ISO 20022 for Corporate Actions: A for Effort; C for Completion in US? (Update)

Where SWIFT goes, Depository Trust & Clearing Corp. follows.

Not a phrase heard very often, if ever. However, when it comes to moving the US financial industry to ISO 20022 messaging for corporate actions, DTCC appears to have relaxed some of its demands.

Nearly a decade ago, SWIFT pressed the financial community hard to convert from the ISO 5777 messaging standard to ISO 15022 with a combination of deadlines and penalties. For any firm that did business with SWIFT messages, the changeover was effectively mandatory.

However with the introduction of ISO 20022, SWIFT has been more lenient. The reason: the cost and difficulty of either recoding or totally replacing the legacy systems that accept and generate ISO 15022 messages to handle a broad range of business processing, especially in the payments arena.

Today, with the multi-year program between DTCC and SWIFT to promote the use of ISO-compliant 20022 messages in the US market for processing corporate actions in its final lap, one glaring gap still remains. It’s a shortcoming which might hinder the full-fledged adoption of the more advanced and operationally efficient message formats in the US, insist some attendees at a SWIFT business forum event in New York on March 4 who spoke to FinOps Report on condition of anonymity.

The common stance among three fund manager operations specialists and two custodian banks interviewed: “It would have been ideal, if DTCC required members to send their corporate action elections in the ISO 20022 format, but at least they will be handling corporate action notifications in the more advanced format,” one custodian bank operations specialist told FinOps. “It will be a big help.”

Why Custodians Care

Without a mandate from DTCC for its participants to use ISO 2022 formats for corporate action elections it will be a lot harder for financial intermediaries to persuade their fund managers to upgrade their messaging protocol. They think that DTCC, as the US umbrella organization for settling over US$1 quadrillion in US equity and debt transactions annually and a critical communications hub for sending out corporate actions notifications, carries the clout to force the issue.

For all the fanfare DTCC has made over the past few years about reengineering its entire corporate actions infrastructure to switch over to ISO 20022 messages by the end of 2015, DTCC now says it won’t force financial firms send their decisions — coined elections in industry-lingo — to issuer corporations through DTCC using the ISO 20022 format.

Corporate actions notifications refer to events that may affect the stock or debt issued by the corporation. The event may be as simple as a dividend to as complicated as a voluntary reorganization such as an exchange or tender offer. Financial firms need quick accurate information on those events to correctly value their portfolios and make investment decisions. In the case of a voluntary reorganization, they must decide how they wish a corporation to proceed and which cash/and or securities payment they want to receive.

The Case for ISO 20022

Customized by the DTCC and SWIFT for the US market, the XML-based ISO 20022 message formats for corporate actions are a step above their ISO 15022 peers with more data fields and reduced reliance on narrative text. Financial firms can ill-afford misinterpreting information or instructions given the complex nature of so many corporate actions and the need for end investors to sometimes make quick choices in elections.

SWIFT’s stance of allowing users of its global messaging network to use both the ISO 15022 messages and the ISO 20022 messages is called coexistence. DTCC appears to share some of the same hesitancy when it comes to forcing its participants to rely strictly on ISO 20022 messages for the entire corporate actions lifecycle instead of its proprietary formats.

“The automation of instructions for distribution event types using ISO 20022 is optional for DTCC clients. Clients will still be able to submit instructions manually through the new CA web user interface for distributions,” says Robert Epstein, in response to emailed questions from FinOps following SWIFT’s US business forum event. Epstein is vice president of asset services at DTCC.

So far, based on a press release issued by DTCC in February, only one unidentified participant is sending DTCC corporate action instructions using the ISO 20022 message types, which were first introduced to corporate action notifications in 2011. More will likely join the bandwagon before the end of 2015 , but one would think more financial firms would have the capacity to do so at this point.

The DTCC’s use of ISO 20022 messages for corporate action notifications and elections was briefly cited by Brett Lancaster, managing director of SWIFT in the Americas, and William Hodash, managing director of business development for DTCC at the SWIFT-hosted gathering in New York.

Although neither offered hard figures on the number of corporate action notifications sent in the ISO 20022 formats nor the number of corporate action elections sent in ISO 20022 formats through DTCC, they displayed plenty of enthusiasm for the joint SWIFT-DTCC effort. The initiative was cited as one of several examples of the newfound lovefest between the two organizations who share similar owners, users, and global aspirations.

Both Lancaster, a former vice president at DTCC who joined SWIFT in late 2010, and Hodash referred further questions about the corporate action project to colleagues at their respective firms. Those questions included a request for clarification on the significance of the 2015 timetable.

Epstein’s response to FinOps’ questions raises a question in itself. The end of 2015, DTCC has repeatedly said, would mark the complete elimination of its use of proprietary message formats in favor of the ISO 20022 formats. However, the US market infrastructure never explicitly stated that it would require its participants to rely exclusively on the ISO 20022 formats for corporate action elections.

Changed Intentions?

In responding to FinOps questions, Epstein would not specify whether DTCC actually always intended to provide its participants with a choice in the elections process and simply require ISO 20022 formats to only be used for corporate action notifications. It would certainly be understandable if DTCC changed its mind, given the difficulties financial firms say they will have in upgrading their middle and back-office operations to accommodate ISO 20022 formats from ISO 15022 formats. It would be equally understandable if that aspect of the DTCC corporate actions project was always clear, but overshadowed by the need for DTCC’s participants to address corporate action notifications in the ISO 20022 format first. Therefore, less attention was given to the elections process.

What is clear is that DTCC has rebranded its work as corporate actions transformation, rather than corporate actions reengineering — a multiyear project designed to collapse multiple internal applications into a single web-based interface reliant on the ISO 20022 format. Perhaps DTCC thinks the word transformation will be more enticing.

Whatever the concept, floated in 2010, it really took off in late 2011 with the first delivery of announcements in a ISO-2022 compliant production mode.

In eventually mandating the use of ISO 20022 formats for receiving corporate action notifications, DTCC has definitely gone a long way to standardizing the message formats and content for middle and back-office operations specialists at buy and sell-side firms which have until recently relied on emails, fax or ISO 15022 formats at best.

So far, says Epstein, over thirty financial firms are receiving corporate action announcements in ISO 20022 message formats from DTCC, which has sent over 200 million of such messages.

However, by not requiring financial firms to send DTCC instructions on corporate actions in the ISO 20022 format, DTCC is continuing to foster the use of proprietary formats and ISO 15022 at best in the US market. It will not be closing the loop on the entire corporate actions chain — which consists of both corporate action notifications and elections, according to attendees at the SWIFT-hosted event.

Those elections might be only a fraction of the more mundane work financial intermediaries have to do in processing corporate action events, but they take up the most time, custodian bank operations specialists tell FinOps Report. The reason: most fund managers are still relying on either emails or text-laden ISO 15022 messages at best. Several custodian bank operations specialists attending the SWIFT-hosted event estimate that only thirty percent of their message traffic from fund managers comes in the ISO 20022 or even ISO 15022 messages.

For its part, SWIFT is hardly in a position to dictate what DTCC does. It is fully aware of the importance its embrace of ISO 20022 formats is to SWIFT’s broader plan to establish a stronghold for the messages in the US market. Yet it remains committed to a doctrine of coexistence of ISO 15022 and ISO 20022 messages, on the grounds it has not received a clear mandate to do otherwise. Therefore, it stands to reason it would retain a similar stance when it comes to corporate actions.

Doctrine of Coexistence

“With the introduction of ISO 20022, our customers now have a choice between formats and we support our customers with whichever messaging formats they choose to use,” says Malene McMahon, senior business manager for SWIFT in the Americas, in responding to additional emailed questions posed by FinOps.  “In the US market, some customers prefer to use ISO 20022 for corporate actions, but the majority of our customers are still seeing benefits and getting good straight-through-processing from ISO 15022.”

Last year about 110 million messages on corporate actions flowed through the SWIFT network in the ISO 15022 format, a 12 percent increase from the previous year, according to McMahon who could not provide similar figures for ISO 20022 formats in 2013.

When it comes to ISO 20022 in the US, the uptick is highest among custodian banks, which are DTCC’s customers and piloted the ISO 20022 program, explains McMahon. That interpretation is backed by the names of the prominent financial firms DTCC has intermittently cited as participating: BNY Mellon; Brown Brothers Harriman; JP Morgan Chase and National Financial.

With custodians carrying plenty of clout with their fund manager clients, it stands to reason they could encourage the use of ISO 20022 messages to their fund manager clients. Of course, it is unclear whether that encouragement should be a gentle reminder or additional processing fees for those relying on emails, faxes or ISO 15022 message formats.

“For custodians that want their customers on ISO 20022, education and awareness is the best they can do,” says McMahon. “There is a perception that moving to ISO 20022 is a daunting task which is why in 2011 we published a book called ISO 20022 for Dummies.”

Apparently, SWIFT thinks it’s relatively easy to switch over to ISO 20022, but won’t require its users to do so. DTCC has made a great stab in the US corporate actions market, but also falls short of a complete mandate.

Should they insist on a complete ISO 20022 migration? It would certainly make sense when it comes to corporate actions — which are widely considered the most risk-prone and costly to handle. Or is the reliance on ISO 15022 simply too embedded in operating systems and processes to overcome?

FinOps Report wants to hear what you have to say. Send your comments and we won’t publish your firm’s name or yours, if you wish.

Update: March 12, 11:58 a.m.

After this article was published, Depository Trust & Clearing Corp. contacted FinOps Report to say that corporate action elections were never part of its ISO 20022 initiative. DTCC also points out that it is shifting from a manual elections process to an automated one and that it is not relevant whether elections are part of the ISO 20022 project.

FinOps deeply appreciates the clarification DTCC is now making about the corporate action elections process and hence is providing it to our readers. In his previous written responses to FinOps emailed questions, Mr Epstein did say that the elections process would take place through an automated process, but never addressed the question of whether or not corporate action elections were intended to be part of the ISO 20022 initiative. As to the importance of this matter, FinOps is leaving it to readers to decide.