Making STP work
Dr Anthony Kirby
Reuters
In today's business climate of 'show me the money', companies need to
continuously improve their bottom line productivity and use information
efficiently to increase the quality of customer service that they
deliver. The financial services industry in particular recognises that
it needs to move from today's sequential processing into a more
streamlined process defined by the principles of straight-through
processing (STP) -- more automated processing, less human intervention
and redundant data entry throughout the life cycle of the trade.
The drivers to achieve STP come in many forms -- operational cost
reduction, the pace of globalisation, increased competition, the
growing regulatory requirement for shorter settlement cycles and
advances in technology, not to mention the growth in trade volumes and
the exploitation of the real benefits of e-commerce. This is because in
essence, STP is about linking together different parts of an
institution and the wider industry to enable businesses to function as
part of a greater whole. In other words, STP is achieved when there is
no manual intervention at any stage in the transaction lifecycle
spanning execution through to eventual settlement.
STP continues to be a top priority for the global securities
industry, driven by high costs, exposure to operational risks and the
need to mitigate trade failures. Furthermore, achieving STP is about
helping firms make the transition towards optimising the handling of
information in the internet world. This is because information content
is critical to the successful initiation and flow of the trade to its
safe completion. So STP has strategic ramifications for the boardroom
equal to its relevance in the back office. But rather than being an
endgame in itself, STP needs to be considered more than merely an
arcane or isolated goal for the financial services industry.
Last year's joint Reuters/Capco/TowerGroup report and the T+1
report on securities processing in the US cited inconsistent,
inaccurate and incomplete data as the major cause of failure to achieve
STP internally. After all, 40% of a trade record is composed of
reference data. Despite the impact of poorly managed data, 37% of
respondents stated that their organisation did not have a reference
data strategy. In addition, 55% said they did not have, or were unaware
of the existence of, defined data reference standards within their
organisation. The study concluded that financial institutions would
spend upwards of USD19bn over the next 4 years in transforming their
businesses to meet the demands of STP and the T+1 deadlines.
These findings highlighted the fact that,
by failing to implement the necessary controls and strategies to manage
the quality and consistency of their reference data, banks are exposing
themselves to undue risk, inefficiency, costs and failed trades. The
research also highlighted the industry's reliance on manual entry and
maintenance of reference data, in conflict with the requirements of
STP. This is because in today's securities processing world,
information relay is often sequential, resulting in poor synchronicity
of vital information throughout a transaction lifecycle.
The findings were in accord with an operational survey published
by SWIFT last year. The lack of STP was estimated to cost the
securities industry USD12bn every year. Failure rates in the back
office were reaching new heights, generating significant operational
costs owing to the following:
• One in five cross-border
trades failed to settle on its contractual settlement date.
• a single cross- border
trade can involve as many as 25 different people, processes and systems
before it is finalised; many of these steps add little or no value to
the trade process.
• 60% of settlement
instructions required repair at a cost of USD6.00 per repair.
• 61% of allocation matching
was considered to be batch intensive.
So STP is seen as a central component in helping firms deliver
scale, by providing the right foundation for financial institutions to
respond to critical business issues. STP is important for a raft of
other reasons too:
• Helping firms boost their
productivity by realising greater operational efficiencies
• Helping firms improve
their bottom line by reducing costs and/or converting more fixed into
variable costs
• Helping firms deliver
scale by opening up capacity to remove volume sensitivity and designing
future flexibility via open systems architecture
• Helping firms provide
great customer service by facilitating information flows and leveraging
knowledge management (thus improving performance and differentiating
themselves from the competition)
• Helping firms link the different
areas of their business, e.g. Securities and FX, to deliver better
value for their customers
• Helping firms manage operational
risk and improve their control, particularly at a time when customer
expectations are growing yet margins are shrinking
• Helping firms meet legal and
regulatory requirements in various market centres -- especially under
the constraints of shorter settlement cycles, e.g. T+1
• Helping firms create greater
business resilience through standards, market practices and attention
to compliance.
More firms need to adopt a diagnostic response which will help firms
pre-empt STP problems occurring later in the transaction cycle by
supplying them with the right business information and tools at the
outset. After all, surely prevention earlier in the cycle is preferable
to more expensive cure days later. By way of example, many STP problems
are the result of a lack of data integrity or the lack of information
synchronicity. What is clear is that success in raising STP rates isn't
just a matter of better standards per se, although standards are indeed
key to supporting efforts between enterprises. The problem has to be
tackled intra-enterprises first, and that means that the right
information needs to be presented before the right user at the right
time for effective decision-making.
In my role at Reuters I am responsible for formulating and driving the
company's STP strategy from a vision whereby Reuters works with the
industry to act as a critical enabler of infrastructure change over the
next 3-5 years. The focus needs to be customer-centric, to work on what
is happening within each firm's trading, settlement and operations
areas, and thereby to improve the quality and integrity of data which
passes through these areas. This means that businesses will be able to
fulfil their transactions with a greater degree of confidence.
As accurate and well-managed data is the foundation of STP,
particularly market reference data as applied to business
counterparties, Reuters data management solutions (including our recent
joint venture with CapCo) will offer a range of downstream data
management tools and diagnostic services. Using a unique set of
algorithms, Reuters will be able to assist its customers to configure
their own data models, to look for and predict where inconsistencies or
discrepancies occur which contribute to failed trades. These approaches
to improve exception-based management will be popular because they will
help our customers make better use of increasingly scarce IT resources,
representing a better return of investment.
In the area of Transactions Management, the acquisition of InterTrade
Direct from Liberty as far back as 1995 coupled with last year's
acquisition of Bridge and their IOE2 order routing product added the
combined liquidity of several hundred money managers. This strategy
complements the 'View & Do' capabilities of Smart Trading which
allows customers to transact directly across a wide range of liquidity
pools, and Smart Data in the Fixed Income space which allows users to
view data such as prices, and then allow the user to form a link with
critical information such as analytics prior to transacting. Reuters
also provides enterprise risk management solutions which enable our
customers to manage transactions across their entire lifecycle.
Finally, the acquisition of leading middleware integrator Tibco in 1995
allowed Reuters to pioneer integration systems which share data across
an enterprise. The Rendezvous suite of Tibco services is already used
by financial institutions across the globe. Reuters won the right in
1998 to distribute a full range of Tibco products and services. In
2001, Tibco additionally acquired a middleware stack with full
transactional capabilities called Talarian, further demonstrating
Reuters commitment in meeting the STP challenge in the integration
space. Reuters will focus on providing solutions in Data Management and
Business Process Management, working with solution providers who are
market leaders in the Order Management, Portfolio Management or
Workflow Management domains. We will continue to evaluate all options
for growth, including co-marketing, alliances, joint ventures and
acquisitions. Reuters will leverage its open systems technology and
drive alliances with third parties, acting in effect as a 'vendor of
vendors' providing greater choice and future flexibility for our
customers. Reuters will also continue to be supportive and inclusive of
industry efforts such as GSTPA, OMGEO and CLS which are taking active
steps towards delivering STP. The use of virtual matching utilities
(VMUs) such as GSTPA's TFM or Omgeo's CTM as a response to shorter
settlement cycles will highlight the importance of good-quality
reference data because high matching rates are a function of compatible
data,
Despite conventional views, STP and T+1 are not only a back office
issue. They affect front office trading applications, risk management
and many middle office practices. The need to enhance the settlement
process requires significant involvement of front office staff,
technology and processes. Data integrity and synchronicity will be key
for T+1 and an instrumental part of end-to-end trade processes will be
the availability of dynamic/static reference data charging the trading
applications. Certain reference data must be accessible by the front
office at the point of trade entry and execution for validation
purposes. The front office requires RIC codes for identifying asset
classes while the middle office depends on ISINs. Access to
counterparty identifiers such as BIC codes or SSIs for identifying
settlement instructions in order to expedite the trade are equally
relevant. Enhanced risk management and credit risk control requires
real time access to matching and counterparty information.
To quote the late Hagay Shefi
of MINT and GoldTier Technologies, "Upon execution of a trade today,
the order sets off a complex, multi-day procedure. Faxes and phone
calls are exchanged back and forth between broker/dealers, asset
managers, custodians and other players -- even for a simple domestic
equity order. What's more, as trading volumes explode, settlement fail
rates increase, degrading the quality of customer service, leading to
increased challenges of client retention. Most financial institutions
do not have a sufficient degree of STP to be able to achieve settlement
by T+1. The internal and external manual processes that are in place
today require the full three days between trade and settlement to
complete all the steps included in the trade process. Moreover, in
about 12% of cases, 3 days is not sufficient and affirmation does not
occur by the trade settlement date."
Although operational costs can be reduced with greater involvement of
front office and trading applications, this does not necessarily
justify the business case for STP or for migrating to a shorter
settlement cycle as such. We plan to demonstrate how e-commerce
approaches to supply chain synchronicity within e-commerce would
support the business case for STP by supporting effective CRM. STP in
e-commerce is accepted but merely as a consequence of automating
information relating to transaction processing rather than as an
endgame in itself. Corporate firms have reasons for implementing STP;
improving the bottom line through cost reduction and operational
efficiency (a common problem), or differentiating from other
competitors on the basis of knowledge or workflow management with a
view to fulfilling their customer relationships and expectations.
So information such as global reference data concerning counterparties,
accounts, assets or transaction workflows will be fundamental to
realising the goals of STP over the next five years. These could be
fertile times to recover from the mass automation compliance programmes
such as the euro and Y2K, and begin to design the architectural
features to build future flexibility into transaction processes. But
ripping everything out and starting from scratch assuming we have a
green field scenario is no longer an option, if it ever was. After all,
there are simply too many moving legacy pieces for that.
The bad news for some is that the cost of rolling out a complete STP
programme versus the time taken to realise the ROI could well be
prohibitive for many players. The Tower Group's projections of STP
spending in preparation for T+1 in the US over the 2001-2004 cycle
showed that the broker/dealers were likely to pick up the majority of
the burden (USD7.01bn or 64%) as compared with the asset managers
(USD2.78bn or 26%) or custodians (USD0.65bn or 6%). Furthermore, the
SIA's July 2000 study indicated that the investment cost for an STP
solution versus the time to achieve ROI varied considerably; the asset
managers showed an ROI on the basis of 4.22 years (compared with 2.58
years for a broker/dealer or 1.49 years for a custodian).
A further study by Celent showed that the lion-share of STP expense
(74.6% for a typical large US broker/dealer) distributed between
altering internal processes to benefit from STP or optimising market or
workflow information in order to improve business decisionmaking. The
stark asymmetry in the business case justification suggests that
broker/dealers and custodians have a better value proposition in
offering outsourcing services to their clients, who might not be able
to make the systems leap necessary to achieve STP.
Many GSTPA members that I spoke to during 1999-2001 on the buy-side
consistently stated that they wanted operational convenience and future
flexibility/migratability. This was a natural consequence of their need
to manage costs, service clients through enhanced performance and
improve their controls, particularly at a time when customer
expectations were growing yet margins shrinking. In fact the desire for
'one-stop' shopping was mentioned on several occasions. However, given
the marginal business case for STP for the buy-side, it is perhaps
unsurprising that asset managers are no longer looking at central
matching in isolation. Many instead are finding the means to
justify the business case on the basis of a solution which sees a
convergence behind the worlds of pre- and post-trade rather than that
of central matching as a process in isolation.
So, STP must represent the means, and not the end, if industry efforts
are to be successful. STP has to be achieved intra-enterprise before it
can be realised inter-enterprise. This means that firms have to come to
grips with the necessary automation, re-engineering of business
processes and integration spanning investment decision, execution,
trade processing, settlement and finally, reconciliation of the
transaction. At the same time, as many enterprises evolve common
inter-enterprise solutions to shared problems, community connectivity
with rules-based management will help achieve the automated processing
of a transaction across the value chain of participants.
Information enablers such as Reuters have not been slow to recognise
that the scope of STP must include the entire life of a trade,
including business support process, end-to-end execution through to
settlement and subsequent reconciliation. These vendors are only too
aware that their timely mix of utility and value-added services (such
as benchmarking and knowledge that comes from understanding the
workflows) could well become the hallmark of an effective end-to-end
STP model. The more that STP is seen as the integration and
synchronisation of vital transaction information, the more apparent it
will become that the information enablers will have a vital role in
helping the industry raise and shape its game.
Dr Anthony Kirby is Head of STP at Reuters.