In the fast-paced world of corporate finance, staying ahead of the game is crucial for investors to maintain a competitive edge. One area that often poses challenges for financial institutions servicing investors is managing complex corporate actions. From mergers and acquisitions to dividend distributions and stock splits, corporate actions can have significant implications for an institutional investor and its stakeholders. For instance, in the Robinhood case reported earlier this year, the inability to process a corporate action (specifically, a 1-25 reverse stock split for Cosmos Health) resulted in financial losses of $57m. The corporate action highlighted technical issues in Robinhood's processing which allowed users on their trading app to sell more Cosmos Health shares than they owned and thus create short positions. Robinhood needed to cover the shorts but at a higher stock price, underscoring the critical importance of accurate corporate actions processing.

The complexity of corporate actions

Processing corporate actions can be complex, and error prone resulting in financial and reputational risk. This can be due to several factors:

• Incorrect or incomplete data. This can occur during data collection, entry, or transmission. For example, if the wrong record date or payment date is provided, it can result in incorrect processing or missed entitlements.
• Poor communication. The company affected by a corporate action (issuers), market participants (e.g., custodians, depositories, and transfer agents), and relevant intermediaries need to communicate effectively. Often, channel breakdowns or delays in disseminating information can lead to processing failures, especially where corporate actions are processed manually and are subjected to human error. For example, Foremost Lithium Resource & Technology Ltd. announced a 1-for-50 reverse stock split effective July 04, 2023. At the primary market source, the declared security rate was miscalculated as 0.05 instead of 0.02, with an effective date of June 30, 2023. If not detected, these errors would have resulted in processing failures down the chain.
• Technical glitches, system failures, or inadequate infrastructure. These issues can range from software bugs, network outages, data corruption, or limitations in processing capacity causing delays, errors, or missed deadlines.
• A lack of deep industry expertise to appropriately interpret terms and conditions. Certain corporate actions can involve intricate processes and dependencies that would need financial institutions to build as well as retain deep industry expertise. For example, Sigilon Therapeutics Inc. had a 1-for-13 reverse stock split effective May 23, 2023. On June 29, 2023, Eli Lilly and Company announced an agreement to acquire Sigilon. The primary market source interpreted it incorrectly and sent a merger event and a tender offer event on the pre-split ISIN instead of the post-split ISIN, which would have been a major problem if not detected.
• New messaging standards and processing aspects. New regulations, such as Shareholder Rights Directive II (SRDII) or Single Collateral Management Rulebook for Europe (SCoRE), can result in processing failures and, in certain cases, monetary and reputational damages.

The case for corporate actions managed services.

To mitigate corporate actions processing failures, many financial institutions are turning to Managed Corporate Actions (MCA) from S&P Global Market Intelligence that leverages our in-depth knowledge and specialization in corporate actions processing for various types of events and their impact on securities. MCA has dedicated teams with expertise in data collection, validation, reconciliation, and processing to help financial institutions handle corporate actions accurately and efficiently. MCA emphasizes that working as a Managed Service goes beyond traditional outsourcing. It offers flexibility, scalability, transformation, reduced risk, and cost-effectiveness for its clients with diverse needs.

MCA utilizes advanced technology platforms and automation tools to streamline corporate actions processing. These robust systems take care of data capture, enrichment, validation, and notification, reducing the reliance on manual processes and minimizing the risk of errors. MCA launched an Agent Validation service to provide a single source of truth for clients. This service helps clients validate and reconcile corporate actions data, resulting in significant cost savings and increased efficiency. It aims to eliminate discrepancies and serve as a reliable reference point for decision-making.

In 2020, the financial services sector saw a shift towards remote work. MCA addressed the challenge of keeping clients updated on critical corporate actions by providing real-time access to information, notifications, alerts, APIs, and multiple portfolios, enhancing mobility and workflow. MCA also responded to industry trends such as dividend cancellations and deferred payments by publishing specific newsletters for clients. This helped clients stay informed about ongoing trends and events.

In addition, MCA has access to comprehensive databases and reliable data sources to collect and validate corporate actions data. Multiple information channels are monitored, such as regulatory filings, announcements, and industry sources, to ensure timely and accurate data capture. Our in-house teams perform data enrichment and normalization to ensure consistency and compatibility with client systems. MCA has also demonstrated its ability to support diverse portfolios, including equities, SPACs, and fixed income, for some of the world's largest asset managers and banks. They facilitate monthly working groups for clients, fostering partnership and discussion on topics affecting corporate action participants.

Importantly, MCA has implemented robust control frameworks and risk management practices to mitigate inherent risks, including managing data errors, missed deadlines, and non-compliance with regulatory requirements for format and messaging.

For the Foremost Lithium Resource & Technology example mentioned above, MCA teams' access to the Canadian Securities Exchange announcements helped quickly validate the information and correct it before it was sent. Similarly, for the Sigilon Therapeutics event, MCA's robust operational processes helped ensure that the correct security identifiers were used.

MCA recognizes that a one-size-fits-all approach doesn't work for all clients. They have created customized process workflows to meet specific client needs and drive digital transformation. The MCA solution is scalable to accommodate varying needs and volumes of corporate actions, enabling clients to scale their processing requirements based on business demands without incurring significant infrastructure costs. There is also flexibility in terms of customization and integration with clients' existing systems. In addition, MCA keeps pace with evolving regulatory standards and industry best practices and stays updated with annual SWIFT upgrades.

A subscription-based pricing model enables clients to control costs and optimize operational expenses by eliminating the need for investing in expensive technology infrastructure, software licenses, and skilled resources. By leveraging MCA, financial institutions can focus on their core competencies, while benefiting from in-depth expertise, advanced technology, scalability, and cost efficiencies to enhance operational efficiency, reduce risks, and deliver accurate and timely corporate actions processing to their clients.

Click here for more information on MCA.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.