Why Financial Institutions Should Automate Corporate Actions Processing

Why Financial Institutions Should Automate Corporate Actions Processing

Corporate actions play an important role in the financial industry and a single missed corporate action will result in financial loss as well as reputational loss. However, gathering and processing corporate actions data often presents a tough challenge. Why is that? And what can financial institutions do about it?

Corporate actions can have a substantial impact on the valuation of assets. That’s why it’s important to keep track of them. Financial institutions need to know what’s happening at the companies in their securities portfolios because, on one hand, they have to inform their clients about it, and on the other hand, corporate actions have a determinative bearing on their proprietary trading. In the procurement of data, three aspects are crucial: quality, timeliness, and accuracy. That sounds simple, but actually isn’t so easy to achieve in reality. But why is that?

Why Do Corporate Actions Present a Challenge?

When a company  announces a corporate action, it is expected to inform its shareholders of the change. The problem, though, is that there are no uniform international standards and regulations to which such disclosures must conform to. Most countries apply very different sets of regulations. This means that corporate actions are communicated in all sorts of formats and publication types. Be it via press release, via a company’s website, or hidden in hundreds of pages of digital or print publication. There is no uniform global format for corporate actions disclosures. They are often communicated in unstructured data. Since understanding corporate actions requires specific background knowledge, experts are needed. This leaves room for interpretation, which in turn can lead to errors.

All of that complicates data sourcing, and in the worst case, it results in financial institutions learning of corporate actions too late or even missing them altogether. That, in turn, can result in financial losses, but also reputational harm. The same goes for companies that carry out corporate actions. Failure to adequately inform investors about corporate actions is detrimental to a company’s reputation.


What Are Corporate Actions?

A corporate action is an activity initiated by a company that materially affects the company and its shareholders. Corporate action events can substantially impact the value of shares, bonds, or other financial instruments issued by a company. There are over 70 different types of corporate actions. Some of the most common ones are:

  • Dividends
  • Stock splits
  • Mergers and acquisitions
  • Rights issues
  • Spinoffs
  • Increases and reductions of capital stock

A distinction is drawn between two kinds of corporate actions: mandatory ones executed without express approval by shareholders, and voluntary ones in which shareholders have the option of taking part.

Show More
Show Less

Why Is Manual Processing of Corporate Actions Problematic?

A whitepaper by SIX found that 46% of all corporate actions data is processed manually. That’s an enormously high figure for modern times. For financial institutions, this means a huge expenditure of time and attendant high costs, as well as susceptibility to errors in gathering data. The transition to a T+1 settlement cycle in the USA, which will probably come to Europe as well in the years ahead, doesn’t make the job any easier. The switch to a T+1 cycle gives financial institutions even less time than before to accurately reconcile corporate actions and resolve any problems that may arise.

It would be ideal if regulators would reach an agreement on internationally recognized standards, but that actually happening is unrealistic in the near future. And even if it did happen, it would likely take several years, if not decades, for those standards to become established worldwide. This means that financial institutions have to take action themselves. But how?

What Can Financial Institutions Do with Regard to Corporate Actions?

In order to reduce risk, time expenditures and, by extension, costs, the key for financial institutions is to automate their processes, an evolution that is already under way. Some companies have set up sophisticated platforms, but others still rely on emails for notifications and use Microsoft Excel to keep track of pending corporate actions.

This is where they have to start the switch to automation. The process consists of two parts: How does corporate actions data roll in? And how does the data get processed internally?  Financial institutions must make sure that they receive high-quality, accurate corporate actions data on time. They can ensure that with a premium data feed such as the structured data feeds from SIX, available in multiple formats, including the international standard ISO 15022 . The second step – processing the data – is performed inhouse at financial institutions. The implementation of high-grade software solutions enables a higher degree of automation of corporate actions processing and delivers the data to the right places punctually and fuss-free.

What Are the Benefits of Corporate Actions Automation?

The key benefits  of automation are the reduction of financial and reputational risk along with cost reduction. Large-scale financial institutions in particular have a tendency to work in silos, meaning that each unit gathers and processes its own data separately. This results not only in redundant data expenses, but also multiplies overall costs.

Furthermore, automation fosters standardization and harmonization. Automation offers the possibility to create an internal competence center that provides processing of corporate actions data as a service. And, last but not least, automation facilitates a transfer of know-how. Corporate actions require specialized knowledge, which is becoming ever scarcer. When a financial institution automates its processes, the corresponding corporate actions know-how gets integrated into the programmed rules.

A reduction of manual corporate actions mechanisms is crucial, particularly with regard to the trend toward shorter settlement cycles.