In a more globally harmonised corporate actions market, Jim Monahan of Sionic says there is an opportunity to create a robust industry utility, where corporate actions data can be collected and housed centrally and managed in a consistent format
How can the industry change the persistent and growing risk in corporate actions processing?
In my view, the industry needs a three-pronged approach to mitigating risk across corporate actions.
The first part of this approach is around the global harmonisation of corporate action events in general. From my 35 years of experience in the corporate action arena, I see distinct differences within the global community in how corporate actions are handled, whether that’s in the application of the key event dates, in how central clearing houses facilitate, or in the different terminology that poses challenges in cross border transactions, which are often already a struggle to manage across the industry.
It’s true to say the industry has done a good job in creating and providing a standard mode of communicating corporate actions, primarily via the existing SWIFT Standards, for example, ISO 15022 or ISO 20022 messaging formats, which provide a structure to communicate corporate actions in a consistent manner. But if corporate actions are not handled, managed, or announced in a consistent manner, it doesn’t matter whether you have a standard format or not: in the end, it’s going to generate confusion and mistakes.
Similar issues arise with the wide array of legacy processes from the bygone era of an industry-driven solely by physical securities. As an industry, we need to assess these properly and understand how and why they were created, then decide how — or whether — we’re going to change them to move forward into a new world.
There has also been a recent focus on industry efforts since the onset of the pandemic, for example, the shortening of the settlement cycle from T+2 to T+1; as well as the push to dematerialise the market to move away from having physical securities. These will be a big step forward in starting to normalise corporate action transactions.
The second major aspect of the approach is around technology. In looking across the spectrum of technology initiatives I have spearheaded across my own career, and at the latest technology solutions currently available, I see tremendous opportunities for firms to make a modest investment to upgrade their existing corporate action applications that will create a major step forwards, with a more robust, less risk averse technology solution than they currently have in place.
One big challenge with mitigating risk is where firms rely on proprietary homegrown systems built back in the 1990s and early 2000s which now have extensive limitations to the coding or integrated development they can do. In my opinion, firms need to commit to funding the opportunities around adopting the latest technology. And I would strongly encourage firms to consider exploring a third-party solution, as many of today’s industry vendors and third-party solution providers have adopted many aspects of the latest technology solutions available.
The third and final point is around people. I firmly believe it is important to have the right people; as well as resources in place, and not to underestimate the necessity for a complete front to back understanding of the process required to successfully manage corporate actions. I have seen some firms, to their detriment, try to minimise the required skill sets needed in this space. It is always a mistake. For example, I’ve seen organisations try to create a team that would only perform pre-pay date-related processing functions, with another team that would focus on post-pay date processing functions. By breaking it down, they thought they were getting more efficiency; instead, once the firm started getting turnover, nobody understood the entire process across pre-pay date to post pay-date from front to back, leading to a series of issues and eventually, requiring the business to return to a model where people perform tasks from front to back.
What do you think some of the challenges could be around moving to those next stages?
Global harmonisation is always a challenge because everybody needs to agree on what the right processes are and what the correct changes are — but I believe it is about taking incremental and small steps forward collectively. For global harmonisation to work, you need to have the right dialogue, the right industry partners and the right people to communicate the opportunities. When I was working for a broker dealer, I found myself in a unique position, and at times, handcuffed with regards to putting ideas forward or challenging the norm because of concerns around upsetting an existing client or having conflicts with other industry partners. Now, as an independent advisor, I have the opportunity to communicate and discuss the issues that exist and actively participate in addressing how we move forward as an industry.
Undoubtedly, the pandemic has pushed plans along to invest in technology by highlighting firms’ weaknesses in their resiliency or contingency plans. Overall, I believe firms did handle the pandemic well and were able to bounce back in a short period of time. Having said that, the pandemic opened Pandora’s box when it comes to some of these bygone legacy processes noted earlier. For example, when you look at physical securities, 90 per cent of all US broker dealers have their security sitting in DTC. During the pandemic, DTC had to shut down its vault for several weeks, as several employees, unfortunately, came down with the COVID-19 pandemic — which meant no physical securities were being delivered across the street. The exact same issue occurred when Hurricane Sandy landed on the shores of downtown Manhattan and the DTC vault was flooded. Both are clear examples that demonstrate that the industry needs to step away from a dependency on physical securities — not simply because they are obsolete in today’s digital world, but also and even more so because of the extensive risk that dependency poses for the industry.
Another specific example of a bygone process that in need of change is the US’ guaranteed delivery process. In my view, this is quite simply outdated and a key generator of risk in organisations. Yet it’s still seen by some institutional investors as a necessity and ‘too risky’ to change. I disagree. The name itself ‘guaranteed delivery’ is a misnomer as no one can guarantee delivery of shares in the process. It’s time people rocked the boat and challenged some of the ‘broken’ parts of these processes.
In terms of technology, firms need to make a commitment to investing in change and in the corporate action programme. I have been fortunate that, during my career, I’ve been able to win the investment arguments and foster the type of ongoing investment necessary to make systems more efficient, risk averse and — just simply better. That’s not to say that it was easy, especially coming out of a financial crisis! My investment opportunities in 2010 and 2011 were greatly reduced, to the extent that we were limited to having a ‘lights-on’ budget only; but, as things improved, I was given more budget to invest annually.
Today, there are so many opportunities with new technology that will allow firms to collaborate more and ideally drive a more efficient operating model for everyone. The evolution and acceptance of cloud technology have been outstanding. Just a few years back, regulatory bodies had real objections to the concept of the cloud and with the industry publishing information on a public cloud, but more recently they have taken the opposite approach and now encourage it. This is key and the benefits of cloud technology are many. From the public cloud versus private clouds, to being able to provide plug-and-play technology solutions, we are going to start to see firms promoting collaboration and simply be more open to the change. Ultimately that will reduce costs and allow firms to adopt newer technologies in a faster mode.
How has the COVID-19 pandemic increased demand for corporate actions?
Broadly, the pandemic highlighted some of the kinks in the industry’s proverbial armour. It posed challenges such as the obvious need for a vast majority of people to work from home. It showed that most firms had the ability and capacity to meet the new demands and it also highlighted those that didn’t fare as well. Additionally, early in the pandemic news cycle, trade volumes simply exploded, with incredible volatility across global markets. This spike exposed fractures in many firms’ post-trade life-cycle management, mainly in the settlement space, which is something that will most certainly be revisited in post-mortem reviews. And in fact, I suspect it is one of the drivers for today’s discussion on the risks, opportunities and requirements of moving to a shortened settlement cycle.
From a pure corporate action perspective, one of the initial challenges at the early onset was with a higher than normal late or default rate on announced dividend and interest distributions. Across the process, there were delays in the flow of corporate action payments from issuers, and their agents to the depositories. This was driven primarily by the same issue everyone was facing of resource constraints and legacy payment processes; it’s a knock-on effect. As a by-product of this challenge, I believe firms will need to re-evaluate their existing income payment methodology, whether contractual or upon receipt, to access the risks should a similar crisis occur in future.
On the other side of the corporate action department, the voluntary corporate action teams saw an increase in fixed income events, with issuers trying to restructure their fixed income debt products to reduce or lower interest rates or extend the programme beyond the current date. This has been coupled with an exponential increase in the growth of special purpose acquisition company (SPAC) related support, primarily centred on splitting newly issued units, which is an extensively manual process across the industry.
When it comes to the less spoken-about corporate action process, proxy management, last year saw the entire annual meeting season, March to June, turned upside down, with issuers unable to conduct annual meetings in person. The virtual meeting arrangement, which has been available for years but not often used as in-person meetings were preferred, exploded onto the corporate action scene. From the logistical planning, new vote management protocols and data sharing across third parties, the industry scrambled to get their feet underneath them.
On the back end of the crisis, now will be the time we could see an expansion in consolidations and merger activities. Q1 and Q2 2021 have already shown that there are signs of growth.
What opportunities will an evolving global environment provide the corporate actions space?
Firms are going to continue to see processing volumes increase as well as client expectations grow for a more seamless front to back corporate action support model. In the end, firms need to make the investment in technology not only to manage growth, complexity and expanding client expectations but also to continue to manage expenses and mitigate risk.
Some of the newer opportunities I hear from my clients are around the ability to leverage today’s technology to be smarter with the data that they have across their infrastructure. I foresee the introduction of data analytics and other machine learning opportunities to start leveraging data not only in a smarter manner, but also in a more robust, more focused manner, where they can start to evolve and see patterns with the data and be more proactive in these environments.
A second front will be a push toward the evolving cloud technology and the deployment benefits within corporate actions. I believe there is a tremendous opportunity to enhance internal, as well as external collaboration within the corporate action arena via the cloud.
How will the adoption of technology change post-pandemic? And how will it affect corporate actions?
The future is going to be around cloud technology and the eventual migration toward a more globally harmonised and collaborative corporate action industry.
I envision numerous opportunities in how new technology will evolve corporate actions; and, if I had to highlight one it would be centred on corporate actions data.
Every firm I’ve worked at or have spoken to over the course of my career has made a huge annual investment in simply collecting corporate data and striving to get it as quickly and accurately as possible. This has evolved with most firms having their own independent, corporate action repositories.
And yet, in its purest essence, corporate action data is free. In the end, issuers, from either a fiduciary responsibility or from a regulatory perspective, are required to publicly announce their corporate action related activities, or data.
With my vision of a more globally harmonised corporate action industry, I believe there is an opportunity to create a robust industry utility, where corporate actions data can be collected and housed centrally and managed in a consistent format — much in the same way in how the industry gravitated toward legal entity identifiers.
From an industry perspective, we have created global standards for communicating corporate actions, such as ISO 20022 and ISO 15022. I see the next steps being centred around gaining momentum for the idea, with a focus on bringing all parties together with a commitment of delivering a solution that encompasses the process from start to finish — issuer, to transfer agents, depositories, banks, brokers and asset managers.
Do you think there needs to be more education around corporate actions across the industry or do people know the changes that need to be made but resistant to take those steps?
There are always opportunities for education in the corporate action arena. And yes, people are, at times, resistant to change. The evolution of corporate actions has a rich and storied upbringing over the decades. The paths taken and reasons why — hold many of the lessons learned from past challenges. I had the benefit of starting my career in the corporate actions space when the industry was primarily physical securities and I’ve been a front row witness to the changes over the decades since. I am a firm believer that the lessons learned in the past and the processes created as a result should be understood by all. And given that career and that experience, I am convinced that the time has now come to create a new paradigm within the corporate action arena. We have the opportunity now to shift towards a more collaborative and globally harmonised approach built around centrally managed and shared data; to create a completely dematerialised market with rules built-in part of the lessons learned from the past — and even more importantly, to forge a new path forwards for our future industry leaders to manage.
As we start to look forward post pandemic, I believe there is a tremendous opportunity for us to put all that has evolved over the last 30 years — including this time of COVID — into perspective and harness all that expertise and experience to build a more resilient, more effective and more efficient corporate action programme for the future.
