Straight Through Processing
Encyclopedia
Straight-through processing (STP) enables the entire trade process for capital market
s and payment
transactions to be conducted electronically without the need for re-keying or manual intervention, subject to legal and regulatory restrictions. The concept has also been transferred into other sectors including energy (oil, gas) trading and banking, and financial planning.
Currently, the entire trade lifecycle, from initiation to settlement, is a complex labyrinth of manual processes, taking several days. Such processing for equities transactions is commonly referred to as T+3
processing, as it usually takes three business days from the "Trade" being executed to the trade being settled. Industry practitioners, particularly in the US, viewed STP as meaning at least 'same-day' settlement or faster, ideally minutes or even seconds. The goal was to minimise settlement risk
for the execution of a trade and its settlement and clearing to occur simultaneously. However, for this to be achieved, multiple market participants must realize high levels of STP. In particular, transaction data would need to be made available on a just-in-time basis which is a considerably harder goal to achieve for the financial services community than the application of STP alone. After all, STP itself is merely an efficient use of computers for transaction processing
.
Historically, STP solutions were needed to help financial markets firms move to one-day trade
settlement of equity transactions
, as well as to meet the global demand resulting from the explosive growth of online trading. Now the concepts of STP are applied to reduce systemic and operational risk
and to improve certainty of settlement and minimize operational cost
s.
When fully realized, STP provides asset manager
s, broker/dealers, custodians, banks and other financial services players with tremendous benefits, including greatly shortened processing cycles, reduced settlement risk and lower operating costs. Some industry analysts believe that STP is not an achievable goal in the sense that firms are unlikely to find the cost/benefit to reach 100% automation. Instead they promote the idea of improving levels of internal STP within a firm while encouraging groups of firms to work together to improve the quality of the automation of transaction information between themselves, either bilaterally or as a community of users (external STP). Other analysts, however, believe that STP will be achieved with the emergence of business process interoperability
.
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
s and payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....
transactions to be conducted electronically without the need for re-keying or manual intervention, subject to legal and regulatory restrictions. The concept has also been transferred into other sectors including energy (oil, gas) trading and banking, and financial planning.
Currently, the entire trade lifecycle, from initiation to settlement, is a complex labyrinth of manual processes, taking several days. Such processing for equities transactions is commonly referred to as T+3
T+3
Settling Securities Transactions, T+3Investors must complete or "settle" their security transactions within three business days. This settlement cycle is known as "T+3," shorthand for "trade date plus three days."...
processing, as it usually takes three business days from the "Trade" being executed to the trade being settled. Industry practitioners, particularly in the US, viewed STP as meaning at least 'same-day' settlement or faster, ideally minutes or even seconds. The goal was to minimise settlement risk
Settlement risk
Settlement risk is the risk that a counterparty does not deliver a security or its value in cash per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value per the trade agreement....
for the execution of a trade and its settlement and clearing to occur simultaneously. However, for this to be achieved, multiple market participants must realize high levels of STP. In particular, transaction data would need to be made available on a just-in-time basis which is a considerably harder goal to achieve for the financial services community than the application of STP alone. After all, STP itself is merely an efficient use of computers for transaction processing
Transaction processing
In computer science, transaction processing is information processing that is divided into individual, indivisible operations, called transactions. Each transaction must succeed or fail as a complete unit; it cannot remain in an intermediate state...
.
Historically, STP solutions were needed to help financial markets firms move to one-day trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
settlement of equity transactions
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
, as well as to meet the global demand resulting from the explosive growth of online trading. Now the concepts of STP are applied to reduce systemic and operational risk
Operational risk
An operational risk is, as the name suggests, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates...
and to improve certainty of settlement and minimize operational cost
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
s.
When fully realized, STP provides asset manager
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
s, broker/dealers, custodians, banks and other financial services players with tremendous benefits, including greatly shortened processing cycles, reduced settlement risk and lower operating costs. Some industry analysts believe that STP is not an achievable goal in the sense that firms are unlikely to find the cost/benefit to reach 100% automation. Instead they promote the idea of improving levels of internal STP within a firm while encouraging groups of firms to work together to improve the quality of the automation of transaction information between themselves, either bilaterally or as a community of users (external STP). Other analysts, however, believe that STP will be achieved with the emergence of business process interoperability
Business process interoperability
Business process interoperability is a property referring to the ability of diverse business processes to work together, to so called "inter-operate"....
.
See also
- Business process interoperabilityBusiness process interoperabilityBusiness process interoperability is a property referring to the ability of diverse business processes to work together, to so called "inter-operate"....
- Electronic tradingElectronic tradingElectronic trading, sometimes called etrading, is a method of trading securities , foreign exchange or financial derivatives electronically...