The Costs of Corporate Actions Inaction

Corporate actions processing has long been a byword for a manual, inefficient, and risk-prone function in the securities industry. While technology vendors have made great strides in overcoming the challenges of processing corporate actions, firms have defied the general trend toward automation, and rates of STP have remained stubbornly low.

Mandatory events are often well automated, with higher STP rates. However, event complexity, data inconsistency, and the number of internal/external touchpoints have left aspects of voluntary events to be managed manually, increasing cost and risk.

Various research studies highlight the costs and risks associated with failing to optimise corporate actions processing:

• Estimates of losses due to missed or mismanaged corporate actions are hard to come by, but the consensus is that over $1 billion is lost every year.
• The risk to firms’ front offices from sub-optimal trading decisions is estimated to be anywhere between €1.6 billion–€8 billion per year globally.
• Firms in the industry spend very large sums on measures to prevent processing failure. Available data on the European fund management industry indicates that firms incur total actual costs of €65 million to €140 million per year.

Reasons for Corporate Actions Failures

• 98% of firms cite manual processing of corporate actions and/or operational errors.
• 71% blaming late corporate actions notifications.

Around 10%–15% of all corporate actions are voluntary, translating into 100,000 to 150,000 complex events each year. The scope for failures in the processing of complex corporate actions is high due to the sheer number of different intermediaries, investors, manual, unformatted, instructions, and tighter deadlines. Processing failures can arise anywhere in the corporate action chain and all market participants run the risk of failures. A simple mistyped data input at any point in the process could result in significant financial losses to both the company and the shareholder.

Failure in handling a single complex event has the potential to result in losses running into tens of millions of euros. The risk is highest for individual custodian firms because they safeguard large amounts of assets on behalf of many investors, but brokers, fund managers, and other financial intermediaries also face risks.

Reputational risk resulting from inadequate approaches to corporate actions is more tangible. A negative judgment by regulators would immediately call into question the reliability of the firm and raise a red flag to current and prospective clients. Once news hits the rumour mill, competitors may then seize the opportunity to entice those clients away.

Our experience suggests that quantifying the value of the financial risk in this intensely scrutinised landscape is almost impossible. No single firm is going to stick its head above the parapet and admit to actual or potential losses.

At a time of unprecedented change and where everyone is looking for greater efficiencies, lower costs and stronger risk management, suffice to say that there is a clear indication of the importance and the potential scale of the issue; do you still think you can afford the costs of inaction in your Corporate Actions?

If you want to make a positive action, find out how our award-winning Corporate Actions solution can help you. Book a demo- info@contemi.com