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Beneficial Owner Corporate Actions Perspective

Beneficial Owners & Corporate Actions: Rapid Response and High Quality

Corporate actions information exists in a manner different than most other market data, in that the various interests within the financial services industry, including the interest of beneficial owners, want to get this information as soon as possible, but not too soon, and certainly never too late.

This may sound strange, but what it means is that receiving information too soon about a corporate action such as a stock split, change in company leadership or a proposed merger, makes it more likely that information is inaccurate or is an unsubstantiated rumor. If the corporate actions data is up-to-the-minute, it’s more likely to be correct and to be coming directly from an accurate source.

News travels fast – and it should for beneficial owners

Think of it like the scene in the hit movie “Crazy Rich Asians,” when the young man meets a young woman for a date in New York. Everyone among their families and friends back in Singapore knows about their date in 10 minutes or less, because the use of social media is so ubiquitous among the characters in the movie. Business news travels just as fast, and you don’t want to be an investor who doesn’t know that a company has announced a merger. If, as beneficial owners, you haven’t gotten that important corporate actions information, you might be asking yourself why your private bank hasn’t gotten you that information.

The advances in corporate actions management and the latest concerns about corporate actions information differ depending on the constituencies, which include private banks, investment banks, custodians, asset managers and the originators – securities exchanges.

The high net worth clients of private banks, especially in Asia, are very engaged in managing their own portfolios and trading accordingly, rather than allocating these functions out to fund managers. As a result, there may be a race to be the first to notify a banks’ high net-worth clients, or beneficial owners, about a corporate action involving a security they own. A late notification may not give these beneficial owners enough time to react to the action and make a choice. It’s a differentiator in retaining and winning business. The private banks will have service-level agreements with custodians to handle corporate actions, but they still get concerned about missing these actions or having late notifications. As a result, private banks may be looking for something to supplement what custodians offer in notification services.

Interaction with beneficial owners

Custodians, as previously mentioned, serve private banks, but have other problems caused by changes to corporate actions processing. If custodians miss an action, they can be liable for the economic impact, so they gather as much information as they can. If there are four versions of information about an action – which could have occurred due to different information emerging at different times, the custodians try to reconcile those into one authoritative version. Their golden version is then communicated to the beneficial owners.

Exchanges, of course, are where the entities (corporates) issue their corporate actions. In many exchanges, in many markets, the dividend rate on a corporate action is the key to matching versions of information about that action, and that rate is usually announced at least 45 days in advance. In some markets, such as Japan, South Korea and Russia however, the forecasted rate (i.e. announced but subject to change) is only finalized on or shortly after the record date. This is another example of an area where one would not want to get the information too soon, because it wouldn’t be right. For exchanges to solve this problem, though, they would have to charge the custodians, which is a non-starter, since custodians exist to solve such inconsistencies.

Lastly, asset managers also have a stake in corporate actions because of the size of positions and associated cash flow that is often involved. Yet, asset managers are usually last in the chain of distribution of corporate actions information, even after investment managers have gotten this information and plugged it into their investment books of record (IBOR). Asset managers, over the past 20 years, have experienced an acceleration of corporate actions information frequency from monthly all the way to intra-day. The accelerated pace heightens their demand for corporate actions information. Again, for this function in the industry, the sooner they know the right information, the sooner they can react with a strategy.

Asset Management and Corporate Actions

Asset managers are also fielding their fund clients’ corporate actions voting responsibilities. So asset managers face pressures to streamline corporate actions workflow, including identifying beneficial owners and sending notifications out to their clients. Similarly, private banks’ clients want corporate actions notifications even if they are leaving it to those banks to handle the voting or response to the corporate action. Still, the workflow system that best achieves this more often resides within a custodian’s operations rather than with asset managers or private banks.

From an operations perspective, “suspect matching,” is an issue, caused by different sources of a corporate action using different formats for key information attributes, such as ratios. For example, the same ratio could be written as 3/4, 3:4 or 0.75; that difference in format needs to be reconciled in order to clarify whether or not different sources are referring to the same corporate action announcement. This issue is a key one for custodians themselves.

Types of Corporate Actions Data

Stock splits can cause similar operations problems when new ISINs are issued. The original ISIN for a company’s stock might be retained but a new one may be issued if another security is created in the split. The generation of new ISINs for stock splits needs to be automated for investment banks to be able to track them and trade the new security at the next market open. The handling of a stock split also has to be managed so that a 50 percent drop in price that occurs because of the split doesn’t trigger an alert from market risk evaluations.

One last type of corporate actions data management issue is that of announcements, such as dividends, that come out of companies’ annual meetings. Working with a major stock exchange in Asia, GoldenSource has developed a notification technology through which a company’s chief financial officer can enter the information directly into the exchange’s system, which validates it, then uses GoldenSource to issue a notification in Swift format, all straight-through processing. Other exchanges, globally, could find this corporate actions capability appealing. This will bolster the exchanges’ reputation for timely and friction-free distribution of corporate actions information that is important to participants and beneficial owners in their market.

Overall, whatever areas of corporate actions management a market participant is considering – its initiation, gathering responses or votes, distribution of results or distribution of dividends – the last thing anyone wants is the information to be distorted because multiple versions aren’t reconciled, or outdated versions are being persisted and spread. That affects the quality of the data, and, by extension, the trust that the client and beneficial owner have in their investment manager, asset manager or private bank.

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