December 16, 2010 – Reducing risk and improving trading will prompt financial firms worldwide to increase spending on automation of corporate action notices. Spending will increase to $93 million in 2015 from $70 million this year.
That’s the conclusion of a report issued on Wednesday by Boston-based research firm Aite Group.
“Front-office interest in corporate actions processing is at an all-time high as renewed emphasis on risk permeates the industry,” writes Fritz McCormick, senior analyst with Aite Group. “Users are pushing toward more evolved workflow and monitoring capabilities to better automate the more difficult aspects of corporate actions processing: entitlement, elections and settlement.”
Processing corporate actions is considered one of the riskiest back-office functions. That is because Wall Street firms are on the hook for making their clients whole if they either send wrong information about a corporate action or notify investors too late for them to make any decisions, when necessary. And there are over fifty types of corporate actions ranging from events as simple as an income or dividend payment to as complicated as a corporate reorganization.
Traders need to know about corporate actions promptly so they can make their investment strategies. Portfolio managers also want to wait as long as possible to submit their decision on such events as mergers and acquisitions so they will minimize market impact.
Automated software will help them make those choices within a couple of hours of the deadline rather than having to comply with the demands of their custodian banks that they do so via paper a week a week ahead of time.
“Thus the front office at asset management firms sees automation in a new light: as a competitive differentiator rather than a way to simply minimize operational costs and boost efficiency,” says McCormick.
His report, which compares corporate actions processing software from six vendors, shows that among the group shows that Information Mosaic; SmartStream, Tata Consulting Services and XSP can accommodate the greatest number of types of corporate actions.
Those include swaps, options, stock splits; rights; mergers and takeovers, tender offers, conversions, dividend and interest payments and early redemptions. Vermeg cannot accommodate swaps or tender offers while Polaris cannot process swaps, says McCormick.
When it comes to how easily the corporate actions software firms can integrate their products with a firm’s other applications and external sources, McCormick suggests that Vermeg’s MegaCor and Tata’s TCS BanCs are the most flexible.
“The system’s architecture offers an open interface to any external system allowing exchange of both incoming and outgoing flows,” says McCormick of Vermeg. “Several data formats can natively be used: XLS, XML, CSV, and SWIFT.”
He says that Tata Consulting’s BaNCs can also handle multiple formats such as CVS files, fixed length, flat files, XML and SWIFT. Also supported are proprietary data feeds from SIX- Telekurs, Bloomberg and Depository Trust Company.
This originally appeared in Securities Technology Monitor.
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