A Review of Corporate Actions Automation

Congratulations must go to Gary Wright who chaired the corporate actions automation conference in London week before last week.  The conference did two things that are pretty rare these days.  It actually did have dialogue between the panelists and the audience, due in no small part to Gary's forthright style of chairmanship.  It also did an excellent job of covering a lot of ground and getting pretty much all the key issues of corporate actions automation out in the open.

Its common in my experience, for such gatherings to focus on or, if not focus, get dragged down into, one particular area of the subject like "we need better standards" or "we need software vendors to step up to the plate", all of which means that other areas get missed.  I was very pleased to see and hear a wide variety of discussion across the whole topic.

STP in corporate actions through automation is a laudable aim that, like most visions, will never be truly achieved.  Thats not to say that we shouldn't try.  Getting 80% of the way there would deliver enormous benefits in cost and risk mitigation, efficiency improvements.

Standards 

Linda Bookheim summed it up well; standards are a necessary element for CA-STP and so attention must be given to content, format and consistent adoption as precursors to automation.  Software vendors must understand where the industry is going and create solutions that meet the need, as ably demonstrated by the case study of CheckFree and HSBC Securities Services.  

People and Change Management 

Financial firms themselves must think about and address the infrastructural issues within their own firms that complex manual processing, and the change to automated platforms, creates.  Its senseless to stand by while your staff turn over their jobs every 18 months caused by the lack of a work-life balance caused in turn by the degree of manual, boring, yet complex processing of corporate actions.  Of course, the corollary to that is the fear you engender, in an already volatile HR market, by the prospect of automation replacing that work-life balance entirely with a lack of job.  My guess is however that the current volatility from the sub prime issue is doing that already.  The trick, as ever, is going to be managing the change from a scene where there are a few specialists with deep knowledge managing a team of "do-ers" that move all the peperwork around - to a model where a much smaller team of specialists work the exceptions while another small team of specialists run the automated part.  Its a different model and should make for an easier work-life balance, especially if the two teams are rotated.  Those exceptions will still happen in a time sensitive environment so you don't want to replace a big over-worked team with a smaller one, you want to mitigate the problem entirely by spreading the load, which also incidentally spreads the risk as you'll have more qualified people in your resource pool.

Regulation

One of the interesting points discussed was regulation.  Much was said of Giovannini and his committee's impact on the direction of corporate actions automation.  Myself, I think we have to put it into context.  The world is jumping to a political tune here not a commercial one and I doubt that at this stage, there's very much that can be done about it.  The reality is that in many areas Giovannini is either plain wrong or at best guilty of forcing a political solution on a commercial, supposedly free, market.  In addition, its assumed, wrongly in my opinion, that harmonisation is one of the pre-requisites for corporate actions STP.  Take tax as an example - covered in the content of three barriers, the main one being number 11.

The fact is that the issues of harmonisation and automation have only the slightest of relationships in practical markets.  In the tax world for example,  your entitlement to a treaty rate of tax on cross border investment income is defined by the Double Tax Treaty (DTT) which relates to the difference between the statutory rate of tax and the treaty rate for the markets concerned.  That's entirely different from the process you need to go through to obtain the benefit of that entitlement - relief at source, long form reclaims or their variant permutations.  If Giovannini wanted to harmonise the tax landscape, they would not be focusing on the process by recommending relief at source - they would be focusing on the entitlement.  The easy way (sic) to create the flat playing field in Europe, would be to harmonise the statutory rate of tax on cross border investment income to 15%.  Then statutory rate would equal the predominant treaty rate across Europe and the processes (relief at source and long form reclaim) become irrelevant and redundant.  This of course belies a lack of understanding of the real complexity and global (not European) scope of this corporate action - a systemic failing of Giovannini highlighted by the continuing setting of targets for the removal of barriers with which they have had a 100% success record in failing to meet.

Of course, Giovannini recognises that the chances of getting all European countries to harmonise their statutory rates is not feasible, so the second best option is to harmonise the process, which according to their 2007 report would seem to favour the US model based on US Section 1441 NRA regulations - the most complex relief at source model on the planet and one which is so efficient that seven years after being promulgated, rumour has it that the failure rate of tax reporting (Form 1042) is in the region of 75%-90%.  Since the tax reporting is the end point of a firm's year long calculation and deduction of withholding tax, one has to question the basis of optimism and recommendation of this process as the effective European process.

By the way, this is a good example of that tunnel vision I spoke about earlier - focusing on a narrowed view of the market.  Every time anyone mentions Giovannini, the conversation about process, automation and all the other issues in corporate actions, subtly exclude everyone outside the EU.  In other words, we have to recognise the limiting factor and context in which Giovannini operates - the EU. Differentials in tax rates, treaties, processes and the like will not be going away in the rest of the world and, if I'm honest, I doubt they'll really go away in Europe.  So, from an automation perspective, even if there is harmonsiation in Europe, the technologist's job will merely have become more complex.  They may well be able to develop STP for intra-European business but they'll  still have to maintain manual processes for extra-European business.  When you consider the fact that the economy is global and inter-connected, it seems to me that the effort is being mis-directed.

The other issue here is of course the concept of a free market.  One of the reasons that we have such a diverse financial services industry is because there are different rules and complexities in the market.  Each firm has a different way of addressing and prioritising these complexities, which leads to competition and choice.  What will happen if Giovannini has its way?  All (within Europe) will be harmonised (read homogenised).  Then, where will the diversity come from.  If we layer the effect of automation as a separate issue to harmonisation, the financial services industry will spiral into consolidation phase as the opportunity to create value decreases as the rules governing what can and can't be done remove the ability for small players to differentiate themselves and the only ones able to afford the price of automation are the utilities and large global players.  And we can already, by inference, see the pre-positioning of this in the market.

Operational Control and Efficiency

What impressed me most about this section of the conference was the way it seemed to acknowledge that we don't know enough about what we don't know.  The current controversy over why there seems to be no monitoring system for global debt (so we could have figured out the size of the sub-prime issue and where the risks were/are) was well framed here.  It was very interesting to hear David Dook's presentation on statistical risk calculations, not least because their value is clear at the level they can be produced at.  I had to smile when he was asked whether risk calculations could be performed at lower levels of corporate actions processing. the answer being, as I understood it, that the number of variables was so great that risk calculations at these levels would be too complex.  So what the answer?  I think we could start by getting some global benchmarks sorted out.  the pre-cursor to that of course being a single understanding of the process so you can measure it, then an assessment of performance and its impact.  If we could get that far, I think that, while we may not have a statistical basis for risk calculations, we'd at least have some intelligent comparisons of each firm's efficiencies.

This also had some great lateral relevance to Kevin Brady's comments about the quality of reference data.  This is indeed the source of many issues: "garbage in - garbage out".  As a person with a scientific background it has always seemed strange to me that, since these data all come from one source, the corporate, that the industry finds it so difficult to get its head around a golden record.  Surely its in the best interests of the corporates to get their act together and make sure that their stakeholders have access to "the golden record" as far up the chain as possible?

Benchmarking

That point nicely segues into Gary Wright's own presentation of BISS' benchmarking tools for corporate actions vendors.  I thought the concept of benchmarking vendors against their customer's needs i.e. does it do what it say what it does? is a creative and innovative approach to benchmarking.

It does rather beg the issue of benchmarking performance against what should be done.  We're sort of assuming that because buyers want X and that vendors can deliver X, that X is the best solution.  Technically of course thats not true.  If both parties make erroneous assumptions, or are attempting to replicate internal inefficient procedures with external software, this introduces "systemic risk" or what I prefer to call "The King's new clothes syndrome".

I recall back to previous blogs and my comments above.  Just as there is no "global regulatory oversight and monitoring body" for key industry performance figures (e.g. where is all the risk being held?) and the multiplicity of bodies we do end up with have all the characteristics of single interest groups (e.g. Giovannini is not a global body and only has a European remit); answering the simple question: How long should it take to process any given corporate action efficiently? seems impossible to answer.  

Conclusion

An excellent conference.  Two things disappointed me. First that there weren't more people there.  I think there were about fifty in all, for a subject which is critical for the further development of the wholesale banking industry.  Second, some of the speakers seemed to have less ability with laptops and powerpoint presentational skills than with their subject matter - what was that again? oh yes "technology and automation". 

Congratulations to all the speakers and the organisers.  I hope that if this conference runs again next year, it gets the much larger turn-out it deserves.