Back office lags in stp spending

Banks and asset management firms in Europe are still allocating low budgets to straight-through processing (STP) initiatives in the back and middle-office areas, claims a new research into European post trading, released at the annual Sibos conference in Sydney last month. This “underinvestment”, if compared to the front-office, would show companies’ clear “lack of commitment and attention” to STP projects, according to David Easthope, analyst at Celent, the financial consulting firm that conducted the study in collaboration with SmartStream Technologies. Fifty per cent of the banks and asset management companies surveyed throughout Europe devote less than 25 per cent of their IT budget to back and middle office functions, according to the study. Allocation and matching problems resulted to be the major issues in the equity markets, due to rising volumes and increasing complexity of cross-border trades. Only a quarter of the respondents acknowledged an improvement in STP conditions for equities in the middle and back-office in the past year, while fifty six per cent stated that they had stayed the same. However, while the current levels of STP for middle and back-office processes are estimated to be over 75 per cent in equities, as well as in fixed income, by 40 per cent of respondents, it is derivatives – in particular over the counter (OTC) derivatives – that present a major challenge. Only 10 per cent of the firms estimated STP was implemented in the “over 75 per cent” range in this asset class. Complexity of transactions, lack of standards and inconsistent data were indicated as the common causes of a lack of STP for derivatives, and confirmation and matching remain the biggest setbacks. Jervis Smith, managing director at Citigroup global transaction services (GTS), says. “I would take issue with the conclusions that people are not allocating enough resources to STP. I think people are finding different ways of tackling the problem. Some have allocated more time and resources to implementing STP, others have outsourced. “We have seen a trend over the last five years, and even more now, for asset management firms to outsource their middle and back office functions to processing organisations, most of which are banks,” he says. Increasing volumes “The volume of business that we are transacting has grown very rapidly over the years. We see that trend continuing and clearly bringing STP to our clients is not only a matter of reducing costs and risks, but also improving the quality of service,” he adds. Mr Smith says that it is always going to be easier to have STP for more commoditised securities, such as equities and fixed income. Even the exchange traded derivatives environment is highly STP. “The key issue for asset management firms and banks is with OTC derivatives. We are seeing an increasing demand from our clients to outsource their OTC derivatives processing to us. “It is really a scale driver that leads people to an outsourcing solution rather than buying the expertise,” Mr Smith adds that there very few operations people familiar with OTC derivatives on the market and it is probably not feasible for an asset management firm to hire these people. “As OTC derivatives will become more commoditised, STP will be an easier goal to pursue. But we are still a long way off for the OTC derivatives being commoditised,” claims Mr Smith. Michael Kempe, director, business model and harmonisation division, at Euroclear, also pointed out that it is very easy to look at the things that have not happened but the advances that the industry has made “have been quite enormous.” He also stresses the importance of harmonisation across all markets “because even if you have STP there are going to have risks and mistakes.” Euroclear recently announced that ?300m a year will be saved by the market as a whole by the work that Euroclear’s group is doing in terms of harmonising the different market processes, by implementing STP and other kinds of related issues.

‘It is really a scale driver that leads people to an outsourcing solution rather than buying in the expertise’ - Jervis Smith, Citigroup