A lot is riding on a corporate actions pilot test, led by The Depository Trust & Clearing Corp. (DTCC), and slated to get underway next week. The pilot has attracted heavy hitters JPMorgan Chase, BNY Mellon, Brown Brothers Harriman, ITG and National Financial Services, which may help persuade corporate issuers to automate their corporate actions. The problem is that it’s a tough sell.
The business benefits of automating announcements for dividends, principal and interest, redemptions, tender offers, stock splits and warrants are risk reduction, greater efficiencies and a leap forward in straight through processing—not headline grabbers.
In addition, many corporates will have to take baby steps toward automation, starting with the adoption of XML. The next move would be to replace manual systems or proprietary messages with the new ISO 20022 messages, which offer standardized syntax, definitions for key elements and facilities for adding supplementary data. In a prepared statement, Susan Cosgrove, DTCC managing director and general manager, settlement and asset services, says that the ISO 20022 standard could help the industry replace “more than 60 different legacy platforms that have evolved over the years.”
Firms involved in the pilot will be using a new browser-based interface that’s slated to become the basis for a unified corporate actions platform. The browser has been designed for use with distributions, redemptions and reorganizations.
The pilot program will end in November and the DTCC will phase in the new standard retiring “all legacy file formats on or before 2015,” according to a recent statement. Until then, the announcements phase of the corporate actions life cycle overhaul is slated to begin in November with distributions and redemptions in 2012 and reorganizations in 2013. The DTCC will supply a dashboard for each event type grouping. (SWIFT, for its part, has reversed engineered ISO 15022 corporate actions messages to produce the rudimentary functions of ISO 20022 messages. SWIFT will be supporting both concurrently.)
Aside from the technology, the push for corporate actions automation needs peer pressure in order to succeed. By taking part in the pilot program, the A-List organizations with their combined clout could help turn the tide in favor of automation. The DTCC, SWIFT and XBRL International, which in a unified effort began pushing for automation in 2009, could also boost acceptance of the DTCC for corporate actions automation.
Fritz McCormick, an analyst with Aite Group, puts it succinctly when he points out that the backers of automation need to activate their followers. “Can you bring your user community to bear and get them to push through this standard and do it as quickly as possible?” he asks in a recent FTF profile of Chris Church, chief executive, Americas, and global head of securities for SWIFT. The DTCC and SWIFT are co-developers of new messaging documentation; SWIFT is also the ISO 20022 Registration Authority. In that same profile, TowerGroup analyst Peter Delano says that it’s encouraging that several firms are participating in the pilot program. Church is convinced that we’re witnessing a game-changer.
If peer pressure fails, though, some in the industry say the government may have to step in and require corporates to automate their corporate actions according to standards.
Given the current quagmire known as Dodd-Frank, peer pressure doesn’t look so bad.
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