On the face of it, the management of corporate actions appears to be fairly straightforward. There is no difficult mathematics involved and each step of the process is surely explainable to anyone with a basic knowledge of financial instruments and the way they work. Yet within buy-side and sell-side alike, many steps in corporate actions processing have consistently defied widespread automation. Consequently, corporate actions processing is often viewed as a necessary, but unpredictably expensive, function beset by risk that is hard to quantify.
There may be many reasons why corporate actions are hard to automate. Probably the key is that even though they might appear superficially simple, processing of a corporate action has a large number of steps involving at least: issuers and their agents; exchanges; custody banks; depositories; brokers; fund managers; data suppliers; institutional investors; and retail clients. Information relating to a corporate action must not only be processed within each organisation in the chain, but may pass up and down several links in the chain many times.
While each step may be simple to explain, the combinations required to process any given corporate action may present a logistical challenge, especially if the corporate action is complex, such as when there are multiple election options. As thousands of corporate actions may be in process at any given moment, that challenge is significant. Furthermore, at each step it is possible for errors to creep in – not least, unfortunately, when the issuer makes the initial announcement.
Over the years, the industry’s response to the problems of corporate actions processing has been fragmented. The focus, understandably, shifts from time to time, in line with economic upturns and downturns. The fulcrum of this function is in the back-office, after all, so tends to command less investment.
Currently, much attention is being paid to standardisation of both industry practice and to the formats, or rather the interpretation of the formats, of the electronic messages that may be used to effect communications in the processing chain. However, neither aspect may be said to be genuinely standardised and, if history is a guide, there is little chance that either will be soon. Meanwhile, fund managers have to deal with those ongoing problems of cost and risk.
So how then can a fund management organisation, of whatever size, hope to position itself best both to operate today and to adapt as industry practice and standards evolve? To answer this it is first worth considering the position of the corporate actions function within the fund management business.
Fundamental element
To many involved in corporate actions processing, their domain often seems to be perceived by their colleagues as a stand-alone function somehow incidental or ancillary to the business. This is odd, because corporate actions are obviously a fundamental element of security ownership: they contribute to portfolio performance and may even be the main reason why a position was established in the first place. Their processing may have an impact in many other business functions too – functions as diverse as risk management, securities lending, compliance, client management and trade settlement, for example.
In many firms, the culture and organisation structure, siloed throughout, mean that much of the data required by many or all departments (account numbers, security definitions, position information etc.) is duplicated in what are essentially private departmental systems. The effect of such business and IT architecture on internal communication is that it is necessarily forced, not natural. This hinders the corporate actions function for which smooth, timely communication with every other function is essential for it to be efficient and effective.
It would be more logical therefore if the corporate actions function was treated as an integrated part of the business, not as a separate, stand alone function and it follows that the logical way to support it is with technology designed to recognise this. That implies that the ideal software system to support corporate actions would not be one of many individual departmental systems, but would be a module of a single system, encompassing all functions in the entire fund management operation and based upon a single database – a so-called seamless processing system. This would eliminate at a stroke the internal communication problems which impede the process (and not just the corporate actions process), while also having the benefits of reducing the number of tasks such as reconciliation and data correction to be accomplished and concomitant reduction in risk.
But that leaves open the question of adapting to the volatile standards in communication with external parties in the corporate actions processing chain - can a seamless processing system really allow flexibility in external interfacing? Perhaps counter-intuitively, the answer is that it not only can, but it can actually be much more flexible than a multi-system architecture. This is because it can be designed to use an entirely consistent approach to the handling of all interfaces: therefore a change to any one will be readily definable in form and will have predictable consequences throughout the system.
John Mayr is head of marketing and business development at SimCorp.
