It seems clear that operations professionals in the securities industry will live, eat and breathe straight-through processing for the next few years. To learn more about the challenges they are facing, Wall Street & Technology Managing Editor Anthony Guerra spoke with Denise Arend, director of operations and chief executive of STP with the California Public Employees' Retirement System (Calpers).
Calpers, which has an investment-portfolio market value of $148.5 billion (as of Feb. 28, 2002), provides retirement and health-benefit services to more than 1.2 million members and more than 2,400 employers.
WS&T: What are the biggest issues you're tackling right now as you try and move to an STP environment?
Arend: I think there's two equally challenging things. One of which is the sense of urgency with the so called T+1 deadline moving. The urgency around getting to T+1 kind of muddied the waters around us getting to an STP solution because an STP solution is really separate from meeting the T+1 deadline.
The second challenge is to figure out what this thing is going to cost us. Everybody loves to have a crystal ball and to say, 'Ok this is going to be $12.10 exactly,' but lots of things have happened in the last year and a half since we first started talking about what it was going to cost. In a public agency, that's especially important because resources are not just falling out of the sky and so setting out a good budget plan, along with a good vision for the project, are the two biggest challenges.
WS&T: Let's talk specifically about workflow. What points in the flow of a trade are you trying to automate right now and what are some of the areas that you will be focusing on in the near future?
Arend: We have done it a little bit by asset class. As I mentioned at the conference (WS&T Drilling Down On STP Conference, see Inside Operations p. 42 for coverage), we are first focusing on fixed income because the BlackRock product, Aladdin, is being implemented right now, which is a portfolio-management system really. It has trade capture and trade execution but it's not a trade-routing system. So we are, by virtue of that system being implemented, we're eliminating a great deal on the back end of settlement and affirmation.
So, (the goal is to) bring in some functionality to the fixed-income group that we didn't have before and that's the ability to look across the entire asset class, all portfolios, by security type or by portfolio type and provide much more of a compliance check, front end and back end. Those are new things that the Aladdin product will give us.
The next things we're going to do, it's not linear, but by the time we are done with implementing Aladdin, we will be out on the Street with an RFP to get an equity-order-management system, which would provide some of that same functionality on the equity side of the house, doing the same kinds of things, eliminating spreadsheets, eliminating the post-compliance-only approach. We'll have pre-compliance and post-compliance and we will, coincidentally, be looking at how we're going to build the electronic hub for all the messages that have to cross for both fixed-income and equity trades. That gets us to the point where, by that time, hopefully, the VMUs will have sorted out what they're all about and we'll be able to do that end of it.
So that's generally our game plan, getting the fixed side in mind first, automating the rest of what we need to on the equity side, which is primarily an order-routing system, and then putting all that through a middleware hub that will get us to providing messages back and forth to all of our counter parties because, right now, those messages go via e-mail, sometimes via fax and SWIFT, but that's with the custodian primarily.
WS&T: How do you feel about there being a T+1 deadline? Do you think it helps or hinders the move to straight-through processing?
Arend: I think it helps people keep their eye on the ball. As with most things, most people operate better if they have a deadline. There's compelling reason to do something if you have a deadline and though this is not a mandated deadline, I think it helps in the sense that it keeps people focused, even if they define the target differently. In our case, we have really defined that target to be an STP solution that happens to meet a T+1 requirement.
WS&T: Where do you see the payback in achieving an STP environment?
Arend: That is actually something we debate among ourselves all the time. I liken it to: We need to build a new building and it's because we have more employees and stuff than we have place to put them. So, what's the payback on that? It's almost a necessity in order to do your business. We are building, whether it's internal or outsourced (see Investment Technology p. 40 where Arend elaborates on outsourcing), the structure upon which the investment program will operate. We won't be able to do business with people unless we can talk to them electronically. (If we) know more about what our portfolio managers and traders are doing (it) will help us minimize risk and maximize the returns that we get from each decision, as opposed to just looking at it as a whole. Each decision becomes critical, as opposed to one balancing out another one, so the payback is not as easily defined as it would be in other kinds of cost/benefit reviews than this case.
WS&T: Asset managers, as a group, don't seem too excited about the T+1 deadline. Why is that?
Arend: I just think it doesn't mean as much to them. In our case, we only do about 35,000-45,000 trades a year. We're not too far away from T+1 anyway. We could throw more people at it and get to T+1. Anything better than T+1 will require technology.
WS&T: Have you made an early commitment to working with one matching service or the other?
Arend: We have made no decision. We are waiting until everything is sorted out and, frankly, it almost doesn't matter because the technology is going to be such so that whatever the connectivity needs to be, it will happen. It just seems like there might be more made of it than needs to be at this point. If this were 2004 and we were still having these conversations and they were still trying to figure out what they were doing, that might be a little more concerning, but I am convinced that all of that will be sorted out and the technology will be there.
WS&T:: Are you grappling with the issue of reconciling your reference data?
Arend: We are because the data we have now sits in little silos around (Calpers) and part of the excitement around the STP solution is to get that out of the silo and into a common area. So, naturally, there is that issue of reference data that we will have to sort out. Now it happens to be in another project, the risk-management project, it really is going to be on the forefront of sorting out a lot of those issues for us.
WS&T: Can you give a quick background on the risk-management project?
Arend: It came out of the emergence of technology to help, on a complete fund basis, figure out how we can minimize market risk. So, the board was quite interested in how to better address some of those issues and the staff and the portfolio manager responsible for that area started looking at how we could do that, and that's when we discovered the Barra TotalRisk product that provides a lot of those characteristics that can take multi-asset-class funds and look at how we're doing.
The other thing that it will do is help determine some attributions that we are unable to determine with other products. 'Did we get this return because of the market or because we made great investment decisions?' So when you're talking about $150 billion of assets, it just makes sense to use some of the technology that's available to make better decisions.