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John Turney
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Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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August 31, 2000

STP's Amazing Advantage

By Joe Anastasio

Also in this article

  • STP's Amazing Advantage

Straight through processing was viewed as an impor tant but expensive luxury just a few years ago. How the pendulum has swung.

Today, most financial institutions regard STP - the uninterrupted flow of data from order entry and execution to clearance and settlement - as a competitive imperative as well as a business requirement. The alternative is high processing costs, unacceptable levels of risk and exposure, as well as lost e-business. Ultimately, it means poorly served clients.

STP now appears on the agenda of most financial service organizations. In a survey conducted a few years ago by the Securities Industries Association, STP was not considered one of the leading technology priorities.

Some analysts estimate the annual losses in a non-STP capital markets environment would exceed a staggering $10 billion.

It is increasingly evident, therefore, that to withstand the stresses of the current and the coming financial services environment, organizations must implement STP.

Two forces are at work. The first is an overwhelming and compelling business case. The second is a likely shift from the "carrot to the stick," namely, the establishment of a firm date to implement T+1.

Let's face it, the days when organizations enjoyed the luxury of reaction time are gone. Trade volumes have tripled since 1995. Market volatility has heightened. Market value losses of some 20, 30 or even 40 percent on a particular stock in a single day are not uncommon. The safety net is gone.

The business case is clear. Think of STP as an enabler that allows the industry to flourish in terms of capacity, scalability, liquidity and transparency, among other areas. The advantages STP brings are apparent:

* More speed and accuracy - inefficient settlement processes limit investors' ability to trade. Automating bank processes through STP reduces duplication of effort and cuts errors significantly.

* Lower costs - S.W.I.F.T. estimates that a mere one percent increase in payments automation yields some $15 million in annual savings, much of which can be passed on to clients.

* Fewer trade failures - STP consolidates all the activities associated with trade processing and settlement into a single electronic process. That provides a single window to monitor issues for timely resolution. This translates into better service and greater satisfaction for clients.

* Finally, STP ensures that information is available to investors in real time, providing them with the essential tools to make sound investment decisions with a high degree of confidence the trade will settle.

New technology has made it vastly easier for investors to compare U.S. companies and their counterparts overseas. Yet, the operational challenge remains to consummate such transactions. STP goes a long way toward alleviating that challenge.

Progress is being achieved. Over the past 10 years, for example, huge strides have been made in immobilizing securities, creating STPs for even the most exotic and complex of them, namely mortgage-backed securities.

In the early 1990s, mortgage-backed securities were processed physically, creating enormous bottlenecks and capacity issues on settlement dates. Now, with electronic processing and confirmation, these problems virtually are extinct. However, not enough progress has been made to claim complete success.