At one point during FTF’s CAPCon New York conference yesterday, a panelist noted that many of the issues being raised have not substantially changed over the past 20 years. While I concede the point, my perception is that corporate actions processing has become a mix of extreme contradictions that are harbingers of real changes to come.
For starters, during a panel on the price tag of corporate actions errors revealed that many securities firms still use fax machines, overnight mailing services and the US Postal snail mail to inform their clients and interested parties about pending corporate actions events to gather responses. In particular, some market participants such as very successful investment managers with the latest IT toys have to reach out to “mom and pop” investors that lack email and Internet access – let’s hope they have phones and fax machines.
On the other side of the coin, some officials at old school investment managers are caught in a time warp and actually have assistants print out email messages because they are incapable of doing it themselves or refuse to, according to some panelists. At the same time, some market participants are contemplating using mobile and social media technologies to distribute corporate action notifications, gather responses and advance the corporate actions supply chain.
Later in the day, a panelist observed that while there is great rhetoric and some activity for the automated Nirvana of straight through processing of corporate actions, firms are unlikely to be able to automate all of what they do because there will always be a patch somewhere of manual processing. Even so, there is clearly a digital divide in corporate actions processing and it will become more distinct as more firms embrace cutting-edge technologies.
To drill down further on the IT front, technologies based on XML and XBRL exist to ease some of the burdens of corporate actions processing but they are not being embraced on a grand scale. In a panel on migrating to the ISO 20022 standard in light of the DTCC’s pending 2015 deadline to move clients to the XML-based standard, it’s clear that some firms are racing ahead and embracing ISO 20022 for corporate actions processing. Yet participants in a later panel argued that beyond the DTCC deadline no one is making a convincing business case for expensive migrations to the new standard. And, in a telling moment at the conference, no hands went up when the audience was asked during the migration panel if they had plans to migrate to ISO 20022 given that they have about 18 months to meet the deadline.
While a few audience participants are beyond planning and have projects underway, clearly there is no groundswell yet for the ISO 20022 migration. Those that want the industry to move in this direction will need to do more work to persuade market participants that it is to their benefit to do so.
More convincing may also be needed to get clients to take the Foreign Account Tax Compliance Act (FATCA) seriously.
As financial services firms know, corporate actions have a major impact upon FATCA reporting issues but that appears to be far less of a challenge than clients that shop around for firms and non-U.S. markets that will help them avoid FATCA compliance entirely. This is beyond foolhardy because these clients will eventually get caught by the tentacles of FATCA as they reach around the globe. The U.S. government still has the clout to make almost all nations sign reciprocal agreements that will allow the IRS to get its pound of flesh. The only successful way around FATCA’s reach is to renounce U.S. citizenship as many wealthy celebrities have done.
Even as we suffer through the idiocy of the federal government shutdown, it will only delay IRS and Treasury Department action on the fine print of FATCA – the deadlines are likely to remain in place. “The FATCA train will not stop,” said one panelist. Good luck to those firms wrestling with clients that want to live in desperate denial.
But not everything on the corporate actions front is a study in stark contrasts. There is a glimmer of creativity and synergy ahead for the Legal Entity Identifier (LEI) and corporate actions processing.
First, there were several mentions and discussions of the attempt to bring standardization to the designation of corporate actions so that market participants use the same language when defining a particular corporate actions event. The Corporate Action Event Reference (COAF) effort is driven by industry groups focusing on market practices and there is hope that this initiative will gain more ground. The interesting connection to the successful LEI push is that corporate actions reporting and processing could be linked to LEIs, and presumably this would be even easier if there were standard definitions for corporate actions. This possibility could cause some to wax poetic about the multiple ways firms could streamline and advance global corporate actions via this potential clarity.
However, the reality is that corporate actions processing has many hurdles especially when as a panelist noted “errant custodians” still use idiosyncratic messaging that creates many Towers of Babel that financial services firms have to scrub, redefine and harmonize so that clients can understand the impacts of corporate actions events.
The last contradiction is the most interesting. With so many forces pushing on the glass ceiling of old IT systems and ancient manual processes, is the corporate actions market on the verge of major breakthroughs in technology and business practices? Should the industry embrace the dynamics of activated investors pushing for more transparency and the latest and best IT tools and business practices? Do cloud computing, social media, mobile technologies, XML and the promise of LEI/COAF synergies offer some interesting possibilities?
Wouldn’t exploring these possibilities be a better way forward than a sad and cynical reliance on huge, costly corporate actions errors that might spur positive changes?
If you were unable to attend CAPCon NY 2013, you can contact Kenson David for the purchase of the event recording and conference materials. You can contact Kenson at kenson.david@ftfnews.com or 646-395.6340 x114.
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