This year, the long-awaited global straight-through processing industry solution will go live and offer virtual matching services for cross-border and domestic trades to investment managers, broker/dealers and global custodians
For close on a decade, virtually all active participants in the global securities industry recognised that there was a need for a new processing solution as trading volumes continued to soar and settlement cycles were shortened. In 1999, these developments prompted the Global Straight- Through Processing Association (GSTPA) to focus on a more efficient and flexible processing and communication infrastructure that would facilitate the processing of institutional trades around the globe in a safer and faster environment. As envisaged, straight-through processing would be an integrated process providing multilateral interconnectivity among trading counterparts, via a secure and reliable standard protocol. GSTPA specified that the system be open to all institutional participants in the global securities arena and would enable real-time enrichment and central matching of key trade information. It had to provide real-time or near real-time processing capabilities and would therefore help to reach a T+1 settlement cycle.
In December 1999, the GSTPA awarded the mandate for developing the GSTP solution to a Zurich-based consortium consisting of SIS Group, the Swiss Central Securities Depository; TKS-Teknosoft, a software development company working with TATA Consultancy Services, an Indian software developer and SWIFT, the industry-owned cooperative that supplies secure messaging services and interface software to more than 7,000 institutions in 196 countries. These three organisations in 2000 created Axion4gstp to build the GSTP solution; in the same year, the industry raised over e90m for the solution.
After the successful completion of the industry testing in early 2001, formal approval of the GSTP utility was granted by the industry and a structured pilot was launched in July 2001. Thanks to the approval of GSTP AG, the GSTPA’s operating company, the pilot phase started on time in July 2001. Testing involved 33 institutions representing an equal number of asset managers, global custodians and broker/dealers.
The platform developed by axion4gstp is the only VMU solution that is industry-designed, approved and tested (see figure). It comprises three main components: the central matching unit, called the Transaction Flow Manager (TFM); the access modules, which offer multiple connectivity options; and the SWIFTNet messaging services based on a secure IP network. The TFM carries out three essential, sequential real-time matching procedures on trade date, including:
q matching of block order notification (BON) and notice of execution (NOE) between the investment manager and broker/dealer;
q matching of net proceeds for each allocation between the fund manager and broker/dealer and notification to the global custodian, and
q compatibility matching of the broker/dealer and global custodian settlement details.
Based on industry specifications, the TFM was also built to track, number, time-stamp and route cross-border and domestic trades automatically. The unit accommodates the convergence of industry standards such as ISO 15022, XML, BIC and ISIN, and provides industry participants with three different access modules tied to varying levels of user sophistication, volume and technical requirements. In addition, the TFM is designed to give customers the option of connecting through a choice of more than 20 concentrators with an extensive global reach to minimise up-front investments and to take advantage of already established business and IT relationships and existing infrastructures.
The GSTPA and its operating company specified that the STP solution needs to support a T+1 settlement cycle, which, when implemented, is expected to diminish market risk to a substantial degree. Although T+1 has been postponed to 2005, the TFM developed by Axion4gstp will immediately provide its institutional customers with substantial benefits such as: sizeable efficiency gains in the post-trade and pre-settlement processing environment, elimination of the middle role of the investment manager as provider of settlement instructions to global custodians and to remove the responsibility of maintaining SSIs (standing settlement instructions) in non-proprietary databases and managing discrepancies between the global custodian and the broker/dealer.
To varying degrees, investment managers, custodians and broker/ dealers have the opportunity to leverage the GSTP solution for their own benefit. Investment managers have a lot to gain. For example, the TFM mandates that settlement instructions are exchanged between the global custodian and the broker/dealer directly and no longer through the investment manager as a facilitator. By mandating direct contact between the custodian and the broker/dealer for settlement purposes, the GSTP solution enables investment managers to remove themselves from this process and to considerably reduce their operational resources and costs.
The TFM is built to handle fixed income and equity products in a similar way. Fixed income, in particular, should benefit considerably from the TFM solution, as it offers substantial automation compared to the current manual process. The efficiency gain in the whole process, coupled with improved reference data, significantly lower transaction fees and a real-time process will bring significant cost savings which are expected to be in the range of 20–30% of current total operational expenditures. This will enable managers to focus more time and capital on their core business, investment research, portfolio strategies, front-office issues, client service and business development.
Asset managers will benefit financially from the transparent and straightforward transaction-pricing model of the GSTP solution. The industry has structured the pricing to benefit the investment manager and to substantially lower the cost compared to current ETC solutions.
All participants will be able to extend the value of their upfront investments in SWIFTNet and ISO 15022 further down the road. SWIFT will move from its current X.25-based network to a secure IP network, which underpins SWIFTNet, by the end of 2004. The convergence to ISO 15022 message standard, expressed in XML, is under way. SWIFT is also offering a hub solution to carry FIX messages over SWIFTNet.
Global custodians that embrace the TFM solution will be net beneficiaries of this technology. The TFM will provide them with significant opportunities to streamline costly legacy operations that have little or no added value, in addition to using their freed-up resources to augment existing higher margin services. With the early involvement in the trade cycle they will be able to reduce trade fails and improve the service they provide to their clients.
The elimination of investment managers from the settlement process provides the securities industry with its long sought after goal of allowing global custodians and broker/dealers to take full responsibility for the resolution of settlement problems. In this environment, the broker/dealer will be able to operate more efficiently and use its financial resources in a more efficient way. As markets move closer each day to complete globalisation, the TFM offers an industry-designed solution that can mitigate escalating risks and facilitate the timely matching of capital and investments. It is not an exaggeration to claim that with the TFM, the industry is entering a new era in which financial firms have a major opportunity to improve the flow of capital, manage investment risks and reduce trading and settlement-related costs.
Roger Weidmann is director marketing and sales at Axion4gstp. Further information can be found at and