TARGETing corporate actions
05 November 2014
A panel of experts assesses the potential effects of TARGET2-Securities on corporate actions in Europe, and what Asia is doing to catch up
Image: Shutterstock
With less than a year to go before the implementation of T2S, how much of a driver has the platform been for corporate actions?
Pierre Colladan: Implementation of corporate action standards is led by two drivers in Europe: one is the action of major players in the securities industry; and the other is the advent of TARGET2-Securities (T2S).
First of all, major stakeholders of the securities industry are committed to the implementation of the European Corporate Actions Joint Working Group (CAJWG) standards endorsed in 2009. Custodians have an industrial stake as they deal with multiple events for multiple clients. Central securities depositaries (CSD) face a similar concern and will meet the demands of their participants.
Local market implementation groups (MIG), directly monitored by the Broad Stakeholders Group, the European MIG and the CAJWG, lead this part of the implementation. This organisation is more or less followed by the European Commission.
Progress is limited by budget considerations, but it should be noted that main corporate events have something to do with settlement. Indeed, a settlement or ‘corporate actions on flow’ may be triggered when a seller does not deliver securities on time to a buyer that wants to participate in a given corporate event.
From a cross-border perspective, these settlement flows linked to a corporate action imply the adoption of a common European language with a shared definition of concepts, terms, dates and even processes. This is why T2S stresses the implementation of standards with the support of two T2S governance bodies.
One is the T2S Corporate Actions Sub Group (CASG). The T2S CASG has defined a set of technical rules adapted to the T2S environment to manage corporate actions on flows, these technical rules complying with the CAJWG standards. It also monitors the implementation of its standards in the participating T2S countries and reports to the second body, the Harmonisation Steering Group (HSG).
The HSG monitors the implementation of a wider range of items, including the European corporate actions standards. It gives priority with regard to T2S migration constraints and issues an annual report underlining the compliance level of each market. It puts any potential non-compliance, and the consequences thereof, in the perspective of the T2S migration of the market concerned.
Through their respective missions, these two bodies put pressure on the whole T2S community to comply with the standards for corporate actions before, or very soon after, any migration to T2S.
The composition of these structures demonstrates the importance of the corporate actions standards and harmonisation topics. For instance, Societe Generale Securities Services has at least one or more experts who is a member, sometimes a chairperson, of every group that defines, validates standards, or monitors compliance with them.
Philippe Ruault: Everyone agrees that there were myriad reasons why Europe needed to tackle the domestic differences preventing corporate actions processing to be harmonised across its markets. These included differences such as the complexity of cross-border events, multi-listed securities, and the sheer absence of norms in some cases.
Whereas T2S is not much of a force behind the standardisation of corporate actions on stock, without a clear deadline for each market, it is fair to say that the efforts to harmonise corporate actions on flows would have suffered from a tunnel effect. So, yes, without a doubt, T2S has been a major driver for the harmonisation initiatives across the board.
T2S is a response to the Giovannini report but it was not at all meant to be the main driver behind the standardisation of corporate actions. Because payments were due to go through T2S, it would have implied a standardisation of the settlement of their proceeds, but above all, what T2S did is that it served as a catalyst to standardise corporate actions on flows across the T2S markets by the time of their migration wave. It is fair to assume that had there been an initiative to harmonise cross-border corporate actions without T2S on the horizon, it would have inherently failed.
To put it bluntly, custody projects without clear deadlines stall. This is why one can wonder what will become of the CAJWG standards that do not have a strong dependency on T2S, such as the inception of SWIFT communication between the CSDs and their participants for announcements, instructions and payments. One likely scenario is that some ‘good students’ will implement them and some countries will not, sometimes for good reasons such as the implementation cost of these standards.
Despite the fact that, by signing the T2S Framework Agreement, local CSDs do not commit to implement the CAJWG standards for corporate actions on flows, the pressure applied by the European Central Bank has increased as the first wave is getting closer. Through its ‘name and shame’ policy that singles out countries not sending positive signals, it intends to speed up progress in countries failing to address issues it deems essential for the project.
To further exemplify how T2S facilitated the harmonisation of corporate actions processes by setting deadlines, one can point out the case of the UK where—partly because it will not be part of T2S in the foreseeable future and partly because it requires a change in the local regulation—no one can tell when we will see the implementation of the recommended sequence of key dates. It is hard to imagine that such an internationally oriented market will not adapt its rules to avoid the risk of being seen as a solitary case in Europe, but still, this is an example of a lack of visibility that was avoided in markets driven by their T2S migrations.
Stephanie Colaric: The driver behind the T2S platform is to provide borderless, commoditised, and harmonised delivery versus payment (DvP) securities settlement in central bank funds across all European securities markets. While asset servicing was not directly part of the remit, the platform has certainly been a catalyst for change in a number of ways. For example, as market participants, CSDs and sub-custodians have taken on the development work necessary to reshape their service structure to meet the demands of T2S. Many have also taken the opportunity to reform areas of post-trade activity, such as asset servicing, in order to support their new business models and better position themselves for the evolving competitive landscape that T2S will encourage.
Specifically, T2S is assisting the operational harmonisation initiative because a prerequisite for a market joining T2S is to become compliant with the market standards for corporate actions processing that were drawn up by the CAJWG and CASG, which are responsible for defining rules for corporate actions on pending transactions or flows. Each market is required to report on their progress towards meeting these standards, with their progress being assessed by a team of market practitioners from within the European MIG. It is fair to say that T2S has really provided the impetus for change.
Paul Phillips: It can be reasonably argued that the pending deployment of the first phase of T2S will have an impact on how the determination of the eligibility to participate, and to that extent, how market claims resulting from active corporate actions are managed by CSDs through the utility. It cannot, however, be considered that T2S has proved to be a key driver in organisations looking at how they process their events or in making any necessary changes in their processes to benefit from its introduction in 2015.
In the current fragmented environment, local settlement procedures differ significantly. Custodians tend to maintain separate back offices in order to interact with each CSD or they employ a local sub-custodian to carry out the activity on their behalf. The objective of T2S is to harmonise the pan-European settlement process through efficient use of CSDs. This will make it much easier for custodians to consolidate these separate back offices into a centralised back office and achieve a higher degree of automation and efficiency. The reduction in back-office costs is one of the key benefits resulting from a harmonised borderless settlement.
The corporate actions process can be complex, with many interactions between buy- and sell-side organisations to determine what is happening, when it is happening, what the impact of the change is and who the change directly affects. Settlement plays a significant part in determining who is affected, and how an entitlement is distributed through the complex current settlement infrastructure network to ensure that the legal recipient of the entitlement is correctly identified and compensated.
By utilising a CSD with access to T2S, it should prove possible to significantly reduce the potential for position breaks, due to settlement failure, across the ex-date, effective and record dates of any corporate action. This alone will considerably reduce the risk of processing incorrect positions. With CSDs (through T2S) settling using central bank funds, you not only reduce the risk of settlement failure, but you also reduce the risk of counterparty failure.
By utilising T2S, it is not only possible to efficiently move and settle the corporate action on flow, but also the associated claim linked to any failed transaction within that flow. This makes the whole claims process much more efficient and has the potential to significantly reduce the overall time taken to resolve and receive or return entitlements to or from the market via these claims.
How closer are we to a common set of standards for corporate actions in Europe, and what still needs to be done?
Colaric: Although the high risk involved in handling corporate events has always been well understood by market participants, and various European-based industry groups have been driving the harmonisation and automation agenda forward for many years, progress has been slow.
There are a variety of reasons for this. For example, there is a lengthy chain of intermediaries involved in the corporate action process from issuer through investor, many with their own specific set of challenges. In some cases the need to make legal, regulatory, and market practice changes has been an obstacle, for example, CSDs may need to change their processes and rulebook, and some markets do not legally recognise the concept of record date. However, historically one of the biggest issues has been that corporate event inefficiencies have not generally been as visible as settlement inefficiencies, so competing priorities always took precedence.
T2S introduced a degree of urgency and focus that was not there before, especially because each market has to comply with the standards in order to join the platform. While it has taken regulatory change to drive these harmonisation efforts forward, positive momentum has been created. This momentum could help the industry working groups and participants themselves to really drive the process towards full end-to-end harmonisation and automation of securities settlement transactions across all intermediaries.
Phillips: We are making slow progress toward a common set of standards that could truly unify a complex process across all of the recognised event types.
The transport mechanism for the movement of corporate actions information across the industry, between active buy- and sell-side participants, has reached a point of maturity in Europe with ISO 15022 now being utilised or the very least useable across almost all participants. The advent of ISO 20022 will, in time, push this even further with the use of XML/XBRL. However, it is anticipated that ISO 20022 will predominantly be utilised in the US and Asia Pacific and China region, where the adoption of the ISO 15022 standard has not been as widespread.
The Depository Trust & Clearing Corporation transformation initiative is leading the charge in the US as it will be eliminating the use of proprietary message types for notifying participants on corporate actions events and replacing them with ISO 20022 message formats by the end of 2015. The Australia Exchange (ASX) in Australia and JASDAQ Securities Exchange in Japan are also leading the ISO 20022 charge in their respective markets.
So, standardisation of the information transport mechanism for the majority of mandatory events, where market interaction other than collating and determining an account of the terms and conditions of the event promotes a high degree of straight-through processing (STP) if an enabling technology is employed within an organization to utilise the information effectively.
For voluntary and choice events, standards need to go a step further.
For the election process, there is a still a lack of clarity and consistency around how the sell side distributes option information as part of the ISO standard. The industry is still seeing a lack of synchronisation around sequencing of options where one organisation can distribute a series of options in a completely different sequence to another. So, when the instruction is required to be executed to a multitude of sell-side organisations, there is a need to rationalise and reorganise the elections into the correct sequence that it was received.
All of this added risk and complexity could be removed if the market strictly adhered to the option types and sequencing submitted by the issuer.
More could be done to formalise how the issuer informs the market of the terms and conditions of the events that it wishes to be executed in the marketplace. The industry has still not found a way of taking the information directly from the issuer and making it possible to quickly confirm that the market is made aware of the finalised terms and conditions of the events being executed. This final, rationalised information can only come from the issuer and is often mis-interpreted by the data-vendor community and distributed accordingly.
Finally, more work needs to be done to better define the claims process. With the advent of T2S (the first phase) in 2015, we have reached a point where we can effectively rationalise both held stock record (corporate actions on stock) and open transactions (corporate actions on flow) to assist in the defining, accurate claiming, tracking and settlement of market claims through participating CSDs.
Colladan: The common set of standards regarding corporate actions exists. CAJWG, where two SGSS experts have been mandated since 2010, representing the French and Italian markets, has issued a set of around 140 standards covering definitions and operational processing for all categories of corporate actions, including transaction management, ie, the process needed in case of corporate actions on flows. These were endorsed in 2009 by all the European constituencies of the securities industry and released in 2012.
At a national level, MIGs are working on local implementation. They meet together every six months in a European MIG to share experiences. These groups have regular exchanges with the CAJWG experts playing the role of the guardians of the ‘European bible of standards’.
As for the T2S community, it aims to comply with these standards too, with priority given to the technical specification made for T2S by the CASG, more specifically for transaction management.
As SGSS experts are direct participants in CAJWG, CASG, MIGs, European MIG and HSG, we can state that implementation is on track. A difficult job is being carried out, requiring a high level of involvement, but two kinds of difficulties may occur:
Purely technical brakes in a challenging environment with many projects; and
Obstacles due to core legacy principles.
Corporate actions standards imply a wide adaptation of information systems and organisations. However, these organisations are facing major regulatory challenges with new regulations, directives, etc.
This is a turbulent environment, with limited resources available. ‘Prioritisation’ and ‘choices’ are commonly heard words when attributing budgets where meeting clients’ needs remains the primary goal.
On the prioritisation battlefield, complying with regulatory requests comes top. T2S adaptation itself demands important efforts, at least from CSDs that are generally setting the pace for implementing standards. Corporate actions standards come at the end of the priority list.
The postponement by Euroclear (ESES markets) of its releases known as Stream 5, now positioned for March 2015, and 6, now positioned for September 2016, is a good illustration of this reality.
When looking at leading countries of each T2S wave, there is a big risk that they will not comply with T2S CASG standards before joining T2S, and sometimes months after. This shows how complex the matter is, and this complexity is not only a technical issue. The most important obstacles are mainly those based on core existing historical and cultural principles.
Furthermore, these are generally reflected in the local legal frameworks. By definition, standards are based on a pure technical approach and by definition a technical approach should be led by core principles to find solutions that respect them, not the opposite.
To the extent that European countries do not share the same list of core principles, obstacles to standardisation will remain, whatever the technical and resources involvement of stakeholders.
Ruault: From the point of view of the CAJWG standards, and in relation to T2S, one cannot say whether markets are close or far without putting each case in perspective. Indeed, some markets might not implement the recommended standards for a few years yet and not before their migration to T2S. However, these same markets might already be prepared to put them into practice, they might have already solved potential regulatory, IT, and legal issues and are simply choosing to synchronise the move to the new standards with their T2S migration. Other countries may very well be almost entirely compliant to the CAJWG standards, but they are far from implementing the remaining standards for a number of reasons.
What we can say is that there are isolated cases of genuine concern about the readiness of some markets due to some implementation issues, such as the problematic consideration about the record date in some cases and the ex-date in others. The favoured payment method outside of T2S is, and I quote the T2S whitepaper on corporate actions: “Using the same payment mechanism for distribution of cash proceeds of [corporate actions] as the one used for the settlement of cash transactions by the issuer CSD.”
However, these cases are being discussed at the highest levels of the T2S governance and solutions will have to be found in due time to ensure smooth processing of corporate actions on flows.
Yet, the glass is more than half-full and we are very close, we just need to remind ourselves that the standards have been endorsed by everyone. This, in itself, is a considerable achievement. Unfortunately, there will be steps backwards as new interpretations will shed light on issues that have not been identified before (eg, the issue with the legal period of subscription rights trading on the French market). This is where the involvement of all key stakeholders in the established governance is crucial in order to find common solutions, even if they are that—for sound reasons—the standards may not be immediately applicable.
On a similar note, no matter how close every market is to adapting to the CAJWG standards, let’s remember that they are merely a toolbox, albeit a very sophisticated one. They are a set of solutions given to us (sometimes even created by us) to ensure smooth corporate actions processing, to reduce cost and risk. They are not a ready-made roadmap to definitely eliminate differences between European markets.
But never say never. Hopefully, European markets will tend towards complete alignment. There have been and always will be historical local practices, intricate domestic laws, and exceptional corporate actions types in the foreseeable future.
What pressure has T2S placed on service providers in this area?
Phillips: T2S is ostensibly designed to facilitate smooth settlement across the different markets in the eurozone and to promote healthy competition across CSDs subscribing to the service across the four phases, with a view to reining in the settlement cycle to two days.
Accurate and timely settlement, which T2S promotes, is a fundamental requirement in the correct determination and application of stock record which is the current, settled (actual) and the open, traded balances across the security, on the ex-date, effective date and record date, and across the trading period of a corporate action. Accurate stock record drives the entitlement calculation process, the election process and the claims process.
Participating CSDs will be under increasing pressure to settle in-house orders within the two days and also to collaborate with other CSDs effectively to settle transactions where the buyer and seller operate in different markets with different CSDs. Failure to achieve this, particularly for trades active across the ex-date and record date of events will fuel an increase in market claims. That in turn will result in an increase in message traffic and put added pressure on the CSDs, and also the associated custodian banks to resolve not only the transaction, to remove any chance of a position break, but to also resolve the associated entitlement claim due from the failed transaction.
For voluntary events, failure to reach settlement in time can potentially expose the seller by preventing the buyer from making an election. Custodians that offer contractual settlement services, and would therefore directly settle any transaction from inventory, are then required to manage the election process through one, or multiple CSDs. This adds even more risk to the process of efficiently and correctly managing elections.
While T2S is aimed at promoting a more efficient, fluid settlement process in Europe, it also presents considerable challenges to the middle - and back-office of organisations to ensure everything that was typically done manually in three days is now done manually in two. This includes determination and reconciliation of failing transactions, which is a significant contributor to corporate actions processing risk.
Colaric: It is well understood that the introduction of T2S is a game changer for the industry. While some of the largest players have made their intentions known, many buy-side participants such as global custodians and brokers are likely to be adopting a watch-and-wait position. It is clear that T2S presents a threat to the business models of CSDs and sub-custodians. As the settlement function becomes totally commoditised, the provision of value-added services such as asset servicing will become essential to both CSDs and sub-custodians if they are to continue to be economically viable.
The challenge for CSDs is how they will develop this expertise, as it is not an area in which they have traditionally been involved. Will market participants be prepared to take the risk of entrusting their asset servicing and value added activities to an untested provider? Sub-custodians on the other hand, have the advantage of many years proven expertise in supporting the institutional investor community, not only for asset servicing but for their value-added services as well.
Ultimately, the winners are likely to be the providers who can adapt their model according to client needs and offer multiple options for accessing their services on a bundled or unbundled basis whilst meeting the regulatory and working standard requirements. These will likely be those regional sub-custodians and ICSDs that already provide multi-market eurozone service offerings, and in fact they are already far along in developing their solutions for the new environment.
Ruault: The inception of T2S and its influence on the harmonisation efforts in the area of corporate actions can, indeed, be seen as an added pressure for all stakeholders. This is mainly because it has set deadlines for market infrastructures and other market players to implement 100 percent of the standards that have strong dependencies with T2S, for example, corporate actions on flows.
Again, instead of allowing all markets to move at their own pace, T2S set clear milestones for each local stakeholder to reach before their own migration waves. Custodians, for example, have faced an increasing financial pressure to enhance their systems as well as time constraints to ensure that their own internal processes would be in line with the standards of each market while taking into account the timing of these markets’ migrations and the standards they would be implementing.
One of the difficulties has been, for instance, to keep a crystal clear, short-to-long term mapping of the adaptation plans of each CSD. Should custodians be unable to keep track and keep up with the pace imposed by local markets, they would face a dangerous situation where they would create a break in the chain of custody by not applying the appropriate markets rules. Not only that, but they would also set themselves apart by bifurcating from the other custodians’ practices, leading to confusion, especially for all investors that might rely on several different providers established in the countries where the CAJWG standards will apply.
This being said, another way to look at these correlated initiatives is to embrace the fact that, for once, the stars have aligned for custodians that can seize this opportunity to harmonise processes, for true regional providers to shine and offer versatile yet consolidated solutions based on the same set of standards and practices.
Going further, T2S is making custodians rethink their traditional offers. Indeed, some large financial institutions that have traditionally relied on local custodians to handle both settlement and asset servicing are starting to look at ways to connect directly to T2S and internalise their settlement activity. While this is made possible thanks to T2S, they will still need the assistance of a provider who will be able to handle corporate actions, tax, and proxy voting, with each activity being subject to all manner of local particularities. By allowing institutions large enough to see benefits in handling their own settlement activity, T2S has therefore pushed custodians to rise to the challenge and think of new ways to service such clients.
At the core of our business, another window of opportunity for custodians lays with the investors, small and big, that are in serious need of clear, practical, detailed and yet comprehensive information about these projects. Those that have actively taken part in the definition of the future standards, both for corporate actions on stock and on flows, will have a chance to capitalise on their deep knowledge of the rationale behind these new standards and communicate all the more efficiently with their clients.
Colladan: For the securities industry, T2S will generate technical, organisational and commercial shock waves that will also impact the corporate actions area.
Technically speaking, there is global pressure on service providers to adapt their information systems to corporate actions standards requests. In France, a strict marketplace organisation has been set up to ensure that all providers will be able to meet these standards, considered by French players as a prerequisite to T2S.
Furthermore, T2S introduces new concepts such as ‘investor CSD’, which is more or less a custodian in the skin of a CSD being a participant in an ‘issuer CSD’. In the scope of corporate actions, this concept opens an electronic highway between issuers, agents and investors passing through an issuer CSD, its participants and their clients.
Any link in the chain of intermediaries not complying with European corporate actions standards will cause a break in the processing of any event. Imagine the consequences of a securities redemption paid in T2S when counterparties are waiting for a T2S dedicated cash account payment?
The second shock wave is revamping organisations in order for a service provider to draw maximum advantage from T2S implementation. T2S offers a technical flexibility to provide client access to multiple CSDs via a single point of entry. This flexibility leads to different organisational questions such as the location of clients’ securities holdings.
Should it be close to the source of information and benefit from immediate announcement and better market deadlines, implying the need to locate assets in each issuer CSD accounts? Centralised in a single CSD to benefit from economies of scale? Disseminated in a local agent network to benefit from deep local knowledge? Or should it be a mixture, with the potential support of local agents in specific matters such as tax processing?
The last shock wave is commercial. Boundaries between key participants will be redrawn. A convergence of roles will emerge, with a confusion of roles between investor CSDs and custodians. Few custodians will look at establishing CSDs.
In this world, the application of corporate actions standards will become a basic common service. Providers unable to offer this basic service will disappear, while those just capable of offering it will only have the fees parameter to make the difference.
However, corporate actions will still be an area of local specificities, for instance, on the taxation front. Providers able to offer deep knowledge and the ability to deal with these specificities will make the difference.
That is the reason why SGSS has adopted a ‘Glocal’ approach based on our multi-local custody offer coupled with our European global access facilitated by T2S. Clients will be offered a single point of access, balanced by direct custody with deep local knowledge and the capacity to deal with local specificities.
T2S is simply the beginning of the story. It is just a pipe and the most important things are at each end and what goes through it, not the pipe itself.
Turning to other jurisdictions, what has Asia got to do to catch up with Europe and the US?
Ruault: The US and Europe are two very different cases. The American market is, by nature, a single consolidated marketplace where diversity lies with the various types of events and tax regimes rather than local specificities. Now, considering the diversity of markets, investors, and providers across Asia, a comparison with Europe does make sense. European institutions themselves wanted to create a set of rules that would make Europe as attractive as the American market to worldwide investors.
However, this is where the comparison between Asia and Europe has its limits. Asian countries still have some way ahead when it comes to adopting common standards, and are yet to generate the momentum to launch a coordinated initiative.
Asia is a fragmented market today and the Asian markets are building the foundations before putting in the finishing touches. Current efforts include more fundamental aspects of corporate actions activity such as increasing the STP rate. For instance, some local CSDs have entered workshops with local custodians in order to improve the STP integration of announcement messages. This will allow for an overall reduction of operational risk but also a much faster transmission of corporate actions details to custodians. Custodians that are a part of these workshops have an opportunity to help build standards and leverage on this first-hand experience to increase the service they offer to their clients.
It will probably be a while before Asia sees an initiative similar to the CAJWG and will depend on where regional harmonisation efforts will be on each country’s priority list. Without a coordinated regional initiative, it is difficult to envisage Asia implementing a common set of standards across the markets in the immediate future. In the meantime, it is the responsibility of custodians to implement processes that allow investors to experience corporate actions in a harmonised way on all the markets where they appoint the same provider, for example, harmonised structures of narratives, harmonised swift set-ups and competitive deadlines.
Still, observers can see positive signals coming from Asia. Without being directly linked to this activity, a number of markets have been very active in their discussions about T+2. The Australian and the Singaporean stock exchanges have initiated talks about reducing the settlement cycle to two days. India is already in line with T+2.
In order to harmonise know your customer (KYC) norms for foreign investors within their market, India has standardised KYC guidelines by implementing a common questionnaire on a risk based approach.
To conclude, there are a number of initiatives being taken in Asia, but for the moment, they are limited to their individual markets rather than launching a regional coordinated initiative.
Phillips: With an increasingly aggressive attitude toward winning new business from traditional western silos, coupled with there being little burden of legacy technologies, Asia has traditionally been an early adopter of new technologies and is usually innovative in its approach to process.
China has been particularly assertive in its expansion in the financial services sector and has shown many innovations in product development and its use of enabling technologies to meet a growing demand for tailored financial services. At an infrastructure level, China is adopting ISO 20022 for its payments systems while Thailand is looking to completely overhaul its own financial services infrastructure to be able to easily adapt to new standards.
Japan’s central depository, JASDEC, is leading the way with its adoption of ISO 20022 and market participants in Japan are required to become compliant in their use of the standard by 2018. Considering how slow it seemed for the global marketplace to first adopt, refine and finally use the ISO 15022 standard, to see Japan straightforwardly adopt the new standard is a testament to the attitude prevailing across Asian markets to maintain parity with and, in some cases, lead the industry.
As always, there is something of a ‘wait and see’ attitude but in the case of harmonised standards for settlements, it is markets in the west that are looking to Asia to determine the potential success or failure of initiatives such as T2S where reduced settlement cycles in Asia have already been established. In Europe, the Single Euro Payments Area is proving to be a success and Asian markets are keen to replicate this success. New listings of companies across Asia remain strong, particularly in China, even though secondary funding for such enterprises is proving difficult and the proliferation of IPO events is forcing the direction of thought around automation of the corporate actions process.
Europe and the US look to Asia for some aspects of development of standards while Asia looks to Europe and the US for others. All markets are looking to harmonise standards and cross-border collaboration with their significant trading partners wherever possible with a view to streamlined processes, making the act of doing business more efficient, simpler and more cost effective for all involved.
Colaric: The capital markets environment across Asia is very diverse, ranging from the well developed and sophisticated markets such as Japan, Australia, Hong Kong, and Singapore, to emerging markets with a variety of foreign investor barriers such as entry eligibility tests, currency restrictions, documentation, and investor ID processes. This, together with no common regulatory regime or single currency and a lack of market linkages, means it is not realistic to compare these markets to Europe or the US.
What we are seeing, however, is very positive progress in the more developed markets. Australia, Japan, and Singapore are good examples of where the industry participants themselves—such as the stock exchanges and CSDs—are being very active in engaging with the various intermediaries and participants and taking meaningful steps, especially around the adoption of SWIFT’s ISO 20022. One of the many positives about Asia is that once a market decides to make an infrastructure change, it tends to happen pretty quickly.
After automation, what’s next for corporate actions, or are we not there yet?
Ruault: This question is twofold as it touches two topics that are essential to further improve corporate actions processing down the road.
As far as automation is concerned, let’s face the fact that corporate actions are worlds apart from, let’s say, settlement. Indeed, even though we can learn from the achievements in the area of STP processing of settlement messages, it seems utopian to think that corporate actions messages could reach such automation rates.
To be more precise, successes in automation need to be assessed slightly differently depending in whose shoes you are. For local custodians, automation of incoming messages has not been achieved yet due to their direct interactions with first-hand material received from multiple sources that do not use standardised communication methods. This is where asset servicing providers at a local level play an important role in dealing with this variety of message formats such as faxes, SWIFT messages and PDF files, by processing narratives more often than not and, overall, by enriching announcement and payment messages to guarantee that the entire chain of custody receives the appropriate information right from the start.
For global custodians, on the other hand, automation is more achievable thanks to their own individual harmonisation efforts one of the many benefits from BNP Paribas Securities Services’s network integration, for instance. But to do so requires solid information from their local custodians, this is why global custodians that can, whenever possible, rely on their own networks of local custody, have an advantage because they control the format of messages in and out and can therefore aim at more than 80 percent STP integration in these cases.
Corporate actions require manual intervention today and while some events are starting to be processed without as much manual work, the increasing complexity and diversity of some events make it that the industry is making progress on one side and taking a step back on the other.
This is partly due to the fact that issuers tend to have needs that are more and more specific and competition is fierce among paying agents whom the issuers will appoint. To win mandates, agents customise the engineering of corporate actions to the maximum, which, in a way, is a contradiction with the global harmonisation efforts led by the industry.
So, in order to move to the next level, a full incorporation of the issuer community as well as the issuing and paying agents is necessary. Without rallying them and without their strong commitment, the efforts to align processes, to reduce operational risks, to guarantee smooth processing of cross-border corporate actions events, will be to no avail.
Phillips: With the growing volumes and increasingly complex corporate actions events, global financial institutions are constantly faced with challenges in processing corporate actions. The automation of data management, event management, entitlement processing, election management and communications through the use of currently available third-party technologies help facilitate the consistent and accurate processing of these events.
High levels of STP are being achieved for mandatory payments and stock adjustments and the adoption of standards and development of common cross-border practices helps ensure that events are processed consistently wherever they may be executed.
However, automatic compilation and update of stock records, the management of position differences between the client and their depository (position breaks) and the management of market claims not automatically compensated through the auto-compensation process are areas that would benefit significantly from further thought and development of both standards and technologies.
T2S will go some way to addressing the challenges with both the position and claims processes while widespread adoption of ISO 20022 with enabling technologies will considerably reduce the financial overhead and risks associated with manual processing.
The industry has made real progress and while we continue to make great strides in this complex process, there is still a significant amount of manual effort involved for many financial institutions, especially those in developing markets. As depositories and exchanges, such as the Australian Securities Exchange, the DTCC and JASDEC migrate from old proprietary formats to the new ISO 20022 formats, firms will need to address how their systems will handle these messages. Systems will also need to be upgraded to support the growing complexity of new event types to ensure that STP levels are maintained and improved upon. Firms may also look to leverage corporate actions solutions that can interface with books and records systems to help further maximise operational efficiencies.
Pierre Colladan: Implementation of corporate action standards is led by two drivers in Europe: one is the action of major players in the securities industry; and the other is the advent of TARGET2-Securities (T2S).
First of all, major stakeholders of the securities industry are committed to the implementation of the European Corporate Actions Joint Working Group (CAJWG) standards endorsed in 2009. Custodians have an industrial stake as they deal with multiple events for multiple clients. Central securities depositaries (CSD) face a similar concern and will meet the demands of their participants.
Local market implementation groups (MIG), directly monitored by the Broad Stakeholders Group, the European MIG and the CAJWG, lead this part of the implementation. This organisation is more or less followed by the European Commission.
Progress is limited by budget considerations, but it should be noted that main corporate events have something to do with settlement. Indeed, a settlement or ‘corporate actions on flow’ may be triggered when a seller does not deliver securities on time to a buyer that wants to participate in a given corporate event.
From a cross-border perspective, these settlement flows linked to a corporate action imply the adoption of a common European language with a shared definition of concepts, terms, dates and even processes. This is why T2S stresses the implementation of standards with the support of two T2S governance bodies.
One is the T2S Corporate Actions Sub Group (CASG). The T2S CASG has defined a set of technical rules adapted to the T2S environment to manage corporate actions on flows, these technical rules complying with the CAJWG standards. It also monitors the implementation of its standards in the participating T2S countries and reports to the second body, the Harmonisation Steering Group (HSG).
The HSG monitors the implementation of a wider range of items, including the European corporate actions standards. It gives priority with regard to T2S migration constraints and issues an annual report underlining the compliance level of each market. It puts any potential non-compliance, and the consequences thereof, in the perspective of the T2S migration of the market concerned.
Through their respective missions, these two bodies put pressure on the whole T2S community to comply with the standards for corporate actions before, or very soon after, any migration to T2S.
The composition of these structures demonstrates the importance of the corporate actions standards and harmonisation topics. For instance, Societe Generale Securities Services has at least one or more experts who is a member, sometimes a chairperson, of every group that defines, validates standards, or monitors compliance with them.
Philippe Ruault: Everyone agrees that there were myriad reasons why Europe needed to tackle the domestic differences preventing corporate actions processing to be harmonised across its markets. These included differences such as the complexity of cross-border events, multi-listed securities, and the sheer absence of norms in some cases.
Whereas T2S is not much of a force behind the standardisation of corporate actions on stock, without a clear deadline for each market, it is fair to say that the efforts to harmonise corporate actions on flows would have suffered from a tunnel effect. So, yes, without a doubt, T2S has been a major driver for the harmonisation initiatives across the board.
T2S is a response to the Giovannini report but it was not at all meant to be the main driver behind the standardisation of corporate actions. Because payments were due to go through T2S, it would have implied a standardisation of the settlement of their proceeds, but above all, what T2S did is that it served as a catalyst to standardise corporate actions on flows across the T2S markets by the time of their migration wave. It is fair to assume that had there been an initiative to harmonise cross-border corporate actions without T2S on the horizon, it would have inherently failed.
To put it bluntly, custody projects without clear deadlines stall. This is why one can wonder what will become of the CAJWG standards that do not have a strong dependency on T2S, such as the inception of SWIFT communication between the CSDs and their participants for announcements, instructions and payments. One likely scenario is that some ‘good students’ will implement them and some countries will not, sometimes for good reasons such as the implementation cost of these standards.
Despite the fact that, by signing the T2S Framework Agreement, local CSDs do not commit to implement the CAJWG standards for corporate actions on flows, the pressure applied by the European Central Bank has increased as the first wave is getting closer. Through its ‘name and shame’ policy that singles out countries not sending positive signals, it intends to speed up progress in countries failing to address issues it deems essential for the project.
To further exemplify how T2S facilitated the harmonisation of corporate actions processes by setting deadlines, one can point out the case of the UK where—partly because it will not be part of T2S in the foreseeable future and partly because it requires a change in the local regulation—no one can tell when we will see the implementation of the recommended sequence of key dates. It is hard to imagine that such an internationally oriented market will not adapt its rules to avoid the risk of being seen as a solitary case in Europe, but still, this is an example of a lack of visibility that was avoided in markets driven by their T2S migrations.
Stephanie Colaric: The driver behind the T2S platform is to provide borderless, commoditised, and harmonised delivery versus payment (DvP) securities settlement in central bank funds across all European securities markets. While asset servicing was not directly part of the remit, the platform has certainly been a catalyst for change in a number of ways. For example, as market participants, CSDs and sub-custodians have taken on the development work necessary to reshape their service structure to meet the demands of T2S. Many have also taken the opportunity to reform areas of post-trade activity, such as asset servicing, in order to support their new business models and better position themselves for the evolving competitive landscape that T2S will encourage.
Specifically, T2S is assisting the operational harmonisation initiative because a prerequisite for a market joining T2S is to become compliant with the market standards for corporate actions processing that were drawn up by the CAJWG and CASG, which are responsible for defining rules for corporate actions on pending transactions or flows. Each market is required to report on their progress towards meeting these standards, with their progress being assessed by a team of market practitioners from within the European MIG. It is fair to say that T2S has really provided the impetus for change.
Paul Phillips: It can be reasonably argued that the pending deployment of the first phase of T2S will have an impact on how the determination of the eligibility to participate, and to that extent, how market claims resulting from active corporate actions are managed by CSDs through the utility. It cannot, however, be considered that T2S has proved to be a key driver in organisations looking at how they process their events or in making any necessary changes in their processes to benefit from its introduction in 2015.
In the current fragmented environment, local settlement procedures differ significantly. Custodians tend to maintain separate back offices in order to interact with each CSD or they employ a local sub-custodian to carry out the activity on their behalf. The objective of T2S is to harmonise the pan-European settlement process through efficient use of CSDs. This will make it much easier for custodians to consolidate these separate back offices into a centralised back office and achieve a higher degree of automation and efficiency. The reduction in back-office costs is one of the key benefits resulting from a harmonised borderless settlement.
The corporate actions process can be complex, with many interactions between buy- and sell-side organisations to determine what is happening, when it is happening, what the impact of the change is and who the change directly affects. Settlement plays a significant part in determining who is affected, and how an entitlement is distributed through the complex current settlement infrastructure network to ensure that the legal recipient of the entitlement is correctly identified and compensated.
By utilising a CSD with access to T2S, it should prove possible to significantly reduce the potential for position breaks, due to settlement failure, across the ex-date, effective and record dates of any corporate action. This alone will considerably reduce the risk of processing incorrect positions. With CSDs (through T2S) settling using central bank funds, you not only reduce the risk of settlement failure, but you also reduce the risk of counterparty failure.
By utilising T2S, it is not only possible to efficiently move and settle the corporate action on flow, but also the associated claim linked to any failed transaction within that flow. This makes the whole claims process much more efficient and has the potential to significantly reduce the overall time taken to resolve and receive or return entitlements to or from the market via these claims.
How closer are we to a common set of standards for corporate actions in Europe, and what still needs to be done?
Colaric: Although the high risk involved in handling corporate events has always been well understood by market participants, and various European-based industry groups have been driving the harmonisation and automation agenda forward for many years, progress has been slow.
There are a variety of reasons for this. For example, there is a lengthy chain of intermediaries involved in the corporate action process from issuer through investor, many with their own specific set of challenges. In some cases the need to make legal, regulatory, and market practice changes has been an obstacle, for example, CSDs may need to change their processes and rulebook, and some markets do not legally recognise the concept of record date. However, historically one of the biggest issues has been that corporate event inefficiencies have not generally been as visible as settlement inefficiencies, so competing priorities always took precedence.
T2S introduced a degree of urgency and focus that was not there before, especially because each market has to comply with the standards in order to join the platform. While it has taken regulatory change to drive these harmonisation efforts forward, positive momentum has been created. This momentum could help the industry working groups and participants themselves to really drive the process towards full end-to-end harmonisation and automation of securities settlement transactions across all intermediaries.
Phillips: We are making slow progress toward a common set of standards that could truly unify a complex process across all of the recognised event types.
The transport mechanism for the movement of corporate actions information across the industry, between active buy- and sell-side participants, has reached a point of maturity in Europe with ISO 15022 now being utilised or the very least useable across almost all participants. The advent of ISO 20022 will, in time, push this even further with the use of XML/XBRL. However, it is anticipated that ISO 20022 will predominantly be utilised in the US and Asia Pacific and China region, where the adoption of the ISO 15022 standard has not been as widespread.
The Depository Trust & Clearing Corporation transformation initiative is leading the charge in the US as it will be eliminating the use of proprietary message types for notifying participants on corporate actions events and replacing them with ISO 20022 message formats by the end of 2015. The Australia Exchange (ASX) in Australia and JASDAQ Securities Exchange in Japan are also leading the ISO 20022 charge in their respective markets.
So, standardisation of the information transport mechanism for the majority of mandatory events, where market interaction other than collating and determining an account of the terms and conditions of the event promotes a high degree of straight-through processing (STP) if an enabling technology is employed within an organization to utilise the information effectively.
For voluntary and choice events, standards need to go a step further.
For the election process, there is a still a lack of clarity and consistency around how the sell side distributes option information as part of the ISO standard. The industry is still seeing a lack of synchronisation around sequencing of options where one organisation can distribute a series of options in a completely different sequence to another. So, when the instruction is required to be executed to a multitude of sell-side organisations, there is a need to rationalise and reorganise the elections into the correct sequence that it was received.
All of this added risk and complexity could be removed if the market strictly adhered to the option types and sequencing submitted by the issuer.
More could be done to formalise how the issuer informs the market of the terms and conditions of the events that it wishes to be executed in the marketplace. The industry has still not found a way of taking the information directly from the issuer and making it possible to quickly confirm that the market is made aware of the finalised terms and conditions of the events being executed. This final, rationalised information can only come from the issuer and is often mis-interpreted by the data-vendor community and distributed accordingly.
Finally, more work needs to be done to better define the claims process. With the advent of T2S (the first phase) in 2015, we have reached a point where we can effectively rationalise both held stock record (corporate actions on stock) and open transactions (corporate actions on flow) to assist in the defining, accurate claiming, tracking and settlement of market claims through participating CSDs.
Colladan: The common set of standards regarding corporate actions exists. CAJWG, where two SGSS experts have been mandated since 2010, representing the French and Italian markets, has issued a set of around 140 standards covering definitions and operational processing for all categories of corporate actions, including transaction management, ie, the process needed in case of corporate actions on flows. These were endorsed in 2009 by all the European constituencies of the securities industry and released in 2012.
At a national level, MIGs are working on local implementation. They meet together every six months in a European MIG to share experiences. These groups have regular exchanges with the CAJWG experts playing the role of the guardians of the ‘European bible of standards’.
As for the T2S community, it aims to comply with these standards too, with priority given to the technical specification made for T2S by the CASG, more specifically for transaction management.
As SGSS experts are direct participants in CAJWG, CASG, MIGs, European MIG and HSG, we can state that implementation is on track. A difficult job is being carried out, requiring a high level of involvement, but two kinds of difficulties may occur:
Purely technical brakes in a challenging environment with many projects; and
Obstacles due to core legacy principles.
Corporate actions standards imply a wide adaptation of information systems and organisations. However, these organisations are facing major regulatory challenges with new regulations, directives, etc.
This is a turbulent environment, with limited resources available. ‘Prioritisation’ and ‘choices’ are commonly heard words when attributing budgets where meeting clients’ needs remains the primary goal.
On the prioritisation battlefield, complying with regulatory requests comes top. T2S adaptation itself demands important efforts, at least from CSDs that are generally setting the pace for implementing standards. Corporate actions standards come at the end of the priority list.
The postponement by Euroclear (ESES markets) of its releases known as Stream 5, now positioned for March 2015, and 6, now positioned for September 2016, is a good illustration of this reality.
When looking at leading countries of each T2S wave, there is a big risk that they will not comply with T2S CASG standards before joining T2S, and sometimes months after. This shows how complex the matter is, and this complexity is not only a technical issue. The most important obstacles are mainly those based on core existing historical and cultural principles.
Furthermore, these are generally reflected in the local legal frameworks. By definition, standards are based on a pure technical approach and by definition a technical approach should be led by core principles to find solutions that respect them, not the opposite.
To the extent that European countries do not share the same list of core principles, obstacles to standardisation will remain, whatever the technical and resources involvement of stakeholders.
Ruault: From the point of view of the CAJWG standards, and in relation to T2S, one cannot say whether markets are close or far without putting each case in perspective. Indeed, some markets might not implement the recommended standards for a few years yet and not before their migration to T2S. However, these same markets might already be prepared to put them into practice, they might have already solved potential regulatory, IT, and legal issues and are simply choosing to synchronise the move to the new standards with their T2S migration. Other countries may very well be almost entirely compliant to the CAJWG standards, but they are far from implementing the remaining standards for a number of reasons.
What we can say is that there are isolated cases of genuine concern about the readiness of some markets due to some implementation issues, such as the problematic consideration about the record date in some cases and the ex-date in others. The favoured payment method outside of T2S is, and I quote the T2S whitepaper on corporate actions: “Using the same payment mechanism for distribution of cash proceeds of [corporate actions] as the one used for the settlement of cash transactions by the issuer CSD.”
However, these cases are being discussed at the highest levels of the T2S governance and solutions will have to be found in due time to ensure smooth processing of corporate actions on flows.
Yet, the glass is more than half-full and we are very close, we just need to remind ourselves that the standards have been endorsed by everyone. This, in itself, is a considerable achievement. Unfortunately, there will be steps backwards as new interpretations will shed light on issues that have not been identified before (eg, the issue with the legal period of subscription rights trading on the French market). This is where the involvement of all key stakeholders in the established governance is crucial in order to find common solutions, even if they are that—for sound reasons—the standards may not be immediately applicable.
On a similar note, no matter how close every market is to adapting to the CAJWG standards, let’s remember that they are merely a toolbox, albeit a very sophisticated one. They are a set of solutions given to us (sometimes even created by us) to ensure smooth corporate actions processing, to reduce cost and risk. They are not a ready-made roadmap to definitely eliminate differences between European markets.
But never say never. Hopefully, European markets will tend towards complete alignment. There have been and always will be historical local practices, intricate domestic laws, and exceptional corporate actions types in the foreseeable future.
What pressure has T2S placed on service providers in this area?
Phillips: T2S is ostensibly designed to facilitate smooth settlement across the different markets in the eurozone and to promote healthy competition across CSDs subscribing to the service across the four phases, with a view to reining in the settlement cycle to two days.
Accurate and timely settlement, which T2S promotes, is a fundamental requirement in the correct determination and application of stock record which is the current, settled (actual) and the open, traded balances across the security, on the ex-date, effective date and record date, and across the trading period of a corporate action. Accurate stock record drives the entitlement calculation process, the election process and the claims process.
Participating CSDs will be under increasing pressure to settle in-house orders within the two days and also to collaborate with other CSDs effectively to settle transactions where the buyer and seller operate in different markets with different CSDs. Failure to achieve this, particularly for trades active across the ex-date and record date of events will fuel an increase in market claims. That in turn will result in an increase in message traffic and put added pressure on the CSDs, and also the associated custodian banks to resolve not only the transaction, to remove any chance of a position break, but to also resolve the associated entitlement claim due from the failed transaction.
For voluntary events, failure to reach settlement in time can potentially expose the seller by preventing the buyer from making an election. Custodians that offer contractual settlement services, and would therefore directly settle any transaction from inventory, are then required to manage the election process through one, or multiple CSDs. This adds even more risk to the process of efficiently and correctly managing elections.
While T2S is aimed at promoting a more efficient, fluid settlement process in Europe, it also presents considerable challenges to the middle - and back-office of organisations to ensure everything that was typically done manually in three days is now done manually in two. This includes determination and reconciliation of failing transactions, which is a significant contributor to corporate actions processing risk.
Colaric: It is well understood that the introduction of T2S is a game changer for the industry. While some of the largest players have made their intentions known, many buy-side participants such as global custodians and brokers are likely to be adopting a watch-and-wait position. It is clear that T2S presents a threat to the business models of CSDs and sub-custodians. As the settlement function becomes totally commoditised, the provision of value-added services such as asset servicing will become essential to both CSDs and sub-custodians if they are to continue to be economically viable.
The challenge for CSDs is how they will develop this expertise, as it is not an area in which they have traditionally been involved. Will market participants be prepared to take the risk of entrusting their asset servicing and value added activities to an untested provider? Sub-custodians on the other hand, have the advantage of many years proven expertise in supporting the institutional investor community, not only for asset servicing but for their value-added services as well.
Ultimately, the winners are likely to be the providers who can adapt their model according to client needs and offer multiple options for accessing their services on a bundled or unbundled basis whilst meeting the regulatory and working standard requirements. These will likely be those regional sub-custodians and ICSDs that already provide multi-market eurozone service offerings, and in fact they are already far along in developing their solutions for the new environment.
Ruault: The inception of T2S and its influence on the harmonisation efforts in the area of corporate actions can, indeed, be seen as an added pressure for all stakeholders. This is mainly because it has set deadlines for market infrastructures and other market players to implement 100 percent of the standards that have strong dependencies with T2S, for example, corporate actions on flows.
Again, instead of allowing all markets to move at their own pace, T2S set clear milestones for each local stakeholder to reach before their own migration waves. Custodians, for example, have faced an increasing financial pressure to enhance their systems as well as time constraints to ensure that their own internal processes would be in line with the standards of each market while taking into account the timing of these markets’ migrations and the standards they would be implementing.
One of the difficulties has been, for instance, to keep a crystal clear, short-to-long term mapping of the adaptation plans of each CSD. Should custodians be unable to keep track and keep up with the pace imposed by local markets, they would face a dangerous situation where they would create a break in the chain of custody by not applying the appropriate markets rules. Not only that, but they would also set themselves apart by bifurcating from the other custodians’ practices, leading to confusion, especially for all investors that might rely on several different providers established in the countries where the CAJWG standards will apply.
This being said, another way to look at these correlated initiatives is to embrace the fact that, for once, the stars have aligned for custodians that can seize this opportunity to harmonise processes, for true regional providers to shine and offer versatile yet consolidated solutions based on the same set of standards and practices.
Going further, T2S is making custodians rethink their traditional offers. Indeed, some large financial institutions that have traditionally relied on local custodians to handle both settlement and asset servicing are starting to look at ways to connect directly to T2S and internalise their settlement activity. While this is made possible thanks to T2S, they will still need the assistance of a provider who will be able to handle corporate actions, tax, and proxy voting, with each activity being subject to all manner of local particularities. By allowing institutions large enough to see benefits in handling their own settlement activity, T2S has therefore pushed custodians to rise to the challenge and think of new ways to service such clients.
At the core of our business, another window of opportunity for custodians lays with the investors, small and big, that are in serious need of clear, practical, detailed and yet comprehensive information about these projects. Those that have actively taken part in the definition of the future standards, both for corporate actions on stock and on flows, will have a chance to capitalise on their deep knowledge of the rationale behind these new standards and communicate all the more efficiently with their clients.
Colladan: For the securities industry, T2S will generate technical, organisational and commercial shock waves that will also impact the corporate actions area.
Technically speaking, there is global pressure on service providers to adapt their information systems to corporate actions standards requests. In France, a strict marketplace organisation has been set up to ensure that all providers will be able to meet these standards, considered by French players as a prerequisite to T2S.
Furthermore, T2S introduces new concepts such as ‘investor CSD’, which is more or less a custodian in the skin of a CSD being a participant in an ‘issuer CSD’. In the scope of corporate actions, this concept opens an electronic highway between issuers, agents and investors passing through an issuer CSD, its participants and their clients.
Any link in the chain of intermediaries not complying with European corporate actions standards will cause a break in the processing of any event. Imagine the consequences of a securities redemption paid in T2S when counterparties are waiting for a T2S dedicated cash account payment?
The second shock wave is revamping organisations in order for a service provider to draw maximum advantage from T2S implementation. T2S offers a technical flexibility to provide client access to multiple CSDs via a single point of entry. This flexibility leads to different organisational questions such as the location of clients’ securities holdings.
Should it be close to the source of information and benefit from immediate announcement and better market deadlines, implying the need to locate assets in each issuer CSD accounts? Centralised in a single CSD to benefit from economies of scale? Disseminated in a local agent network to benefit from deep local knowledge? Or should it be a mixture, with the potential support of local agents in specific matters such as tax processing?
The last shock wave is commercial. Boundaries between key participants will be redrawn. A convergence of roles will emerge, with a confusion of roles between investor CSDs and custodians. Few custodians will look at establishing CSDs.
In this world, the application of corporate actions standards will become a basic common service. Providers unable to offer this basic service will disappear, while those just capable of offering it will only have the fees parameter to make the difference.
However, corporate actions will still be an area of local specificities, for instance, on the taxation front. Providers able to offer deep knowledge and the ability to deal with these specificities will make the difference.
That is the reason why SGSS has adopted a ‘Glocal’ approach based on our multi-local custody offer coupled with our European global access facilitated by T2S. Clients will be offered a single point of access, balanced by direct custody with deep local knowledge and the capacity to deal with local specificities.
T2S is simply the beginning of the story. It is just a pipe and the most important things are at each end and what goes through it, not the pipe itself.
Turning to other jurisdictions, what has Asia got to do to catch up with Europe and the US?
Ruault: The US and Europe are two very different cases. The American market is, by nature, a single consolidated marketplace where diversity lies with the various types of events and tax regimes rather than local specificities. Now, considering the diversity of markets, investors, and providers across Asia, a comparison with Europe does make sense. European institutions themselves wanted to create a set of rules that would make Europe as attractive as the American market to worldwide investors.
However, this is where the comparison between Asia and Europe has its limits. Asian countries still have some way ahead when it comes to adopting common standards, and are yet to generate the momentum to launch a coordinated initiative.
Asia is a fragmented market today and the Asian markets are building the foundations before putting in the finishing touches. Current efforts include more fundamental aspects of corporate actions activity such as increasing the STP rate. For instance, some local CSDs have entered workshops with local custodians in order to improve the STP integration of announcement messages. This will allow for an overall reduction of operational risk but also a much faster transmission of corporate actions details to custodians. Custodians that are a part of these workshops have an opportunity to help build standards and leverage on this first-hand experience to increase the service they offer to their clients.
It will probably be a while before Asia sees an initiative similar to the CAJWG and will depend on where regional harmonisation efforts will be on each country’s priority list. Without a coordinated regional initiative, it is difficult to envisage Asia implementing a common set of standards across the markets in the immediate future. In the meantime, it is the responsibility of custodians to implement processes that allow investors to experience corporate actions in a harmonised way on all the markets where they appoint the same provider, for example, harmonised structures of narratives, harmonised swift set-ups and competitive deadlines.
Still, observers can see positive signals coming from Asia. Without being directly linked to this activity, a number of markets have been very active in their discussions about T+2. The Australian and the Singaporean stock exchanges have initiated talks about reducing the settlement cycle to two days. India is already in line with T+2.
In order to harmonise know your customer (KYC) norms for foreign investors within their market, India has standardised KYC guidelines by implementing a common questionnaire on a risk based approach.
To conclude, there are a number of initiatives being taken in Asia, but for the moment, they are limited to their individual markets rather than launching a regional coordinated initiative.
Phillips: With an increasingly aggressive attitude toward winning new business from traditional western silos, coupled with there being little burden of legacy technologies, Asia has traditionally been an early adopter of new technologies and is usually innovative in its approach to process.
China has been particularly assertive in its expansion in the financial services sector and has shown many innovations in product development and its use of enabling technologies to meet a growing demand for tailored financial services. At an infrastructure level, China is adopting ISO 20022 for its payments systems while Thailand is looking to completely overhaul its own financial services infrastructure to be able to easily adapt to new standards.
Japan’s central depository, JASDEC, is leading the way with its adoption of ISO 20022 and market participants in Japan are required to become compliant in their use of the standard by 2018. Considering how slow it seemed for the global marketplace to first adopt, refine and finally use the ISO 15022 standard, to see Japan straightforwardly adopt the new standard is a testament to the attitude prevailing across Asian markets to maintain parity with and, in some cases, lead the industry.
As always, there is something of a ‘wait and see’ attitude but in the case of harmonised standards for settlements, it is markets in the west that are looking to Asia to determine the potential success or failure of initiatives such as T2S where reduced settlement cycles in Asia have already been established. In Europe, the Single Euro Payments Area is proving to be a success and Asian markets are keen to replicate this success. New listings of companies across Asia remain strong, particularly in China, even though secondary funding for such enterprises is proving difficult and the proliferation of IPO events is forcing the direction of thought around automation of the corporate actions process.
Europe and the US look to Asia for some aspects of development of standards while Asia looks to Europe and the US for others. All markets are looking to harmonise standards and cross-border collaboration with their significant trading partners wherever possible with a view to streamlined processes, making the act of doing business more efficient, simpler and more cost effective for all involved.
Colaric: The capital markets environment across Asia is very diverse, ranging from the well developed and sophisticated markets such as Japan, Australia, Hong Kong, and Singapore, to emerging markets with a variety of foreign investor barriers such as entry eligibility tests, currency restrictions, documentation, and investor ID processes. This, together with no common regulatory regime or single currency and a lack of market linkages, means it is not realistic to compare these markets to Europe or the US.
What we are seeing, however, is very positive progress in the more developed markets. Australia, Japan, and Singapore are good examples of where the industry participants themselves—such as the stock exchanges and CSDs—are being very active in engaging with the various intermediaries and participants and taking meaningful steps, especially around the adoption of SWIFT’s ISO 20022. One of the many positives about Asia is that once a market decides to make an infrastructure change, it tends to happen pretty quickly.
After automation, what’s next for corporate actions, or are we not there yet?
Ruault: This question is twofold as it touches two topics that are essential to further improve corporate actions processing down the road.
As far as automation is concerned, let’s face the fact that corporate actions are worlds apart from, let’s say, settlement. Indeed, even though we can learn from the achievements in the area of STP processing of settlement messages, it seems utopian to think that corporate actions messages could reach such automation rates.
To be more precise, successes in automation need to be assessed slightly differently depending in whose shoes you are. For local custodians, automation of incoming messages has not been achieved yet due to their direct interactions with first-hand material received from multiple sources that do not use standardised communication methods. This is where asset servicing providers at a local level play an important role in dealing with this variety of message formats such as faxes, SWIFT messages and PDF files, by processing narratives more often than not and, overall, by enriching announcement and payment messages to guarantee that the entire chain of custody receives the appropriate information right from the start.
For global custodians, on the other hand, automation is more achievable thanks to their own individual harmonisation efforts one of the many benefits from BNP Paribas Securities Services’s network integration, for instance. But to do so requires solid information from their local custodians, this is why global custodians that can, whenever possible, rely on their own networks of local custody, have an advantage because they control the format of messages in and out and can therefore aim at more than 80 percent STP integration in these cases.
Corporate actions require manual intervention today and while some events are starting to be processed without as much manual work, the increasing complexity and diversity of some events make it that the industry is making progress on one side and taking a step back on the other.
This is partly due to the fact that issuers tend to have needs that are more and more specific and competition is fierce among paying agents whom the issuers will appoint. To win mandates, agents customise the engineering of corporate actions to the maximum, which, in a way, is a contradiction with the global harmonisation efforts led by the industry.
So, in order to move to the next level, a full incorporation of the issuer community as well as the issuing and paying agents is necessary. Without rallying them and without their strong commitment, the efforts to align processes, to reduce operational risks, to guarantee smooth processing of cross-border corporate actions events, will be to no avail.
Phillips: With the growing volumes and increasingly complex corporate actions events, global financial institutions are constantly faced with challenges in processing corporate actions. The automation of data management, event management, entitlement processing, election management and communications through the use of currently available third-party technologies help facilitate the consistent and accurate processing of these events.
High levels of STP are being achieved for mandatory payments and stock adjustments and the adoption of standards and development of common cross-border practices helps ensure that events are processed consistently wherever they may be executed.
However, automatic compilation and update of stock records, the management of position differences between the client and their depository (position breaks) and the management of market claims not automatically compensated through the auto-compensation process are areas that would benefit significantly from further thought and development of both standards and technologies.
T2S will go some way to addressing the challenges with both the position and claims processes while widespread adoption of ISO 20022 with enabling technologies will considerably reduce the financial overhead and risks associated with manual processing.
The industry has made real progress and while we continue to make great strides in this complex process, there is still a significant amount of manual effort involved for many financial institutions, especially those in developing markets. As depositories and exchanges, such as the Australian Securities Exchange, the DTCC and JASDEC migrate from old proprietary formats to the new ISO 20022 formats, firms will need to address how their systems will handle these messages. Systems will also need to be upgraded to support the growing complexity of new event types to ensure that STP levels are maintained and improved upon. Firms may also look to leverage corporate actions solutions that can interface with books and records systems to help further maximise operational efficiencies.
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