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Corporate Actions Automation - a contradiction in terms?

I was quite intrigued back in October when I was walking around the exhibition halls at SIBOS in Boston to see how many software vendors on the corporate actions side were promoting their solutions for custodians, brokers and funds as STP.  It seems to me we need to disconnect the marketing hype from the extremely fragmented reality of corporate actions automation.

Its true that between financial counterparties e.g. paying agents, custodians, brokers and the like, there are standards, processes and messaging solutions that allow for automation.  But thats a long way from STP.  Most corporate actions processes have many manual elements which can't be automated because of the way in which the markets operate.  Take withholding tax as an example.  It always amuses me to see technology vendors promoting their solutions as STP - well they would wouldn't they.  So, remind me, after you've received income data electronically, calculated tax entitlements electronically, sometimes even generated the tax refund forms electronically...what do you do?  Oh yes, you have to get local certification of the reclaim - manually - because local authorities are not set up to process certifications electronically.  Then you have to file the reclaim to a foreign tax authority - manually - because for the most part tax authorities are not automated and want hard copy claims together with supporting hard copy documentation.  And so it goes.  If you're a custodian with one of these systems, your obligation to your client (and to your firm) is to chase up those claims because they can take months and often years to recover.  Guess how you do that.  Oh yes, manually!  So, when the refund comes back, more often than not it turns up electronically?  No, as a cheque.  In the end, over 60% of this particular corporate action type has been processed manually, which means additional expense, risk and liability.

The business case for a single corporate actions solution to this process has holes you could drive a 21st century truck through.  Lets take a walk through it from a custodian's perspective.  First, because I don't know how my clients are going to invest and where, I don't really know how much work I'm going to have to do to file and recover tax for them.  So, in the light of that, I'm supposed to employ staff, give them expensive office space, computers and telephone lines etc.  Then I have to go license a software application and pay annual maintenance fees in case it crashes.  Any slight change to the market processes I have to follow and I'll have to pay more to have the program adjusted.  All this is up-front cost and risk for a variable return.

Is this really the best we can collectively do in the 21st century?  Of course not.  We need what others call disruptive technologies.  That may sound dire.  Actually all it means is that you have to think outside the box and create a solution thats innovative.  In this case, for corporate actions automation we don't just need a solution, we need a different way of thinking that gets us around the more traditional approaches.

The problem we have to get round is that tax authorities are even more conservative than banks.  Their processes are essentially manual.  So, without a change in thinking, we can NEVER automate this corporate action.  This logic also applies to many other areas of corporate actions processing.  Its not that there's no will; its that there's no way.

What really pleased me at SIBOS was SWIFT's presentation at one of the open theatre sessions on the exhibition floor where, as part of a case study, they explained something called V-STP.  The change in thought was simply this.  Instead of trying to automate the corporate action process internally, when its patently not possible, try creating a process so that, as far as you are concerned its automated, in other words "virtual" STP.  Outsourcing! I hear you cry.  Not really.  The V-STP case study leveraged ISO standards, SWIFT IP network and a "value node" where all the things that would otherwise be manual in your own shop are done (still manually) but by someone else.  Now all you have to do is use all these three things together and you get what is essentially a completely STP process.

Its a neat way to think around the problem and it has several advantages.  For internal build custodians, it works, but importantly, there's nothing to stop the corporate actions vendors from doing the same thing.  Why build functionality into a platform that cannot possibly deliver STP, when you could build a pipe to a place where the manual work gets done, thus giving your customer an STP process, greater buy in and loyalty to your product and a fantastic commercial edge.

The even more important benefit is that this technology model is not restricted to withholding tax.  Thats just the first use its been put to and if what they said at SIBOS was anything to go by, it was very successful.  The next question is how the V-STP model gets rolled out to other areas corporate actions.

Given the tough times ahead for financial services firms, most banks are going to be looking very closely at the cost and efficiency benefits they can get both from the "value node" providers on the back of the SWIFT network and the corporate actions platform vendors.  For them, its a quick win.  Minimal development time, no testing required and a nice commercial advantage to be gained.  For the banks, it gets the manual processing off their desks as well as much of the cost and risk.

I think V-STP has a bright future.  What do you think? 

 

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Comments: (1)

A Finextra member
A Finextra member 15 February, 2008, 11:11Be the first to give this comment the thumbs up 0 likes

Your quite right about the STP missing link with tax reclaims and I do not think any corporate actions vendor is acuatually marketing this as part of their STP promotions. However, STP within corporate actions has been created by most of the CA vendors and something we have been testing for the last six years through our benchmarks, created and scored by an independent industry panel. The industry has been satisfied with the increasing capability of the CA systems that are now extending into areas of risk managment.

So you can feel very confident that the CA vendors are not spinning a line but genuine in their presentations. We know, we proved it!

It might be interesting to see if the various tax authorities would engage in a technology solution for withholding tax that would I'm sure be intergrated to by the existing CA vendors. We could then extend this concept to other agencies within the CA Industry processes and really move to industry wide STP rather than internal automation of parts of the process as done today.

Ross McGill

Ross McGill

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TConsult Ltd

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