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The new drivers for STP More clarity & less hype

STP has been talked about for a long time and a myriad of STP projects have been implemented. But new market developments should make banks realise that initiating or revisiting STP projects could be essential for their survival, argues Stephen Kell, principal consultant at TCA Consulting.

Recent developments within the banking industry mean that STP is not now merely a 'nice to have', but a matter of survival. Basel II will put punitive charges on banks with low STP rates because of their higher operational risk. Changing trade messaging standards and the development of the GSTPA and Omgeo are all forcing banks to up the pace in trying to achieve STP. These and other new factors - beyond the traditional well-rehearsed arguments around cost reduction and increased customer satisfaction - are driving an irresistible pressure on banks to achieve high STP rates.

However, the ways to achieve STP, and indeed its very definition, have recently been subject to debate. The focus has shifted from internal STP, between the front, middle and back office systems and processes, to STP between counterparties. At the same time there has been the rise of the concept of eSTP, which focuses on internet trading. All of this contributes to the general confusion as to what STP is. More clarity and less hype are required around this whole subject, and how can it be achieved. Most banks have some level of STP internally, so a starting point for most will be to look at what should they be concentrating on next.

The answer lies in putting more focus on end-to-end integration between clients and suppliers and from trade orders to reconciliation. Recent changes in capital markets make these goals even more important.

No T+1 without STP
A number of new factors are emerging in the wholesale banking market which should re-focus banks' attention on the core value of STP and the best way to achieve it.

For example, wholesale banks and financial institutions will soon find momentum pushing them towards T+1. If they resist, they risk going out of business - settlement clients, for example, are increasingly demanding aggregation of information, which requires a switch to a client-centric approach and implementation of the technology to deliver up to date information. Fundamentally, the fact that the US market is moving to T+1 in 2004 is forcing those who wish to trade in that market, even if they are not themselves US-based, to provide this trading timescale. This dramatically increases the numbers of institutions who should be working towards T+1.

Moreover, there are some other, even more pressing, deadlines to contend with. The old ISO7775 securities SWIFT messages will cease to function in November 2002, to be replaced by ISO15022. Since the majority of trade settlement messages move via the SWIFT system, wholesale organisations have very little time to update their IT infrastructures to be compliant with the new standard. If they do not start the necessary IT update now, they will not be able to implement a strategic project in time for the new standard replacing the old; leaving them with a second-rate and less reliable system of trading and settlement.

Operational risk and Basel
Aside from the issue of messaging standards, those that fail to deliver STP may also find themselves on the wrong side of their pan-national regulator. The second consultative paper from the Basel Committee on Banking Supervision provides an incentive for using STP to reduce operational risk and, by implication, capital charges. Those who do not put in place proper structures to monitor and minimise their operational risk may find themselves punished financially by the regulator once firmer measures are announced. Even more significantly, they will have given away a significant competitive advantage to those banks which move ahead and increase their operational efficiency.

Aside from regulatory issues, the value of STP has been highlighted by recent fluctuations in trading volumes. For example, last year equity trades were at a peak, while this year volumes have dropped off. Those banks with STP have a much lower cost base and because of this are much better placed to cope with fluctuating levels of trading, and therefore income.

An incremental approach
Although these factors highlight the value of STP, it remains the case that banks need to think very carefully about how they carry out projects.

As important as factors such as proper technical analysis and project management are, the key to a successful STP project is an incremental approach. Tight deadlines should not force banks into all embracing, 'big bang' projects. Projects which are broken down into discreet parts are much more manageable and the success, or otherwise, of each stage can be more easily measured. Having said that, the end game must be clearly defined to ensure that the strategic solution and architecture are reached. The danger with big projects lies where a great deal of money is spent and when an attempt is made to measure the success of the project at the end, few results are evident - and it is too late to go back and take corrective measures.

However, those that set about incremental, sensibly staged projects, and use the available technology to the full, should see significant efficiency gains, not just in terms of the immediate STP project, but also in terms of future extensibility and handling changes that may later prove necessary. By contrast, those who delay STP implementations or merely tinker will soon find a substantial competitive gulf opening before them. For a start, ISO15022 offers substantial business benefits only to those who take a full end to end strategic approach to their projects. Furthermore, STP projects will ultimately affect not just trades but the majority of business lines within institutions, such as corporate actions and asset management. And there is little point in awaiting further technological developments: the technical architecture designed to support an STP programme is already at, or fast approaching, maturity.

Time to get moving
There are other factors which should encourage banks to initiate STP projects sooner rather than later. Advances in technology over the past five years have gone a long way towards making STP easier to achieve. Integrating disparate systems is not the struggle it once was. Recent advances in middleware technology have meant that projects such as these no longer involve an intricate programming challenge. Granted, mapping work on data structures may still be required, but this can now be done in more user-friendly programming environments which can be used by those who are not specialist programmers.

By the same token, when it comes to connecting internal components to third party applications, advances in common technology standards, ranging from IP networks to XML (and variants such as FIXML), mean that STP initiatives have a technically far smoother path than in the past. In addition, new developments such as ISO15022, GSTPA and Omgeo are also dramatically reducing the number of external proprietary interfaces and standards that institutions have to contend with.

Even where substantial changes to systems are required, migration tools have emerged to ease the process. These can be used to provide temporary connections between incompatible technologies to prevent business disruption while the STP project is underway.

The best approach to the job in hand
Despite the technical advances and industry promoted common standards which have made STP implementations somewhat easier, projects still need a specialised approach, in terms of business and technical analysis and project management. There are areas where incorrect strategies can lead to potentially costly mistakes, even when an incremental approach is adopted.

To start with, it is essential that the business analysis stage forms the first leg of any implementation project, and its core feature must be a review of the existing trade capture and processing procedures within the organisation and how they will need to be changed to accommodate STP. For example, it is important to identify for which products, and where in their process flow, the level of manual intervention (and by implication also the level of operational risk) is highest. Furthermore, in practice, other initiatives that have a bearing on STP may already be underway in the organisation, and the business review not only needs to take into account their impact on any STP project, but also how they could be leveraged to make such a project easier.

The business analysis also needs to identify where it is appropriate to use STP, as in practice there will be circumstances where it will be advisable to exclude certain transactions from the automated flow. For example, if the normal transaction size for a particular counterparty is 1m, but a 100m trade suddenly appears, it would be prudent to re-route it for manual checking.

At the same time, it is important to address organisational issues such as lines of reporting and departmental responsibilities and how they could be affected by increasing STP. An important part of this process is planning for the retention and recruitment of a small number of high calibre staff. While STP undoubtedly reduces total staffing requirements, post-STP there is still a vital role for skilled personnel who are intimately acquainted with the systems environment and can swiftly resolve any problems that arise.

Technical analysis
A structured business analysis and process modelling should be followed by a full technical analysis of the IT changes needed. This process requires practical knowledge of both integration technology and expertise in banking business practices to arrive at the most suitable architecture - specific to an individual client's needs - which supports STP.

Once the new business processes and the technical architecture to support them have been decided, implementation planning can begin. In order to ensure the fastest completion date, several work streams should be conducted in parallel, which will have to cover the implementation of both changes in business operation and major technical components.

Both of these elements will be highly complex and have interdependencies on deliverables; particularly when user testing is being planned. Again, it is vital to have a planning process that identifies the following at the earliest possible stage: immovable deadlines, lag times in terms of ordering equipment, practicalities of parallel running operations, staffing for the project, necessary liaison among third parties and internal businesses and inter-dependencies.

On a higher level, crucial to an STP project's success is the quality and experience of the implementation team's management, with the skill balance between business and technology being a vital component. An overly business-weighted team may inadvertently impose methods that are technically unfeasible, while a technically-weighted one may adopt technically valid solutions, which nevertheless run the risk of failing business needs, such as delivery deadlines. Furthermore, these shortcomings may not become apparent until the critical transition-to-live stage of the project.

However, if technical and business analyses are rigorously carried out, within the framework of a carefully monitored project, banks will be ready to reap considerable rewards from STP.

A brave new world?
Those banks which manage sensible STP projects will find themselves part of a new, and more profitable, environment. By using front end standards such as FIX, GSTPA transaction flow management and ISO15022 at the back end, banks will be able to achieve STP and use automated electronic trading systems effectively. At one and the same time this will speed up trades, reduce their costs and lower failure rates. By using end-to-end STP - not only within their own bank but also from clients, investors and internal repository and back - banks could well start to remove the old hard and fast distinctions between front, middle and back offices. Many discrete front office functions in particular might benefit from being replaced by a specialised workforce which is able to deal with failure management, monetary issues and front office trade settlements.

STP implementations can be a cost effective way of making wholesale institutions ready to trade more effectively. STP will then up their game in terms of reducing their operational risks and improving customer satisfaction, as well as making them ready to trade in a T+1 environment.

To find out more, contact Catherine Livesley at TCA Consulting's marketing department on +44 (0) 20 7415 8001 or email marketing@tcaconsulting.com.


Bruce Allen
Director, European Office

Catapult Research Inc. 

All of the charts in this article are "produced on GannTrader, courtesy of GannSoft Publishing, Inc."

Editors Note: James Smith, C.E.O. and founder of Catapult Research, Inc. and Bruce Allen have been analysing market behaviour since the 1970's. Specialising in timing and long term forecasts, they have correctly forecast major market stock, currency, commodity and capital market events worldwide.




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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