Cash & Liquidity ManagementPaymentsSTP & StandardsRising to the Challenge: Five Barriers to STP in the Treasury Department

Rising to the Challenge: Five Barriers to STP in the Treasury Department

Straight Through Processing (STP) is one of the most serious challenges facing the Financial Services Industry. In the treasury that means the fully automated hands-free processing of a security transaction from the Fund Manager’s decision through to settlement reconciliation. Properly implemented STP reduces costs per transaction and the risks associated with trade failure but time is short.

The challenge for the ambitious, is clear cut: how can any transaction be conducted through all the stages of input, verification, activation, confirmation and implementation with manual involvement confined to just one set of instructions at the outset?

Treasury management systems (TMS) have provided corporate treasurers with the ability to perform limited straight-through processing (STP) for a number of years. Once a deal has been executed and manually keyed into the TMS the production of confirmations, settlement instructions, reports and accounting entries can be automatically generated without the need for further re-keying of data. Full STP, however, can be seen as the delivery of end-to-end processes without the need for any manual intervention. For the corporate treasurer this means starting the STP from the identification of the underlying exposure.

To point out that the technology already exists to realise the ideal of ‘one-touch trading’ is only part of the answer. Financial Services Industry carries a heavy legacy of systems, procedures and policies. However, in a period of evolution, crucial progress is made because as problems present themselves, they are addressed and overcome. They are problems which emerge only through experience and there are no short cuts. Those who wait to profit from the experience of others will inevitably find themselves at a continuing disadvantage to competitors who have moved on to the next stage of the evolutionary cycle.

Transaction Lifecycle and STP

During the lifecycle of a simple financial transaction, there are many stages that must be managed to reduce errors, inefficiencies and operational risk – all of which create barriers to true STP.

The first stage begins with a decision to trade. An important control in the STP process is to ensure that trading decisions are based on accurate and up to date information. Cash management or risk management engine upon which that decision is based needs to be correct, updated in real time and easily auditable. Fast, accurate and automated reconciliations, at the trade or position level can mitigate such risks.

The second stage in the lifecycle is trade execution. Again execution methods may vary, and all bring risks from an STP perspective. When transactions are conducted over the phone, natural human error can be introduced. The internet also presents challenges, the most notable being security and latency.

Once the deal is executed, the workflow begins to get more complicated. Where an online exchange is involved, the initiation of the STP process can happen in two ways. The treasurer can simply re-key the trade into their TMS platform, or alternatively, the exchange can interface directly with the TMS platform.

The next stage in the cycle is to automate internal controls, like market risk and counterparty exposure measures, and cash and accounting positions to ensure a high level of STP.

The final stage in a simple transaction is payment, whether internally across accounts or externally through banks, each of which can create a challenge to STP. Firms that have aggressively pursued counterparties to agree standard settlement instructions can achieve greater automation than those who need to exchange instructions on a trade-by-trade basis.

It is clear that exceptions can arise at any stage during the lifecycle of a transaction – from opportunity spotting through to settlement. By installing a fully integrated treasury engine, that enables front to back office processing and seamless interfaces with external platforms, corporate treasuries can minimise the risks and achieve greater rates of STP. What ever the transaction stage some key barriers to STP are: Lack of automation, Issues of Integration, Security & Integrity, Non Standard Processes, and High Cost of trade failure in cross border environment.

What are the key barriers to true STP?

Until recently the main barriers to achieving full STP have been:

1. Automation Deficits and Manual Interventions

Some organisations have invested heavily in STP and are now reaping the benefits of higher levels of operational automation, but there is a more general lack of automation throughout the investment industry where STP rates for some processes are as low as 15 per cent. This means six trades out of seven are effectively manual! This is unsurprising when analysis of the trade flow within organisations reveals ten or more ‘stop’ points in the process, where the trade is taken out of the normal trade flow and processed manually, increasing the risk of human error.

Trading transaction workflow existing in many organisations have considerable manual element, throughout every organisation there are endless examples of the same data being entered by different people (or even sometimes the same person) into multiple systems. This is an unforgivable waste of our human resources and leaves plenty of scope for introduction at every stage the possibility of human error, which could be even more expensive. Staffs are essentially cogs in the machine, often working under a great deal of pressure and their responses can become dulled through repetition. So the demands of both crisis management and risk management are increased. The multiplication of effort diverts treasury resources to mundane administrative tasks, away from the value-added core treasury concerns of foreign exchange, interest rate and liquidity management.

2. Incompatible technologies: Integration

Another barrier to achieve STP is the heterogeneous IT environment of market participants. Most organisations with a vast number of disparate, proprietary back-office systems face growing pressures to keep pace with the ever-changing demands of customers. Many are running advanced front-end systems, giving the appearance of straight-through processing (STP), when in actuality, antiquated systems still exist in the back end, lending to redundancies and bottlenecks. What’s more, different forex platforms, banks, and software providers are currently using different standards and interfaces.

The key blocker is inability to link multiple systems within the company and between market participants in a controlled manner. Companies and banks have their own systems, which need to communicate effectively to support STP. At the very least, straight- through-processing requires the building of interfaces for corporate treasury and management systems, as well as pricing engines for banks.

3. Data: Reference, Speed, Flow and Quality

Reference Data integrity related issues are also problems in the current institutional processing environment. Incorrect data is the leading cause of all failed trades. Technology firms and others have been working on various approaches to address these concerns. Today, however, easily deployable, cost-effective methods for authenticating and authorizing transactions in real time are limited.

What is required is ‘Data Liquidity’, that is to:

  • Data flow, delivering Data across systems and networks as necessary
  • Data speed, delivering information rapidly when requested by applications or users, or proactively based on predetermined schedules or triggering events; and
  • Data quality, delivering current and accurate information in the data format required by the destination applications, devices and users

4. Multiple Standards: Non Standard Processes

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, organisations 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 transactions.

5. Costly trade failures, high rates of errors, and vanishing recovery time: Risk and Security

As global markets move towards T+1 settlement the opportunity for error increases with volume, and again as a result of shortened settlement periods. Similarly mistrust of electronic commerce and commercial Internet is hampering valuable activities like STP. At first glance, some of these concerns appear to be well founded. Whilst computer security is nothing new, the open and anonymous nature of the public Internet has magnified the threat and has created potential barriers to STP.

Whilst the openness of the Internet is one of its greatest strengths, allowing companies to communicate directly with customers and suppliers, it is also the greatest potential weakness, exposing corporations as never before. Without a rock solid foundation to e-security, one that can scale and grow as the business demands, huge gains could remain unrealized. The task of making an online transaction a secure one is complex. Online operations must not only ensure that all communications are confidential, but must also be able to control access and verify the identity of all parties involved. Without such a comprehensive infrastructure vital data and applications are vulnerable to compromise; whether from outside or from within.

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