Corporate actions - creating the perfect storm

By Kevin Maxwell,Marketing Manager ValueLink, Understanding the underlying problems that create risk within the processing of corporate actions now demands a much more strategic thought process. Many firms have invested in people to research and interpret the details of a corporate action. However, this has proven to be costly, time consuming and open to a …

February 10, 2011

By Kevin Maxwell,
Marketing Manager
ValueLink,

Understanding the underlying problems that create risk within the processing of corporate actions now demands a much more strategic thought process. Many firms have invested in people to research and interpret the details of a corporate action. However, this has proven to be costly, time consuming and open to a significant risk of errors. To mitigate this, the investment has been redirected towards a technology solution. In reality, what is needed is the “perfect storm” between the people, the infrastructure and the technology.

Corporate actions announcements are rarely straightforward and the processing of these actions remains an operation seen by many to be expensive, risky and inefficient. The quality and accuracy of corporate actions data has always been a key element in the changing landscape of the financial services industry. New internet services have driven growth of these actions, particularly among private individuals making investments, to record levels. Whether they involve a bond redemption, entitlement issues, an exercise of warrants or variation thereof, the steps that are followed between the issuer (either directly or through an intermediary) to the investor can result in specific details being missed or left out, data dropped and investor decisions being delayed.

The challenges of dealing efficiently with these increasingly complex actions is now, more than ever before, paramount in the minds of those involved in the industry. They face increased pressure to mitigate the risk of processing complex corporate actions. Firms must remain competitive and to do this they must constantly be enhancing their own system capabilities. Custodians are being inundated with information and are under constant pressure to decipher it quickly and accurately. Firms are constantly searching for an innovative solution that is as close to STP as possible. The reality of corporate actions is that this will never really be possible and this, in part, is what drives them to take these advanced measures on board. It is imperative that they be much better prepared to deal with the anticipated volumes in a manner which will instil investor confidence. The marketplace is starting to see an increase in the adoption of message standards by more companies, which is a great step forward. But is it enough? And is it happening fast enough?

While industry efforts to standardise messaging is on-going, the very nature of more complex corporate actions demands that as much attention be paid to ensuring that companies manage the operational risk associated with communicating these actions. However, it is well worth pointing out that the efforts to ensure “standardisation of message” is only addressing one element of the equation. It should not be looked at as being the”be all and end all” of how to deal with this issue of risk mitigation. Companies need to effectively harness the technology and the content of the experts, which would, in turn, provide them with the ability to interpret, decipher, and communicate the information across all interested parties in a much more highly effective manner., However, until event data is provided from source and delivered to the market in a consistent fashion, the possibility for mistakes and/or omissions will remain.

What is very clear is that it has never been more urgent for organisations to ensure that they have all the elements for effective and accurate corporate actions communication in place – and this starts and ends with the people they employ. Simply buying an off-the-shelf solution will not solve all the problems either – it will help reduce cost and risk but the full benefits of automation will not be realised unless the technology and the staff are working in perfect harmony.

Companies that can call on high quality, experienced staff will reap the benefits of their investment (in both the people and the software). There is no substitute or “software solution” when it comes to the practical knowledge that experienced staff will have built up when dealing with risk mitigation. Organisations are increasingly investing their time and money in their employees – training them and teaching them to remain at the cutting edge of corporate actions.

It is simply not acceptable, especially in these financial times, to throw more people at the problem. Therefore the need to automate is very apparent to most. What needs to be made more apparent is the need to educate those involved.

Many organisations are taking a good, hard look at themselves when looking to more effectively deal with the increased complexity of corporate actions. The manner in which they have previously handled the process of reporting corporate actions is well worth examining. A wise man once said that “…those who fail to learn history are doomed to repeat it…” and this was never more apropos than with corporate actions. In order to reduce risk today, the key is to identify where the current manual processes can be automated and focusing on those elements. Budgetary concerns can be addressed by having the automated solutions implemented across a number of different actions.

This does not mean that every step of the process must be automated. In fact, given the increasingly complex nature of some of the actions, it is probably impossible. It is, however, a simple enough plan to ensure that you have robust systems fed by reliable data feeds that are monitored by experienced staff. Using the right people with the right technology on the right elements frees up valuable time to assess and mitigate risk in much greater detail.

Transferring the corporate actions cycle to an STP-driven, standardised set of processes has been the operational goal of many organisations for years now. One size clearly does not fit all and as the new decade continues to bring fresh obstacles and challenges, the companies who recognize these issues, and invest in people on a level equal to that of their IT investment towards these same issues, will ultimately reap the benefits of their actions.

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