Turning the tables on asset servicing risk
29 Nov 2023
With losses and missed opportunities amounting to an estimated US$1 billion every year, John Kirkpatrick, vice president for securities services at Broadridge, highlights the importance of driving constant advances in automation, asset safety and data standardisation
Image: Broadridge
Operations professionals would largely agree that asset servicing is the most high risk and manual process in securities operations. For the client servicing products, it is also widely regarded as one of the most important service differentiators. Firms win, lose, or retain client business based on the quality of their asset servicing offering.
Corporate actions, income and tax are highly visible to discerning clients and can easily go wrong — resulting in potentially large financial losses that have sometimes run to millions of dollars. Given this potential risk, it is surprising that these processes are less automated than most. Even with years of automation and additional controls, there are still corporate actions losses that make the headlines.
As a result, this is an area that receives a lot of focus. Industry groups regularly discuss ways to harmonise processes and reduce risk, but with the sheer variety of events that are often complex, there are still many challenges to finding a truly automated process that is both competitive and safe.
Announcement capture
A much discussed, but still unresolved, solution lies in fixing the issue right at the start of the process. That is the event creation — when the event is first announced by the issuer. It is critically important for the financial intermediary to be certain that all the details of the event are correct before sending these to their clients. This involves gathering details from multiple sources, scrubbing the data to identify any conflicts, then fixing the conflicts before creating a ‘golden copy’. The process is costly, prone to error and adds delay to the end client receiving the information.
The key to change globally lies in harmonisation and standardisation of the data that is being sourced from the issuers and the issuer agents, from the start of the investment chain. Standardisation of this data will facilitate automation and will enhance interoperability. Digital information generated at source removes the need for any additional sources and therefore any event scrubbing. This can be described as ‘issuer to investor, digitised at source’ and would be a true fix-all solution.
The good news is that parts of the industry are making progress towards this solution. Two good examples of digitisation at source are ASX in Australia and SIX in Switzerland. In these markets, issuers and issuer agents are mandated to publish event information in an agreed and machine-readable format to the market infrastructure. This approach is also being advocated by industry bodies and infrastructure providers — for example, the International Securities Services Association (ISSA) in its recently published corporate action data-sourcing white paper, SIFMA’s US corporate actions standardisation position paper, and the recent proof of concept (PoC) from Broadridge and the Depository Trust & Clearing Corporation (DTCC), announced in January 2022, that sources corporate actions announcements from issuers and agents. This traction needs to be sustained, with the same approach being applied globally, thereby delivering significant benefit to investors and reducing costs for intermediaries.
Despite this progress, firms should not be waiting for the issuers, CSDs and exchanges to provide the final answer. Firms should be asking themselves, ‘How many times do I pay for/receive/scrub/fix data across all the lines of business in my organisation?’ Those lines of business include prime, equities, custody, funds services, broker-dealer services, wealth and retail. If the answer is more than once, there is a great opportunity to reduce cost and risk, while also improving client service.
The delivery of asset servicing will differ according to the line of business providing the service. For instance, in investment bank (IB) equities, the service is relational and mostly about managing the inventory. Where am I long? Which desk is short? Where do I have open borrows or open loans? Who do I need to hold liable? Who will be holding me liable? Which positions are ‘borrow to hold’? Where are there opportunities for arbitrage?
For custody, however, the flow is hierarchical and about providing timely and accurate service to institutional clients — information flows from issuer to central securities depository (CSD) to direct custodian to global custodian and then to the investor.
However, the true commodity in the whole flow is the event. This does not change, regardless of the line of business. The terms, dates, rates etc are consistent.
As such, there should only be one ‘golden copy’ event for any organisation. The client reply deadline for voluntary events will vary according to the client and their value to the firm, but that can be managed at a line of business level.
Everything else remains the same. Therefore, implementing a single announcement utility within an organisation will reduce cost and provide an improved and more timely service to clients.
Downstream processing
After the event has been sourced and passed to the downstream platforms, there is more divergence across the various business lines. There are significant variances in processing between the lines of business.
Because of these differences, most firms will have separate technology solutions for their various businesses. However, this should not discount the possibility of moving to a single, strategic solution.
A modern asset servicing solution will be built on a modular basis, the core components being event creation, eligibility, entitlements, voluntary response tracking, payments and claims. These core components are suitable for all of the various lines of business.
The fundamental differences can be catered for by the development or configuration of workflow tools and dashboards that are separate and bespoke to any given business.
As an example, an IB dashboard would highlight where a desk is short and needs to cover; a custody dashboard would highlight where a client has elected ‘out of the money’.
In summary, common core components providing accurate and real-time data, via middleware and APIs to business specific workflow tools and dashboards, are a powerful solution.
Claims
Claims management remains a consistently challenging part of the overall process. A trade failing over record date for a dividend will result in a claim. As settlement cycles shorten, the number of claims will increase.
Most intermediaries are carrying a significant number and value of open payables and receivables due to unsettled claims.
These balances can at times run to tens of millions of dollars and this can lead to considerable financial and regulatory exposure.
Despite the risk and manual burden of open claims, there has been little progress in implementing effective solutions to manage them. This is perhaps understandable as organisations are more focused on managing events and voluntary responses. However, with collaboration, and some effort, there are opportunities to disrupt and modernise.
All claims are a result of bilaterally agreed trades. All the data regarding the security, dates, status and settlement is available. If both parties to the trade use the same solution to manage and settle the claim, then the whole process can be automated. Solutions are available, but there needs to be a lot more take-up across the industry for them to make a real difference.
Conclusion
There is no doubt that asset servicing is a critical and high-risk part of the securities industry. Some processes, such as event creation and claims, can be improved without dependency on new regulation or changes to issuer behaviour, but this will require investment in technology and some collaboration among the firms involved.
With losses and missed opportunities amounting to an estimated US$1 billion every year, this is an area deserving of greater focus and a drive for improvement.
Corporate actions, income and tax are highly visible to discerning clients and can easily go wrong — resulting in potentially large financial losses that have sometimes run to millions of dollars. Given this potential risk, it is surprising that these processes are less automated than most. Even with years of automation and additional controls, there are still corporate actions losses that make the headlines.
As a result, this is an area that receives a lot of focus. Industry groups regularly discuss ways to harmonise processes and reduce risk, but with the sheer variety of events that are often complex, there are still many challenges to finding a truly automated process that is both competitive and safe.
Announcement capture
A much discussed, but still unresolved, solution lies in fixing the issue right at the start of the process. That is the event creation — when the event is first announced by the issuer. It is critically important for the financial intermediary to be certain that all the details of the event are correct before sending these to their clients. This involves gathering details from multiple sources, scrubbing the data to identify any conflicts, then fixing the conflicts before creating a ‘golden copy’. The process is costly, prone to error and adds delay to the end client receiving the information.
The key to change globally lies in harmonisation and standardisation of the data that is being sourced from the issuers and the issuer agents, from the start of the investment chain. Standardisation of this data will facilitate automation and will enhance interoperability. Digital information generated at source removes the need for any additional sources and therefore any event scrubbing. This can be described as ‘issuer to investor, digitised at source’ and would be a true fix-all solution.
The good news is that parts of the industry are making progress towards this solution. Two good examples of digitisation at source are ASX in Australia and SIX in Switzerland. In these markets, issuers and issuer agents are mandated to publish event information in an agreed and machine-readable format to the market infrastructure. This approach is also being advocated by industry bodies and infrastructure providers — for example, the International Securities Services Association (ISSA) in its recently published corporate action data-sourcing white paper, SIFMA’s US corporate actions standardisation position paper, and the recent proof of concept (PoC) from Broadridge and the Depository Trust & Clearing Corporation (DTCC), announced in January 2022, that sources corporate actions announcements from issuers and agents. This traction needs to be sustained, with the same approach being applied globally, thereby delivering significant benefit to investors and reducing costs for intermediaries.
Despite this progress, firms should not be waiting for the issuers, CSDs and exchanges to provide the final answer. Firms should be asking themselves, ‘How many times do I pay for/receive/scrub/fix data across all the lines of business in my organisation?’ Those lines of business include prime, equities, custody, funds services, broker-dealer services, wealth and retail. If the answer is more than once, there is a great opportunity to reduce cost and risk, while also improving client service.
The delivery of asset servicing will differ according to the line of business providing the service. For instance, in investment bank (IB) equities, the service is relational and mostly about managing the inventory. Where am I long? Which desk is short? Where do I have open borrows or open loans? Who do I need to hold liable? Who will be holding me liable? Which positions are ‘borrow to hold’? Where are there opportunities for arbitrage?
For custody, however, the flow is hierarchical and about providing timely and accurate service to institutional clients — information flows from issuer to central securities depository (CSD) to direct custodian to global custodian and then to the investor.
However, the true commodity in the whole flow is the event. This does not change, regardless of the line of business. The terms, dates, rates etc are consistent.
As such, there should only be one ‘golden copy’ event for any organisation. The client reply deadline for voluntary events will vary according to the client and their value to the firm, but that can be managed at a line of business level.
Everything else remains the same. Therefore, implementing a single announcement utility within an organisation will reduce cost and provide an improved and more timely service to clients.
Downstream processing
After the event has been sourced and passed to the downstream platforms, there is more divergence across the various business lines. There are significant variances in processing between the lines of business.
Because of these differences, most firms will have separate technology solutions for their various businesses. However, this should not discount the possibility of moving to a single, strategic solution.
A modern asset servicing solution will be built on a modular basis, the core components being event creation, eligibility, entitlements, voluntary response tracking, payments and claims. These core components are suitable for all of the various lines of business.
The fundamental differences can be catered for by the development or configuration of workflow tools and dashboards that are separate and bespoke to any given business.
As an example, an IB dashboard would highlight where a desk is short and needs to cover; a custody dashboard would highlight where a client has elected ‘out of the money’.
In summary, common core components providing accurate and real-time data, via middleware and APIs to business specific workflow tools and dashboards, are a powerful solution.
Claims
Claims management remains a consistently challenging part of the overall process. A trade failing over record date for a dividend will result in a claim. As settlement cycles shorten, the number of claims will increase.
Most intermediaries are carrying a significant number and value of open payables and receivables due to unsettled claims.
These balances can at times run to tens of millions of dollars and this can lead to considerable financial and regulatory exposure.
Despite the risk and manual burden of open claims, there has been little progress in implementing effective solutions to manage them. This is perhaps understandable as organisations are more focused on managing events and voluntary responses. However, with collaboration, and some effort, there are opportunities to disrupt and modernise.
All claims are a result of bilaterally agreed trades. All the data regarding the security, dates, status and settlement is available. If both parties to the trade use the same solution to manage and settle the claim, then the whole process can be automated. Solutions are available, but there needs to be a lot more take-up across the industry for them to make a real difference.
Conclusion
There is no doubt that asset servicing is a critical and high-risk part of the securities industry. Some processes, such as event creation and claims, can be improved without dependency on new regulation or changes to issuer behaviour, but this will require investment in technology and some collaboration among the firms involved.
With losses and missed opportunities amounting to an estimated US$1 billion every year, this is an area deserving of greater focus and a drive for improvement.
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100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
