Increasing STP Rates – The Fantastic Four

No exciting trips out and about were to be had for this blog entry. Just me, a keyboard and several cups of terrible coffee. My topic this time is Straight Through Processing (STP) and I thought we’d have a very high level look at the factors that effect STP rates.

In the increasingly competitive Financial markets, the pressures resulting in diminishing commission rates and decreasing profit margins continue unabated. “Do more for less!” is the mantra of Operations managers in financial services institutions across the globe. Playing the STP rate game where you live and die by the changes in decimal places in your effective rate is not something to be taken lightly. But what factors come into play in STP? Where could operations managers look at to make improvements and what functionality should STP incorporate? Read on and we’ll look at these together.

The STP Fantastic Four

1 Static Data – The middle and back office space is populated by a number of your core applications. Each of these requires client and product data and, given the hectic day-to-day cross-silo activities, this data often gets out of sync, resulting in trade breaks at core application boundaries. Having a centralised “golden source” of static data that propagates client and product data to your core apps in real time whilst also being available to your STP process is absolutely fundamental to achieving the best STP rates.

2 Workflow – An STP system without a workflow and an efficient way to interrogate the trades within it presents a significant factor in STP risk. “This trade is broken – where is it now and how do I find out how it got there?” is the bench mark question that should be applied to any STP system. If you can’t find the trade quickly and gather the information required to help you fix it, then your middle and back office processes are actually working against you and your aim of increasing your STP Rate. Systems built around clear workflow models with user interfaces that allow the identification, interrogation and resolution of trade breaks without having to rely on the IT department are essential in the STP arms race.

3 Rules Engine – All STP systems have rules that determine what happens under what circumstances, which data is mapped for a certain scenario and which core application(s) a trade needs to be loaded to. Unfortunately, a lot of STP processes contain rules that are spread across the entire system. This presents significant problems in making changes that may be required due to changes to data formats or workflows required in order to support exchanges, CCPs, customers and custodians. Having a centralised rules engine that contains all the processing for the system ensures that changes that are required can be made quickly, without the risk of missing a hidden rule and impacting your STP rate. However, be very wary of STP systems that allow “on-the-fly” routing rule changes unless you are keen to expose your operations department to the train wreck that can often accompany the “glib one-liner” change to rules.

4 STEP capability – Despite your drive to increase STP rates, it is likely that trade Breaks will still occur. Having an STP system with Straight Through Exception Processing (STEP) capabilities that can intelligently identify breaks, interrogate them and make a decision in order to fix them is a highly desirable asset. However, in the real world, it is unlikely that such expert systems could be maintained effectively and the risk of unexpected, automated “fixes” can be very real, potentially resulting in a negative impact on your STP rate. A more realistic target would be a STP system that witnesses a trade break being resolved and automatically applies the same fix to any other currently broken similar trades, and any arising in the future. For instance, a trade breaking because of a missing back office account could be fixed automatically when the missing back office account and related allocation rule were added to your static data golden source and your rules engine. Something to think seriously about.

If you can combine the above abilities into your STP processing, then you are on your way to driving your STP rates through the roof.