Rahul Agarwal, Head, TCS BaNCS Cloud for Asset Servicing
Corporate Actions are increasingly complex, but also provide significant arbitrage opportunities for fund/investment managers. Fund managers need to be made aware of corporate actions as early as possible, so that they can adopt an early mover advantage in increasingly price sensitive markets. The fund managers may have to choose between cash and stocks for optional dividends or make decisions on further investment in the form of rights issues or warrants conversion. Generally, they will have to respond by a deadline announced by the issuer for decision making. Fund managers would need to monitor the stock markets till the last moment before making any investment decision to minimize the impact of the volatile stock prices.
These fund managers hire custodians, who are responsible for processing the events on their behalf. These services include publishing corporate actions information as soon as possible to fund managers and processing their decisions on voluntary events.
Custodians employ human resources and IT systems for efficient processing of these events, which constitutes a significant cost to their operations. Moreover, there is a significant business risk of providing inaccurate information or not processing decisions accurately before the deadline. Therefore, they generally keep a buffer on the deadline and insist that fund managers respond a few hours earlier to minimize the business risk. Hence, it causes conflict of interest, where on one end, the customer i.e., the fund manager, insists on delaying the response, and on the other end, the custodian wishes to build a buffer for the deadline. Therefore, it becomes a balancing act for custodians to manage customer demand and business risk.
Custodians across various geographies are diversifying – either organically or inorganically and creating multiple entities within the same organization. Many times, these entities depend on each other for custody services in their respective geographies.
Currently most of these entities are operating in silos, thus, processing corporate actions separately. This creates duplication of work and redundancy of operations, which custodians can only ill afford.
Moreover, these entities depend on each other for processing, and therefore, uses various mechanisms to pass on the Corporate Actions information and instructions to each other. Depending on the efficacy of these data transfer mechanisms, these entities decide the required buffer time for information exchange. This creates a delay for the end customer in receiving the information on events and reduces the response windows for voluntary corporate actions events.
There is a scope for improving the total cost of event processing and client servicing by synergizing the corporate actions processing using a single event processing model. This requires integration to the back-office and the implementation of a true multi-entity processing capability.
In the single event processing model, events are processed together for the entities through an integrated back-office. This should enable synchronous notification generation for corporate actions events to all the end customers across all the entities. This may require certain IT challenges such as consolidating the position stock record, client privacy and preferential client treatments which may have been signed by different entities. However, a modern system with true multi-entity capabilities should provide the necessary configurability to ensure that client privacy and SLAs are not compromised.
The single event model will also support client instructions on voluntary events to flow seamlessly to the integrated back-office, thus eliminating the need for the buffer used by various entities on the deadlines for voluntary corporate actions. This will enable fund managers to make the decisions as late as possible, thus, minimizing the risk for price variations in decision making.
As the event is processed only once across all the entities, this reduces the duplication of efforts and helps in cost reduction.
Disclaimer: Views or opinions represented in this blog is based on author’s own research and does not represent TCS BaNCS