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Introduction

Corporate actions have been sidelined for too long and deserve to be treated with more respect. No type of investment security can be fully understood without knowledge of its corporate actions. All corporate actions have implications for the sustainability of an investment’s performance, but more beguiling investment preoccupations put them into the shade.

The corporate actions processing industry is in deeper shadow than even the actions themselves. Together with bank clearing and exchange settlement systems, the administration of corporate actions is one of the key co-operative functions tying our highly competitive global finance industry together. In the financial markets of the developed world the efficiency and “risklessness” of corporate actions processing is entirely taken for granted. Yet the volume of complex corporate actions and a common sense estimate of the likelihood of mistakes occurring suggest that industry practitioners and investing clients may be deluding themselves.

Figures for the annual number of equity and debt security corporate actions stand at approximately one million and three million respectively. ^[1] For equities it is estimated that corporate actions that can be classed as complex comprise 10-15% of the total. It has also been estimated that every year 18,000 corporate actions have the potential to cause significant share price movements in the world’s 25 most important stock markets. Although this represents just a small percentage of the total number of corporate actions, it nevertheless equates to several dozen price moving corporate events each trading day. In the realm of debt securities the payment events of structured debt caused a huge increase in the volume and complexity of corporate actions in the 2003-07 period. ^[2] Corporate actions processing faces challenges in delivering entitlements to investors accurately and in good time and meeting these challenges is important to the securities industry. Despite this corporate action practitioners have been left to themselves, carrying on their craft quietly behind a high wall.

If knowledge of corporate actions brings us to fully understand the securities they relate to, some familiarity with corporate actions processing is important in gaining an insight into the workings of the securities industry as a system. With the exceptions of accountancy and financial regulation, no other activity involves as many kinds of investment industry participant as corporate actions processing.

The current state of corporate actions underscores the incompleteness of the globalisation of financial markets. The corporate actions industry is global in the sense that the corporate actions for any tradable security, from wherever it originates will, in some cases, only be processed after a fashion. The relegation of corporate action processing to obscurity is one factor in disguising the host of cultural, ethical and regulatory differences that distinguish securities markets from one another. These differences in the detail are woven into much cross-border corporate actions processing. Although we may be on the brink of an unparalleled extension of the world’s developed economies, understanding of the entitlements of shareholders (domestic and overseas) in the newly developed countries is a long way behind other features of globalisation.

A look at corporate actions at this time will give food for thought in several directions. As the financial institutions take stock, re-examining their points of reference, it will be interesting to see whether corporate action entitlements receive more of the limelight than they have up until now.

The corporate actions industry needs to improve its efficiency; what needs to change to affect this, and will the major players be able or willing to put up the investment necessary? As the balance of economic power shifts eastwards, what kind of corporate actions environment will investors meet with when they invest outside their own region? In sum, a better acquaintance with the current state of corporate actions will allow a greater understanding of changes in the securities industry.

Endnotes

1 For the 12 months from March 2003 there were estimated to be 935,000 equity corporate actions (‘Corporate Action Processing, What Are The Risks’, a study carried out by the consultancy Oxera on behalf of the Depository Trust and Clearing Corporation). Figures on the volume of complex actions and those with the potential to cause share price movements are from the same report. [return to text]

2 ‘Transforming Structured Securities Processing’ (Depository Trust & Clearing Corporation white paper, September 2007). [return to text]