The securities industry is rallying forces to build a global stock trade processing application to handle the swelling volume of cross-border trades.
A group that represents U.S. and European financial institutions engaged in cross-border trades, dubs the new application, Transaction Flow Monitor (TFM). A secure underlying network will support TFM, a post trade, pre-settlement matching tool aimed primarily at fund managers.
The group, the Global Straight Through Processing Association (GSTPA), recently announced a list of 17 companies that responded to its Request for Information. That RFI is part of the three-step process of selecting a consortium of vendors to build the new system. (The GSTPA was formed last year to achieve cost efficiencies in global cross-border trading.)
The TFM system is expected to be pilot tested next year, and in production about 12 months later.
C. Steven Crosby, a partner at the financial services consulting group at KPMG, which was enlisted by the GSTPA to assist in the selection, said TFM would have far-reaching consequences.
By replacing manually intensive steps for communicating data in the electronic trade confirmation process, TFM will become "the first global system to provide multi-lateral interconnectivity between broker dealers, investment managers and custodians worldwide."
The GSTPA is the forerunner to the Global Straight Through Processing Committee, which is working on a technical blueprint for the ambitious plan. The GSTPA is coordinated by Anthony Kirby out of London. He previously headed Securities Traffic Development for SWIFT (Society for Worldwide Interbank Financial Telecommunications). The committee is talking with several Asian firms about joining the group.
The Candidates
In June 1998, about 100 vendors expressed interest in bidding for the project. A subset of that group was then invited back to submit a response to GSTPA's RFI. That required the vendors to outline their qualifications to complete the project. The committee is now reviewing those vendor responses. Bidders participating in the final Request for Proposal (RFP) phase will be announced soon. Crosby says the entire selection process will be completed by Thanksgiving.
The GSTPA did not disclose estimates for the project. But according to a story in The Wall Street Journal, technology providers estimated the cost of building the new system at between $60 million and $100 million. Those estimates do not include the price tag for individual firm's plug-ins, so-called Participant Access Modules (PAM), for the TFM application.
The GSTPA plans to release a study that will justify the cost of building the new system. The study will examine the costs and savings for participating firms.
Crosby says the cost to build the system will be recouped in part by savings achieved in reducing "failed" cross border trades. "There is a strong and compelling business case. There will be significant savings for the industry," he said.
The Big Guns
Several international firms and financial utilities have submitted bids to build the new system. These include the New York-based Depository Trust Company and SWIFT in partnership with Oracle Corp., Andersen Consulting and Hewlett-Packard. Computer giant IBM announced plans in September and teamed with Reuters Group and Equant N.V. to compete for the trophy project. At the same time, Big Blue inked a deal with PaceMaker software. That software would handle post-trade data coming into IBM middleware applications for transaction processing.
Tom Shaw, IBM's executive in charge of securities processing, says the TFM project is based on standards that include messages and data elements transmitted between the participating firms' access modules and the TFM. Shaw says the system will also be based on XML (eXtensible Markup Language), the Internet coding standard that utilizes "tags" to describe data elements within a message.
(XML, for example, would enable a message to identify itself as either a notice of execution or allocation message, and to describe the specific elements and values for that particular message.)
Of course, it is not certain that the TFM technology will fly with financial institutions. Some, like Boston-based quantitative investment firm Franklin Portfolio Associates, said it will consider the system as a replacement for its current manual processing system. That involves printing trade tickets and then faxing them to U.S. custodian banks. The banks, in turn, then transmit instructions to sub-custodian counterparties overseas.
Gregg Pendergast, head of operations at Franklin Portfolio, said the firm is attracted to TFM, in part because it will link a broader set of market participants than a SWIFT network, which it currently uses.
"SWIFT enables me to transmit instructions from my shop to a custodian bank," he said. "TFM gives me the ability to match with the broker dealer. The fact that all those parties will look at the same pieces of information and either agree or disagree at the front end is a huge benefit."
Still, Pendergast says the TFM technology will need a critical mass of users to be attractive. Pendergast cited DTC's ill-fated international ID system as an example of a global initiative that failed due to a lack of market participation. Crosy at KPMG responded that several GSTPA members have shown interest in TFM.
GSTPA's list of leading global members, which has already invested millions in the new system, seem likely to ensure at least some degree of market participation.
Pendergast also expressed concern about how the TFM would be regulated. Crosby replied that individual user firms will be subject to their own local regulators.