STP - A Step Now For A leap Later|
by Sabyasachi Bardoloi
The current business environment in the sphere of financial
service industries is facing uphill challenges. With each
passing day, transactions are mounting, margins getting
compressed accompanied by an ever-rising expectation level
of the customers, which is leading to virtual difficulty
for financial institutions to map out their priorities and
capitalize on the opportunities.
Moreover, very many factors like globalization,
technological change, deregulation and economic
uncertainties are all combining together to create a
chaotic situation in the financial services sector. The
perfect answer to tackle this scenario is Straight Through
Processing (STP), which has been blowing in the wind since
STP - the baseline
STP is a solution that automates the end-to-end processing
of transactions of all financial instruments, from
beginning to end, and is set to revolutionize the entire
financial services industry. Applied rightly, STP provides
the basis for an orderly settlement cycle.
STP not only compresses clearing and settlement times but
also provides a flexible, cost-effective infrastructure,
which enables e-Business expansion through real-time
processing and access to enterprise data. Thus STP may be
defined as the end-to-end automation of financial
transaction processing from pre-trade to post-settlement.
STP streamlines back office activities, leading to fewer
failures, lower risks and drastically reduces costs per
transaction. It embraces a set of applications, business
processes and standards, which is set to revolutionize the
settlement and processing standard within the capital
STP - the drivers
There are a number of drivers, which are motivating the
entire financial services industry to adopt the STP option.
The main advantages that STP would bring includes:
a. Efficient electronic connectivity among different
parties involved in the trade cycle.
b. Integration of front, back and middle office
applications based on certain standards.
c. Scrapping of most of the manual activities and
redundant processes in the end-to-end processing of trade
d. More accurate trade execution and settlement.
e. Reduction in operational costs.
f. Cutting short the trade cycle.
STP - a sluggish odyssey
Since the introduction of STP, many financial institutions
have realized its potential but few have taken the final
plunge. Due to lack of critical integration technology over
the last decade, the deployment of STP within financial
institutions has been rather sluggish.
Although the financial industry has reduced its T+5 trading
cycle i.e. settlement within 5 days after the actual trade
has been done, to a T+3 approach, it has been real slow in
any kind of business process management and technological
advancement as far as trade settlement and processing are
concerned. Outdated manual and unnecessary operational
processes are still in place without any sort of automation.
Historically all securities trading was done by voice and
paper-based communication, with all the turnaround issues
that human intervention implies. But due to the rapid
strides in technology, it is steadily leading to the day
when STP will no longer remain a virtual dream; it will
turn into an actual reality.
The Security and Exchange Commission has set a target for
the US equities markets to transform themselves into a T+1
trading environment by June 2005. However, the advance in
this direction has been far from satisfactory.
A joint report compiled by Reuters, Capco and TowerGroup
last year, as well as the T+1 report on securities
processing in the US clearly indicated inconsistency,
inaccuracy and incomplete data as the major cause of
failure to achieve STP.
It may be noted that 40 per cent of trade record is
composed of reference data. Indicating poorly maintained
data, 37 per cent of respondents stated that they do not
possess a reference data strategy white 55 per cent
informed that they do not have or rather are not aware of
any defined data reference standards within their
The study further projected that financial institutions
would have to spend an approximate $19 billion over the
next 4 years while trying to transform their business to
meet the STP and the T+1 deadline.
STP - adopting open global standards
There can be little doubt that STP is set to revolutionize
the exchange of data and information in the financial
industry. However in order to achieve effective STP rates,
financial institutions need to attune their information and
transaction systems to support industry standards such as
SWIFT, the Financial Information Exchange protocol (FIX)
and Extensive Markup Language (XML).
These messaging standards are helping to achieve continuous
end-to-end automation of international trade processes
thereby making it easier and faster to send/receive
Currently the importance of STP and the use of industry
standards such as SWIFT is getting importance due to the
vast array of proprietary formats in which financial data
is passed from one system or application to another.
With a view to promote increased trade connectivity,
leading brokers and institutional investors have adopted
the FIX protocol as the industry standard for electronic
exchange of trading information. The widespread adoption of
FIX is already revolutionizing the way brokers and
institutions are communicating and conducting business
The FIX protocol is vendor-neutral and designed to
facilitate the integration of buy-side firms' order
management systems with those of their brokers thus
supporting the move toward full STP.
Standards like the SWIFT and FIX are intended to help
standardize messaging services for securities transactions
among financial institutions, stock exchanges and
However, as of today, XML is clearly emerging as an
upcoming "standard" for sharing and exchanging data through
Web Services since it is proving to be less expensive, more
flexible and over and above it is based on open global
standards as well as being platform- independent, thereby
having a wider use and availability.
Financial institutions clearly require a profound
integration tool that will help them to realize the full
implementation of STP. Speculations are making the rounds
that XML is clearly proving to be the best viable
integration option and if adopted in a proper manner, will
prove to be the best answer for a perfect STP.
The need of the hour clearly is that the financial industry
as a whole adopts a universal standard applicable to one
and all, so that the SEC deadline of T+1 by 2005 could be
strictly adhered to. Adopting this step will indeed prove
to be a leap for the future since it will lead STP to a
T+1, or perhaps who knows, to a T+0 level.
About Pinnacle Systems, Inc.
Pinnacle Systems, Inc. is a technology consulting and
solutions provider to Capital Markets firms.
Pinnacle's in-depth domain expertise via its Capital
Markets Excellence Center (CMEC) in conjunction with its
Efficient Delivery Model (EDM) delivers cost-effective
project-based solutions to major global banks.
The company is headquartered in Piscataway, New Jersey,
with offices in New York City, and development centers in
For more information visit www.pinnacle-sys.com. You may
contact our Capital Market experts at 275, Madison Avenue,
6th Floor, New York, New York, 10016, USA. Tel: 212 880
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