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STP - seeing the light

www.thomsonvision.com

There has been much talk and effort put into straight through processing (STP). Traveling to conferences and trade shows can almost be compared to being in church, listening to the clergy preaching to the congregation evangelizing the benefits of STP. However, make no mistake, this push towards STP is not due to people seeing the light and deciding this is the right thing to do. Three factors drive change in the financial markets: profits, competition (which could be argued is the same as profits) and regulators. STP is driven by all three.

So what's all the hype about? What are the benefits?

The two main benefits are:

 ncreased efficiency

Increased operational control

Increased Efficiency
As the surge in technology and the consolidation of major currencies (i.e. the euro) push liquidity and price transparency to new levels, institutions have increasingly more difficulty in earning the large spreads of yesteryear. In the past there were only a few large institutions that controlled the vast majority of the market and it was almost impossible for the little guy to obtain the necessary information to play in the game. The large players were able to charge large spreads and reap the benefits of their size.

As technology advanced and drove down costs, it was easier for others to get into the game and entice investors by charging smaller spreads. The strategy was successful and larger institutions were forced to follow suit and lower their spreads to stay competitive. With the squeeze in spreads comes the drive to maintain profitability through containing but There is no better example of increased efficiency than in the foreign exchange market. The liquidity and price transparency are so great in this market that spreads have been driven to razor-thin levels and institutions have had to find other ways to find and retain new customers. A number of financial institutions have developed Internet platforms to push the trade execution out to their customer's desktop. This allows customers to directly input the deal and have it flow through to the financial institution's back office for processing.

Increased Operational Control
Increased operational control is a factor in maintaining and/or increasing profits and complying with regulators. As the squeeze in spreads increased and profits were more difficult to come by, institutions turned toward minimizing costs. One way this was accomplished was by implementing operational controls to eliminate costly mistakes or outright fraud, which often went undetected in the past. This is not to say that in the past institutions would turn a blind eye to these issues,

as competition increased and spreads began to thin, institutions had to look elsewhere to maintain their profit levels. In addition, as issues such as Barings arose, regulators began to take control of operational risk. They are now beginning to require institutions to measure this risk as noted by the proposed new capital adequacy framework, which will replace the current Capital Accord, issued by the BIS in 1988.

With all of this said it, should be noted that STP is a good thing. There is a common saying that "adversity is the mother of all invention," and it is my contention that STP is a good example of this. STP is a prime example of capitalism at its best. The competitive and regulatory pressures have caused the market to look at itself and say, "we can do better". With STP, more customers will be served at a better price while maintaining the profitability of the institutions that do the best job.

Implementing STP
According to the Global Straight Through Processing Association (GSTPA), some of the issues surrounding STP are:

 Manual repair and review procedures

Incompatible technologies

 Excessive costs

 Multiple service providers

Relatively high rates of errors

Costly trade failures

Thomson Financial Treasury Solutions offers a number of STP software solutions and provides bank treasuries with industry leading-treasury and risk management capabilities for their global treasury needs. We will use Thomson Vision, our international bank treasury solution, to illustrate the implementation of STP.

In straight-through processing, deals are captured and processed with little human intervention, helping reduce errors and risk. In Thomson Vision, risk reduction is accomplished through the use of superior workflow processes and connectivity to front office dealing systems and S.W.I.F.T. Deals are captured, positions updated and reports are generated from the middle office; and accounting, settlement, and payment processing are done in the back office. Through this entire process, the transaction is touched only once.

The deal capture process has been designed to be quick and easy to use. Deals may be captured in Thomson Vision in a variety of ways, including:

n Direct dealing (e.g., via Reuters Dealing 2000 or EBS)

n Trader deal input

n Back office deal input

Real-time data updates occur as Thomson Vision captures deals. Positions and profits, trader limits, counterparty limits, nostro positions and projections and similar types of information are updated immediately and broadcast to other workstations as required. Additionally, the system has been configured to default the details to the back office for all transactions. Therefore, on deal input of key minimum deal details (e.g., counterparty, start/maturity dates, amount, interest rate and currency), the accounting entries and standard settlement instructions will be automatically placed into the deal by the system.

Confirmation is done with a third party such as a broker or customer. The confirmation process may become part of the verification process, but can also be independent. Thomson Vision will create S.W.I.F.T. confirmations and process the receipt of S.W.I.F.T. confirmations. Outgoing confirmations can be through S.W.I.F.T., telex, fax or printed letter. For all methods other than S.W.I.F.T., the format is generally custom-configured to the bank's requirements.

The system allows you the option to send S.W.I.F.T. confirmations before the deal is verified, getting deals confirmed quickly.

The illustration shows the automated flow of the transaction through Thomson Vision to provide efficiency and operational control.

SWIFT
This workflow process addresses the GSTPA issues of:

n Manual repair and review procedures

n Relatively high rates of errors

n Costly trade failures

Thomson Vision also addresses these remaining issues of:

n Incompatible technologies

n Excessive costs

n Multiple service providers

Thomson Vision handles all financial products in use by today's bank treasuries, has full front to back office functionality, and has direct links (both import and export) to the bank's other mission critical systems.

In today's world, STP is more than just another buzzword, STP is the conduit that allows you to control costs, increase profitability, gain a distinct competitive advantage and position yourself to be a leader in today and tomorrow.

 

 

Section Menu

New Millennium
STP changes
Operational efficiency
Global Straight
The road to T+1
Closing the gap
financial services
CLS and Liquidity
STP: Within and Between
STP - seeing the light
Some case studies
Reducing operational risk
Not Easy!!
Hidden barriers
Thinking Panaceas
Less hype!
End to End
T+1 on Hold

 
 
 

 

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