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 process- ing, 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 han- dling 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