While COVID-19 has exposed inefficient work processes in the corporate trading space, industry experts suggest it has been a catalyst for a new and improved way of working.
The financial services industry traditionally handled securities transactions on existing back office systems that were separated by region, industry or asset class, and these systems were not integrated with each other and often worked. in batches without any real-time capability.
More recently, modern solutions have become available allowing institutions to deploy technology to help navigate the complexities of corporate actions, but manual workflows are still commonplace.
According to Mike Wood, general manager of asset services at Broadridge, the only common cause of problems in corporate actions has always been the lack of defined processes, manual workflows and paperwork associated with fragile and complicated infrastructures resulting in operational inefficiencies and increased risks.
With the volatility of last year, when the pandemic began, the move towards remote working had a ripple effect on corporate actions and only heightened the importance of modern technological solutions in this space.
For corporate actions, a company may issue cash or stock dividends that are typically paid during specific periods, typically quarterly or annually. This tends to mark a portion of the company’s profits that goes to the owners of the shares.
Lockdowns and remote working have caused some issuers to postpone their Annual General Meeting (AGM) and approval of cash dividends – or even cancel their dividend for 2020, meaning the implications of that will linger for a long time this year. .
Amid the challenges, however, industry participants came together and collaborated by sharing creative solutions to solve some of the issues and problems associated with corporate actions. This has been a catalyst for changing the way corporate actions are viewed and the approach to them.
The immediate implications of COVID-19
During the pandemic meridian from late March to April, unprecedented uncertainty caused the prices of almost all asset classes to drop dramatically.
According to Alina Sychova, head of capital markets origination at Sova Capital, this has resulted for them in an increase in requests from corporate clients regarding opportunities for liability management or share buybacks.
“Of these, only a handful were prepared and able to make the quick decisions needed to initiate bond or stock buybacks, and unprepared clients missed the window as asset prices began to rise. straighten out in summer, ”says Sychova.
COVID-19 has also brought tremendous relief from the government, which Sychova says has flooded the global economy with operating cash, a hugely effective catalyst for primary markets.
In response to investors watching closely for new equity placements, issuers believe the market has unlimited potential for absorbing liquidity, prompting companies to consider alternatives to traditional sales.
The pandemic has also meant that people have moved from working in an office to working from home.
BBH was able to move 95% of its workforce from corporate actions to a work-from-home model thanks to the high levels of automation of its processes.
“We have identified the need to adjust certain workflows to ensure we continue to maintain our risk and control environment,” said Cara D’Addario, vice president of corporate actions at Brown Brothers Harriman (BBH).
Meanwhile, KDPW CEO Maciej Trybuchowski said there were “no major issues” for corporate actions due to the COVID-19 pandemic in the Polish capital market.
Trybuchowski identifies that the most common problem was that general meetings had to be canceled due to legal restrictions on public meetings.
“We offered assistance in this regard to issuers with our solution which was implemented before the pandemic, in the fall of 2019. The electronic voting application helps companies whose shares are registered in KDPW to keep and to vote remotely at general meetings, ”he said. Explain.
COVID-19 is still affecting businesses and there is a large degree of uncertainty as to when participants can return to a more balanced world of securities trading.
Last year, some issuers had to postpone their annual general meeting and approval of cash dividends, or even cancel their dividend for 2020.
In Poland, for example, dividends paid by state-owned companies in 2019 amounted to over PLN 24 billion (£ 4.7 billion or $ 6.4 billion).
According to Janus Henderson, the provider of the Global Dividend Index, around 35% of dividends were not paid in 2020, with distributions being postponed until 2021.
This sharp drop is due to the fact that a large part of dividends are paid by banks as well as by defensive stocks such as utilities.
“While crown-era state aid has reached unprecedented volumes, the banking sector and defensive stocks may not be able to freely share their profits with shareholders,” comments KDPW’s Trybuchowski.
Meanwhile, the European Central Bank and local regulators in Europe are not encouraging banks to pay dividends.
In Europe, heads of member state organizations acting on behalf of shareholders have gone to great lengths to improve the handling of general meetings.
David Baxter, CEO of T-Scape, suggests that these are, along with disclosure of information to shareholders, the two aspects of the European Commission (EC) Shareholder Rights Directive (SRD) II, which has entered into in force in September 2020, which the market is still struggling to manage.
The EC rejected attempts by financial intermediaries in April 2020 to postpone the directive. These same intermediaries have also asked the EC to waive any sanction for non-compliance with the directive until September 2021.
Baxter suggests that this was not an “unreasonable request” given the argument that SRD II was not so much a regulation as it was a market infrastructure project.
“In which case, full buy-in could not be obtained until all the relevant market players are on board. With such an effort to put these improvements in place, the timing of COVID-19 compared to SRD II could not have been worse, ”Baxter said.
Challenges and problem solving
Besides SRD II, the pandemic has brought to light traditional processes that rely on physical documents and signatures.
This has encouraged creativity in solving some of the issues and problems associated with corporate actions.
D’Addario explains that BBH has worked with its customers to quickly create new electronic workflows for items that were previously done physically, while maintaining the same level of risk and control.
For example, BBH was able to file approximately 50% of its claim volume via email in PDF format for the 2020 statute of limitations for tax claims that typically require the filing of physical documents.
Of how the pandemic has encouraged creativity to solve some of the issues and problems with corporate actions, Baxter says: were concerned. “
From KDPW’s perspective as a post-trade infrastructure institution, its services have long been guided by regulation and technology.
Trybuchowski says: “Regulations aimed at improving market transparency and security are very complex and require the retention and processing of huge volumes of data. We need cutting edge technology to ensure compliance. Most of our services, including securities trading services, are delivered through computer systems that were designed and developed independent of the pandemic. “
Opportunities for today and tomorrow
There are opportunities for increased collaboration across all parts of the corporate action chain as well as an increased focus on harnessing technology to achieve automation and scale.
Looking at some of these opportunities and how corporate actions might change in the future, experts anticipate increased interest in automation across the industry and expect greater collaboration with stakeholders in the industry. market to leverage technology and partnerships with FinTech companies to create real-time solutions.
D’Addario says BBH would like to see a greater focus on tax claims to see stricter standards and automation introduced into the claims process.
“This would include a focus on migrating physical signatures to electronic signature requirements and revising the medallion stamp process. This collaborative industry approach would benefit cardholders by providing more transparency and time to make informed investment decisions, ”she explains.
The future of corporate actions lies in the further development of electronic communications, which Trybuchowski says goes far beyond the simple transition from paper documents to email and extends to advanced communications systems and applications.
Discussing other looming opportunities for corporate actions, Broadridge’s Wood says, “FinTech providers have helped the market meet these needs and grow with innovative projects underway to reshape the way the marketplace. drives corporate actions, seeking to rationalize inefficiencies in the marketplace, something the corporate world has badly needed for some time.
Although 2020 has been a difficult year for many, Wood points out that the fintech industry is thriving and that the realization that institutions can take advantage of shared services has been more prevalent than ever in 2020.
“Benefits such as automation, optimization of operations and costs will benefit everyone in the market, enabling new innovations in 2021. There are some really exciting times ahead in the innovation space of operations at titles, ”he adds.