Corporate Action Entitlement Processing Automation – The Forgotten STP

Sean Cain, Product Director at Eagle alliance vendor Fidelity Corporate Actions Solutions, discusses the challenges related to the lack of automation in corporate actions entitlement processing and opportunities for straight through processing.

There is an industry need to automate Corporate Action (CA) processing into downstream systems such as accounting, trading, and brokerage systems. As each downstream system is different, and there are currently no industry standards when it comes to CA Entitlements Processing, the vast majority of downstream processing is manual and extremely risky.

The CA industry has made major strides in the past few decades in regards to risk reduction. The industry has done a great job in standardizing and automating CA notifications, instructions, and payments via SWIFT messaging. When you attend industry conferences, much of the discussion is dominated by continued work in these areas. I like to refer to automation of downstream processing as the Forgotten STP, as there is very little industry focus and discussion in this area.

CA entitlements processing automation differs greatly from system to system. As every system is unique, the capabilities of each system and the enhancements required to automate processing in each system is extremely varied. There tends to be a lot of automation in the industry on simple income and mandatory events (cash and stock dividends, stock splits, interest payments, etc). These events are less complex by nature, but do make up a large percentage of the action volume, which is a good start.

There is however a long way to go to automate everything, which should be the end goal for all CA operations teams. There is very little automation on voluntary events and complex mandatory events, yet this is where the majority of complexity and risk is. These types of events can cause significant issues with costly errors and compensation to the front office, business partners, and individual investors.

The industry has continued to focus on STP, and rightfully so. Any time an event is manually updated at any stage of the CA lifecycle, risk is introduced. Given the vast majority of industry work on STP has focused on the notification, instruction, and payment portions of the lifecycle, it is imperative to begin focusing on the CA entitlement processing to downstream systems and the resultant business value.

All aspects of the CA lifecycle create significant risk of financial loss and can result in a number of downstream issues to business partners and clients. The culmination of all of the work performed is the processing to downstream accounting, trading, and brokerage systems. There are at least three implications that might arise from incorrect or untimely processing, all potentially causing operational problems and financial exposure.

One, incorrect shares or cash can be projected to the front office or to the account holder. If these incorrect projections are acted upon, there could be liability and compensation for the operations team in charge of the processing. In addition, the front office or the investor is not able to see the full picture and this may impact investment decisions they are making, resulting in potential reputational risk to the front office, other business partners or external clients.

Two, if processing is delayed, the front office or account holder can be disadvantaged by the opportunity cost of not having the resulting shares or cash available to act upon. When dealing with large entitlements, even the smallest delay or market movements can lead to losses incurred.

Three, for operations teams that strike NAVs (Net Asset Value) for accounts, if the incorrect or untimely processing results in an incorrect NAV, there is a potential for losses for the operations team. For anyone buying or selling the account at the incorrect NAV, the operations team is liable to make the transaction whole. If this NAV error spans over multiple days, which is common if the payment is not received and reconciled the same day as processing, then the potential compensation amount increases each day.

Corporate Action processing is executed on a wide variety of proprietary systems so I don’t believe there will ever be a central authority to oversee the process and mandate automation. Companies are doing the best they can in the current environment by added controls and oversight, but the lack of automation stifles the ability of operations to grow with scale and take on increased complexity. In addition, no matter how strong the operational controls are, if a process is being done manually, there will at some point be a breakdown and it could result in significant financial exposure.

We will see a greater emphasis on CA entitlements processing automation as a next step in the industry. Through the strategic alliance between Fidelity Corporate Actions Solutions and Eagle Investment Systems, this integration has set the industry standard of what can be accomplished through CA processing automation. Clients will realize significant long-term benefits by automating entitlement processing, including improving workflow, controls, accuracy, scalability, timeliness, service to business partners and STP, while reducing risk, time spent, and resources.

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