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Automating Exception Management in Securities

A contributed piece by the Managing Director of SunGard eProcess Intelligence.

The Stages of STEP

Automated exception management consists of three key stages. Firstly, the system must highlight 'problem' or 'outstanding' transactions where no compensating entry exists. Such transactions are made apparent as a result of the 'Matching Process.' Secondly, the nature of the problem must be determined (knowledge management to identify and research the individual transaction, exactly what is wrong with it, and whether it can be automatically repaired). Thirdly, intelligent actions such as automated messaging must take place in an attempt to repair the problem (employing business intelligence tools to apply the organization's total expertise/rules automatically).

As the timescales in which exceptions must be dealt with are compressed (whether because of the approach to T+1 in securities, or CLS requirements in FX) the identification and resolution of exceptions has to happen ever faster.

Immediate Advantage

So what are the exception management scenarios in securities which can benefit from automated exception processing, right now in T+3, and even more so in a T+1 future?

Simply identifying exceptions as soon as possible after a transaction has been set in motion will deliver considerable benefits. The larger proportion of exceptions in securities are generated in-house by processing mistakes, human error or system-to-system inconsistencies between front and back office. Many internally generated exceptions can be caught and corrected before receiving an undelivered note from the clearing organization. Financial risk is contained, and reputation enhanced--client service reputation for custodians, and market reputation for brokers.

Position Reporting

When knowledge management and business intelligence technologies are brought into play, however, the game is raised. Best practice rules can be better implemented. Even common-sense checks (""Why has no settled security transaction been received where the cash has closed and the trade was booked and confirmed as a Delivery Vs Payment?"") can now be automatically performed. Position control is available at the item level, revealing unsettled transactions which may be masked in balance reporting.

To know the reality of one's cash position at item level gives a true picture of liquidity, and that has to be a route to more efficient trading, and the possibility of more competitive pricing. Organizations can reduce, then control, stock borrowing levels, another factor chipping away at margins. In another example, where the market value and trade value start to move adversely away from one another, escalation rules can be put in place to try and resolve the exception before the potential loss becomes critical.

Trading Peaks

Finally, there is one further lesson to be gained from the world of FX. After the introduction of the euro, it became quite apparent that those institutions which had implemented automated exception processing had protected themselves against sudden transaction peaks, the consequent sudden rise in exceptions, and the hike in operations risk represented by those exceptions.

In the euro world, these peaks were caused by unpredictable effects on the currency resulting from political announcements. In Securities, we might draw a broad parallel with the unpredictability and volatility resulting from such phenomena as the current love-hate relationship with 'dot-com' stocks. Sudden flows from 'dot-coms' to 'Internet infrastructure' companies, then to undervalued traditional stocks, and then back into the latest 'dot-com' opportunity, put enormous strain on back-office staff, increasing both cost and operations risk. If exception processing is automated, peaks are easily accommodated with expert staff focused only on the most difficult cases.


Although standardization initiatives such as GSTPA are fundamentally important to the overall efficiency of the market, its benefits are available to all players. Competitive advantage comes mainly from improving internal processes, in the space which is under your total control. An entire STEP implementation does require investment--not just money but also expert time and intellectual capital. Its success depends on careful analysis and decisions relating to the manner in which exceptions will be identified and subsequently resolved. The good news is that it can be achieved in manageable increments, each with their own short-term return on investment in T+3, and delivering a strategic advantage in the forthcoming world of T+1.

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