16 - 30% 71 - 100% 31 - 45% Percentage of financial institutions in-country planning to invest in corporate actions automation.Base: 303 financial institutions in 53 countries.Source: “AIM Global Reference Data and Risk Management Survey,” Aim Software, 2011.Figure 3 cognizant reports 4
  5. 5. According to a 2009 survey by the Depository willingness of issuers to adopt XBRL. This makesTrust & Clearing Corporation (DTCC) and Society the role of the Securities and Exchange Commis-for Worldwide Interbank Financial Telecommuni- sion (SEC) exceptionally important, since withoutcations (SWIFT), the use of XBRL could result in a regulatory push, issuer companies are unlikely toreductions worth $400 million in wasted costs for voluntarily take up new reporting formats.the U.S. financial services industry due to a 30%improvement in STP rates.5 The combination of While the U.S. scenario is promising, the storyISO 20022 and XBRL, which allows issuers to tag is entirely different in other parts of the world.important data points at the time of writing the In Europe, the level of standards harmonizationmessage, holds much promise for creating fur- is not the same as in the U.S., complicating thether efficiencies. Financial firms can extract the implementation of ISO 20022. Getting financialrelevant data and pass it on to their clients in the services companies across geographies to adoptISO 20022 format. This way, data entered by the any standard is challenging and could requireissuer is much less susceptible to risks imposed several years to achieve. The TARGET-2 Securitiesby manual rekeying and allows for easier inter- trading platform is expected to play a key role inpretation by financial services firms. As a result, the adoption of the ISO 20022 format for corpo-investors have access to clear and accurate data. rate actions processing. (For more on this, read our paper, “TARGET2-Securities Platform: Impli-Embrace of the ISO 20022 standard is highly likely cations for the Post-Trade Arena.”) But repeatedin the near future, especially in the homogenized delays in its implementation are not helping theU.S. market. The DTCC recently announced that cause. Similarly, the Corporate Actions JointISO 20022 is ready for implementation, follow- Working Group (CAJWG) has taken up severaling a lengthy pilot implementation that involved initiatives to promote automation. However,leading industry players, including BNY Mellon, progress has been rather slow, given the fact thatBrown Brothers Harriman, JPMorgan Chase and the corporate actions process has been built overNational Financial Services LLC.6 DTCC plans to decades in a paper-based economy.8transmit corporate action notifications via theISO 20022 XML-based format by 2015, replac- Emerging economies have yet to see widespreading existing flat file notifications.7 In the first adoption of standards, although in regions suchquarter of 2013, it plans to send ISO messages as Asia, SWIFT has made inroads. Harmonizationsystemically to help participants carry out further of cross-border securities trade in Asia has a longtesting, followed by Elective Dividend Services way to go given the diverse nature of the markets.(EDS) events messages. Given this scenario, achieving consistently high STP rates at a global level remains a distant, ifEven as these developments take place, much of not unachievable, dream.the automation efforts’ success will depend on theTop Drivers for Automation Reduced operating costs Client demands for service quality Corporate actions losses (or near misses) Other Anticipated volume growth Regulatory pressure 1 2 3 (Respondents were asked to rate the factors driving automation. A score over 2 indicates strong support.)Source: “Corporate Actions 2012: A Global Survey of the Corporate Actions Marketplace,” Swift and CityIQ, 2012.Base: 95Figure 4 cognizant reports 5
  6. 6. Process Automation Barriers and see” approach given adoption costs. A 2010 Changes in the management of corporate actions survey by A-Team found that 60% of respon- are progressing at a snail’s pace. The need for dents in the U.S. and Europe were unclear on the reducing the risks involved in corporate actions benefits offered by the new standard.10 processing has been recognized for several years now. However, given the deep-rooted nature of A similar situation likely exists in other advanced the earlier practices, standardized practices have and emerging markets. The benefits of STP yet to gain a strong foothold. can be realized only when there is wide adoption of these standards. This will take continued effort At an organizational level, front-office require- by industry bodies, cooperation from industry ments or regulatory initiatives typically trump the players and buy-in from the issuer community to requirements for automating corporate actions create messages in formats that are compatible processing. While employ- with standards used by downstream organizations. At an ees at the operational level organizational tend to be aware of these Legacy systems in individual institutions pres- level, front-office risks, their voices seldom ent another barrier to effective processing. Most make it to the boardroom. financial services companies have implemented requirements A TowerGroup survey found systems with multiple vendors over the years that or regulatory that 65% of operations are either incompatible or been made to interop- initiatives professionals plan to invest erate through extensive internal or third-party in automating corporate effort. A complete overhaul of these systems usu- typically trump actions processing but fear ally means high Cap-Ex, while sticking with legacythe requirements that the regulatory squeeze systems presents clear operational disadvantages for automating could monopolize planning, in the form of high maintenance costs and errors C-level attention and fund- caused by overreliance on manual intervention.corporate actions ing.9 A more recent study This can result in hefty performance penalties processing. by SWIFT and CityIQ affirms enforced through existing contracts between this (see Figure 5). financial services providers and their clients. In today’s economic climate, spending con- By automating the corporate actions func- cerns can trump broad-based automation or tion, organizations can ensure long-term systems upgrade initiatives. Take the case of operational efficiency and effectiveness. As migrating to the ISO 20022 messaging format. with most IT-driven projects, ultimate success, While some organizations have already seen however, depends on how firms plan and imple- the benefits of this standard and are preparing ment their corporate automation actions to upgrade, several others have taken a “wait program. Among the key imperatives: Factors Impeding Corporate Actions Automation Projects 14% Difficulty building business case 19% Doubts about attaining STP Cost of SWIFT messaging 11% No impediments 9% We are fully automated 3% 3% Lack of management buy-in 2% Competing internal priorities 10% Lack/inadaquacy of solutions 29% Limited return on investment Source: “Corporate Actions 2012: A Global Survey of the Corporate Actions Marketplace,“ Swift and CityIQ, 2012. Base: 95 Figure 5 cognizant reports 6
  7. 7. • Create a clearly defined set of expectations arrangements in which no party in the value chain between providers and financial institutions, is unfairly burdened. along with feasibility and cost-benefit analysis.• Build a plan for integrating the varied sys- Given the high costs involved in automating cor- tems that must interoperate in an automated porate actions, several smaller players, such as environment. independent asset managers and broker-dealers,• Put in place systems to mitigate risks. remain averse to embracing automated solutions.• Establish a strong working relationship The answer to this may lie in the software as a between the operations team and technology service (SaaS) model, which enables firms to providers. access automation solutions as utilities. Cloud• Enact a phased approach to automation sup- computing has gained popularity among financial ported by internal audits and management services firms due to the benefits offered in the reports. form of on-demand availability, fixed-cost vari- abilization, pay-per-use and scalability. This hasThe Case for Corporate Actions as a provided incentives for firms to source middle-Service and back-office functions to third parties.Despite increased outsourcing in areas such asvalidation, it is still uncommon to work with a There is a long way to go before corporate actionspartner that specializes in corporate actions pro- processing can be offered as a truly commod-cessing. The chief reasons for this include the itized cloud-based offering, as it is much morerisks involved and companies’ perceived loss of complicated and risk-prone than conventionalcontrol. Large custodians are among the only back-office functions. Challenges exist in themembers of the corporate actions value chain form of data security, integrity and reliability, asthat use third-party services. The primary risks well as the need to integrate these systems withpivot around third-party interpretation errors, legacy platforms.which can be traced to the lack of common globalstandards. However, it is safe to say that as greater stan- dardization and automation takes root, corporateNevertheless, expert third parties offer clear cost actions processing is likely to evolve to a stagebenefits, and the number of corporate actions where it can lend itself to wide-scale commoditiza-automation solutions available to financial firms tion. As such, financial services firms and their cli-has increased over the past few years. By working ents may be more willing to embrace greater levelsclosely with service providers, financial services of automation provided as utilities by third-partiescompanies could create balanced risk-sharing specializing in the corporate actions function.Footnotes “Taking Risk Out of the System: Is It That Easy?” A-Team Group, 2010.12 “Corporate Actions Automation: Making Progress on an Old Problem,” Aite Group, 2009.3 “SimCorp Poll Pinpoints Lack of Automation as Biggest Cause of Corporate Actions Failure,” SimCorp, March 7, 2011.4 XBRL (eXtensible Business Reporting Language) is an open standard that supports information modeling and the expression of semantic meaning commonly required in business reporting. XBRL is XML-based. It uses the XML syntax and related XML technologies such as XML Schema, XLink, XPath, Namespaces, etc.5 “A Business Case to Improve Corporate Actions Communications,” DTCC, SWIFT, XBRL, 2009.6 “DTCC Launches Corporate Actions ISO 20022 Pilot For Entire Lifecycle of Distribution Events,” DTCC, September 2012.7 “DTCC Launches Corporate Actions ISO 20022 Test Pilot,” DTCC, April 2011.8 “Changing the Game for Corporate Actions,” A-Team Group, 2010. cognizant reports 7
  8. 8. 9 “Making the Case for Automation of Corporate Actions Processing,” TowerGroup Edge, 2011.10 “The Waiting Game: Standards in Corporate Actions Processing,” SmartStream and A-Team Group, 2010.References• “Building the Business Case For Outsourced Corporate Actions Validation,” DTCC, A-Team Group, 2012.• “Corporate Actions: Past, Present and Future,”, 2011.• “Managing Risk in Corporate Actions: All Aboard?” FTSE Global Markets, Nov. 1, 2011.• “Outsourcing: A Solution for Wealth Managers Corporate Actions Processing,” BISS Research, 2011.• “The Never-Ending Story? Progress in the Automation of Corporate Actions,” SmartStream Technologies and A-Team, 2010.• “Creating a New Vision for the Corporate Actions Industry: Issuers, Intermediaries and Investors Work to Solve Challenges,” BNY Mellon, 2010.• “Improving Issuer-Investor Communication by Reducing Risk and Cost through Technology Standards,” DTCC, SWIFT, 2009.• “Inertia — Automation’s Biggest Barrier,” A-Team Group, 2010.• “Transforming Corporate Actions,” DTCC, 2003.CreditsAuthor and AnalystAkhil Tandulwadikar, Cognizant Research CenterSubject Matter ExpertDipen Banerjee, Senior Consultant, Banking & Financial Services, Cognizant Technology SolutionsDesignHarleen Bhatia, Creative DirectorSuresh Satyavarapu, DesignerAbout CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business processoutsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquarteredin Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep in-dustry and business process expertise, and a global, collaborative workforce that embodies the future of work. Withover 50 delivery centers worldwide and approximately 150,400 employees as of September 30, 2012, Cognizant is amember of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among thetop performing and fastest growing companies in the world.Visit us online at for more information. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 1 Kingdom Street #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA Paddington Central Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London W2 6BD Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 207 297 7600 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 207 121 0102 Fax: +91 (0) 44 4209 6060 Email: Email: Email:©­­ Copyright 2013, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.