Bringing issuers into the standardisation fold

The joint work by SWIFT, DTCC and XBRL US to standardise corporate actions announcements is set to bring benefits throughout the chain, from issuer to investor.

This article was originally published in Issue 2 of Asset Servicers on SWIFT

The inefficiencies created in the corporate actions process because issuers announce events in non-standard formats are well known. Much has been achieved during recent years through ISO standardisation and automation among financial intermediaries in the corporate actions chain, but until the issuers are fully on-board with standardisation there will always be a crucial gap.

Currently, issuers do not generate announcement information in a standardised, electronic format. Many good reasons can be cited for them not to standardise, but the results are that the investors' intermediaries - such as the custodian banks - must manually generate electronic records containing the corporate event details that investors need. Each of many intermediaries and data providers is interpreting announcements to manually create data, often with variations. The outcome of this interpretation can vary widely, bearing in mind the complexity of many events. To reconcile the multiple versions of an announcement, the data messages from multiple sources go through a manually-intensive scrubbing process. Inevitably some inaccuracy or misinterpretation remains, introducing the risk of not acting appropriately on an event, sometimes leading to very high compensation payouts.

This problem can be minimised if the industry standard is adopted earlier in the lifecycle of a corporate action. It has been suggested that issuers have little to gain from getting involved - that the lack of standardisation of announcement information causes problems for intermediaries, but not for the issuers themselves. In fact, issuers do stand to gain. If standardisation is achieved at the announcement stage, the content of the issuer's corporate action can be communicated to the investor with no risk of misinterpretation or delay - and the issuer is not required to devote resources to answering queries about the event.

Since each issuer only infrequently announces a corporate event (four to six times annually), there is, however, a need for tools to help them quickly and easily align with industry standards.

A technology gaining widespread adoption for corporate financial and regulatory reporting is eXtensible Business Reporting Language (XBRL). A newjoint effort by SWIFT, Depository Trust & Clearing Corporation (DTCC) and XBRL US is leveraging the success of XBRL as a technology to improve issuer-investor communications for corporate actions in the US. The approach also has global applicability, as both XBRL and SWIFT are international organisations, and there is a commitment to ensure alignment with global ISO standards. The effort is starting in the US, but will soon be replicated in other major financial markets.

SWIFT, DTCC and XBRL US are building a corporate actions XBRL taxonomy with data elements based on, and aligned with, the ISO 20022 repository elements. This will enable issuers to electronically and easily "tag" data using off-the-shelf or open source software when preparing a prospectus. The tagged data can then be readily transformed into an electronic, data-driven ISO 20022 message for consumption and downstream processing, from intermediaries to investors.

Issuers get a straightforward, easy-to-use technology that will enable them to standardise announcements in a way that is aligned with and supports further adoption of the global ISO standards.

Intermediaries continue to use the ISO message standards and will be able to achieve better automation, while investors will be able to make decisions based on more accurate, more timely information.

As Mark Bolgiano, President and CEO of XBRL US, points out: "The leadership of DTCC and SWIFT on this issue will enhance the overall adoption of XBRL in the US, and dramatically improve the corporate actions process throughout the US financial supply chain and, ultimately, in the global marketplace."

Donald F. Donahue, Chairman and CEO of DTCC, adds: "Through this joint initiative we have an opportunity, at last, to bring clarity to the often manual, labour-intensive and unnecessarily risky business of interpreting information related to corporate action announcements."

SWIFT is also planning to work with XBRL International in co-operation with local XBRL jurisdictions and securities markets. This will include markets in Europe, as well as Japan, Australia, China and South Africa, among others.

"Already dozens of countries have adopted XBRL for financial reporting, and the next most significant information disclosure impacting equity and bond holdings from an investor's point of view is corporate actions, so this is an obvious next step," says Max Mansur, Market Manager, Custody and Asset Servicing at SWIFT. "In virtually every market in which we've discussed this problem, there is complete agreement that data from the issuer is essential to solving the corporate actions problems."

Japan's market infrastructures have already strongly invested in XBRL, as have those in China, specifically the Shanghai and Shenzhen Stock Exchanges, which have been heavily investing in XBRL for corporate reporting since 2004 and have already begun mandating XBRL for dividend reporting. Both are also implementing ISO messaging for communications out to the custodians in the market.

South Korea, Singapore and India are very actively using XBRL as are many countries in Europe such as Spain, Belgium, France, UK, Italy and Poland.

Chris Church, Global Head of Securities at SWIFT, says: "Collaboration among SWIFT, DTCC and XBRL will promote straight-through processing of corporate actions by electronically capturing data directly from issuers, or directly at the point that a corporate action is announced, in a standardised format. The work we are doing in the US as a start is a stepping stone to making a bigger difference for the industry on a global basis."

Corporate actions: still a priority post the financial crisis? Drew Douglas, global head of custody, HSBC Securities Services, shares his views on how to take asset servicing automation to the next level. In light of the global financial crisis, is standardising and automating corporate actions processing still a priority? Apart from being a very manual process, corporate actions is probably one of the highest risk areas in the investment/custody world. The risk increases during turbulent times, including the volatile markets we have recently experienced. Improving straight-through processing (STP) rates, the information available to clients and reducing operational risk must be a core focus for any custodian. We will continue to invest in corporate actions efficiency and our clients are requesting more – and better – information, whether on the sub-custody or global custody front. Corporate actions are on everyone’s radar, and we will continue to invest significantly in this space. How important do you believe it is to extend corporate actions standardisation to include the issuer community? Do you believe existing initiatives are well-positioned to achieve this goal? In all automation, it is important to consider the end-to-end processes. For corporate actions, the process is initiated by companies who created the events which may be further complicated due to legal/regulatory reasons. From that perspective, it certainly makes sense to start the end-to-end automation from the beginning. However, very often STP and automation initiatives benefit the downstream users more than the upstream users. Therefore, the challenge here is to get the true commitment from the issuers where the business case may not be very attractive, and to persuade them that the whole industry will benefit from such initiatives. One difficulty here is that the issuers are in such a large community, and the situation is complicated by the number of markets they are in. A more effective way to manage their participation may be by working with those who regulate the issuers: the securities regulators or the stock exchanges. Anything that can be done to better standardise announcements will be hugely beneficial. XBRL will have further advantages, as those that deploy it will also benefit from ease of regulatory reporting and better efficiency in tax reporting. What else can be done to further improve levels of efficiency in the corporate actions process? Apart from the issuers’ end, there are also other areas where there is still room for further standardisation and automation. There is still room to improve market compliance with the existing standards and to reduce the use of free format messages and narrative fields. This is something that SWIFT and the Securities Market Practice Groups (SMPGs) could help to enforce. One way to achieve market compliance is probably to introduce higher message costs to the offenders. Additionally, I believe SWIFT should work to broaden its community of users and reduce the cost of entry for user groups such as hedge funds. Banks would certainly support such a broadening of the community but a particular strategy to tackle this market will be required. What else do you think SWIFT can do to encourage broader uptake of standards for asset servicing? Once a standard is complied with and the investment made, agreeing when the old standard will be retired and cutting off the use of the old messages to push the new standard into play is quite important. If an old standard remains in circulation alongside a new one, the motivation of new users such as issuers and smaller buy sides to adopt standards will be diminished, because it appears more difficult for them to comply. Bigger players who are trying to drive automation out to other users end up having to run dual processes, which is inefficient and expensive. Where else within the asset servicing business can greater efficiencies be achieved, and how can the lessons learned in corporate actions be applied elsewhere? Across the broad range of activities that fall under the banner of asset servicing, any further automation will help us reduce costs and risks. Tax is going to be an area where we will see increasing regulatory requirements. Many tax reclaim processes are currently very manual and different tax authorities have different rules. With the Organisation for Economic Co-operation and Development (OECD) initiative to harmonise this, we should see more opportunities for standardisation and automation in the future. The wider use of XBRL/ISO will also benefit other financial reporting automation initiatives. While not purely asset servicing, the developments in corporate actions should also benefit similar developments in the world of securities lending and collateral management.