Sionic’s Jim Monahan reflects on the lessons learned in the world of corporate actions over the last year and, more importantly, considers the opportunities that lie ahead
As the light at the end of our journey through the global pandemic starts to become brighter, it’s time to reflect on the lessons learned in the world of corporate actions over the last year; and, more importantly, to consider what opportunities lie ahead.
At its onset, the pandemic exposed a wide spectrum of weaknesses within financial services. Many can be attributed to legacy practices and mindsets that grew from the bygone era of physical securities and other practices which simply failed to evolve over decades. Such traditions and ways of thinking challenged the industry and triggered our ability to reassess how we do our business and adjust to the new remote working environment that many were required to quickly adapt and continue to work from today.
As the pandemic persisted, we saw resilience rise to meet challenges old and new. The industry adapted and responded to new demands and growing disruptions alongside the pre-existing ones with which we are all too familiar. And unlike the crisis of 2008/2009, financial services responded well. Without ample time to brace for the impact of the pandemic, our industry did two things; adapted to change and became more strategic.
Now it’s time to build on the lessons learned in 2020/2021 and prepare for a more seamless, client centric, less risk-prone corporate actions operations environment. In doing so we must utilise the expansive knowledge behind today’s industry to preserve the best lessons learned from yesterday while building a better foundation for tomorrow.
Corporate action risk
When discussing corporate actions with my peers and colleagues, our conversation often centres on the question of how the industry can change the persistent and growing risk in corporate actions processing. Sionic estimates that nearly $1 billion is lost each year through missed opportunities or mismanaged corporate action events. These growing losses arise from a combination of factors, from current industry circumstances to longstanding processes that, left unaddressed, hinder optimum processing performance across the industry. We believe the industry’s failure to address the root cause(s) surrounding corporate action risk has impeded our collective ability to mitigate losses and has ultimately fostered an increase in the global risk profiles of many firms.
The primary sources of corporate action risk are often driven by the growing complexity of corporate actions across the globe; expanded use of derivatives and the associated introduction of intricate inter-company booking models; and higher corporate action processing volumes driven by both an increase in announced events and also by growth in trading activity. These factors, coupled with outdated systems and inefficient manual processes, incrementally add to the burden within organisations, exponentially compounding the associated risk.
At Sionic, our vision is of a less risk adverse corporate action environment evolving through three distinct avenues: process, technology and people.
Global harmonisation of the corporate action processes
Any ‘new normal’ will affect all facets of our personal and professional lives: the pandemic has changed the preferences and expectations of employees, employers, and clients forever. Similarly, the world of online consumption and contactless commerce will continue to reshape consumer behaviour on a permanent basis.
We believe the potential for changes within financial services could prove even more significant, as both regulators and industry participants push for real change from archaic conventions to a digitalised infrastructure. This has the potential to achieve our collective desired goal of a more efficient, transparent and — which is now essential, as the crisis shows — a more resilient post-trade support process.
These evolving global conditions provide corporate action leadership teams across the industry with the opportunity to reshape financial services and create a more globally harmonised corporate action model that will promote efficacy, visibility, and ultimately produce a model for greater and lasting durability: now is the time for change.
In the last few months, various industry whitepapers have proposed a move towards complete dematerialisation; and an even bigger push to move the US markets to a shortened settlement cycle of T+1, with an eventual plan of moving toward T+0. We are advocates of both and believe they are the springboards to mitigating risk within the corporate action arena going forward.
The collective desire within the industry to tackle these broader challenges presents corporate action leadership teams with the opportunity to push for real change within our industry. Dematerialisation can drive change in the existing and antiquated processes supporting partial calls or the legacy and risk-prone guarantee delivery model. The movement to shortened settlement cycles will impact ex-date models and can further close — or potentially eliminate completely — the due bill claims process with which firms continue to struggle. And we believe this is just the start.
Ultimately, our industry’s success will be driven by our collective ability to adopt both a holistic forward-looking view (whether it is a movement to T+1 or towards global harmonisation within corporate actions), along with a more focused approach across the broader post-trade life cycle, inclusive of corporate action, as we drive real change within the global corporate action arena.
Technology
Sionic foresees the forward-looking technology view for financial services post-pandemic as being markedly reshaped —virtually and otherwise – by lessons learned in the last year. Evolving brokerage and banking operations, expanding customer networks, security, compliance, and many more aspects within the broader post-trade lifecycle ecosystem will be re-evaluated, re-defined and refreshed. More importantly, the adoption of new technology to meet the expected permanency of an expanded remote working environment and the need for an improved virtual collaboration landscape will be paramount in their design sessions.
Pragmatic financial institutions will remodel their approach to data management; from designing new data modelling ecosystems that infuse employee interactions with artificial intelligence (AI) to embracing a technology approach toward an expanded utilisation within cloud. As the speed of market changes increases and consumer behaviours follow suit, the use of cloud infrastructure will become progressively more popular.
The ability to expand virtual collaboration and improve operating efficiency will be driven by each firm’s ability — and willingness — to harness the power of their respective internal trade lifecycle data. Equally important is the movement toward data utilities and the ability to standardise, collate and share common data across the industry.
In the years ahead, as the adoption of cloud-based operating platforms progresses, we envision data utilities that will evolve beyond the parameters defined today and move towards a more collaborative approach to data management/sharing, which will expand to include key corporate action datapoints leveraged across the industry today. Embedded deep into the fabric of this rapidly evolving post-trade support model are the intricacies of the corporate action life cycle. We believe employing tools and systems that are data-driven, collaborative, agile, and sustainable will deliver the client-centric value proposition for which firms strive. Pooling together resources in a regulated and secure way via the cloud will ultimately support an array of business models, business growth, and business functions: a pivotal step toward reducing risk.
People
Employees across financial services have already demonstrated admirable adaptability. This new framework can accelerate workforce reskilling and agile ways of working, strengthening both client and employee relationships, whether face-to-face, remote or virtual.
Our research already shows a massive opportunity to create a healthier work/life balance for people while unlocking motivation and discretionary effort. The global pandemic has accelerated an already rising trend towards at-home working. COVID-19 restrictions make virtual working the only choice for many knowledge workers and any return to in-person working will likely be in a very different form. Here at Sionic we have both surveyed knowledge workers and worked with clients to develop new ‘equip to lead’ training and models of leadership that address the continued challenges of sustaining people and organisation performance in one of the most challenging of recent times.
The pandemic did not happen to technology, it happened to people. Even with the most advanced technology and automation, there are still elements of corporate action processing that require human enrichment and intervention. In this aspect the goal is not to become increasingly more certain but to become more prepared and, being prepared is what makes us ready; ready for immediate action which we know is a part of the new normal in the world of corporate actions. Often in an ever-changing environment, we change the system, we change the procedure, we change the timing, but we do not consider the change that must take place internally. That type of change requires a change in skill, a change in knowledge, a change in ability, and a change in thinking.
When we start to evaluate corporate action risks from a people perspective, we must acknowledge the inherent issues that arise with expertise, replacement, reputation, and profitability. As technology performs the task, it is up to the workforce to identify errors, breakdowns in the process, resolve failures, and go above and beyond what the system can achieve.
Decision making and cross training are aspects of the process that we all can play a part in and it is an equally essential part of the investment any firm can make to reduce risk and exposure and ensure sustainability and longevity. Every so often we become accustomed and conditioned to the old way of doing things, but the pandemic has taught us that there is value in becoming more expectant and less entitled. Having the right people in the right places is just as crucial as doing the right job right.
With the extended experience of the pandemic comes new insight about who we are as an industry and what we are capable of when faced with adversity and uncertainty. But it is hindsight from the lessons learned and foresight to look to the future that puts us in a position to make critical decisions; decisions not just about our technical footprint but also about the resources we have available. Our belief is that we must assess what we need to unlearn, relearn, and learn for the first time and in the approach, we must also consider the following: knowledge base, perspective, and skillset.
Risk mitigation will require firms to acknowledge the social currency people can bring to the organisation and the intrinsic value they are equipped with. Placing them in a thriving environment with the necessary tools for success ultimately rescues the industry from the mundane fatigue we have all started to feel prior to the pandemic and throughout its duration. If there is one lesson that we can take with us on the journey forward it is that what got us here, will not get us to our next destination. People must evolve with the profession, and organisations must evolve with the industry. Our goal is to help shed light on the vision forward and to serve as a guide along the path.
Conclusion
COVID-19 has influenced every area of daily life. It has shifted our core sense of being, changed how we breathe, how we work, how we interact, and how we communicate. The conditions around us have simultaneously challenged our comfort and our capacity. Although unpredictable and concerning, it is our disposition that with change comes growth. The pandemic has pivoted us into long term thinkers tasked with finding answers to short term problems (and perhaps even vice versa). As a result, a time of slowing down has given us an opportunity to accelerate the industry shifts that were already on the horizon, from technological advancements, to revolutionising remote work, to reexamining our processes, and even cultivating global relationships.
So how do we build momentum on this new path? Our expertise tells us it will be through our people, processes and technology. If we do not keep making the effort, we must also question what will be the alternative result? Will we continue to struggle to go back to normal or will we create a new and improved normal as a byproduct of our perseverance? Without forward-thinking, we risk losing the gains made in the race against the pandemic. So let’s start now, with an inventory of each of these aspects within our firms and then continuously build the balance in our infrastructure accounts.
We have all felt the personal effects of the pandemic and collectively will reflect on the before and after moments along the journey ahead. At Sionic, we are inspired by the people who have found unexpected resilience; in awe of the technology we rely on so heavily to keep the industry thriving, and proud of the legacy processes that have bought us this far. In an age of information — or the lack thereof (especially in the case of a global pandemic) — we believe it is critical to create a new vision and execute a new plan.
It’s time to look toward the detailed mechanics and implementation of global harmonisation, cooperative data sharing, the use of AI, simplified yet cohesive booking models, condensed trade settlement cycles, and investments in people capital that will ultimately take the industry to its next destination. And as career experts in this field, we are excited by the journey that lies ahead.
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