STP and synchronized settlements
Oh, and one other STP objective we still have left to accomplish: Synchronizing trade and settlement cycles, not only within traded asset classes within markets, but across asset classes and across markets. Cash flows resulting from settlements of one asset class are needed for payment against purchases of other assets classes. When contract markets settle overnight, government-debt markets settle intra-day, and equity markets settle in three days, we have tremendous gaps in cash flows between firms and clearing houses. Systemic risk of significance would occur should one firm not honor its settlement liabilities after receiving others’ settlement obligations.
Successful STP undertakings
Most industries in the physical supply chain have invested in universal product and supply-chain-identification coding schemes to identify their physical products and documents uniquely, and to identify their manifestation in electronic transactions. They have further standardized their identifiers for transportation intermediaries, delivery locations, and counterparties. They began this investment nearly four decades ago when the Universal Product Code was designated and manifested in the ubiquitous bar code (now RFID tags and QR Matrices) seen on all products and posters around the globe. The concepts of scanning items at the check-out, automated inventory replenishment systems, just-in-time delivery systems, and direct store-delivery systems are just some of the STP efficiency benefits made possible by these code standards throughout the physical world’s supply chain.
These standards and tagging systems also help to mitigate operational and systemic risks. Regulators can, for example, track a tainted Tylenol capsule back to its manufacturing process or find the source of tainted beef around the globe. The parallel project of accomplishing the same in the global financial supply chain -- tracing transactions from issuance to order, to trade, to payment, to ownership, to asset-servicing, to risk aggregation -- is obvious and long past due.
In contrast, during the financial crisis financial, regulators could not find the mortgage that was defaulted on in a US city that wound up as a toxic asset on the balance sheet of a failing bank in Australia. Financial regulators could not see the counterparty positions allegedly held by convicted financial con artist Bernard Madoff at a London OTC options dealer. They certainly missed the numerous movements of securities bundled into Lehman’s Repo 105 collateral moving from the US to the UK and back again to dress up their US leverage ratio.
STP and global identification schemes
We as an industry we could not see the forest for the trees. Now governments and their financial regulators around the world are onto the issue like never before. They need standardized data to do their work. They always needed it to oversee that which they had responsibility for regulating, but they didn’t know what to ask for. They need it now as well to analyze systemic risk, the new mantra forcing the issue of data management and straight-through-processing to the fore.
The financial industry needs it as well. We always needed universal, singularly unique identifiers to mitigate operational risk. It is in their interests that regulators are now calling for such capability in order to monitor systemic risk. They want the tools to protect one financial institution from the contagion of another in this interconnected global system. Regulators have discovered what we knew for decades, that the root cause of the problem was the lack of a global identification system for financial market participants and the contracts and instruments they trade in. Regulators are now providing the motivation for the industry to come together, as other industries have, to solve this problem through global collaboration.
STP lesson: Learn from others
The experience of the physical goods segment of the global economy has direct parallels to the global financial services industry. The development of a universal coding system for products, businesses, transportation intermediaries, locations, and trade counterparties led directly to the efficiencies that made Walmart, FedEx, and Amazon economically efficient commercial businesses. That transaction lifecycle, with that brand of STP, not only moves physical inventory, but also provides for an information audit trail.
The financial industry does not have a physical inventory to move, along with its data. It should be easier to get STP done here if we get our global ID house in order, synchronize our trade and settlement cycles, and add technology infrastructure. “Cooperation before competition” should be another mantra in our quest for STP.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