A rift between processors threatens the dream of efficient cross-border settlements. The Global Straight Through Processing Association hardly sounds like some radical cell.
By Heather McKenzie
Institutional Investor Magazine
A rift between processors threatens the dream of efficient cross-border settlements. The Global Straight Through Processing Association hardly sounds like some radical cell. But when it was created in 1998, its mission - simplifying and standardizing cross-border securities transactions - promised to revolutionize the cumbersome, labor-intensive processing of international stock and bond trades.
Given its membership of 110 powerful investment managers, broker-dealers and global custodians, the GSTPA seemed destined for an easy triumph. It was just a matter of agreeing on standards and on a way to automate the complex and time-consuming task of settling international transactions. Members could look forward to reduced costs and lower execution risks.
Today the nonprofit GSTPA is well past the planning stages, and its technology effort is getting into high gear. But instead of a bloodless revolution, the organizers are facing a potential mutiny. A competitor has come on the scene, promoting an alternative way to embrace the new technologies, shorter settlement cycles and globalization of markets that originally gave rise to GSTPA. It’s a for-profit company at that, a joint venture of Thomson Financial ESG in Boston and New York-based Depository Trust & Clearing Corp. Besides threatening the association’s peace, competition could upset its economics. GSTPA envisions a utility, with high volumes ensuring low per-transaction costs. If the utility loses business, those costs could rise.
Of course, Thomson and DTCC argue that their entry will spur better solutions at lower prices. And the free marketers within GSTPA don’t discount this possibility. But it can’t be tested yet. The Thomson-DTCC enterprise, though announced last April, first must obtain Securities and Exchange Commission approval, which the new venture is hoping will come in the first quarter. (GSTPA is not creating a new clearing body and thus doesn’t need similar approval.)
This hasn’t prevented Thomson and DTCC from talking themselves up. Thomson ESG chief executive officer Howard Edelstein, also CEO-designate of the new and as-yet-unnamed joint venture, says that it will take a “holistic view” of the entire trade management process, unlike the GSTPA’s more limited, utilitylike focus on trade processing. Edelstein also asserts that Thomson and DTCC, building on their existing securities processing and settlement businesses, can offer an easier transition to a new standard.
But as Anthony Kirby, then executive director of GSTPA, reminded his members in a June 2000 report, the motivating factor all along has been the association’s three middle names: straight-through processing. That means maximizing the end-to-end automation of cross-border trades and minimizing those that fail to settle because of timing or technical errors.
Kirby underscored that as GSTPA pursued these goals, it was committed to a “spirit of inclusiveness and cooperation.” As details of the Thomson-DTCC alternative emerged, officials on both sides talked about “interoperability,” or sufficient cross-network compatibility to ensure that the financial community would stay connected regardless of which system prevailed.
That conciliatory concept has hardly healed the rift. Kevin Milne, London-based managing director of Thomson Financial ESG, complains, “We want to get interoperability, but it is becoming frustrating because we are not agreed on what interoperability is.” Milne accuses GSTPA of falsely giving the impression that interoperability is a “done deal.”
Kirby’s successor as GSTPA executive director, David Gilks, also in London, says, “We must wait for the chance to have the debate” on interoperability until the SEC gives Thomson-DTCC the green light.
The polarization may be surprising to some, but it actually has been festering since the early days of the GSTPA.
The association’s goal, as translated from mission statement into action, was to develop a transaction flow manager, or TFM. This computerized network would perform time-stamping, trade-matching, routing and other functions, all smoothing the way toward final settlement at T+1, or trade date plus one day, speed.
When Edelstein got wind of GSTPA’s intentions, he presented Thomson’s Intelligent Trade Management, or ITM, as a ready-made system for delivering those post-trade, presettlement functions. But Thomson and GSTPA failed to come to terms.
GSTPA instead granted a three-year contract to a consortium consisting of DTCC, IBM Corp., Swiss technology vendors SIS SegaInterSettle and TKS-Teknosoft and the Belgium-based Swift banking communications cooperative to build the TFM. Subsequently, DTCC and IBM dropped out of the consortium, now called axion4gstp. More than 40 firms and axion4 will provide the E70 million ($62 million) funding for the TFM, which is scheduled to finish testing and be in operation by September. Now the pressure is on to provide an adequate return on that investment. Thomson is quick to note that while it, as a vendor, has ROI worries, its customers don’t.
Gordon Baker of TCA Consulting in London doubts that the TFM can be commercially viable over axion4’s three-year contract period. “It’s made even more difficult by the fact that there is a competitive product out there already,” Baker says. That competitor’s presence and its “holistic” operating principles also complicate the prickly interoperability issue.
GSTPA’s openness to compatibility centers on TFM network components called message concentrators. These are gateways designed to foster system efficiency by combining transactions from smaller investment managers and brokerages and funneling them into the TFM.
If Thomson-DTCC has access only at the concentrator level, says Thomson’s Milne, “we’d have no opportunity to undertake all of the trade management” that is the firm’s big selling point. “We’d be able to offer our clients only 1 percent of the facilities and functions they now have access to with ITM.”
GSTPA’s Gilks concedes that there is a big divide but adds: “I don’t see how we can avoid the conflict if we are to maintain the purity of the TFM system. The GSTPA model involves many checks to assure members that their messages are unadulterated.”
Stanley Young, a partner at Accenture (the former Andersen Consulting), holds out little hope for resolution. “Each system would have to be intelligent enough to work out where the trade is, say, if the broker is using GSTPA and the fund manager is on Thomson,” he says. “And where would the matching take place - in GSTPA or back at Thomson?”
Gilks admits that interoperability “won’t be easy. I perceive that at the detail level - how standards are defined - will be where the problems are. The devil will be in the detail.”
Thomson’s entry raised another set of hackles - but overcame them by allying with DTCC. According to Young, custodians were reluctant to put Thomson between themselves and their clients because of concerns over the security of settlement instructions. Those fears subsided, because virtually all custodians are already happily linked to DTCC’s network.
But custodian-friendliness remains a point of contention, and Thomson recognizes it. Says Milne: “The industry is evolving as fund administration and custody are being brought together under the umbrella of asset-servicing. If the industry continues to move this way, we will build in the flexibility for custodians to get involved earlier in the trading process.”
With so many basic issues unsettled, confusion reigns in places where it was supposed to be eliminated by now. Major custodians, such as Bank of New York and Chase Manhattan Bank, must support both systems to assure clients freedom of choice. “We don’t have all the answers. We look at them as works in progress,” says Tonya Wilson, Chase global client technology manager. “We have to stay focused on the real challenge: getting clients automated and getting paper out of the process.”
The custody operations may succeed by remaining agnostic. But Accenture’s Young believes that two global straight-through processing models are “one too many,” and only a “fight to the death” will determine the survivor.