Giant STP for market settlement
The move to straight-through-processing could save the securities industry and investors over $18bn, says Sanjay Vatsa
In a world where trading volume is bulging at the seams; where settlement cycles are winding down to a single day; where trading hours are nearing 24x7; and where the e-revolution is changing all the rules, at last… the customer is truly ‘king’. A migration to a customer – and information – centric model is the requirement for the day.
In this customer-first environment, where a growing legion of investors have greater access to more markets than ever before in history, their expectations have reached very demanding levels. And those organisations that meet and go beyond these service expectations will reap the rewards, while the others will be quickly disintermediated.
STP – potent weaponry for investors
To meet the challenge of moving to a customer – and information – centric model, capital markets players agree that the single most effective weapon taking the industry to the next level is global, end-to-end (execution to settlement) straight-through processing, or STP.
Of that there is little debate. Yet, much of the STP discussion to date has centered on its organisational impact, the inner workings of systems and processes that financial service firms build at the back end. There is a good reason, too. The industry’s shift to internet time, the demands for instantaneous information, cost-effective transaction processing and improved risk management have put capital markets players and their budgets under enormous stress.
The fact is, those organisations that fail to implement STP today will be unable to sustain the stresses of tomorrow as trade volumes double and triple. These organizations will be at risk, sentenced to endure the franchise-limiting ravages of high processing costs, constant trade failures, inefficiencies that limit trading, increased levels of risk and exposure, lost e-business revenue and fragmented processes and systems.
As for investors…
On the other hand, clients do not care about the plumbing. The value of end-to-end STP for them represents less of a technological leap forward and far more the pathway to gain the speed, accuracy and low costs they seek in the ever-growing volume of trading activities in which they participate. In addition, STP is the best means for investors to access real time decision-making information – the key to effective execution.
Organisations today would do very well to hear their voices. What they are calling for is exactly what STP provides.
Lower costs – SWIFT estimates that a mere 1 per cent increase in payments automation yields some $15m (E15m) in annual savings, much of which can be passed on to clients; if not, clients today have an abundance of new market choices that await them. By way of example, Instinet Corporation last summer unveiled its STP-driven bond-trading framework and expects to slice transaction costs in half.
Over the next four years, STP should save the global securities industry as a whole between $10.4bn to $18.8bn. These costs today are borne by the investors, which will be released when the industry as a whole moves to end-to-end STP.
Fewer trade failures – The STP platform consolidates all the activities associated with trade processing and settlement into a single electronic process. This provides a single window to monitor issues proactively for timely resolution – thus minimizing manual intervention – from entering trades, to closing the books. To the client, lower trade failures mean higher service levels, lower costs and much greater satisfaction rates.
More speed/accuracy through efficiencies – inefficient settlement processes limit investors’ capabilities to trade. Automating bank processes through STP reduces duplication of effort and decreases errors in trade. The main benefit to investors is the speed and accuracy it brings, crucial attributes in a real-time trading age, and the increased opportunities to conduct more trades whenever and wherever they choose.
Information – The foundation of STP ensures that information is available to investors in real time, offering them the essential tools to make effective investment decisions.
Top of the agenda
For these and other reasons, few initiatives draw more attention today than STP. What’s most interesting is that just a few short years ago, in a survey conducted by the Securities Industries Association, STP was notably absent from the list of technology priorities. This past summer it ranked number one.
No one ever accused capital markets players of being unable to read between lines of code. What they see tells them that the organizational advantages offered by the STP solution – greater capacity, scalability, liquidity, transparency, better risk management, real time information, reduced fails and settlement cycles, elimination of redundant operations and systems – are advantages weighing in on behalf of their clients, too – retail or institutional.
The fact is, whereas STP was once in the category of ‘luxury, nice to have’ – much like the telephone, the automobile, the TV and, yes, even the computer – today, in a post-Y2K world where budgetary considerations may be less constricting, it is mission critical.
Problem solvers, not paper shufflers
Undoubtedly, the implications of these gains through end-to-end STP are staggering for clients, but they also are transforming the way investment managers view their roles and responsibilities on behalf of their clients.
In an STP-driven environment, client managers are free to focus more on the investment side of the client relationship and less on time-consuming operations. They can be more portfolio-vigilant and astute in their investment decisions, focused on gathering information, pinpointing new options and developing creative investment scenarios and solutions.
Consider the flood of information available across global markets via the Internet. Then, consider the need for speedy and accurate trades based on the free-flowing data. Brokers and dealers must play an immediate and pivotal role in separating the ‘noise’ from the chaff, conducting, for example, due diligence on issuers planning public offerings. The speed STP brings to the equation catapults advisory roles to a new level of clientinteraction.
With the advent of one-day (T+1) settlement cycles scheduled to launch in the US in 2002, the groundwork for end-to-end STP already is cast in stone. How timely! Analyst estimates tell us that without the implementation of STP, the capital markets industry could lose nearly $10bn a year. That’s a conservative estimate.
Now that Y2K is in the rearview mirror, those institutions that implement seamless, global, robust, open and fully integrated transaction systems, or end-to-end STP, will be among the first to realize the great benefits being offered by the new e-age. So, too, will their clients. Investors are watching the industry’s progress closely.
The benefits of lower costs, minimal exceptions, timely and accurate information that supports trading strategies and decision making will all ultimately result to the end investor. This is one single initiative that can further optimise and maximise the returns to the end investor.
Sanjay Vatsa is managing principal of The Capital Markets Company in New York