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Operations: A Year of Consolidation and Preparation

1999 was a year of sweeping change in the financial services technology industry, including the growth of ECNs and online trading.

Back-office operations never get much of the limelight, but as the industry is changing left and right wanting bigger, better, and faster, the burden falls on the back office to make sure the systems can support the changes taking place. Particularly when it comes to clearance and settlement of securities, it ensures that the trades pouring in-at unprecedented volumes and speeds-don't fail.

That said, the past year has been marked by many events to help the industry do just that-improve efficiency and help the industry move closer to straight-through processing. One of the year's highlights was the merger of the Depository Trust Company and the National Securities Clearing Corp (WS&T, 6/99). The two organizations working together, combining departments and some systems, will ultimately make the trade-processing arena more efficient.

That was not the only clearinghouse to consolidate in 1999. With the advent of the euro, there has been a flurry of consolidations in Europe, as Europe's clearinghouses are vying to be the central clearinghouse for the European Union. Along these lines, Cedel International of Luxembourg merged with Deutsche Borse Clearing. Cedel also had set its sights on bringing the Paris Borse's Sicovam into the fold. Yet, just as the year was coming to a close Cedel's negotiations with Sicovam ended, and in a turn of events, Sicovam said it planned to form an alliance with Euroclear-Cedel's main competitor in the pan-European clearing market. The sudden switch transpired after Cedel struck a deal with Eurex-the German and Swiss derivatives exchange, which would be at the expense of Clearnet-the Paris Borse's stock settlements unit.

Thus far, the consolidation and linking taking place among clearinghouses, is only the tip of the iceberg, and its continuation is expected to spur a need for enhanced technology and middleware. Already Cedel said it would spend a "large sum" on technology to move from a "continuous batch" to a real-time settlement system over the next three years-something that all the clearinghouses need to do if they have not already. It's not only the clearinghouses that have to undergo this monumental change, all investment firms are working on or plan to move away from a batch system in order to be ready for T+1 by June of 2002.

To further the charge toward T+1, two industry initiatives made headway last year. The Global Straight-Through Processing Association's plan for a Transaction Flow Manager-a central utility to connect broker/dealers, investment managers and custodians in the post-trade pre-settlement arena for cross-border trades. The GSTPA spent much of the year trying to select an applications developer, network services provider, facilities manager and operator to run the utility. The 100 initial vendors have been narrowed to four consortiums, and the final decision was expected to be made in mid-December.

The second industry initiative is the SIA's Institutional Transaction Processing Committee's plan to create a virtual matching utility for domestic trades. The idea is similar to the GSTPA's model for cross-border trades where it will enable all parties involved in the trade to monitor the trade through the entire process. This utility is to be interoperable with other service providers, utilities and systems, including the GSTPA's TFM. As the year was coming to a close, the SIA was choosing a consultant to assist it with an industry plan.

Looking back, 1999 was a year of preparation. As operations departments hustled to wrap up Y2k debugging and testing, they also began to set their sights on the future and lay the framework for the projects on the horizon.

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