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Leveraging Synergies: How DTCC's Global Corporate Action Service Can Benefit Deriv/SERV Customers
The growing popularity of equity derivatives (see Next Focus for Derivatives Automation: Equities, this issue) underscores an important linkage between these instruments and corporate actions.
"Corporate action events, such as stock splits or extraordinary dividends, may impact an equity derivative through its effect on the underlying instrument," said Gina Ghent, DTCC vice president, Business Development. "A merger, for example, may cause a firm to cancel or change the terms of an equity derivative trade."
This relationship is why corporate action information is an essential part of post-trade processing of equity derivatives. "Whatever the impact, finding out the information is very important from a risk management perspective," said Ghent. "Firms expose themselves to various risks, from market to operational and legal risk, if they are not aware of a corporate action on an equity derivative's underlying instrument."
Sourcing the information
For firms trading equity derivatives, a key business consideration is where to obtain timely, accurate data on corporate actions.
One of the market's most reliable and comprehensive sources for this infor-mation is offered by DTCC via its Global Corporate Action (GCA) Validation Service. Voted "Best Corporate Actions Provider" in 2004 and 2005 by readers of Waters magazine on five continents, the service combines data from multiple vendors into a single, integrated and standardized information stream, covering almost 1.5 million securities from more than 150 countries.
In 2005, the GCA Validation Service handled 826,400 corporate action events. The GCA Validation Service is offered by DTCC Solutions LLC, a subsidiary of DTCC.
For front and back offices
While the GCA Validation Service offers broad coverage, it is tailored specifically to each client's needs. Firms specify the securities they want tracked and pay based on the securities being tracked.
Customers, including brokerage/ banking firms such as JPMorgan Chase Securities and Merrill Lynch, are increasingly using the information not only for their back offices, but for their trading desks, as well.
This trend corresponds to the findings of a recent report issued by Oxera, an independent economics consultancy based in Europe, and sponsored by DTCC. The study noted that corporate actions can have a significant impact on trading prices, trading volume and trade price volatility.
"The Oxera report highlights the need for firms to make sure their trading desks have access to data on corporate actions in order to execute proper trading strategies," said James Femia, DTCC managing director, Global Corporate Actions. "It also demonstrates that all organ-izations, especially buy-side firms, increasingly need accurate corporate actions information quickly throughout their oper-ations."
Given the service’s value for front offices, DTCC recently launched a marketing campaign targeting hedge funds and other buy-side firms.
More on the Oxera report
The Oxera study, which analyzed five different corporate action event types, found "strong evidence that announcement dates of corporate actions often result in significant and systematic share price movements. The significance of the impact differs depending on the corporate action type."
Oxera also found that, in general, the most significant price movement, volatility and volume changes occurred on the announcement day and in the immediate two or three days following the announcement.
"Potentially most important, these effects often emerge in a predictable manner around critical corporate action processing dates," the report states. This means when firms disseminate corporate action information quickly and accurately throughout their operations, the front offices are direct beneficiaries because the data can help trading desks improve trading decisions and strategies.
(To obtain a free copy of the Oxera report, titled "Share prices and trading activity over the corporate action processing cycle," visit DTCC's Web site at www.dtcc.com/downloads/leadership/whitepapers/2006_oxera.pdf.)
Checking with custodians
The GCA Validation Service also provides several unique features, including "custodian check." This allows the custodians for the customer firm to feed their information on corporate actions events into the GCA feed on a private basis, so firms can compare that information to the validated composite record provided by the GCA Validation Service. Currently, about 85 custodian banks globally are connected to the service. @
[For additional information on DTCC's GCA Validation Service, contact GCA Sales in New York at 212.855.4144, in London at +44 (0)20 7444 0403, or via email at gcainfo@dtcc.com.]