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Straight Talk On Straight-through Processing Governance Starts With Shareholders

By: Thomas MacMillan

Why should you care about straight-through-processing (STP)? To start, inefficient securities transaction processing costs investors $140 million a year, according to a 2002 Cap Gemini Ernst and Young survey. Thomas MacMillan, chair of the Canadian Capital Markets Association, examines how STPcan help reduce the high operating costs for investment managers, broker/dealers, custodians, and others in the securities industry which ultimately result in lower investment returns.

When the markets are up, investors tend to ignore how many points processing inefficiencies can shave off their net income. But in today’s more challenging environment, this cannot be ignored. Plans to improve operational efficiency on an industry level began about four years ago, when markets were good. Even in today’s tough times, budgets for operational efficiency improvements haven’t been slashed. For those holding the purse strings, straight-through-processing (STP) is the answer to expense management and a way to improve client service and attract new clients.

What does STP mean?

Well, that depends. If you ask eight securities industry participants to define STP for securities transactions, you’ll get nine different answers. But each answer will have a common goal: seamlessly and quickly passing accurate financial information electronically – on a system-to-system basis – to all parties in the end-to-end securities transaction chain without manual handling or redundant processing.

Why is STP so important?

STP will:

How can STP become a reality?

STP won’t just happen because it makes good business sense and it saves us hundreds of millions of dollars in the process. It will take a critical mass of securities industry participants saying “I’m fed up with the current process and I’m not going to take it any more” coupled with fear – “can we really compete against U.S. markets if we don’t do anything?”

It is for these reasons that the Canadian Capital Markets Association (CCMA) was created in 2000. The CCMA is a federally incorporated, not-for-profit organization comprised of firms and associations such as the Pension Investment Association of Canada, the Association of Canadian Pension Management, the Investment Counsel Association of Canada, the Investment Dealers Association of Canada, the Canadian Bankers Association, and the Security Transfer Association of Canada. It was launched to identify, analyze, and recommend ways to meet the challenges and opportunities facing Canadian and international capital markets. Its mission is to enhance the competitiveness of Canada’s capital markets through a forum of industry experts who provide leadership and direction to the investment community. Its core purpose today is to promote straight-through processing strategies. Made up of representatives from all parts of Canada’s capital markets, the CCMA will promote Canada’s evolution to STP across all industry segments.

CCMA participants have contributed more than 55,000 hours to STP cross-industry efforts to date. The following broad targets have been established:  December 2003 – Industry standards and best practices to be published  December 2004 – Legislative, regulatory, and rule changes to be enacted  June 2005 – Industry-wide STP to be implemented. Furthermore, there are the following specific targets for the institutional market:

What can Canadian institutional investment managers expect to gain from STP?

There are a number of benefits STP can bring to the institutional investment manager, including:

Where are we on the road to implementing STP?

Industry participants, with the CCMA, are developing best practices, standards, and metrics to monitor progress towards achieving best practices and standards, with a draft paper to be released for public comment in June of 2003.

Over the next year, the CCMA will also be involved in a number of important industry initiatives, including:

These and more initiatives are expected to be in place within a year and be supported by any requested legal changes by December 2004. This will enable participants to implement STP on a cross-securities- industry basis for debt, equity, and fund trades by the target date of June 2005.

Canada is not grappling with these challenges alone. Recently issued reports by the Group of Thirty, the Committee on Payment and Settlement Systems/International Organization of Securities Commissions, and others include many recommendations that will bring markets around the world closer to STP domestically and globally.

STP for the Pension Fund Business?

As described above, STP benefits for pension and investment funds run from earning the best possible return on investment to reducing risks to improved corporate governance and due diligence. Pension and investment funds should be asking their managers and suppliers STP-related questions, for example:

It doesn’t matter that you’re not directly involved in the trade or investment decisionmaking process. What matters is that your fund is processed in the most efficient manner. This is why it’s important for you to challenge your suppliers and talk to your counter-parties.

Thomas MacMillan is chair of the Canadian Capital Markets Association.

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