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Wednesday, 17th April 2024
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Standardising STP will beef up the back office Back  
John Anderson examines the problems and complexities facing Straight Through Processing in an increasingly globalised context. He looks at the tools and organisations available to help standardise back office procedures and says companies need to devote more resources to this issue.
The challenges facing financial services sectors around the world are legion. They range from the threat of global recession, accelerated by recent events in the USA, to long term issues such as public pension reform and the ageing of the world population. It is natural, and indeed vital, that the industry as a whole attends to these matters.

At the individual practitioner level attention is also often focussed on the ‘big picture’. It is easy to concentrate on developing front office profit centres with new and sophisticated trading systems and decision support services and significant resources are allocated to the invention of new instruments and the exploration of new markets. One area however is often overlooked or languishes at the end of the queue when budgets are being considered. Back office operations are usually regarded as a less than glamorous cost centre. Settlement and administration departments often still have to rely on manual intervention to match trades, monitor income distributions and other events, mark collateral to market and so on.

The accurate maintenance of relevant static, cross reference, corporate action and pricing data on an ever increasing number of instruments from around the world requires a huge investment in IT resource, personnel and indeed knowledge. Naturally there are significant costs associated with this, and that’s assuming everything runs smoothly! The additional costs involved in unwinding failed bargains or missing income events can be immense. Problems are exacerbated by the increasing complexity of investment strategies and by the compressing of trading and settlement cycles. As the industry moves towards T+1, and ultimately T+0, trends are already emerging. A number of funds are moving towards pricing intra-day, and other institutional offerings that used to price monthly are moving to daily pricing. These are trends that can only increase driven by the need to satisfy client demand.

There can only be one response. The automation of as much of the trading and settlement processes as possible. This is the ‘holy grail’ of straight through processing (STP). Significant developments are in hand throughout the industry as a whole through the Global Straight Through Processing Association and by commercial ventures such as Omgeo, the global joint venture between the US market depository DTCC and Thomson Financial.

I would like to focus on the very beginning of the process. In order to match a trade, settle a bargain, allocate a valuation price or collect a corporate action it is essential to correctly identify each instrument at the earliest possible point. This is a relatively straightforward process within individual markets, for example in the UK and Ireland investors will be familiar with the Sedol numbering system. However as institutional investors and indeed private clients increasingly look to global markets for new opportunities, a number of identification systems have to be considered. In addition to the Sedol numbers already mentioned we have CUSIPs from the USA, WPKNs from Germany, Sicovams from France, Valors from Switzerland and many, many more.

This lack of standardisation requires heavy reliance on manual procedures rather than automated exception procedures and the ability to cope with multiple service providers with incompatible technologies and separate databases. It is little wonder that this generates excessive costs, end to end, due to insufficient use of STP and a relatively high rate of errors and costly trade failures.

If straight through processing is to work it is clearly essential to adopt a standard approach to instrument numbering. The International Organisation for Standardisation (ISO) is a federation of 130 member countries with 200 technical committees, 600 sub-committees and 2,000 working groups. Up to 15,000 international standards have been formulated on a voluntary basis. It is no surprise that this is not the fastest organisation in the world, but it has, with its steady and reliable outputs contributed significantly to the financial industry.

ISO Technical Committee 68 is responsible for the financial industry and Subcommittee 4 for securities. The standards produced here provide a backbone for the financial industry. These include ISIN 6166 the International Security Identification Number, the Swift messages, 7775 which are still being used until all members have migrated to ISIN 15022 and the CFI, the Classification of Financial Instruments.

Many readers will be surprised to learn that the first version of ISO 6166, introducing the International Securities Identification Number (ISIN), was introduced as far back as 1975. In 1992 the Association of National Numbering Agencies (ANNA) was created with 22 founding members to improve the co-ordination and dissemination of ISINs, and by 2000 ANNA comprised 61 members. The sixth version of ISO 6166 was introduced in 2001 and extended the coverage of ISINs to include derivatives, interest rates, currencies, indices and commodities. Also in 2001, ANNA decided to create the ANNA Service Bureau (ASB) to better serve the financial industry and specifically to facilitate the industry’s movement toward Straight Through Processing.

The ANNA Service Bureau is tasked with improving upon all aspects of the timely, accurate and standardised identification of financial instruments as well as the equitable distribution of this information. The Service Bureau will act as a central hub to receive and consolidate ISIN information from the 61 ANNA members and disseminate this information to the market.

In addition ANNA has also authorised the Service Bureau to provide solutions to the industry’s ongoing requirement to link and cross-reference the single ISO numbering standard ISIN with the myriad of local numbering systems embedded in the infrastructures of market participants.

The task of operating the ASB has been given to Telekurs Financial and Standard & Poors. S & P is a division of the McGraw-Hill Companies and is a leading global provider of financial, economic and investment information, advisory services and credit ratings. S & P has operated the CUSIP Service Bureau for the American Bankers Association under an exclusive licensing agreement since 1969. Telekurs Financial is a global provider of descriptive, corporate action and pricing information for international securities. Owned by the Swiss banks, Telekurs maintains one of the world’s most comprehensive databases of static data, corporate actions and market data on over 1.5 million financial instruments. Telekurs Financial is the official numbering agency for Switzerland. S & P and Telekurs were chosen to operate the ASB as they have an alliance, going back over ten years, which created a joint International Security Identification Directory (ISID). ISID is a database product offering cross-referencing of different securities identification schemes.

The ASB is a virtual enterprise using the IT infrastructure of the two companies with two synchronised ISIN databases one in New York and one in Zurich. The National Numbering Agencies, who remain the owners of their ISIN data, will send their updates to Zurich or New York and they, along with other ASB customers, can access the service for enquiries or downloads.

The adoption of the ISIN as a single security identifier within straight through processing is a key component in the realisation of the substantial benefits that will be available to the market. Existing market participants will undoubtedly incur costs introducing STP applications, such as cross-reference databases, however Investment Managers, Broker/Dealers and Global Custodians will all benefit from quicker and therefore less risky settlement. Increased efficiency, the reduction of failures and the shortening of settlement cycles will result in reduced operating expenses and better use of capital.

Suggested websites for further information: www.anna-web.com, www.telekurs.co.uk, www.standardandpoors.com, www.gstpa.org.

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