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Middleware Vendors Hold the Key to Integration Strategies

There are many different technologies that play an important role in one's STP strategy, but above all middleware is the most crucial. In this feature, middleware is put under the microscope.

Financial institutions preparing for T+1 will spend a lot of time with their middleware vendors, whose straight-through processing (STP) products and services will form the "glue that ties all the pieces together," says John Kiger, director of product marketing for San Jose, Calif.-based middleware vendor BEA Systems.

Middleware, which is quickly becoming synonymous with enterprise applications integration (EAI), is an "absolutely fundamental requirement" for STP, he says. "Participating in end-to-end transactions without the middleware layer that provides messaging and securities and data exchange between applications running the business is not possible."

Dushyant Shahrawat, an analyst at the TowerGroup in Needham, Mass., agrees. He says that while the "middleware product line hasn't changed, vendors are being proactive, helping clients understand what T+1 is all about."

That's because they're positioning themselves to become the vendors of choice for helping financial institutions iron out their straight-through-processing issues in the run-up to one-day settlement, which is expected to be implemented in 2004.

"Middleware is going to be critical to the T+1 environment," especially with the new transaction flow manager (TFM) proposed by the Global Straight Through Processing Association and a corresponding solution from Omgeo, from Thomson/DTCC, says Marilyn Hignett, a technology partner with The Capital Markets Company in New York City. It will be up to middleware to route the necessary information and make corrections in real time.

In order to establish a T+1 environment, the industry must spend an estimated $8 billion dollars, according to a business case report prepared for the Securities Industry Association by Accenture (formerly Andersen Consulting) and The Capital Markets Company.

Broker-dealers are expected to spend upwards of $5.4 billion followed by asset managers at $1.7 billion and custodians at $600 million. Infrastructure service providers, including middleware vendors, will cough up $237 million to prepare their systems. Shahrawat estimates that middleware vendors will spend $71 million or 30 percent of that amount, readying their own systems for T+1.

It's in the breakdown of where T+1 spending will occur that favors the middleware market. About $3.3 billion will be spent "modifying internal processes to ensure compliance with compressed settlement deadlines," while an additional $2.9 billion will be spent to standardize reference data and industry protocols, areas in which middleware plays a role.

While no one will hazard a guess at just how much of the $8 billion pie middleware vendors stand to earn, it's likely to be substantial.Shahrawat estimates that EAI spending alone by financial institutions, which includes middleware, will hit $733 million this year and rise to $1.19 billion by 2003, a compounded annual growth rate of almost 25 percent.

STP is all about integration and allowing the front, middle and back offices to speak to each other. It's also about being able to take incoming messages and send outgoing messages to trading partners and suppliers no matter what standard or protocol is used.

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