STP in the finance industry - Reuters view

STP refers to the seamless electronic processing of a trade from order entry and execution through to settlement and clearing.

STP is not just a drive towards improved efficiency and lower costs. According to Reuters, the global provider of solutions and consultancy for the financial markets, STP represents a much more complete and holistic approach to the trading process.

"STP is one continuous process covering the entire financial trade cycle, which will provide inter-operability between investment managers, brokers and custodians throughout the trade cycle," says Ian Evans, Strategy Development Manager at Reuters Solutions and STP Solutions Specialist, Reuters Gulf.

"Due to the way the industry has developed, very few organisations have been able to automate all the elements in the trading process. Most have instead focused only on improving discrete components in the chain rather than the global picture."

These organisations are now realising the significant benefits that STP can offer.

"Firstly, STP will reduce costs, as it will eliminate or minimise manual intervention, duplication, and transaction failure. For example, the cost of repairing a fault at the order entry stage is marginal as compared to repairing it at the settlement stage. Industry estimates put the cost of not adopting STP at over US$12 billion a year in trade correction.

"Secondly, STP will achieve wider automation, better data accuracy and quicker resolution of errors, thereby reducing the risk profile of an organisation. This will result in fewer trade losses, and reduced capital allocation.

"Thirdly, it will provide greater trade-flow transparency, facilitating the monitoring of settlement performance as well as improved reporting, leading to enhanced levels of customer service and satisfaction," says Evans.

Reuters believes that changes in the financial industry also provide compelling reasons on why businesses will need to embrace STP. "The expected growth in financial markets, increased globalisation, as well as investor demands for market convergence, will combine to create intensified cost and risk pressures in the market, maximising the need for process efficiency.

"Additionally, new industry regulations will make an STP environment compulsory" explained Evans, referring to the US-led move to next-day settlement, known as T+1, and new risk management and investor protection rules, such as BASEL II.

T+1 is the shortening of the trade cycle from the current trade date plus three days (T+3), to trade date plus one day. BASEL II, expected to be adopted in Europe in 2005, is an extension of risk regulations to include credit, market, liquidity, business, and operational risks.

"Finally, new technologies will enable efficiency and cost improvements, and lower barriers to entry in all parts of the financial market value chain."

How will companies achieve STP?
"STP is not just about a technology change that can be bought 'off the shelf'. It will significantly impact everything from the firm's organisational structure and daily business process, to its technical architecture," says Evans.

"As a consulting and solutions provider for STP, Reuters will aid companies by acting as a facilitator, supporting the process of re-engineering the organisation, rather than simply automating existing activities.

"To achieve STP, a substantial shift in attitude towards business processing will be required, starting with the buy-in of staff, customers and counterparts, to developing the necessary skills and processes to handle completely different operational issues."

STP is coming - will you be ready?

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