There are difficult questions to be answered about who should pay the bill for straight-through processing for the securities industry – especially when the original idea was that it would pay for itself.
How far has the securities industry come in the six years since the now defunct Global Straight Through Processing Association (GSTPA) first began building a central matching system that promised to remove inefficiencies in the industry?
The driving force behind the GSTPA was pressure from the US and UK governments to improve the lack of transparency in the costs attached to securities investment. The GSTPA was formed by the banks to put forward a plan of action in a bid avoid having a solution imposed on the industry.
Who foots the bill?
At Sibos 2003, the panel addressing the hot topic of who pays the STP bill will no doubt conclude that it is currently the customer. However, the more important question is: who should be paying it? STP was supposed to take inefficiencies, which cost the customer dearly, out of the system and, in effect, pay for itself. While the customer is already paying for the large number of failed trades that still occur, should they also foot the bill for putting it right?
According to US consultancy TowerGroup, there is still much work to be done. Last year it said that even without moving to T+1, the industry will have spent an estimated $7.4bn on STP projects by 2005. Of that, TowerGroup estimates US broker/dealers will pick up 68% of the costs. Whether they pass this on to customers and whether this correlates with the millions of dollars saved on failed trades remains to be seen.
According to TowerGroup’s research, failed trades are still rife. TowerGroup director Larry Tabb estimates that just 1.9% of firms have no failed trades, with one quarter of firms failing to settle up to 5% of trades. The biggest culprit causing failed trades has been identified as incorrect reference data, causing 45% of failed settlements, says Mr Tabb.
These figures show the magnitude of the bill and the problem facing the industry. Regardless of when the securities industry moves to next-day settlement, it has been shown that the only way to iron out inefficiencies is to manage the process in real time. There is some reassurance that the investment in STP systems today will hold the industry in good stead for a move to T+1, and make the move to shorter settlement times less painful and certainly less costly.
Difficult questions
The conference session will cover some difficult questions. For example, does the end customer pay for the industry’s inefficiencies? Is the industry making enough effort to reduce costs and mitigate risks for the investor? Or is it merely a chain of disparate, unaligned players that are individually adding fees to the process while passing risks on to other counterparties?
Many more questions need to be answered before more money is spent. Should the customer pay for the amount of consolidation of processes needed within banks and brokers? Perhaps it is time the investors started to see a return on their investments of the last five years. Who should pay the cost of a trade that fails to settle? Should a firm be penalised for inefficiencies?
There are more questions than there will be answers at this panel session – unless the participants bear in mind that they, too, will depend on a pension fund one day.
Relevant sessions
Tuesday October 2111am-12.30pmSwift’s value proposition – improving your bottom line
Wednesday October 229-10.30amSecurities: At the end of the day, who pays the bill?
