STP v6

STPAre your shareholders suffering from STP deprivation?

As financial services companiesposition themselves for leadership inthe 21st century, they find themselvesin a vastly changed landscape.

The pace of mergers and acquisitions,skyrocketing trading volumes,dramatic increases in cross-borderinvestment, the advent of e-business—all represent enormousopportunity.

Capitalizing on the opportunityrequires the organizational agility thatarises from a highly efficientinfrastructure and exceptionalexecution capability. We all know howelusive that can be. Indeed, achievingoperational excellence to captureeconomic gain can sometimes feel likechasing the impossible dream.

But it doesn’t have to.

Are yourshareholders suffering from STPdeprivation?

Frankfurt

Trade processing cost calculations arebased on U.S. domestic and cross-borderunit costs and volumes. Transactions areconsidered cross-border when at least onetrade participant resides in a country otherthan the country where the instrumentbeing traded is issued.

Trade processing cost calculations arebased on U.S. domestic unit costs estima-tes of USD5.75 – USD10.75 and cross-borderunit cost estimates of USD35 -USD60. (for certain markets, cross- border costs

can be as high as USD100 – USD200). Unitcost calculations include internal (tech-

nology and operations) and external(vendor) trade processing costs

and are based on market infor-mation and client

experience.

USD2927

2523

2119

1715

1311

97

53

1 1998 1999* 2000* 2001* 2002* 2003* 2004*

Trade Processing Costs

in USD billions

Time

Higher End of RangeLower End of Range

Steady StateRange of Net Income

Increase over 4 years

(2001 - 2004):

USD10.4 - USD18.8 billion

Impact of STP

on Global Securities

Net Income

With globalization and consolidation markingour industry today, competition has intensified.Commercial, private and investment banks aremerging with brokerage and insuranceorganizations to produce fewer yet moreformidable competitors. Meanwhile, technologyis creating and will continue to create newmarkets, providing the backbone for unprece-dented products and services.

Large institutions, however, are often hinderedby huge investments in legacy systems that aredifficult to overhaul. So while new technologyand communication infrastructures provide newopportunities for leading financial servicesproviders, they also present opportunities forleapfrogging them.

How do you capitalize on these opportunities?By harnessing technology innovation andcombining it with superior business process toproduce operational excellence. This will fuel theagility necessary to not only move with themarkets, but arrive there first to stake a claim. Inthe end, this is what will enable serious players tocapture market share while controlling costs,bringing economic gains to their shareholders.

Pursuingshareholdervalue

Impact of STP

on U.S. Securities

Industry

What is your

company’s

daily volume?

USD 6.2 - USD11.9 billion

Range of

Net Income

Increase over

4 years

(2001 - 2004):

Trade processing cost calculationsare based on 1998 figures and donot reflect inflation.

Steady state based calculationsare based on projected volumesand unit costs. Unit costs areassumed to remain constant insteady state.

Net income increase scenarios arebased on industry estimates of up to 50% in potential cost savingsresulting from implementation ofindustry-wide STP.

Net income calculatedbefore taxes. ‘U.S. securities industry’is defined as including100% of U.S. domesticand 50% of cross-bordertransactions.

Over the next four years, STP would save the global securities industry betweenUSD10.4 billion and USD18.8 billion…

… and the U.S. securities industry as a whole between USD 6.2 billion and USD11.9 billion

STP impact on individual companiesattributes 100% of STP estimated cost-savings benefits to companies

with a daily volume range of 5,000 – 50,000, but only 70% of estimated cost-savings benefits to companies with

a daily volume range of 50,000 – 100,000 to account for assumed existing levels of internalSTP.

All calculations assume full ownership of whole trade process.

Tokyo

Sources include the SIA, SWIFT,DTC/NSCC, GSTPA and client project data. All analyses conducted exclusivelyby The Capital Markets Company.

Customers today are demanding speed, quality andthe ability to deal in a variety of products andtransact business across international borders withminimum risk.

STP (straight through processing), a long-timeimplementation challenge for financial servicesexecutives, provides for the seamless globalprocessing of trades from execution to settlementthrough to reporting. The benefits are well-known:lower unit costs, risk reduction, increased capacityand compressed cycle times—results that allowfinancial services providers to yield the level ofquality and service that clients are demanding.

While just one of several milestones to achievingoperational excellence in today’s environment, STP isthe most critical. In addition to bringing obviousbenefits to your sales and trading P&L, it eliminateserrors and increases the transparency of reporting toreduce operational risk. Also, by increasing sales andtrading efficiencies and maximizing synergies acrossall business lines, STP reduces the cost of doingbusiness and promotes a more efficient use ofbalance sheet and regulatory capital. This provides apathway to accelerating business growth. How? Byreducing time-to-market for new products andservices, re-capturing processing capacity, slowingthe rate of increase of technology investmentrequirements going forward and affording additionalcapital for value-added investments. Yourshareholders will reap the rewards.

STP: a keyenabler

Impact of

STP on

Individual

Companies

USD640 - USD900 million

What is your

company’s

daily volume?

This is Your Range of Net

Income Increase over 4 years

(2001 - 2004)




5,000 - 10,00010,000 - 25,000

25,000 - 50,00050,000 - 100,000

How much would you save?

London

Why now is the timeGlobal capital markets are exploding. Twenty-hour-a-day trading will soon be commonplace inthe major markets. Four billion shares a day willbe traded on average. Global equity marketcapitalization is doubling. Cross-borderinvestment is anticipated to rise by 25% annuallyin the next three years alone.

At the same time, barriers to entering the globalcapital markets arena are collapsing. Technologyinnovation coupled with the decreasing cost ofdoing business has paved the way for new entrantsand new breeds of players. Day trading, ECNs(Electronic Communication Networks),disintermediation (i.e., the provision of middleand/or back office services by an external party)—all are changing the rules.

Meanwhile, client service requirements are alsoexerting pressure to change. In addition to easyaccess to products and markets, customers areplacing a premium on value-added services suchas improved transaction reporting andinformation management across their activities.

In this dramatically changing environment, it’sabout survival of the fittest. Those who adapt—and, more importantly, differentiate themselves—will prevail in the end. And those who do not,will, quite simply, fail.

Are you ready?Leapfrogging the competition is risky business.

As you gear up for the new millennium, yourability to anticipate where your biggestopportunities are and, more importantly, how youbring them to fruition by being internallyprepared, will be your most critical successfactors. Infrastructure inefficiencies incurred overthe last decade—along with huge investmentsmade in "must-do" items like Y2K and the Euro—are and have been crucial roadblocks to overcome.

Ignore STP at your own riskOld business practices live long and die hard. Theseemingly endless struggle with implementingglobal straight through processing is a goodexample. However, this is one battle you cannotafford to lose. Addressing your sales and tradinginfrastructure limitations and inefficiencies willtranslate into capital gains that can be redirectedinto new business and improved client service. Aseamless, fully automated real-time transactionprocessing machine is the cornerstone ofcompetitive advantage and considerable value toclients and shareholders.

Consider the alternative. Can you afford themissed business opportunities? Can you sustainthe high unit costs, the exposure and risksassociated with cross-border processinginefficiencies and transaction failures? Can youafford to suffer lost revenues, low margins andnegative impact to earnings per share? If not, thetime is right to renew your quest for operationalexcellence.

How would your organization fare?

On a scale of one to five, with one being the lowest and five the highest, rate your level of confidencein stating the following:

My organization has the uniform approach to transaction processing required to support a trulyglobal presence. Automation is at a peak. Cross-border business is booming. We are ready for theanticipated doubling in trading volumes and tripling in cross-border activity.

My organization is well positioned to respond quickly and with minimum cost and risk to our clients’demands for new products in new marketplaces.

My organization is ready to take advantage of e-business opportunities. We have identified our mostprofitable opportunities and are prepared to make them happen. Disintermediation poses no threat.

My organization is fully prepared for extended trading hours. We have infinite capacity and havealready begun to shift our resources to market-making.

If your confidence level failed to reach at least a "3" on any of these statements, you should seriously consider accelerating your STP program.

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

While a long-time mantra of the financial servicesindustry, STP is often misunderstood. True STP isend-to-end or front-to-back—it encompasses thesystems and processes supporting the entire lifecycle of a trade, starting with activities leading toand including trade execution and ending withsettlement and transaction reporting.

To a large extent, the ability to achieve STP islimited because of dependence on external links tocounterparties and other participants in the tradecycle. The good news is that entities facilitatingfront and back end processes—securities exchangesand central securities depositories, respectively—arealready taking steps to enable STP. In addition,industry and service-provider initiatives areaddressing inter-organization connectivity and STPissues. These movements, however, account for only30% of the STP puzzle. It’s the remaining 70%,internal STP, which is the real challenge. But it’s alsowhat makes the greatest impact on your customersand shareholders.

Achieving STP is one challenge that you literallycannot afford to overlook. Even with an 80% end-to-end STP rate, the 20% of transactions thatrequire manual intervention or fail due to a lack ofSTP can account for up to 80% of your operationalexpenses. And while many institutions can lay claimto employing varying degrees of STP, particularlyregarding domestic trades in the U.S. and in majorEuropean markets, achieving STP globally—whichis where the biggest opportunity lies—is a differentstory.

Just as it is often forgotten that true STP means end-to-end, there is often disagreement on the measuresthat define it. In an ideal world (i.e., in the not-so-distant future when customers will no longer bewilling to pay for processing), internal STP—globalor domestic—is defined by the "10x10x1 rule": 10-cent unit cost, 10-second cycle time and a 1% or lessexception rate. In the real world, true STP translatesinto a 50% or more decrease in total processingcosts. It reduces end-to-end cross-border unit costsfrom USD35.00–USD60.00 to USD18.00–USD30.00and end-to-end domestic unit costs fromUSD5.00–USD10.00 to USD2.50–USD5.00 pertransaction, respectively. Unit costs continue todecrease as volumes rise.

Exchanges, clearing houses and central securitiesdepositories have reacted to the increased demand for newmarket entry and cross-border investment by movingtoward consolidation. In Europe, Asia and Latin America,local exchanges have formed alliances to consolidate accessto trading systems, making it easier for local participants toexecute transactions, especially in new products, and toaccommodate higher volumes of cross-border activity.European central securities depositories have alsoestablished bilateral links to form the European CentralSecurities Depository Association in order to improvecross-border collateralization, clearing and settlement byproviding a single point of entry into the European market.The more recent Cedel/Deutsche Börse and DepositoryTrust Company/National Securities Clearing Corporationagreements in Europe and the U.S., respectively, are otherexamples of this trend to consolidate. Similar initiatives toform regional depositories are underway in Eastern Europe,Asia, Africa and Latin America.

Meanwhile, regulators have been swift to react to the recentgrowth and continued anticipated rise in market activity.On the heels of recent market crises and industry threatsand challenges such as Y2K and the Euro, regulators aroundthe world have increased pressure to tighten riskmanagement to combat systemic risk. In the U.S., the SEChas strongly recommended the shortening of settlementcycles to one day after trade date ("T+1 settlement") by2002.

In response, key industry participants have taken steps toimplement STP on an industry-wide level.

The Global Straight Through Processing Association(GSTPA), for example, a conglomerate of globalcustodians, investment managers and broker-dealers, isaddressing the post-trade, pre-settlement chain. GSTPAproposes to create a core facility to which all parties canconnect to monitor transaction status. The SecuritiesIndustry Association (SIA) has formed subcommitteesfocusing on institutional matching, payment finality andother standardization issues in preparation for T+1settlement. The SIA initiatives are addressing industry-wideprocess flows from order management to settlement.

Financial services companies must clearly prepare for theseindustry events. Doing so, however, will only addressportions of the entire STP chain. Taking advantage of therequired review of your internal processes andinfrastructure to implement internal STP will put youahead of the curve.

STP: theway it is

Pieces of the puzzle

Paris

Outsourcing. Increasing technology costs,inconsistent internal processes, the cost ofretraining personnel—these are drivers foroutsourcing back end or "core" processing functionssuch as clearance, settlement and reporting.Outsourcing may well provide a relatively painless,cost-effective, viable solution. However, bear inmind that its efficiency depends on a vendor’sability to integrate with your in-house systems.

Intranet technology. A major trend emerging afterY2K is the improvement of electronic distributionsystems that provide products and services over theInternet. Revenue streams from e-business arepotentially extremely lucrative.

Remember, however, that the profitability of such aventure depends on operational excellence. Enterthe intranet. Intranet-based applications are alreadybeing used to access centralized reference data and,in some cases, are being connected to core systems.More sophisticated versions will enable completetasks, such as transaction reporting and repair, to beundertaken from any location. Even whole backoffice systems have been developed using the latestintranet technology. In addition to applying thistechnology to the trade processing cycle, considerwhat could happen if you connected your intranetto the Internet. The possibilities are endless.

To successfully and cost-effectively implement STP,you need to take stock of what you already haveworking for you. Conduct a quick but thoroughanalysis of the benefits, if any, you have gained fromthe investments you made in Y2K and the Euro: re-examine the current states of your systemsinfrastructure and business processes. Refine yourbusiness priorities, considering how they havechanged in light of external risk assessments andindustry events, current and planned. Next, evaluatethe availability of your resources and organizationalappetite for change. Ascertain where you arespending the most, and where your investmentdollar is reaping the most reward. How can youchannel resources to the areas that will bring themost benefit to all involved?

Once you have completed these analyses, takestrategic action:

Model STP at the organizational level. Prioritize STP implementation according to yourbusiness strategy, keeping in mind that STP is thekey facilitator for e-business. Identify isolated poc-kets of STP success and apply learnings to the biggerpicture. But first set a baseline for your STP targetsusing tools like ABC (activity-based costing) andbenchmarking, to ensure you are implementing STPonly where it makes economic sense. Appointchampions for end-to-end transaction processeswhom you hold accountable for results.

Design processes and build systems strategically,implement tactically. Understand the timing implications of industryinitiatives and their impact on your internalprocesses and address them in your overall strategy.Then place initial focus on your own problematicareas. Is there an opportunity to secure an early winby solving short-term needs while providing thebasis for a total solution? Your goal should be togain immediate payback to establish self-fundedimplementation.

Apply leading-edge process and technology innovation. Implementing STP presents an opportunity toprepare your systems architecture for futureenhancement, functionality and scalability andattain the highest level of business processefficiency. This is an investment that has thepotential to yield tremendous returns. Investsmart—do it right.

Capitalize on the opportunity to develop superior information products. The demand for information transparency andcontrol has never been higher. STP enables real-time, customizable internal reporting across clients,transactions and locations. Take advantage of it.Differentiate yourself early by planning for thetransformation of this capability into value-addedproducts and services for your clients.

Makeyourmove

Additionalfactors toconsiderbefore youget started

Despite today’s business options and technologicaladvances, implementation of an STP program isdaunting. It requires unwavering business andhuman resource commitment, not to mentionexpertise in process and systems reengineering, afirm grasp of leading technologies and a detailedunderstanding of the impact of industry initiativeson internal processes.

You might ask yourself if a consultant is in thefuture. Selecting one can, however, be a nightmarein itself. In doing so, keep in mind that a successful"consultant" will have, in addition to the knowledgeoutlined above, hands-on experience in developing,implementing and integrating front, middle andcore processes and systems. Moreover, a consultantwho is truly in a position to help you address yourSTP challenge will have a track record ofimplementing STP solutions for a variety offinancial services companies. The reality is notmany do.

One finalstep:buyerbeware

New York

© 1999 The Capital Markets Company

All rights reserved. All product names, company names and

registered trademarks in this document remain the property

of their respective owners.

North America

Joe AnastasioPartner

The Capital Markets Company

120 Broadway, 15th Floor

New York, NY 10271

USA

T +1 212 284 8600

F +1 212 284 8601


Wood Island, Suite 308

60E., Sir Francis Drake Blvd.

Larkspur, CA 94939

USA

T +1 415 461 1305

F +1 415 461 1398

United Kingdom

John OwenPartner


Clements House

14-18 Gresham Street

London EC2V 7JE

United Kingdom

T + 44 171 367 1000

F + 44 171 367 1001

Europe

Jos SchmittPartner


Groenenborgerlaan 16

2610 Antwerp

Belgium

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Imperiastraat 6

1930 Brussels

Belgium

T + 32 2 720 95 76

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Belgium

T + 32 10 45 54 91

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112, avenue Kleber

95116 Paris

France

T + 33 1 47 55 30 90

F + 33 1 47 55 30 25

The Capital Markets Company is the first company to focus on providing globalbusiness and technology solutions to players in the world’s capital markets.Our experts provide thought leadership, develop software components and formulate e-business solutions for financial institutions, central securities depositories and clearingand settlement houses. We offer solutions for STP (straight through processing), enter-prise wide risk management, clearing, settlement, custody, payments and e-business.

The Capital Markets Company brings together a group of both financial services andinformation technology practitioners with hands-on experience in providingsolutions for improving efficiency and managing risk in the capital markets. Ourexpertise includes the full range of business and technology project work —from IT strategy and back office re-engineering to large-scale systems implementations toglobal payments and transaction processing. High performance and shared commonvalues are critical to our goal of bringing the highest possible service to our clients,business partners and the financial community as a whole.

While the global capital markets are changing rapidly, The Capital Markets Company is keeping ahead of the pace. Our expertise in providing STP solutions is deeplyrooted in our partners’ successful track record of developing and implementing STPstrategies for numerous leading financial services companies. It also draws on their yearsof participation in financial services industry committees and working groups (includingmembership in various Securities Industry Association, New York Clearing House,Group of 30 and New York Stock Exchange committees, subcommittees and workinggroups). The Capital Markets Company’s broad offering for STP also includes a varietyof customizable software components that facilitate STP on an enterprise-wide level.

For more informationon our STP offerings,

please contact:

Documents

STP v6