Asset-owning organisations rightly continue to view the efficiency of asset servicing through several lenses.
These include, but are not limited to, cost reduction and risk management. However, the management of corporate actions also plays an increasingly critical role in meeting ever-increasing external demands, be they for better customer service or regulatory compliance.
So, why is this consistently important part of the operational tapestry seen as a perennial recluse? In summary, because it doesn’t quite fit.
As an essentially litigious activity surrounding the legal and beneficial ownership of assets, the corporate actions lifecycle starts with proxy voting and ends with the final delivery of the entitled proceeds. And with a lack of truly standardised and industry-wide solutions, the process has often proved difficult to shoe-horn into a coherent, efficient operational structure.
If left untreated, the resulting, implicit risk profile may spread throughout the corporate actions lifecycle, perpetuating endemic risk for all the participants — from issuer to asset owner.
A view from the bridge - it’s just the movement of cash or stock, or a name change, isn’t it?
Senior management can struggle to reconcile a parochial view of corporate actions management with their “trophy cabinet” of historic operational losses or near misses, which can potentially result in high levels of internal stakeholder scrutiny, and customer or regulatory dissatisfaction. Although most houses have an annual financial provision to “guard” against losses, the direct impacts — and subsequent consequences for relationships — can be severe. These effects will be measured by most service level agreements (SLAs) or descriptions (SLDs), and regulators will need to see an appropriate control framework. Left untreated, operational mis-steps in asset servicing will become a more frequent, if
unnecessary, distraction.
Awareness of the pitfalls of corporate actions management should be a priority, followed by an “index-adjusted” programme of operational evolution. But the challenges are widespread, and organisations need to not only meet their own internal objectives, but also help coach the wider industry to adapt and adopt change.
However, here lies a stumbling block. Achieving the greater good effectively means uniting all of the intermediaries involved in the corporate actions lifecycle. Even if they are aware that they belong to this “community” in the first place, it may be challenging to coordinate a collaborative effort. Specifically, asset issuers tend to have no relationship with any other parties in the intermediary chain, except the legal or beneficial owner and, closer to home, their registrar.
The key to building a business case for change is to both deconstruct the corporate actions lifecycle and see the bigger picture. Think of the lifecycle as a giant, if intricate, jigsaw puzzle. With each puzzle piece individually exposed, it is possible to see the immediate and perceived risk within each of the processes and determine which parts of the process need addressing. But the picture on the box also provides a clear understanding of how these processes perform together and interact.
Both within and beyond the operational environment tasked with managing corporate actions, there is enormous reliance on current and high-quality information. So, a vertical and siloed approach is likely to prove limiting and may lead to upstream, cross-stream and downstream impacts. These should be at least acknowledged, if not fully addressed, to ensure all business outcomes are protected.
After conquering Everest, George Mallory was asked why he wanted to climb the legendary mountain. His reported retort, “Because it’s there,” is not only applicable to mountaineering but also to those that are prepared to scale the heights involved in re-engineering corporate actions.
Planning the ascent
I cannot profess any mountaineering skill myself. But a solid grasp of what constitutes the base camp, summit and interim stages of the journey will be critical to understanding not only what you are measuring but also how to improve the results. As well as gaining a strong and common understanding of the proposed business outcome, at a micro or macro level, you must accept what you can and cannot control. Initially, this approach will allow you to moderate, attempt to isolate and limit change management to activities where you are the majority stakeholder. At the same time, you will be able to at least limit, if not avoid, the knock-on impact of any changes on the minority stakeholders.
Achieving success at each stage will either contribute to reaching the summit or, more importantly, act as a standalone achievement — regardless of the progress of any other phase of the project.
The constituent phases can be further broken down into the three Ps: people, platform and process. Each of these complementary facets must be precisely and proportionally balanced to maintain the solution and the overall business outcome. Otherwise, you are likely to introduce implicit risk or, worse, another trophy in the cabinet.
People – resources and skills
To fulfil the operational mandate of corporate actions processing, organisations should recognise the difference between expense management and expense reduction as they assess and fine-tune the competencies of their teams. They should focus on providing a scalable but sustainable support model that anticipates and matches the growth aspirations of both the organisation and the market.
There is an argument for factoring in the varying complexities of different corporate actions events. For example, on the face of it, a cash dividend will seem easier to manage than a rights issue with multiple elective choices.
However, you could also argue that a global custodian safe-keeping the majority of shares in a market issuance within an omnibus account could face reputational damage — and possible regulatory censure — for failing to pay shareholders on the payment date if a reconciliation process failed.
Using an alternative scale, an asset manager may miss an investment opportunity and fail to utilise an expected receipt of cash to purchase equity in a rising market, with a direct impact on performance. In other words, even simple, mandatory events require oversight and the right skills and experience.
Nevertheless, there could well be opportunities to “right-source” the operation to a lower cost centre or a business process-as-a-service (BPaaS) solution. This could be to improve either the end-to-end business outcome or facets thereof, for example, the capture of an announcement and provision of a silver or golden record for downstream consumption.
It is also worth noting that the demand for BPaaS services has significantly increased in the current COVID-19 environment, as lockdown conditions in the pandemic prevented many off-shore operations from accessing their office desktops, introducing risk and straining existing business continuity plans. The ability to continue to meet regulatory and customer service requirements should remain the focus of the operation; and being able to rely on external organisations to manage such operations is as much about optimising the service offering as it is about ensuring resilience.
Platform – technology
A robust foundation of technology is crucial for a sustained, strong and scalable client product, regardless of domain. To resolve the perennial “buy versus build” debate, organisations need to develop a clear understanding of their own businesses and articulate their business models and growth plans, the latter in the context of an appropriate time frame. Aspiration and vision are critical for any organisation’s agenda, but the inability to express these appropriately will negatively influence the ability to implement any platform, no matter how large or small.
Considering these factors will help an organisation decide whether to develop a solution in-house or select an external technology partner. Regardless of the decision, the fact remains that technology is both an enabler and a catalyst for business change.
The transformation may be limited to a corporate actions project within a greenfield site, for example where processes have been previously run on spreadsheets. Or it could be a component part of a larger programme of work within a brownfield site, such as part of a legacy eco-structure. Either way, the resultant choice of technology must immerse itself in the overall organisation’s topography. Furthermore, it must be executed and maintained with minimal disruption to the applications and processes that surround it, both technically and operationally (i.e., in terms of how easy it is to use).
Technology investment should be treated as an annuity, providing a demonstrable return on investment that matches the business and technical roadmap. A programme of continuous investment will prevent any newly introduced platform from being treated as legacy shortly after being deployed.
Preparing the platform to cope with unknown internal and external challenges is never easy, but technology that is innovative, flexible and adaptive will shorten the time to market when trying to surmount such obstacles. In addition, competing organisational priorities and target investment initiatives may often starve in-house-built applications of the regular funding they need. Remember: it’s not just about keeping the
lights on.
This is also true for the fintech organisations who continue to invest in their platform architecture or functionality to improve their clients’ overall experience, by removing rudimentary tasks through machine learning or robotic processing automation. Artificial intelligence is a driving force of positive change and is starting to filter into some operationally
orientated technologies.
It doesn’t stop there. The need for interconnectivity between platforms is critical considering the number of actors on the post-trade stage, including those managing corporate actions. Application programme interfaces (APIs) are increasing in number and foothold as the go-to choice for easing integration; in contrast with some legacy schema-based technologies, they do not rely on overhead link-and-chain development.
An organisation’s introspective review of historical technology projects may lead to the conclusion that a partnership model with the financial technology innovation community could be an approach worthy of consideration.
The pandemic, in particular, has exposed challenges for legacy architecture that need urgent remedy. This may be a comfortable or difficult step for organisations to consider, but one that needs to be made and lived with.
When approaching a fintech organisation, it is worth bearing in mind the key differences between the terms “product” and “platform”. Specifically, fintech organisations should always ensure that their platform supports the client’s business outcome. But with their product, they should also provide an overall service experience that continues throughout the relationship and is in lockstep with the client’s organisational goals. This should include the following:
Implementation – proven prowess in implementing such technologies within the client’s applied environment, ideally supported by former industry practitioners with the requisite domain experience
Product roadmap – a demonstrable book of work for advancing the features and functionality of the product and platform technologies
Professional services – post-implementation consultative assistance for client change management activities
Relationship and service models – a structured support model for both day-to-day activities and senior management
Focusing upon platforms, fintech organisations should have a wide suite of solutions, either offered vertically (e.g. for corporate actions or reconciliations) or horizontally as an end-to-end data management solution, with high levels of connectivity across multiple platforms, be they their own or those of others (third-party or in-house solutions). This suite should ideally be offered on a software-as-a-service (SaaS) basis on public or private cloud, including flexible managed service packages — giving clients an opportunity to rationalise their technology infrastructure operations and reduce their total cost of ownership.
As noted by FIS’ 2020 Readiness Report and Cybersecurity Ventures Special Report there has been a significant adjustment to organisational drivers and appetite for integrating SaaS and BPaaS solutions, often influenced by either pandemic and/or cybercrime considerations:
In summary, fintech partnerships are becoming less and less alien within the securities industry — and the “caveat emptor” (let the buyer beware) attitude seems to be fading as each partnership is struck.
Process – operational activity
To complete the three Ps triumvirate, does process drive technology and people — or does technology drive the process and people and all permutations thereof? This dilemma is often faced when introducing a platform to any environment. To release themselves from this circular argument, technology clients need to weigh up what could be done (as a discretionary activity) versus what must be done (mandatory). That means typically accepting the legal and control environment as a boundary, within which most processes can be fully understood.
Using corporate actions as an example, this approach should not only meet the immediate need to process the full lifecycle of the event but also address the points where operational processes meet. The ability to process an event in a timely and high-quality manner should be common to all downstream processes, whether you are providing the necessary detail for an intraday net asset value valuation point or the correct reconciliation of investible cash to be converted into the fund’s base currency.
Identifying upstream and downstream process overlaps in a transactional flow will help you consider processes in relation to the platform and people aspects of the challenge and then document them as part of a standard operating procedure. No operational process, asset servicing operations included, can function with impunity without understanding its influence within an organisation.
Whether they are tackling either a greenfield or a brownfield opportunity, it is paramount that organisations understand and articulate their requirements. However, clients can often be so wedded to existing processes that they are unwilling, not unable, to change their modus operandi, resulting in conflict. The key to diffusing such situations is to determine whether alternative means can still achieve the right business outcome.
We must also remind ourselves that the management of asset servicing activity provides no competitive advantage and is purely a cost-to-serve expense. So, it is a priority for clients to understand from their fintech partners exactly how the platform achieves its processing objectives.
To maximise the benefits of its technology, a fintech firm’s professional services organisation should have a deep subject matter expertise in the corporate action domain of a client’s environment and how the platform is utilised. Often, the firm’s subject matter experts, of varying seniority, are former industry practitioners who have worked in either custody, asset management or investment banking organisations. They can share their deep pool of previous experience, along with knowledge accrued in other client implementations, with the operational teams who will be using the platform. As a result, they can help improve synergies between platform and process. Engaging, detailed discussions on this subject will help a client further embed the platform within its applied environment and avoid the temptation to force a 20th-century process into a 21st-century platform.
The issuer community – a part of the solution?
The asset-owning industry has attempted to improve efficiency and reduce risk within the corporate actions process, not only by considering the aforementioned topics but also by influencing and aligning many of the communication processes that interconnect the market. Avoiding the debate as to which technical communication format is the best to use, the focus here has been on content management and a potential realignment of roles within the intermediary chain. Fundamentally, there’s been a need to deconstruct the end-to-end lifecycle — and maybe surprisingly to some, that lifecycle starts with proxy voting.
Homing in on the announcement capture process, it is important to recognise that every corporate actions event starts life as a litigious outcome, resulting from action taken or discussed at an annual general meeting or an extraordinary general meeting, be that the approval of a dividend or a capital raising event.
Constitutionally, those participating at the meeting will influence the outcome that eventually drives the corporate action event. Although the issuer will reformat this outcome into the prospectus of the corporate action event, the whole process remains a litigious activity that is then subject to multiple interpretations by the intermediary chain, which in turn makes it necessary to scrub the data. In short, the only version of the event should be that of the issuer. It is therefore incumbent on the industry to invite the issuer community to the table so that it can collectively identify mechanisms and technologies for recording the event once and once only: allowing the single version of the truth to be distributed downstream. Each recipient of the announcement can then have total confidence in the provenance of the event. There is an industry-wide need to support such an effort, potentially with assistance from listing authorities or regulators. In supervisory terms, the introduction of Shareholder Rights Directive II in 2019 may only be the beginning of bringing issuers into the fold.
Once the intermediary chain can rely solely on the issuer’s de-facto publication, not the interpretations of others, there will be no need to expend energy on scrubbing notifications. This will allow the remaining players in the chain to vastly improve the timing, accuracy and quality of the correspondence as it travels from the issuer through to the beneficial owner. Intermediaries will then be able to redefine their roles and focus more clearly on delivering a high-quality service, be that for entitlement management, response collection, reconciliations, or reporting.
The asset servicing contribution to solving the bigger problem
Rather than being the bête noire of an operation, asset servicing needs constant care and attention. As corporate organisations become ever more inventive in organising their fiscal affairs through corporate actions, the pressure is also on tax authorities to collect correct tax payments and regulators to ensure compliance. At the same time, customers and investors are demanding enhanced reporting and operations are challenged to receive all elective responses by published deadlines. Asset servicing will always be called upon to respond to these varying and increasing demands. But it can only meet its obligations by preparing to be part of the solution, not the problem.
