The asset servicing model is one that is facing a number of challenges – some of which are existential - across multiple fronts. As the industry looks to adapt, many organisations are increasingly turning to cloud-based technologies and other innovative solutions to future proof their businesses against changing regulations and evolving customer demands.
Corporate actions: A costly business
The processes underpinning asset servicing are in need of a significant strategic overhaul, mainly because many of the underlying processes across corporate actions have barely changed over the preceding two decades. A number of service providers are very reliant on legacy or manual-based technologies, meaning there are often deficiencies in data quality and timeliness throughout the transaction lifecycle. All of these problems are exacerbated by the high levels of intermediation between issuers of securities and the end investors, all of which contribute to added costs, inefficiencies and avoidable mistakes.
The losses accrued by investors because of chronic inefficiencies in corporate actions are non-trivial. For example, analysis by law firm Greenberg Traurig found beneficial owners in aggregate failed to gain $1.3 billion from scrip dividends annually, or $8.9 billion between 2011 and 2016. Aggregate losses from undersubscribed rights offerings, continued Greenberg Traurig, exceeded $100 million per annum, and these are still compounding. Given the enormous liabilities facing investors such as pension funds, these losses need to be better contained.
Regulators clamp down on inefficiencies
Regulators are also demanding operational improvements from intermediaries such as custodians and CSDs. The Shareholder Rights Directive II (SRD II) requires intermediaries to relay details about shareholders to issuers in good time, as well as transmitting information on meetings and voting to investors, and facilitating votes without delay. It also mandates that intermediaries provide timely notification of corporate action events. This will require providers to make technological enhancements to their current operating model. Furthermore, the Central Securities Depositories Regulation (CSDR) imposes tough settlement discipline measures in what will also require the industry to implement reforms.
Is Cloud the answer?
Increasingly, asset servicing providers are turning to the Cloud to help them modernise and scale their businesses. In response, Broadridge has made its Global Asset Servicing Solution available on Amazon Web Services in what should help users reap a number of benefits. Cloud services enable customers to replace their multiple incumbent systems with a modern, mutualised solution approach, allowing for standardisation of processes and data; efficiencies, and a reduction in operational risk. While these capabilities can also be delivered by a ‘traditional’ Application Service Provider (ASP) deployment model, Cloud adds additional flexibility, scale, speed and ease of integration. By embracing the Cloud, providers can deliver a superior service to clients.
In addition to supporting APIs (application programming interfaces) and providing robust levels of security, cloud solutions are playing a pivotal role in supporting financial institutions during the ongoing Covid-19 crisis. Asset servicers are facing renewed pressure on their return on equity, but they are also having to cope with increased trading volumes, which are consuming vast amounts of processing power. Traditional technology systems are certainly feeling the strain under Covid-19, and this is prompting more firms to seek out cloud solutions. Furthermore, COVID is placing operations teams under pressure due to market volatility and changing corporate action events, which is also driving a need to modernise. A recent poll conducted by Finextra found 62% of respondents believed Covid-19 would accelerate the pace of cloud technology adoption across asset servicing businesses.
Creating synergies in corporate actions
The Cloud can streamline the current antiquated corporate action process, offering greater flexibility, scalability, and standardisation/centralisation of data. By leveraging cloud solutions, asset servicers can deliver a more systematic and seamless corporate action service, thereby incurring sizeable risk mitigation, processing efficiencies and service resiliency for both themselves and their underlying clients, while simultaneously appeasing regulators.
As the new normal emerges, the benefits of asset servicing in the Cloud are becoming difficult to ignore. If your firm does not have a mature Cloud strategy, now is the time to consider how to harness the competitive advantages the Cloud can bring as asset servicing evolves.