The securities industry is making discernible progress toward its goal of executing and settling all equity trades without any human intervention -- so-called straight-through processing. The trouble is, each step seems to take a little longer than the last.
Since last July, when the Securities Industry Association suspended an aggressive campaign to settle equity trades one day after the trade date -- it had wanted to improve on the current three-day, or T+3, timetable by 2005 -- asset managers, broker-dealers and custodians have collaborated on a series of more modest, incremental initiatives to nudge themselves steadily toward STP.
The gradualist approach is working. In a recent SIA-commissioned survey by Stamford, Connecticutbased consulting firm Gartner, 90 percent of investment firms responding worldwide said that they have launched STP initiatives. And the rate of same-day trade affirmation has risen to 23 percent from 14 percent since 2001. The speed of affirmation -- the step in the clearing process when all parties are informed that a transaction is ready to settle -- is an important barometer of STP preparedness.
Still, there’s a long way to go. Jeffrey Bernstein, chairman of the SIA’s STP steering committee and co-manager of Bear, Stearns & Co.'s international clearing operations, says, “For us success will be a trade-date affirmation rate in the high 90s.”
At the current pace it will take several years to hit Bernstein’s goal. Even then there will be a sizable number -- albeit a more manageable one -- of failed or unmatched transactions that require expensive manual resolution.
A nagging set of problems that only recently began to be addressed threaten to push the end-date back still further.
These revolve around corporate actions -- dividend declarations, stock splits, mergers, bankruptcies and the like -- that have to be reflected in the accounts of individual shareholders.
Corporate actions are one of the last labor-intensive processes in securities operations. Technology vendors are making a concentrated effort to address the problem. At least 27 companies are now offering corporate-actions products, says John Wilson, a director of London-based consulting firm CityIQ.
Unfortunately, the product proliferation causes its own problems: It heightens confusion in a field that demands cooperation and standardization to compile and manage vast amounts of company news that must be accurately reflected in shareholder records.
There are encouraging signs, however, that vendors and users realize corporate actions require the same sort of disciplined commitment the industry has made to other aspects of STP. The SIA has a committee working on it. A recent survey sponsored by Swift, the Brussels-based financial messaging cooperative, along with CityIQ and STP software developer SmartStream Technologies, found that 75 percent of the 240 organizations polled in 33 countries said that they expected “substantial” automation of their corporate-actions processing.
Even so, these projects promise to slow the completion of STP. Most are at an earlier stage than other elements of pre- and posttrade STP automation, and they are tremendously complex.
Boston-based research firm Celent Communications says that as many as 250,000 corporate actions have to be processed annually, affecting portfolio accounting, securities lending and other crucial data functions. A major corporate transaction can be a back-office nightmare.
“Access to clean, standardized data is nonexistent,” notes Allen Whipple, head of the New York operations of Summit Systems, a securities automation subsidiary of U.K.-based Misys.
Richard Cato, senior operations manager at London-based HSBC Holdings, admits that financial institutions have “failed miserably” to confront the difficulties. Cato is a member of the Europe committee of the International Securities Association for Institutional Trade Communication, which sets standards for trading automation. The group, he says, “has been trying to get people interested in working together to solve these problems, but the only interest we have had so far has been from vendors.”
Richard Moore, president of Sybase Corp.'s Financial Fusion banking and capital markets software unit, says that the banks and firms will inevitably come around because of their need for greater efficiency. But the up-front investment could be daunting.
Research firm Celent estimates that the securities industry will spend $830 million on corporate-actions solutions between 2003 and 2007. That compares with the price tag of $1.7 billion that the SIA put on the trade-clearing aspects of T+1, which is one reason that plan was scaled back. Corporate actions could provoke a similar reaction.
“Automating corporate actions is discretionary spending, and while it’s a great idea, firms are in deep trouble financially and don’t want to spend money,” says CityIQ’s Wilson.
An industry utility, which is a not-for-profit entity that provides economies of scale if a large number of companies participate, may be one answer to the cost problem. In April the New Yorkbased Depository Trust & Clearing Corp. launched GCA, a global corporate-actions service designed to serve as a centralized source of “scrubbed” data on corporate announcements. That will be complemented next year by a Global Corporate Actions Hub, facilitating communications via the Internet among investment managers and custodians.
Similarly, a Zurich-based central securities depository, SegaInterSettle, says that it will introduce an online corporate-actions service this month, with further processing enhancements due early next year.
In theory, a utility can deliver the benefits of outsourcing, reducing the costs of in-house automation as well as the headaches. Installing a corporate-actions system from a leader in the field, Xcitek Solutions Plus, takes three to six months -- as fast as it gets in this market, but far slower than most back-office software packages.
New Yorkbased Xcitek works faster than others because it has prebuilt interfaces to data feeds from Bloomberg, DTCC, FT Interactive Data Corp. and others. “You can lose a few years doing those [interfaces] alone,” says Xcitek managing partner Brendan Farrell. “This is a very tough business, but that has less to do with overall market conditions than with the fact that the market is immature in terms of packaged offerings.”
Indeed, DTCC’s GCA service is relying on software from Xcitek, which has sold systems to major banks and has strategic alliances with data management providers such as Asset Control of the Netherlands and Fidelity Investments affiliate Fidelity Enterprise Data Systems.
Says James Femia, head of DTCC Asset Services: “There is a great deal of anticipation in the market that we will be able to build and deliver a single-platform solution that identifies information and makes it readily available and easy to understand. This will remove a level of risk from the entire corporate-actions process.”
Of course, for the utility approach to work, all the key constituencies have to buy into it -- especially custodians. DTCC will address this later this year with “a custodian verification component,” says Femia. “We recognize that custodians, subcustodians and central securities depositories are vital to the process and may be the best source of information. The service will always protect the proprietary nature of custodian information.”
CityIQ’s Wilson, however, views the GCA service skeptically. “Without exception, anyone offering market data, cleansed or otherwise, accepts no liability for errors,” he says.
Femia counters that the DTCC has established a number of business and technical agreements to ensure the quality, timeliness and comprehensiveness of its data. “GCA is not looking to shift current levels of liability, but instead to mitigate overall risk for the industry,” he says.
Meanwhile, the search continues for software packages that institutions would be able to plug into their back rooms at relatively low cost. Even the technologists are not too hopeful on this point.
John Byrne, chief executive of Information Mosaic, a Dublin-based investment management systems firm, says vendors have overpromised in the past, leaving a false impression that the industry has fallen hopelessly behind in automating corporate actions.
“We did not set expectations properly about the effort and pain to get these systems installed properly,” says Byrne.
Robert O’Brien, vice president of product management at securities software supplier Financial Technologies International in New York, suggests that packaged software won’t work in the traditional sense because corporate actions is not a discrete, stand-alone application.
“The software needs to be able to receive data from multiple suppliers and have flexibility to process at the account level,” says O’Brien. “Every business within a securities firm may treat corporate actions differently, so you will have many different process steps. If you can apply a subset of rules of aggregation to the vendor and custodian data, you will be able to use the same information across the firm and make savings.”
In other words, advanced software is a mixed blessing: Even if it’s bought off the shelf, it requires so much customization that it becomes a complex, in-house development.
“We deal with some of the biggest banks in the world,” says Summit’s Whipple, “and I can tell you that they don’t have this problem licked.”
