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Corporate Actions Risk



For many years Corporate Actions have been known to be very risky. The smallest mistake can easily result in huge losses (millions of Euros for individual companies that handle the events that is...). Please find below a bit more info about the risks involved.



Types of Risk


Financial risk

A mistake can easily lead to a substantial financial loss or -gain. (just like making losses, it is also possible to end up with a gain as a result of a mistake).


Reputational risk

Every market participant expects a flawless service from the paricipant higher up in the chain in the industry. Even if a mistake does not directly lead to a financial loss, there is always the threat of suffering damage to one's reputation. After all, having to admit to a mistake to a client is never going to make a very good impression.


Audit risk

The industry is being closely regulated and auditors will make sure that every procedure is being adhered to. Making a profit as a result of devation (intentionally or not) of procedures is not allowed.


Trading risk

Failing to make the right decision based on the information of the event may lead to sub-optimal trading.



Reasons why Corporate Actions can result in huge losses:


Voluntary Events:

* Information is incorrectly passed on somewhere down the chain of industry players

Many industry players receive their information about corporate actions events from multiple sources. Any of those sources could potentially pass on incorrect information.


* The industry does not know one uniform, standardised way of communicating with eachother. This is certainly true when different countries are involved. The huge amount of systems and formats that are used (and that are constantly being upgraded) are therefore often not compatible.


* Information is interpreted incorrectly somewhere down the chain of industry players

Even if the information received is correct, it can easily be misinterpreted.


* Information is received too late

It can take a long time before the information finally reaches the final investor since all the information needs to go via many market participants.


* Information is not received at all

It can also be that information about a certain event is being missed, for example because the investor has got no holdings in the security on the moment of initial publication of the event, but buys into the stock at a later point in time.


* The wrong decision is made by the investor with regards to voluntary corporate actions events

Somebody in the company of the investor needs to analyse the situation and make a decision as to what cause of action to take regarding voluntary events. Since there is always many factors involved an incorrect judgement is easily being made.


* The wrong instruction is given or a correct instruction get misinterpreted somehere down the chain. The fact that till date a large portion of all instructions are still being processed manually from free format templates explains why losses are still being made.


* The instruction is too late

All voluntary events have so called "reply-by-dates" or put differently: DEADLINES. Dead


* The instruction is not given and/or received at all


* There can be breaks in the reconciliations that market paticipants have with eachother.


Mandatory Events:

* Mandatory events carry risk. If for example entitlements resulting from a corporate actions event are being passed down the chain too late, this might easily result in missed opportunities to sell the securities for a good price.


* Also, if shares resulting from a corporate actions event are being short sold by the investor and the anticipated shares subsequently don't come in (on time) this might lead to buy-ins which can be very costly.


* Unreconciled positions between market participants can also result in losses during mandatory events.


* Trades being booked late or back-valued, can result in missed corporate actions proceeds.


* Different sub-processes of the event being processed by different departments within the same organisation can easily lead to communication problems as well. Also there is the different need that the front-office and the back-office require when dealing with corporate actions. The front office may find timliness of information more important than accuracy regarding deadlines or payouts in order to implement their trading strategies. The back-office require more accurate information in order to process the event without any mistakes for their customers.

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