It has been said that too many industry groups and committees slow down standardisation of corporate actions—do you agree?
Adam Scott: There are a number of national and global industry groups that ultimately have the same objective; to standardise and improve corporate action processing across the industry. While these groups have made significant progress and continue to do so, the multiple committees can have different and conflicting requirements and standards at national market practices levels. In the past, these conflicting requirements have led to significant and long discussion hindering the progress in corporate actions standardisation.
We are now seeing far more collaboration across the different industry groups, which is already bearing benefits and increase standards. The crossover in the associated groups in terms of membership is becoming more common and they are collaborating more and more on key industry initiatives such as XBRL, ISO 20022, and financial transaction tax. If we take the US for example, Information Mosaic actively participates in both the Securities Industry and Financial Markets Association (SIFMA) and the International Securities Association For Institutional Trade Communication (ISITC) industry groups. We have recently seen an increase in collaboration between these groups and that is reflected in the topics that are top of both organisations priority list.
Overall, we have certainly seen in the past that the industry has been slow in terms of some standardisation initiatives and this could well in fact be attributed to conflicting requirements from the various industry groups and committees. We are, however, seeing a lot more collaboration and this can only be positive for the industry as a whole. We see this as being a very important and strategic evolution in the race to standardise corporate action processing and mitigate against the associated risks.
Alan Jones: I agree to a point but at the end of the day it is, or at least should be, the National Market Practice Group (NMPG) that has the ultimate control over what proposals and recommendations are made against existing standards supporting corporate actions processing. My main issue is that one of the major consumers of the data and industry standards, ie, solution vendors, are blocked from participating in any NMPG discussions or decision making processes. At least in the US vendors are encouraged to add the benefits of their experiences working with clients through automation and STP projects that are dependent on standardisation.
Do you think that all firms will eventually introduce ISO 20022, and do they need to?
Scott: I think eventually that ISO 20022 will be the de facto standard for corporate action processing. When that will be is another question all together. There has been some great strides made in the US with DTCC leading the way and driving ISO 20022 adoption. The wheels are certainly in motion and DTCC members will have to adopt the new standard in some shape or form by the cut-off date.
The Japanese and Australian markets are also looking to adopt ISO 20022 as standard. Both markets are closely watching the roll out in the US to learn from its success.
Adoption to ISO 20022 will be slow. For example, the buy-side firms in the US have shown little interest in moving to the ISO 20022 standard. There are a number of buy-side firms that have still not adopted ISO 15022 and those that have adopted it have done so in the not too distant past and at significant cost. The brokers and custodians must continue to provide ISO 15022 to their clients for the foreseeable future, so we do see a potentially long transitional period from ISO 15022 to 20022.
Co-existence between them is costly, particularly for the custodians, intermediaries, data and application vendors that must support both formats. There needs to either be a date when ISO 15022 will no longer be supported, or legislation to incentivise the industry to move to the ISO 20022 format. Despite the fact that the newer format brings with it significant automation and standardised benefits, this alone will not persuade organisations to adopt it in the short term.
Jones: That is the million-dollar question. If you consider that many financial institutions are yet to or have only just embraced ISO 15022, there is a considerable lead-time for new data standards to be widely introduced. The question remains, will the market become fragmented and split across two sets of standards, ie, 150222 and 20022, with co-existence becoming more widely discussed. The problem is that moving from one data standard to another is not an easy, quick or cheap process. Many firms have based their existing architectures on the data standards that were current when they were first built, and moving from either a proprietary or standard format to a new structure can involve multiple systems and departmental change management projects. These generate strain on resource pools that are already stretched within the current climate.
Why does there seem to be a lack of consistency and standardisation with upstream communication?
Jones: Exactly for the reason stated in the question— there are often many different participants within the chain through which an event notifications need to flow. Each participant will have differing levels of automation and processes in place which inevitably results in multiple manual touch points and the manipulation or transformation of data. The holy grail of issuer to investor communications, as well as, the unique corporate action event identifier used by all parties still seem to be a future aspiration due to the lack of any enforcement by regional or domestic authorities. The costs involved in implementing these processes dictates that there will never be industry wide voluntary participation.
Scott: We have to remember who the actual issuers are in some situations. There is absolutely no benefit or incentives for them to invest to standardise issuer communication. Their goal is to communicate all the necessary detail to ensure the shareholder is fully informed about an upcoming corporate action. This requires them to issue detailed prospectus and communication. Until there is a compelling business case, or legislation for the issuers to standardise, we will continue to see a lack of global standards for the foreseeable future.
How has automation of the election process with the depository changed the sector?
Scott: The DTCC ISO 20022 messaging conversion is progressing well and there continues to be a positive take up on the ISO 20022 corporate action announcement. The next phase of the roll out is to introduce the corporate action election messages. This is currently being tested by DTCC and participant members, including application vendors such as Information Mosaic, are providing input and feedback to DTCC on the messaging content and standards.
The automation of the election process will bring with it significant benefits for all industry participants, whether they interact with the DTCC directly or not. This process will allow for extended deadline times, reduce errors and interpretational risk and overall reduce the costs associated with this process. Shareholders and decision makers will see significant benefit from automation, with the extended deadlines giving them more time to evaluate their decision and ensure that it is the right one.
Jones: The major beneficiaries of automation around the management election instructions are the larger custody firms that have invested in solutions that can process the required message formats in this area. Other sectors, for example fund management, within the corporate actions election process still largely employ manual processes using custodian web portals where data needs to be manually entered.
It may be surprising with all the technological advancements we have made, but the use of faxes to instruct against optional events is a process that is still common within certain sectors of the market. An amusing story was told recently that explained new starters at a financial institution fresh out of education had to be trained how to use a fax machine because they had simply never encountered one before.
How would you differentiate corporate actions in the US from Europe, and from Asia?
Jones: ISO standards have defined a list of event types that cover the global market requirements. However, the intricacies of the way events should be processed in each market need to be catered for and these are published by Standard Market Practice Groups in the Event Interpretation Grid in line with the annual message format guides. When processing an event a corporate action clerk or automated system needs to be able to differentiate between an event announced against an asset listed in the US, versus the same event type announced against an asset listed in Brazil, for example, due to the regulations and characteristics of that market.
This market level management of events is required to be able to control the processing schedules of the event in line with risk factors, actual versus contractual settlement arrangements, as well as the likelihood of actually receiving the benefit from the event on the appropriate pay or effective date. Corporate action processing requirements vary considerably from region to region or even country to country. In areas where seasonal peaks and troughs in volumes, tax withholding and reclaim requirements and the adoption and application of industry standards occur, it is vital that any solution that looks to automate the process has to ability to configure business rules against events types—pre-asset, per country and even per-market where the target asset is listed.
Scott: In the past there were numerous differences between corporate actions in the US, Europe and Asia. Even simple events such as stock splits and bonus issues had different terms and calculation methods. With the continuing globalisation of financial services and other industries these differences have less impact. More and more organisations and shareholders have diversified portfolios with investments in companies across the globe. This has somewhat let to a convergence of standards and along with the collaboration of standard market practice groups reduced the number of differences.
However, differences do remain, whether it be the event types used, the payment method and terms, or when event terms are confirmed; some Asian markets, for example, may only confirm the terms of the event on the payment date. These differences continue to create interpretational risk even on the simple events. The continuing work of then Standard Market Practice Groups will help to reduce the differences and risks. It’s vital that they continue to collaborate and progress at a faster rate.
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