Automation Transforms Corporate-Actions Processing

Terry Flanagan

The Depository Trust & Clearing Corp. is spearheading a project to transform the processing of corporate actions from manual and error-prone, to automated and standardized.

DTCC’s multiyear Corporate Actions Transformation project centers on using the ISO 20022 messaging standard for corporate actions processing. Automating the instruction process by using ISO 20022 messaging is meant to increase efficiency in corporate actions processing by eliminating manual touch points and the opportunity for error.

“What we are looking to do is to leverage the ISO 20022 global standard as a means of communicating out to our clients,” Dan Thieke, managing director of settlement and asset services at DTCC, told Markets Media. “We are introducing a lot more automation, particularly around instruction processing. We think this is going to help drive significant efficiencies for our clients because they can now take ISO messages from us on a real-time basis and then instruct on electable events back to us using the ISO standard as well.”

DTCC recently completed the third phase of the transformation project, which encompasses distribution events such as stock dividends, cash dividends, and principal and interest payments. “On many of those events there’s an election for either cash, stock, or perhaps a certain withholding rate on taxes,” said Thieke. “We have introduced the ability for our clients to instruct us on distribution events using the ISO standard, which we think is a significant milestone.”

One of the main benefits of the industry using the same standard is that the risk of misinterpretation when transferring data from one broker to another or from one custodian to another is reduced significantly and efficiencies are boosted.

“Traditionally, corporate actions has been an area that has lacked automation and standardization,” said Thieke. “We are focused on driving down the operational risk associated with corporate action processing by eliminating the manual step of having to re-key instruction messages into two systems, which can be prone to manual errors.”

T-Scape, a financial software provider, has launched iActs, a web application designed to provide increased levels of automation to front and back office processes with the initial release focused on corporate actions and the direct capture of elections from decision makers.

Dan Thieke, DTCC

Dan Thieke, DTCC

The product is intended to address market-wide need for tangible and measurable benefits in the form of operational efficiencies and reduced risk, that can be achieved within the client’s current corporate action technological environment, the company said.

A large U.S.-based asset manager has integrated iActs with its the legacy system in order to address the processes surrounding non-mandatory corporate actions.

“By providing the front-office with a means to input elections directly via iActs, the risk of error carried by the back-office is effectively removed,” said David Baxter, T-Scape’s managing director, in a release. “Our mantra has been to keep the complexity associated with corporate action processing very much ‘under the hood’.”

A standard messaging and data model will go a long way in reducing miscommunications and errors throughout the corporate actions chain — from custodians, to investment managers, to the end investors.

“There are a number of vendors that provide firms with information on corporate actions,” said Thieke. “That may compound the problem because if there are inconsistencies with some aspects of the events across those data providers, clearly that is going to create exception processing.”

With the distribution phase of the transformation project completed, DTCC will now focus on redemptions and reorganizations.

Redemptions events include full and partial calls, final paydowns, maturities, full and partial pre-refundings, partial defeasances, and terminations. Reorganizations events include exchange offers, conversions, mergers, reverse stock splits, tender offers, and rights and warrant exercises, and other events arising from the servicing of the securities eligible at the depository.

“We are going to follow the same approach for the next phase which will be redemption events including partial calls, and full calls, and finally the last phase which will be around traditional voluntary reorganization events,” said Thieke.

Featured image by photosoup/Dollar Photo Club

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