TORONTO — Canadian investment management firms are going to spend next year extending the work they’ve done to automate the internal processes around securities trading to other parts of the financial services industry, according to data released at an event hosted by Microsoft on Thursday.
There
are already many firms actively developing projects around what’s called straight-through processing (STP), which would eliminate or minimize the manual steps around securities trading. According to IDC Canada, which surveyed 23 of the biggest firms in Canada on the subject last year, most of those projects are focused on the “”pre-trade”” pain point of getting data in a common format. This would include data passed between the firm’s portfolio managers, trading desk, compliance manager and back office.
In 2005, IDC says those projects will move to automating data processing between the firm and exchanges, brokers, custodians and industry utilities like FundServ. This is despite the fact that 52 per cent of those surveyed said they were either dissatisfied or very dissatisfied with their internal STP efforts.
“”This is the weakest-link-in-the-chain argument,”” said Jamie Sharp, an analyst at IDC who presented the data at the half-day Microsoft event for the financial services industry. “”They want to make sure they have all their own stuff worked out before they start connecting to the rest of the industry.””
Until last year, the financial services industry was racing to comply with a regulation that would require them to complete trading transactions one day after order execution, otherwise known as T+1 trading. Although the Canadian Capital Markets Association believes this will reduce the annual default risk by $53 million, but the deadline for T+1 has since been deferred. Sharp said at least 30 firms admitted this has delayed their STP projects, but most of them are still moving ahead.
“”This is an operational efficiency play. To do this to meet a regulatory requirement is missing the boat,”” he said.
Morgan Stanley, for example, is working with Vancouver-based Tap Solutions Inc. to come up with a single way to receive, distribute and use securities data. John Fleming, one of Morgan Stanley’s managing directors, said the first phase of this digital library went live in May. The next phases of the project, which will continue through 2005, will involve making sure securities data meets the firm’s quality standards.
“”Forget about processing trades clearly and never having a pair of hands touch it — what if that trade never should have been done in the first place?”” said Fleming, noting that many investment managers talk about trading volumes, but not about the number of trades that have to be reworked. “”We need to build quality into our process.””
Simon Blyth, Tap’s vice-president of sales, said Canada is poised to be a leader in STP because of its well-thought out regulatory regime and a cooperative culture within the financial services industry. That’s not the case on Wall Street, he said, where the fear of costly or inaccurate processing will drive STP.
“”There are people who are going to be running to keep their businesses alive, but we’re not there yet,”” he said.
FundServ, which operates a large investment fund transaction processing system, did a survey of its users to gauge the level of STP activity. According to Carol De Veau, the firm’s vice-president of business development, about 65 per cent of the trades it receives have been automated (meaning they started with an electronic order), and about 35 per cent were phoned in, faxed or brought in through a fund company. “”This gives us a lot of ammunition in going to our industry as a group,”” she said. “”Sponsorship for internal STP can come from the CEO, but sponsorship for external STP has to be industry-wide.””
Other Canadian firms working on STP include Scotia Capital, which is rolling out a platform from Wall Street Systems, and the Canadian Depository for Securities, which is deploying technology from Information Builders.
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