Calling all to action
05 April 2023
Brian Bollen delves into the US Corporate Actions Working Group’s latest objectives, and looks at why the sector needs to rapidly modernise and standardise its practices
Image: lblvdone/stock.adobe.com
The US Corporate Actions Standardisation Position paper, a publication by the US Corporate Actions Working Group, was supremely well-timed for the research of this article.
“The position paper is intended to be a ‘call to action’ for issuers, transfer agents, exchanges, utilities, service providers and broker-dealers,” says Tom Price, SIFMA managing director of operations technology. “The whole initiative is to modernise the markets that we work in.”
“There is an old saying on Wall Street: you are only one corporate action from a new career. If you mess up, the impact can be substantial in terms of processing.”
He outlines: “This is an area ripe for modernisation and for the creation of a level playing field.”
The impact
The paper highlights how complex corporate action announcements could impact investors and how standardisation and centralisation of a timely announcement would benefit market participants.
US issuers often publicly announce debt tender offers, which is a corporate action that a company may undertake to buy back and restructure debt.
This is a common event performed when a company’s debt securities are trading below face value on the open market.
It often introduces complexities for the issuer, deal managers and investors, with extensive details outlined in the announcement’s terms and conditions.
Upon announcement, shareholders of the specified debt securities have a limited period of time to accept the offer and thereby tender the notes. Following the announcement, issuers are allowed to make amendments to the terms and conditions of the event, which can often happen, as markets shift and the price of the security changes.
In the paper, the US Corporate Actions Working Group highlights: “In these situations, the issuer can choose to amend the event with new terms and conditions. However, the deadline can remain the same as the initial announcement, providing the investor with less time to interpret and act upon the new information.
“The risk that the investor potentially invites, based on stale initial terms and a compressed timeline to participate in the event highlighted in this use case, could be mitigated through a centralised and standardised dissemination of event terms and conditions.
“By enhancing the announcement process, market participants can benefit from a timely and accurate flow of event information and any subsequent amendments.”
State of affairs
Within the US financial markets, the current regulatory landscape of corporate actions doesn’t mandate the standardisation and dissemination of corporate announcements and their data elements, leaving investors with a fragmented and disparate perspective on the subject.
When a corporate action is approved by an issuer’s board of directors, the company often utilises press releases, regulatory filings or public websites to communicate events to investors and market participants.
However, these releases do not follow any uniform structure and often result in inconsistent timelines, formats and mediums for public dissemination.
This is in part due to a patchwork of rules and regulations enacted and enforced by numerous entities.
In addition, some important investor information and data can only be found in original offering documents or prospectus offerings, which are often more than 100 pages long and contain complex language not easily understood by all readers. Furthermore, these documents do not always contain structured data or data tables, resulting in manual interpretation of free text.
This process can add risk to financial services organisations that independently interpret complex offering documents, which can lead to delays, inhibit downstream communication and increase operational costs.
This fragmented and complex method of processing and disseminating corporate action information significantly impacts both investors and the issuers who rely on market participants and financial services organisations to process and distribute the information to the broader market.
Further research
Globally, it is estimated that 46 per cent of event data is published and received manually, driving unnecessary risk and expense to organisations that process corporate action events for their clients and downstream organisations. It is critical for broker-dealers, data vendors, depositories and financial services providers to process information accurately and take steps to reduce the risk of erroneous processing.
With the upcoming transition to a T+1 settlement cycle, there may be increased investor risk as financial services organisations will have even less time to perform vital reconciliation, calculation and issue remediation activities.
Even retail investors that do receive timely and accurate corporate action announcements may not necessarily understand them. This potential for misunderstood corporate action events may have an impact on event participation and the value of the underlying security. In addition to retail investors, there are other market participants impacted by the current state of corporate actions.
A global industry survey conducted by The Value Exchange concluded that, on average, it costs financial services firms more to source the data of a corporate action event than it does to process that information. This metric highlights the complexity of the dissemination process.
While some announcements may follow similar formatting rules and include relevant information on how such events will be processed, others may leave room for independent interpretation by market participants.
Client-servicing organisations, such as broker-dealers, and the data vendors that support them, may interpret a corporate action announcement directly from an issuer and manually pull out the important details before repackaging them to be sent to investors downstream.
Eliminating interpretative processing steps and simplifying the lifecycle of a corporate action may benefit the large-scale institutions and the retail investor by reducing manual processing and unnecessary complexity, respectively.
As the US market continues to modernise and investors call for more timely information about their investments, it is important that regulations, technologies and processes evolve in tandem to meet the demands of clients.
“The position paper is intended to be a ‘call to action’ for issuers, transfer agents, exchanges, utilities, service providers and broker-dealers,” says Tom Price, SIFMA managing director of operations technology. “The whole initiative is to modernise the markets that we work in.”
“There is an old saying on Wall Street: you are only one corporate action from a new career. If you mess up, the impact can be substantial in terms of processing.”
He outlines: “This is an area ripe for modernisation and for the creation of a level playing field.”
The impact
The paper highlights how complex corporate action announcements could impact investors and how standardisation and centralisation of a timely announcement would benefit market participants.
US issuers often publicly announce debt tender offers, which is a corporate action that a company may undertake to buy back and restructure debt.
This is a common event performed when a company’s debt securities are trading below face value on the open market.
It often introduces complexities for the issuer, deal managers and investors, with extensive details outlined in the announcement’s terms and conditions.
Upon announcement, shareholders of the specified debt securities have a limited period of time to accept the offer and thereby tender the notes. Following the announcement, issuers are allowed to make amendments to the terms and conditions of the event, which can often happen, as markets shift and the price of the security changes.
In the paper, the US Corporate Actions Working Group highlights: “In these situations, the issuer can choose to amend the event with new terms and conditions. However, the deadline can remain the same as the initial announcement, providing the investor with less time to interpret and act upon the new information.
“The risk that the investor potentially invites, based on stale initial terms and a compressed timeline to participate in the event highlighted in this use case, could be mitigated through a centralised and standardised dissemination of event terms and conditions.
“By enhancing the announcement process, market participants can benefit from a timely and accurate flow of event information and any subsequent amendments.”
State of affairs
Within the US financial markets, the current regulatory landscape of corporate actions doesn’t mandate the standardisation and dissemination of corporate announcements and their data elements, leaving investors with a fragmented and disparate perspective on the subject.
When a corporate action is approved by an issuer’s board of directors, the company often utilises press releases, regulatory filings or public websites to communicate events to investors and market participants.
However, these releases do not follow any uniform structure and often result in inconsistent timelines, formats and mediums for public dissemination.
This is in part due to a patchwork of rules and regulations enacted and enforced by numerous entities.
In addition, some important investor information and data can only be found in original offering documents or prospectus offerings, which are often more than 100 pages long and contain complex language not easily understood by all readers. Furthermore, these documents do not always contain structured data or data tables, resulting in manual interpretation of free text.
This process can add risk to financial services organisations that independently interpret complex offering documents, which can lead to delays, inhibit downstream communication and increase operational costs.
This fragmented and complex method of processing and disseminating corporate action information significantly impacts both investors and the issuers who rely on market participants and financial services organisations to process and distribute the information to the broader market.
Further research
Globally, it is estimated that 46 per cent of event data is published and received manually, driving unnecessary risk and expense to organisations that process corporate action events for their clients and downstream organisations. It is critical for broker-dealers, data vendors, depositories and financial services providers to process information accurately and take steps to reduce the risk of erroneous processing.
With the upcoming transition to a T+1 settlement cycle, there may be increased investor risk as financial services organisations will have even less time to perform vital reconciliation, calculation and issue remediation activities.
Even retail investors that do receive timely and accurate corporate action announcements may not necessarily understand them. This potential for misunderstood corporate action events may have an impact on event participation and the value of the underlying security. In addition to retail investors, there are other market participants impacted by the current state of corporate actions.
A global industry survey conducted by The Value Exchange concluded that, on average, it costs financial services firms more to source the data of a corporate action event than it does to process that information. This metric highlights the complexity of the dissemination process.
While some announcements may follow similar formatting rules and include relevant information on how such events will be processed, others may leave room for independent interpretation by market participants.
Client-servicing organisations, such as broker-dealers, and the data vendors that support them, may interpret a corporate action announcement directly from an issuer and manually pull out the important details before repackaging them to be sent to investors downstream.
Eliminating interpretative processing steps and simplifying the lifecycle of a corporate action may benefit the large-scale institutions and the retail investor by reducing manual processing and unnecessary complexity, respectively.
As the US market continues to modernise and investors call for more timely information about their investments, it is important that regulations, technologies and processes evolve in tandem to meet the demands of clients.
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