As the dissemination of corporate action information has become more complicated, temporary arbitrage opportunities (and risks) arise in trading. Moreover, failure to interpret corporate action information correctly may lead to suboptimal trading decisions by fund management firms for clients or for proprietary positions. This is just another case of how important data is for an investment firm, and the need to ensure that data doesn’t get siloed in either the back, middle or front office. Increasingly, investment managers want a ‘whole office’ perspective of their data – including corporate actions.
Because corporate actions data can be used to improve decision-making, as well as ensure the best possible outcome for clients, the front office no longer want slow manual processes holding them back, and instead are looking to get data continuously throughout the day.
I recently stumbled upon an article from a few years ago which said that there are over a million complex corporate actions annually, and a further 10+ million corporate actions announcements, meaning that for asset managers with diverse investments, there is room for complexity.
Apart from efficiency gains, it seems that risk management is at the top of the agenda in terms of streamlining corporate actions workflow. The below three points are taken from a report by Interactive Data.
Operational risk: Inefficiencies in the corporate actions chain, including misinterpretation and processing failures, late payments, and untimely information to the front office triggering poor trading decisions, can lead to operational risk and subsequent losses borne by intermediaries in the chain. As a key component of daily net asset value (NAV) calculations, it is critical that all corporate actions events are correctly identified and processed. High-quality, on-demand corporate actions data helps to reduce inefficiencies, especially when it shows the lifecycle of the data content to support an audit trail.
Reputational risk: Failure to properly handle even a single corporate action can result in significant reputational damage and exposure to financial risk. The need to interpret, transform and summarize corporate actions information can lead to inaccurate communication of an issuer message. Pricing errors and the associated reputational and financial loss are a significant concern for fund administrators. Again, high-quality, timely corporate actions data, using a robust and standardized process, is fundamental to managing this risk.
Liquidity risk: Effective liquidity risk management entails understanding the interplay between complex financial factors such as the relationships between issuers of financial instruments, the instruments themselves, the counterparties and clients involved. With increased complexity of corporate actions bringing about events that can suddenly change a firm’s risk profile, comprehensive and timely corporate.
