The processing of corporate actions — the announcements of any event that brings material change to a company and affects its stakeholders — is high-risk, high-cost and inefficient in the financial services industry. Banks will receive incremental value as hurdles are overcome and standards are introduced for the more common kinds of corporate actions.

• Issues with corporate action processing are escalating due to increasing globalization, the volumes of corporate actions that need to be processed, and a decreased tolerance for operational risk.
• Data quality issues that stem from the lack of standardization, inadequate identification of events and differing interpretations underlie the high costs and risks of corporate action processing.
• SWIFT, XBRL US, and the Depository Trust and Clearing Corporation (DTCC) are developing XBRL-based standards for the tagging of corporate action event announcements by issuers; however, limited issuer involvement and interest will be major barriers to their adoption.
• XBRL is no panacea, but it is an important addition to the tools being brought to bear on improving corporate action reporting.

Financial institutions:

• Exert increased vigilance over data quality and interpretation within your firm as costs and risks increase. There will be no complete solution to the corporate action data quality issue in the foreseeable future.
• Include participation in industry efforts to standardize corporate action data and reporting procedures at the source when evaluating corporate action data providers.

Issuers:

• Evaluate the corporate action prototype issued by XBRL US and how it may simplify corporate action reporting. Work with financial intermediaries, and press them to pass on the benefits that they would accrue from adoption of an XBRL standard for corporate action reporting.

Financial intermediaries:

• Provide tools, assistance and incentives to issuers to give them a sufficient business case for conversion to a new process for reporting.

The processing of corporate actions — the announcements of any event that brings material change to a company and affects its stakeholders — is high-risk, high-cost and inefficient in the financial services industry. Vendor corporate action solutions — both software- and service-based — are being joined by renewed industry efforts to streamline corporate action processing through data standardization that enables greater automation and quality controls.

These efforts are being fueled by several factors:

• High volumes of corporate action events at a macrolevel and a microlevel, as investors expand the range of corporations in which they hold an interest. In 2008 alone, there were over 5.8 million unique corporate action events on corporate and municipality securities (see www.dtcc.com/downloads/products/gca/CorpActionsConfHandout.pdf ).
• The cost and risks associated with corporate action processing are escalating due to increasingly complex products, organizational structures and relationships, and deals. Globalization brings a range of additional factors, including multiple currencies and regulatory requirements, and involves central security depositories, custodians and prime brokers.
• Latency in business decision making is decreasing — whether that is for real-time trading activity defined in milliseconds or, more recently, microseconds, or for non-real-time functions, such as portfolio valuation and risk assessments. Thus, there is less time to resolve corporate action data and interpretation discrepancies, making automation and standardization that much more important.

Corporate actions are any events that bring material change to a company and affect its stakeholders. Underlying the difficulty of corporate action data processing is the scope of what is included in this definition. Under the corporate actions umbrella are a wide range of events that differ significantly in the data that needs to be communicated, the form and channels of communication, and the actions that need to or may be taken.

A corporate event can be something that is:

• As straightforward as an announcement of a quarterly dividend, to something as complex as a corporate merger and the associated ramifications on stock issues
• As quantifiable as a two-for-one stock split, or as nonquantifiable as a change in the membership of the corporate board
• As routine as a quarterly earnings report, or as unusual as a bankruptcy filing
• As nondemanding as a change requiring no specific investor action, such as an announcement of a dividend, to as demanding as a change requiring an investor decision, which must then be applied, such as in a merger or acquisition
• As regulated as a merger or tender offer that requires, in the United States, for example, a filing with the Securities and Exchange Commission (SEC), to as unregulated as an announcement of a new corporate office

What a corporate event is can be open to some interpretation. While some events — such as an announcement of a dividend or a merger or acquisition — are widely understood to be corporate events, other events such as a change in board structure, a name change or an office opening are open to debate.

There are two primary uses of corporate action data, with significant implications for the trade-off between timeliness of data and data quality, and how corporate action data is sourced:

1. Use of corporate action information to make real-time or near-real-time trading decisions. Traders seek to seize fleeting market opportunities presented by material corporate events, such as the announcement of an acquisition or a change in dividend. For these purposes, corporate action events are typically sourced from third-party market data providers, such as Reuters or Bloomberg, with speed of delivery overriding accuracy. As trading in general speeds up, additional pressure is being placed on the timeliness of corporate actions for these purposes.
2. Use of corporate action information for non-real-time decision making and portfolio and account updates. For these purposes, corporate action events are typically sourced directly through the issuer or the issuer's agent, or through a custodian or prime broker or other source with fiduciary responsibilities. Accuracy, instead of speed of delivery, is the primary concern.

Efforts to standardize corporate action data have centered on ISO 15022 and, more recently, ISO 20022, which introduce messaging standards for communications between account servicers and account owners. These standards are applied after the announcement has been made by the issuer. Despite these efforts, the process from first announcement by the issuer to the final application of the event to portfolio valuation and shareholder communication is often manual and not standardized in terms of content, format and channel of communication. Issues exist across this processing chain, as shown in Table 1.

Many of these issues stem directly or indirectly from the lack of standardization (format and channel) and lack of automation in the original publication of corporate action events by the issuer. For example:

• Standardization in how corporate actions are phrased and the specific data fields included. This would: (1) ease the issuer's concerns about legal liabilities; and (2) remove to some degree the problem with multiple interpretations of an event. This, of course, presumes that: (1) the event is one that conforms with the details of events that occur with a fair degree of frequency; and (2) the issuer and its agents desire a general market understanding of what has or is about to transpire.
• Standardization in how key facts and phrases within corporate action announcements are tagged within regulatory documents, prospectuses and press releases and on corporate websites. This would allow for automated extraction and identification of event facts, reducing the problem with events that are undetected (or undetected in a timely fashion), and the data quality issues that come from re-entry of information.
• A standardized process for assigning unique identifiers to corporate action events. This would minimize the difficulty in tracking changes to corporate action events and identifying the most recent, correct version of a corporate action announcement.

To tackle these issues stemming from the lack of standardization and automation, SWIFT, the DTCC and XBRL US have announced a joint initiative to promote straight-through processing of corporate actions (see www.dtcc.com/products/gca/improving_communications.php for additional information). This announcement was made at the 28 May 2009 XBRL US and Securities Operations Forum Conference held in New York City, which Gartner attended.

Highlights of the XBRL US, SWIFT and DTCC initiative are:

• A corporate action taxonomy will be created to support a "seamless transition from issuer-generated documentation to data, using XBRL technology."
• The data tags to ISO 20022 will be aligned so that XBRL-tagged data can be easily converted into ISO 20022 messages.
• SWIFT will roll out the new ISO 20022 corporate action messages on a global basis, building on ISO 15022 adoption.
• The DTCC will make all corporate action announcements it publishes available in ISO 20022, beginning in 2010.
• The DTCC is implementing a registration process to issue unique corporate action event identifiers that will work with the XBRL process.
• XBRL US has developed a prototype for merger announcements, which will be expanded to cover approximately 55 different types of corporate actions by the end of 2009.

Gartner believes XBRL can provide significant benefits to corporate action data processing. The underlying value proposition of XBRL is that it separates facts from document formats, while preserving value and meaning. XBRL has unique characteristics not found in ISO 15022 and ISO 20022 that have traditionally been used to standardize corporate action messaging by financial intermediaries. Some of these characteristics and their value for corporate actions are:

• An ability to support multiple languages with a single document, through the label linkbases
• An ability to perform basic validations as the documents are being created, through the definition linkbases
• An ability to store links between data elements and authoritative sources through the reference linkbases
• An ability to support multiple uses based on a single document through the presentation linkbases

Because of the criticality of standards in the financial services industry, Gartner's banking and investment services team developed and applied a set of key criteria for assessing standards viability. These criteria help determine the likelihood that a given standard will gain the critical mass and stability to warrant adoption:

1. Sponsorship and representation. This examines the extent to which the various market constituencies that would be involved in implementing and using the standard have a voice in the standards initiative.
2. Formalization and funding. This examines the strength of the organization sponsoring the standards initiative.
3. Universality and stability. This examines adoption trends, drivers and enablers. There are three components to this category: consistency in market practice and standards use; market penetration; and ease of implementation and tool and third-party support.
4. Criticality and scope. This examines the strength of the market drivers for adopting the standard.

We applied these criteria to XBRL in general in "XBRL: A Tool for More-Effective Risk Management" and found its overall viability generally to be strong. However, as noted in that research, each XBRL taxonomy needs to be examined separately for viability.

Table 2 presents an assessment of the current viability of an XBRL taxonomy, aligned with the ISO 20022 messaging, specifically for corporate actions. This assessment reflects the newness of the initiative, with no current released taxonomy, and issues with limited involvement — particularly on the part of issuers. These issues can be overcome with the dedication of significant work and resources.

Significant standardization of corporate action event data at the point of first issuance will not be achieved within the next five years. This is due to the major hurdles that must be overcome.

The most significant of these hurdles is the creation of a business case for issuers. Issuers do not have a strong business case for making an investment in tools and training for producing XBRL-compliant corporate action announcements. The benefit of more timely investor communications and less room for misinterpretation of corporate action events must also be joined by economic incentives for issuers. Financial intermediaries — which can gain substantial cost savings by the implementation of standardized communications from issuers — must provide tools, training, services and other incentives to issuers to gain their participation. Regulator intervention in the near-term to midterm to require XBRL-compliant corporate action reporting is highly unlikely.

The other hurdles that must be overcome, as reflected in the "weaknesses" column of Table 2, are primarily a matter of time and investment, as taxonomies are developed, and tools appear in the marketplace.

As a result, financial services firms and their intermediaries must continue investments in corporate action data-cleansing processes, tools and services.

While the development of an XBRL taxonomy for corporate actions and its adoption by a critical mass across the majority of corporate action types is unlikely to occur during the next several years, incremental value will be received as hurdles are overcome and standards are introduced for the more common kinds of corporate actions, such as dividend announcements:

• Financial institutions:
  • Exert increased vigilance over corporate action data quality and interpretation within your firm as costs and risks increase. There will be no complete solution to the corporate action data quality issue in the foreseeable future — though improvements will certainly be made — and globalization, more-complex business structures, the increasing speed of doing business, and more-complex products and portfolios will exacerbate data quality problems. Corporate action data should be included in master data management initiatives and operational risk oversight. Investments need to be made in services and tools for automating the receipt, cleansing and application of corporate action data.
  • Include participation in industry efforts to standardize corporate action data and reporting procedures at the source when evaluating custodians, prime brokers, central security depositories and third-party corporate action data providers. Press your corporate action providers to explain — and prove — how they are working with issuers to promote standardization in reporting, and to share the gains they as intermediaries would receive from standardization with the issuers.
• Issuers:
  • Familiarize yourself with the corporate action prototype issues by XBRL US, and evaluate how it may simplify corporate action reporting.
  • Work with financial intermediaries, and press them to pass on the benefits that they would accrue from adoption of an XBRL standard for corporate action reporting.
• Financial intermediaries:
  • As a primary beneficiary of issuer adoption of XBRL taxonomies for corporate action publication, provide tools, assistance and incentives to issuers to give them a sufficient business case for conversion to a new process for reporting. Publicize these activities as a short-term differentiator as a provider of fiduciary services, and as a longer-term impetus to general industry adoption.

"XBRL: A Tool for More-Effective Risk Management"