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Working Paper 46
In recent years, the number of automation projects has increased throughout the Finance Industry and particularly in securities trading and processing. The same observation can be made for corporate actions automation projects. Corporate actions messages are triggered when specific decisions are taken at the issuer’s side which result in cash flows or impact on the capital structure of a security. The overall objective of this study is to highlight the savings potential of automation projects based on empirical evidence gathered from a medium sized universal bank. The involvement of employees - measured in time units and employee working days respectively - is evaluated and interpreted as savings potential if manual processing was to be replaced with fully automated processes. The theoretical part of this study explains the method used for the empirical part. This method describes the entire corporate action processing chain and consists of several sub-processes which serve at the same time as a basis for establishing the involved time. Interviews were conducted with experts who deal with corporate actions on a day-to-day basis. Twelve corporate actions types were selected and their specific sub-processes were examined. In particular for cash flows, the majority of the sub-processes were already automated; hence, for these sub-processes, it was not possible to establish the potential time spent for manual processing with hindsight. Therefore, the core focus of this analysis lies on how the level of automation can be optimised: first those sub-processes that have only recently been automated, and second, those sub-processes that currently are processed manually but which could be automated. Today, at the bank under review, 60% of the cash flows are fully automated; 23% are partially automated and 17% are processed manually. As for automated processing, the only manual task derives from error messages that can occur due to false or missing data and that need to be corrected manually. A full overview of IT-related costs such as for the development and installation of automated processing systems is beyond the scope of this study. The savings potential of automated processing shall point out to which extent the costs of automation projects are acceptable depending on the required pay-back time and the number of administered securities. The study concludes that both dividend payments and interest payments constitute those types of cash flow for which it would be most profitable to increase the degree of automation. Thus, for these cash flow types it would be suitable to apply a full STP. In contrast to cash flows, most corporate actions types have been processed manually. Looking at the selected corporate actions types, “Exchange of security with cash component” and “Name change” related to shares bear the highest savings potential. To sum up, if the remaining sub-processes were automated and based on the 12 corporate actions types under review, it would be possible to achieve annual savings of approx. 114 employee working days (54583 minutes). The savings potential could be higher, namely by 34 employee working days (16131 minutes), if the automated processes would not necessitate further manual interaction due to conflicting, missing or delayed data. The benefits of automation are substantial for instance when just considering shares: For 1000 shares, 31.6 employee working days could be saved if the 6 corporate actions types relevant for shares would be fully automated. Besides, for only one corporate action type, e.g. dividend payment, that affects 1000 shares and 1000 investment funds on a yearly basis, 23.2 employee working days could be saved. From the corresponding multiple of these intervals of 1000, one can draw conclusions regarding other instrument quantities. In general, it can be said that for all corporate actions types, the highest potential for automation can be identified for sub-processes at the beginning of the whole processing chain; i.e. the receipt and control of corporate action messages as well as for checking and recording position data. For enhancing automated processes, data providers, custodians and financial institutions alike will have to take further action. Above all, standardisation, data quality and the timely delivery of data are areas that continue to require special attention.
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