A summary of the key challenges and possible solutions by Will Dolan – Head of Fidelity ActionsXchange
Significant work has been done across the industry to drive messaging standards into the Corporate Action arena. This objective toward standardisation suggests that operating efficiency can be attained, costs can be saved, and errors can be avoided through adherence to a common messaging format. With that said, why have these efforts taken so much time to evolve, and what can be done about it?
Standards like ISO and XBRL as well as industry participants (SWIFT, ISITC, NMPGs, SMPG, SIFMA, DTCC, etc.), are taking the industry closer toward a common corporate action messaging standard, but much more effort is needed by issuers, agencies, service providers, investors and regulators. True adoption and standardisation will require greater focus, coordination, and continued regulatory support and involvement. This does not mean we can only achieve success if standardisation becomes a mandate, but mandates can become motivators and drivers of change. The industry can and must prove success first, thereby serving as a catalyst for regulation aimed at driving increased adoption.
The complexity to solve this issue is only exacerbated by the global community where an intricate web of regulators, depositories, custodians, issuers, service providers, and other interested parties may have competing priorities and views regarding standardisation. Getting these constituents to agree to drive towards standardisation, and commit funding and resources, is critical to solving the challenge. Very few organisations have the luxury to focus on these issues full time, so getting attention on this important matter typically is likely to conflict with other higher priority initiatives. With an increasing spend on regulatory matters driving the majority of financial service firms’ discretionary budgets, competition for resources and funding is quite tight.
One solution to this dilemma, is continued co-ordinated efforts across industry groups, funded initiatives within the user community, proven success from mandates such as the DTCC’s migration to 20022, and industry support of the Global LEI (GLEI), creating a collaborative and open dialogue with regulators for support of harmonised global standards and increasing regulatory support. We have to show the industry that the support of global standards adoption will deliver sustainable return on the investment made, drive appropriate technological changes, and prove that end-to-end automation is achievable. Without that evidence, standardisation efforts may not achieve the level of prioritisation required.
Here are some of the challenges and recommendations to industry participants dealing with these issues, and a few examples where success is starting to emerge.
Success stories are emerging
There are several bright spots in the industry worth noting that help validate standardisation efforts across the industry. We see significant progress as it relates to the XBRL American Depositary Receipt (ADR) working group, which includes The Depository Trust & Clearing Corporation (DTCC), BNYMellon, Citi, FINRA, GlobeTax, JPMorgan Chase, and XBRL US. The goal of this joint effort is to create standardisation and automation to reduce costs and risks. Specifically, they plan to fully automate corporate actions communication flows between information sources, market infrastructures, local agents, global custodians and investment managers. The solution is enabling financial institutions to reduce the costs and risks associated with processing corporate actions, and to build scale for this important function.
Another pocket of success can be seen in Australia with progress being made by the ASX. Speaking at last year’s Sibos asset servicing session, Andrew White, general manager, settlement services for the Australian Securities Exchange (ASX), said building industry consensus to present to regulators was the ideal way to form corporate action standards. The ASX has moved to SWIFT’s ISO 20022 messaging format for corporate actions for the majority of corporate events for ASX-listed instruments, including dividend announcements. To do this, the Australian industry brought together the whole corporate actions community to agree upon a standard and then presented this standard to the regulators. “We actively engaged the whole community of issuers, custodians, registries and vendors to see the process we thought we should move to,” he said. “Getting everyone in the room to see the benefits and then reflecting that back to the regulator is key. The strength of issuers’ [support] was very powerful.”
While the rest of the world (US and Europe in particular) may not be able to follow this example due to a more complex market structure, it provides evidence that the industry must work together and involve the regulators in the process.
Get the issuers involved
The industry can do more to help the issuers at the point of creating the corporate action announcement. Instead of trying to solve the problem downstream, the US and European markets should focus on adoption across the issuers (upstream). If the issuers can deliver XBRL corporate action announcements (i.e. announcements that can be data-tagged), those messages can be fully integrated with ISO 20022 messaging. The benefit here is greater straight-through-processing and error reduction downstream, with the hope of higher interest from the other parties to use this data format. The mission of the XBRL Corporate Actions Working Group tasked with this challenge will be to define a global standard for corporate actions documents that can be tagged at origination by the issuer or the issuers agent and allow straight through processing of this information to the security holder, tightly integrated with relevant ISO 20022 messages. This strategy assumes that issuers will properly report corporate actions announcements using the new XBRL standard, which may take time and influence to achieve full compliance.
Issuers need motivation to participate in the process, so solving their needs (e.g. reporting), or eliminating their pain points, is a certain way to gain adoption at that level. Additionally, the quality of the message creation will be important to monitor so that incorrect information does not pass downstream. Quality can be enhanced by automation, by strong policies and procedures, as well as potential audits.
Streamline implementation and adoption
Message standards are a good idea, but adoption problems exist because standards will only add value if all parties are using the same standard. Otherwise, adding a new messaging syntax (without complete adoption) just adds complexity and a need to translate more communication among different formats. The co-existence of two ISO standards is expensive to maintain and a deterrent for adoption. Setting an end date for the use of ISO 15022 is necessary to drive further adoption.
Along with the DTCC’s adoption of ISO 20022, Fidelity ActionsXchange works with DTCC participants and non-participant firms to adopt the more advanced industry messaging standards. Because the industry is still addressing the migration to uniform standards we must be able to support multiple formats of information, which isn’t the most efficient way to operate. Because of the lack of real adoption and standardisation across the industry, we’re required to ensure we support the flow of corporate action information in a variety of ways in support of our diverse client base.
One other consideration toward greater adoption would be to continue to support industry groups to focus changes to standards limited to those that can clearly demonstrate a material benefit to the industry participants. Is it really a standard if the standards themselves are constantly moving targets?
Increase collaboration with regulators for industry solution that work
Regulatory focus is important, but to deliver the intended outcomes, these efforts are best achieved in collaboration with active industry dialogue and support. Mandates can be helpful, but also have a tendency to create unintended consequences. For example, in 2009, the Securities and Exchange Commission (SEC) mandated that issuers report quarterly financials both in a plain text format and in XBRL format. However, unlike the plain text reports which the SEC audits, there are no required audits of the XBRL formats, so issuers are not giving the XBRL reports enough care for analysts/investors to trust the output. In this example, while well intended, the industry has not fully embraced the XBRL format.
The complexity of this issue requires significant collaboration across the industry and proven successes before the regulators can fully effect desired changes in the system. The collective input of experts across all dimensions of the issue, that know what needs to be done, should work with global regulators to lead the efforts while at the same time involving and working with the various global regulators to gain momentum on the issue.
Automate as much of the lifecycle as possible
Accessing high quality and comprehensive announcement coverage is crucial to avoiding both the cost and risk of manual reconciliation and exception processes introduced by the variety of counterparties involved in the corporate actions process, particularly with today’s complex event and entitlement structures. Even today, once the announcements are captured, we continue to see significant manual processing downstream to disseminate critical corporate action information. Many firms support these processes through a variety of manual, highly fragmented and often spreadsheet dependent communication. Automation and standardisation are critical throughout the process, not exclusively at the announcement capture stage. Adoption is much easier to attain when there are multiple groups and processes that can benefit.
While this is by no means a comprehensive guide, some of the key themes from this article could be applied to the efforts underway by the industry’s active working groups. Most importantly, data quality, automation across the lifecycle of the corporate action, and reducing potential risk should be driving principles for any of these standardisation efforts. Additional likely benefits from these efforts will be a reduction in operating costs over time, greater efficiency and timeliness of the data, and support from the regulators to help drive greater adoption.