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STP in the new millennium
As we fast approach the next millennium there are two things that we can be sure of with regard to Straight Through Processing. One, we will see many predictions of what STP will look like in the future. Two, STP in the next millennium will present a different landscape to that which exists today.
In order to have any chance of predicting the changes that we are likely to see in the STP arena we must constrain the crystal ball gazing to a medium term time frame. With technological change running at its current pace there is a practical limit on the two to three year horizon. So to extrapolate into the brave new world of the next millennium we must first have a sense of where we are and what drivers for change exist.
The securities industry, in so far as its confirmation and settlement systems are concerned, is in a mess, with manual systems, islands of automation and very different practices across companies, let alone across markets and continents. The IT infrastructure which supports the ever more complex securities industry has struggled and often failed to keep pace with the ever increasing volumes and values being traded in the various markets. We know that there are shrinking settlement timeframes, driven by the market regulators in their efforts to reduce credit and systemic risk. We see inefficient, highly manual processes involving high costs and risk of error. We experience financial loss through, for example, interest claims for late or incorrect settlement. We need ever increasing headcounts to process the higher trading volumes.
These facts are now being reported in national press articles. Recently Andrew Garfield the Financial Editor of the UK’s Independent reported that costs for fund managers are “out of control” (1999 Price Waterhouse Coopers Investment Management Survey). He points out that “The survey shows productivity down sharply. It took three more people on average to manage £1bn of assets than in the previous year. The rise in costs comes at a time of increased pricing pressure which has seen fees fall by 5.5 per cent year on year.”
“The securities industry, in so far as its confirmation and settlement systems are concerned, is in a mess, with manual systems, islands of automation and very different practices across companies, let alone across markets and continents.”
To meet these challenges there is
a need to increase efficiency and reduce effort by providing an environment where fewer people with less risk can process greater volume.
Current processes are highly manual and labour intensive, which equates to high processing costs and increased risk of error. Current systems lack scalability. Most businesses are also searching for opportunities to reduce operating costs and increase profitability.
Taken together, these factors mean that information needs to be communicated between the fund manager, broker and custodian efficiently and quickly. Although manual systems may be able to cope with small trading volumes, it becomes immediately obvious that the only way to advance sensibly is to harness IT.
We must therefore have an ability to capture trade data once and once only, at the point of the investment decision and to process that decision electronically and seamlessly through order creation & compliance, trading, confirmation, settlement and finally into reconciliation.
This definition of true STP must become our objective across the whole industry. Efficient institutions are constrained by counterparts with manual systems, there is advantage to be gained from ‘going it alone’, however the true benefits are only realised when all members of the chain have implemented automated systems.
Looking forward, how then is IT to be harnessed for business survival in the next millennium? IT will provide the step change from our expensive resources and there are two paradigm shifts that may bring this about. The first is the well-publicised GSTPA initiative This sponsors a completely re-engineered trade process from the point of trading through to settlement. The second is the emergence of e-commerce in general using Internet technologies, for example XML and IP.
Which major initiative and/or combination to gain widest acceptance is still up for debate.
We know that huge demand and innovation will propel the Internet technologies. If the GSTPA follows its own technological pathway then there is a danger that the securities industry will head down a proprietary cul-de-sac (a tendency which is partly responsible for the position today). There is even an argument that several institutions are looking to initiatives like the GSPTA to try and make sure the costs of entry to the market-place are kept high, so that the internet world does not disintermediate their business operations. This is not to say that the best of both worlds cannot be achieved, that is, that the new STP paradigm is driven technologically by developments in e-commerce, whilst the industry model is driven by the GSPTA.
At a more practical level, actual STP systems can be created today, despite the limitations of the current industry infrastructure. This requires the amalgamation of several messaging and communisation mechanisms, namely FIX, Oasys, Trax, SWIFT and unfortunately for the recipient, the humble FAX or Telex.
The key here is successful exception management. Almost any software vendor can automate the vanilla transactions that even people find easy to deal with, how they are constructed to cope with exceptional conditions, however, sets apart the real STP system from the also-rans.
This exception management capability will be required, regardless of the fact that new technologies and mechanisms are brought in to replace the systems that exist today.
It is undoubtedly true that those organisations that have already made the shift to an automated environment will benefit most from the new technologies.
What is already possible is that trade confirmation shrinks from trade plus one day to trade plus five minutes. Settlement instructions shorten from trade plus one day to trade plus ten minutes; manual intervention is cut from 100% to 15% and costs are reduced to 1/8 of their previous level.
This is achievable: it is done all the time for FX trades, confirmed via SWIFT. Our record for equity trades is 11 minutes. So even without the next paradigm shift, trades could soon be settled on trade date. Going into the next millennium, with the promise of the new technologies we should soon be able to beat this performance.
As we look forward, the internal and external issues that plague us today will hopefully be resolved. Typically, data cleansing is always a problem, but this will slowly disappear as consistent use of codes and identification schemes are spread throughout the industry. Messaging set-up should become simpler as counter-parties grow support for standards.
Internally we may even see convergence of business rules and workflows that meet the general business process.
STP is even achievable today and delivers real benefits. It is undoubtedly true that those organisations that have already made the shift to an automated environment will benefit most from the new technologies. It can even be argued that it is not an option for industry participants to wait for the emergence of the new landscape, those organisations that are not automated today, or at least preparing for automation will have an even bigger shock when moving to the new systems that will appear early in the next century. They may not even survive the wait.
by Ron Clarke
ISSN No:1470-5494 All rights reserved. No part or portion of this publication may be reproduced or transmitted in any form without the express, prior and written permission of the publisher. Whilst every effort has been made to en
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