Ted Anastasi, Vice President, Fidelity Corporate Actions Solutions
Fidelity Corporate Actions Solutions (FCAS), a Fidelity Investments company, has been a trusted source for comprehensive corporate event information and workflow solutions since 1997. FCAS is the corporate action center of excellence across the Fidelity Investments enterprise, encompassing multiple business units representing both the buy and sell side of our business on a global scale. We have also deployed service models on a commercial basis to a broad range of financial services firms made up of banks, sell-side and buy-side investment managers, hedge funds, global custodians, broker-dealers, insurance companies, portfolio accounting platforms, brokerage platforms, asset servicers, trading platforms and specialty providers.
In an effort to increase operational efficiency and mitigate risk, our clients continuously look for ways to increase straight through processing (STP) in managing the corporate action life cycle. This effort usually leads to the question of: Is 100% corporate action STP achievable? The short answer is no at this time. However with proper operational controls, a better understanding of data sources and capabilities coupled with corporate action automation tools, a higher STP can be achieved.
Here is what we have seen across our client base and how we collaborated with our clients to help increase STP. Let’s assume a back-office operation sourcing corporate action event information from multiple custodians/depositories. Many clients utilize a non-custodian data vendor, which we recommend as a best practice. Also, assume the operation services global equity and fixed income holdings.
Straight Through Processing (STP) Analysis
We want to offer our perspective on the various levels of corporate actions STP. The table on the following page summarizes our experience with STP with regards to income/distribution, mandatory and voluntary events within the corporate action lifecycle.
A growing trend in our client base is the use of a third party data vendor and exclusion of custodian data altogether for income/distribution events. Custodian dividend data can be time consuming to validate when reviewing differences if data is coming from multiple custodians holding the same security. By utilizing one trusted source, STP is increased.
With standardised formats, STP can be achieved at a high level with proper systems and controls in place. The vast majority of volume relating to income/distribution and mandatory events are relatively simple corporate action types. With these announcements utilizing the SWIFT format or an alternate accepted file format, there is almost zero interaction in loading the file and successfully capturing the data. Though voluntary events are more complex, upfront analysis to understand which custodians/depositories adhere to the latest market messaging guidelines leads to high STP. Ongoing analysis of exceptions and management of custodian/vendor quality and adherence to market practise standards should be done in order maintain high STP.
In the capture process, our clients have benefitted from increased STP by normalizing data prior to loading, normalization of event-by-event template configuration, utilizing regional and market specific event templates and in some cases, reducing the number of sources.
In the capture process, our clients have benefitted from increased STP by normalizing data prior to loading, normalization of event-by-event template configuration, utilizing regional and market specific event templates and in some cases, reducing the number of sources.
A major limitation on STP for voluntary events due to thelack of consistency between source data and their payout options. This results in more manual touches are required from a voluntary perspective than from an income/distribution or mandatory events perspective. Multiple sources are providing data based on how they need to process it on their downstream system and it may not match what the client is looking for thus leading to discrepancies across the different sources.
We have helped our clients increase STP in the validation process by utilizing vendor hierarchy rules at the event and market level, creating configurable business rules at the client level and ranked data sources, refining templates so only the minimum number of required critical fields are used, and setting appropriate tolerance levels for exceptions. The concern in the industry is finding the right balance between STP and custodian liability. Please note there could be a tradeoff between STP and liability. More specifically, the client cannot hold custodians liable if a hierarchy automatically overwrites their information. A compensating control is a quality vendor (multi-sourced) with timely, accurate and complete coverage in order to get more comfortable with utilizing hierarchy rules.
Voluntary and Election Instruction Process
With voluntary events, there is a significant decrease in risk due to the fact that most clients require a manager review prior to sending election memos to the front-office. Also, most clients require a review of the instructions sent to custodians/depositories. Creating a narrative, validating the difference in all the custodian option numbers, and confirming the position information is all recommended prior to releasing the information downstream. From what we have seen in the industry, clients are not willing to fully automate this process and implement a user review prior to these key checkpoints. We are also seeing an increased demand for certification documentation along with the submission of instructions. Therefore, we have not observed any tangible STP.
Entitlement Processing
Here we run the gamut in terms of STP from high for income/distribution events to medium for mandatory events and low for voluntary events. The more complex the event, the more speciic information is needed and the more complex the rules are in order to automate processing in a downstream system. With the increased complexity comes an increase in cost to automate and that cost may overwhelm the need to automate. Additionally complex taxability reduces STP as it presents its own set of challenges in terms of automation. To ensure smooth connectivity to downstream partners, we recommend a standardised file in three formats for loading data to an accounting system, a trading system and other internal systems. Upfront analysis is recommended to determine the file layout and critical data fields in order to minimize exceptions once the transactions map. Configurable and flexible formats allow for custom rules which lead to better event matching and STP.
The level of STP is highly dependent on the client’s downstream system and there is no industry standard in this realm. A growing trend is for clients to seek out a corporate action product that is partnered with an investment accounting product. The client benefits from having a proven process without the expense and effort of having to create and maintain the integration themselves.
Payment Reconciliation
Reconciling payments from the depository or custodians achieves a high level of STP for income/ distribution events and medium for mandatory and voluntary events. The challenge here is when exceptions occur due to loans, settlement failures, taxability or partial payments, just to name a few. Each exception requires manual analysis to research. Events like a tax reclaim always require manual intervention.
Closing Thoughts
Industry collaboration will continue to play a key role in driving higher rates of automation. Unlike securities clearing and settlement, corporate actions remain highly manual in the post-trade cycle. Now more than ever we need subject matter experts, market practitioners, change agents and thought leaders advocating for and supporting global initiatives to increase corporate actions automation. An example of an initiative currently trending upward is ISO 20022 adoption. Adopting the ISO messaging standards enables the automation of corporate actions communication and downstream messaging which improves efficiency, accuracy and timeliness. In 2011, FCAS became an early adopter of ISO 20022 announcement messages to support the newer standards and resulting benefits for our clients. Two years later, we have fully integrated the consumption of DTCC 20022 announcement messages for our data services offering. Today, pockets of adoption are increasing at the global level.
We continue to see the Securities Market Practice Group (SMPG) promoting data standardisation to maintain and expand the use of the Event Interpretation Grid (EIG+) combined with the increasing adoption of the MyStandards on-line tool to standardise corporate action event templates at the national or local market level.
The SWIFT users community, such as ISITC continues to proactively evaluate the corporate action messaging and submit change requests to enrich the ISO standards to ease data parsing and reduce instances of manual inputs and open to interpretation of data content. When it comes to the annual SWIFT upgrade, changes for corporate action messaging are often a larger effort compared to other Category 5 messaging changes.
The SIFMA Corporate Actions Section has a number of ongoing initiatives addressing operational efficiency which include evaluating better ways to identify worthless securities, conducting partial calls review, and realizing success in working with legal counsels to minimize downstream processing impact. The group continues to work with the regulators to revisit the language around liability and five business days Tender Offers, to name a few.
The International Securities Services Association, ISSA Corporate Actions & Proxy Voting Working Group has been tasked to evaluate the current practices for beneficial owner disclosure across all markets to identify commonalities and the feasibility to establish market practices to report and process beneficial owner disclosure requests in a more standardised and consistent manner.
It is clear that the industry still has a lot of catching up to do to eliminate manual interpreting and processing of announcements, instructions and entitlements to achieve 100% STP. FCAS continues to take an active leadership role in key industry forums to help shape the industry’s agenda and achieve the objectives of harmonization, transparency and straight through-processing. This helps our clients to speed up the pace of automation while keeping their pulse on controlling risk as volumes and complexity increases.