STRAIGHT THROUGH PROCESSING << From Client to Settlement >>

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STRAIGHT THROUGH PROCESSING ltlt From Client
to Settlement gtgt
Costache Roman Country Manager Romania
Moldova Bucharest, November 19, 2002
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Straight Through Processing
Straight Through Processing (STP) Enables
Seamless Communication between Parties
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What IT IS NOT Straight Through Processing
Why?
Exactly.
Exactly what?
Exactly why?
Exactly why what?
What?
Why?
Why what, exactly?
Why is he mad?
I dont know!
From Rosencrantz and Guildenstern Are Dead by
Eugene Ionesco
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Straight Through Processing in Finance
Straight Through Processing (STP) is the
seamless, electronic trade process from
pre-trade price discovery to full settlement in
all parts of the financial markets value chain.
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Why STP Retail Banking ?

• Larger volume of clients and operations

• Larger range of offered services

• Increased operational risk

• Increased requirement for high quality services
  at client

• All the above suitable to be addressed by STP

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The financial markets value chain
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Industry Enterprise STP
Institutions will only achieve maximum benefit if
STP is addressed both by individual enterprises
and by the industry as a whole
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Industry Drivers for STP

• Industry Initiatives (growth, globalisation,
  convergence)
• Market Restructuring (exchange consolidation,
  execution alternatives)
• Process Changes (T1)
• Regulatory Requirements (Basel II,.)
• Technology Advances (lower entry barriers)

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Enterprise drivers for STP
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Getting the Organization ready for STP
Standardisation of Data and Adoption of Standards
Re-engineering of the Business Process
Enterprise and Industry Integration
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STP Vision

• Seamless communication among parties
• Concurrent, not sequential, exchange of
  information
• Significant real-time processing, less batch
  processing
• Virtual processing, not physical processing

• Reduces operational risk
• Reduces settlement risk
• A catalyst for change
• improvement of lower cost structure
• more efficient market process and infrastructure

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Quantitative Approaches in Basel II Operational
Risk
Basel II

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Example settlement claims through unmatched
trades
Basel II operational risk loss events
Buyer
Seller
Bond-Trade
Sales Desk Bank A
Sales Desk Bank B
Cash
Deal Entry
Deal Entry
Interest claim
No deal entry
3,5 x 50 M x 1/365
Settlement system B
Settlement system A
Matching failure
Not due to IT system failure

• Failure of inadequate internal
  payment/settlement processes
• Losses through reconciliation failure
• Securities delivery errors
• Limit breach
• Insufficient capacity of people or systems to
  cope with volumes
• Missing deal ticket
• partly information fault
• e.g. Changing account Number
• incorrect data input

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Number of individual loss events by business line
and event type
gt 80
Source QIS II
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From loss data to loss distributions
Basel II Loss distribution approach
frequency
severity
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Different frequency/ impact types of loss events
Expected-Loss events
Unrealistic loss events

High frequency high impact
High frequency Low impact
High frequency High impact
Low frequency low impact

Low frequency Low impact
Low frequency High impact
Negligible small loss events
Fat-Tail events
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Reducing operational risk through STP?
Basel II advanced measurement approaches
Basel II advanced measurement approaches and STP
High frequency low impact
Low frequency high impact
High frequency low Impact
High frequency High Impact

Low frequency High Impact
Low frequency Low impact
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Typical situation
Order mgmt
Market data mgmt
Proprietary systems
Clearing settlement
Accounting
Risk mgmt
Trade capture
Credit mgmt
Portfolio mgmt
HTML/XML, Streaming, Wireless
Corporate treasurer
Retail broker
Private investor
In-house dealers
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and STP Vision
Traders, Sales, Customers, etc.
Accounting, Payment Custody, CRM etc.
Front / mid / back office OMS, Risk Applications,
Databases etc.
B2BIntegration
Portals
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Practical Case REUTERS STP Solution
Practical Case REUTERS STP Solution
TREASURY RISK MANAGEMENT- BACK-OFFICE CUSTODY
SERVICES
TIBCO Business Works

• Treasury BO operators
• Accounting
• NOSTRO/LORO
• custodian

• automated rates
• customer desk

• interbank dealers
• risk management

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Questions
It is not the answer that enlightens, but the
question. Eugène Ionesco (Découvertes, 1969)