Guest Contributor: Kevin Cullen, Marketing Director, Information Mosaic
In a recent e-mail message from one of my UK colleagues, she added some conversational information along with the business side. “Beautiful weather here in London, today: about 30 degrees.” At first glance, I thought, “Is she kidding? She must be freezing! Is this typical for London in September?” But then I thought I had it all figured out. The date of the mail was “12-09” so this was obviously an unsent message from last December. Ah, issue resolved. Or maybe not…
Of course, you understood immediately that the real issue was the well-known Celsius vs. Fahrenheit debate. This weather standard is analogous to corporate actions processing, and I mean beyond the hackneyed “Corporate actions is like the weather: everyone talks about it but no one does anything about it.” That could not be further from the truth. In fact, well-intended initiatives by individuals and organizations alike, have been undertaken to address corporate actions processing inconsistencies, with more certainly to follow. The Celsius/Fahrenheit issue, however, highlights one of the major points of conflict with global corporate actions processing: the lack of a universally accepted standard. If we cannot collectively agree on something as straightforward as which temperature scale to use, a topic so basic that it affects us all – from meteorologist to banker – how can we expect to agree on a matter as complex as corporate actions?
Participants in the chain, from exchanges, market infrastructure organizations, custodians, data and application vendors, to asset and wealth managers, both individually and in concert, have been addressing the lack of a single global corporate action message standard for many years. The solutions include a new standard, recommendations for the use of particular fields in the current standard, data normalization applications and feeds, and the use of rules engines and middleware. However, those efforts are akin to the makers of phone apps that convert Celsius to Fahrenheit and do not address the real need: a global acceptance of a single standard.
In the list of participants above, I consciously left out the Issuer who, I fear, has not been adequately courted for their involvement. While a game-changing initiative like XBRL for corporate action messages may be, at the very least, a significant part of the solution, without Issuer buy-in, comprehensive automation is impractical. The issuer-agents and their lawyers would still be publishing the non-standard paper-based text for corporate actions that continue to lead to inconsistent definitions, multiplicity in data vendor interpretations and disagreement in content. The remedy may be found in regulatory mandates enforcing Issuers to adhere to the standard with mega-tagged electronic announcements. But is legislating change the right approach? Would this be like requiring the makers of Fahrenheit barometers to abandon production, destroy their current inventory and start manufacturing Celsius gauges?
Granted, there is a cost for change and in adopting a global standard, and the cost, like any expenditure, must be weighed against derived benefits. In many firms, the STP rate of mandatory corporate action events – dividends, interest payments, maturities – is quite high. Since almost 80% of the industry volumes are made up of these simpler, easier- to-process event types, automation is more readily addressed. It is the remaining 20% (quite literally the “80/20 rule”) made up of complex announcements such as tender offers that pose the need for investment. Would the goal of having full STP of corporate actions processing, regardless of whether the event was mandatory, voluntary, or even mandatory-with-options, be enough of an incentive for this investment? The resultant process would be one that ensures timely payments for investors, rapid response to asset managers for option notifications, reduced operational risk and real-time position updates to traders. As Bob Dylan sang, “You don’t need a weatherman to know which way the wind blows.”
At the recent International Withholding Tax Summit, it was made very clear that cross-border tax processing has similar roadblocks to that of corporate actions. There has been minimal global consensus about tax treatments on dividends and interest and even less efforts towards automation. The interests of various tax regimes can often be driven by political needs and cross-border competition. Some tax authorities, like some financial firms, are resistant to automation, despite any widely accepted industry cost-benefit analysis.
What would be the prime motivation for change? Past efforts by the US government to enforce the adoption of the metric system have failed repeatedly. It can be argued, however, that not only were the benefits not sufficiently explained to the public, but that there was no defined incentive. The American public, like some financial intermediaries in considering corporate actions automation, only saw the cost and the inconvenience. In the microcosm that is the financial industry, the incentive is essentially financial: getting investors their money sooner, getting information to traders and portfolio managers quicker for the eventual re-investment in issuer companies. These points must be put forth effectively to all participants in the chain.
I had better stop here; as Oscar Wilde once wrote, “Conversation about the weather is the last refuge of the unimaginative.” And I’m sure he would have said the same for blogging about it.