August 26, 2011 – As financial firms begin to rely on automated, standardized messages rather than faxes and emails to communicate corporate actions to investors, they are faced with a challenge: how to integrate the information across a wide range of computing platforms.

Standardization alone, says one software vendor specializing in message transformation and integration, won't be enough to reduce operational risk involved with errors.

Those mistakes involve receiving mistaken information or information too late on which to make any decisions required when it comes to exchange, tender or merger offers. The operational risk is only increasing as the number of corporate actions firms must process also rises.

"Along with the corporate action processing chain from issuer to ultimate users, the problem of data reliability is less the result of the failure of any specific system, but rather the difficulty of maintaining the same information set across disparate systems and data formats," says Vijay Oddiraju, chief executive of Volante in its recently released white paper entitled "Corporate Actions Data Management: Empowering Firms: the Role of Integration in Industry-Wide STP."

The new standardized messages are formatted in either the International Organization for Standardization’s 15022 protocol which flow through the network operated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), or the updated XML-based ISO 20022 protocol which may move through SWIFT and soon the Depository Trust & Clearing Corp.'s proprietary network. Because the ISO 20022 messages are XML-based, they may also be transported across otherwise proprietary interfaces among partner institutions or through service providers.

Although ISO messages have grown in popularity, they are still predominately favored by custodian banks and data vendors that channels the information to asset managers and retail brokers that service individual investors. SWIFT has been far less successful in recruiting asset managers and retail brokers to use its network and adhere to ISO standards in the corporate actions workflow. Even though firms can use the XML-based format to pass corporate actions information to others and don’t need to use SWIFT’s network, they must still have the ability to receive and integrate ISO messages into the rest of their systems. That's a pretty tall challenge with a myriad of legacy systems that do not recognize these formats.

The answer: Preserving data accuracy of corporate action information through existing technology with data transformation and integration within a firm and to its clients. "Such integration offers the potential to extend corporate ... information distribution across all of the systems architecture and media channels, meeting business requirements and regulatory demands, current and future," says Oddiraju. "As a short to medium term investment, the payback is certain but with ISO 20022 coming into play for corporate actions data, the ROI will only be enhanced."

The immediate and obvious payback of integration, says Oddiraju, is straight-through processing. It eliminates the cost, delays and risk of unrecognized errors associated with manual keying in of corporate actions data. When an incoming message can automatically flow to front and back office systems - as well as investor communications processes - profits and service levels increase.

Here are three potential ways firms can use integration to improve how they handle corporate actions, as outlined by Volante:

  1. Outsourcing: Volante calls this the answer of last resort. It's pretty expensive and loaded with risk. The data provided by the third party firm is likely to be more expensive than buying it direct. And if a trading operation or asset management needs more information, especially from international markets, it must be purchased from other sources. Outsourcing also does not relieve the need for firms to oversee data quality and processing to ensure accuracy and performance.
    “The reality is that most of these things could be done less expensively in-house, especially since most firms are already integrating outsourced and in-house data and processes,” Oddiraju says. “Independence from any specific vendor can be built into the data architecture with platform-neutral integration that also supports STP, no matter what message standards or software environments are in the mix.”
  2. Apps: Apps for personal communications devices could be used to engage retail investors says Volante. These apps are designed for smartphones, wireless tablets and PCs, so that agents can alert investors at the earliest stage of the corporate event, and investors can advise them of decisions.
    The pitfall: the implementation of apps as an investor communication channel requires full integration of straight STP along the processing path. Although mobile communications are still in the early days of development, currently both XSP and Information Mosaic are offering app solutions to their customers.
    Software as a service: Smaller firms can use the same type of systems as large top-tier banks but without the capital outlay. "The use of a cloud-based SaaS service bureau could provide an affordable alternative for Tier Two and Tier Three firms," wrote Volante. "Potentially these firms could turn to cloud-based services for receiving market and reference data as well as accessing technology and operational support, such as data transformation and integration, data cleansing and corporate action notifications."
    Several software vendors are also considering consolidating corporate actions data in cloud-based services. Smartstream is leading the pack, but others like Information Mosaic and Vermeg, which already operate on an ASP basis, would be logical entrants in this field. Although there are fears about a risk, such as hacking, the potential cost benefits of cloud-based technology could make outsourcing more viable, according to industry sources.
  3. Message transformation: While message transformation and integration is an obvious component of any development related to incoming electronic message, Oddiraju points out that the integration issues in corporate actions processing go beyond any single development project. “This information needs to be in the hands of certain departments virtually as soon as it is issued,” he says. “It affects valuation and pricing instantaneously. It can alter the composition of portfolios, mandating action to bring them into compliance. And of course, investors must be made aware of the information and any associated actions.”
    The flow of corporate actions data must match business requirements and integration is how that happens. Standards can make communication easier among the players, but ultimately it’s integration that puts the messages to work.

This column originally appeared on Securities Technology Monitor.

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