Corporate Action Processing

Corporate action processing is the set of operational steps that financial institutions follow when a company or other issuer takes an action that affects its securities and their holders. Examples include paying a dividend, carrying out a stock split, redeeming bonds, offering new shares in a rights issue, or being taken over. Custodians, brokers, fund administrators and asset managers must learn of each event, work out who is entitled to what, collect any decisions from investors and make sure cash and securities end up in the right accounts.

The work sits within securities operations, downstream of issuers, their agents and central securities depositories, and upstream of end investors. It is a well-known source of operational risk, because events are numerous, often complex and still partly communicated in unstructured form.

Think of a building manager who receives letters from the landlord: a rent refund for everyone, a choice between two new parking schemes, or news that the building is being sold. The manager must make sure every tenant hears about it, collect the tenants' choices by the deadline and see that refunds reach the right people.

Banks and brokers play that role for investors. When a company announces something that affects its shares or bonds, they find out, check the details, tell their clients, gather any decisions, and pay out the cash or new shares. A missed deadline or a wrong number can cost clients money, so the work is closely controlled.

• Mandatory events. Apply automatically to all holders, such as cash dividends, coupon payments, stock splits, bond redemptions and mergers where shares are converted.
• Mandatory events with options. Happen regardless, but holders may choose how, for example taking a dividend in cash or new shares.
• Voluntary events. Require holders to decide whether to take part, such as tender offers, exchange offers, rights issues and buy-backs.

General meetings and proxy voting are often handled by the same teams, although they are sometimes treated as a separate category.

1. Event capture. Details are gathered from issuers, agents, depositories and data vendors.
2. Validation. Sources are compared to create a single verified record, or "golden copy", of terms, dates and options.
3. Notification. Clients are informed of the event, options and deadlines, usually through electronic messages.
4. Election. For voluntary or optional events, client instructions are collected and passed up the chain before the market deadline.
5. Entitlement calculation. Holdings on the record date determine entitlements, taking into account the ex-dividend date, pending trades and securities on loan.
6. Payment and posting. Cash and securities are credited, withholding tax is applied or relief obtained, and positions are reconciled.

Where a trade is pending over the record date, the buyer or seller may be owed a market claim, and where an event changes the security itself, pending trades may need to be transformed into new terms.

Much of the industry communicates corporate actions using ISO 15022 messages, such as the MT564 notification, and increasingly ISO 20022 messages, guided by market practice groups that standardise how events are described. In the European Union, the revised Shareholder Rights Directive (Directive (EU) 2017/828) and its implementing regulation require intermediaries to pass information on corporate events and general meetings along the chain promptly and in standard formats, and to help issuers identify their shareholders. Market standards on settlement in Europe also set rules for market claims and transformations. Securities lending adds complexity, because a lender who wants to vote or take up an option may need a timely securities lending recall, and borrowers usually pay the lender manufactured dividends.

Errors can be expensive: a missed election on a voluntary offer, an incorrect entitlement or a late tax reclaim may leave the institution compensating clients. Risks are greater for complex cross-border events, events announced at short notice and those described only in free-text documents. Firms reduce risk through straight-through processing, multiple data sources, checks by a second person on high-value events, clear cut-off times and reconciliation with depositories and bank custodians. Automation and machine-readable announcements by issuers have improved the process, but many events still require manual interpretation, especially for mergers and acquisitions with several options.