In the name of straight-through processing (STP) of
securities trades, financial services companies over the next two
years will spend an estimated $6bn (£3.7bn) replacing their manual
processes by plugging into virtual trade-matching utilities (VMU),
installing middleware and integrating front- and back-end computer
systems.
In simple terms, STP is the removal of manual processes in the
trade-processing cycle, including paper and disparate data systems,
creating an unbroken electronic stream of information from the
broker/dealer to the clearinghouse. At present, much of the trades
process still relies on fax or telephone.
STP includes messaging standards, translation middleware and
electronic connectivity among investment managers, broker/dealers,
custodian banks and clearing companies. One confusing aspect of STP
is its association with T+1, or trade plus one day. T+1 refers to
reducing the trade settlement cycle from the current standard of
three days to one, and it is dependent on STP's electronic
efficiencies.
The Securities Industry Association (SIA), an US financial
industry group, has lead the charge toward STP and T+1. But the 11
September terrorist attacks in 2001 and the economic downturn
squelched the SIA's effort to move to T+1 by 2005, as attention and
budgets turned toward more critical needs such as disaster
recovery, business continuity and regulatory compliance. The SIA
stated in July that it will focus on promoting STP by 2004, with no
deadline for T+1.
The real incentive to move to STP, the SIA argues, is the return
on investment, which could be considerable for many companies.
For example, Northern Trust in Chicago went live in August with
an e-mail alert system that replaced a labour-intensive fax process
for notifying investment managers of corporate actions such as
mergers, acquisitions and name changes. The homegrown technology,
called Corporate Action Delivery and Response system, took a year
to develop and cost just under $10m. It has reduced the number of
employees required for data input by up to 70% and improved
productivity by 50% to 60%t, says Teresa Parker, who is responsible
for securities and banking operations worldwide at Northern
Trust.
The web-based e-mail system runs off a Sun Solaris server, while
production data, including accounting programs, runs off IBM
iSeries and zSeries mainframes. The e-mail application is a
proprietary program based on Java. It's used for sending
securities-related data to fund managers, who are online using
either the Society for Worldwide Interbank Financial
Telecommunications (SWIFT) industry messaging standard or
Northern's web-based product.
"Before, it took 10 people to process 1,000 trades a day, and
now it takes four people," says Parker. But there is risk involved
in moving to an all-electronic process. "If you get a trade wrong,
the most you're going to pay for is the lost interest on the trade.
If you get a corporate action wrong, you might have to sell a
security you got by mistake. That could be 17 cents, or it could be
millions of dollars," she says.
IT managers say that the benefits of STP outweigh the risks. A
move to an all-electronic flow of information allows managers and
broker/dealers to see a stock price first and react to it, which
can translate into increased profitability and improved customer
service, according to Larry Tabb, an analyst at research specialist
TowerGroup.
Electronic systems also require fewer salespeople, who are
normally busy writing down orders and having staff keypunch
information into back-end systems. STP also helps remove errors
from orders that in a manual process can be entered at any point as
orders move internally and externally from a fund manager or retail
broker to a custodian bank and a clearing house.
Integrating internal systems
Because banks work with multiple brokerages to authorise the
release of funds that are used to cover securities trades, the
manual approval processes used today can take several days to clear
even one trade.
"Firms use multiple systems, and not all of them are linked
together. The issues have to do with linking all the systems
together so transactions flow from one to another with no one
handling it. There are snafus everywhere along the line," says
Tabb.
Internal message standards for cash reporting, bulk payments,
investment funds, securities pretrade processes and
customer-to-bank credit transfers are virtually nonexistent, say
analysts.
Applications and messaging systems within securities firms and
banks weren't created with consistent architectures, so middleware
is needed to send data from one message format, such as the
Financial Information Exchange (FIX) protocol, to back-end systems
that may use proprietary formats.
Generally, high-value customers - those who trade more than
$100,000 a day - call brokers or sales representatives on a trading
desk to check their account balances, stock holdings and what
excess cash they might have to invest. Sales representatives then
write up order tickets by hand and fax them to an operations
department, where someone else keys in the order into back-office
systems. Those orders then have to be reconciled between the front
and back office to make sure all the tickets were received without
any missed trades.
Virtual matching utilities
One key issue for all companies participating in securities
trading is connectivity to nascent VMUs, such as Boston-based Omgeo
LLC and the Zurich-based Global Straight-Through Processing
Association. Matching in post-trade message instructions at one
centralised datacentre creates an unbroken flow of electronic data
between financial services firms.
Matching utilities are basically trading traffic managers. They
use large servers or mainframes and common messaging formats based
on XML to allow broker/dealers and investment managers to
communicate with one another and assemble the many pieces of data
required for a trade to be confirmed before being sent on for
settlement by a custodian bank.
Royal London Asset Management has been integrating back-office
systems for about a year and plugged into Omgeo's Central Trade
Manager (CTM) VMU about three months ago. Before that, the
London-based bank was taking an average of 20 hours to get
confirmation of a trade, according to Julian Baines, Royal London's
investment servicing manager, who oversaw the deployment of Omgeo's
technology at his company. The same process now takes three hours,
he says.
Also, prior to using Omgeo, Royal London's fund managers input
data onto databases that were transferred daily in batch mode to a
back-office system, where the trades were physically examined by
clerks on the company's settlement team. Those clerks in turn
printed an electronic confirmation and used that to discover
exceptions or mistakes.
"Fifty percent of those orders were failing on poor allocation
data, poor information to brokers or vice versa," says Baines, who
adds that errors were virtually eliminated with the new electronic
messaging system. Royal London uses an application programming
interface gateway device on an existing Windows NT server that
translates code from its Thomson Financial's Icon investment
management, valuation and accounting system into Omgeo's CTM.
"Because our back-end database was from Thomson, they did the
integration work," Baines says. The connection into Omgeo's CTM
took about a year. The greatest hurdle, as Baines puts it, was
understanding "the new jargon". Royal London has linked eight of
its highest-volume brokerages, with four more in the pipeline.
"That would give us 60% of our volume," Baines says. "Once we hit
that, we'll be looking to increase it and have all 60 brokerages on
by the end of the year."