Streamlining Corporate Actions Processing with Blockchain

Banking & Financial Services

White Paper

Streamlining Corporate Actions Processing
with Blockchain

About the Authors

Raghavasuresh Samudrala
Raghavasuresh Samudrala is an Industry Solution Advisor with the Banking and Financial
Services (BFS) unit of Tata Consultancy Services (TCS). He has around 20 years of
experience in IT solutions and consulting, and his areas of interest include enterprise
architecture and innovation. Samudrala holds a Master's degree in Computer Science
from the Indian Institute of Technology (IIT), Chennai, India.

Ganesh Raghavan Padmanabhan
Ganesh Raghavan Padmanabhan is a Domain Consultant with TCS' BFS business unit. He
has nine years of IT solutions and consulting experience in the banking domain.
Padmanabhan's focus areas include the exploration of new industry solutions for capital
markets. He holds a Master's degree in Business Administration from the S P Jain School
of Global Management, Singapore and Dubai.

Abstract

Despite the use of advanced technologies and heightened process maturity in capital
markets, complexity and inefficiencies continue to exist in issuer and asset services, such as
corporate actions information, voluntary actions, and proxy voting processing. The corporate
actions information generated by issuers needs to be communicated to investors through
multiple intermediaries such as custodians, data providers, exchanges, banks, and Central
Securities Depositories (CSDs). Currently, an issuer publishes corporate actions data as raw
text (without a defined structure). When intermediaries try to convert this data into a
structured message, formatting errors and inaccuracies creep in.

The blockchain technology comes to the rescue here. With features like distributed ledgers,
peer-to-peer digitally signed transactions, trusted processing nodes, and integrity algorithms,
it can help address most inefficiencies in the current hierarchical process flows. This way,
financial institutions can build golden sources of corporate actions information sourced from
issuers and issuer agents.

The use of blockchain technologies in corporate actions information management offers
several benefits including cost reduction and risk mitigation in issuer agent services and
asset-servicing processes. In this paper, we discuss how the blockchain technology can
address the issues in corporate actions processing.

Contents

Simplifying Information Exchange with Blockchain Technology 5
Building a Trusted Corporate Actions Processing Hub 5
7
Corporate actions information processing 8
Voluntary actions 9
Proxy voting 10
Conclusion

Simplifying Information Exchange with Blockchain

Technology

Corporate actions processing is an important asset-servicing function that supports issuers and investors. From its
inception as an announcement by the issuer, until the benefits are extended to the investor, corporate actions
information is processed by various financial intermediaries. The resultant exchange of information often leads to
numerous challenges in processing corporate actions data, primarily due to non-standardized communication
practices.

The cumulative cost of reprocessing corporate actions data each year is notably high. The main reasons being lack
of data reliability due to mistaken information, delayed updates, and complex event setups like exchange tender
offers or mergers. Key challenges that financial firms continue to face are maintaining consistency of data across
disparate systems and processing multiple data formats. Despite attempts by industry bodies to harmonize
corporate actions data, and standardize related communication among the participants, some lags remain. This can
be attributed to the high cost of implementation, use of legacy platforms, and the rigidity of existing enterprise
architectures in most firms.

We feel that the financial services industry is faced with multi-dimensional challenges – hierarchical process flows
during exchange of information among intermediaries, time-consuming processes such as reconciliation and
validation of information, and multi-layered system structures across the investment value chain. This makes it
difficult to simplify, optimize, and improve the corporate actions process.

A blockchain-based solution can remove technical barriers in processing and enable seamless communication of
corporate actions data between parties. It can also solve the twin problems of data reliability and integration across
inter- and intra-application environments. Other advantages include access to accurate information, elimination of
redundant research and scrubbing, availability of authenticated, detailed information on corporate actions events in a
single location, transparent communication of event details, and advanced alert functions for intermediaries’ operations.

Building a Trusted Corporate Actions The ability of blockchain
technology to process
Processing Hub information across
hierarchies, in a trusted

Corporate actions information is the main trigger for processing of manner, can be utilized to
entitlements and benefits to investors as part of their ownership of an asset. simplify the corporate actions
Complexity continues to exist in transferring information from the issuer to information exchange.

the investor. Currently, this information is exchanged or re-keyed through

intermediaries like news agencies, financial data providers such as Bloomberg L.P. and SIX, stock exchanges, CSDs,

transfer agents, and custodians. The challenge lies in ensuring data accuracy at each step of this information

exchange. Some areas of concern are:

5

n Complex, error-prone, manual interventions and time-consuming paperwork

n High costs and frequency of data validation due to hierarchical message flow, leading to data quality issues

n Data inaccuracies due to disparate systems and disrupted communication between issuers and investors
through intermediaries

n Lack of compliance with communication standards across participants of the corporate actions value chain

We believe that a ‘trusted corporate actions processing hub’, created using blockchain infrastructure and
solutions, can help financial firms address these challenges. Developed by either CSDs, stock exchanges, or industry
consortiums, this hub will seamlessly process the information exchange between issuers and investors. The key
features of a corporate actions processing hub include:

n Standard interface for the issuer to register and transmit announcement details to participants

n Defined templates for making and registering announcements

n Flow of authenticated information from issuers and registrars in digital format

n Standard APIs to send notifications to participants, allowing seamless integration with internal systems

n Smart contracts to orchestrate workflows and rules for voluntary actions processing and proxy voting

n Exchange of information between parties through standard protocols

n Public key access and graphic user interfaces (GUIs) for shareholders and beneficiaries to interact and exercise options

Figure 1 gives an overview of a trusted corporate actions processing hub that will complement existing processing
systems.

Challenges in the current Issuer / New ecosystem using Blockchain Brokers Investors/ Service Providers
ecosystem Registrars infrastructure Brokers
Brokers
Complex, time-consuming, Data providers Sponsor /
and effort-intensive process Consortium Real-time
NEWS integration
Hierarchical message flow Access
leading to data quality issues Structured / Fund Managers
Unstructured Trusted Corporate Action Hub
Over-reliance on multiple Stock exchanges Investors
intermediaries Corporate actions information

Lack of standardization and Voluntary actions
harmonization
Proxy voting

CSD
Advantages

Simplification and Reduced Increased Improved Improved quality
process operational risks transparency automation and real-time
distribution
optimization

Figure 1: A Corporate Actions Processing Hub (Source: TCS Internal) 6

A corporate actions processing hub, underpinned by blockchain technology, can help financial institutions simplify
and optimize the following three processes:

n Corporate actions information processing: Processing announcements from issuers, creating a golden copy of
corporate action events, and distributing data to interested parties

n Voluntary actions processing: Sending event notifications, receiving inputs from beneficiaries, and processing
the eligibility for downstream executions like benefit calculations and entitlement processing

n Proxy voting: Ensuring the participation of all beneficiaries and having them exercise their right for all the
resolutions communicated by issuers

Corporate actions information processing

Information processing follows a hierarchical structure where an issuer publishes the information in the public
domain, which is then captured by various exchanges (see Figure 2). This information is subsequently disseminated
to multiple intermediaries like custodians, CSDs, and data providers. Finally, the investor gets the information from
one of the intermediaries. During this flow, the information is exchanged in multiple formats, which introduces
inaccuracies and redundancies. Additionally, the parties across the corporate action value chain require multiple
integration points, which in turn drives up the development costs.

Current Scenario Future Scenario

Issuers / Registrars Stock Exchanges CSDs

XML / Online/ Voice

Issuers / Registrars GUI / Templates Peer-to-peer protocols

Stock Exchanges Golden source, accurate
information (direct from
Data Proprietary Proprietary CSDs
Providers Custodians issuers)
Distributed Ledger
NEWS
Peer-to-peer protocols

XML ISO 15022

Brokers Fund Managers Custodians Fund Managers

Investors

Figure 2: Corporate Actions Information Processing - Current vs. Future State (Source: TCS Internal)

7

The challenges associated with multiple data formats can be overcome by using the distributed ledger feature of
the blockchain technology. It enables secure distribution of structured and unstructured information validated by
issuers, and can be a valuable service for financial institutions. It allows issuers and registrars to register and transfer
corporate announcements through digitally signed transactions. Once the announcement is accepted by the
system, a golden copy is created and distributed to all the parties. This eliminates any risks and the need for
repetitive validations, and ensures accurate and timely communication of information, in the standard format.

Voluntary actions

Voluntary actions require depositories, custodians, and brokers to run individual election processes for investors,
and communicate the status and confirmation of election settlement to respective participants (see Figure 3). The
communication of announcement follows a hierarchical flow from the depository to investors, through custodians,
brokers, and sometimes, other intermediaries. Similarly, investors' actions are communicated back to the
depository through brokers and custodians. Quite often, it is very difficult for these intermediaries to get the
required inputs from investors, within the stipulated timeframes. Most of the markets in Europe and the Americas
are yet to completely automate voluntary actions processing, as the end-to-end flow requires significant
intermediate reconciliations.

Current Scenario Future Scenario

Issuers / Registrars

Issuers / Registrars

GUI

CSDs Announcements Golden source, accurate
Custodians information (direct from
CSDs Custodians
issuers)
Events repository Fund Managers
Workflow for elections
Elections setup Proprietary Communication to
Proprietary beneficiaries (smart contracts)
Records keeping
Reconciliations Receipts and confirmation
Settlement of (P2P protocols)
proceeds
Record keeping of election results

Investors Fund Managers Investors

Figure3: Voluntary Actions Processing - Current vs. Future State (Source: TCS Internal)

8

A blockchain-based solution can help simplify this process through a smart contract mechanism. This allows the
institutional investors to exercise their options directly, once the options for executing an event are set up. The
result of the action can be immediately shared with CSDs and custodians, for further downstream processing. Such
a solution streamlines the overall process by enabling instantaneous access to investors for exercising options and
executing events, while eliminating the need for multiple reconciliation between various parties.

Proxy voting

The existing proxy voting process involves significant manual effort for reconciliation between corporate registrars,
custodians, and asset management firms. In general, it takes nearly 25 to 30 days from the time of the
announcement until the close of voting (see Figure 4).

Current Scenario Future Scenario

Issuers / Registrars

CSDs Issuers / Registrars Custodian(s)

Public Meeting notifications | Intimation
Announcement (graphical user interface)

Voting Custodian(s) Workflow setup CSDs
Announcement n Setting up of proxy vote ballots
n Setting up of proxy vote eligibility and rules
Capture
(smart contracts)

Proxy voting Proxy voting Communication with Custodians and
management management Broker Dealers
(P2P protocols)

Reconciliation Vote Proxy vote instruction and MMaianitnatianinvvooteterreeccoorrddss aanndd
instructions confirmations dedleivlieveryryooffrreeppoorrttss
Fax
Vote registry Emails (distributed ledger)

Downstream Brokers Fund Managers
processing

Figure 4: Proxy Voting - Current vs. Future State (Source: TCS Internal)

Blockchain can make the corporate governance mechanism more effective by allowing issuers to disseminate their
resolutions and other notifications hours before annual meetings, run the voting process during meetings, and
secure feedback from investors well in time. The resultant real-time processing helps financial firms eliminate over-
reliance on intermediaries during the proxy voting process.

9

Figure 5 summarizes how a blockchain-based solution streamlines the corporate actions process.

Efficient Flexible Scalable Transparent

n Straight-through n Seamless integration with n Distributed ledger that n Robust audit trials
processing and data feeds multiple participants with grows with load
from distribution to standard APIs n Negligible reconciliation
execution n Fine-tuning of new efforts
n Workflow management market practices without
n Simplified processes and through smart contracts impacting participants n Ease of setting up of
elimination of redundancy policies and governance
n Prioritization and alert mechanisms
n Complete automation of functionalities
information exchange

Figure 5: Blockchain-based Solution for Hassle-free Corporate Actions Process (Source: TCS Internal)

Blockchain-based corporate actions processing hub is our best bet.

Backed by industry best practices, this solution provides a single source of information to all parties.
The accuracy of corporate actions data is ensured through the digital signature feature, which also
reduces the operational risks associated with misinterpretation of issuer data along the value chain.
The elimination of manual intervention helps expedite the process, while making it error-proof.
Having all participants on one platform not only allows instant transfer of data, but also reduces
communication costs, eliminates process redundancies, and improves the transparency to
shareholders and beneficiaries.

Conclusion

We believe that the blockchain technology holds great promise for streamlining various operations in the financial
services industry. It can truly transform the existing market structure and potentially disrupt the financial
marketplace. One area where blockchain can prove immensely useful is corporate actions processing. Currently,
organizations follow a hierarchical relationship structure for the exchange of information among participants. This
often results in data inaccuracies and process lags. A blockchain-based solution will facilitate peer-to-peer
communication, thereby breaking the hierarchical process flow, reducing process redundancies, minimizing
reconciliation efforts, and decreasing the processing time.

10

About TCS' Banking and Financial Services Business Unit TCS Design Services I M I 04 I 16

With over four decades of experience in partnering with the world's leading banks and financial
institutions, TCS offers a comprehensive portfolio of domain-focused processes, frameworks, and
solutions that empower organizations to respond to market changes quickly, manage customer
relationships profitably, and stay ahead of competition. Our offerings combine customizable
solution accelerators with expertise gained from engaging with global banks, regulatory and
development institutions, and diversified and specialty financial institutions. TCS helps leading
organizations achieve key operational and strategic objectives across retail and corporate banking,
capital markets, market infrastructure, cards, risk management, and treasury.

TCS has been ranked #1 in the 2015 FinTech Rankings Top 100 of global technology providers to the
financial services industry, by both, FinTech Forward (a collaboration of American Banker and BAI)
and IDC Financial Insights. TCS has also been recognized as a 'Leader' and a 'Star Performer' in
Everest Group's 2015 PEAK Matrix™ report for Capital Markets Application Outsourcing (AO), as well
as a 'Leader' in the 2015 PEAK Matrix™ report for Banking Application Outsourcing (AO).

Contact
Visit TCS’ Banking and Financial Services unit page for more information
Email: [email protected]
Blog: #Drive Governance

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