True STP in FX Trading: Fact or Fiction?

The possibility of true straight-through processing (STP) does exist but it remains clear that it requires determination and diligence coupled with a willingness to seek process improvement and embrace new technology. This article highlights the experience of two large corporations in their pursuit of STP in FX trading.

The Corporate Experience

Boeing and Textron, two organizations with sophisticated global operations and large foreign currency exposure, are prime examples of corporations that had a real need for, and took advantage of, STP to improve various FX trading processes.

Boeing is an aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. It operates in 90 countries and employs approximately 150,000 globally. STP within FX trading gives Boeing’s treasury the ability to focus on strategic aspects of the operation rather than manual administrative tasks. “Our foreign exchange related technology infrastructure was developed with a holistic view. Our systems are integrated and speak to each other,” says Randall Durling, director, international finance at Boeing. “This enables treasury to focus on value-added services to the business units and higher priority trading while shifting other related duties to the appropriate staff including accounts payable (A/P), accounting, and the business units themselves.”

Textron is a multi-industry company with brands including Bell Helicopter and Cessna Aircraft Company. It operates in 32 countries and has approximately 40,000 employees, generating revenues of US$11bn. Textron’s treasury has transformed its central processes through technology and was able to extend STP a step further. “A crucial component of STP for Textron is based on business units around the world having direct access to the trading system; this allows more effective management of their FX exposure,” says Robert Hemstreet, assistant treasurer at Textron. “Now, exposure management, hedging activity and reporting comes full-circle, enhancing the control and accountability. Prior to the Internet and STP, that layer of communication and control was non-existent.”

For these organizations and others that are similar, achieving STP means benefiting from reduced manual processes, compliance and the resulting time and cost savings. To that end, STP provides a single point of entry, facilitates competitive bidding, creates auditable control points throughout the trade lifecycle and generates comprehensive reporting.

Challenges Still Exist

Banks and corporations primarily fuel the trading of foreign exchange, the largest financial market in the world. Some corporate treasury practitioners perceive STP as potentially harmful to their bank relationships due to the lack of human interaction. These organizations choose to receive larger deal quotes over the phone in order to keep overall bank relationships in good standing. Other challenges, such as pricing engine latency and interfacing between disparate systems, also still exist. However, as with all technology, innovation is the driving force and constant improvement continues with regard to system functionality and overall bandwidth.

Another considerable challenge to STP has been FX trading restrictions in emerging markets due to unique banking structures and government regulations. “At Textron, 95% of all trading is electronically executed in our system with an efficient, fully documented and auditable workflow,” says Hemstreet. “The remaining 5% of trading in emerging markets must be executed locally. Local restrictions force us to revert to manual processes outside of operational controls and this inherently increases our risk.”

Continued Adoption Driving Operational Change

Geoffrey Moore identifies six phases of technology adoption.¹ Analysis of STP technology adoption within corporate treasury finds three of those phases most applicable: early-adopters, early majority and late majority.

Early adopters of STP, including Boeing and Textron, saw the potential of the technology even in its infancy. Several years ago, they leveraged online FX trading and STP to drive operational change in their respective organizations. Both corporations implemented web-based treasury management systems interfaced with an online FX trading portal and have made the combination of technologies the core of their entire FX treasury operation. These early adopters have achieved operational change and are now in maintenance mode; allowing the focus to shift to continued workflow improvement and treasury performance metrics.

The early majority implemented STP and online FX trading as the technology matured and became more sophisticated and less expensive. This group had the advantage of purchasing tested technology and leveraging the best practices of early adopters. An additional driver was the regulatory environment of Sarbanes-Oxley and FASB, which forced organizations to utilize audited solutions to ensure compliance.

The late majority, those still relying on spreadsheets, could see significant improvement in operational efficiency, price discovery and compliance within their organization through the adoption of STP related technology. This group largely consists of middle-market corporates who have an ideal opportunity to adopt mature and economical STP technology.

Conclusion

Early corporate adopters have led the way in implementing STP procedures that have defined the process as we know it today. In the past few years, a significant number of organizations have followed suit; primarily pushed by compliance and control initiatives. Consequently, STP has evolved into a well-established practice among corporate treasury departments. However, a large group still exists without the advantages of STP technology; largely in the middle-market segment. This late majority group faces many of the same challenges as its predecessors, but now has the benefits of mature technology, established marketplace and lower transaction costs. Therefore, 2007 is a prime opportunity for remaining corporates to embrace the STP initiative.