Seamless flow of trade data can be achieved to yield substantial benefits
Wednesday, July 02, 2003
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A typical day at an institutional fund house—Details of trade confirmations
that have been executed in the day are sent out to the custodian for effecting
the trade settlements. The custodian also receives details of the executed trade
from the broker of the fund house, for cross-verification of the trade data.
Upon verification, it is found that the trade details do not match the
instruction documents sent across by the fund house and the broker.
The result: Delay in effecting settlement instructions, which need to be
complied with in a certain time frame as per the guidelines of the Securities
and Exchange Board of India (SEBI) guidelines, for the custodian. So, is this a
phenomenon that bogs only the Indian securities industry?
The price: Studies show that the percentage of global trade failures
resulting from unmatched trade data is of the order of around 15% of total
trades, which in monetary terms is upwards of billions of dollars. Clearly, this
is a steep price to be paid for the lack of an efficient processing framework
that combines the end-to-end flow of data into a single, seamless process.
The Straight Through Processing (STP) technology framework seeks to provide
these efficiencies by providing seamless data flow both within the enterprise as
well as across the market without any manual intervention.
Evolving Global Securities Industry Framework
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Volumes of trades will increase adding liquidity to the market
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Reductioithe Risks of Settlement failure
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Cost advantages to the Broker/Dealer
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Not just shortened trade cycle and T + 1
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Cross Boarder trades
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Control, fluctuating transactiovolumes
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Move towards and enterprise wide continuous processing infrastructure
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Flexible cost effective infrastructure base with STP technologies will
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Enable eBusiness expansion
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Expand horizons through Globalization
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Improve risk management capabilities
Better Customer Relationship management
So what exactly is STP? Primarily, STP involves the automation of the complete trade lifecycle,
right from pre-trade, trade to post-trade operations.
The underlying impact of an STP environment is to automate the entire process
without any manual intervention. STP treats the trade cycle as a single unit,
instead of a series of loosely-related messages.
STP is about effective risk management, of settlement risk at the client and
institutional levels. Trade failures arising due to data inaccuracy in the
post-trade scenario should not happen as it points to human error and process
inefficiencies. This clearly is one aspect of the operation that can be managed
and controlled by using appropriate technology framework. This is where STP
comes in.
Global snapshot Globally, financial services industry markets are witnessing the
constitution of a true STP environment that is defining the industry’s complex
transaction framework. The advantages of an industry standard framework are well
known but the key defining factors of this market are trading standards,
settlement standards and accounting standards. The STP service model is focused
on achieving a high volume of matched trades, which will be able to flow through
to the various participants in a real time environment regardless of market or
instrument type. The emerging STP process comprises both internal and external
process components.
Impact of STP and Indian markets In India, SEBI has endeavoured to shorten the settlement India cycle and has
been successful in reducing the same from T+5 to T+3. Now the target to be
achieved is a T+2 and, subsequently, T+1. SEBI set up an STP Committee and
defined a roadmap for an efficient STP framework in February 2002 with a vision
to making the Indian capital markets at par with global practices. STP as a
market order is a new concept in India, but it is growing rapidly. Since
December 2002, when STP services were formally launched, several market
participants have adapted the STP framework in their operations.
STP’s benefits Adoption of STP will contribute towards improved business efficiencies and
streamlined operations. STP will also help to maintain real-time access to
account information, improving customer service. The benefits accruing to
participants are as follows:
Reduced settlement cycle: Achieving seamlessness will be an enabler for
shorter settlement cycles to assist both domestic and cross-border trades in
Indian securities.
Transparency/auditability: Managing trades within a single automated process
will improve the transparency of the trade status and will enable organizations
to monitor the process.
Reduced counter-party risk: Once a trade has been executed, there’s an
element of uncertainty between all parties on the status of the trade. STP will
reduce such counter-party risks.
Reduced operational risk: Automating the process from execution through to
settlement will reduce manual processes and provide a more timely and accurate
processes.
Performance measurement: Management of information throughout the process
will be the key to determine success.
Improve attractiveness of Indian market: Foreign investment in India will be
determined, not only, on investment opportunity but also on the operational
efficiency and risk profiles of the Indian market. Introducing a process with
regulatory oversight will enhance India’s profile and, therefore, its
attractiveness to foreign investment.
We are confident that with the successful introduction of STP services in the
country, India would emerge as the preferred investment destination by
attracting global funds into a market that offers the best combination of
"returns" with "efficiencies".
