TRANSFORMING Corporate Action Processing

A PLAN BY THE DEPOSITORY TRUST & CLEARING CORPORATION TRANSFORMING Corporate Action Processing

Providing a New Level of Risk Management And Achieving Straight-Through Processing

JUNE 2003 Transforming Corporate Action Processing

Table of Contents Executive Summary ...... 3 Introduction ...... 7 Challenges of Corporate Action Processing...... 8 Best Practices...... 11 Extending DTCC’s Role in Corporate Actions...... 13 “At Source” Standardization...... 13 Global Corporate Action (GCA) Validation Service...... 15 Global Corporate Action Hub (GCAH)...... 16 Development and Promotion of Standards and Market Practices...... 17 Streamlined and Improved Processing for High-Volume and Complex Events...... 17 Enhanced Instruction Processing ...... 18 Corporate Action Liability Notices...... 19 Elimination of Certificates for Corporate Action Transactions...... 19 Appendix — Corporate Action Processing at DTC...... 20

Please forward comments to: James Femia, DTCC Asset Services, at [email protected] or Christopher Wyle, DTCC Asset Services, at [email protected].

EXECUTIVE SUMMARY

his paper presents The Depository Trust & which then results in thousands of communications TClearing Corporation’s (DTCC) analysis of the sent and/or payments allocated to investors. challenges associated with corporate action processing, and DTCC’s strategy to help market participants CHALLENGES OF CORPORATE ACTION PROCESSING manage risk, reduce costs and achieve greater levels In today’s complex global marketplace, financial of straight-through processing (STP) globally. Given institutions that process corporate actions are faced today’s uncertain economic climate, DTCC considers with major challenges. First and foremost is obtain- it an opportune time to reexamine processes and ing accurate, comprehensive, timely corporate action products with an eye towards improving efficiencies information. Issuers, offerors and agents announce in areas of the industry that remain labor-intensive events in different ways, using various means of and risk-prone. describing the terms applicable to an event. This DTCC has taken a leadership position on a range of lack of uniformity and standards makes it difficult corporate action initiatives. Our goal is to position to identify and interpret announcement information, customers to handle higher volumes of corporate introducing a great deal of risk and cost into the actions, steadily reducing their costs and risks, while process. Additionally, many financial intermediaries providing greater processing resiliency as the global are part of the corporate action processing chain, markets and economy recover. so information often must travel, for example, from issuer to agent, through one or more layers of custo- Corporate action processing is an area of significant dians, and ultimately to the investor. Voluntary risk — and one of the most manual, complex and offerings, which involve options, add to the com- challenging parts of back-office operations globally. plexity and level of risk. Today’s environment is characterized by a lack of standard market practices and by labor-intensive It is difficult to quantify the overall corporate action processes, such as telexing, faxing and re-keying of losses caused by inaccurate or incomplete announce- information, all of which expose financial services ment data, missed deadlines, human error or other firms to high costs, errors, customer-service issues operational problems. However, industry sources and, potentially, financial loss. estimate that 10% of the annual cost of processing corporate actions comes from “write-off” funds Rights offerings, elective dividends, tender offers, reserved for losses. Even if only partially accurate, bankruptcies, conversions, mergers, amalgamations, this translates to tens of millions of dollars in annual redemptions, spin-offs and periodic income pay- losses due to operational problems. ments are examples of the many different types of corporate action events. A corporate action occurs According to the January 2003 Group of Thirty when changes are made to the capital structure or (G30) study,1 “Corporate actions, across the market, financial position of an issuer of a security that affect are the major source of financial losses attributable any of the securities it has issued. Events can be to operational failure.” An increased focus on man- straightforward or complex, mandatory or optional, aging operational risk, underscored by the Basel II with the latter requiring that a decision (election) be Accord, has stepped up efforts to bring improve- made based upon certain financial terms before the ments to corporate action processing. Indeed, a event expiration date. recent industry report2 predicts that spending on corporate action projects will reach almost $830 Each corporate action has a multiplier effect. A single million between now and 2007. event may involve hundreds of financial institutions,

Transforming Corporate Action Processing 3 BEST PRACTICES porate actions, DTCC is involved in only certain To help address these issues, DTCC has developed aspects of the processing chain — at the front and a corporate action strategy, which encompasses the back ends. Financial institutions processing corpo- following best market practices. We believe these rate actions still handle a great deal of labor-inten- best practices are the building blocks to transform sive and time-consuming work. Securities profes- corporate action processing on a global scale and sionals face many challenges and issues, all of which tackle the challenges facing the industry: are common across the globe and are further magni- fied in developing markets. 1. Standardizing the data elements in corporate action announcements to ensure the availabil- DTCC is committed to extending its involvement in ity of consistent, accurate information; corporate actions to bring greater economies of scale and help industry participants better manage risk 2. Automating the dissemination of corporate globally. It is clear to us, however, that no one organ- action announcement information to ization or single approach will result in a complete eliminate manual processing and simplify industry solution. Rather, a confluence of efforts by communications; industry participants, as well as by industry groups 3. Promoting standards and best market practices working within national markets and across borders, to streamline processing; will be needed to ensure progress.

4. Promoting the automated exchange of instruc- To advance best practices and STP in the industry, tions to reduce risk and cost; and DTCC is pursuing the following corporate action initiatives: 5. Eliminating the use of certificates in the handling of corporate action transactions where . “At Source” Standardization Efforts are aimed at these practices remain. ensuring that corporate actions are announced in a consistent and straightforward manner to facili- DTCC is committed to promoting and implementing tate electronic dissemination and promote STP. these practices within the industry. Moreover, DTCC is uniquely positioned to facilitate and encourage . Global Corporate Action (GCA) Validation their adoption, given DTCC’s broad global customer Service provides a centralized source of base, technological infrastructure, expertise and rep- “scrubbed” announcement information for securi- utation in the industry. ties in any market to bring greater levels of STP to the earlier stages of the corporate action process- In the United States, DTCC is strategically and inte- ing life cycle. grally involved in handling corporate actions. Through its depository subsidiary (DTC), DTCC . Global Corporate Action Hub (GCAH) is a flexi- processes corporate actions as part of its Asset ble, real-time messaging solution, which will auto- Services business, which today provides custody and mate and centralize the point-to-point exchange of asset servicing for more than 2 million securities corporate action information that takes place issues from the United States and 100 other coun- among investment managers, banks and broker/ tries and territories. In 2002, the depository dealers in all markets. processed a record volume of reorganization, . Standards Efforts are under way that focus on the redemption, dividend and interest payments, valued adoption and usage of message standards for intra- at nearly $1.9 trillion. industry communications and the development of best market practices. EXTENDING DTCC’S ROLE IN CORPORATE ACTIONS . Streamlined and Improved Processing for High- Although the depository is a major processor of cor- Volume and Complex Events are in progress

4 Transforming Corporate Action Processing through a collection of industry initiatives, inter- . Efforts to Eliminate Certificates for Corporate nal DTC operations enhancements and bench- Action Transactions in the United States are marking procedures, and improved communi- under way to streamline processing by avoiding cation processes with issuers and their agents. the shipment and surrender of physical certificates. . Enhanced Instruction Processing capabilities are being developed to facilitate automated feeds of DTCC will continue to collaborate closely with election instructions at DTC and to improve the customers, industry associations and others to bring acceptance of beneficial owner election instruc- improvements in the way corporate actions are han- tions from participants. dled in the global securities marketplace.

. Corporate Action Liability Notices will be accom- DTCC welcomes comments or questions on all modated through an automated platform that aspects of this paper. These can be addressed directly facilitates the electronic exchange between senders to either James Femia, managing director, DTCC and receivers of these notifications. Asset Services, at [email protected] or Christopher Wyle, vice president, DTCC Asset Services, at [email protected].

1Group of Thirty, “Global Clearing and Settlement: A Plan of Action,” January 2003. 2Celent, “Corporate Actions Automation: Getting Closer to Reality,” April 2003.

Transforming Corporate Action Processing 5

INTRODUCTION

orporate action processing is an area of signifi- of the objectives outlined in the recent G30 report, C cant risk — and one of the most manual, com- including those related to standardizing corporate plex and challenging parts of back-office operations action processing. In addition, DTCC is supportive globally. Deadlines are often tight. Information may of corporate action initiatives by The Canadian be conflicting, confusing, incomplete or even incor- Capital Markets Association (CCMA) and the rect. Often, it must wind its way through many International Organization for Standardization (ISO). firms. As a result, financial institutions run the risk The intent of this document is to serve as a catalyst of late payments, market price fluctuations, loss of within the industry by recommending best practices, interest or even missed opportunities. A slip-up on a and providing a clear description of DTCC and single corporate action event could involve a signifi- industry initiatives aimed at improving corporate cant monetary loss. action processing. Our objective is to inform market Greater emphasis on managing operational risk and participants of the tremendous amount of work costs in today’s business environment has spurred under way at DTCC, so that they may help us shape the industry to focus on the corporate action arena. and build upon it to most effectively realize the However, streamlining corporate action processing industry’s objectives. is a challenging undertaking due to the diversity of This paper is divided into three sections: event types and the amount of manual processing involved. The situation is further complicated by the . The first describes corporate action processing many industry players that are part of the corporate today, the challenges confronting the industry, and action processing chain, the continued growth of why improvements are needed; sophisticated financial instruments and the increas- . The second outlines recommended best practices ing globalization of the securities market. — some of the main ingredients to bring about To lower operational risk and improve efficiencies, progress; DTCC has been working on many fronts to advance . The third lays out a range of DTCC initiatives automation and standardization for corporate aimed at improving corporate action processing. actions. Many internal enhancements have been made at DTCC’s depository, including specific efforts on high-volume and complex events.

DTCC has collaborated closely with industry mem- bers, including broker/dealers, custodians, investment managers, issuers, agents, information providers, vendors, regulators, and industry groups, such as the Americas’ Central Securities Depositories Association (ACSDA), the International Securities Services Association (ISSA), the Securities Industry Association (SIA) and The Bond Market Association (TBMA), as well as standards groups like International Securities Association for Institutional Trade Communication - International Operations Association (ISITC-IOA) and Securities Market Practice Group (SMPG). DTCC is a strong advocate

Transforming Corporate Action Processing 7 CHALLENGES OF CORPORATE ACTION PROCESSING

CORPORATE ACTIONS DEFINED information about corporate action events is both corporate action occurs when changes are made complex and difficult because there are no global A to the capital structure or financial position of standards. an issuer of a security that affect any of the securities First, there is lack of uniformity in the way corpo- it has issued. Some events are straightforward and rate action events are announced “at the source” — “passive,” resulting in the automatic disbursement that is, at the point at which the information is first of cash or some other entitlement. Others, like rights established by the party originating the corporate offerings or dividends with elections, are more com- action. Issuers, offerors and agents announce events plex and require the investor (or its designated deci- in different ways, using various means for describing sion maker) to make an election based on certain the specific terms applicable to an event. The lan- financial terms and communicate its choices for fur- guage used to describe a corporate action may con- ther processing. tain important details obscured by legal terminology, Every day, financial institutions are inundated with making it difficult to interpret the information cor- news of various corporate actions from a range of rectly. Further, the announcement may be published sources. The information is used to service propri- by press release, tombstone, exchange bulletin, etary and customer positions, manage portfolios prospectus and/or direct correspondence, with differ- and make decisions related to sales, trading and ing formats and levels of detail. arbitrage. Second, there is no single securities identification Each corporate action has a multiplier effect. A sin- system universally accepted and universally used to gle event may involve hundreds of financial institu- cover all instruments and all markets, which means tions, which then results in thousands of that identifiers (e.g., ISIN, CUSIP or Sedol) must communications sent and/or payments allocated to frequently be cross-referenced. investors — both retail and institutional. Voluntary Lastly, processing details are often market or instru- offerings, which sometimes have numerous options ment specific, with differing terminology, rules, con- expiring within tight time frames, compound the ventions, notification and response time frames, and pressure. penalties. These details may further vary based upon The potential exposure of a single event involves the tax and residency status of the owner of the huge sums of money if a financial institution has to security. “make good” on opportunities that were missed or Today, most global financial institutions collect erroneously processed on behalf of clients. It is a corporate action announcement information from common practice in the industry for financial insti- a range of sources, including information providers, tutions to allocate funds to cover losses attributable broker/dealers, sub-custodians, global custodians, to corporate action liabilities. investment managers, depositories and exchanges, In today’s complex global marketplace, financial as well as newspapers, news feeds, trade journals firms processing corporate actions are faced with and the Web. The information can often be confus- several major challenges as outlined below: ing, contradictory and sometimes just plain wrong. The net result is labor-intensive and time-consuming CHALLENGE 1: processing to normalize, reconcile and cleanse the Obtaining Accurate Information data, generally referred to in the industry as Acquiring comprehensive, accurate announcement “scrubbing.”

8 Transforming Corporate Action Processing Scrubbing, which involves the validation of data for issues are much more intricate than regular income accuracy and completeness, is an inexact science due payments, reflecting the changing balance between to its very subjectivity. Errors arise from missed or interest income and principal prepayments. As a late announcements, and incomplete or faulty data. result, financial institutions must expend greater Misinformation, at a minimum, may cause customer effort to understand and effectively process these service issues or, even worse, huge losses if an event securities. is missed or mishandled. CHALLENGE 4: CHALLENGE 2: Using Information for Multiple Purposes Managing the Flow of Information Additional complications arise because financial Further compounding the challenge of obtaining institutions typically have multiple departments that accurate information is the large number of parties require corporate action information. Each depart- involved in the dissemination, interpretation and ment may rely on different procedures, data vendor processing of the data. Corporate action information feeds and its own proprietary solutions. While they is generally transmitted through a long chain of all need announcement information, each uses it in financial intermediaries. There are different means a different way. For example, a trader may make a and standards for communicating events as dictated complex arbitrage decision for the firm’s proprietary by local practices, and legal or tax requirements. position based on the offer. An investment advisor may discuss election options with several clients Communication between custodians and investment holding the security in their portfolios. The opera- managers is particularly complex. A custodian will tions professional needs the terms of the offer to have many accounts affected by a single corporate process the event for holders of the security. action, whereas an investment manager may have multiple custodians that it must deal with individu- CHALLENGE 5: ally for a single event. Managing Resource Requirements Handling voluntary offer elections is an error-prone The volume of corporate actions is often difficult to process because, like the game of “telephone,” the predict, making allocation of resources a challenge. information may be miscommunicated or misunder- Volume may change cyclically (e.g., European divi- stood at any point in the chain. Communicating dend season, year-end notifications), but it is also across different time zones and markets adds more subject to interest rate changes or random market complexity, and greater operational risk and cost. events. Newly acquired positions of securities involved in a corporate action create exception pro- CHALLENGE 3: cessing. Volume fluctuations may cause operational Handling Increasingly Complex Instruments problems because corporate action processing is not and Events readily scalable. The skill and expertise required to The increasing sophistication of financial instru- effectively handle corporate actions requires a signif- ments adds yet another layer of complexity. For icant and growing investment, both in staff and example, asset-backed securities (ABS), collateral- systems. Often, it is difficult, especially in a down ized mortgage obligations (CMOs) and other struc- market, to justify the high costs of investments tured securities are fast-growing segments of the needed to accommodate future volume increases. debt market, owing in large part to the innovative features they offer market participants. From 2000 CHALLENGE 6: to 2002, the principal amount of new ABS and CMO Processing Elections issues coming to market through DTC has grown by Handling corporate action election instructions is a close to 95%. The monthly distributions from these decentralized, cumbersome process for the industry.

Transforming Corporate Action Processing 9 Financial intermediaries and their customers convey For DTC-eligible securities, election instructions election decisions in many different ways, and may communicated by participants to DTC are, for the rely on paper-based modes, such as fax or telex, most part, key-entered into the Participant Terminal which means that the elections must be re-keyed System (PTS). Typically, individual investor instruc- into other systems. Inefficient, non-automated pro- tions are received, combined and submitted in bulk cessing increases the potential for delays and/or to DTC. Sometimes, however, it would be advanta- errors communicating instructions, which may geous to process elections at the beneficial owner result in failure to meet a deadline. level — especially for those events that involve cash- in-lieu of fractions, prorations or odd-lot features.

10 Transforming Corporate Action Processing BEST PRACTICES

ow do we as an industry prepare for increasing requirements, promoting these standards with Hlevels of corporate actions? How do we address issuers and offerors, and acting on behalf of the the challenges of information and communication? industry to implement these new standards as the How do we prepare for more complex events that normal way of processing corporate action reach across borders? How can we bring about fun- transactions. damental change in the industry? 2. Automate the Creation and Best practices are the building blocks to streamline Dissemination of Announcements processing in the global marketplace, and ultimately Automating the handling of announcements reduce costs and lower operational risk. reduces manual, error-prone processing and mini- mizes the chance of delayed or miscommunicated Outlined below are best practices that DTCC information. This has two aspects — automating believes will address the industry’s challenges and the creation of the announcement and its subse- contribute to improvements in the way corporate quent distribution through the chain of custodians actions are processed globally. and to the ultimate investor.

1. Standardize Corporate Action Today, the automated creation of announcements Announcement Information can be achieved through greater centralization and Standardizing the information included in corpo- streamlining of processes used in collecting data rate action announcements is the first step in from various sources to compose an announce- bringing greater STP to corporate actions. ment. In tomorrow’s world, standardized Accurate and timely information is critical to all announcements should be distributed in auto- industry participants to help them manage the mated form directly “from the source.” This elimi- risk and cost associated with corporate actions. nates both a major source of potential error and Standardizing announcements eliminates the vari- significant delays in the onward distribution of ability and risk associated with the individual information, giving the investor more time to interpretation of announcement documentation, assess and make decisions about the transaction and ensures access to consistent and comprehen- involved. sive information. 3. Promote Usage of Standards and Today, major risks exist in corporate action pro- Best Market Practices cessing due to the lack of uniformity in the way Standardizing intra-industry communications and announcements are made from the initial dissemi- market practices for handling corporate actions is nation point — “at source.” DTCC supports the crucial. Standards help back-office operations SIA initiative to provide clear and full disclosure more effectively process sophisticated financial of standardized corporate action information in instruments with unique characteristics, manage prospectuses and proxies, and ultimately the global transactions and deal with unexpected electronic distribution of this information from increases in volumes. Following best market prac- the initial source (e.g., issuer, offeror or agent), tices and business usage rules facilitates the and the similar effort by ISSA. receipt and delivery of information, cutting across In the coming years, DTCC will help the industry national, market and legal differences, which achieve these important objectives by supporting today complicate the processing of corporate the adoption of standardized announcement actions.

Transforming Corporate Action Processing 11 4. Promote Automated Exchange of Instructions Moreover, DTCC is uniquely positioned to facilitate Bringing greater automation to the communica- and encourage their adoption. Over the past 30 tion of corporate action election instructions sig- years, DTCC has established a broad global cus- nificantly reduces the risk of processing voluntary tomer base and a network of connectivity among corporate actions. Several DTCC initiatives are major broker/dealers, banks, mutual funds, major aimed at this, including the Global Corporate insurance carriers and other financial intermediaries. Action Hub, as well as efforts to enhance instruc- Relying on rigorous, ironclad risk management sys- tion processing. tems and a world-class business continuity program, DTCC subsidiary companies centralize, automate 5. Eliminate the Use of Certificates and streamline clearing, settlement and asset servic- in Handling Corporate Action Transactions ing processes for a range of financial instruments, Eliminating the use of physical certificates in han- reducing risk and lowering cost for the industry. dling corporate action transactions, where this occurs today, will facilitate streamlined processing, On the institutional side of the business, DTCC’s which lowers costs and reduces risks associated joint venture, Omgeo, co-owned with Thomson with the shipment of certificates. It also provides Financial, is the leading provider of post-trade the basis for immediate distribution of corporate pre-settlement trade management solutions for action entitlements to investors. This is an exten- institutional trades, linking investment managers, sion of the drive toward dematerializing physical broker/dealers and custodians in more than certificates and using electronic ownership 40 countries. records. In addition, DTCC takes an active role in a variety of DTCC, which has incorporated these best practices industry associations related to clearance, settlement into its own operating philosophy, is committed to and standards, including ACSDA, G30, ISITC-IOA, promoting and implementing these practices within ISSA, SIA, SMPG, TBMA and many others. the industry.

12 Transforming Corporate Action Processing EXTENDING DTCC’S ROLE IN CORPORATE ACTIONS

TCC is committed to further extending its market in an electronic form and without delay pro- Dinvolvement in the area of corporate action pro- motes STP and eliminates the potential for manual cessing to bring greater efficiencies, and help indus- processing errors. try participants better manage risk and deal with DTCC will provide strong support to several indus- increasingly complex instruments and markets. try initiatives aimed at addressing concerns about Although the depository is a major processor of cor- the integrity of corporate action announcement porate actions, DTCC is not involved in all aspects information. This involves bringing consistency and of the processing chain. To date, efforts primarily uniformity to the process of disseminating have been focused on the front and back ends, leav- announcements “at source” — that is, at the point ing a gap between the notification of the corporate when the information is first established by the action and the disbursement of money and/or securi- issuer or offeror originating the corporate action. ties to participants. A great deal of labor-intensive Full disclosure will help reduce the operational risk and time-consuming work is still handled manually, resulting from vague or hidden offer terms and pro- much of it by fax, telex, mail, e-mail and phone. tect the rights of the investor. This includes scrubbing announcement information, Globally, an ISSA committee is working on an effort notifying investors about corporate action events, to obtain agreement on a standard set of data ele- handling elections on voluntary events and reconcil- ments that should be included in corporate action ing positions, election decisions, etc. This work is announcements in all securities markets. DTCC particularly burdensome when processing is not cen- will support this ISSA initiative in conjunction with tralized through a depository. other central securities depositories around the DTCC is aggressively pursuing several STP projects globe. for corporate actions aimed at improving the quality In the United States, the SIA’s Corporate Action of corporate action information, simplifying process- Division has proposed that a standard template of ing and advancing best practices in the industry. The corporate action data elements be agreed upon, illustration on page 14 shows where these initiatives and that laws and regulations governing corporate fit into the corporate action life cycle. actions be amended to require issuers or offerors to DTCC is certain that no one organization or single include this completed template in prospectuses or approach will result in a complete industry solution. other documents issued in connection with a corpo- Rather, a confluence of efforts by industry partici- rate action. Efforts are well under way and DTCC pants, as well as industry groups working within will work with the SIA to complete definition of the national markets and across borders, will be needed template, support efforts to urge the Securities and to ensure progress. Exchange Commission (SEC) to mandate these requirements, and itself promote these standards “AT SOURCE” STANDARDIZATION with corporate action offerors and their agents. Ensuring that information about a corporate action As part of these efforts, DTCC will centralize and is announced in a standard, consistent and complete simplify participants’ access to corporate action format by the entity most familiar with the specific offering prospectuses through the introduction, in details is the most effective way to address the risk 2004, of an electronic facility to receive them. Later associated with identifying and interpreting the stages of the project will offer on-line archiving to information. At the same time, ensuring that the make the prospectuses available to participants for “at source” announcement is disseminated to the

Transforming Corporate Action Processing 13 Corporate Action Life Cycle

1. Announcement Collection Collect corporate action announcement information Consolidate data and prepare for comparison

WHERE DTCC’S INITIATIVES FIT… 2. Announcement Validation Normalize, reconcile and enrich data Validate for accuracy and 1. Announcement Collection completeness At Source Standardization Produce scrubbed announcement record GCA Development and Promotion of Standards and Market Practices Streamlined and Improved Processing for High Volume and Complex Events

2. Announcement Validation 3. Identification and Notification Determine investors impacted At Source Standardization by event and calculate entitlements GCA Notify investors of announcement Development and Promotion of Standards information and Market Practices Streamlined and Improved Processing for High Volume and Complex Events

3. Identification and Notification Development and Promotion of Standards 4. Election Processing and Market Practices (for voluntaries) GCAH Reconcile elections Enhanced Instruction Processing Communicate elections from investors through various financial intermediaries 4. Election Processing Submit instructions before deadline Development and Promotion of Standards and Market Practices GCAH Enhanced Instruction Processing

5. Event Settlement Event Settlement Streamlined and Improved Processing 5. Deliver securities, if necessary for High Volume and Complex Events Receive securities and/or Corporate Action Liability Notices money payment Elimination of Certificates for Corporate Action Transactions

6. Reconciliation Allocate entitlements to investors Notify investors of final transactions Close-out event

14 Transforming Corporate Action Processing their review and electronic distribution to their subsidiary of DTCC. This initiative is focused on customers. automating the receipt, compilation and validation of corporate action announcement information. Leveraging existing technology, DTCC will expand the Electronic Library Files (ELF) system, an auto- GCA provides a centralized source of scrubbed mated filing capability that accepts, processes and announcement information to bring greater levels stores offering statements for public offerings han- of STP to the earlier stages of the corporate action dled through the depository’s underwriting process. processing flow. GCA helps improve operational This system helps issuers launch their securities by efficiency and lower risk, effectively driving down providing a single place where securities firms costs for the global marketplace. The goal is to involved in handling the issues can easily and improve the quality of announcement information, quickly access information. so that all financial institutions can receive accurate and comprehensive data without duplicating effort. Why should the industry invest in “at source” GCA applies a very broad definition to corporate standardization? actions to include both mandatory and voluntary g This will ensure that clear, comprehensive infor- events, and by yearend, GCA will provide worldwide mation is available to everyone immediately upon coverage. announcement of a corporate action, reducing the distance between offeror and investor, and con- GCA validates the data through an intricate process tributing to customer satisfaction. of mapping, normalizing, consolidating and verify- g This eliminates risks from misinterpretation of ing information from information providers and a information about a corporate action, leading to a broad range of other sources. A composite record is substantial reduction in losses and related “write- derived from this process and is enriched with offs.” follow-up research by experienced DTCC profession- g This eliminates the need for staff resources to als. Later this year, GCA will also offer a custodian review corporate action announcements to iden- verification component, which allows a GCA sub- tify and interpret necessary information. scriber to have composite records confidentially What are the risk factors on this investment? compared with corporate action information from its g “At source” standardization optimally requires custodian banks. some type of regulatory sanction, which may not be forthcoming. Without this, the take-up of Why should the industry invest in the GCA these standards will require greater investment of validation service? time and effort. g GCA reduces the need for individual firms to devote staff resources to review corporate action announcements to identify and interpret neces- More information on these initiatives can be obtained from Christopher Wyle at [email protected]. sary information. Through centralizing this function, the industry can achieve economies of scale by having a single staff perform the function on GLOBAL CORPORATE ACTION (GCA) behalf of a broad population of industry mem- VALIDATION SERVICE bers, with individual firms converting this to a As efforts to standardize announcement information variable cost. “at source” progress, market participants will require g GCA will provide additional flexibility and scala- services aimed at improving the current announce- bility for firms at reduced cost. It also permits the ment process. To address this need, the Global industry to realize the benefits of greater stan- Corporate Action (GCA) validation service was dardization in the announcement process earlier, launched as a pilot in April 2003 as a service offer- before the “at source” efforts are likely to achieve ing of Global Asset Solutions LLC, a wholly owned significant results.

Transforming Corporate Action Processing 15 g GCA also will help efforts to standardize Through an integrated, real-time status monitoring, announcement information at the issuer/offeror audit and reminder system, GCAH will reduce the level, since the consolidated “purchasing power” financial risk of missed announcements and incor- of the utility can be used to enforce more rapid rectly submitted elections due to manual processing. take-up of the announcement standards. For custodians, GCAH will lower the risks and costs What are the risk factors on this investment? of communicating corporate action information to g Coordinating communications with vendors to their customers, and tracking and receiving elections create the basis for the service may involve diffi- in various formats. For investment managers (who culties. Participants in the service must agree on may deal with 10 or more custodians on a single a common set of vendors. corporate action), GCAH will eliminate multiple g The lack of current standards in this area, partic- faxes of the same announcement in varying formats ularly globally, will involve higher levels of inter- from different custodians, as well as the need to link vention of service staff during the early phases of to several proprietary custodian systems. service development. g Since the liability standard applying to the cen- In the future, DTCC will explore bridging GCA and tralized GCA service must be appropriate for a GCAH for those customers using both services to “utility” service, individual firms cannot com- allow validated corporate action information output pletely eliminate this function. by GCA to be used as input for the GCAH messaging hub to realize improved levels of STP. Additional information on GCA can be obtained from Anthony DiMurro at [email protected]. Why should the industry invest in GCAH messaging? g The risks and attendant losses from current meth- GLOBAL CORPORATE ACTION HUB (GCAH) ods of communicating between custodians and To achieve greater levels of STP, DTCC plans to investment managers can be substantially con- introduce the Global Corporate Action Hub (GCAH) trolled through centralized messaging and mes- in late 2003. GCAH is a flexible, real-time messaging sage tracking, leading to a substantial reduction solution, which will automate and centralize the in losses and related “write-offs.” point-to-point exchange of corporate action informa- g A centralized, automated messaging service should tion, such as notifications and elections. This initia- reduce the staff required to handle and track tive is aimed at streamlining the corporate action communications between the counterparties. communications process, which today oftentimes g This automated interface also permits instruc- relies on fax or telex, for investment managers, tions to be forwarded on for further processing banks and broker/dealers. without manual intervention, eliminating staff resources for re-keying instructions detail. GCAH will consolidate and correlate corporate What are the risk factors on this investment? action information across multiple institutions, pro- g The technology involved is complex, particularly viding both custodians and investment managers given the need for message tracking and alert with a single view of an event and the relevant capabilities. account information. GCAH will allow free-form g As with any network-based service, a sufficient construction of corporate action messages, conform- number of counterparties need to take up the ing to the new ISO 15022 corporate action messag- service roughly at the same time to derive signifi- ing standard and global market practices. For cant value. high-volume processors of corporate actions, GCAH will offer file-to-file transmission capabilities. More information on GCAH can be obtained from Lorraine Morrison at [email protected].

16 Transforming Corporate Action Processing DEVELOPMENT AND PROMOTION OF STANDARDS AND MARKET PRACTICES Why should the industry invest in promoting DTCC has committed significant resources to indus- standard market practices? g try efforts to develop standards to facilitate STP for The risks and attendant losses in variable prac- corporate actions globally. These efforts have focused tices and variable formats for communication can be reduced as practices and message formats are on the agreement of message standards and the standardized, leading to a substantial reduction in development of best market practices to define busi- losses and related “write-offs.” ness usage rules. What are the risk factors on this investment? DTCC works with several industry groups on stan- g The take-up of standard practices may be a very dards initiatives: prolonged process.

. As co-chair for ISITC-IOA, DTCC is helping refine For more information about corporate action standards, the corporate action ISO 15022 message standard, contact DTCC’s Lorraine Morrison, co-chair of the ISITC-IOA initially released in November 2002, adding Corporate Action Working Group, at [email protected]. approximately 70 new data elements.

. As a representative on national and global securi- STREAMLINED AND IMPROVED PROCESSING ties market practice groups, DTCC has been work- FOR HIGH-VOLUME AND COMPLEX EVENTS ing to develop best practice guides that set usage Today’s low interest rates have produced record rules for ISO 15022 corporate action message volumes of early full and partial redemptions of standards, seeking to create globally harmonized fixed income securities and also increased the market practices to enhance industry STP. issuance of structured securities, such as ABS and CMOs. As a result, the volume of related principal DTCC is committed to promoting the adoption and and income payments handled by DTCC’s depository usage of standards within the industry. DTCC con- has increased, and allocations to participants are up. tinues to work with industry groups, such as the SIA The lack of standards and consistent procedures, on its Corporate Action Division’s STP Initiative and together with extremely tight processing time frames, The Bond Market Association on its task force focus- has exacerbated problems such as late notifications ing on CMO payment submission standards. DTCC and post-payable adjustments. stands ready to work with the industry on a G30 recommendation regarding the adoption of XML To improve processing and bring greater standardiza- as the standard language and ISO 15022 as the tion, DTCC embarked on a number of projects last standard message for communication protocols for year, implementing internal enhancements and safe- corporate actions. guards, while working with the industry to establish more rigorous reporting standards for agents and DTCC is incorporating the developing standards trustees. One example is the industry-wide task force and global market practices into its current — sponsored by The Bond Market Association and processes, as well as services being developed. supported by the SEC — that is mapping out a strat- For instance, GCAH conforms to the new egy to address the complexities of dealing with ISO 15022 message standard and global market CMOs. In January 2003, DTCC issued a discussion practices. GCA has incorporated many best practices paper on CMO processing, outlining the initiatives in the classification of events and data elements, and undertaken to strengthen processing for these supports the ISO 15022 messages for custodial instruments. records. GCA will migrate to ISO 15022 on outbound messages in 2004. DTCC is working with the agent community to automate the transmission of early redemption notices to the depository, improve the timeliness of

Transforming Corporate Action Processing 17 notification and reduce the duplication of notices. introducing new capabilities that are secure and easy Standardized file layouts for announcement informa- to adopt. This will minimize participants’ processing tion sent to the depository were implemented in the problems, such as the handling of cash-in-lieu of second quarter of 2003. Participants will benefit fractions, odd-lot transactions and prorations for from more timely and accurate notifications. Already customers. For voluntary offers, participants will be in 2003, DTCC has reduced post-payable adjust- able, at their option, to include detailed beneficial ments by capturing and reporting key information owner information at the time an instruction is sub- earlier in the process. These adjustments, which mitted, which can subsequently be used for the allo- have long been identified as a significant issue for cation. In 2004, DTCC will introduce a revised participants, are the result of late notifications. pricing strategy to support instruction processing at the beneficial owner level. All these improvements, which reduce manual intervention, adjustments and errors, allow DTCC to bet- DTCC is extending its Participant Browser Services ter control costs and improve service to customers. (PBS) to corporate action processing, replacing the existing “green screen” terminal interfaces. The PBS Why should the industry invest in improving graphical user interface simplifies processing and processing for complex corporate actions? staff training through improved navigation, drop- g These efforts will reduce errors in the handling of down menus and elimination of codes and these actions and subsequent adjustments to pro- acronyms. The Corporate Actions “function suite” cessing, thereby improving customer satisfaction. will continue to be enhanced and a capability to pro- g Errors corrected “post-payable date” also present duce customized reports of on-line archive informa- the possibility of losses if a custodian cannot get tion is forthcoming. erroneous payments returned, or if an investor has taken action on incorrect information and Why should the industry invest in enhanced subsequently incurs a loss to correct that action. instruction processing? What are the risk factors on this investment? g This reduces the need for staff resources to re-key g The complex structures involved in many of instructions by permitting straight-through pro- today’s newer security types severely compress cessing of many types of corporate action elec- the time frames for corporate action processing, tions (but an initial investment of technology leaving little margin for error and therefore per- resources is required). haps limiting the benefit that these efforts can g This reduces the need for staff resources to han- produce. dle exception processing (e.g., raising cash-in-lieu amounts) for instructions at the beneficial owner More information on these initiatives can be obtained from level, and customer dissatisfaction (or “write- Virginia Holton at [email protected]. offs”) when discrepancies occur in this process. g Development of browser-based terminal capabilities should reduce training requirements for par- ENHANCED INSTRUCTION PROCESSING ticipant staff in this area. To achieve a greater level of STP, DTCC will provide What are the risk factors on this investment? automated feeds for announcements (outbound) g Fully automated processing of corporate action and election instructions (inbound) processing using instructions will require additional oversight at standard ISO 15022 messaging. This will allow the depository to ensure automated messages are participants to unify announcement and election properly handled. processing into one work process.

DTCC will continue to improve the acceptance of For more information, contact Alan Hutton at election instructions at the beneficial owner level by [email protected].

18 Transforming Corporate Action Processing CORPORATE ACTION LIABILITY NOTICES ELIMINATION OF CERTIFICATES FOR In response to STP initiatives launched by several CORPORATE ACTION TRANSACTIONS SIA committees, DTCC is developing a messaging DTC continues to work with agents and others to platform that will accommodate a variety of notifica- reduce the need to surrender physical certificates, tions and communications among participants. often required in the U.S., to complete corporate action transactions. The physical presentation of cer- One type of notification that will be accommodated tificates is an obstacle to meeting time-critical dead- is corporate action liability notices, transforming this lines, and also increases risk and cost. manual, paper-intensive process into an on-line electronic process that is easily accessible through a An initiative is under way for the depository to act Web-based application, as well as MQ messages and as the “destruction agent” for paying agents, thereby file transfer protocols. Through this facility, the eliminating the need to deliver physical certificates sender and receiver will have a central location to and allowing an entire event to be book-entry. transmit and receive notices of liability and the DTC continues to work aggressively with agents that assurance that the counterparty is in receipt of the are part of its Fast Automated Securities Transfer notice. Each notice of liability will have a unique (FAST) program to make as many securities FAST- control number, and any updates to the notice will eligible as possible. Through FAST, securities are be tracked and recorded in an audit trail. Message registered in the depository’s nominee name and formats will be based on ISO 15022 standards. held at agents. Efforts are in progress to automate The SIA’s Corporate Action Liability Notice Working the transmission of accompanying hard-copy docu- Group has finalized its business requirements. mentation, such as Letters of Transmittal, The corporate action liability notice application is Redemption Summary Forms and Inventory expected to be available in 2004. DTCC will imple- Manifests. ment an initial version of this platform to provide In addition, DTCC has begun a major effort to support for Automated Stock Loan Recall Messaging dematerialize restricted securities, the largest single Systems (ARMS) in mid-2003. group of U.S. securities still held in certificate form, with last year’s launch of Networking for Equities Why should the industry invest in centralizing (NFE). Eliminating certificates and using electronic liability notification? ownership records for restricted securities facilitates g The modest investment required will be more book-entry processing of corporate actions. than offset by savings from reduced resource requirements through automation of this cur- rently manual process, and by eliminating the Why should the industry invest in eliminating the use of certificates on corporate actions? occasional losses due to mishandling of liability g This furthers the industry’s overall dematerializa- notifications. tion efforts and will produce significant cost reduc- What are the risk factors on this investment? tions at the depository and at corporate action g None. agents, reducing their fees for these services. g This will eliminate risk from the occasional errors Further information can be obtained from Margaret Koontz at in the certificate presentation process (e.g., losses [email protected]. of certificates “in transit”). What are the risk factors on this investment? g None.

Further information can be obtained from Joe Trezza at [email protected].

Transforming Corporate Action Processing 19 APPENDIX — CORPORATE ACTION PROCESSING AT DTC

hrough its depository subsidiary (DTC), DTCC dures. Most of the securities issues held at the Thandles certain essential aspects of corporate depository are in book-entry or paperless form, elim- action processing. This is part of DTCC’s Asset inating the need for the physical movement of mil- Services business, which today provides custody and lions of paper certificates and instructions annually. asset servicing for more than 2 million eligible securities issues from the United States and 100 other CORPORATE ACTIONS AND BUSINESS CONTINUITY countries and territories. Risk management is a key underlying objective of Making sure corporate action proceeds are collected the drive to transform corporate action processing. and allocated to participants on time constitutes a Any delay in receiving corporate action announce- giant processing task for the depository. In 2002, a ment data or in processing elections represents sig- record volume of reorganization, redemption, divi- nificant operational and, potentially, financial risk. dend and interest payments were processed, reach- Ensuring business resiliency through highly reliable ing nearly $1.9 trillion, up more than 16% from the systems and operations is essential to mitigating this prior year. More than 10,500 reorganization events, risk. This makes today’s emphasis on business conti- 250,000 redemptions and calls, and 3.2 million nuity critical to financial institutions that handle income payments were processed at the depository corporate actions. last year. While DTCC remained fully operational on 9/11 To handle these transactions, DTCC deals with as and the days that followed, we have undertaken an many as 4,000 agents around the world. For high- aggressive program to further enhance our business volume agents, DTCC has developed direct, auto- continuity plans. Elements of the plan include the mated communication lines to allow for seamless implementation of new and redundant remote data processing of instructions and money payments. processing capabilities, decentralization of critical In addition, DTCC has worked with the agent com- staffing functions, reconfiguration of our network to munity to improve the quality and timeliness of ensure connectivity with multiple telecommunica- announcement information for DTC-eligible tions suppliers, and implementation of a testing pro- securities. For eligible issues, DTC’s Reorganization, gram with customers to validate their readiness to Redemption and Dividend data files are often the maintain connectivity with DTCC subsidiaries in the primary source for custodian banks, broker/dealers, event of a crisis. These efforts are part of DTCC’s vendors and others in the United States. ongoing commitment to ensure a world-class business continuity program for all critical business This high-volume processing business offers tremen- functions. dous economies of scale to customers and is based on secure and reliable systems and rigorous proce-

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