‘Financial Reporting and Corporate Actions: Cutting Through the Fog’

Donald F. Donahue, DTCC chairman and CEO, delivered a keynote speech at the 2009 XBRL US National Conference in which he discussed how the use of XBRL (eXtensible Business Reporting Language) can improve transparency while simultaneously reducing costs and boosting efficiency. The following was excerpted from his remarks.

The need to improve transparency in the financial markets is understood to be one of the key lessons we should be drawing from the events of the last two years. And those of us in the know understand that the widespread adoption of techniques for distributing data in “structured” form is going to be key to achieving the higher levels of transparency that today’s financial markets will demand.

Donald F. Donahue, DTCC Chairman and CEO

Reducing the risk of miscommunication should be a top priority for all of us. And that priority drives what we’re trying to do with our colleagues at XBRL US – to build a corporate actions taxonomy or event classification system based on XBRL to provide for the dissemination of all of these data in “structured” form. The goal is to make it easy and inexpensive for issuers to tag or electronically capture and identify key data as they prepare the documents for a corporate action.

XBRL US and DTCC are also working with SWIFT, the international financial network, to ensure that there is full alignment between the XBRL corporate action taxonomy being developed here in the U.S. and the international standards, which, in the new ISO 20022 format, will begin coming into widespread use in late 2010.

And to ensure this effort moves ahead, we’re also going to make corporate action announcements we publish at DTCC available in the new ISO 20022 messages by the end of next year. We’re in the process of rewriting our corporate actions technology and, as part of that rewrite, we’re not only moving toward the XBRL-ISO 20022 combination, we also plan to decommission the legacy U.S. proprietary message formats generated by our old system by 2015. We want one global standard as well.

Several companies have suggested that, while transparency is a good thing, XBRL might somehow make them more liable for any mistakes or misinterpreted information in a document.

But while the current system may mask accountability to a degree, companies need to understand that, if a mistake is uncovered as the corporate action cascades down to investors, everyone always points the finger upstream. As a result, every participant from that point upward has to share the costs and liabilities for the error, including the issuer.

So why not avoid the potential for downstream errors in the first place? Why not tag the announcement with XBRL so that everything is obvious and errors can be caught before they begin to move into the system?

We happen to think that XBRL can be applied to much broader issues in the market as well. Corporate actions data represent only one slice of what the financial industry would refer to as “reference data,” meaning the information about financial assets needed to identify and evaluate them. And the same problems that beset corporate actions exist in this broader field as well, suggesting that over the longer term XBRL may have a broader scope for problem-solving.

Perhaps the clearest example of this – and one that emphasizes our “transparency” theme – involves securitizations, the process of transforming loans, most prominently mortgage loans, into tradable securities. If we used XBRL standards to make these issues much more transparent, we might be able to speed up the revival of the securitization process. @