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Straight-through processing(STP)1is a method used by financial companies to speed up the transaction process and allow the transaction to be processed without manual intervention (straight-through).

It was developed for equities trading in the early 1990s in London for automated processing in the equity markets.

The process before STP was very antiquated: sales traders would have to fill in a deal ticket, blue for buy and red for sell. The order was invariably scribbled and mostly unreadable. Upon receiving the order, the trader would often execute an incorrect investment on the market. A runner picking up the ticket would input the order into the system to send out a contract note. For example, if the client wished to purchase 100,000 shares, but the trader only executed 10,000, the runner would send out the contract for 1,000. In those days, there was a T10 settlement so any errors were fixable. However, with the new introduction of T5, the settlement arena changed, and STP was born. To reduce the exposure of risk, failed settlement, there could only be one golden source of information and that it was the responsibility of the sales trader to be correct as they had the power to correct any discrepancies with the client directly.

The goal of STP is to reduce the time it takes to process a transaction, in order to increase the likelihood that a contract or an agreement is settled on time. The concept has also been transferred into other sectors including energy (oil, gas) trading and banking, and financial planning.1

Currently, the entire trade lifecycle, from initiation to settlement, is a complex labyrinth of manual processes that take several days. Such processing for equities transactions is commonly referred to asT+2(trade date plus two days) processing, as it usually takes two business days from the trade being executed to the trade being settled. This means investors who are selling a security must deliver the certificate within two business days, and investors who are buying securities must send payment within two business days. But this process comes with higher risks through the occurrence of unsettled trades. Market conditions fluctuate, meaning a two-day window brings an inherent risk of unexpected losses that investors may be unable to pay for, or settle, their transactions.

Industry practitioners, particularly in the United States, viewed STP as meaning same-day settlement or faster, ideally minutes or even seconds. The goal was to minimisesettlement riskfor the execution of a trade and its settlement and clearing to occur simultaneously. However, for this to be achieved, multiple market participants must realize high levels of STP. In particular, transaction data would need to be made available on a just-in-time basis, which is a considerably harder goal to achieve for the financial services community than the application of STP alone. After all, STP itself is merely an efficient use of computers fortransaction processing.

In the past, STP methods were used to helpfinancial marketfirms move to one-daytrade settlementof equitytransactions, as well as to meet the global demand resulting from the rapid growth of online trading. Now the concepts of STP are applied to reduce systemic andoperational riskand to improve certainty of settlement and minimize operationalcosts.

There is often confusionaccording to whom?within the trading world between STP and anelectronic communication network(ECN). Although they are similar initiatives, ECN connects orders with those of other traders as well as man liquidity provides. An ECN is also typically a bigger pool of orders than a standard STP.

When fully implemented, STP is able to provideasset managersbrokersanddealerscustodiansbanksand otherfinancial serviceswith benefits including shorter processing cycles, reduced settlement risk, and lower operating costs.2Some industry analysts believe that STP is not an achievable goal in the sense that firms are unlikely to find the cost/benefit to reach 100% automation.3Instead, they promote the idea of improving levels of internal STP within a firm while encouraging groups of firms to work together to improve the quality of the automation of transaction information between themselves, either bilaterally or as a community of users (external STP). Other analysts, however, believe that STP will be achieved with the emergence ofbusiness process interoperability.

Straight-through processing exists in other areas of financial services, such as payments processing456.

Payments may be non-STP due to various reasons7such as missing information, information which that is not in a machine understandable form (such as name and address rather than acode), or human-readable instructions Please credit urgently) or simply falls outside of rules for which the bank allows automatic processing (for example, payments of large value or in exotic currencies).

Traditionally, making payments involves many departments in a bank. Both initiating a payment to be sent and processing a received payment may take days. In the past, payments were initiated through numerous human-friendly (aka paper-based) means, such as a human through a paper order, over the phone, or via fax8. The payment order was input into the banks payment system, then confirmed by a supervisor. This confirmation ensured an accurate match of input versus order before sending the payment. When multiple banks, countries or currencies were involved, the process often took several hours. When the complexity of the payment was higher, the amount of labor increased and additional human intervention resulted in more risk of errors, longer processing time, and higher costs.

In most cases, banks levy charges for non-STP payments or for manual repairs. Alternatively, banks may not charge on a per repair basis, but rather levy heavierfeesforcorrespondentsthat provide lower quality (lower STP) payments9.

Straight Through Processing – STP. Investopedia

Frequently Asked Questions on Straight Through Processing. Securities and Exchange Board of India

STP and Credit Derivatives. Waters Technology

JRobert McKay.Payment STP Through High Quality Data.

Adaptive Intelligent Systems: Proceedings of the BANKAI workshop, Brussels, Belgium, 12-14 October 1992.

Ganesh Guruvayur.Challenges around STP in Payments.

Deepak Pareek.Rising to the Challenge: Five Barriers to STP in the Treasury Department.

Non-STP Fees – Whats Really Happening and Why?.

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This page was last edited on 9 April 2019, at 00:41

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