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Cash STP: getting the sell side and buy side to work together

Cash STP: getting the sell side and buy side to work together. James Spurdle, Client and Sales Support Manager, RBS Terri Van Praagh ASI, Director – Head of Market Activities, Baring Asset Management. Agenda. Background: what is ISITC Europe and What are the Working Groups?

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Cash STP: getting the sell side and buy side to work together

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  1. Cash STP: getting the sell side and buy side to work together James Spurdle, Client and Sales Support Manager, RBS Terri Van Praagh ASI, Director – Head of Market Activities, Baring Asset Management

  2. Agenda • Background: what is ISITC Europe and What are the Working Groups? • What is cash STP - how does it impact trading and operations? • What is being done to improve efficiencies? • Buy-side perspective of STP - same day affirmation (SDA) and SSI issues

  3. www.isitc-europe.org What is ISITC Europe? Environmental Issues Political/Social/Regulatory Standardisation Technical/Business Technology Software/Applications/Hardware Market Appetite For Collaboration Market Sentiment Bull/Bear Asset Investment Appetite (Derivatives/Debt/Cash/Equities) Industry Issues Identification And Scoping Industry Associations IMA/APCIMS/LIBA Standards Bodies ISO/SWIFT/FPL/FPML ISITC Europe Community Brokers Asset Managers Vendors Custodians Individuals Consultancies Utilities Industry Response Validation, Collaboration And Activity Agreed ISITC Europe Executive Working Group Working Group Working Group Working Group Working Group ISITC COLLATERAL: Requirement specifications White papers, Best practice guidelines and more ... ISITC Europe Specific Actions And Results (Collaboration When Agreed)

  4. www.isitc-europe.org ISITC Europe Working Groups *e.g. UCITS III/IV, MiFID, KYC/AML, T2S/Clearing & Settlement CC Data Investment Funds Alternative Investments Regulations STP/ Ops/Other Investment Funds ETC Best Practice Corporate Actions Claims Swaps Alt. Investments Incl. Derivatives BESG RegSIG XJSG Broker Forum Broker Forum RDSG Regulatory Instrument Client C/Parties Transactions Corp. Actions … Custodian Forum Custodian Forum IM Forum IM Forum Supplier Forum Vendor/Utility Forum IT Group Website IT Group Website Education Group Marketing PR Event Organisation Marketing Group Key: Existing WGs Proposed new WGs Proposed revised WGs

  5. www.isitc-europe.org e.g. FIX 5.0, ISO20022, XBRL, IBEIs… e.g. MiFID, MLD III, PSD/SEPA, T2S… e.g. CLOs, REITs, Emissions… e.g. BOAT, eCCP, PE-ACHs.… e.g. SOA, P2P, ESPs, Latency, Meta-data e.g. DMA, algos, MTFs, Dark Pools e.g. BPO, KPO, AO, … e.g. FMFG, Liquidity, Capital, Innovation… e.g. Coll. Mgmt, Islamic Fin., Research… e.g. Cross-margining, NAV Admin, Benchmarks… e.g. BRICS, Emerging, Regional, Havens… e.g. SLAs, Market Impact, STP… The increasing importance of risk and regulation New Regulations New Products New Standards New Technologies New Channels New Infrastructures New Strategies New Domains New Outsourcing New Geographies New Metrics New Asset Services Source: ISITC Sep 2007

  6. www.isitc-europe.org What is Cash STP? • Equities and Fixed Income Process • Involves the sell side and the buy side • Involves the Dealing Desk and Operations • Untouched by human hand –Fully automated • Measured from point of execution to settlement… • Requires accurate data and up-to-date systems • Requires standards and established market practices

  7. www.isitc-europe.org Impact on Trading and Operations • Market Turmoil – Need for reliable structure • Verification of trades is critical–Know your position • Manual and fax-based processes not sustainable • Automated and standard processes lead to risk reduction • Cost – a manual trade can cost as much as 5 times that of an automated trade • MiFID – States that ‘Best Execution’ is about the whole process, not just price • What are we doing about it?

  8. Cash Securities STP Working Party The Working party focus’ on Cash Equities and Fixed Income securities. Concentrate on the trade processing of Cash Securities including the allocation and confirmation processes. www.isitc.org

  9. www.isitc-europe.org Past achievements • ETC Code of Best Practice (2005) • 1996 Industry User Group (IUG) – First draft • 1999 Updated • 2005 Current Version in use • 2008/9 Proposed update

  10. www.isitc-europe.org Notice of Execution/Allocation/Confirmation/Affirmation • Model 1: Notice of Execution/Allocation/Confirmation/Affirmation.

  11. www.isitc-europe.org Block/Allocation/Confirmation/Affirmation • Model 2: Block/Allocation/Confirmation/Affirmation.

  12. www.isitc-europe.org Central Matching via Virtual Matching Utility • Model 3: Central Matching via Virtual Matching Utility.

  13. Work in progress • Standardisation of Management information • Standardisation of fails reporting • Alert Quality Analysis review

  14. www.isitc-europe.org Standardisation of Management information

  15. www.isitc-europe.org Apples with Apples

  16. www.isitc-europe.org Standardisation of fails reporting

  17. www.isitc-europe.org Alert Quality Analysis review • 32,112 records checked for Equity Market • 31% of Data is missing vital data required for Dutch Market • 25% of data is populated in an incorrect field or is invalid for custodian which when used will cause an unmatched item • 44% of data conforms with market standards to give STP

  18. www.isitc-europe.org STP Solution available • Bloomberg VCON • FIX 4.2, 4.4 and 5.0 • Omgeo Oasys Global and CTM • SWIFT 515, 509 and 517 • Xtrakter TRAX2

  19. www.isitc-europe.org Buy Side Perspective of STP IM Custodian 1) Trade execution/allocation (T) 7) Reconciliation/Failed trade monitoring 6) Settlement/ position reporting (S and S+1) 2) Trade matching with broker (by T+1 noon latest) 3) SWIFT instruction to Custodian (by T+1 p.m. latest) 5) Clearance and Settlement 4) Pre-Matched / Matched trade reporting (S-1)

  20. www.isitc-europe.org Where are the issues? IM Custodian 1) Trade execution/allocation (T) FIX? 7) Reconciliation/Failed trade monitoring 6) Settlement/ position reporting (S and S+1) 2) Trade matching with broker (by T+1 noon latest) Same Day Affirmation (SDA) Standard Settlement Instructions (SSI) 3) SWIFT instruction to Custodian (by T+1 p.m. latest) 5) Clearance and Settlement 4) Pre-Matched / Matched trade reporting (S-1)

  21. www.isitc-europe.org SDA • Same Day Affirmation - Benefits • Settlement failure rate doubles with non-automated parties • Failed rates drop to <0.5% for already automated parties • Allows prioritisation of workload • Enables quicker identification of problems

  22. www.isitc-europe.org SSI • Ex Shorts, between 80-90% of buy side trades fail due to incorrect SSI • Failed trades add 50% to the process cost of a trade • So what’s difficult? • Who has the data? • Who is responsible/liable for the upkeep? • When is that data available?

  23. www.isitc-europe.org Summary • ISITC Europe Bringing together all participants • Addressing issues through Cash STP Working Group • Issuing Best Practice Documentation • Assisting in the clean up of Alert • Promoting SDA – with Omgeo • But… • Remember, it’s taken 12 years to get this far!

  24. Questions

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