The Depository Trust & Clearing Corporation in New York, which has nearly $24 trillion of securities under custody, has developed a service to handle corporate actions processing and plans to set up an office in Asia for client servicing and marketing purposes, says James Femia, managing director.
The organization is considering a number of locations in the Asia Pacific to open an office by the end of the year, seeded with four DTCC professionals from the New York and London centres. Shanghai is said to be at the top of the list by industry executives, although Hong Kong, Singapore, Sydney and Tokyo are also being looked at.
The office will be able to service Asia-based clients in the same time zone, help clients there with processing issues in their US or European portfolios, and also market the DTCC's new corporate actions processing capability, the GCA Validation Service, to fund managers, custodians and broker/dealers in the region.
Last year the DTCC introduced the Global Corporate Actions Validation Service, which gives collects, authenticates and delivers information on traded securities. The DTCC processed around 3.5 million corporate action transactions worth $2.2 trillion in 2003, including acts related to dividends, interest payments and tender offers, from among the securities in its custody.
Corporate actions remain "the last bastion of manual processing" holding out against the global move toward straight-through processing, says Femia. "Firms are processing corporate actions the same way today as they did 20 years ago."
Corporate actions remain the most laborious, costly and risky area in transactions processing, primarily because it remains a manual affair. There is no market standard or protocol to handle the work, and it usually requires the attention of firms' most seasoned and experienced back-office personnel.
The DTCC identified a six-step life cycle for corporate actions. First is collecting announcements from a variety of information sources, including from data vendors, exchanges, news services and client interfaces. Second is to validate or "scrub" the information to make sure the information is accurate and complete.
Subsequent steps involve identifying which investors will be impacted and notifying them; communicating and processing elections; settlement in cash or securities; and reconciliation, so that investors receive their entitlements or are told of the final outcome of the event. Femia notes that every step represents a point of potential failure or missing information, which can put both operations and a firm's reputation at risk; even custodians often lack correct information if they rely on sub-custodians in particular markets.
The GCA Validation Service developed by DTCC covers the first two phases. Instead of having lots of firms spend time and money collecting information from a multitude of sources and figuring out if the information is correct, DTCC now will do this, in its role as an industry utility. So far three global broker/dealers have outsourced corporate actions work to DTCC and more institutions are in the pipeline, including a large hedge fund.
DTCC currently processes corporate actions from New York and London. At clients' request, it has decided to add a third processing centre in the Asia Pacific. This is also part of DTCC's business continuity strategy (i.e. it's backup in case a disaster shuts down another centre).