Corporate Actions Europe 2010

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Bernice Grant
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1 A-TEAMINSIGHT presents Reference Data Review Corporate Actions Europe

A-Team Group Corporate Actions Europe 2010 Paul Phillips, business development consultant for SmartStream Alexandra Karg, head of data operations and managing director at SIX Telekurs Sophie Bertin,

what needs to be done to get the market to adopt these standards? Phillips: Standards are all well and good when they are effective, easy to understand and (relatively) easy to adopt.

2 A-Team Group Corporate Actions Europe 2010 Paul Phillips, business development consultant for SmartStream Alexandra Karg, head of data operations and managing director at SIX Telekurs Sophie Bertin, head of Asset Servicing & Custodians, Swift Roundtable: Corporate Actions Europe Our panel of corporate actions experts debate the challenges facing the European corporate actions market and how best to tackle them. Market standards have been defined by a number of groups in the corporate actions space, such as the Corporate Actions Joint Working Group (CAJWG) and the Securities Market Practice Group (SMPG), what needs to be done to get the market to adopt these standards? Phillips: Standards are all well and good when they are effective, easy to understand and (relatively) easy to adopt. International businesses used to operating in the global marketplace are naturally better placed to adopt the many local standards but smaller organisations with the flexibility to move into and out of markets quickly have often been stifled by the myriad conditions that must be met to satisfy the local business needs. All current standards are guidelines based on perceived best practice. However, regulators need to look at forcing compliance to many of the better proposals and guidelines instead of sitting back and hoping that the adherence to them becomes de-rigueur. Karg: Of course, there is a multitude of groups working on corporate actions as well as on other standardisation matters. Nevertheless, in Europe direction is given by the European regulators. The Giovannini report has issued recommendations towards the harmonisation of corporation actions and the CAJWG sets the standards towards their implementation. The SMPG has been working on the harmonisation of corporate actions worldwide, or at least on making differences transparent where a worldwide standard was not possible due to local usages. On the corporate actions data level (message types), there are differences between the US and European markets with regard to messaging standards. The US has taken a different approach from Europe to standardise the delivery of corporate actions information. DTCC is working on it and the Securities and Exchange Commission (SEC) has mandated that all prospectus information and proxy voting use XBRL by In Europe, Swift is leading the community with the implementation of ISO standards (ISO 15022, ISO 20022). Their active participation in working group and committees shows that the user community is very interested in contributing to the development of these standards. However, their implementation could be more difficult since organisations think in terms of business case where money needs to be invested. The business case is rather to be considered for the community as a whole. Europe needs to drastically reduce settlement costs, which are 10 times more expensive than on the US market. We may expect or even hope that the regulators will enforce such implementation. But at which pace will the whole community follow? That s the question. Bertin: Awareness of the benefit and value is the key to justifying investment to follow market practice; it is not without effort and some up-front cost, however, the benefits of using the standards are very tangible and increase with more players using them. I believe we should be clear, though, that the work of SMPG hasn t been publishing new standards, rather defining market and making best practice recommendations. There is growing and significant awareness that following market practice reduces risks, improves STP and efficiency. And once there is significant adoption, a market practice can be enforced. On Swift, messages cannot be sent unless they follow the October 2010 Issue 13 An A-TEAMGROUP Publication 9

3 Corporate Actions Europe 2010 A-Team Group messaging standard and, in November 2010, the ISO MT 564, corporate actions announcement message, will change SMPG s D versus E market practice into a standard. D versus E is the placement of date, period, rate, and price data within a message (where should it go), in D block or E block in the message? For years this was a problem, but market practice helped get the industry on the same page. This change from market practice to a standard will virtually eliminate workflow stopping due to placement problems with date, period, rate and price data. Are all of these initiatives compatible or is it a case of too many cooks spoiling the broth? Moreover where do the gaps lie for future standards development? Karg: We know that many standards means no standard. The same standard needs to be adopted as widely as possible by the same community. There are examples where even the regulators have promoted the use of different standards. One example is the Alternative Instrument Identifier (AII), which is aimed at identifying options and futures in co-existence with the ISIN. With regards to corporate actions there will be standards in Europe and in the USA respectively, but we need to focus on a global harmonisation. Bertin: To respond to this concern the International Securities Services Association (ISSA) formed a corporate actions working group to study global corporate actions standards and market practices. After a year, the working group published Global Corporate Actions Principles and a paper that described the state of corporate actions processing across all markets. I would refer you to to download these documents. The overall opinion is that market practice is converging and that the best path to filling gaps in standards will be to leverage success across all markets, since all market practice definition is a precursor to a standard. Phillips: The benefit for financial institutions right now is that these are not mandated initiatives. The best of them will be adopted whilst others will eventually become forgotten. We believe there is compatibility but would like to see all bodies working much harder to coordinate efforts around accuracy of information provided at the issuer level coupled with more rigid formatting for distribution through the data chain to the financial institutions having to process the actions. All of the proposed standards focus on how information should flow across the market. What the standard definitions are, when information needs to move and what the delivery mechanisms are. This helps in significantly reducing the time it takes to place the information into, and move this information through the processing lifecycle. This is essential, of course. Nevertheless the processes used within financial institutions remain mostly untouched. Many organisations still do not use the ISO MT564 messages correctly and seem unable to resist the temptation of using an MT568 message instead. This is fine within the constraints of the movement of messages under the proposed guidelines; however, it is essentially useless when trying to automate the event processing once the information has been received. Issues still remain around the best practice for claims processing. No definitive message exists for proposing, tracking and, ultimately, resolving market claims and the use of faxes and s is still predominant. Furthermore, no strict guidelines exist on the period of validity before a claim can be rendered defunct. It would be helpful to recommend a framework of protocol, underpinned by sensible timelines, in managing this problem. What is the business case for adopting ISO in your view? Will it be compelling enough to achieve what failed to do? Bertin: Before the crisis, the compelling reason was additional functionality. The crisis tended to put that objective on hold and postpone investment in the new technology that ISO requires, XML. It is important to note that the ISO data definition is essentially the same as ISO so that a transition to the technology doesn t have to mean changes to workflow or even databases, just middleware and messaging. So the new motivation for the move to ISO is emerging as interoperability, lower maintenance cost and availability of additional data for some markets, called extensions, like for the US. However, even more important, the real value of ISO 20022, the business modelling, will begin to shine already as the path to real STP in corporate actions. Phillips: If an organisation wishes to operate both in Europe and the US, and wishes to be able to receive quick and accurate information electronically, then adopting ISO is probably the more straightforward approach in achieving this objective. XML, on which XBRL and ISO are built, has been in the technology space for over a decade and financial institutions are only relatively recently cottoning on the usefulness of the format for information flow. It becomes a natural technical progression from ISO to ISO when put in this context. With the SEC mandating the use of XBRL by 2013 and with the inevitable draw of corporate actions information into this format, then for those organisations already utilising the ISO standard it becomes more of a technical step change to move to ISO than it was to adopt the ISO standard in the first place. There is real value in the long term for moving to a more compelling technology, however, to substantiate this as a business case for moving from ISO to ISO purely for corporate actions messaging? I don t see there being a strong business case at all. Karg: One of the main aims of ISO has been to set a worldwide standard by offering a platform on which the multitude of standards, which are coexisting with ISO (FPL, MDDL, UNCEFACT, XBRL, etc), could be converted into one standard. The progress made in the development of ISO messages is very promising, although a wide implementation by the industry in the short term is rather unlikely. What about the regulatory environment and the number of reforms being pushed through? Karg: The regulatory environment shows the direction and the reforms pushed through tend to increase the efficiency, while contributing to reducing costs. The enforcement of standards and procedures by the regulators definitely pushes in the right direction. In 10 An A-TEAMGROUP Publication October 2010 Issue 13

4 A-Team Group Corporate Actions Europe 2010 Switzerland for instance, the securities commission enforces the distribution of term sheet data and of corporate action messages for listed securities via a common, standardised platform (Connexor). Bertin: The regulatory environment is indeed very challenging, with many new reforms coming. Specifically corporate actions are indirectly impacted by all the regulations aimed at increasing transparency in the system, collecting and providing data and contributing to the operational risks. Phillips: The various regulatory authorities could do more. The regulators are relying too much on the industry getting its own house in order. Much of what is being driven in the corporate actions space borders on self-interest; however, these initiatives and guidelines offer real opportunities to make significant progress. The regulatory bodies in the US, across Europe and across Asia need to grasp the nettle, assess what is good practice, mandate these practices globally setting clear guidelines and timeframes for adherence. They cannot and should not rely on the industry to provide inconclusive answers to rudimentary problems that are difficult to interpret and event more difficult to implement. How can the industry more effectively engage the issuer community in the push towards greater standardisation? Karg: The market infrastructures need to take the lead in their respective markets. Where the adoption of standards can be accelerated with incentives or penalties (like Swift did a years ago with ISO 15022), this should be done. The regulators should play a decisive role too. Bertin: This is our best opportunity. The advent of XBRL in corporate financial reporting, whether regulatory filings or tax authorities, has created the opportunity to approach issuers about corporate actions, especially in markets where issuers use paper-based communication. The Issuer to Investor: Corporate Actions project, led Swift, DTCC and XBRL US, has published a business case that is very compelling, estimating some US$400 million savings annually if issuers would use XBRL in the US to tag, or electronically identify the data, in their corporate event publications including prospectus, press release and regulatory filings. I would encourage anyone interested in corporate actions, or even interested in learning what happens, to read the business case available on Swift.com. Within the document is a case study of one corporate action, a mandatory merger, that lasted for over 8 months with 36 different publications from the issuer and their agents affecting the event. That is a lot of opportunity to misinterpret paper documentation throughout the processing chain. Adding data tagged with XBRL and using data elements defined in ISO 20022, that data can unquestionably be the same throughout the chain, removing a significant portion of the risk and problems. This should be a compelling story to issuers and their agents: they get to control the data they intend for their investors to act upon. Phillips: A central utility needs to be created that allows issuers to publish all of the required information relating to the corporate events they wish to undertake. This needs to be an easy access, cost effective utility that completely removes the potential for ambiguity and misinterpretation. The industry has taken great steps in determining standard data requirements for all of the recognised event types. The foundations are already in place. This would give all issuers a central mechanism for publishing the information the markets need to effectively process their actions. This utility could be offered to the issuer community and maintained by the industry through a central body, overseen by committee and placed on the cloud, or, the utility could be provided by entrepreneurial technology organisations capable of hosting and servicing the utility providing access on a subscription basis. How will the move towards XBRL for financial reporting in the US impact the area of corporate actions? Is it an appropriate format for the rest of the world? Phillips: XBRL is already a global format, widely used by governments across the world. The SEC mandated use of XBRL for financial reporting is a logical, if somewhat late, steps to make and with XML underpinning the structure it is inevitable that adoption will be widespread, certainly in the US. For corporate actions this offers some real benefits. With XBRL we can remove some of the ambiguities of attribute use seen with, for example, ISO We can define the data element and we can fix the tag. We can package it in an industry standard technical wrapper and send it wherever we want, however we want. Data movement and translation should become much more cost effective with global adoption of XBRL. Karg: XBRL is not only an important format for the US market the impact will be a worldwide one. ISO, Swift and their community are also dealing with XBRL. XBRL is an XML dialect and as such can be dealt with within the ISO methodology framework. The move to XBRL is important to standardise the corporate actions message types, contents and rules and thus make a higher degree of automation possible. The higher degree of automation in return enables us to avoid media breaches and give more control to the markets players to ensure the data quality and timeliness of corporate actions processing through an STP approach. Bertin: There is no reason that XBRL cannot be useful for the rest of the world in corporate actions, especially in areas that are heavily relying on paperbased communication. XBRL is useful for tax, financial and regulatory reporting for over 40 countries. Even where registrars are capturing data as issuer agents and passing announcements to the CSD, there is still value for XBRL to be added to the public distribution channels directly from the issuer. It can only enhance the transparency and viability of a market if the issuers are proactive in communicating the event s key data, as described in an XBRL taxonomy that is based on ISO This can also be useful for announcing shareholders meetings and the often frequent changes in resolutions that happen right up until the vote. The efficiencies may change our traditional view of corporate actions processing, but it seems that the tradition of manual processing, high risk and compressed deadlines actually needs changing so that both the issuer and the investor are better served by the process. October 2010 Issue 13 An A-TEAMGROUP Publication 11

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