The DTCC and key custodian banks are embracing ISO 20022 to bring standardization to corporate actions
Editor’s note: This is the first of a two-part series on the Depository Trust & Clearing Corp.’s (DTCC) embrace of the ISO 20022 XML-based standard for state-of-the-art automation for corporate actions. The DTCC is working closely with financial messaging services provider SWIFT on this project. In fact, at SWIFT’s Sibos conference in Toronto, Sept. 19-22, there will be education sessions on ISO 20022 on Monday, Sept. 19, from 2 pm to 3:45 pm. In addition, later on Monday, the DTCC will provide an update on its implementation of the new standard from 5 pm to 6 pm. On Tuesday, Sept. 20, a session at 9 am will showcase the DTCC’s pilot project. Another education session is slated for Thursday at 9:30 am.For years, many voices in the industry have been crying out for a way to standardize the automation of corporate actions and overhaul a highly inefficient, mostly manual system riddled with expensive errors.
Market research firm Aite Group has estimated that large custodians and investment management firms set aside “between 15% and 20% of their custodial services budget to cover potential losses from errors and omissions.” As profit margins and budgets get tighter, more firms are hoping to shrink the funds they need to fix the errors caused by manual processes and faulty data.
In fact, few in the industry would argue against standards for corporate actions data and processing. However, many firms still resort to manual processes to deal with the problem, says Paul Kennedy, business manager, reference data for data solutions provider Interactive Data Corp. (Europe).
“The back office gets the least investment so in many places it’s done manually,” says Kennedy. “There’s still a large degree of emails and other documentation—a very paper-based, manual approach. For a lot of people, it’s a small enough activity that they throw people at it instead of trying to invest in standards and data automation processes.”
Yet when firms are presented with the latest and greatest standard they still need a compelling reason to modify their behavior, Kennedy says. The Bedford, Mass.-based Interactive Data Corp., for instance, was among the first providers to offer products based on the current standard for corporate actions ISO 15022.
“For a lot of people, it’s a small enough activity that they throw people at it instead of trying to invest in standards and data automation processes.”
—Paul Kennedy, business manager, Interactive Data Corp. (Europe)
“We did that based on what we viewed as market demand at the time,” Kennedy says. But despite 10 years and many providers offering ISO 15022-based services, the standard is not accepted by “the vast majority of the marketplace.”
In fact, many firms are “either not using or haphazardly using [ISO 15022],” says Fritz McCormick, a senior analyst at Aite Group. “They have adjusted it to fit their needs and so the potential for benefit is definitely there,” McCormick says. “But the pragmatic side of me wonders about how easy it will be to get the industry to move in that direction.”
The difference this time for standardization, say industry observers, is the involvement of the Depository Trust & Clearing Corp. (DTCC).
The DTCC wants subscribers to leapfrog over ISO 15022 and its own proprietary corporate actions platform to the emerging standard ISO 20022. DTCC officials say ISO 15022 does not include all of the data elements the DTCC needs to support, and its legacy Global Corporate Actions (GCA) platform cannot keep up with the demands of the market.
The leapfrogging is also intended to give DTCC clients greater flexibility than the legacy platform, a reduction in the risks caused by manual processes, an efficiency boost and real straight through processing (STP) capabilities.
The DTCC’s commitment is manifesting itself in a pilot project, launched this past April, to test ISO 20022-based corporate action announcements and a new browser-based interface slated to become the basis for a unified corporate actions platform. The browser has been designed for use with distributions, redemptions and reorganizations.
The announcements phase of the corporate actions life cycle overhaul, encompassing dividends, principal and interest, redemptions, tender offers, stock splits, warrants and reorganizations, is slated to go into production on November 20 this year. The DTCC is planning to go live with corporate actions distributions and redemptions in 2012, and reorganizations in 2013. The DTCC will supply a dashboard for each event type grouping.
The overhaul has been in the works since 2009 when the DTCC teamed up with the SWIFT financial messaging and networking services consortium and the not-for-profit XBRL International, which promotes the eXtensible Business Reporting Language (XBRL), an XML variant that helps standardize communication between businesses and via the Internet.The DTCC has galvanized the efforts of several industry organizations to help catapult DTCC subscribers to the emerging ISO 20022 for corporate actions offerings from announcements to payments by 2015.
Getting there will take many pilots and many steps.
The initial pilot project has attracted the custodian banking service providers J.P. Morgan, BNY Mellon and BBH. Steve Sloan, asset servicing product manager for J.P. Morgan Worldwide Securities Services, foresees “big advantages” to being in a corporate actions pilot test, led by the DTCC.
“Number one,” says Sloan from J.P. Morgan, “this work has to be done because, at some point, these old legacy DTCC files will be decommissioned. So we wanted to get a head-start on this and to take advantage, when we go into production, of a lot of these benefits behind what the DTCC is doing.” The bank intends to implement all of the ISO 20022-based announcements with an eye to income and redemption corporate actions.
J.P. Morgan will get the key benefit of “helping develop the message,” McCormick says. “They’ve got a vested interest in getting in there early and making their intentions known. It’s a very savvy thing to be doing.”
The DTCC will be getting feedback from J.P. Morgan and the other pilot participants on the quality of the ISO 20022 messages and how well they are adhering to standards, explains Sloan. When the announcements phase goes live, it will coincide with SWIFT’s release of networking services that facilitate distribution of the ISO 20022-based data. (In the meantime, SWIFT has reverse engineered ISO 15022 messages to produce the rudimentary functions of ISO 20022 messages and supports both concurrently.)
“We’ve given [the DTCC] several suggestions on how they can streamline their data and make it more market-practice oriented,” Sloan says. “As far as J.P. Morgan, the challenge for all participants is to take these messages in. It’s a new format—it’s XML based. So we have to build that infrastructure to take in those messages. And each participant has its own story about what they’re doing with the messages, how they’re viewing them, how would they migrate them into a production environment.”
J.P. Morgan’s involvement with the pilot project began in March and a review of the bank team’s progress continued through the summer. The project team consists of business and IT talent, Sloan says.
“I’m in the product management space. There are a lot of different touch points in the technology world. I would say that with all the people from a technology or business perspective there are 15 to 20 people that have their hands in the project,” Sloan says. “We have build-outs for our technology to support the new messaging. We have build-outs to take the data as it would have come in and try to integrate it into our current systems.”
The firm had to review its current environment and data quality before it could take on the ISO 20022 messages.
“What we had to do was to go through the rules and codes that we had to take in the legacy DTCC files,” Sloan says. “We have to unravel that code and look at how to transform the new data and how to make the changes accordingly. The first building block was insuring that we understood our current code.”
The second building block was the data mapping process to take the old data to the new data. “The DTCC has a website for its documentation and we’ve been using their documentation as well as our own documentation to do that mapping,” Sloan says.
The DTCC has changed the way it utilizes and structures its data.
“So anything that is structurally different with their data, we had to make changes such as adding field into our systems to coincide with their fields,” Sloan says. “Wherever we can re-use our fields, we’re doing that. Wherever we needed to add new fields, we’re doing that as well.”
Sloan and the project team also had to adjust to the DTCC’s new official corporate action IDs—unique identifier for events.
“While every custodian has its own corporate action ID number, there will now be an official number for the event that will be sponsored by the DTCC,” Sloan says. “For clients that have multiple custodians, this is a huge advantage for them. That official ID is fully usable by them. They will be able to instruct their custodians with that ID. Otherwise, if they had 10 custodians, they’d have to store 10 event IDs depending on who they would have to send an instruction to.”
In addition, the DTCC now has a consistency to its field names.
“For every different system [of its legacy platform], you would have to log into the DTCC separately,” Sloan says. “Now they have harmonized their data so there’s a consistent data model that defines all their attributes and they use standard definitions for the model. So the model of their data makes it more understandable from a business perspective.”
“This work has to be done because, at some point, these old legacy DTCC files will be decommissioned.”
—Steve Sloan, asset servicing product manager for J.P. Morgan Worldwide Securities Services
As Sloan and his team get deeper into the project, they are finding their biggest challenge has been handling the messaging volume. Over the summer, the bank has been testing the impacts of full-volume XML-based message feeds into its environment, which uses the SWIFT network.
“On heavy processing days, this can be quite a large amount of volume. So we’re talking about upwards of 100,000 messages per day,” Sloan says. “This replaces the old file-driven system of which many of these files were received end of day. So there is a shift to more real-time data and to take that in intraday.”
The next phases of the overhaul will focus on the entitlements, distributions and responses. “Next year, we’re going to be working on distribution events,” Sloan says.
Like Sloan, Stephanie Keppenne, managing director in BNY Mellon Asset Servicing’s product management group, is looking ahead to the rewards to come from the DTCC project. Improved services for clients and staying on top of international standards top her list of expectations.
“Automating the corporate action processing flow from the issuer to the investor will definitely reduce the risk of interpretation,” Keppenne says. The overhaul will hasten time to market issues for corporate actions and provide BNY Mellon clients with “a larger window to make their investment decision related to corporate actions.”
BNY Mellon’s pilot team is composed of those skilled in SWIFT networking and experts in the US market for corporate actions. In addition, the bank has a project manager leading the effort with the support of manager to oversee the architecture of the project. The team has been working with the DTCC since fall 2010 to map the US events to SWIFT messages and the bank’s proprietary tools. “On the IT side, we are upgrading our platforms to adopt the XML and process the new messages,” Keppenne says.
BNY Mellon Asset Servicing has consistently upgraded its IT infrastructure to counter “the risk inherent to the corporate action events,” Keppenne says. The firm has also had to adjust to “market evolutions such as adequately supporting the repo trades entitlement, upgrading to support the US Cost Basis, integrating the yearly SWIFT Releases, and moving to the XML technology.” The firm has also had an ongoing investment in Workbench, its web portal for corporate actions, and has to maintain local corporate action teams in America, Asia and Europe.
“We are also in the pilot for MyStandard, a SWIFT product which should provide us with a tool to, among other functionalities, optimally manage the SWIFT rules and the BNY Mellon SWIFT user guide for our clients,” she says.
Keppenne says she urges firms trying to improve their corporate actions processing to invest in flexible IT solutions.
“Even if the demand for standardization is definitely there, it takes time to implement it while corporate events keep on becoming more complex,” she says. It’s also critical to invest in educating staff members that will be the first to face these changes and relay them to clients.
“A continuous review of the corporate action workflows is equally important to ensure that procedures and systems remain adequately efficient and that best practices are adhered to in order to reduce risks,” she adds.
For the moment, aside from the pilot participants, DTCC clients are faced with incomplete, untimely information that has to be pieced together from multiple sources, including the DTCC and third-party data vendors, explains Brett Lancaster, managing director, securities initiatives for the SWIFT Americas. It takes a great deal of effort to get a golden copy of a corporate announcement, Lancaster says.
“Automating the corporate action processing flow from the issuer to the investor will definitely reduce the risk of interpretation.”
—Stephanie Keppenne, managing director in BNY Mellon Asset Servicing’s product management group
It also takes an effort to process corporate actions, which the Aite Group says was an approximately $70 million global business in 2010 that will grow to $93 million by 2015.
Despite the challenges, Lancaster and others are determined to bring standardization to corporate actions.
“Seeing this project through for me personally and the team here in the Americas is one of the most important things that I have on my plate,” says Lancaster, who was pushing for the reengineering project when he worked for the DTCC. “I have to see this through—not just this pilot phase but for the next phase, which covers the elections and elections management side.”
While the announcements phase is important, DTCC clients are probably more concerned with the automation of elections to the DTCC because now “that’s all faxes, emails and phone calls to their clients and to their investment managers asking them how they will vote,” Lancaster says. “To get that automated is the real win in terms of STP. This is a big project and it will last until 2015.”
By the time the DTCC moves on to the elections phase, the announcements stage will probably seem like the easy part, McCormick says.
“The hard part comes when you’re starting to transfer messages that really didn’t exist before,” McCormick explains. “You can pretty easily map an announcement from an older messaging type or an ISO 15022 type to ISO 20022. But it’s tougher when you’re building it from scratch. That will begin to show the industry how much effort is involved.”
To download further information on the DTCC’s plan to revamp it’s Global Corporate Actions click here.
(The second part in this series to run later this month will focus on the barriers that lie ahead for the acceptance of ISO 20022.)
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