STP used to be seen in terms of automating transactions and considered a mere operational issue. However, STP of late is being taken as shorthand for a set of key business health indicators that determine an organisation’s ability to function efficiently and effectively, and as such is picking up interest in the boardroom.
In today’s business climate, firms in any industry need to improve their bottom line productivity and use information efficiently to increase the quality of customer service that they deliver. Information content is critical to the successful initiation and flow of the trade to its safe completion. 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.
As such, 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. 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.
A TowerGroup study in March 2001 concluded that financial institutions in the securities space would spend upwards of $19 billion over the next 4 years in transforming their businesses to meet the demands of STP and the T+1 deadlines. In October 2001 a joint report by Reuters/Capco/TowerGroup cited inconsistent, inaccurate and incomplete data as the major cause of failure to achieve STP internally. The report found that despite the impact of poorly managed data, 37 per cent of respondents stated that their organisation did not have a reference data strategy. In addition, 55 per cent said they did not have, or were unaware, of the existence of defined data reference standards within their organisation.
These findings highlighted 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.
So accurate and well-managed data is the foundation of STP, particularly market reference data as applied to business counterparties, asset identifiers and transaction references, as well as fees, prices and corporate actions. However, meeting these demands operationally presents several complex business challenges for every financial organisation:
· How to function on a global or regional scale?
· How to keep up with technological innovation?
· How to respond to transaction volumes doubling every three years?
· How to handle added complexity?
· How to manage increasing time criticality?
· How to manage operational cost?
· How to provide better control?
· How to respond to regulatory expectations?
· How to provide great service to customers?
More firms need to adopt a diagnostic response and Reuters 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 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.
One of the skillsets I intend to import into the financial space will be how approaches to supply chain synchronicity within e-commerce would support the business case for STP by supporting effective CRM. STP in the e-commerce space 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.
Corporate firms such as Walmart (and B2B exchanges such as Transora) in the retail sector already measure and manage supply chain success on a balanced scorecard which tracks customer satisfaction, service costs, business resilience, and capital employed. The retail environment for traded goods features hundreds (if not thousands) of suppliers. Information about cash and materials is key because tighter inventory turns and cash-to-cash cycles spell savings. The financial industry would do well to take a leaf out of the corporate book and work towards developing more collaborative efforts to assist customers set metrics and benchmarks which improve performance. This is the type of parlance which buy-side firms understand.
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.
This is just as well because the bad news for some is that the cost of rolling out a complete STP programme vs. 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 ($7.01bn or 64%) as compared with the asset managers ($2.78bn or 26%) or custodians ($0.65bn or 6%). Furthermore, the SIA’s July 2000 study indicated that the investment cost for an STP solution vs. 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 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.