It is difficult to imagine the thought process of the people who got together to found and develop the Global Straight Through Processing Association (GSTPA), but it might have gone something like this: “We’ve had this great idea. Let’s spend hundreds of millions of dollars on a new industry utility that will facilitate cross-border trading and settlement. Let’s try to involve as many of the industry’s players as we can - broker/dealers, custodians and fund managers - from all around the world. We’ll commission a consortium to build and manage the central platform, the Transaction Flow Manager, and the network. And we’ll make it perfectly clear to everybody that this is the only solution. Nothing else will come close to it, and no other vendor should even bother to try.”
So far, so good. That seeds of the project were sown in 1998, and by the end of last year a winning consortium had indeed been appointed. The GSTPA, populated with heavyweights from Merrill Lynch, State Street, Citigroup and AXA, amongst others, was beginning to deliver on its promises. After initial cynicism, many were starting to believe that the project might be a lot more than simply an excuse for lots of overseas trips and a hefty allocation of air miles, and could indeed work.
And then something very strange happened. The Depository Trust and Clearing Corporation (DTCC), the US’ clearing and settlement agency, which had been selected as part of GSTPA’s winning consortium, asked to be suspended from discussions after disclosing that it was in negotiations with another vendor which might present some conflicts of interest. Not long afterwards, DTCC announced that it was going ahead with a joint venture with Thomson Financial ESG, the leading commercial supplier of trade confirmation solutions. The joint venture would pool some of the resources of the two organisations “ to create the leading global trade processing platform and bring the securities industry closer to shortened settlement cycles”.
Whilst there is nothing wrong with a bit of competition, it is somewhat strange to see competitors so closely linked. The board of DTCC includes representatives of Merrill Lynch, Chase, State Street, The Bank of New York, Salomon Smith Barney and Goldman Sachs, all of which are big supporters of GSTPA. Furthermore, many of the DTCC’s largest clients and shareholders are major clients of Thomson as well as being prime movers behind GSTPA.
In effect, the very people who had set out to establish GSTPA as the industry’s utility for cross-border trade processing had also sanctioned the establishment of a direct competitor. As if that were not enough, at the very moment when the Thomson/DTCC venture was announced, the GSTPA members were being asked to write out substantial cheques to fund the first stages of product development. They responded to the call, raising over b90m by the beginning of August.
Is this what they call commercial logic, or is it sheer madness of the first order? The answer is a bit of both. For many of the largest sell-side firms, GSTPA is a critical bet. Successful implementation would lower costs and risks, improve productivity and enable markets to move to T+1 settlement. But what if it fails? Like any sensible bookmaker, the broker/dealers are hedging their bets by supporting the Thomson/DTCC initiative, which looks equally likely to succeed. In terms of the overall net income of these firms, their investment in the two bets is no more than a managing director’s annual lunch expenses.
But that argument is slightly undermined by the fact that it is the big broker/dealers who run GSTPA. There are eight broker/dealers on the executive committee, which is chaired by Merrill Lynch. Custodians have six seats at the table, and fund managers five. If the project fails, who will be to blame? Publicly betting against yourself isn’t a particularly good way of inspiring confidence in your management abilities, yet broker/dealers do this all the time, as they have demonstrated with their multiple investments in electronic crossing networks (ECNs).
None of this would look quite so odd if it weren’t for the fact that the broker/dealers are clamouring for change and consolidation elsewhere in the market.
As neither GSTPA nor Thomson/DTCC is likely to withdraw from the market, the key issue now is interoperability. Can the two sides talk to each other, agree on common formats, share data and generally behave in the best interests of the market? Will they inspire each other to come up better, cheaper services? With the honourable exception of Euroclear and Clearstream, positive precedents are few and far between. If, as has been suggested, it will take nearly four years for the US to prepare for T+1, the market could be facing a protracted period of bitter competition. Whether that results in cost and service benefits for industry players is the sixty-four thousand dollar question.