Corporate actions
Oct 2024
By protecting legacy revenue streams through legacy processes, firms may be failing to innovate. David Baxter, managing director at T-Scape, looks at the problems this causes and how it can be addressed
Image: T-Scape
Of all the articles, publications, and white papers written on the topic of corporate actions processing over the past 25 years, I would argue that the first was likely the only truly original piece. While I do not know who authored that seminal work, I would wager it was published around 2001, soon after the arrival of the ISO15022 standard (the catalyst for corporate action automation) and at a time when the first commercially available corporate action systems had arrived. But here is the thing: since then, the conversation around corporate actions processing has been remarkably static. A quick search will yield familiar headlines like these from 2022/23:
‘Corporate Actions is What Really Needs More Automation’
‘Automation Adds Efficiency to Corporate Action Processing’
‘Why Corporate Actions Processing Needs Full Automation Now’
These are well-written pieces, and it is certainly in the interest of corporate action solution providers like my own company that the conversation remains alive. But aside from nods to current topics like AI, distributed ledger technology (DLT), or ISO20022, these articles could easily have been written 20 years ago. The narrative has barely changed, and that points to the real issue — despite knowing what needs to be done, and the benefits to be gained, progress has been frustratingly slow. This begs the question, why?
A system moving slowly by design?
There are plenty of reasons commonly cited for the sluggish pace of progress in corporate action processing. Legacy systems, competing strategic priorities, and the high cost of investment are among the usual suspects. But there is another reason that is not often discussed, probably because it is a little unpalatable. And that is protectionism.
Though these institutions may not deliberately obstruct progress, the preservation of complex, manual processes that generate revenue could result in a form of unintentional protectionism. By moving slowly, they ensure that the transition to automation does not erode the revenue streams tied to these manual processes
To suggest that the largest organisations in the industry are deliberately holding back progress would be a stretch. However, the reality is that the biggest players, whether they are custodians, investment banks, or large technology providers, tend to be the least agile. Laden with technological debt and complex, entrenched systems, it is not in their immediate interest to embrace rapid change. These institutions, often slow to adapt, may inadvertently contribute to a glacial pace of innovation, ensuring that any shifts occur inch by inch.
Reluctance to embrace ISO20022: A case in point
One need look no further than the industry’s adoption of ISO20022, the newer standard for corporate actions processing. Understandably, the market has been hesitant, given the substantial investment in ISO15022 since its 1999 release. However, with the DTCC’s move to ISO20022 and the introduction of the Shareholder Rights Directive (SRD) II in Europe, it seemed that momentum was finally building.
Yet, even with this progress, the broader shift to ISO20022 has been underwhelming. SRD II, intended to improve issuer-shareholder engagement using ISO20022 messaging, was a great starting point to evolve processes. It offered a chance to widen the corporate action ecosystem by engaging issuers directly whilst laying the foundations for more comprehensive automation to the benefit of all.
But I think it is fair to say, we have seen a lot of foot-dragging since SRD II was introduced. Some intermediaries, no doubt taking advantage of the fact that SRD II is a directive rather than a regulation, have been somewhat slow to comply.
And issuers too have added layers of complexity by appointing third-party technology providers who have brought their own inefficiencies, for example, not understanding basic elements such as what a unique reference is.
Rather than leveraging ISO20022 for end-to-end automation, many institutional shareholders are still directed to manually use portals, defeating the very purpose of automation and in fact harking back to an age even prior to SWIFT.
Of course, platforms have their place, but manual voting at the institutional level is archaic in a world where systems like iActs can capture votes direct from a fund managers’ front office (or indeed direct from the fund managers clients themselves) and send them straight to the issuer (or the appointed technology provider) in ISO20022 format.
The larger issue: Protectionism or pragmatism?
Here is where protectionism might subtly creep in. The industry giants, whether custodians, investment banks, or technology providers, have much to lose by moving too quickly.
They operate vast, complicated systems designed for stability, not agility and many of their revenue streams may be tied to manual processes that could be disrupted or significantly reduced through automation.
As such the pace of change is deliberate and conservative, these institutions favouring the slow march of progress. It means they are able to ensure that no one, not least themselves, gets left behind. However the flip side is that in doing so, they also inadvertently stifle innovation hindering any major leaps forward that might otherwise be made. Instead, we remain stuck in a cycle of incremental, almost repetitive change, where progress occurs but true transformation does not.
Where innovation stumbles
This reluctance to embrace rapid change has broader implications. True innovation in corporate actions has been scarce since ISO15022’s introduction in 1999. And it is not that we lack the technology to build innovative solutions. We do and we can, iActs is proof of that. But systemic inertia reduces the markets’ ability to adopt such solutions, and as a result, the many benefits they bring cannot be fully realised across the board.
This is why webinars, articles, and white papers repeat the same messages year after year: the need for automation, the benefits of efficiency, etc. But none of this is new. The challenge is getting the industry’s biggest players to truly embrace these changes rather than inching forward while holding onto the familiar comfort of legacy systems and processes.
The way forward: Rethinking risk and reward
I am not a huge fan of regulation, preferring instead that we self-regulate, but the truth is that self-regulation has not been enough to overcome these barriers. Perhaps the real challenge is not technical, but cultural. We know which custodians perform poorly, which technology providers fail to meet standards, and which institutions drag their feet. Yet, we continue to accommodate this slow progress, and in doing so, we allow innovation to stagnate.
Perhaps it is time to call out the worst offenders, a ‘league table’ of sorts that highlights not only the companies excelling in innovation but also those that lag behind, failing to meet agreed-upon standards or resisting automation and modernisation efforts. After all, we often see the same companies winning industry awards and accolades, but rarely are they held accountable (even mentioned) in any meaningful way when they fall short. This lack of transparency contributes to the repetitive cycle we find ourselves in, where genuine progress remains elusive while the same narratives are trotted out year after year.
Radical I know, but by naming and shaming, as well as celebrating those who push boundaries, we could drive more substantial change. True transformation in corporate action processing will not happen until we are willing to hold everyone accountable, not just for success, but for failure to innovate and adapt too.
Or maybe we just call for the regulator.
Just a thought.
‘Corporate Actions is What Really Needs More Automation’
‘Automation Adds Efficiency to Corporate Action Processing’
‘Why Corporate Actions Processing Needs Full Automation Now’
These are well-written pieces, and it is certainly in the interest of corporate action solution providers like my own company that the conversation remains alive. But aside from nods to current topics like AI, distributed ledger technology (DLT), or ISO20022, these articles could easily have been written 20 years ago. The narrative has barely changed, and that points to the real issue — despite knowing what needs to be done, and the benefits to be gained, progress has been frustratingly slow. This begs the question, why?
A system moving slowly by design?
There are plenty of reasons commonly cited for the sluggish pace of progress in corporate action processing. Legacy systems, competing strategic priorities, and the high cost of investment are among the usual suspects. But there is another reason that is not often discussed, probably because it is a little unpalatable. And that is protectionism.
Though these institutions may not deliberately obstruct progress, the preservation of complex, manual processes that generate revenue could result in a form of unintentional protectionism. By moving slowly, they ensure that the transition to automation does not erode the revenue streams tied to these manual processes
To suggest that the largest organisations in the industry are deliberately holding back progress would be a stretch. However, the reality is that the biggest players, whether they are custodians, investment banks, or large technology providers, tend to be the least agile. Laden with technological debt and complex, entrenched systems, it is not in their immediate interest to embrace rapid change. These institutions, often slow to adapt, may inadvertently contribute to a glacial pace of innovation, ensuring that any shifts occur inch by inch.
Reluctance to embrace ISO20022: A case in point
One need look no further than the industry’s adoption of ISO20022, the newer standard for corporate actions processing. Understandably, the market has been hesitant, given the substantial investment in ISO15022 since its 1999 release. However, with the DTCC’s move to ISO20022 and the introduction of the Shareholder Rights Directive (SRD) II in Europe, it seemed that momentum was finally building.
Yet, even with this progress, the broader shift to ISO20022 has been underwhelming. SRD II, intended to improve issuer-shareholder engagement using ISO20022 messaging, was a great starting point to evolve processes. It offered a chance to widen the corporate action ecosystem by engaging issuers directly whilst laying the foundations for more comprehensive automation to the benefit of all.
But I think it is fair to say, we have seen a lot of foot-dragging since SRD II was introduced. Some intermediaries, no doubt taking advantage of the fact that SRD II is a directive rather than a regulation, have been somewhat slow to comply.
And issuers too have added layers of complexity by appointing third-party technology providers who have brought their own inefficiencies, for example, not understanding basic elements such as what a unique reference is.
Rather than leveraging ISO20022 for end-to-end automation, many institutional shareholders are still directed to manually use portals, defeating the very purpose of automation and in fact harking back to an age even prior to SWIFT.
Of course, platforms have their place, but manual voting at the institutional level is archaic in a world where systems like iActs can capture votes direct from a fund managers’ front office (or indeed direct from the fund managers clients themselves) and send them straight to the issuer (or the appointed technology provider) in ISO20022 format.
The larger issue: Protectionism or pragmatism?
Here is where protectionism might subtly creep in. The industry giants, whether custodians, investment banks, or technology providers, have much to lose by moving too quickly.
They operate vast, complicated systems designed for stability, not agility and many of their revenue streams may be tied to manual processes that could be disrupted or significantly reduced through automation.
As such the pace of change is deliberate and conservative, these institutions favouring the slow march of progress. It means they are able to ensure that no one, not least themselves, gets left behind. However the flip side is that in doing so, they also inadvertently stifle innovation hindering any major leaps forward that might otherwise be made. Instead, we remain stuck in a cycle of incremental, almost repetitive change, where progress occurs but true transformation does not.
Where innovation stumbles
This reluctance to embrace rapid change has broader implications. True innovation in corporate actions has been scarce since ISO15022’s introduction in 1999. And it is not that we lack the technology to build innovative solutions. We do and we can, iActs is proof of that. But systemic inertia reduces the markets’ ability to adopt such solutions, and as a result, the many benefits they bring cannot be fully realised across the board.
This is why webinars, articles, and white papers repeat the same messages year after year: the need for automation, the benefits of efficiency, etc. But none of this is new. The challenge is getting the industry’s biggest players to truly embrace these changes rather than inching forward while holding onto the familiar comfort of legacy systems and processes.
The way forward: Rethinking risk and reward
I am not a huge fan of regulation, preferring instead that we self-regulate, but the truth is that self-regulation has not been enough to overcome these barriers. Perhaps the real challenge is not technical, but cultural. We know which custodians perform poorly, which technology providers fail to meet standards, and which institutions drag their feet. Yet, we continue to accommodate this slow progress, and in doing so, we allow innovation to stagnate.
Perhaps it is time to call out the worst offenders, a ‘league table’ of sorts that highlights not only the companies excelling in innovation but also those that lag behind, failing to meet agreed-upon standards or resisting automation and modernisation efforts. After all, we often see the same companies winning industry awards and accolades, but rarely are they held accountable (even mentioned) in any meaningful way when they fall short. This lack of transparency contributes to the repetitive cycle we find ourselves in, where genuine progress remains elusive while the same narratives are trotted out year after year.
Radical I know, but by naming and shaming, as well as celebrating those who push boundaries, we could drive more substantial change. True transformation in corporate action processing will not happen until we are willing to hold everyone accountable, not just for success, but for failure to innovate and adapt too.
Or maybe we just call for the regulator.
Just a thought.
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