Even $100 million, courtesy of many of the world’s biggest financial institutions, wasn’t enough to sustain the Global Straight Through Processing Association, which quietly closed up shop in November.
In its four-year life span, the GSTPA went from panacea -- a trading utility that would help the securities industry to realize its dream of fully automated straight-through processing of international transactions -- to irrelevancy. Despite repeated strategic shifts and an eleventh-hour move to cut costs and narrow its focus by outsourcing its back- office operations, the GSTPA couldn’t overcome the fact that market participants discovered they didn’t really need its Transaction Flow Manager system to meet their near-term efficiency goals.
“It’s unfortunate, but the GSTPA could not see its mission and vision through,” laments Joseph Anastasio, chairman of capital markets consulting firm Capco North America in New York.
At its peak the Zurich-based GSTPA enjoyed the support of some 110 members -- including virtually every major investment banking, asset management and custody firm. Its mission was to create a central matching utility whose technology engine, the TFM, would enable market participants to ensure the accuracy of securities trades and to track their status until final settlement.
But GSTPA didn’t deliver fast enough. Because of repeated delays at its development arm, Axion4gstp, GSTPA didn’t launch the TFM until last September. By then the industry had moved on, finding other means to solve the problems the TFM was supposed to address.
To be sure, some of GSTPA’s problems were beyond its control. Weak global markets forced many investment firms to scale back technology spending. Plus the U.S. securities industry, by postponing indefinitely its 2005 target for settling trades within one day of the trade date, or T+1, removed some of the urgency that gave rise to the GSTPA.
The investment community didn’t lose sight of its STP requirements, so much as it lost interest in the TFM. Trade-matching remains an essential goal. But securities operations experts are increasingly convinced they can effectively match trades locally, using in-house systems to compile and gain access to the data that otherwise would have resided in the TFM. In other words, they can automate the bulk of transactions without a central matching utility. Only the more complex, nondollar-denominated cross-border trades would be beyond the scope of local matching software, but those transactions represent a fraction of overall volume and can be handled as exceptions.
The sea change in market sentiment has also affected GSTPA rival Omgeo, which offers a competing global matching system, the Central Trade Manager. “I don’t think clients want to be dictated to by the industry on a broad level anymore,” concedes Richard Hughes, Omgeo’s managing director for Europe, the Middle East and Africa. “They are saying, ‘make [STP] real for us.’”
Although Omgeo, a joint venture of the Depository Trust and Clearing Corp. and Thomson Financial, has made significant headway with its domestic Oasys-TradeMatch service -- it had signed 89 U.S. investment managers as of January, up from 19 a year earlier -- it has more modest immediate expectations for the CTM. It now describes global matching as a longer-term objective to which TradeMatch clients can migrate gradually. Omgeo still expects the industry will want a single central-matching platform for all trades, domestic and cross-border; it just may take longer than anticipated for the sign-on to occur.
“We are committed to providing central matching to our clients, as we believe it is a key enabler of STP,” asserts Omgeo CEO Adam Bryan. “It is really exciting to see clients not only adopt our central matching services but also report back to us reductions in their costs and risks.”
One Omgeo customer, San Francisco based investment manager CapitalWorks, has cut its back-office workload “by about 60 percent, further facilitating and improving our STP environment,” notes the firm’s operations manager, Jennifer Fonden. But, like most financial institutions, CapitalWorks is pursuing an internal system.
“We are now seeing STP everywhere -- not just in the back office but also in the front office, where even traders are talking about it,” says Anthony Kirby, the London-based head of Reuters Group’s global STP program. Kirby, who served as GSTPA’s executive director in 1999 and 2000 and joined Reuters in January 2002 after a stint with online trading site Bolero.net, is still a champion of global STP. But his brief now is to implement improvements in Reuters’s trading technology and database systems to be compatible with clients’ STP goals.
The fundamental problem that gave rise to GSTPA’s TFM and Omgeo’s CTM remains: The fund management industry is riddled with error-prone manual procedures -- too many faxed orders and settlement instructions, for example, that need to be transcribed. The solution is to eliminate as much human intervention as possible with STP, and in-house matching accomplishes much of that. Some firms have managed to completely automate 90 percent or more of their transactions with the right blend of software and reengineering, says Jonathan Clarke, director of U.K. securities industry consulting firm Citisoft.
Buy-side firms have three back-office options, says Jerry Norton, London-based director of strategic development for technology consulting firm Logica- CMG: automating in-house procedures; outsourcing to a third party, such as a custodian; or developing a common utility solution -- perhaps a “mini-TFM” that addresses only investment managers’ specific needs rather than trying to accommodate the varying needs of all market participants.
With the utility model pursued by the GSTPA now suspect, Citisoft’s Clarke sees a narrower set of choices: “Players that have put projects on hold because they were waiting for the TFM will now either go with Omgeo or, I think more likely, will look at buying or building their own internal solutions.”
A host of STP-oriented technology suppliers are waiting in the wings to serve the demand for local matching, including DST Systems, HelioGraph, Mercator Software and One-Ten.
Fritz McCormick, an analyst with Boston-based technology research company Celent Communications, says that the variety and strength of vendor offerings have helped to make a centralized utility less necessary. “Participants want a suite of services besides central matching that integrate with the front, middle and back offices internally,” he says.
Work under way at Schroder Investment Management, an original GSTPA backer, bears out McCormick’s view. Ann Bonathan, the firm’s executive director in London, says it is focusing on front-office systems, putting automated decision support, compliance and order management alongside local trade matching.
Because it has an outsourcing deal with J.P. Morgan Chase & Co., Schroders is locked into a messaging architecture that makes a move to central trade matching impractical, says Bonathan. The local matching system, One-Ten’s Salerio, fills the bill for Schroders -- and will for the foreseeable future.
Hugh Cumberland, London-based director of product marketing for Mercator, a Wilton, Connecticut, systems integration company, believes that GSTPA’s failure has left a cloud over central matching. “Firms will automate, and some may still go for central matching, but there are other solutions,” he says.
Schroders, among others, is automating internally with the Financial Information Exchange protocol, or Fix, which the securities industry began adopting in the mid-1990s to standardize messaging between buy- and sell-side firms. Fix, commonly used for indications of interest and pricing, can be extended to order execution, allocations and confirmations, thereby enabling local matching.
Sellers of central matching systems -- Financial Models Co. and SunGard Data Systems as well as Omgeo -- have had to start talking up their local programs. Omgeo’s Hughes says that with clients insisting on short-term returns on technology investments, his company is encouraging adoption of electronic trade confirmation, which is a logical step toward local matching.
Toronto-based Financial Models is likewise changing tack in marketing the latest version of its FMCNet service for managing posttrade communications among brokers, investment managers and custodians: FMCNet will also handle pretrade communications between asset managers and brokers. Explains FMC president Stamos Katotakis, “This new capability will provide, on one platform, the ability for asset managers to handle all aspects of communication between themselves and the counterparties they deal with” -- and, as a result, improve their STP penetration.
“FMCNet has provided local matching for some time,” adds Katotakis. “There is evidence that central matching is of interest to institutions -- but only in the long term. One of the issues for the industry in moving to central matching is whether it adds to their ability to create greater efficiencies or to move information at less cost.”
For now, at least, most firms seem content to act locally -- while still thinking globally, of course.
