STP
Are your shareholders suffering from STP deprivation?
Frankfurt
Are your shareholders suffering from STP deprivation?
As financial services companies position themselves for leadership in the 21st century, they find themselves in a vastly changed landscape. The pace of mergers and acquisitions, skyrocketing trading volumes, dramatic increases in cross-border investment, the advent of ebusiness—all represent enormous opportunity. Capitalizing on the opportunity requires the organizational agility that arises from a highly efficient infrastructure and exceptional execution capability. We all know how elusive that can be. Indeed, achieving operational excellence to capture economic gain can sometimes feel like chasing the impossible dream. But it doesn’t have to.
Pursuing With globalization and consolidation marking industry today, competition has intensified. shareholder our Commercial, private and investment banks are value merging with brokerage and insurance organizations to produce fewer yet more formidable competitors. Meanwhile, technology is creating and will continue to create new markets, providing the backbone for unprecedented products and services. Large institutions, however, are often hindered by huge investments in legacy systems that are difficult to overhaul. So while new technology and communication infrastructures provide new opportunities for leading financial services providers, they also present opportunities for leapfrogging them. How do you capitalize on these opportunities? By harnessing technology innovation and combining it with superior business process to produce operational excellence. This will fuel the agility necessary to not only move with the markets, but arrive there first to stake a claim. In the end, this is what will enable serious players to capture market share while controlling costs, bringing economic gains to their shareholders.
Trade processing cost calculations are based on U.S. domestic unit costs estimates of USD5.75 – USD10.75 and cross-border unit cost estimates of USD35 -USD60. (for certain markets, cross- border costs can be as high as USD100 – USD200). Unit cost calculations include internal (technology and operations) and external (vendor) trade processing costs and are based on market information and client experience.
Over the next four years, STP would save the global securities industry between USD10.4 billion and USD18.8 billion…
STP f o t c Impa Securities e bal t Incom o l G on Ne
29 27 25 s t s o C lions 23 g n i s s 21 e in USD bil c o r P e d 19 Tra 17 15 Trade processing cost calculations 13 are based on 1998 figures and do 11 not reflect inflation.
e y Stat Stead
USD
Steady state based calculations are based on projected volumes and unit costs. Unit costs are assumed to remain constant in steady state. Net income increase scenarios are based on industry estimates of up to 50% in potential cost savings resulting from implementation of industry-wide STP.
Trade processing cost calculations are based on U.S. domestic and cross-border unit costs and volumes. Transactions are considered cross-border when at least one trade participant resides in a country other than the country where the instrument being traded is issued.
9
Range nd of E r e Low Range nd of E r e h Hig
2003* 7 * 2 0 20 01* 0 5 2 * 2000 3 99* 9 1 1 1998
Time
our at isoyf W Rhanmgepanncyo’sme e? o et I voluomver cN dIaniclyrease s 4 year 1 - 2004): (200
ome et Inc ears N f o y Range ase over 4 Incre 1 - 2004): 8.8 billion (200 0.4 - USD1 USD1
USD
ion .9 bill SD11 U 6.2
TP S f o t c Impa Securities y S. ndustr on U. I … and the U.S. securities industry as a whole between USD 6.2 billion and USD11.9 billion
Net income calculated before taxes. ‘U.S. securities industry’ is defined as including 100% of U.S. domestic and 50% of cross-border transactions.
2004*
STP: a key enabler
Customers today are demanding speed, quality and the ability to deal in a variety of products and transact business across international borders with minimum risk. STP (straight through processing), a long-time implementation challenge for financial services executives, provides for the seamless global processing of trades from execution to settlement through to reporting. The benefits are well-known: lower unit costs, risk reduction, increased capacity and compressed cycle times—results that allow financial services providers to yield the level of quality and service that clients are demanding. While just one of several milestones to achieving operational excellence in today’s environment, STP is the most critical. In addition to bringing obvious benefits to your sales and trading P&L, it eliminates errors and increases the transparency of reporting to reduce operational risk. Also, by increasing sales and trading efficiencies and maximizing synergies across all business lines, STP reduces the cost of doing business and promotes a more efficient use of balance sheet and regulatory capital. This provides a pathway to accelerating business growth. How? By reducing time-to-market for new products and services, re-capturing processing capacity, slowing the rate of increase of technology investment requirements going forward and affording additional capital for value-added investments. Your shareholders will reap the rewards.
Tokyo
How much would you save?
f Net nge o r 4 years a R r ove s You This i me Increase Inco 1 - 2004) ion (200 0 mill SD90 STP impact on individual companies U 40 attributes 100% of STP estimated USD6 llion i r u m o 0 y is SD64 cost-savings benefits to companies U What pany’s 20 with a daily volume range of USD3 illion com volume? m 0 3 5,000 – 50,000, but only 70% USD2 daily 0 n SD13 0 o of estimated cost-savings U i 0 l l ,0 i 0 - 10 30 m benefits to companies with USD1 50,000 5 a daily volume range of USD6 00
t of c a p Im P on ST ual id Indiv anies Comp
25,000
- 50,0
50,000 – 100,000 to account for assumed existing levels of internal STP.
5,000 00 - 2
10,0
5,000
00
- 10,0
Sources include the SIA, SWIFT, DTC/NSCC, GSTPA and client project data. All analyses conducted exclusively by The Capital Markets Company.
All calculations assume full ownership of whole trade process.
London
Why now is the time
Are you ready?
Global capital markets are exploding. Twentyhour-a-day trading will soon be commonplace in the major markets. Four billion shares a day will be traded on average. Global equity market capitalization is doubling. Cross-border investment is anticipated to rise by 25% annually in the next three years alone.
Leapfrogging the competition is risky business.
At the same time, barriers to entering the global capital markets arena are collapsing. Technology innovation coupled with the decreasing cost of doing business has paved the way for new entrants and new breeds of players. Day trading, ECNs (Electronic Communication Networks), disintermediation (i.e., the provision of middle and/or back office services by an external party)— all are changing the rules.
As you gear up for the new millennium, your ability to anticipate where your biggest opportunities are and, more importantly, how you bring them to fruition by being internally prepared, will be your most critical success factors. Infrastructure inefficiencies incurred over the last decade—along with huge investments made in "must-do" items like Y2K and the Euro— are and have been crucial roadblocks to overcome.
Ignore STP at your own risk Old business practices live long and die hard. The seemingly endless struggle with implementing global straight through processing is a good example. However, this is one battle you cannot afford to lose. Addressing your sales and trading infrastructure limitations and inefficiencies will translate into capital gains that can be redirected into new business and improved client service. A seamless, fully automated real-time transaction processing machine is the cornerstone of competitive advantage and considerable value to clients and shareholders. Consider the alternative. Can you afford the missed business opportunities? Can you sustain the high unit costs, the exposure and risks associated with cross-border processing inefficiencies and transaction failures? Can you afford to suffer lost revenues, low margins and negative impact to earnings per share? If not, the time is right to renew your quest for operational excellence.
Meanwhile, client service requirements are also exerting pressure to change. In addition to easy access to products and markets, customers are placing a premium on value-added services such as improved transaction reporting and information management across their activities. In this dramatically changing environment, it’s about survival of the fittest. Those who adapt— and, more importantly, differentiate themselves— will prevail in the end. And those who do not, will, quite simply, fail.
How would your organization fare? On a scale of one to five, with one being the lowest and five the highest, rate your level of confidence in stating the following: 1
2
3
4
5
My organization has the uniform approach to transaction processing required to support a truly global presence. Automation is at a peak. Cross-border business is booming. We are ready for the anticipated doubling in trading volumes and tripling in cross-border activity. 1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
My organization is well positioned to respond quickly and with minimum cost and risk to our clients’ demands for new products in new marketplaces. My organization is ready to take advantage of e-business opportunities. We have identified our most profitable opportunities and are prepared to make them happen. Disintermediation poses no threat. My organization is fully prepared for extended trading hours. We have infinite capacity and have already begun to shift our resources to market-making. If your confidence level failed to reach at least a "3" on any of these statements, you should seriously consider accelerating your STP program.
STP: the way it is
While a long-time mantra of the financial services industry, STP is often misunderstood. True STP is end-to-end or front-to-back—it encompasses the systems and processes supporting the entire life cycle of a trade, starting with activities leading to and including trade execution and ending with settlement and transaction reporting. To a large extent, the ability to achieve STP is limited because of dependence on external links to counterparties and other participants in the trade cycle. The good news is that entities facilitating front and back end processes—securities exchanges and central securities depositories, respectively—are already taking steps to enable STP. In addition, industry and service-provider initiatives are addressing inter-organization connectivity and STP issues. These movements, however, account for only 30% of the STP puzzle. It’s the remaining 70%, internal STP, which is the real challenge. But it’s also what makes the greatest impact on your customers and shareholders. Achieving STP is one challenge that you literally cannot afford to overlook. Even with an 80% endto-end STP rate, the 20% of transactions that require manual intervention or fail due to a lack of STP can account for up to 80% of your operational expenses. And while many institutions can lay claim to employing varying degrees of STP, particularly regarding domestic trades in the U.S. and in major European markets, achieving STP globally—which is where the biggest opportunity lies—is a different story. Just as it is often forgotten that true STP means endto-end, there is often disagreement on the measures that define it. In an ideal world (i.e., in the not-sodistant future when customers will no longer be willing to pay for processing), internal STP—global or domestic—is defined by the "10x10x1 rule": 10cent unit cost, 10-second cycle time and a 1% or less exception rate. In the real world, true STP translates into a 50% or more decrease in total processing costs. It reduces end-to-end cross-border unit costs from USD35.00–USD60.00 to USD18.00–USD30.00 and end-to-end domestic unit costs from USD5.00–USD10.00 to USD2.50–USD5.00 per transaction, respectively. Unit costs continue to decrease as volumes rise.
Pieces Exchanges, clearing houses and central securities of the depositories have reacted to the increased demand for new puzzle market entry and cross-border investment by moving toward consolidation. In Europe, Asia and Latin America, local exchanges have formed alliances to consolidate access to trading systems, making it easier for local participants to execute transactions, especially in new products, and to accommodate higher volumes of cross-border activity. European central securities depositories have also established bilateral links to form the European Central Securities Depository Association in order to improve cross-border collateralization, clearing and settlement by providing a single point of entry into the European market. The more recent Cedel/Deutsche Börse and Depository Trust Company/National Securities Clearing Corporation agreements in Europe and the U.S., respectively, are other examples of this trend to consolidate. Similar initiatives to form regional depositories are underway in Eastern Europe, Asia, Africa and Latin America. Meanwhile, regulators have been swift to react to the recent growth and continued anticipated rise in market activity. On the heels of recent market crises and industry threats and challenges such as Y2K and the Euro, regulators around the world have increased pressure to tighten risk management to combat systemic risk. In the U.S., the SEC has strongly recommended the shortening of settlement cycles to one day after trade date ("T+1 settlement") by 2002. In response, key industry participants have taken steps to implement STP on an industry-wide level. The Global Straight Through Processing Association (GSTPA), for example, a conglomerate of global custodians, investment managers and broker-dealers, is addressing the post-trade, pre-settlement chain. GSTPA proposes to create a core facility to which all parties can connect to monitor transaction status. The Securities Industry Association (SIA) has formed subcommittees focusing on institutional matching, payment finality and other standardization issues in preparation for T+1 settlement. The SIA initiatives are addressing industry-wide process flows from order management to settlement. Financial services companies must clearly prepare for these industry events. Doing so, however, will only address portions of the entire STP chain. Taking advantage of the required review of your internal processes and infrastructure to implement internal STP will put you ahead of the curve.
Paris
Make your move
To successfully and cost-effectively implement STP, you need to take stock of what you already have working for you. Conduct a quick but thorough analysis of the benefits, if any, you have gained from the investments you made in Y2K and the Euro: reexamine the current states of your systems infrastructure and business processes. Refine your business priorities, considering how they have changed in light of external risk assessments and industry events, current and planned. Next, evaluate the availability of your resources and organizational appetite for change. Ascertain where you are spending the most, and where your investment dollar is reaping the most reward. How can you channel resources to the areas that will bring the most benefit to all involved? Once you have completed these analyses, take strategic action: Model STP at the organizational level.
Prioritize STP implementation according to your business strategy, keeping in mind that STP is the key facilitator for e-business. Identify isolated pockets of STP success and apply learnings to the bigger picture. But first set a baseline for your STP targets using tools like ABC (activity-based costing) and benchmarking, to ensure you are implementing STP only where it makes economic sense. Appoint champions for end-to-end transaction processes whom you hold accountable for results. Design processes and build systems strategically, implement tactically.
Understand the timing implications of industry initiatives and their impact on your internal processes and address them in your overall strategy. Then place initial focus on your own problematic areas. Is there an opportunity to secure an early win by solving short-term needs while providing the basis for a total solution? Your goal should be to gain immediate payback to establish self-funded implementation. Apply leading-edge process and technology innovation.
Implementing STP presents an opportunity to prepare your systems architecture for future enhancement, functionality and scalability and attain the highest level of business process efficiency. This is an investment that has the potential to yield tremendous returns. Invest smart—do it right. Capitalize on the opportunity to develop superior information products.
The demand for information transparency and control has never been higher. STP enables realtime, customizable internal reporting across clients, transactions and locations. Take advantage of it. Differentiate yourself early by planning for the transformation of this capability into value-added products and services for your clients.
Additional factors to consider before you get started
Outsourcing. Increasing technology costs, inconsistent internal processes, the cost of retraining personnel—these are drivers for outsourcing back end or "core" processing functions such as clearance, settlement and reporting. Outsourcing may well provide a relatively painless, cost-effective, viable solution. However, bear in mind that its efficiency depends on a vendor’s ability to integrate with your in-house systems. Intranet technology. A major trend emerging after Y2K is the improvement of electronic distribution systems that provide products and services over the Internet. Revenue streams from e-business are potentially extremely lucrative. Remember, however, that the profitability of such a venture depends on operational excellence. Enter the intranet. Intranet-based applications are already being used to access centralized reference data and, in some cases, are being connected to core systems. More sophisticated versions will enable complete tasks, such as transaction reporting and repair, to be undertaken from any location. Even whole back office systems have been developed using the latest intranet technology. In addition to applying this technology to the trade processing cycle, consider what could happen if you connected your intranet to the Internet. The possibilities are endless.
today’s business options and technological One final Despite advances, implementation of an STP program is step: daunting. It requires unwavering business and human resource commitment, not to mention buyer expertise in process and systems reengineering, a beware firm grasp of leading technologies and a detailed understanding of the impact of industry initiatives on internal processes. You might ask yourself if a consultant is in the future. Selecting one can, however, be a nightmare in itself. In doing so, keep in mind that a successful "consultant" will have, in addition to the knowledge outlined above, hands-on experience in developing, implementing and integrating front, middle and core processes and systems. Moreover, a consultant who is truly in a position to help you address your STP challenge will have a track record of implementing STP solutions for a variety of financial services companies. The reality is not many do.
New York
The Capital Markets Company is the first company to focus on providing global business and technology solutions to players in the world’s capital markets. Our experts provide thought leadership, develop software components and formulate e-business solutions for financial institutions, central securities depositories and clearing and settlement houses. We offer solutions for STP (straight through processing), enterprise wide risk management, clearing, settlement, custody, payments and e-business. The Capital Markets Company brings together a group of both financial services and information technology practitioners with hands-on experience in providing solutions for improving efficiency and managing risk in the capital markets. Our expertise includes the full range of business and technology project work —from IT strategy and back office re-engineering to large-scale systems implementations to global payments and transaction processing. High performance and shared common values are critical to our goal of bringing the highest possible service to our clients, business partners and the financial community as a whole. While the global capital markets are changing rapidly, The Capital Markets Company is keeping ahead of the pace. Our expertise in providing STP solutions is deeply rooted in our partners’ successful track record of developing and implementing STP strategies for numerous leading financial services companies. It also draws on their years of participation in financial services industry committees and working groups (including membership in various Securities Industry Association, New York Clearing House, Group of 30 and New York Stock Exchange committees, subcommittees and working groups). The Capital Markets Company’s broad offering for STP also includes a variety of customizable software components that facilitate STP on an enterprise-wide level.
For more information North America on our STP offerings, Joe Anastasio please contact:
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