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STP: Shedding the Leftover Inefficiencies

This is a reprint of the article originally appearing on Waters Technology by Josephine Gallagher. Reprinted with permission.

Five years ago, when Erik Kaland, COO of Storebrand Asset Management, joined the firm, he inherited a problem. Norway’s largest investment manager was laboring under decades’ worth of built-up issues—structural inefficiencies; manual processes; custom-built technologies and fragmented systems architectures all combined to create a costly, ineffective technology base at the business.

Worse, some of the employees who had put this in place, or developed the platforms in the first place, had left the firm, leaving very few who knew how to fix the car when it broke down.

“The picture I was confronted with was that we had a lot of customization and many systems, more than 100 we counted at one point, and we no longer had the skillset in our employees to maintain and develop these further,” says Kaland. “It was very costly, and it reduced our agility and ability to onboard new types of solutions.”

The industry has spent decades trying to upgrade its technology stacks, improve efficiency and automate from the front office to the back office. However, due to the nature of buy-side technology development in past years, the build-up of multiple complex systems has meant that some asset managers are struggling to get their systems to communicate. It might seem odd in 2018, but the bulk are still trying to resolve the problem of straight-through processing (STP).


“It’s a kind of an 80/20 rule where the industry has gone a long way in the last 20 years to improve things but it is now at the difficult part, where to get to the next improvement, you have got to do some radical surgery,” says Jerry Norton, head of strategy, financial services at CGI, a technology consultancy.

Historically, asset managers have tended to approach their technology strategy much like it was a candy store, by picking and choosing platforms from various third parties, according to need or desire, and by building out proprietary systems. Problems then emerged when trying to bridge these technologies from multiple sources to create effective STP chains. Today, many heavyweight asset managers have reached a high grade of STP across their firms, often ranging at 90 percent or above, according to sources. However, those without the resources of the largest global money managers are still catching up on decades-old technology debt at a time when new challenges have emerged.

“They are really sitting on the edge, held back by their inability of time and budget and not really wanting to spend that on what runs, then suddenly they realize they have grown so big and are now under pressure to upgrade,” says Chitra Baskar, COO at fund administrator Viteos Fund Services. “Better to think ahead than have to execute under pressure.”

For many, that pressure has already arrived. A combination of new practices around settlement discipline, owing to Target2-Securities in Europe, and the recent Securities and Exchange Commission (SEC) ruling on T+2 settlement in the US, for instance, have forced operational processes to be accomplished faster than ever before. Outside of equities, the same pressure is being felt in fixed income and derivatives, owing to reporting mandates in rules such as the Dodd-Frank Act’s Title VII, the European Market Infrastructure Regulation, and the revised Markets in Financial Instruments Directive (Mifid II).

For the first time, many buy-side firms are being forced to capture data intraday throughout each transaction lifecycle across all asset classes—a complex task by any measure, even for sophisticated quant shops, let alone smaller asset managers that may still rely on software that was regarded as outdated years ago.

CGI’s Norton explains that regulation has been a key driver in achieving STP but that in the lead-up to Mifid II some firms adopted compliance technologies in a hurry before tackling fundamental issues such as future-proofing their infrastructure and ensuring interoperability between old and new systems.

“A lot of Mifid II was done as workarounds and there are still a lot of reporting issues that are workarounds,” he says. “You can keep on applying a patch to a patch but at some point, you have got to start again and it is getting to that tipping point, I think.”

To add to the problem, some parts of the industry are still largely untouched by automation. One example of this includes the repo market, where transactions are still carried out using manual processes or basic technologies such as telephones, email, Microsoft Excel spreadsheets, and even faxes. EU lawmakers have recognized these operational issues in this segment of the market, and are set to endorse the Securities Financing Transaction Regulation (SFTR), which is expected to go live in first quarter of 2020.

One perspective is that achieving full STP can prove challenging without some level of industry standardization. A single asset manager may leverage technologies from various providers across multiple global jurisdictions. Today there is no common underlying thread that links these fragmented systems to operate seamlessly without the addition of multiple application programming interfaces (APIs).

This doesn’t just affect buy-side firms, but also the custodians and asset servicers who handle their processing. Lou Maiuri, head of Global Exchange and Global Markets at State Street says that some of the issues of surrounding the age-old problem of STP have emerged due to the lack of standardized processes or numbering systems for currency trading, repos or derivatives. He explains that as a major custodian, State Street may receive different versions of the same transactional data sent from individual counterparty platforms or vendors, making it increasingly difficult to enable seamless STP.

“As a custodian and in our role, we are dealing with every trading system on the planet,” says Maiuri. “So as people and attorneys come together to invent a new investment vehicle and trade it, we have got to get it into the system, strike a net-asset value, get it settled and deal with the safekeeping. And we don’t always know what these things are so there is a lot of what I would call friction in the machine.”

Therefore, the nature of trading on the buy side, which can stretch into the esoteric more often than not with customized instruments and exotic structured products, often hinders attempts to standardize.

“In the land of alternatives, there is no real ability to perform STP,” says Melanie Pickett, head of front-office solutions at Northern Trust. “In the European markets it is a little bit different with industry utilities and the ability to automate hedge funds subscriptions but there is no industry clearinghouse for these types of transactions.”

Under the Knife

There is no easy fix. Some firms, such as MEAG, which manages the assets of Munich Re and Ergo, have spent years getting to a point they are satisfied with.

“Our vision is for 100 percent STP across the liquid environment,” says Claudio-Peter Prutz, head of digital business services and organizational development at MEAG. “We truly believe in the value of our portfolio managers, as human beings, so our starting point would be the optimization of the portfolio. From there, it’s a matter of pressing a button and that is it.”

In the late 1990s, MEAG made a strategic move to upgrade and automate its front-office functionality. Today the Munich-based asset manager is striving for 100 percent STP across its front-to-back operations using a single automated platform from a third party, SimCorp. It’s an ambitious target and one that Prutz admits the firm might never reach. To date MEAG has attained 97 percent automation rate across its pre-trade compliance operations, including the management of 6,500 compliance rules and is aiming to close the remaining three percent across the front and back offices to differentiate itself from its competitors.

“I don’t think that we will ever reach 100 percent, but anything close to 100 percent is highly satisfying,” he adds. “Seamless automation, like in this example, can give you a significant competitive advantage.”

For others, it’s been a case of taking a sledgehammer to an aging infrastructure. This is what Storeband Asset Management’s Kaland had to do upon joining the firm. Kaland explains that as with many other buy-side firms, fee compression, diminishing returns and shift from active to passive investments influenced its decision to scale back its IT infrastructure. Since the restructuring, Storebrand has decommissioned multiple IT systems across order management, portfolio management, and external risk systems, resulting in annual savings of at least €1 million ($1.7 million).

“In this climate of higher costs and diminishing margins, you can either keep innovating, creating leading-edge solutions and services to sustain margins,” adds Kaland. “Or you can go the other way—grow aggressively, consolidate to reduce costs, and be competitive that way.”

Despite the fact that many firms hoping for a silver bullet are effectively in a long wait for a train that isn’t coming, others are hoping that the solution may lie in emerging technology. One, in particular, could prove fruitful in paving the way for improving STP.

Promising Technologies

Distributed-ledger technology (DLT), often referred to in shorthand as blockchain, is touted by many as one of the emerging technologies set to reshape certain aspects the financial markets and resolve some of the industry’s biggest challenges, at least in the post-trade space. As one concept, effective STP could be achieved by executing trades or processing data on a distributed ledger.

State Street’s Maiuri explains that blockchain technology could be used to create an industrywide securities master database, or an immutable book of record for trading all asset classes, where every investment instrument would have a globally recognized reference identifier. The idea is that each counterparty would have a transparent view and understanding of each investment instrument created, its transactional data, and how to distribute it.

“One concept here is that you can take these instruments and tokenize them using a blockchain and get rid of some of these problems,” he says. “This technology could tokenize assets in a way that starts to distribute them in a way that is a lot cleaner.”

State Street is currently exploring this possibility of using private blockchain technology to tackle some of the problems relevant to STP and standardization, for the trading of securities or alternatives. MEAG’s Prutz further echoes this perspective in that blockchain technology holds a great deal of potential in resolving some of the operational issues on the buy side, but that the sell-side community is under greater pressure to innovate in this space. He says there are other emerging technologies that the asset manager is exploring and developing to increase its level of automation across the firm.

“As an asset manager, we have to focus on efficiency,” he adds. “There are some promising developments such as robotics and machine learning, which could deliver more automation and less manual interaction. That is something we are working on as well.”

For those with the budget to do so, some major buy-side firms are actively exploring the use of artificial intelligence (AI) technology for many front- and middle-office tasks. AI can be used to minimize the need for manual processes, as intelligent machines have the capability to process modern-day volumes of data in a short period of time, reduce the possibility of human error, improve data quality and make STP more efficient.

“Really, STP should look at reducing the number of times you bring in the same data and really enhance your data management capabilities,” says Viteos’ Baskar. “And therefore STP becomes a lot easier, simpler and something we can take on.”

She adds that STP can be enhanced by building out warehouses to normalize, clean and process the data. This can be used to enable the technology to more efficiently process the data throughout all event lifecycles and ensure it remains connected as possible at all points. Implementing an effective STP system throughout a firm can require many resources. But in today’s competitive landscape, with the increasing pressure of costs, it seems the STP problem is worth resolving now rather than holding off any longer.

“Everything needs additional people, time and money before you make this change,” says Baskar. “It is an inevitable thing. You have to consider how long you can push it and some days how to make this change because you are otherwise working off inefficient products.”

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