Lessons to be learned
18 Nov 2020
T-Scape’s David Baxter suggests the changes under the Shareholder Rights Directive II could serve as a platform on which the industry can build better processes
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What feels like a very long time ago (circa 2005), while attending one of the many conferences of the time, a panellist was questioned as to what he could do to improve corporate action processing efficiencies?
The panellist being questioned was a representative of a well-known UK registrar.
The audience consisted of custodians, third party administrators, fund managers, investment banks and others.
Prior to the question being raised the discussion had largely centred upon the problematic nature of processing corporate actions and the proposition that if the issuing company’s agent, in this case the registrar, could provide corporate action data in a standardised structured format the world would be a much better place.
It was eXtensible Business Reporting Language (XBRL) and the tagging of key data elements that was being pushed as the answer to achieving this.
Addressing the issue the panellist asked a few questions of his own, receiving responses as he went. It went something along the lines of:
Panellist: “Who will be responsible for the tagging of the data that is to be issued?”
Response: “Well that would be you, Mr Registrar.”
Panellist: “Who will be paying the cost of performing the tagging?”
Response: “Well, that would be you too, Mr Registrar.”
Panellist: “And who will benefit most from the work that you have kindly given me to do, using my resources and at my cost?”
Response: “Well, that would actually be all of us Mr Registrar.”
The conversation continued with the panellist asking just how the market would benefit, the reply being that if a level of interpretation could be removed from the process, then processing errors could be reduced and financial losses avoided.
Panellist: “Oh I see. You are incurring financial loss because I am not announcing corporate actions in the way that you’d like me to. I understand. So let me ask, given that you’re laying the issue at my feet, what is the scale of the losses you have incurred?” Aside from the murmurs and awkward shuffling it was evident that the likelihood of any of the audience opening up about losses due to corporate action errors was well, very unlikely.
And that was about as close as we’ve been to meaningful issuer engagement. Aside from XBRL not being the answer, the only other conclusion (or rather consensus) among the audience was that, while we (the market) should be sorting this out ourselves to ensure the regulator doesn’t come down on us, having such regulatory involvement is probably the only way we’ll ever get round to doing something.
Let’s fast-forward to 3 September 2018, when the European Commission bound all member states to a regulation that would come into force on 3 September 2020 regarding ‘shareholder identification, the transmission of information and the facilitation of the exercise of shareholders rights’. To translate this into corporate action speak, it focuses on two specific processes. The first relates to a company’s ability to understand who its shareholders are at any point in time (ideally within a 24-hour window), through the issuance of a shareholder identification disclosure (SID) request. The second serves to remove inefficiencies within the existing process to ensure company-meeting announcements reach shareholders in order that they can exercise their right to vote. To facilitate both of these ‘the transmission of information’ would ideally be performed using the ISO 20022 standard. It’s fair to say that while ‘disclosures’ and ‘meetings’ don’t readily spring to mind when we think of corporate actions, they are the first to be affected by regulation and as such can provide us with an idea of the impact regulation can have on the process.
Let’s fast forward again to the here and now, being approximately two months since the implementation of what’s more commonly referred to as the Shareholder Rights Directive II (SRD II), and take a look at where we are at. For sure, we knew that the market wasn’t ready. That was evident from the failed attempt in April of this year to have the European Commission defer the implementation of SRD II until 3 September 2021, citing COVID-19 as the primary reason for the market being somewhat ill prepared. This was further evidenced when, just prior to implementation date, attempts were made by the same post-trade parties to have any penalties for lack of compliance waived until 3 September 2021. Additional reasons to COVID-19 were put forward, including the proposition that the regulation itself wasn’t actually a regulation but rather a market infrastructure project. The post trade groups may have a point, but why wait until the week of implementation to raise it. In short though, the market just wasn’t ready. Let’s however, put this to one side for now and turn our attention to the regulation itself and what’s being played out. If we dig a little deeper it is evident that some of what has been proposed in the regulation hasn’t been thought through fully. In places it is less than consistent, and in some areas not detailed enough to be fully understood.
By way of example, let’s look at SID, and the communicating of shareholder identities to a requesting company. It sounds like a fairly straightforward exercise, but the reality is somewhat different. To begin with the requesting company or the agent (registrar) working on its behalf, may not be equipped to handle the data when it arrives. In such circumstances the task of collection, aggregation and presentation is outsourced to a third party organisation, known simply as the recipient. The last intermediary will pass shareholder information to this recipient. Now, given there may be no existing relationship between sender and receiver and given the highly sensitive nature of the data being exchanged would it be unreasonable to have expected some method by which a recipient’s credentials could be verified to be included as part of the process? Presently there isn’t anything in the process that facilitates this. The expectation presumably being that you either trust in the accuracy and immutable nature of the data being passed from one intermediary to the next, or you introduce your own process of verification, i.e. telephone/email the company to confirm requests had been made and confirm details of the recipient. Yes there’s a flag that can be set verifying ‘that the request or information transmitted originates from the issuer’ but is that good enough, a single flag? In the wider corporate action process today we have a process called data cleansing. It exists because it is recognised that mistakes are often made. Given that it’s the same protagonists in play for SRD II, do we merely accept the data for what it is, bypassing any form of verification? That seems odd. As does introducing a new process that is dependent upon manual intervention. Surely that isn’t the way forward either. But, continuing with the same example, let’s look at the act of communicating the information itself. Provision for three methods of communication have been defined: SWIFT, email and URL. These are not mutually exclusive and as such all three can be populated. This is fine given that the capabilities of the sending party are unknown but wouldn’t it have made sense to include a ‘preferred method of communication’ that an application like iActs for example, could use to automatically deliver information according to that preferred method? Remember, the format of each, whilst (in theory) based upon ISO 20022 will be nuanced according to the communication type. So a disclosure packaged for SWIFT, for example, will be different to one packaged for email. It’s also worth pointing out that whilst the goal is to use ISO 20022 to enable a 24-hour turnaround, the regulation stipulates that as long as it’s machine-readable format then that’s fine too and you don’t need to adhere to the 24-hour turnaround. This seems a little odd. But getting back to the ‘preferred communication method’ it is left to the technologists to define new rules to determine how best to communicate the information. In this particular example it’s a fairly straightforward exercise, but the point is that it might have been avoided completely with a little more thought up front.
These are just a few of the issues that could and maybe should have been exposed a long time ago, but are only just now coming to light as the market scrambles to be compliant. The disappointing thing is that the regulation has been out there for a while, it’s not like the regulator has just sprung this on us. But maybe that’s the issue, that the change has been regulatory driven rather than market driven and hence the sluggish response from the market. Which comes back to the original thoughts at that conference all those years ago about the market rather than the regulator taking a lead. Perhaps if the market had taken a more proactive role in defining a better way of processing corporate actions the need for regulator intervention and the issues now coming to light would have been avoided. It’s not like the technology or expertise wasn’t or isn’t there, it is, at T-Scape and companies like it. To be masters of our own destiny has to be better than being forced into action by the regulator. So maybe there’s a lesson to be learned going forward as hopefully, the changes under SRD II serve as a platform upon which we can build better processes that a) make use of the new levels of engagement between company and shareholder, b) extend beyond European equities and perhaps most importantly c) improve processes across the gamut of corporate actions not just disclosures and meetings. Or, of course, we could just wait for the regulator to give us another kick!
The panellist being questioned was a representative of a well-known UK registrar.
The audience consisted of custodians, third party administrators, fund managers, investment banks and others.
Prior to the question being raised the discussion had largely centred upon the problematic nature of processing corporate actions and the proposition that if the issuing company’s agent, in this case the registrar, could provide corporate action data in a standardised structured format the world would be a much better place.
It was eXtensible Business Reporting Language (XBRL) and the tagging of key data elements that was being pushed as the answer to achieving this.
Addressing the issue the panellist asked a few questions of his own, receiving responses as he went. It went something along the lines of:
Panellist: “Who will be responsible for the tagging of the data that is to be issued?”
Response: “Well that would be you, Mr Registrar.”
Panellist: “Who will be paying the cost of performing the tagging?”
Response: “Well, that would be you too, Mr Registrar.”
Panellist: “And who will benefit most from the work that you have kindly given me to do, using my resources and at my cost?”
Response: “Well, that would actually be all of us Mr Registrar.”
The conversation continued with the panellist asking just how the market would benefit, the reply being that if a level of interpretation could be removed from the process, then processing errors could be reduced and financial losses avoided.
Panellist: “Oh I see. You are incurring financial loss because I am not announcing corporate actions in the way that you’d like me to. I understand. So let me ask, given that you’re laying the issue at my feet, what is the scale of the losses you have incurred?” Aside from the murmurs and awkward shuffling it was evident that the likelihood of any of the audience opening up about losses due to corporate action errors was well, very unlikely.
And that was about as close as we’ve been to meaningful issuer engagement. Aside from XBRL not being the answer, the only other conclusion (or rather consensus) among the audience was that, while we (the market) should be sorting this out ourselves to ensure the regulator doesn’t come down on us, having such regulatory involvement is probably the only way we’ll ever get round to doing something.
Let’s fast-forward to 3 September 2018, when the European Commission bound all member states to a regulation that would come into force on 3 September 2020 regarding ‘shareholder identification, the transmission of information and the facilitation of the exercise of shareholders rights’. To translate this into corporate action speak, it focuses on two specific processes. The first relates to a company’s ability to understand who its shareholders are at any point in time (ideally within a 24-hour window), through the issuance of a shareholder identification disclosure (SID) request. The second serves to remove inefficiencies within the existing process to ensure company-meeting announcements reach shareholders in order that they can exercise their right to vote. To facilitate both of these ‘the transmission of information’ would ideally be performed using the ISO 20022 standard. It’s fair to say that while ‘disclosures’ and ‘meetings’ don’t readily spring to mind when we think of corporate actions, they are the first to be affected by regulation and as such can provide us with an idea of the impact regulation can have on the process.
Let’s fast forward again to the here and now, being approximately two months since the implementation of what’s more commonly referred to as the Shareholder Rights Directive II (SRD II), and take a look at where we are at. For sure, we knew that the market wasn’t ready. That was evident from the failed attempt in April of this year to have the European Commission defer the implementation of SRD II until 3 September 2021, citing COVID-19 as the primary reason for the market being somewhat ill prepared. This was further evidenced when, just prior to implementation date, attempts were made by the same post-trade parties to have any penalties for lack of compliance waived until 3 September 2021. Additional reasons to COVID-19 were put forward, including the proposition that the regulation itself wasn’t actually a regulation but rather a market infrastructure project. The post trade groups may have a point, but why wait until the week of implementation to raise it. In short though, the market just wasn’t ready. Let’s however, put this to one side for now and turn our attention to the regulation itself and what’s being played out. If we dig a little deeper it is evident that some of what has been proposed in the regulation hasn’t been thought through fully. In places it is less than consistent, and in some areas not detailed enough to be fully understood.
By way of example, let’s look at SID, and the communicating of shareholder identities to a requesting company. It sounds like a fairly straightforward exercise, but the reality is somewhat different. To begin with the requesting company or the agent (registrar) working on its behalf, may not be equipped to handle the data when it arrives. In such circumstances the task of collection, aggregation and presentation is outsourced to a third party organisation, known simply as the recipient. The last intermediary will pass shareholder information to this recipient. Now, given there may be no existing relationship between sender and receiver and given the highly sensitive nature of the data being exchanged would it be unreasonable to have expected some method by which a recipient’s credentials could be verified to be included as part of the process? Presently there isn’t anything in the process that facilitates this. The expectation presumably being that you either trust in the accuracy and immutable nature of the data being passed from one intermediary to the next, or you introduce your own process of verification, i.e. telephone/email the company to confirm requests had been made and confirm details of the recipient. Yes there’s a flag that can be set verifying ‘that the request or information transmitted originates from the issuer’ but is that good enough, a single flag? In the wider corporate action process today we have a process called data cleansing. It exists because it is recognised that mistakes are often made. Given that it’s the same protagonists in play for SRD II, do we merely accept the data for what it is, bypassing any form of verification? That seems odd. As does introducing a new process that is dependent upon manual intervention. Surely that isn’t the way forward either. But, continuing with the same example, let’s look at the act of communicating the information itself. Provision for three methods of communication have been defined: SWIFT, email and URL. These are not mutually exclusive and as such all three can be populated. This is fine given that the capabilities of the sending party are unknown but wouldn’t it have made sense to include a ‘preferred method of communication’ that an application like iActs for example, could use to automatically deliver information according to that preferred method? Remember, the format of each, whilst (in theory) based upon ISO 20022 will be nuanced according to the communication type. So a disclosure packaged for SWIFT, for example, will be different to one packaged for email. It’s also worth pointing out that whilst the goal is to use ISO 20022 to enable a 24-hour turnaround, the regulation stipulates that as long as it’s machine-readable format then that’s fine too and you don’t need to adhere to the 24-hour turnaround. This seems a little odd. But getting back to the ‘preferred communication method’ it is left to the technologists to define new rules to determine how best to communicate the information. In this particular example it’s a fairly straightforward exercise, but the point is that it might have been avoided completely with a little more thought up front.
These are just a few of the issues that could and maybe should have been exposed a long time ago, but are only just now coming to light as the market scrambles to be compliant. The disappointing thing is that the regulation has been out there for a while, it’s not like the regulator has just sprung this on us. But maybe that’s the issue, that the change has been regulatory driven rather than market driven and hence the sluggish response from the market. Which comes back to the original thoughts at that conference all those years ago about the market rather than the regulator taking a lead. Perhaps if the market had taken a more proactive role in defining a better way of processing corporate actions the need for regulator intervention and the issues now coming to light would have been avoided. It’s not like the technology or expertise wasn’t or isn’t there, it is, at T-Scape and companies like it. To be masters of our own destiny has to be better than being forced into action by the regulator. So maybe there’s a lesson to be learned going forward as hopefully, the changes under SRD II serve as a platform upon which we can build better processes that a) make use of the new levels of engagement between company and shareholder, b) extend beyond European equities and perhaps most importantly c) improve processes across the gamut of corporate actions not just disclosures and meetings. Or, of course, we could just wait for the regulator to give us another kick!
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