DTCC Embraces ISO 20022 for Corporate Action Elections

Depository Trust & Clearing Corporation’s corporate actions transformation project could well become a gamechanger for the US market by including the use of ISO 20022-compliant messages for elections, as well as notifications on corporate events.

Beyond the obvious reduction of operational risk in the stickiest aspect of corporate actions processing, the expanded use of ISO 20022 may finally push recalcitrant sectors of the financial market into migrating from legacy ISO 15022 messaging to 20022 which was first introduced two decades ago. Although there are no official figures, corporate actions specialists at buy and sell-side firms say that ISO 20022 has gained popularity among mega global custodian banks; however, broker-dealers and fund managers are lagging in its adoption.

The US market infrastructure’s decision to use ISO 20022 messages for elections instructions, highlighted in a recent article on its website, eliminates any confusion about its stance on the use of 20022 in elections. A year ago, there were no public indications that its commitment to ISO 20022 went beyond sending out notifications to its participants. But based on what DTCC itself now says, it is embracing ISO 20022 messages for the entire corporate actions lifecycle.

Here is how a recent article entitled “DTCC Reaches Another Milestone in its Corporate Actions Transformation Initiative” and written by Joyce Rosen, product manager for asset services, describes the new service: “The completion of Phase 3 [of the corporate actions project] which focuses on the lifecycle of distribution events, such as principal and interest, stock and dividend payments and others, resulted in migrating more than 6,500 clients to the new CA Web. Equally important, for the first time, clients can submit instructions to DTCC electronically via ISO 20022 messaging.”

The Corporate Actions Web portal, according to DTCC, consolidates into one platform functionality that was previously spread across several internal systems. As a result, the user experience is improved and so are operational efficiencies for DTCC’s bank and brokerage participants.

The DTCC’s corporate actions project, which the organization itself describes as transformational, represents a multi-year migration to a single web-based interface using XML-based ISO 20022 message formats, which DTCC modified for the US market. “Client input was a key driver behind CA Web’s ease-of-use. Throughout the design and testing process, DTCC collected extensive feedback, making iterative revisions and modifications, based on the recommendations,” writes Rosen.

Goodbye Risk

With DTCC processing about 500,000 of these instructions annually, eliminating manual submissions is expected to reduce costly mistakes. Historically, handling of notifications and elections has been considered a time-consuming and risky business. Until recently faxes and emails were the norm, with the associated likelihood of manual errors. Those firms that automated the process have mostly adopted the legacy ISO 15022 messages, communicating via the SWIFT network. Some of the largest financial institutions often allocate a percentage of their operating budgets to pay for potential corporate action mistakes — either delays in notifying end-investors, sending the wrong information or processing decisions incorrectly.

Despite common industry reliance on software that uses older ISO 15022 messages, some of the world’s largest financial intermediaries are backing the DTCC’s corporate actions project for the US market. Among those which have been mentioned in previous DTCC press releases are BNY Mellon, Brown Brothers Harriman, JP Morgan and National Financial.

Whether their decision is because of or in spite of the DTCC’s use of ISO 20022 message formats, it is generally accepted that ISO 20022 messaging will cut the risk of errors, because additional fields in the message formats reduce the need for narrative text, leading to misinterpretation. This difficulty is felt particularly in processing voluntary corporate actions, which are notable for complexity of information and the need for end-investors to return a decision by a predetermined deadline. Although voluntary corporate actions — namely reorganizations, mergers and tenders — may represent only a fraction of the entire universe of corporate action events they typically cause financial firms the most cost and grief, corporate actions operations experts tell FinOps Report. By contrast, so-called mandatory events — such as dividend and interest payments — are far more straightforward.

Push to Upgraded Messaging

Given its clout as a US market infrastructure and central conduit for corporate action notifications and elections, DTCC’s embrace of the ISO 20022 messages for full corporate actions processing may help to accelerate the transition from ISO 15022 to ISO 20022 in the overall US market — including among end investors, such as fund managers. Where large custodians and broker-dealers responsible for processing the bulk of corporate actions go, their buy-side clients typically follow.

DTCC received the first ISO 20022 electronic instructions for distribution events on CA Web in early April. More than 6500 users have been migrated to the system, and DTCC has a “healthy pipeline” of clients testing instructions with more expected to sign up in the coming months, according to Ann Marie Bria, vice president of asset services, who was cited in the article. DTCC processes about 500,000 of these instructions annually.

Next up: Phase 4 of the DTCC’s project, which focuses on redemption event processing, is scheduled for testing as early as Q3 of this year.  The final phase, planned to be fully implemented in 2016, will focus on the lifecycle of reorganization events such as tender and exchange offers.

What do fund managers contacted by FinOps think? Three, now using the older ISO 15022 message formats, say they are considering switching to ISO 20022 message types for elections at the recommendation of their custodians. Still, they have been reassured by their custodians that they can keep using ISO 15022 messages if they wish. The custodians will simply reformat the messages into the ISO 20222 messages.

‘It certainly gives a boost to the use of ISO 20022 messages in the US,” agrees one corporate actions operations director at an East Coast US fund management shop. He estimates that only a third of US fund managers use either ISO 15022 or ISO 20022 messages at best, leaving plenty of room for improvement.