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Most people in the financial services industry have realised the importance of Straight Through Processing (STP) in their quest for competitive advantage. Indeed, the cost reduction and improved service levels that STP brings are essential for long term survival. But this realisation is the easy part. It is the transformation to next generation trade processing that poses the real challenges of timing, co-ordination and systems development.
STP must be viewed from four perspectives, all of which operate at different speeds, creating varied and complex pressures. The first and fastest of these areas is 'e'. The middle two are the external and internal environment. And the fourth is the legacy system that exists within every organisation; the snail compared to the e-swift.
The increased transaction volumes and extended trading hours created by internet broking and alternative trading systems is already putting unforeseen pressure on middle and back office systems, with the result that labour intensive systems simply cannot cope. Earlier this year, brokers were seen to struggle as their volume of trades increased above their processing capability and they were unable to provide satisfactory fulfilment.
Handling trade volume is the biggest challenge raised by e-commerce, and any firm without scalable systems that allow for direct flow of transaction without manual intervention will struggle. It is essential to have consistent data and technology architectures throughout the firm to prevent any future failures. Overloads will impact on the firm's quality of service, and customers will quickly become aware of any resulting delays or problems. In a worst case scenario, failure to cope will attract the attention of the regulator, and the firm implicated could be prevented from taking on further clients.
The 'e' world is also providing a cost driver for STP as the prices charged by traditional brokers are continually squeezed by the loss leader approach of new entrants. In this situation, the costs of manual intervention and the re-keying of data become prohibitive and the price reductions, provided by STP, are essential in order to compete.
The proposed merger of the London and Frankfurt Stock Exchanges to create iX currently plans to make SETS redundant, with the result that all UK brokers will have to use the German trading system XETRA. Whether it is viewed as an obligation or an opportunity, firms will have no choice but to adopt the system; they will have to spend money to stay in business. This presents an ideal milestone for them to introduce STP at the same time.
Brokers across the world will be affected as consolidations take place. Whether Euronext (amalgamation of the Paris, Amsterdam and Brussels exchanges), Euroclear and Sicovam, or LCH and Clearnet, there will be an impact on firms' systems. In the US, participants are challenged by the imminent adoption of decimal pricing. There will be up to 10 times more price ticks coming over the market wires and trading support systems must be scalable if they are to cope with this.
The industry's voluntary launch of the GSTPA initiative is also propelling STP into the cross-border processing arena. At the time of writing (May 2000), GSTPA specifications have still not been published, and the initiative is potentially challenged by the new joint venture between Thomson Financial and the US utility DTCC. But whatever the outcome there is enormous growth in cross border trading and firms will have to be able to process these transactions seamlessly.
Despite the prospect of on-going changes, there is light at the end of the tunnel. It does appear that all industry initiatives will use the same messaging standards, ISO15022 and XML, which will simplify end user implementation of necessary systems and allow the same language to be used for each national CSD (central securities depository) and all other institutions. Future mergers and amalgamations will not require a change in firms' systems. A solution is also emerging for STP with the introduction of FIX trading interfaces that talk the same language, and will result in a reduction of the number of errors or problems occurring.
The introduction of messaging standards will create strict time-lines for firms to adhere to. The ISO15022 message standards on the SWIFT network will go on general release in November 2001, by which date every securities user on SWIFT must be able to handle them. The old message standards are expected to be turned off a year later in November 2002, so conversion must be completed by this deadline.
The three areas that must be considered are:
1. Process and
2. Common reference
3. Work flow
Benchmarking services that allow participants to realise their STP rates on a comparative basis, either within their own organisation or across the industry are available. These can be subscribed to or are available from utilities. Poor performers will have high cost, inefficient services and bad customer service and must focus on improving systems, or on outsourcing some processes to a third party that can do it better or cheaper than they can. However, strong performers may wish to consider the business opportunity offered by their specialist skills, either working directly with another firm, via an MBO or through a joint venture with a competitor, a customer or a consultant. It is predicted that specialist firms will increasingly emerge as they concentrate on their core competencies and sell their expertise to others.
The death knell of legacy systems is already ringing. Developments such as the US move from three day to one day settlement will kill off batch systems, as real time processing will be needed throughout the value chain. The date of June 2002 for the US transformation is not set in stone, but the principle of T+1 will remain, and shorter settlement times to reduce systemic risk in financial infrastructure are inevitable.
The replacement of legacy systems is the slowest process of STP implementation within a firm, and is in direct conflict with the speed of 'e' and the triggers of external events. These conflicting timescales must be taken into account throughout the planning process.
The way forward
There is no alternative to STP for the financial services industry. Whether key functions are outsourced or developed in-house is immaterial; what matters is that firms develop their individual strengths and market position with the most efficient and cost effective methods possible. Much of the decision making on whether to develop STP systems rests with fund managers who have the most manual intervention in their procedures and should be calling the shots as they are on the buy side of the process. It is up to them to turn this challenge into an opportunity.
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