One of, if not the most, work intensive areas when operating a financial intermediary like a securities brokerage firm or asset manager is corporate actions. There are both simple and complex corporate actions that get executed every day. The simplest form is when a company pays a dividend in cash. The total amount for the dividend is then received by the brokerage firm who will then distribute the cash between its customers depending on who held what at the so called eligibility date. This is simple enough but when a company issues a dividend in shares and when those shares are not their own it becomes more complex.

Lets say your customers hold a total of 1,000 shares of Company A which decides to divest of a shareholding in Company B that it has by distributing those shares to its shareholders at a rate of 1 share of Company B for every 65 shares of Company A that are owned. Dividing 1,000 shares by 65 gives us 15.384615 shares of Company B.

You cannot own fractional shares; yes, there are ways as a financial intermediary to let your customers invest in fractional shares but in the real securities register of shares for a company it is not possible to deal with fractional shares.

Those 0.384615 shares will instead be settled in cash so you as the intermediary will get paid say 30 EUR per share meaning 30 * 0.384615… ≈ 11.53 EUR. There might also be tax consequences where the local tax agency will have been involved to set what the acquisition value per share should be for those customers who will get allocated a full share or more.

These are just some initial examples of all the variables that you must deal with as a financial intermediary or asset manager.

Back to the original question, is it possible to automate this and should you?

In my opinion I would say yes and no 🙂

For the basic corporate action types you could in many cases get the terms of the corporate actions delivered to you via file (I look forward to the days when custodians will have nice APIs for this!) and then read those files into an application that interprets this and creates transactions in your back office system. Each custodian is delivering these in various formats and they also have different terminology so you need to integrate specifically with each one.

For the more complex types you would need to create a wizard like tool for each one since the number of properties vary greatly so you cannot use one type of user interface for all of the types.

The way we work with the systems at Huddlestock is to create wizard like interfaces for each type of corporate action which then uses our own API to create the resulting transactions with things like acquisition values, taxes and conducts automatic reconciliation at the end so we know that everything went well.

We just created some new tooling for our own back office operations to use for corporate actions like reverse splits, mergers and dividend of instruments in various complex situations. This cuts away days or administration each month and this is something that users of Huddlestock’s investment operations system could benefit from today.

Please get in touch if you are a financial intermediary looking to automate your corporate action tasks or if you need a complete platform to manage your financial operations!