Max Mansur is a Global Market Manager in Securities Markets at SWIFT.  He works in the asset servicing domain addressing the needs of custodians, securities market infrastructures, broker/dealers, investment managers, issuers, and their agents. Mr. Mansur has 31 years of information technology experience including system design, program management, quality, and financial solutions. He can be reached by email.

This is the first part of a two-part interview. The second part contains questions 7 through 13.

1. In your capacity as a senior manager at SWIFT, you are working with the DTCC and XBRL US "to fundamentally change corporate actions announcement processing" by integrating XBRL into the system. To begin with, could you explain what corporate actions are and what activities they entail?

A corporate action is any activity that impacts a security that has been traded, cleared, and settled on behalf of the investor. Typically initiated by the public company issuing an equity or offering a bond, the action needs to be described and communicated to all investors and holders of the security as well as the public. The announcement of the action can include dates, rates, periods, prices, options, conditions, terms, exclusions, identifiers, and other characteristics. So there’s a lot of data that is often wrapped deeply in legal verbiage to prevent or mitigate any potential litigation for the action. The more complex the action, the longer the document will be, often into hundreds of pages.

The tradition and even regulatory mandate is all paper-oriented, hence the interest in XBRL to identify unambiguously the embedded data in accordance with a widely used standard. There are more than 50 types of events that are considered a corporate action including dividends, interest payments, name changes, splits, tenders, mergers, redemptions, calls, spinoffs, warrants, exchanges, Dutch auctions, bonuses, repurchases/bids, and bankruptcy notices. Globally, about one million corporate actions are “announced” each year, 400,000 in the U.S. There are several times as many “scheduled” corporate actions for fixed income securities with periodic distribution of payments, but these are very straightforward so not the focus of our initiative.

2. The data standard ISO 20022 is already in widespread use for corporate action events announcements. Why is an additional data standard like XBRL needed?

First, as an aside, let me say that ISO 20022 is not yet in widespread use for corporate actions; rather, ISO 15022 is the core securities standard that is currently being used by the SWIFT community. However, ISO 20022 was developed to be easily translatable with ISO 15022 to help support a period during which both standards will coexist. As such, we’re avoiding a ‘big bang’ approach to the migration of a few thousand global institutions using ISO 15022 to XML-based ISO 20022. As these institutions asynchronously obtain funding and transition their messaging technology to XML, they can expect to either translate or interface with translated messages for a period of time. SWIFT is preparing support for this transition in consultation with our members and will address other message domains as well, such as clearing and settlement messages.

Now, to your question: First, it is important to understand that XBRL corporate reporting taxonomies are inherited from underlying GAAP or IFRS accounting standards. XBRL doesn’t attempt to create accounting standards; rather, through the design and linkbases of XBRL, it enables the use of existing standards for extensible data reporting that enhance and add value to the human readable form of business reporting. So the XBRL taxonomy for corporate actions doesn’t start from scratch; it begins with the ISO 20022 standard and, by design, will maintain through the label linkbase and style sheets the alignment with ISO 20022. The growth of COTS (commercial off-the-shelf) software tools for XBRL, facilitating a marriage between “paper” and “data,” is the value that XBRL brings to the table beyond ISO 20022.  

The genesis of ISO financial messaging has been the enabling of standard business workflows between financial institutions based on a common business model and data dictionary. ISO 20022 is emerging for corporate actions, and will be live in late 2010, built on the very solid basis of ISO 15022, a tag-value messaging standard that was widely adopted in the early 2000s for securities, currently with several millions of messages processed globally each month. Another several million corporate actions messages per month are not ISO, but proprietary within several markets, including the U.S.’s DTCC messages. The advent of ISO 20022 means, with XML and a more robust business definition basis, that virtually all markets globally are committed to the new standard. DTCC will begin with corporate actions announcements in 2010. This is a large part of the opportunity to concurrently roll out a corporate actions taxonomy aligned with ISO 20022 in 2010 and reap the rewards of clean data from the source using the most advanced standard available.

3. So ISO 20022 will be the basis for the XBRL data elements, structures, and validation in the corporate actions taxonomy?    

Yes, that’s right. Additionally, market practice guidelines help define entry points in the taxonomy, making tagging eminently more usable by the issuers and their agents. I think this compares favorably with the way US GAAP governs the financial reporting taxonomies where XBRL only expresses data elements that are meaningful from a GAAP viewpoint while implementing entry points that are useful by the reporting industry, such as energy or airline manufacturing. Interestingly enough, we expect fewer than 500 data elements for corporate actions whereas US GAAP currently exceeds 17,000 data elements.

4. Could you describe the "scrubbing" process that corporate action announcements now undergo? How will XBRL remove the problems associated with it?

Good, now we’re at the heart of the matter. Many different institutions have the responsibility of monitoring securities for announcements of corporate actions. Upon discovering an action announced for a held security, a custodian gathers feeds from multiple sources, each of which has attempted to send the correct data in a message. The core problem is that each source manually entered the data by reading and interpreting the source document. This is a recipe for discrepancy, thus scrubbing is necessary to create the “golden copy” which is really just the best version of the truth based on all these indirect feeds.

If the issuer or their agent tagged all the key elements of data and attached an XBRL file to the filing, press release, or prospectus with which they currently announce to the market, then there could not be any discrepancy because there would be data from the source. The additional information that a financial institution, like a custodian, adds to the message is all specific to the institution’s accounting and servicing of the holdings related to the event, not the event itself.

One important aspect to remember is that a complex corporate action event may take several months to complete from start to finish, with many documents filed and many updates. Each update is repeatedly going through the “scrubbing” process without core data from the source. This is the source of tremendous risk, as well as all the additional time necessary to manually check, rekey, validate, and try to prevent a costly error that could be in the millions of dollars.

[Editor's Note: The Corporate Actions 2009 backgrounder is an excellent resource for more in-depth discussion of these topics.]

5. Slide 7 of the corporate action presentation you made in July to the XBRL technology workshop held in Santa Clara states that "Institutional investors often use multiple custodians with the potential for conflict in the custodians’ descriptions of the corporate action." How will XBRL help to overcome this challenge?

This is a very deep problem and not easy to explain. The best analogy is a variant of the “telephone” or “whispers” game, except beyond the single chain of a game, it begins with the same complex information from not one, but many origins and then, through several daisy chains, the messages are concentrated into the investment manager. The unavoidable misinterpretation drives errors, thus the need to “scrub” to figure out which of the conflicting data is correct, requiring significant time and introducing risk. So the proposed solution is that, instead of a “whisper,” we’re asking for a standardized “form” of the data instance to be given once from origin of the message. If each custodian and data provider and broker/dealer starts with the same data, with standard-driven precision, at the same time (via XBRL) then how much risk remains?

6. Why is XBRL particularly useful for the technology needs of corporate action announcements? What other technology solutions were considered and rejected? Why is XBRL superior to these alternatives?

XBRL is tailor made for “pointing out” the data of interest within a report. It has huge technical and business momentum. The data can be identified without disturbing the conditional and legal necessities wrapping the data in human readable reports. The issuers are already being enabled to use this technology, so adding a bit more seems achievable for a great deal of investor value. There are tools to help with tagging and reading/rendering. The only other options might be (a) messaging from agents using the ISO 20022 Issuer Agent Corporate Actions messages that Euroclear is deploying for communications between registrars and their depositories, (b) some kind of paper form, or (c) re-inventing some kind of tagging interface to build into or around the ISO 20022 messaging. Corporate actions announcements are business reports for public availability and investor consumption, like corporate reporting. So XBRL is a neat solution.

Written by Chie Mitsui     Posted on November 22, 2009

Chie Mitsui is a Data Analyst at Nomura Research Institute, where she is helping design NRI’s new XBRL-enhanced services. She previously worked as system designer for information service products at Jiji Press, a Japanese financial news and data distribution company. Ms. Mitsui holds a masters in physics from the Tokyo University of Science and is pursuing her MBA.

XBRL Japan held a workshop in February on "How to Use XBRL for Analysis," which I discussed in an interview with this blog. The attendees — analysts, data intermediaries, and representatives of  securities firms — focused on how users can analyze statements using the XBRLized earnings digests that the Tokyo Stock Exchange has been providing on the Web since last year.

Besides showing the audience on how to use XBRL for analysis, the seminar also served to extend the dialogue regarding continuous improvement of the data standard. In order to serve users better, I believe we need (a) more testing from users’ perspectives, and (b) greater opportunity for them to express their views.

Toward that end, we hosted a second seminar with the same theme in September. This time we treated US and Japanese XBRL data together for comparing companies’ performance across the two jurisdictions. Enabling fast, inexpensive, and user-friendly comparisons of this kind should be one of the main objectives of XBRL. 

The important lesson we learned from this exercise is that there are considerable challenges to selecting meaningful sets of elements from among XBRL data. When we asked users to choose several elements (accounts receivable, revenue, etc.) to compare the financial performance of Japanese and US companies, they found the exercise difficult and confusing.

There were two main problems:

Differences in the style of element names    Elements are developed under different business cultures and accounting traditions in different countries, leading to difficulties in identifying elements that can be meaningfully compared.

Differences in the structure of taxonomy    Even if the element names are different, if the structure of the taxonomy is similar, then selecting the correct element wouldn’t be much of a problem. But the different approaches to naming elements, the similarities among them,  and their vast number – US GAAP  taxonomies have more than 15,000 elements — created confusion for participants. In the end, the XBRL tools we employed couldn’t enable the user to select the correct set of elements and contexts.

We used computation of the receivables turnover ratio (sales/account receivable)  as an example. When selecting sales from Japanese financial statements, users just choose the element “NetSales” from the “IncomeStatement”  and the “Current year” period context. All Japanese companies’ taxonomies have the same name for this element, hence users can easily select it.

However, naming for US XBRL financial statements varies. Each company decides its own names for elements, presentation links, and contexts. For users unfamiliar with US company financials, such inconsistent naming causes confusion during the selection of elements for comparison. Because Japanese users are used to a consistent naming style, they have considerable difficulty in selecting elements from US taxonomies. (Japanese taxonomies also have their problems, as I described in the interview.)

At the workshop, we discussed how feedback from users opinions could successfully be channeled to taxonomy makers. In my view, XBRL Japan should lead this effort. The XBRL groups in Japan and the US, as well as the IASB and other teams around the world, should work together to formulate international standards and rules for taxonomy design.

We hope to continue the dialogue on how XBRL taxonomies should be created from the perspectives of international users. Our next seminar will focus on comparisons between IFRS and Japanese XBRL, and I look forward to discussing the results of the meeting.

Paul Wilkinson is Chief Strategy Officer of CLOUD, Inc., the Consortium for Local Ownership and Use of Data. He was Senior Adviser to SEC Chairman Christopher Cox from 2005 until 2009, where he oversaw XBRL adoption. From 2001 to 2005 he was Executive Director of the U.S. House of Representatives Majority Policy Committee, handling international and economic policy. He can be reached by email.

This is the third installment of a three-part interview. Part 1 contained questions 1 through 5, and Part 2 has questions 6 through 10.

11.  How has the financial crisis of the past two years or so changed the playing field for XBRL implementations? With the immediate sense of financial meltdown now passed, has the urgency to adopt XBRL in such areas as TARP funding and stimulus spending diminished?

The crisis has made the case for transparency stronger than ever, for industry and government alike. In industry, better data is obviously critical to detect risk sooner and pierce bubbles earlier. In government, there’s an interesting right-left coalition for transparency and open government. About the time Web 2.0 came around, I began contemplating the chances technology might support a genuine political realignment. I don’t think there’s any doubt that a generation raised using standard communication platforms like Facebook will want to revolutionize the snail-mail era corporate proxy rules, not to mention have better oversight and control over how their tax dollars are being used by their government.

With U.S. fiscal and monetary health in such a precarious position, I think it’s becoming more urgent every day to find ways to use technology to empower government to do more with less. Congress and political appointees tend to assume cost savings necessary to fund political priorities will materialize out of thin air, while career civil servants are left to clean up the messes after each new wave of spending. I hope the people who have dedicated their lives to federal service, rather than politics, will recognize the need for better data systems to improve efficiency and consider how XBRL has proven itself as a flexible financial standard that could be applied as easily to government finances as it was to corporate finances.

12.  In a Comment on a Seeking Alpha article on FAS 157, you wrote that “What the [SEC] staff means by ‘the complete integration of interactive data as a tool to bridge the gap between historical cost measures and fair value’ is using XBRL to give investors choice in how to evaluate asset value.” Could you explain how XBRL enables investors to do that?

Data tagging makes it easier for issuers and financial statement users alike to calculate, disclose, and compare various facts that comprise “valuation.” Some believe anything but historical cost or real market prices are subject to manipulation. Others believe models are the only way to calculate useful valuations in the absence of a market transaction. Disagreements like those are what make markets. And the more information market participants have, the less likely they are to walk away from a transaction on the grounds of uncertainty about risk.

I’ve never understood why ABS couldn’t simply be priced based on anticipated net present values of future cash flows under various scenarios minus risk premiums. Markets value more complex instruments, from currencies to options to public company securities, 24/7/365. During the crisis, the problem seemed to be that ABS holders thought risk premiums were too high and that accepting them would threaten their solvency. Bankruptcy judges work out problems like that all the time, but because ABS and their derivatives were deemed too complex, bankruptcy judges were deemed incapable of handling problems like Bear Stearns. Preparing ABS and derivatives using an industry standard computer language like XBRL could make such securities less complex, meaning bankruptcy judges could go back to doing their jobs. They, like investors, would have more information upon which to base important decisions.

Computers can handle more XBRL data more quickly and less expensively because with XBRL, computers have more data and require less human intervention. The typical fear, uncertainty, and doubt concern the expense of creating systems to produce and analyze XBRL data. But in the long run, the context XBRL data carries, and the software that creates, validates, and analyzes XBRL data more efficiently than data in other forms, saves untold hours of human labor that are typically required to process data in less structured forms.

Computers don’t care if they’re dealing with ASCII text that carries HTML tags or ASCII text that carries XBRL tags. Users, however, when they see the value added by XBRL tags, do care. And users don’t even need to know what XBRL is to see that value. XBRL is the global standard for financial data in the private and public sectors for the simple reason that it’s more efficient than other standards.

13.  In a Comment to a post on this blog, you wrote “A focus on human auditing of XBRL DOCUMENTS could, indeed, be expensive. That’s why machine auditing of XBRL DATA is important.” Could you explain what you mean by that? What is the difference between auditing documents and auditing the data in them?

Presenting XBRL statements doesn’t change most of the audit process. The main new requirement is that the numbers and captions on the old paper financials match the numbers and captions in the new data financials. I try not to use the term “XBRL documents,” since it’s almost an oxymoron. Sure, you can print out the raw ASCII with all the brackets (which would result in really big audit costs since those “documents” are so tough to read), or you can print out numbers from any number of viewers on your PC. But XBRL isn’t intended to be used on its own to create documents. It is intended to let data users and computer programs know what the data means so they can do things with the data that users consider valuable. The point of my comment was to note that besides supporting the rendering of financial statements, XBRL can be used in internal systems, along with other software, to prevent manipulation or unauthorized access. From trusted time stamping to reliable audit trails to cross checking among various systems, handling financial information in data format instead of document format or spreadsheet format promises better audit efficiency and therefore more reliability.

14.  XBRL adoption for financial reporting has been touted as a way to decrease the cost of capital for small- and mid-size companies. Do you think that is likely to happen? If so, why haven’t smaller companies been more vocal in demanding implementation?

Smaller companies are necessarily more concerned about dealing with the world as it is and usually don’t have time to explain to policy makers how the world should be. Future business strategy and innovation are often more important to investors in smaller companies than past financial performance. To the extent XBRL permits funders to get more comfortable with more data sooner, it will reduce capital costs. And to the extent XBRL can be expanded to cover reporting about strategy and innovation, it will also mean more and better competition for capital among smaller firms.

One benefit of the XBRL phase-in will be that big firms will pay the bulk of the costs for the development of software that smaller firms will then be able to use to improve their own financial reporting. Just as HTML and XML standards have empowered smaller start-ups ranging from Google to Expedia to Pandora to take on large old-economy market leaders, XBRL should give smaller companies fairer access to more capital sources. Better information means markets are better able to allocate capital toward better uses – and if small companies can find better uses for capital, they can use XBRL as a tool to help them compete with more established companies. Small companies might overcome large company reputational advantages by using actual authenticated information to compensate for their own less robust reputations.

15.  There’s been much discussion of using XBRL for Enhanced Business Reporting (EBR), Key Performance Indicators (KPIs), and more extensive narrative reporting. How do you view the potential for XBRL in these areas? How important do you think these implementations are compared with those for current financial reporting requirements?
 
With more market participants having more and better access to financial information, that means there will be less opportunity to differentiate your analysis of a particular company on the basis of the financial statements. The market will price in financial information sooner and more accurately than ever. Therefore, non-financial metrics will be more important than ever.

XBRL’s potential in these areas is vast. Whether and when it will be realized is another question of leadership. We have the world’s most powerful capital markets because we have the world’s most powerful information infrastructure, but there are no guarantees for perpetuity. The more we can do to improve the information infrastructure, the better. I’m sure that market leadership to improve the entire commercial and personal information infrastructure will emerge. The sooner it does, the better off we’ll all find ourselves.

Paul Wilkinson is Chief Strategy Officer of CLOUD, Inc., the Consortium for Local Ownership and Use of Data. He was Senior Adviser to SEC Chairman Christopher Cox from 2005 until 2009, where he oversaw XBRL adoption. From 2001 to 2005 he was Executive Director of the U.S. House of Representatives Majority Policy Committee, handling international and economic policy. He can be reached by email.

This is the second installment of a three-part interview. The first part contains questions 1 through 5; Part 3 has questions 11 to 15.

6.  XBRL has not captured the imagination of security analysts and other investment professionals as some had hoped. Why do you think investors have been relatively indifferent about interactive data? As the SEC’s XBRL adoption expands to more companies, do you see that situation changing?

XBRL shouldn’t capture the imagination of analysts, investment professionals, and investors. XBRL isn’t what’s important to them; the data is. Many investors don’t realize it, but they’ve been using XBRL or similar standards for years. The difference is that in the past, third parties have been standardizing and tagging company data, not the companies themselves. The main thing that changed with the public company XBRL mandate is that companies are now responsible for making sure that the data investors actually use is accurate. Companies spend so much money making sure their disclosures are as accurate and complete as possible that it would have been a shame to continue to let all that hard work be subject to third party interpretation, normalization, and potential over-simplification. We’ve all seen what happens in a game of “telephone.” There’s a reason hearsay is inadmissible in court. It may not “capture the imagination,” but eliminating an entire level of hearsay in the world’s leading capital markets has the potential to be a pretty big deal.

What I see changing isn’t necessarily respect for the data standard among non-technical users, although like all successful data standards, the standard must become more useful over time to avoid becoming obsolete. What I see changing is respect for the professionals responsible for preparing the data. Until I became involved in the XBRL project, I didn’t understand the full extent to which the accounting profession is vital to healthy markets. You can see that in the fact that while accountants and auditors were using SOX to improve public company reporting, financial engineers were working to avoid accountants by relying on non-GAAP models for ABS. With XBRL, the accounting profession’s work is transmitted more accurately and more fully to more people who can make more effective use of that work. I suspect that’s one reason the AICPA was such a strong supporter of XBRL from the outset.

7.  In a recent blog, you posited the idea that “NIEM is to XBRL as United States customary units are to the Metric System.” Could you expand on that idea and explain more fully how you see the relative contribution of NIEM and XBRL in implementing data standards for Federal government activities?

The main point I hope readers took from my post is that global standards are more efficient than national standards. NIEM is a domestic U.S. standard. Yet we live in a global economy. It’s just a no-brainer to me that when local standards and global standards are both available, you go with the global standard unless there’s a compelling reason for parochialism. That’s why the G-20 leadership supports global accounting standards. Heck, we almost lost Winston Churchill before WWII because he was accustomed to a parochial standard and looked the wrong way when crossing Fifth Avenue in New York City. Who knows how much we’ve lost as a result of parochial standards?

With respect to NIEM, why should one nation’s government care if its information standards are compatible with other governments’ standards? Well, two reasons are terrorism and financial crime. They’re both global challenges. At the SEC and at the House Homeland Security Committee before that, some of our greatest challenges were facilitating international cooperation among law enforcement and intelligence agencies to combat terrorism and financial crime.

Making NIEM global, through collaboration with XBRL standards, could significantly improve how law enforcement officials work with each other across borders. XBRL’s validation capability could also be helpful in the law enforcement domain. With all the smart people working on both standards, there’s no reason they can’t become fully interoperable open standards – or unified into a single standard. I don’t think anyone knows how NIEM and XBRL will ultimately work together, but that’s what makes working on data standards interesting – someone will always find better ways to make standards work.

8.  In a post describing health information technology standards, you suggest that the SEC’s adoption of XBRL could be used as a model for adopting standards in other industries. In this respect, what elements of the SEC implementation do you find worthy of emulation?

The same leadership gap exists with respect to medical records that existed before the SEC moved forward with XBRL. No perfect standard exists in any domain. After the SEC chose XBRL, much hard work remained to make it capable of supporting high quality GAAP reporting. In medicine, the plethora of incompatible proprietary standards is much worse than in financial reporting. Nevertheless, if patients are to enjoy the benefits of medical records created, transmitted, and used according to open industry standards, someone must overcome the proprietary interests and provide the leadership to choose and develop an open and effective high-quality standard.

In learning, grades can mean different things to different schools and different people. Unique students are taught in identical ways on agricultural calendars in the information age. Someone someday will develop open standards to support a system in which unique students enjoy custom lessons to meet their educational needs and measure their progress. Extensibility, dimensions, presentation layers and more could be big parts of such a standard.

In the end, recognizing the unique worth of every individual – in education, medicine, business, and every sector – requires robust methods to assemble, store, and use complex information. XBRL blazed the trail. I’ve frequently noted that if we could find a way to convert U.S. GAAP to a computer language – when no one is even sure how many tens of thousands of pages of literature comprise the standard – other challenges must be easy in comparison. Other industries have enormous amounts to learn from the XBRL experience.

[Disclosure: I’m the Chief Strategy Officer for CLOUD, Inc., the Consortium for Local Ownership and Use of Data, a new non-profit organization exploring the potential of cross-industry data standards for personal information that would give individual users more control over their own information.]

9.  In a post on your blog about a bill to make XBRL the data standard for disclosure to the US government, you wrote “Bringing labor-saving technology to banking and securities regulation is one thing, but making L.A.’s [legislative assistants] on the Hill redundant? What hath sunlight wrought?” Isn’t it possible, however, that XBRL will increase the demand for analysts, because analysis will be easier to do?

As a former L.A., I certainly hope XBRL makes analysis easier and boosts demand! Perhaps I was a bit facetious. The title of Clay Shirky’s book, “Here Comes Everybody,” says a lot. The nice thing about democracy is that we all have something to contribute, and the more high quality information we have – Chris Anderson’s “long tail” of information – the more we can contribute and the less time we waste sorting information that’s not useful. Too often, the toughest part of quality analysis is collecting the data to analyze. Making data available to the world by supporting open standards and open software to analyze that data can’t help but support smarter decisions.

Freerisk.org and Wikinvest are just two examples of how more accessible data can make analysis faster and better, if not easier. Having faster and better data supports deeper thinking about how to analyze the data. And thinking is hard – so I’m not so sure about “easier.” But by reducing the cost of analysis, XBRL pushes the supply curve of analysis to the right – meaning it intersects the demand curve at a point where there’s more analysis in the market at a lower price. By increasing the quality of analysis – less garbage in means less garbage out – the markets subject to analysis should work more efficiently, resulting in more capital being allocated to more productive uses – a virtuous circle.

10.    What XBRL developments in other countries do you find noteworthy, and what can the US learn from them?

What I find most noteworthy are the many and flexible uses for XBRL. The greatest lesson the U.S. might learn could be, “XBRL – it’s not just for GAAP anymore.” Australia’s Standard Business Reporting project is impressive, as is the work to standardize corporate actions XBRL US is doing with the International Organization for Standardization (ISO), the Society for Worldwide Interbank Financial Telecommunication (SWIFT), and the Depository Trust & Clearing Corporation (DTCC). Using XBRL for corporate actions on a global basis could be like moving from vinyl records to mp3’s. By cutting overhead costs – time costs and money costs – equity financing has the potential to make gains relative to debt financing. And that means stronger and more efficient global capital markets.

Moreover, smoother global accounting, as the International Financial Reporting Standards taxonomy continues to improve, smoother global trading, and a more standardized corporate actions process all mean that more capital can be allocated to its highest and best uses more quickly. More open and competitive global capital markets simply mean that billions of people will be better off.