The quality and accuracy of corporate actions data has always been a key element in the changing landscape of the financial services industry.  Yet organizations continue to spend millions of dollars striving to achieve the nirvana of a true corporate action ‘Golden Record’.

Many have invested in people to research and interpret the details of a corporate action.  However, this has proven to be costly, time consuming and open to significant risk of errors. To mitigate this, the investment has been redirected towards a technology solution. 

Users can set criteria and rules within a corporate action application telling it how to interpret data, compare information from multiple sources and automatically create that ‘Golden Record’.

Corporate action applications have significantly improved the quality, accuracy and timeliness of corporate actions data, but the data is still only as good as the interpretation the source has made of the press release, Stock Exchange announcement or Issuer prospectus.  Public Companies don’t generally make announcements in a standard format used by all, which leads to a lack of clarity, leaving it open to interpretation by the corporate actions desk. Unless the corporate action is announced from the Issuer in a clear and standard format this interpretation will always be made and the associated risks will never go away.

According to XBRL-US “The use of an agreed upon standard by issuers in addition to others in the corporate actions supply chain, will save time and money for public companies, processing agents, asset servicers and investors”.

Like the terms ‘Golden Record’ and ‘Golden Copy’ before it, we are no doubt hearing the use of the term XBRL as the ‘New’ thing to standardizing data and reducing corporate action announcement risk.

So what is XBRL? The definition of XBRL (eXtensible Business Reporting Language) is “a language for the electronic communication of business and financial data” based around the XML open standard messaging language.  In other words, it’s an electronic way of sending information that would otherwise be in the form of a written document.  This messaging can then be used by applications to read in the data and display it back to the user in a readable format, based on the user’s defined rules.

Currently Public company press releases and prospectuses do not follow a standard in how corporate action events are defined.  XBRL will enable the extraction of data from a written document in a structured format and send it out electronically to Stock Exchanges, Asset Servicers and Shareholders; reducing the need to interpret the whole document and the subsequent risks associated with that.

Already adopted as a regulatory requirement in a number of countries for accounting and financial reporting, the next step is to adopt this for corporate actions. The corporate actions information can then be converted from the XBRL technology standard into the ISO20022 standard ensuring information clarity and reduced risk.

Will this really remove interpretation and reduce risk?

Let’s take an example of a simple Stock Split by Japanese company Mizuho, originally announced in May 2008. The headline on Reuters was “Japan’s Mizuho plans 10-for-1 stock split”; sounds simple enough.  Reading further into the article it states “the bank will issue 999 new shares for every one” and raise the minimum trading unit from one share to 100.  So now is it a 999-for-1 stock split?

Let’s also include the interpretation of the announcements from a UK based custodian and a US based data vendor. The UK custodian decided it was a ‘Bonus Issue’ and shareholders will receive 999 additional shares for every one share held, in other words if you have one share you will end up with 1000.  The US data vendor announced it as a ‘Stock Split’ and shareholders will receive 1000 new shares for every one old share held.

Both companies’ announcements resulted in the same number of new shares, but they were announced differently because of different local market practices.

The UK custodian using the ‘Bonus Issue’ as they don’t have stock splits in the UK and the US data vendor using ‘Stock Split’ as they don’t have bonus issues. Had both sources announced to a US Asset Manager and they misinterpreted the data as 999 new shares for every 1 old share this would have impacted their NAV calculations and lead to further errors.  If they’d used the 10-for-1 terms in the Reuters announcement it would have been even worse.

The point of this is to illustrate that there are still local market practices that also lead to incorrect interpretations, irrespective of the details announced by the issuer.

This issue must also be resolved as part of the XBRL announcement initiative.  The use of standard event types from the issuers, based on their local market guidelines, will go a long way to resolving these types of problems and again reduce the need for interpretation and the associated risks.  If in this example the Japanese issuer had announced this electronically as a ‘Stock Split’ these issues would have been removed.

The adoption of corporate actions XBRL messaging will significantly improve the accuracy of data and reductions of errors.  How likely this is to be adopted in all markets is yet to be seen; there’s no doubt the larger mature markets such as London, New York, or even Shanghai, together with the larger public companies, will adopt this and hopefully include regulatory legislation to enforce it.

But announcements from these markets are not generally the ones that cause misinterpretation and errors.  Even in these markets there are exceptions as in cases such as the example above.  It’s more likely to be announcements from emerging markets and smaller public companies where the risk is highest and the greatest loses can occur.

For XBRL and Issuer announcement to truly streamline the announcement of corporate actions and reduce risk it will need to be adopted by all countries and public companies.  Until this occurs, it will be those complex events on the small public company resulting in a major price impact that continue to cause problems and errors.

As much as we would like to believe it, XBRL Issuer announcement will not yet get us to the nirvana of a true corporate action ‘Golden Record’.  For this to be even close to achievable the other issues raised in this article also need to be resolved.

I believe the use of the correct market practice terms is the most achievable. If all parties within the global market practice groups agreed that an announcement should be at the least based on the market practices of the public company’s local market, then issues such as different announcements for the same corporate action shouldn’t occur.

As for all public companies announcing corporate actions using XBRL, this will need regulatory change in all countries.  This may not be achievable in the next 10 years, but we should continue to work towards it. 

The inclusion of XBRL announcements will not remove that need to multi-source and review the corporate action announcement just yet, but it will definitely reduce the risks and that alone is a reason to adopt this sooner rather than later as corporate actions volumes and complexity continues to grow.