09 March 2009 Features

 

Knock-on effects

Kristina West

The automation and standardisation of corporate actions have been on the agenda for such a long time that progress appears to be moving at a snail's pace. Is the fragmented nature of Europe, derailing the process?

Transferring the traditionally cumbersome and paper-laden corporate actions cycle to an STP-driven, standardised set of processes has been the Holy Grail of the securities industry for many years, and the drivers are growing more urgent by the day. With risks including misinterpreting events, late announcements, missed instructions and missing data, there is the possibility of huge losses at a time when cost and risk are already critical issues.

As Max Mansur, global market manager at Swift, puts it: "Before the crisis, when there was a lot of money flowing, some could be held back to pay corporate actions claims if there was a mistake. Also, if there was a problem, you could throw people at the process. There is now a headcount issue, and no residual capital. It would reduce the risk of failure and [the need for] capital reserve if firms could automate."

The high level of manual intervention in corporate actions also continues to be an issue, with headcount dropping and limited funds for investment in technology. For example, with elections on corporate actions, many markets are still required to fill out paper certificates which go with the electronic election instruction, creating unnecessary risk through the need for manual intervention.

Edwin De Pauw, director, product management, at Euroclear, notes the beginning of the corporate actions life cycle is particularly prone to manual intervention. "Communication from the issuer is still mostly through legal documentation and is interpreted by different players, which results in the need for data cleansing. This takes time, is not cost efficient and creates risk," he adds.

These primary issues - risk, cost, manual intervention - are being addressed by various bodies at an industry-wide and global level, and primarily concern automation between counterparties and in-house. However, Europe continues to have its own set of issues, revolving primarily around standardisation.

One of the main barriers to harmonisation is different market practices. The European markets, of course, evolved independently for historical reasons, and it was only the introduction of the euro and the consequential rise in cross-border investment that made the case for standardisation across Europe so compelling. It became harder for investors to understand different markets and exercise their rights related to corporate actions. Issues such as different data sources for each market, a lack of harmonisation of market rules and different rules on stock splits have all contributed the need for standardisation across different jurisdictions.

Speaking at the recent Securities Operations Forum Corporate Actions Europe event in London, Tomas Thorsen, secretary of the European Commission's Clearing and Settlement Financial Compliance (FISCO) expert group, commented: "Cross-border trading in the EU is still more costly and complex than in the US. The investor pays two to six times more for a cross-border transaction than for a domestic one. The present system hinders the functioning of capital markets."

Additionally, the very initiatives that are aiming to standardise the process may be adding to the confusion. Between the Giovannini recommendations, Clearstream's Link Up Markets, Target2 Securities, Euroclear's Common Communication Interface, Swift's work and many others, standardisation looks like an impossible dream. Not only is each initiative calling for automation and standardisation in its own way, they have been forced to spawn a number of working groups to look at the initiatives and try to find harmonised solutions.

So how can these issues be addressed, especially given that problems such as tax and regulatory differences are outside the jurisdiction of financial services? One approach that has united many of the different initiatives has been work towards removal of the Giovannini barriers.

Thorsen says that the FISCO group has been looking at the removal of the Giovannini barriers 11 and 12. This will ensure a level playing field between domestic and foreign investors. "Fiscal compliance barriers increase the cost of cross-border settlement, and procedures vary between member states and even within single states," he says. "We are looking at the removal of barriers to make the process more efficient. We want to abolish paper and pass on information electronically."

The introduction of ISO 20022, however, appears to be dividing opinion. "Swift always offers, promotes and facilitates standards, but the market has to choose to adopt them," says Mansur.

Gert Raeves, vice president of strategic business development at GoldenSource, believes that the market, right now, is not as behind 20022 as might be hoped. "No-one is very keen to take up 20022," he says. "Proxy voting and shareholder meetings are new standards, but traditional corporate actions are just getting a remix of what existed with the hope that harmonisation will kick in. Large-scale early adopters such as Euroclear will make it a de facto standard, but people have got a lot on their plates. There is no rush when there is no clarity on the finish line. If they have 15022, which is ok, the perception will be that 20022 is not a priority," Raeves concludes.

Alan Parsons, securities product manager at CheckFree, also notes that the standards set only apply around Swift messaging. "There is considerable use of non-Swift messaging within our community. Whilst the Swift standard covers the high volume business model there will always be stoppers created where counterparties are still paper based, or utilise proprietary links. Any standards created really need to be applied across these messaging models also otherwise true STP will never be established. Alternatively the use of ISO standard messaging must be made cheaper to cost-conscience businesses so that there is a greater adoption rate."

With many of the issues preventing true automation and standardisation in Europe stemming from the fragmentary nature of the market, are there any lessons that can be learned from the US approach? While some barriers can't be crossed - it is still extremely unlikely that there will ever be single depository, regulator or fiscal regime as enjoyed by the US -  the move towards single standards is an important one.

On the tax side, there are some calls to introduce the US Qualified Intermediary scheme to overcome issues in tax reclamation stemming from the current situation whereby 54 different tax reclaim forms are being used throughout Europe.

Swift is also looking at leveraging the Extensible Business Reporting Language, which is used for corporate financial reporting in the US. Swift's Mansur notes: "XBRL is not a standard, but gives a methodology to allow a standard to be used. A financial report writer can publish with XBRL to define different data elements. It is in its infancy, but in a May conference in New York we are looking at a business case to justify this. Why would the issuer do this? What is the value to the investor, and the market?"

While the industry continues to address the issue of standardisation, step by step, and individual firms look at automation in light of current events, others are looking beyond Europe as the next big barrier to overcome.

Euroclear's De Pauw wants to see the new ISO standards adopted by non-European issuers. "It must be about global market best practice, not just European. There is no single forum to address this need now. There is some talk about global standardisation within ISO committees. And, with representatives from the associations participating in the corporate actions joint working coming from European and non-European markets, I expect the US and other markets to quickly adopt these standards as well."

Also, now that the financial crisis has put a halt to the usual approach of throwing technology and people at a problem, firms are thinking of different ways of doing things and getting back to basics. People are becoming more interested in sharing risk and doing things together. If the credit crunch ushers in a new era of co-operation, and the European securities industry looks across the Atlantic for solutions as well as within its own fragmented borders, the credit crunch may be seen to offer the corporate actions arena a lifeline.