There’s no T+1 deadline looming, but investment managers are focusing on straight-through processing as a means to get there, according to a recent report from IDC Canada and eClientscope Inc.
A 2004 deadline to move to T+1 trading — the completion of trading transactions one day after
order execution, rather than within the current three-day requirement — was abandoned last year.
“”These firms don’t have the appetite to wholesale replace their infrastructure and business practices,”” says Jamie Sharp, IDC Canada’s director of customer segments.
In place of T+1, the Canadian Capital Markets Association — a non-profit organization aimed at making Canada’s capital market more competitive — is promoting straight-through processing (STP) of trades.
“”STP is a means to get to T+1,”” says Sharp. And deadline or not, a T+1 regulation is inevitable, he says.
Under current regulations, the transaction is exposed to fluctuations in the market for three days — a potential disaster if there is a large movement in stock prices. The CCMA estimates the annual reduction in default risk of a T+1 regime at $53 million. The total benefit from STP and T+1 will be $190 million a year, the organization says.
The Ontario Teachers’ Pension Plan has been moving toward STP internally for more than four years. While reduced transaction costs and increased trading opportunities also drove the strategy, reducing that exposure was the clincher, according to Al Reesor, executive vice-president of member services and chief information officer at the OTPP.
“”We are extremely at the front end in managing risk,”” Reesor says.
STP is the seamless passing of trade information electronically, system-to-system, to all parties in the transaction chain without human intervention. To front-office staff used to faxing order information through the chain, “”it will be a change in behaviour and a change in systems,”” says Barbara Amsden, executive director of the CCMA.
Dan Houle, OTPP’s director of business applications, says the pension fund’s trading is entirely electronic — internally.
“”We’re very comfortable with the state we’re in,”” Houle says.
The OTPP has taken a hub-and-spoke approach to automating trading. An active data warehouse containing the necessary information serves as the hub; transaction applications all run off the hub like spokes.
Not all partners in the trading chain are integrated. For the last two years, OTPP has been focusing on better integration with counterparties and custodians.
“”Initially, it was spotty,”” Houle says, but in the last year, the situation has improved. Now, about 80 per cent of equities trading is done electronically.
Other asset classes haven’t adapted as quickly, largely because of the complexity of the trade. It’s much more difficult to model a derivative or option trade and capture it as an electronic transactions. Equity trades are relatively simple. They’re also higher in volume and smaller in value.
“”That’s where the biggest bang for your buck is,”” Houle says.
With an eye to integration with counterparties, the OTPP has built its system on widely used standards. FIX is the messaging protocol-of-choice for equities, and fixed income traders are taking a serious look. SWIFT is a dominant payment protocol. IDC sees increasing convergence between the latter two as the ISO 15022 data dictionary standard absorbs them.
Of the three phases of the trading process — pre-trade, trade and post-trade — the first is the major pain point, says Sharp. The investment managers surveyed for the study confirm this: Almost three-quarters flagged the pre-trade phase as a major challenge.
Consider, for example, an ethical trading portfolio, says Sharp. As it stands, there’s no automated way to prevent the manager from dealing in tobacco shares. Getting a handle on all the necessary pre-trade information is a challenge, since it’s distributed throughout the office and in disparate formats, says Amsden.
“”It could be paper, it could be books, it could be feeds, it could be dial-up-and-download,”” she says.
While the 800-pound gorilla of the Canadian STP software market may be Financial Models Company Inc. of Mississauga, Ont., the tools of choice are actually data sheets built in Access, Excel or similar desktop applications. It’s not an ideal solution, Sharp says.
“”They’re not necessarily built for collaboration,”” he notes.
Sharp estimates brokerages and wealth management firms will make almost $900 million in IT purchases in 2003.
