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FOXHAWKS :: Hot Challenges :: Straight Through Processing

 Full Front2Back / Front2Risk Straight Through Processing (STP)


The hottest financial vehicle has been structured products. Super-complex structures were invented and traded worldwide. While volumes have materially declined for such products, many institutions still have huge positions in their portfolios. Although many financial institutions may now focus more on plain vanilla products rather than super complex structures, they still have to manage the post-trade life cycle for these products until they expire and disappear from their portfolios. Simple and manageable products have lower margins and, therefore, the pressure to raise cost per unit is even higher.

In addition, because fulfilling additional regulatory requirements will further shrink margins, the costs generated from trade execution to booking in the general ledger need to be minimized to achieve necessary margins and, hence, profitability. Furthermore, costs to manage the post-trade life cycle for existing positions in complex products need to be minimized, which can only be achieved through a complete straight through process and a high degree of automation.

Listed and OTC derivatives need to be processed front2back by systems. Management of an entire position’s life cycle needs to be computerized and, where possible, fully automated.

Human intervention should only be required to handle exceptions.

Financial institutions need to be able to…

  • keep cost per business transaction at a minimum to maintain profitability and enable competitiveness; this can be achieved by eliminating manual intervention by increasing the STP rate
  • have a sling and simple system and a process landscape without fragmentation and redundancy because high complexity is a killer for STP
  • utilize standardized market data and methods across all systems, i.e., interest rate curves and the methodology utilized need to be the same for the front office and the back office systems
  • achieve high levels of automation across all asset classes and product types; OTC derivatives processing needs to be as automated as standard stock transaction processing
  • establish process flows that share information in almost real time (near time) and in both directions from front to back (or front to risk) or from back to front (or risk to front)
  • have a single system landscape for all business functions; redundant implementation of systems across the front, mid, back, and risk offices must be prevented; establishing systems for functional or departmental silos will create fragmentation and redundancy
  • standardize all interfaces and establish central process controls and business transaction management with state-of-the-art third-party software packages for ETL, ESB, middleware, and BTM (business transaction management)
  • minimize the number of failed transactions by relying on correct, complete, and timely data; according to experts, the major cause of transaction failure is "false data"


Importantly, STP does not stop at the posting of journal entries in the general ledger, which is implied by the term front2back. STP has to cover the complete process landscape through all systems. For example, a new transaction needs to be automatically visible in risk measurement, and collateral management needs to be made aware of new requirements.

Furthermore, STP is not a one-way communication channel. Back2front process flow is as essential as front2back. In other words, limits on credit lines and sensitivities or VaR established by the risk office need to be considered in pre-trade analytics before trade execution across all desks. STP entails two-way, or more, communication channel.

Institutions need central data transportation and a business process management component to steer and monitor all processes across an enterprise. Standardized Interfaces with common ETL (extract, transform, and load) capabilities, services-based integration (SOA) systems, business transaction management (BTM), and single point of data ownership, are key for the removal of overgrown and so-called "spaghetti-architectures." Utilizing such concepts is essential to establishing a nimble, sling, simple, understandable, and easily maintainable system landscape.

Another key action for institutions is the reduction of fragmentation and complexity. Consolidating systems and replacing legacy or spreadsheet-based processes with comprehensive systems will help institutions gain more thorough understanding of the system landscape and will reduce cost of ownership. More importantly, the associated operational risks are significantly reduced.

To create awareness of the importance of proper STP across the entire enterprise, institutions must be able to calculate cost per transaction and make such costs transparent. Doing this sounds simple, but most institutions have no clear understanding of their true cost per unit. Transparency will cause a major push in achieving real STP across the enterprise.

These are difficult challenges – not necessarily new, but for many institutions definitely hot challenges. In order to meet set deadlines and achieve expected results, special skill sets are required.

We at FOXHAWKS can help – by providing you with the right skill set at the right time.