Overcoming STP (Stalled Transaction Processing)
Despite its many ups and downs over the past decade or so, straight-through processing (STP) remains the holy grail of financial services information management. The reason for its continuing popularity is that STP, which involves the integration of disparate, legacy data and the process automation this integration enables, promises a massive improvement in operational efficiency. Compared with the typical silo environments of yesteryear, where every business line, location, department, or even individual ran their own isolated operation, STP promises dramatic savings in processing speed as well as operational costs, not to mention enhanced accuracy, fewer failed trades and better risk management. It has been claimed by some vendors that their STP solutions can drive down the cost of manual trade settlements by as much as 75 per cent, while raising confirmation rates from a daily average of under 15 per cent to over 80 per cent.
While all this is to be devoutly wished, the reality is there are still some hefty issues that continue to challenge the vision of a totally automated flow of enterprise information across the local or global enterprise. One of these issues is how to handle the many exceptions that occur within, say, a trade settlement process and require human intervention, thus stalling the STP flow. Another ongoing challenge is the disparate islands of legacy data that cannot be easily shared. While much progress has been made in integrating enterprise information, this still remains an issue, especially for multinational organisations with far-flung operations.
At the heart of many of these challenges is the question of standards – that is, messaging and other types of infrastructure standards – since it is these that form much of the ‘glue’ that binds the STP infrastructure together. Developing and establishing standards, however, is a broad issue and requires its own article. Suffice it to say that much progress is being made with recent messaging standards such as ISO 15022, and organisations like SWIFT, Omgeo and industry bodies such as ISITC have not slackened their pace in addressing the needs of next generation STP.
When looking at automating the straight-through process we can apply the 80/20 rule. This states that at best, only 80 per cent of end-to-end transaction processing is capable of full automation. The remaining 20 per cent will inevitably be subject to exceptions to the process rule. These exceptions can be anything ranging from an incorrect address or mis-matched confirmation to the wrong date or a discrepancy in payments. Each exception must be intercepted and handled manually, and in so doing it causes a break in the STP flow which clogs up the system, slows down the settlement process and increases the risk of human error. A mistake or omission made at one point in the flow can also have major repercussions down the line, but these can easily remain undetected unless everything can be brought into a single workflow process that can match and catch any anomalies.
The more exceptions that can be captured and closed, the more intact is the STP process. And the business drivers for improving STP are many and mighty in today’s bottom-line driven and regulatory conscious environment. Companies are now more than ever looking to the operational efficiencies that can help them reduce costs and minimise expensive or reputation-damaging risk. They also recognise that there is a powerful competitive advantage in being able to deliver more accurate and timely information to clients.
Given this ‘real-economik’, it is not surprising that exception management is one of the fastest-growing technologies within STP. Here again the 80/20 rule applies. Many types of exceptions – such as a wrong date – occur frequently and can be anticipated in advance. They fall into the 80 per cent of anomalies for which systems can be built to check and auto-correct in a ‘semi-automatic’ fashion. That leaves only 20 per cent of the 20 per cent of processing exceptions that ultimately require manual intervention.
The best way to handle anything that causes a break in the STP flow is to bring it inside an intelligent workflow system.
A good example of applied intelligent workflow is the area of corporate actions management. A CA solution will typically contain a library of pre-built templates that can handle the 80 per cent routine exceptions. Here is how it works: Information is gathered from disparate legacy systems and other sources such as SWIFT, data feeds, settlement and stock lending systems and integrated via the middleware layer into a central database. All data is then scrubbed, validated, reconciled and cross-referenced against the exception template library. If a new source of data is introduced into the system, then another interface needs to be built to identify exceptions arising from the new data source. All exception templates must be pre-tested before delivery to the user, since any bugs this will create ‘exceptions within the exceptions’
However, it’s not enough to be able to bring exceptions to an operator’s attention, they must also be handled and relegated, with self-clearing mechanisms for exceptions that can be resolved automatically. For those that still require human intervention they must have timed, proactive alerts with security backstops to ensure that everyone involved in settling an event has responded. And there should also be a full audit trail. In short, as part of the STP dynamic, exceptions must be managed within a set of logical workflow parameters. All workflow rules must also be flexible enough to change or override as required.
There is, however, not much point in being able to capture exceptions if back office operators are then faced with a long, undifferentiated list of exceptions and aren’t able to sort out those that need to be prioritised or otherwise categorised. Another key element of an intelligent workflow solution is the graphical control monitor which enables each exception to be viewed as it occurs from a single viewing window, no matter where in the system it arises. To prevent a buildup, those exceptions that can self-clear are automatically removed from the workflow. If an exception reaches its deadline without being closed, an on-screen alert is issued to designated personnel for action. After a specified time, if it hasn’t been sorted, then a request for action is escalated.
So far we’ve been looking at exceptions as they occur within the transaction settlement process from, say, the point of a trade confirmation through settlement. Let’s also look at it from the back end of the process, at the point where final transaction matching and reconciliation is done. Any exceptions, anomalies or mis-matched trades that have escaped the process up to this point can now be highlighted and flagged back up the line to be dealt with. Having a reconciliation system integrated into the transaction processing workflow provides a vital backstop to the entire exception management and STP process.
Of course, exceptions are only one of the culprits that can cause a glitch in the STP flow. We mentioned at the beginning that information silos were another challenge to achieving STP. While these can occur at any level of an enterprise, multinational companies with operations spread all over the world are especially prone. There are multiple factors for this including geography, culture and localised information silos. Now, however, there is the Internet. Web technology provides a ubiquitous, low-cost platform that is transforming isolated, legacy outposts into members of a single enterprise entity. It is paving the way for a single transaction workflow that enables access to the same data, at the same time. Decisions can be made based upon real-time information, rather than based on monthly reports.
The world is getting smaller as new markets open up, settlement cycles shrink and international regulations become more demanding. Of course as the playing field expands so do the complexities of global transaction processing, putting pressure on STP and Web-based workflow technology to keep pace with these changes. Integrated solutions are extending the reach of STP not only from the back to the front office, but from one end of the planet to the other. With intelligent workflow solutions packaging up next generation tools like message broking, trade settlement, exception management and enterprise reconciliation, STP technology is now striding into the 21st century at an ever-increasing speed.