Lingua Fatca

The eXtensible Business Reporting Language (XBRL) and International Organization for Standardization (ISO) 20022 standards for financial industry messaging are gaining acceptance among corporate actions operations users, although they still have further to go to get the same acceptance from issuers. In addition, the Foreign Account Tax Compliance Act (Fatca) could spur greater use of those messaging standards for corporate actions, and improve their compatibility.
Automation of corporate actions processing depends on alignment with the XBRL and ISO 20022 standards, according to Deborah Culhane, chief operating officer at Fidelity ActionsXchange. Both are dependent on, and need to gain, that issuer acceptance, she says.

“There could be a strong business case made that corporate actions, in investor servicing spending, represents one of the largest cost factors in their budget,” says Culhane. “Normal servicing fees are substantially increased for a firm when they announce a corporate action. Embracing the standards agenda and creating a clear standardized communication for the financial community must have benefits in more effectively managing the risk and cost of corporate actions.”

Issuer engagement with the XBRL standard has been difficult to obtain without regulation compelling it, according to Culhane. Citi, however, has agreed to use XBRL reporting as part of its alignment with ISO 20022.

XBRL can work with ISO in the long run, but issuer acceptance is necessary, says Ian Davidson, EMEA product head, electronic markets, Citi, agreeing with Culhane. “Without any obligation for an issuer to have to produce this in XBRL, we’re relying on people’s good intentions and voluntarily doing this, which won’t get very far,” says Davidson. “Many have proofs of concept, but without something more compelling to drive it, that will have limited success.”

Standards and Corp Actions
XBRL was designed for financial statement reporting and then leveraged for corporate actions, says Dan Thieke, vice president of asset services at the Depository Trust & Clearing Corporation (DTCC), which began working with Swift and XBRL US in 2009 to deploy the standard for corporate actions.

“The goal all along has been to ensure end-investors receive clear and concise information pertaining to corporate actions while making it easy and inexpensive for issuers to identify and tag key data as they prepare documents for corporate actions processing,” he says. “While issuers are still considering and weighing the benefits of XBRL, the industry must continue to discuss and demonstrate how XBRL will benefit issuers, their investors and the industry as a whole.”

If more issuers use XBRL to introduce corporate actions, processing will improve, explains Thieke. “XBRL is a format that can be consumed by a lot of downstream systems,” he says. “That’s really where the opportunity is today, because now information is released by the issuer in formats that are difficult to digest downstream —unfriendly user methods such as paper prospectus documents posted on websites.”

Implementation of an XBRL-based process for corporate actions begins with American Depositary Receipts (ADRs) and distribution events for ADRs, says Thieke. “We’re working with a handful of the depositary banks who support ADRs,” he says. “These are the issuers in the US market but also financial firms like Citi and JPMorgan Chase. For distribution events on ADRs, they will use the taxonomy to submit to us and put in the terms of the distribution event using the XBRL taxonomy. We will consume that and have that flow through our process, and ultimately go outbound to our customers and holders of that security.”

Reconciling ISO 20022 and XBRL
The industry, particularly participants in the XBRL pilot, has worked collaboratively to reduce the number of extensions in ISO 20022, which can break straight-through processing or slow it down, according to Martin Kruse, senior vice president for global corporate actions at BNY Mellon Asset Servicing. Some industry participants are on track to use XBRL for corporate actions, although industry take-up will require more time due to the need to line up issuers and agents with the standard, adds Kruse.

DTCC’s use of ISO 20022 and XBRL aligns the organization with the rest of the industry, according to Kruse. “DTCC itself will be able to keep up with standards that change, and not just new ISO releases but the standard upgrades every year,” he says. “That will make that whole process much easier. Hopefully, we should see the benefits pretty quickly.” The implementation of these standards for corporate actions should last into 2013, however, adds Kruse.

Corporate actions and Fatca
“Taxes have always been another area of complexity in corporate actions,” says Culhane of Fidelity ActionsXchange. The extension of cost-basis accounting to corporate actions by the IRS, along with Fatca, increases the complexity of corporate actions processing, she explains. “Withholding elements of Fatca will apply against all distributions,” says Culhane. “Corporate actions involves significant distributions of cash per share, which will be subject to those withholdings. There are significant distributions out of corporate actions events, so Fatca will be a significant undertaking.”

The Fatca implementation timetable currently has the IRS issuing regulations this summer, with a deadline for foreign financial institutions (FFIs) to agree to identify new US accounts by January 1, 2013, to enter FFI agreements to avoid withholding by June 30, 2013, and to begin Fatca withholding on US source dividends and interest by January 1, 2014.

The use of XBRL will also reduce the need for interpretation in processing corporate actions, according to Kruse. “Interpretation has been the biggest challenge for corporate actions in the last couple years, because so many corporate actions events we’ve seen have become so complex,” he says. “Rather than a standard option like ‘take no action’ or ‘subscribe,’ corporate actions over the past couple of years have increased the options significantly. In some cases, we are seeing events with 15 or even 30 different options from which investors can choose. Over time, XBRL should substantially reduce the amount of interpretation that could be required for complex events.”

A corporate action payment is potentially like any other payment under Fatca and could be subject to Fatca withholding, explains Amy Harkins, senior vice president and managing director, BNY Mellon Asset Servicing. “Although the payment is being made through a paying agent, and so some people may loosely term the payment as being ‘passed through,’ this is not the same as the term ‘pass thru’ as used in Fatca,” she says. “Accordingly, you cannot treat the payment as not being subject to Fatca withholding until 2015, the earliest time that under the current IRS Notices we have been told withholding on ‘pass thru’ payments will occur.”

Still, Fatca will have implementation costs, notes Stuart Winny, global custody tax products manager at Citi. “Organizations are going to have to do a lot of work to ensure their compliance,” he says. “Institutions have to start searching their records to make sure they identify any US recipient accounts they have on their books. The question is whether institutions try to do that manually. If they have a sizable book of business, they may need to do development work. On banking systems, that doesn’t come cheap. It is quite a headache for institutions.”