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STP, T+1 and the Back Office

What if the Securities and Exchange Commission decides to subsequently mandate the move to a one-day-settlement cycle?

Bob Griefeld, an executive vice president with SunGard, disagrees, noting that firms that invested in the GSTPA still seem to be fully behind the venture. SunGard, however, has given every indication that it is pushing forward with its own matching engine, regardless of what happens with the GSTPA.

Though matching has been closely tied with the T+1 initiative, Tabb believes it will catch on, whether or not T+1 is instituted, because it is critical for inter-firm STP. Bob Almanas, senior vice president responsible for non-U.S. operations with State Street, says that in the other parts of the world, matching has already proven itself to be beneficial. ""We have experienced the benefits of matching, with respect to that which occurs in some local markets, and it is clear that matching can identify settlement problems before the trade fails,"" he says. ""It is a key risk mitigator.""

Connected on the back end to the matching-utility piece of the puzzle would be the depository, which would accept matched trades directly from new utilities. DTCC is currently working on a new Inventory Management System which would both give operations professional greater control over what comes into their inventory and allow them to passively send out and receive orders en masse.

Linking up the new matching utilities to DTCC's proposed IMS will go a long way to improving the back-office environment in the securities industry, says TowerGroup's Tabb. But, what about internal STP that comes with integrating systems, such as seamlessly joining a trade-order-management system to a portfolio-accounting system or synchronizing reference data across an enterprise to ensure one department's pricing of a security doesn't conflict with another's. That's where the adoption of industry-approved protocols, like FIX, XML and ISO 15022 comes into play.

In fact, there is a major effort underway by the Society for Worldwide Inter-bank Financial Telecommunication to make 15022 the de facto standard in front-to-back-office processing (see Wall Street & Technology, August, Inside Operations). SWIFT has mandated that all traffic on its network, used by the financial industry to communicate payments messages, be based on the 15022 data dictionary and messaging structure. However, it is uncertain whether all firms will meet the Nov. 16 deadline.

For firms that are having difficulties maintaining a superior level of technology right now, things are only going to get worse. That means outsourcing is become a more and more attractive option to the small and mid-sized player. Banks like State Street and The Bank of New York have divisions or separate businesses that are looking to be the back office for smaller brokers and investment managers.

C. Michael Viviano, chairman and chief executive officer of BNY Clearing, says that providing clearing and settlement services is no longer about the basic exchange of cash and securities. Rather, a back-office-service provider must offer value-added services. Those services revolve around integrating what Viviano calls ""the four platforms of financial services:"" securities, banking, asset-management and insurance products.

Some of the securities products include: listed and OTC execution, clearance and settlement, and margin finance. BNY Clearing acts as an integrator of third-party providers, like Reuters, Thomson Financial, CheckFree, etc.

'We can bring scale,"" says Viviano. ""We can bring our investments in products and technology on an outsourced basis which (some firms) can't afford or is not their core competency.""

Tabb says that another area of huge importance is exception-management technology and real-time messaging, which can ensure messages are being sent and received properly and repair or redirect faulty messages. ""It's about making sure (messages) get where they need to go and in good shape and are processed correctly on the opposite side. If there are any problems in the creation, transmission, acceptance or processing of a message you need to know about it quickly,"" he says. Vendors which specialize in this type of messaging, says Tabb, include Tibco, Netik, Vitria and webMethods.

Moving forward, Tabb says that the tough economic times make it critical that operations people do more with less. That means linking together ""everything you possibly can so transactions move through the pipes as quickly and efficiently as possible."" Also, he says, increased scrutiny from the SEC makes it important to know who touched a transaction and when they touched it. It's critical, ""from an audit-trail standpoint, to have that information if something goes wrong because there will be fewer people involved in the process and a lot more transactions.""

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