Case 18: Blockchain Can Increase The Automation of Corporate Actions

Dominic Hobson, Founder, COOConnect

Listed companies must provide their annual accounts in a structured format, but any company announcements that may require action by investors or their representatives — known as corporate actions — are typically published as unstructured text, or in PDF format. Those relying on the information have to read and interpret the data manually before taking action. Over 90 per cent of corporate actions are distributed by data

Over 90 per cent of corporate actions are distributed by data vendors, and then processed on behalf of investors by an agent such as a custodian or fund manager. Information is manually extracted from the original, interpreted and re-keyed by vendors. Levels of automation are low, errors frequent, and the process highly inefficient. One estimate puts the global cost of corporate actions processing at up to $10 billion per year. Custodians frequently reimburse clients for missed or incorrect execution of instructions. Block chain technology could make this process more efficient. Corporate actions represent contractual information and value, which can in principle be transferred directly between payers and payees without the need for intermediaries, provided the parties can trust the source data and have the necessary experience to act upon the information they receive.

If a block chain was coupled to an application that captures and stores corporate action announcements in a structured format, it could be used to ensure that the data is from a verified source, and prove the time-stamped date that it was issued. This could be done in reverse for the execution of instructions. A distributed ledger based on such a block chain would reassure parties at every point in the process that their information is accurate, up-to-date, and unchanged since it was published by the issuer. In theory, it could eliminate all intermediaries between the issuer and the fund manager, guaranteeing the accuracy and timeliness of the information.

The important question is whether this can be organised in a fully-decentralised manner. Corporate action information differs from simpler contractual information (such as money changing hands) because investors and shareholders often need to use intermediaries with specialist knowledge to act on their behalf.

These intermediaries may need to be able to modify or augment the data before passing it on, and the original corporate action itself may change, through follow-up announcements that supersede earlier ones. This modified data could quickly lose its provenance as data vendors share it with clients or package it with other data, making the process difficult to automate.

On its own, block chain technology is currently too slow to cope with these constantly shifting packages of data. Bitcoin’s block chain can handle about 20,000 transactions per hour, with up to an hour’s latency before a transaction can be trusted. That would be very inconvenient in a corporate action process, which is subject to a final deadline that fund managers prefer to keep open as long as possible.