STP: Half a Century of Unfulfilled Promises
There was a time when the vision for Straight-through-Processing (STP) was all about the “locked-in-trade,” an idea spawned back when equity trading floors were of the human kind and the communications vehicle was voice over telephone. If we could only get a trade into the new devices connecting teletype machines and TV-like screens, into the hands of a broker, onto an exchange floor, and back again -- all within a computerized work flow -- it would be “locked in” so computers could process the transaction, presumably error free.
As this materialized, in the form of data terminals connected to high-speed telephone networks connected through switching and storage computers. It enabled firms to send, store, and place an order onto an exchange, then retrieve the executed order, match it to the sent order, and send it on to its origination point. Locked-in-trade for sure, but still insufficient for STP.
STP matures
We learned quickly that there was a next step to STP, settling the trade -- transferring ownership and getting paid. So we moved from bilateral payment and settlement to multilateral netting and novational methods. This allowed the industry to build efficient computerized clearing mechanisms and depositories in equity and bond markets and also to computerize the clearing houses and central counterparties in contract markets. We did the same for our sovereign debt markets. Now surely the STP vision was fulfilled. No, not quite.
We then built post-trade matching and allocation facilities, so that groups of exchange and dealer trades, originated from multiple money managers, and destined for a myriad of custodians, could be processed efficiently by computer. We recognized the burgeoning asset securitization markets and successfully fit them into our ever more complex, yet evolving, computerized attempts at a STP environment. We dealt with mortgage pass-through securities with their pools and pre-payment speeds, and later their risk tranches and fit them in as well. We dealt with the extended supply chain of investment managers, hedge funds and later high-frequency traders, who were moving off of telephones and faxes, and needing computerized straight-through-processing access. We plugged them in through the ubiquitous Internet and latency-busting fiber networks.
Other markets and the STP mantra
We began to see listed contract markets evolving multi-manager pooled accounts and limited partnership structures, similar to the evolving collective vehicles in the capital markets. These too needed post-trade matching and allocation processes so that the myriad of administrators validating trades and preparing statements and K-1s could do their jobs more efficiently.
Later the industry invented OTC derivatives and tried to fit them into the ever more complex, evolving, computerized, not-yet-completed STP environment. This didn’t quite work, since there were one-off trades done between two counterparties, a throwback to the days when most transaction were entered into on a one-to-one (bilateral, to use industry jargon) basis. Later innovations had another component -- a reference entity involved, as in CDSs, creating three way relationships and tri-party agreements -- not to mention the retro method of physical contracts, even though they evolved in streamlined fashion as Master Agreements.
It got really complex when all these products -- bonds, mortgage backed securities, securitized loans, and asset backed securities of all types got aggregated into higher order derivatives, the infamous CDOs, with all kinds of risk appetites to choose from. These CDOs were again aggregated into CDO Squared securities with the mind-numbing possibility of a fiduciary who wanted to do proper due diligence having to read through a billion pages of offering memoranda and prospectuses.
Regulation swept in after the financial crisis of 2007-2008 and foisted new infrastructure entities on the OTC Derivatives markets: market data displays of quotes, sales prices, and volume; swaps electronic execution trading platforms (SEFs); central counterparties (CCPs); and swaps data repositories (SDRs).
Data standardization and the STP mantra
Along the way we recognized that we should standardize the way we send data, to help foster computerized STP pathways. So we used evolving technologies and invented data tagging conventions like FixXML, FpML, and XBRL. This allowed us the ability to move one step back in the STP pathway, to originators of documents and data, thinking that by standardizing message formats and surrounding the basic elements of a financial transaction with data tags, computers could talk seamlessly to each other and hunt down any piece of data.
Seemed as though we were getting closer to the STP vision. We could now go from the minds’ imagining a new product or offering, written down in prospectuses or articles of incorporation or a Master Agreement (really processed in word form) into a prescribed data language so that computers could seamlessly update reference databases and trades could be assembled seamlessly from those component parts.
We could now see a clear vision of arriving in STP land, or could we? Turns out that along the way we forget to standardize on a common language for the data content, common IDs, common data tags, common data content, etc. We had done this locally -- a version for each vendor, firm, market, even sovereign jurisdiction, when what we needed was a global standard in keeping with the global nature of the financial system. We needed a common language that was universal, so transactions could seamlessly flow across the globe and be processed and aggregated by computer. Instead we had built a Tower of Babel or a Rube Goldberg device (take your pick) for huge infrastructure edifices and mapping systems, and for mapping infrastructure facilities shared by many that added huge cost and certainly enormous operational risk to the financial system.
Allan is President and founder of financial industry joint venture development company Financial InterGroup Holdings Ltd; and strategy & acquisition consultancy Financial InterGroup Advisors. The companies are engaged in the capital, contract, currency, cash and investment ... View Full Bio
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