Abhishek Malik, Consultant, TCS BaNCS for Capital Markets

Abbreviations: AM – Asset Managers, CA – Corporate Actions, FM – Fund Manager, LOB – Line of Business, AI – Artificial Intelligence, ML – Machine Learning

Asset Servicing, including Corporate Action events have a high impact on Asset Managers. Events are to be processed in an accurate and timely fashion by the AM operations team, to ensure that the funds and units value is priced correctly. Errors in processing or election decisions, including the makeup of the fund could have a negative impact on the fund’s performance and the client’s investment.

CA processing involves a complex lifecycle. Any event announced on securities (held by the fund) need to be processed in an accurate and timely fashion. In this article, we will take some examples to illustrate how corporate actions impact asset managers especially from a back-office operations point of view in terms of key nuances, challenges faced and possible solutions.

First, let’s review how a typical corporate actions event may impact the securities holder -

  • CA events may lead to cash or security distribution into holders’ accounts depending on event terms e.g., cash dividends, coupon payments, stock dividend, bonus issues.
  • Event may impact stock trading price e.g., competing tenders on a security may result in jump of its market price hence the security holder needs to be watchful for such events and take trading decisions.
  • Choice / voluntary events enables the shareholder to participate in the event as per the issuer laid-out options. Securities holder should carefully evaluate each option to perform elections. E.g., in a Dividend option event, it may be more profitable to opt for securities option instead of cash option depending on the prevailing market price of the security.
  • Information Events – There are other types of corporate actions which provide information to the shareholders e.g., name change of the security.

Now, let’s review impact of CA events from AM back-office operations point of view: -

1) Engagement with Multiple Custodians

AM firms are typically serviced by multiple custodians. When a CA event is announced on security, AM operations team would receive event details from all custodians for the funds which hold the security. Each custodian may follow different formats (e.g., SWIFT 15022, SWIFT 20022, Fax or Email) to send out event information. Also, each custodian has its own way of defining the event terms; for example, event options ordering, option type, number of options, event qualifiers and text narratives can differ from one custodian to other.

Thus, operations teams a spend huge amount of time in generating a golden copy of the event by scrubbing event details of various custodians. Users are required to create options mapping (b/w the golden copy and custodian messages) so that elections are sent on correct options. A good CA workflow solution should be able to automatically scrub various event announcements and process free text information (of emails / faxes) via AI based solutions thereby reducing manual effort and associated errors.

2) Elections Processing

The AM operations team performs the following activities w.r.t to voluntary events -

  • Share event details with fund managers (FM)– This is typically done manually via emails and is a time-consuming process. Mobile-based, or internet-based applications can help automate this process by enabling FM to self-track elective events and upcoming deadlines on a real-time basis.
  • Capture elections as provided by FM – The operations team receives election decisions from FM against each event by methods such as emails. Having an automated transmission of the election decision into back-office CA system can help eliminate manual tasks and reduce risks related to incorrect election capture by users.
  • Options mapping and transmission of elections back to the custodians - The operations team then validates the FM elections against updated positions and trades (buy, sells, security loans etc.) after which consolidated elections to be sent to custodian are generated. The typical challenge here is to ensure accuracy in option details and format as prescribed by the custodian else it may face rejection. Having multiple custodians for the same event increases the complexity and hence a solution to perform automatic options mapping in elections would be the way to address it. The focus should be to establish SWIFT connections with custodians instead of relaying elections via email or faxes.
  • Track acceptance of elections with custodians – The operations team needs to ensure that all elections sent to the custodian are acknowledged and accepted. Election rejections by custodians need to be addressed and resolved. An automatic instruction tracking dashboard can help alert users in case of issues and usage of MT567 swift messaging can help automate this process.

3) Election Standing Instructions

Fund managers may also provide standing instructions (SI) for preferred options to be elected automatically for specific scenarios. Based on these instructions, elections should be applied by the operations teams on all funds attached to the fund manager. The typical challenge here is the automation of SI elections and to ensure that the SI gets overridden if the FM does provide any election thereafter. Having an automated process which applies standing instruction before deadlines can help reduce manual workload of operations users.

4) Fund Accounting (NAV calculation process)

This function involves correct application of event terms to calculate impact on the fund NAV. Both cash distribution (example cash dividend, coupon payments) and stock distributions (e.g., bonus issue, stock dividend) should be considered while computing funds NAV. Likewise, re-organization events such as stock splits which lead to drop of security market price should be properly accounted for to avoid auto triggering of trading algorithms. What makes this process complex is the treatment of tax lots and cost basis allocation to the new securities that get

added. A robust fund accounting platform that handles nuances related to different CA event types during NAV calculation would be a good solution.

5) Interactions with Trading platform

Trading restrictions and alerts may be required in stock trading platform on securities that have ongoing corporate actions. The key challenge here is to transmit real time trading blocks to the trading platform from the CA processing platform based on the quantity of elections e.g., Selling transactions should not be allowed for the quantity of stocks that have been tendered as part of the event. Likewise, buy /sell trades happening through the day should be reflected in the CA platform to ensure entitlements are calculated on the most up-to date positions. These points can be easily addressed via API-based real time integration b/w the trading platform and CA processing platform.

6) Payment Reconciliations

The operations team reconciles the event - (cash and security) payments made by the custodians against internal entitlement calculations. Reconciliation differences often arise and need to be resolved in timely manner. Such functions should be automated i.e., system should use custodian SWIFT payment messages to automatically reconcile event entitlements and raise alerts to users in case of discrepancies. The solution should also provide relevant reasons that may have led to breaks e.g., positions not balanced, event rates not matching or taxation differences so that breaks can be easily resolved by the back-office team.

7) Impact on the Securities Market prices Due to Ongoing Corporate Actions

CA events often lead to changes in securities trading prices. For example, the buy back offers wherein a certain percentage of issued shares are repurchased by the company. This is mostly done at a premium to market price to entice shareholders into tendering. This may lead to increase in the share price of the security and present a trading opportunity to the FM. Competing tenders and rights issues may lead to price fluctuations as well. Hence, it is important that CA events information are passed onto the FM in timely manner. Subscribing to data vendor or stock exchange feeds may enable the solution to automate processes for such events and transmit information to trading desks/FM.

In summary, while the processing of Corporate Action events is complex and requires handling of several aspects, it is reasonably possible to resolve most of these challenges with an advanced back-office solution in place. Solution providers are increasingly deploying novel technologies such as artificial intelligence and machine learning to bring in process sophistication and assist the operations team in streamlining events. In the next article, we shall dive into some of these use cases where in AI/ML is revolutionizing the CA processing space.

Disclaimer: Views or opinions represented in this blog are based on the author’s own research and do not represent TCS BaNCS.

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