“Corporate actions continue to be an area of complexity, manual processing and high risk” according to the interim results of research into the corporate actions processing, conducted by the wealth management consultancy, Compeer.

Even as corporate action volumes appear to increase each year (with larger participants processing in excess of 40,000 dividends and 9,000 elections last year), there is a general perception in the market that corporate actions continue to be an area of significant risk.

According To Compeer’s Research, The Main Areas Of Concern Are:

• Managing multiple, conflicting data sources with different structures
• Presenting clients and investment managers with inaccurate or incomplete information
• Managing election processes with multiple touch points and inconsistent default definitions
• Incorrectly reporting instructions across multiple custodians or nominee accounts
• Not releasing trade restrictions due to an event not being processed in a timely manner

These risks are heightened by the increasing complexity of many events, especially where deliverables cross markets, as in the case of the Shire acquisition; or dividends with multiple elections, as is the case with Rolls Royce and is standard practise in many foreign markets.

The industry response to this risk and complexity has been to establish best practice, but this has introduced the paradox that risk can be reduced, efficiency increased, and services improved, but rarely all together. An example of this would be reducing the risk of missing an event or improving the quality of event information by receiving notifications from more than one source. This, however, would then require the additional effort of recording multiple notifications, reconciling their data and the management / resolution of any exceptions. If this was to be done manually, the increase in effort would be directly proportionate to the number of additional notifications received, and therefore this is rarely implemented.

Is Automation The Answer?

The only means of resolving this paradox is through automation. Receiving notifications in digital form (and not simply free text entered in a comments / notes section) allows corporate action platforms to easily digest and reconcile multiple custodians / sources. The inevitable differences in dates and other discrepancies can be resolved using automated rules, the only manual intervention being due diligence on the resulting master copy. More sources could therefore add to the quality of information, and thereby reduce risk, and improve efficiency over the manual alternative.

Additionally, receiving at least one notification from a data vendor is likely to provide earlier notice of a pending event as vendors are more likely to publish notifications on announcement date or as soon as it is known by the market. This will provide for a bigger processing window, even when custodians bring forward ex-dates to reflect their need to process the resulting instructions. The use of a vendor would also allow visibility of corporate actions across the company’s entire instrument universe, and not just those with invested positions. This has the potential for moving corporate actions from a reactive process dependant on the custodians, to a proactive service enabling clients and investment managers to make better informed investment decisions.

Don’t Miss Manage Your Elections

Another example of the paradox raised within Compeer’s research is the management of elections and the resulting instructions. The risk of missing an election deadline, or misreporting instructions to a custodian or multiple custodians can be reduced by supressing the available options or mandating an outcome. This might also improve efficiency as it would reduce or remove the effort needed to manage the process by which instructions are collected from clients or investment managers and apportioned across custodians. Such efficiencies would however come with a sharp contraction of client service and may even be in contravention of the upcoming Shareholders Rights Directive (SRD II). Again, the solution is automation. A corporate actions platform should be able to automate the processes by which information, including election choices, is circulated to clients and investment managers; the collection of their instructions; and the correct allocation / reporting of these across one or more custodians or nominee accounts. The nature of automation means that the number of elections and / or the number of options available within each election is no longer correlated to the human effort required to manage their processing. The result is better ‘best practice’, reducing risk, whilst providing a more customised client experience / result and improving efficiency. Additionally, this ability to manage large numbers of elections with multiple options might become a mandatory function if SRD II regulates the provision of proxy voting, if requested by a client (shareholder).

Why Do Firms Continue With Manual Corporate Action Processes?

This raises an important question. If automation provides a means of solving the risk, efficiency, service paradox, why are corporate actions still manually processed in over 80% of wealth managers? The answer largely lies in the historic cost of corporate actions processing software and the necessary data. However, we and our data vendor partners are presently working to bring cost effective corporate action automation to even the smallest financial institutions. There is now no reason not to reduce risk, improve efficiency, whilst improving services.