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STP: Within and Between
The deadline for implementation of T+1 has been delayed. However, if the industry's sense of urgency is less keen as a result, the SIA suggests that the focus on achievement of STP should be as sharp as ever. Institutions may well find that their survival depends on it. According to research by the Tower Group, the drive towards STP implementation will lead to expenditure of $19 billion in the build-up to T+1. Even considering the postponement of "T-day", few serious players will delay preparations.
Given that level of expenditure, it is not unreasonable to question where the focus of the development should be, and who should be taking responsibility: many institutions may take the view that T+1 is a problem for IT vendors, but others consider that much of STP is reliant on business processes and workflows, which are clearly within the remit of the institution.
To a great extent, however, the financial services industry is technology, reckons Cris Conde, president and CEO of SunGard. "Finance, in its simplest form is nothing but debits and credits; book-keeping and trade execution; which is effectively managing information." Conde points out that the biggest cost in IT at the moment is integration of existing systems into a single end-to-end solution. Some 70 per cent of the IT budgets of banks is devoted to this as over the past four decades mergers have seen them acquire a heterogeneous systems environment; because the business requirements of the individual business units demand best-of-breed functionality.[see diagram]
The move towards global STP, however, compounds this situation since, in order to achieve the settlement goals required; as well as satisfying capital adequacy directives and other regulatory requirements; there is now a need for a much greater degree of interoperability between institutions and their disparate systems.
Till Guldimann, vice chairman of SunGard says: "This is where the network becomes important, in terms of providing the interoperability through messaging." The development of its SunGard Transaction Network has been central to SunGard's approach to STP, but Guldimann insists STN has not been created as a stand-alone service that then has to find customers, as have been a number of the other offerings of the past few years. "STN is about providing value to our existing users by connecting them," he said. "We are helping our client base by leveraging their existing investment."
This approach also allows STN to take part in cross-industry infrastructure initiatives with the likes of S.W.I.F.T. and the Global Straight Through Processing Association's Transaction Flow Monitor. "We'll link to as many as can be economically justified and that make sense to our clients, but we don't have preferences," says Guldimann. "Believing in redundant networks means that we never do anything on an exclusive basis." For this reason it is entirely possible that, say, a trade being settled on the STN could use SwiftNet for communications; and some parts of SwiftNet could be subcontracted to Radianz, which might be further sub-contracted to a local telecom provider.
The creation of communities of interest has a number of advantages for the customer. According to research by Forester Research, such communities in electronic trading could result in a reduction in trading costs of between 50% and 67%. In some senses, this could become more important in the drive to shortened settlement cycles than the internal integration effort. The whole industry is focused on shorter settlement cycles and increased efficiencies in the value chain that involves different parties to the transaction, but this requires significant reengineering of processes: it won't happen merely by speeding up or patching over existing processes.
STP: Within and
It is this inherent improvement in speed and accuracy of transaction that marks an important distinction between the development of STP and previous large-scale development deadlines like Y2K or Euro compliance. Put simply, while there was a clear deadline in both those cases; and in the case of Y2K there was no chance of it being postponed; there was nothing to be gained from beating the deadline by a year or two.
With STP, on the other hand, the sooner that institutions can implement it, the sooner the benefits will appear on the bottom line. This explains why there has been as much drive towards STP in countries that don't have the shadow of T+1 hanging over them, and also why some are even talking about T+0 settlement.
There are also other side-benefits to STP that render it attractive even without the driving factor of a deadline for T+1: it allows scalability to process volumes as they increase and it reduces cost by increasing efficiency. It provides for the development of resilient architectures, because an infrastructure that has been developed so as to not have manual choke points, as the automation inherent in STP implies, is an infrastructure that can be replicated across several data centres. It is not a coincidence that those institutions that best coped with last year's terrorist attacks were those with a high degree of automation that allowed their workflows to re-route though unaffected parts of the communications infrastructure.
When the T+1 deadline seemed closer, it had the effect of focusing minds in the financial industry and the IT vendors that serve it. Now the goalposts are further away, yet the pressure on the industry is no less great: like so much else in this field, the beneficial effects on the bottom line are the key drivers.
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