| The essential guide to straight through processing |
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| Straight through processing offers the opportunity to make substantial cost reductions in the securities industry. |
Straight Through Processing (STP) is the generic term applied to any system used to settle financial transactions in which the buy and sell side are linked through an end-to-end automated process in real or near-real time. While STP clearly applies to all financial products requiring settlement, it is in the securities industry that its impact is being most largely felt and in which the most significant initiatives are taking place.
Driving forces
The securities industry has been witness to a continuous stream of innovations and changes in recent years - Electronic Communications/Crossing Networks, 24/7 trading via the internet, decimalisation (in the US) to name but a few. All of these have fueled a huge growth in the volume of securities traded. Alongside this overall growth, the growing globalisation of assets has driven a proportionally larger rise in the volume of cross-border trading. According to Tower Group, there will be 108 million cross-border trades executed worldwide in 2002 - up from 36 million in 1999.
While a local trade can be relatively straightforward to settle, cross border trades are plagued by ‘fails’ and manual processes. A single cross-border transaction can touch as many as 25 different function points - processes, systems, people - as part of the settlement cycle and few of these add any value to the transaction. Moreover, the significant manual processing of such trades create points at which errors often occur. The Society for Worldwide Interbank Funds Transfer (SWIFT) estimates that up to 20 per cent of all cross-border transactions have errors requiring manual intervention - a significantly higher percentage than for domestic trades.
Another event impacting the securities industry, originally due to take place in 2002 but now unlikely before 2004, is the move to T+1 trading (settlement within one day of trade date). In 1995, the US Equities markets shifted to T+3 settlement (settlement within three days of trade date) from T+5 as a result of recommendations from the G-30 regulators. The US regulators now seek to reduce this to T+1 and estimate that by doing so they will eliminate between $760 billion and $1.8 trillion of pending operations risk.
While the conversion from T+3 to T+5 was relatively straightforward, requiring few changes to the batch processing, confirmation and settlement systems in use, the shift to T+1 will require significant change. Effectively, execution, confirmation and settlement will now need to be done in real or near-real time.
GSTP solutions
A number of GSTP solutions are currently being developed; the most significant and probably best known is that of the Global Straight Through Processing Association (GSTPA).
In 1998, the GSTPA was founded with the aim of identifying and developing a solution to the STP problem. Membership of the association is open to all investment managers, broker/dealers and global custodians involved in the processing of cross-border securities trades. Currently more than 90 companies are members of the association. In December 1999, the GSTPA created an alliance of three companies with extensive background in the securities industry: SIS SEGAINTERSETTLE AG, TKS-Teknosoft S.A. and SWIFT and mandated them with the development of a GSTP solution.
A Swiss based company, Axion4gstp Ltd (referred to as axion4) formed by the alliance and in which they each hold shares, will develop and deliver the GSTP solution. A further operating company, GSTP AG, created by the GSTPA manages the business relationship with axion4. To date, around $90 million has been raised from more than 40 of the members of the GSTPA to fund the development of the solution.
The heart of the GSTPA solution is the Transaction Flow Manager (TFM), which will track, number and time-stamp trades in addition to performing critical matching processes.
The GSTPA’s solution makes full use of industry standards including Internet Protocol based standards such as XML for technical messaging and SWIFT’s Secure IP Network for message transmission. GSTPA has also adopted ISO15022, a standard released in 1999 specifying the format of messages between companies operating in the securities markets.
Other STP solutions
In addition to the GSTPA solution, Omgeo, a joint venture of Thomson Financial and the Depositary Trust and Clearing Corporation (DTCC), is developing a competing solution. DTCC was originally heavily involved in the developments that led to the creation of the GSTPA and it’s position as provider of services to a large number of the members of the GSTPA has led to some confusion over whether the industry is currently supporting two competing GSTP solutions. There is also concern as to how the market participants will be able to support two competing trade settlement platforms although this is being addressed through Omgeo’s adoption of the ISO 15022 standard, allowing the two platforms to talk to each other. Further inter-operability is expected but has yet to be defined.
Other solutions available include the Web eSTP offering from Accenture, a web-based STP solution which will provide industry participants with a single point of entry for pre-trade, trade and post-trade activities. The solution has been developed by combining best-of-breed applications using eBusiness Integration tools from SeeBeyond.
STP in Ireland
STP presents the securities industry in Ireland, in particular those companies operating in the IFSC with a much-needed opportunity to drive substantial costs out of their processes and systems. The IFSC, once built on the premise of a well-educated labour force and cheap land, is increasingly finding itself the victim of its own success. Rents and salaries have grown to the point where a new basis of competition with other financial centers is needed. Utilising what is now a skilled and experienced securities work force in the manual processing of securities trades is a waste of the local talent pool. STP will provide an opportunity to re-deploy that talent base in the pursuit of ‘quality’ and to focus on elevating the local industry into profitable niches in which a more sustainable long-term competitive advantage can be achieved.
Mark Wallace-Jones is a partner at Accenture. |
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| Article appeared in the May 2001 issue.
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