By Daniel Carpenter, CEO of Meritsoft (a Cognizant company)
As market participants work through a period of relatively low equity market volatility, the recent news from Janus Henderson that 2023 is on track to be a record year for dividend payouts will be cause for celebration across their front offices and with investors. Those working behind the scenes processing those dividend claims may be less enthusiastic, though.
From a post-trade perspective, a continuing high dependency on outdated systems and manual intervention in the asset servicing operations teams presents a significant challenge. Any upsurge in the current workload will test the ‘keep calm and carry on’ mantra and only increase demand for automation of claims management operations.
The challenge is that the data — and communications — required to manage claims effectively under a mounting weight of trading volumes tend to be both substantial and variable. For asset servicing teams, the list of events that need to be processed can be extensive, and the associated claims that need to be tracked across both receivables and payables can present plenty of hurdles for those tasked with doing the work.
It gets even more challenging when your firm is operating in a jurisdiction where claims are concentrated within key windows in the calendar. In Europe, for example, many companies pay their dividends over a similar period leading, inevitably, to huge spikes in volume between March and June – or, as it is often referred to, ‘dividends season.’ That means a period of long shifts for operations teams working on the repatriation of monies to the underlying beneficial owners. Of course, many of those holders will have traded heavily within this period to optimise their own tax position, causing the volume of claims to spike.
When operations teams are relying on manual processes, or minimally automated processes, the work and communications start to pile up, with poor rates of straight-through processing and plenty of exceptions to manage. That makes it difficult to scale the claims management process to handle higher volumes that are concentrated at specific times of year, or around different corporate actions.
Without automation, delays are inevitable. As a result, anyone who thinks that the European dividend season is wrapped up for the post-trade operations team before the summer holidays is optimistic. It’s not unusual for corporate actions teams to still be processing and settling dividend claims three months after the rush of dividends has come to an end. In an extremely high-volume year, and with inadequate processes, a bank may still be working through the backlog six months later.
This undermines relationships and all the work that banks are doing to acquire and retain valuable customers. After all, it is hard to build positive relationships with someone when they owe you money, or you owe them. This is without having to re-charge or re-pay monies that have been incorrectly allocated to a client due to manual error which, as you might expect, adds additional strain to client relationships.
It also incurs costs. Money is tied up to meet capital adequacy requirements and aged debtors build up. You don’t have a complete picture of your funding and you can end up locking up funds — often completely unnecessarily — especially if you have risk-weighted assets. Money tied up cannot be invested and cannot work to improve return on equity. The opportunity costs can mount up fast.
The seasonality of the problem can also create an ‘out of sight, out of mind’ approach, something that left untended can become a substantial drain on costs, margins and reputations. The better approach is to use the experience as a driver to implement greater levels of automation so that your claims management operation ceases to be such a time-consuming paper chase.
Making sure the right information is in the right place, in easily readable formats and at the right time is crucial. Automating the issuance and reconciliation of receivable claims, and the reconciliation, payment and settlement of payable claims, gives you greater control and oversight of what is outstanding. This in turn enables you to reduce the volume and value of aged debtors sitting on the books, improve funding for trades and reduce your risk-weighted assets.
In the end, optimising claims operations is all about managing data and communications, through many channels, as efficiently as possible. Deploying a platform designed around a deep understanding of the way that data and associated financials flow through your business, and the way that each function uses it, can create substantial operational efficiencies, optimise your funds, and keep your clients onside.
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