Transforming Corporate Actions Processing: The Long Road AheadBy streamlining corporate actions processing through automation and adoption of common messaging standards, companies can improve the quality and timeliness of data and enable a move to cloud-based utility services.

Executive SummaryAs businesses expand into new geographies in search of growth, the volume of corporate actions is growing exponentially. Advances in communica-tions technology allow issuers to send announce-ments in a variety of formats; however, the processing of these messages by corporations or their financial service providers remains highly manual and error-prone. At a time when the business environment is growing in complexity and volume, these errors are unaffordable.

Straight through processing (STP) of corporate action messages is the industry’s holy grail. Numerous efforts have been made to standard-ize the corporate actions process, with some suc-cess seen in dividends and income processing. For instance, several financial services companies have adopted the ISO 15022 messaging stan-dard, and the more recent ISO 20022 promises even better results. eXtensible Business Report-ing Language (XBRL) also holds great promise for reducing the risks associated with corporate actions processing. But financial services compa-nies have been slow to adopt ISO 20022 as they

question the value of the new standard, and XBRL is in need of a regulatory push.

Nevertheless, the industry seems convinced of one thing: automating corporate actions process-ing is the way forward, as it holds the promise of reducing processing errors by minimizing manual intervention and other inefficiencies that are known to generate huge annual losses.

At the heart of improved corporate actions processing is the quality and timeliness of data, but these benefits depend on multiple factors beyond the control of an individual party in the corporate actions value chain. In some countries, for example, companies must obtain a physical certificate before issuing a corporate action, adding to the time required for the message to flow downstream. Also, given the number of possible intermediaries through which a message passes, the risk of data dilution is high. Overcoming these challenges requires greater collaboration among industry players, as well as engagement with the issuer community to help facilitate meaningful change.

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Greater automation needs to be complemented with industry-wide adoption of messaging stan-dards. Achieving this on a global scale will not come easily, but several initiatives are underway that, with support from regulators, could move the ball forward. On the technology front, growing automation of corporate actions has resulted in the development of modern solutions that will make it easier for both corporations and their financial services partners to streamline and reduce costs for this key process in the coming years.

Businesses may increasingly work with part-ners on activities such as data validation, but this approach is somewhat risky due to process complexity. Repetitive processes are more easily entrusted to service partners, as they can be better optimized for time savings and, importantly, enable operations teams to focus on business outcomes rather than fixing data.

Advancements in cloud computing will enable organizations to access corporate actions process-ing solutions on a pay-per-use basis, thereby vari-abilizing the high fixed costs typically associated with this space. Going forward, increased automa-tion and adoption of industry standards will allow for the commoditization of corporate actions processing, thus creating a level playing field for smaller industry players, many of which cannot afford today’s prohibitively expensive solutions.

In sum, we believe the following to be the industry’s key imperatives:

• Harmonization of market practices at an international level.

Risk and Result

• Adoption of greater and faster automation of corporate actions processing.

• Creation and support of initiatives for industry-wide adoption of common standards.

• Development of risk-sharing models that create a level playing field for vendors.

• Engagement with the issuer community to make the necessary technological changes.

Corporate Actions BluesCorporate actions processing has been a long-term area of concern for financial services companies. Action announcements arrive in various forms and formats, with issuers using different terms to describe the same events. These messages pass through various interme-diaries, including agents and custodians, before reaching the investor. A lack of global standards for formatting these messages means that at various stages, data may be communicated in paper-based formats, such as fax, thus adding to their processing time. This makes the cycle of information flow risk-heavy and error-prone, opening companies to the possibility of huge losses and reputational damage (see Figure 1).

Key issues confronting financial services firms that process corporate actions include:

• Time-consuming and error-prone manual intervention and paperwork.

• High processing costs.

• Data validation, requiring a high level of skill; in-house validation is often costly and error-prone.

• Inefficient processes, increasing the risk of loss.

• Low data reliability, caused by disparate systems in the processing chain from issuer to user.

Source: “Corporate Action Processing: What Are the Risks?” Oxera, 2004.

Figure 1

Risk Corporate Action Who is Impacted

Direct risk of processing failures

Mandatory with options; voluntary.

Anybody in the corporate action chain (e.g., custodian, fund manager or broker), with liability depending on which market participant causes the failure.

Direct cost of late payments

Mainly mandatory (mostly dividend and interest payments).

Investors (interest forgone).

Risk of sub-optimal trading decisions

All Brokers or fund managers involved in trade (if proprietary) or investors (if cost passed on).

Indirect cost of ineffective corporate governance

Voluntary (mainly proxy voting).

Issuers (in the long run), investors, the system at large.

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• Data conflicts between trusted sources.

Typically, financial services companies have teams dedicated to corporate actions processing, as mes-sage interpretation requires expertise with various rules and regulations. Such expertise comes at a high cost, due to the growing complexity of corpo-rate actions messages. Firms often use disparate sources for corporate actions data, and messages might vary in completeness and quality, adding to the time taken to validate the data and pass the relevant insight on to the client. Furthermore, different departments within a financial services firm use data for different purposes, increasing the importance of data integrity.

With businesses expanding their footprint to emerging markets in search of growth, the volume of corporate actions has increased rapidly in the past few years. As recession slowly gives way to growth, capital requirements and corporate restructuring will rise, leading to even greater volumes of corporate actions messages. In the global marketplace, data is exchanged across time zones and geographies, placing pressure on business operations and increasing risks related to incorrect and/or delayed communication. More complex instruments, combined with the growing complexity of the global business environment, creates additional pressure on resources. With nearly one million announced corporate actions every year, the industry is said to suffer losses of approximately $1 billion.1

Not surprisingly, mitigating the operational risk associated with corporate actions processing is

financial services firms’ top priority (see Figure 2), as is improving efficiencies. The Aite Group estimates expenditures on corporate actions processing solutions will grow from $70 million in 2010 to $93 million by 2015.2 The level of auto-mation is more visible in the more mature U.S. market, which has a homogenous regulatory and reporting system compared with the diverse and emerging systems used in Europe and developing nations (see Figure 3, next page).

The Solution: Automation, Standards, Regulatory Support

Corporate Actions Top List of Operational Risks

Figure 2

Base: 42 European and U.S. asset management companies

Corporate actions

Middle-office functions (allocations, confirmations,matching/affirmation, presettlement management)

Account opening/client onboarding

OTC derivatives processing

Reference data management

Valuations

Reconciliations

Highest priority Third highest priority

Source: “Assessing Operational Risk in the Securities and Investments Industry Survey,” TowerGroup, 2010.

Second highest priority

The challenges facing corporate actions processing start right at the source. Issuers of corporate actions operate in disparate industries with different regulations that vary from one country to another. Moreover, issuers are not legally required to publish announcements in for-mats that are compatible with existing standards, thus hindering smooth processing. For example, the issuer might make an announcement through a paper-based message, but the investor con-sumes this data in an electronic format created by intermediaries.

This lack of uniformity percolates down to the individual entities that process these messages. Some of the key challenges related to the processing of corporate action messages include the following:

• Growing volume of corporate action announce-ments, accompanied by growing business complexity.

• Complex event types (e.g., derivatives).

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• Managing different announcement formats.

• Improving data quality.

• Improving timelines.

• Integrating data across platforms and sources.

• Overcoming barriers of legacy systems to enable better data integration and commu-nication.

In a recent survey by SimCorp,3 78% of respondents said manual processing of corporate actions was the top reason for corporate actions failure, despite more than half (58%) having automated notifications. While automated noti-fication processing exists in the back office, the passing of these notifications to the front office is typically manual. This is a reflection of the state of automated corporate actions processing, which usually focuses on simple, standardized events, such as dividend announcements.

Automation priorities vary according to firm size and areas of operation. Top drivers for automa-tion include cost reduction, client demands and risk of losses (see Figure 4, next page). Never-theless, the extent of automation tends to be dictated by the business benefits of the automated process. Firms that need to process large volumes of corporate actions, such as custodians, dedicate more resources to process automation compared

with smaller firms that deal with lower, more manageable volumes.

The story changes when it comes to messaging standards adoption. The large-scale adoption of the ISO 15022 standard reflects the benefits of this specification in terms of operational efficiencies and risk reduction. Today, most mid- and large-sized institutions use ISO 15022 for corporate actions, and the volume of messages in this format is expected to grow. Nevertheless, the standard is somewhat inflexible — due to lim-ited message field parameters and allowance of free text — which limits the automation of certain message types.

Meanwhile, XBRL4 has emerged as a technologi-cal standard bearer for corporate actions process automation. Its benefits include:

• Clear conveyance of the issuer’s intent, thus reducing the risk of misinterpretation.

• Greater automation.

• Reduced manual interpretation, re-keying and manual exceptions.

• Timely decisions for investors through reduced communication latency.

• Extensible tag library, in which issuer companies can create customized tags.

Investing in the Automation of Corporate Actions

Base: 303 financial institutions in 53 countries.

Figure 3

White indicates countries in which financial institutions were not part of the survey.

Percentage of financial institutions in-country planning to invest in corporate actions automation.

Source: “AIM Global Reference Data and Risk Management Survey,” Aim Software, 2011.

0 - 15%

16 - 30%

31 - 45%

46 - 70%

71 - 100%

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According to a 2009 survey by the Depository Trust & Clearing Corporation (DTCC) and Society for Worldwide Interbank Financial Telecommuni-cations (SWIFT), the use of XBRL could result in reductions worth $400 million in wasted costs for the U.S. financial services industry due to a 30% improvement in STP rates.5 The combination of ISO 20022 and XBRL, which allows issuers to tag important data points at the time of writing the message, holds much promise for creating fur-ther efficiencies. Financial firms can extract the relevant data and pass it on to their clients in the ISO 20022 format. This way, data entered by the issuer is much less susceptible to risks imposed by manual rekeying and allows for easier inter-pretation by financial services firms. As a result, investors have access to clear and accurate data.

Embrace of the ISO 20022 standard is highly likely in the near future, especially in the homogenized U.S. market. The DTCC recently announced that ISO 20022 is ready for implementation, follow-ing a lengthy pilot implementation that involved leading industry players, including BNY Mellon, Brown Brothers Harriman, JPMorgan Chase and National Financial Services LLC.6 DTCC plans to transmit corporate action notifications via the ISO 20022 XML-based format by 2015, replac-ing existing flat file notifications.7 In the first quarter of 2013, it plans to send ISO messages systemically to help participants carry out further testing, followed by Elective Dividend Services (EDS) events messages.

Even as these developments take place, much of the automation efforts’ success will depend on the

willingness of issuers to adopt XBRL. This makes the role of the Securities and Exchange Commis-sion (SEC) exceptionally important, since without a regulatory push, issuer companies are unlikely to voluntarily take up new reporting formats.

While the U.S. scenario is promising, the story is entirely different in other parts of the world. In Europe, the level of standards harmonization is not the same as in the U.S., complicating the implementation of ISO 20022. Getting financial services companies across geographies to adopt any standard is challenging and could require several years to achieve. The TARGET-2 Securities trading platform is expected to play a key role in the adoption of the ISO 20022 format for corpo-rate actions processing. (For more on this, read our paper, “TARGET2-Securities Platform: Impli-cations for the Post-Trade Arena.”) But repeated delays in its implementation are not helping the cause. Similarly, the Corporate Actions Joint Working Group (CAJWG) has taken up several initiatives to promote automation. However, progress has been rather slow, given the fact that the corporate actions process has been built over decades in a paper-based economy.8

Emerging economies have yet to see widespread adoption of standards, although in regions such as Asia, SWIFT has made inroads. Harmonization of cross-border securities trade in Asia has a long way to go given the diverse nature of the markets. Given this scenario, achieving consistently high STP rates at a global level remains a distant, if not unachievable, dream.

Top Drivers for Automation

Figure 4

(Respondents were asked to rate the factors driving automation. A score over 2 indicates strong support.)

Base: 95

Source: “Corporate Actions 2012: A Global Survey of the Corporate Actions Marketplace,” Swift and CityIQ, 2012.

Reduced operating costs

Client demands for service quality

Corporate actions losses (or near misses)

Other

Anticipated volume growth

Regulatory pressure

1 2 3

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Process Automation BarriersChanges in the management of corporate actions are progressing at a snail’s pace. The need for reducing the risks involved in corporate actions processing has been recognized for several years now. However, given the deep-rooted nature of the earlier practices, standardized practices have yet to gain a strong foothold.

At an organizational level, front-office require-ments or regulatory initiatives typically trump the requirements for automating corporate actions

processing. While employ-ees at the operational level tend to be aware of these risks, their voices seldom make it to the boardroom. A TowerGroup survey found that 65% of operations professionals plan to invest in automating corporate actions processing but fear that the regulatory squeeze could monopolize planning, C-level attention and fund-ing.9 A more recent study by SWIFT and CityIQ affirms this (see Figure 5).

In today’s economic climate, spending con-cerns can trump broad-based automation or systems upgrade initiatives. Take the case of migrating to the ISO 20022 messaging format. While some organizations have already seen the benefits of this standard and are preparing to upgrade, several others have taken a “wait

and see” approach given adoption costs. A 2010 survey by A-Team found that 60% of respon-dents in the U.S. and Europe were unclear on the benefits offered by the new standard.10

A similar situation likely exists in other advanced and emerging markets. The benefits of STP can be realized only when there is wide adoption of these standards. This will take continued effort by industry bodies, cooperation from industry players and buy-in from the issuer community to create messages in formats that are compatible with standards used by downstream organizations.

Legacy systems in individual institutions pres-ent another barrier to effective processing. Most financial services companies have implemented systems with multiple vendors over the years that are either incompatible or been made to interop-erate through extensive internal or third-party effort. A complete overhaul of these systems usu-ally means high Cap-Ex, while sticking with legacy systems presents clear operational disadvantages in the form of high maintenance costs and errors caused by overreliance on manual intervention. This can result in hefty performance penalties enforced through existing contracts between financial services providers and their clients.

By automating the corporate actions func-tion, organizations can ensure long-term operational efficiency and effectiveness. As with most IT-driven projects, ultimate success, however, depends on how firms plan and imple-ment their corporate automation actions program. Among the key imperatives:

Factors Impeding Corporate Actions Automation Projects

Figure 5

Base: 95

Source: “Corporate Actions 2012: A Global Survey of the Corporate Actions Marketplace,“ Swift and CityIQ, 2012.

14%

11%

3%3%

2%

10%29%

9%

19%Difficulty building business case

Doubts about attaining STP

Cost of SWIFT messaging

No impediments

We are fully automated

Lack of management buy-in

Competing internal priorities

Lack/inadaquacy of solutions

Limited return on investment

At an organizational

level, front-office requirements or regulatory

initiatives typically trump

the requirements for automating

corporate actions processing.

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• Create a clearly defined set of expectations between providers and financial institutions, along with feasibility and cost-benefit analysis.

• Build a plan for integrating the varied sys-tems that must interoperate in an automated environment.

• Put in place systems to mitigate risks.

• Establish a strong working relationship between the operations team and technology providers.

• Enact a phased approach to automation sup-ported by internal audits and management reports.

The Case for Corporate Actions as a Service

arrangements in which no party in the value chain is unfairly burdened.

Given the high costs involved in automating cor-porate actions, several smaller players, such as independent asset managers and broker-dealers, remain averse to embracing automated solutions. The answer to this may lie in the software as a service (SaaS) model, which enables firms to access automation solutions as utilities. Cloud computing has gained popularity among financial services firms due to the benefits offered in the form of on-demand availability, fixed-cost vari-abilization, pay-per-use and scalability. This has provided incentives for firms to source middle- and back-office functions to third parties.

There is a long way to go before corporate actions processing can be offered as a truly commod-itized cloud-based offering, as it is much more complicated and risk-prone than conventional back-office functions. Challenges exist in the form of data security, integrity and reliability, as well as the need to integrate these systems with legacy platforms.

However, it is safe to say that as greater stan-dardization and automation takes root, corporate actions processing is likely to evolve to a stage where it can lend itself to wide-scale commoditiza-tion. As such, financial services firms and their cli-ents may be more willing to embrace greater levels of automation provided as utilities by third-parties specializing in the corporate actions function.

Footnotes1 “Taking Risk Out of the System: Is It That Easy?” A-Team Group, 2010.

2 “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.

Despite increased outsourcing in areas such as validation, it is still uncommon to work with a partner that specializes in corporate actions pro-cessing. The chief reasons for this include the risks involved and companies’ perceived loss of control. Large custodians are among the only members of the corporate actions value chain that use third-party services. The primary risks pivot around third-party interpretation errors, which can be traced to the lack of common global standards.

Nevertheless, expert third parties offer clear cost benefits, and the number of corporate actions automation solutions available to financial firms has increased over the past few years. By working closely with service providers, financial services companies could create balanced risk-sharing

About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in 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. With over 50 delivery centers worldwide and approximately 150,400 employees as of September 30, 2012, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world.

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Credits

Author and AnalystAkhil Tandulwadikar, Cognizant Research Center

Subject Matter ExpertDipen Banerjee, Senior Consultant, Banking & Financial Services, Cognizant Technology Solutions

DesignHarleen Bhatia, Creative DirectorSuresh Satyavarapu, Designer

References

• “Building the Business Case For Outsourced Corporate Actions Validation,” DTCC, A-Team Group, 2012.

• “Corporate Actions: Past, Present and Future,” Watertechnology.com, 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.

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.