What is a corporate action?
A corporate action is any event that affects the stock or security of a company such as a dividend announcement, stock split or rights issue. Generally information about the corporate action event is required to be communicated to shareholders by law. An industry explanation can be found here.
What types of corporate action are there?
Depending on who you talk to, there can be anything upwards of 100 types of event. They range from ‘Mandatory’ events that do not require a decision by the shareholder, such as a share dividend to ‘Voluntary’ events such as a capital raising which may require the consent of a majority of the shareholders. Other examples might be a ‘Split’ or ‘Stock Option’ which require shareholders to decide which option to take and then ‘elect’ to do so. Company financial advisors are adept at conceiving new methods to enhance the capital of a company or to carry out financial objectives more efficiently, so new types of corporate action evolve over time. A list of event types is available here.
Why are corporate actions so complicated?
In themselves corporate actions are not particularly complicated. They are generally clear and well described so that shareholders can decide what to do if they need to do anything. What is complicated however, and what gives rise to massive industry uncertainty, is the way they are announced and communicated or distributed. Generally local regulation requires that they must be announced to the local markets (often through a stock exchange), but there is no prescribed electronic format or information structure that the announcement should follow, so this means that announcement data cannot be processed automatically. A discussion of the complexity of corporate actions is available here.
So why is the way corporate actions information distributed a problem?
Problems arise because the data announced on the exchange no longer reaches the shareholder directly – or only occasionally. Gone are the days when a shareholder would rely on an announcement received by post or published in the Financial Times. Also, with electronic trading, there has been a proliferation of nominee accounts and dark pools of investment where it is difficult to establish the identity of the shareholder (and with it the ability to inform him or her directly). Corporate action events are mostly processed by custodian banks or asset managers acting for large numbers of shareholders all together and who need accurate and timely information to know how to act in their best interests and they need accurate information promptly. So instead of direct information, companies now receive their information indirectly from a network of data vendors who gather the information from whatever source they can find, aggregate it, some scrub it for accuracy and sell it to banks
What about sources of information? Surely we can find out what is necessary?
As with other company announcements, corporate action announcements are actually public documents intended for wide dissemination. They are not confidential, and the issuing company bears responsibility for the accuracy of the information carried within them. But because of the nature of stock markets and the way electronic information is distributed, it has become very difficult for anyone to ensure that accurate information is relied on by the investor or agent in real time. The problem is exacerbated by the way data is now exploited, with exchanges selling corporate actions information feeds to vendors and banks, who then process the information and send it on further down the processing chain. The way companies process the data results in re- (which means that it can no longer be compared to the original – or only with difficulty) and manual intervention, perhaps to comment on or enrich the data, amplifies the problem.
So what does this all cost?
So far from being able to access information that is accurate, direct from the source in real time, there is a whole industry that has built up on the back of the source-accuracy problem. In an attempt to solve the problem, banks purchase multiple data feeds from different vendors (when the information originated from one issuer company only!), data vendors provide ‘scrubbed’ feeds, scrubbing software is used to help with automation, scrubbing is done again and again at multiple stages (even though the data has already been scrubbed and so should be pristine) and in spite of all of this, there is still risk and error, requiring those who act for shareholders to make provision for loss. It is estimated that corporate actions uncertainty costs the industry in excess of $10bn per annum and rising.
So what are governments doing to introduce transparency?
The EU Transparency Directive makes it a requirement that from 2015 countries situated in the EU must provide a ‘National Storage Mechanism’ (NSM) for financial information and for the accreditation of Regulated Information Services (RIS) who will publish the information to the markets. RIS providers such as the London Stock Exchange’s Regulatory News Service (RNS) must file announcements they receive from companies listed on their exchange with the NSM as they are announced. So far the UK is the only EU country to have implemented this directive and this initiative is by no means an international approach. There are many countries where, even though it is a regulatory requirement to announce on the local stock exchange, the exchange itself does not provide public access to corporate actions information, preferring instead to exploit the monopoly they have on data by selling this information to data vendors. Of course this does anything but promote transparency and it is Instant Actions’ objective to get them to provide this information openly and if they do not to get the information direct from the issuer companies.
Why are corporate actions announced in an unstructured format?
This is a hangover from the past when stocks and shares were traded on physical exchanges and the data recorded in analogue format. Although trading is now all-electronic, this occurred on an exchange by exchange basis, with little thought given to how information should be provided to keep pace with this, so although information is invariably published in either text or pdf, there is no global mechanism that makes it a requirement for this information to be published in a common way. The history of corporate actions announcements and how they have evolved is available here.
And why does this cause problems? Where does XBRL fit in?
Publishing in unstructured format causes problems because there is no approved taxonomy within the documents themselves that allows those acting for large numbers of shareholders to process the information automatically so that they can streamline the process. As a result that most of the processing is still done manually which is costly and causes delay error and risk. There has for some time been a proposal that countries should mandate that corporate actions announcements should be made in XBRL format, in a similar fashion to the way company annual accounts are published now, however there is no likelihood that this will happen soon, and even if this did become law, there still needs to be a way to check that data has not changed as it flows through the corporate actions information chain. There is a great deal of information on the problem of corporate actions information but a good analysis – ‘A Business Case to Improve Corporate Actions’, was published by the Depository Trust and Clearing Corporation (DTCC), SWIFT and XBRL (US) and is available here.
So what is being done to resolve this? Where do ISO 15022 and ISO 20022 fit in?
The Society for Worldwide Interbank Financial Transactions (SWIFT) has introduced two messaging standards ISO 15022 and recently, the more versatile ISO 20022 to provide a methodology for interpreting unstructured announcements and they also provide message templates for communicating this interpreted data. Interested parties from the industry (custodian and investment banks) have formed Securities Practice Market Groups who get together periodically to recommend amendments to the standard which are then published annually. SWIFT is a not-for-profit organisation owned by the banks specifically tasked with introducing and managing financial standards and infrastructure. SWIFT and Codel worked together to demonstrate how a new system could bring certainty to corporate actions announcements.
So will ISO 15022, ISO 20022 and XBRL solve the problem?
Sadly not! Even if companies were sufficiently motivated to enter their information in a prescribed format, it still needs to be processed and worked on as it flows through the markets. This is because intermediaries who ‘service’ assets (i.e. act on behalf of others to manage them) need to append information to the original data to notify what has been done and to tackle local issues (for example paying tax in a local country). This means that the originality of the source data is lost because it has been amended. The loss of this source-accuracy is a real problem partly because it introduces the risk of error and partly because it does not provide for notification of updates to a corporate action in real time.
Why do some corporate actions require updating?
There are some types of event the outcome of which is uncertain, for example a merger or acquisition. In these examples the initial announcement will almost certainly be followed by multiple follow-on announcements leading to either success or failure. Those who service the assets on behalf of shareholders absolutely need to know that they have the most current and up-to-date information, otherwise they may make a catastrophic mistake, or miss a deadline which costs everyone a great deal of money. It is partly for this reason that banks rely so heavily on data vendors who invest considerable effort to ensure that they provide the most accurate and up to donate.
So what is really needed and how does Instant Actions help?
What is needed is a community application for issuers to publish their announcements to a global audience. This needs to be underpinned by technology that provides the information in industry-standard data format such as ISO 15022, ISO 20022, & XBRL and which ensures that the information can be verified as source-accurate and up-to-date at any point during the information life cycle. Instant Actions and Codel’s digital notary together are building this application in phases.