What is Straight Through Processing?
Straight-through Processing (“STP”) is a mechanism that automates the end-to-end processing of transactions of the financial instruments. It involves the use of a single system to process or control all elements of the work-flow of a financial transaction, including what is commonly known as the Front, Middle, and Back office, and General Ledger.
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In other words, STP can be defined as electronically capturing and processing transactions in one pass, from the point of first ‘deal’ to the final settlement. The ultimate goal of STP is to replace the traditional phone and fax confirmations with a completely automated loop, from pre-trade communication and trade deal capture through post-trade clearing and settlement.
How does STP work in the trade life cycle?
- The trade lifecycle is kicked off from the moment a trader or investor decides to buy or sell a security on the market. It involves every step the trade follows from the time a security is chosen to when it is matched with a counterparty, to the time it is settled; in fact, several other auxiliary steps, such as accounting and reporting, are also a result of the trade transaction.
The trade life cycle includes the following four processes:-
- Pre-trade: All the steps a trader takes before he or she creates an order for the trade are included in the pre-trade stage. It is the stage at which the trader analyses and chooses security to purchase or sell.
- Trade: The trade phase is the stage at which the order is created and routed to an exchange or such a marketplace where it can find the best counterparty and price.
- Post-trade: The obligations of each party and the money and securities exchanged are calculated in the post-trade phase.
- Post-settlement: The post-settlement phase includes risk management, accounting, reporting, and reconciliation.
- Straight through processing (STP) aims to automate as much of this lifecycle as possible, making systems confirm and match a trade, ensure that the correct amount of money is exchanged, conduct risk analytics, and build transaction accounts.
- Earlier, each and every transaction involves expensive re-entry of numerous data from paper documents and other sources vulnerable to discrepancies, inconsistencies, delays, and potential fraud due to human interference.
- Through the use of STP, orders are processed, confirmed, cleared, and settled more cost-effectively and with fewer errors in a shorter time span. In fact, due to STP, the entire trade life cycle is been now settled in two days (In India) meaning it takes two business days from the “trade” being executed to the trade being settled.
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Benefits of STP:-
Increased Processing Efficiency:
- STP allows real-time transactions to be performed seamlessly, allowing for more transactions at a lower cost and with fewer exceptions.
- Additionally, reconciliation efforts will be substantially reduced, with internal and external systems continuously reconciled on a near real-time basis.
Cost Reduction:
- Financial costs due to incorrectly executed payments or failed trades such as principal loss, penalties, and interest are largely reduced due to the implementation of STP.
- Other costs that are hidden and potentially more damaging such as employees’ time allocation, loss of business, opportunity costs, and a damaged reputation with clients, counterparts, and regulators are also reduced to a great extent.
Reducing Risk:
- STP offers an atmosphere of seamless, high transaction throughput, reducing the time between execution and settlement of trade and thereby reducing inherent risks.
Author: Keval Shah
About the Author: Keval Shah is a Chartered Accountant and FRM 2 Candidate. He is passionate about financial markets and loves to play Chess.
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