STP Whitepaper Straight-­‐Through Processing Spotlight Issue Date: 28 September 2010 Version: 1.0 Final Author: Simon Leighton-­‐Porter This whitepaper presents an innovative approach to achieving pre-­‐matching across multiple products and markets, showing how true STP can be achieved using Rapid Addition’s products. apid Addition -­‐ STP Whitepaper Contents Introduction .............................................................................................................................. 2 About Rapid Addition ................................................................................................................ 2 About the author, Simon-­‐Leighton Porter ................................................................................ 2 A New Approach to Straight-­‐Through-­‐Processing (STP) ........................................................... 3 RA-­‐ShortCut in the Client’s Environment .................................................................................. 5 RA-­‐ShortCut as a Service ........................................................................................................... 6 RA-­‐ShortCut in the Broker’s Environment ................................................................................ 7 Working with External Data Sources ......................................................................................... 8 Summary ................................................................................................................................. 11 Copyright Rapid Addition 2011 Page 1 of 12 apid Addition -­‐ STP Whitepaper Introduction The role of the FIX Protocol in the pre-­‐trade and trading space is well-­‐known. Less so are its capabilities in the post-­‐trade environment. This paper aims to show how FIX can be used to deliver Straight-­‐Through-­‐Processing and how the experience can be enhanced with the use of Rapid Addition’s software. About Rapid Addition With over 70 clients worldwide, including stock exchanges, Rapid Addition is the leading provider of FIX and FAST related software solutions to the global financial community. Rapid Addition is a technology partner of Microsoft and founding member of the Intel Low Latency Labs. Rapid Addition is the only FIX vendor to continuously test their products in the labs. RA-­‐Cheetah, the flagship FIX engine, gives a consistent low-­‐latency performance and is the only FIX engine to provide this level of consistent measurement. RA-­‐Cheetah™ and GRHub™ (our order routing software) run on our advanced low-­‐latency GenerationZero™ technology, which, inter-­‐alia ensures no garbage collection. For further information, please visit www.rapidaddition.com About the author, Simon-­‐Leighton Porter Simon Leighton-­‐Porter is COO of Rapid Addition. Having worked in investment banking for over 18 years and has extensive experience of the front office both from a business and IT perspective. Prior to joining Rapid Addition, Simon spent over 10 years with Citigroup. His product experience covers equities, fixed income, and derivatives. He is a member of the FIX Global Technical Committee, is chairman of the FIX FX OTC Options Working Group, and represented FIX Protocol Limited on the MiFID Joint Working Group. In 2006 he received the ISITC Europe Personal Contribution to Operational Efficiency Award. Copyright Rapid Addition 2011 Page 2 of 12 apid Addition -­‐ STP Whitepaper A New Approach to Straight-­‐Through-­‐Processing (STP) For many institutions, even the largest, true STP remains an aspiration, rather than a reality. The complexities of cross-­‐border, multi-­‐asset class trading and a processing environment, frequently combined with legacy systems, often make the costs of achieving process automation prohibitive. However, the flexibility offered by RA-­‐ShortCut™, Rapid Additions FIX Adaptor for Microsoft’s BizTalk, unlike other workflow solutions, mean it can be used practically anywhere in the business process. The diagrams presented in this paper follow the business flows between a customer of a broker (private banks; hedge funds; other brokers; asset managers; corporate treasury etc). 1. FIX MsgType=8
(Execution Report) OrderStatus=Filled
$
BROKER
ShortCut
$
1. FIX MsgType=8
(Execution Report)
OrderStatus=Filled
BROKER
Contains...
Execution Details
Side (Buy or Sell)
Instrument
Account
Price
Trade Date
Settlement Date
etc
Rapid Addition
ShortCut
ShortCut Rules and Orchestrations Provide:
Net money
Settlement instructions
Custom mapping and translations
Custom business rules
Validation and reconciliation
Feeds to accounting and position-keeping
systems
etc
ShortCut Output Examples Include:
1. Fully-populated MT54X
2. FIX MsgType=X containing XML
representation of the MT54X
3. Custom-format settlement instructions
4. Drop copies
5. Transparency reporting
This diagram shows just some of the mapping, workflow and business process functionality available from Rapid Addition’s ShortCut product. A key point to remember is that ShortCut can sit anywhere in the process, e.g.:
Execution Details
q Side (Buy or Sell)
q Instrument
q Account
q Price
q Trade Date
q Settlement Date
q Etc...
ShortCut Verticals
q Net Money
q Settlement instructions
q Custom mapping & translations
q Custom business rules
q Validation & reconciliation
q Feeds to accounting systems
q Feeds to position-­‐keeping systems
q Etc...
q As part of a routing hub
q On a network provider’s infrastructure
q The broker’s infrastructure
q The client’s infrastructure $
Example ShortCut Output
Fully populated MT54X
INTERNAL
FIX MsgType=X with XML representation of MT54X
Custom-­‐format SSIs
$
Drop copies
Output can be routed to any destination, for example:
q Customer
q Settlement Agent
Transparency reporting
EXTERNAL
Figure 1 Figure-­‐1 shows the FIX conversation from the point where the broker sends a final Execution Report message indicating that the order is filled or done for the day. This message contains the information necessary to settle the trade, such as: •
•
•
•
•
Whether it was a Buy or a Sell; The instrument identifier; Price; Quantity; Trade date; Copyright Rapid Addition 2011 Page 3 of 12 apid Addition -­‐ STP Whitepaper •
•
Settlement date; Etc… If not supplied on the Execution Report, RA-­‐ShortCut™ can be used to: •
•
retrieve and derive settlement instructions for all parties; calculate net money and apply allocation/confirmation details. Copyright Rapid Addition 2011 Page 4 of 12 apid Addition -­‐ STP Whitepaper RA-­‐ShortCut in the Client’s Environment Figure 2 presents an example shows how RA-­‐ShortCut can be used within the client’s infrastructure. 1. MsgType=D
New Order Single
$
$
2. MsgType=8
Execution Report
OrderStatus=Filled
CUSTOMER
BROKER
Execution Details
ShortCut
$
1. FIX MsgType=8
(Execution Report)
OrderStatus=Filled
BROKER
Contains...
Execution Details
Side (Buy or Sell)
Instrument
Account
Price
Trade Date
Settlement Date
etc
ShortCut Rules and Orchestrations Provide:
Net money
Settlement instructions
Custom mapping and translations
Custom business rules
Validation and reconciliation
Feeds to accounting and position-keeping
systems
etc
Rapid Addition
ShortCut
ShortCut Output Examples Include:
1. Fully-populated MT54X
2. FIX MsgType=X containing XML
representation of the MT54X
3. Custom-format settlement instructions
4. Drop copies
5. Transparency reporting
Fully-populated
Settlement message:
MT54X/XML/Custom format
$
SETTLEMENT AGENT
(Custodian, Outsource Provider, CSD, etc)
Figure 2 In this instance, the execution details from the FIX message are consumed by RA-­‐ShortCut which could, for example, carry out some of the following tasks: •
•
•
•
•
•
Reconciliation Posting to internal books and records Internal reporting Regulatory reporting Retrieval of standing settlement instructions Creation of a fully-­‐populated SWIFT MT54X message for onward transmission to its settlement provider Copyright Rapid Addition 2011 Page 5 of 12 apid Addition -­‐ STP Whitepaper RA-­‐ShortCut as a Service RA-­‐ShortCut also offers opportunities to network and routing hub providers. In Figure 3, we see how RA-­‐ShortCut can be offered as a service to any participants using the network or hub. ShortCut on an External Network
ShortCut can act as a routing hub or form part of
an external provider’s trading network
ShortCut
$
1. FIX MsgType=8
(Execution Report)
OrderStatus=Filled
BROKER
Contains...
Execution Details
Side (Buy or Sell)
Instrument
Account
Price
Trade Date
Settlement Date
etc
Rapid Addition
ShortCut
1. MsgType=D
New Order Single
2. MsgType=8
Execution Report
OrderStatus=Filled
$
Populated
MT54x message
for client to check
and route
ShortCut Rules and Orchestrations Provide:
Net money
Settlement instructions
Custom mapping and translations
Custom business rules
Validation and reconciliation
Feeds to accounting and position-keeping
systems
etc
ShortCut Output Examples Include:
1. Fully-populated MT54X
2. FIX MsgType=X containing XML
representation of the MT54X
3. Custom-format settlement instructions
4. Drop copies
5. Transparency reporting
MT54X Content
No
1. MsgType=D
New Order Single
2. MsgType=8
Execution Report
OrderStatus=Filled
Client allows 3rd-­‐
party to send MT54X?
CUSTOMER
$
BROKER
Yes
Populated MT54x message
$
SETTLEMENT AGENT
(Custodian, Outsource Provider, CSD, etc)
Figure 3 Here we see that RA-­‐ShortCut can be configured with business rules that determine whether or not, and under which circumstances, the user firm authorises the provider to send SWIFT MT54X messages on its behalf. The sending of such messages could, for example, be dependent on the receipt of a FIX Execution Acknowledgement message from the customer. Copyright Rapid Addition 2011 Page 6 of 12 apid Addition -­‐ STP Whitepaper RA-­‐ShortCut in the Broker’s Environment Finally, Figure 4 shows how RA-­‐ShortCut can be used within the broker’s environment. If, for example, the broker is acting as prime broker to its customer, once the trade details are agreed, all settlement instruction processing can be handled in-­‐house, thus taking the customer out of the settlement process altogether. ShortCut as Part of the Broker’s Infrastructure
In this instance, the client has given authority
to the broker to generate settlement
instructions on its behalf
1. MsgType=D
New Order Single
$
$
2. MsgType=8
Execution Report
OrderStatus=Filled
CUSTOMER
BROKER
Execution Details
ShortCut
$
1. FIX MsgType=8
(Execution Report)
OrderStatus=Filled
BROKER
Contains...
Execution Details
Side (Buy or Sell)
Instrument
Account
Price
Trade Date
Settlement Date
etc
ShortCut Rules and Orchestrations Provide:
Net money
Settlement instructions
Custom mapping and translations
Custom business rules
Validation and reconciliation
Feeds to accounting and position-keeping
systems
etc
Rapid Addition
ShortCut
ShortCut Output Examples Include:
1. Fully-populated MT54X
2. FIX MsgType=X containing XML
representation of the MT54X
3. Custom-format settlement instructions
4. Drop copies
5. Transparency reporting
Fully-populated
Settlement message:
MT54X/XML/Custom format
$
SETTLEMENT AGENT
(Custodian, Outsource Provider, CSD, etc)
Figure 4 Copyright Rapid Addition 2011 Page 7 of 12 apid Addition -­‐ STP Whitepaper Working with External Data Sources With an increased emphasis on the outsourcing of data management, particularly where legal entity data and settlement instructions are concerned, workflow tools like RA-­‐ShortCut offer an opportunity to take the automation of data maintenance and of the multi-­‐party post-­‐trade conversations from aspiration to reality. All STP systems are vulnerable to any qualitative failings of its participants’ ability to maintain and use reference data in general, and Standing Settlement Instruction (SSI) data in particular. If we break down the actual SSI maintenance process into its component parts then we see just how error-­‐prone it is. SSI maintenance process without RA-ShortCut
ii. Broker sends
SSIs to Investor
BROKER
SSI DATA
iii. Investor re-keys
broker SSIs
Broker
SSI data
i. Broker maintains
own SSIs
$
$
OWN SSI
DATA
OWN SSI
DATA
BROKER
4. Broker re-keys
investor SSIs
INVESTOR
2. Investor re-keys
own SSIs
3. Investor sends
SSIs to broker
Investor
SSI DATA
Investor
SSI data
$
Custodian/
Prime broker
1. Custodian/prime
broker sends
investor SSIs
Investor
SSI data
Figure 5 Here, the SSI paper trail that starts with the broker is shown in Roman numerals; the flow initiated by the custodian or prime broker in normal numbers. What’s needed is a solution to a long-­‐standing and costly problem. Bundling what is effectively an outsourced SSI data model with true workflow and message transformation capability would create a unique product offering. Copyright Rapid Addition 2011 Page 8 of 12 apid Addition -­‐ STP Whitepaper The following diagrams show how the problem could be fixed at minimal cost, greatly benefitting the various actors. Model 1 – Data Store
$
SSI
DATA SOURCE
INVESTOR
Investor now
removed from SSI maintenance cycle
Broker may choose
to make their SSIs
available for look-up
$
BROKER
Custodian/prime broker
maintains investor SSIs directly via
central data source
$
Custodian/
Prime broker
Figure 6 In Figure 6, executing brokers, prime brokers and custodians make their own and their customers’ (in the case of custodians and prime brokers) SSIs available via a single data source. The major advantage here is that it greatly shortens the SSI paper-­‐chase and keeps responsibility for SSI data in the hands of those entities which “own” the data: the custodians/prime brokers and the executing brokers. Copyright Rapid Addition 2011 Page 9 of 12 apid Addition -­‐ STP Whitepaper Model 2 – Using the Data
$
$
SSI request
SSI
DATA SOURCE
SSI request
INVESTOR
BROKER
ShortCut pulls investor
SSI in response to
SSI request
$
Custodian/
Prime broker
Figure 7 Figure 7, above shows just one of the many ways in which matching and settlement parties can use the SSI data source. Here, the investor – a catch-­‐all term for hedge fund or investment manager – and the broker each initiate an SSI retrieval process. In the case of the broker, this request might go direct to the data source, whereas in the case of the investor, the request could be handled automatically via RA-­‐ShortCut, as shown in Figure 8, below. Copyright Rapid Addition 2011 Page 10 of 12 apid Addition -­‐ STP Whitepaper SSI details
$
$
SSI
DATA SOURCE
SSI request
BROKER
INVESTOR
SSI request
RA-ShortCut pulls investor
SSI in response to
SSI request
SSI-enriched
MT515
RA-ShortCut
$
CSD
1. FIX MsgType=8
(Execution Report)
OrderStatus=Filled
BROKER
Contains...
Execution Details
Side (Buy or Sell)
Instrument
Account
Price
Trade Date
Settlement Date
etc
Rapid Addition
ShortCut
ShortCut Rules and Orchestrations Provide:
Net money
Settlement instructions
Custom mapping and translations
Custom business rules
Validation and reconciliation
Feeds to accounting and position-keeping
systems
etc
ShortCut Output Examples Include:
1. Fully-populated MT54X
2. FIX MsgType=X containing XML
representation of the MT54X
3. Custom-format settlement instructions
4. Drop copies
5. Transparency reporting
$
SSI-enriched
MT515
SSI details
Custodian/
Prime broker
Figure 8 Here, the investor initiates the SSI look up by sending, for example, a FIX Execution Report message (done for the day) to the prime broker. RA-­‐Shortcut receives the message, recognises that an SSI look-­‐up is required and retrieves SSIs based on: executing broker, instrument type, PSET etc. Once again, it should be stressed that the SSI data source in this diagram could be practically anywhere in the process: external to all parties; in the prime-­‐
broker’s infrastructure; in the hedge fund’s infrastructure etc. Summary What we at Rapid Addition are proposing is a genuinely innovative approach to achieving pre-­‐matching across multiple products and markets. By integrating RA-­‐ShortCut into the process flow, most of the problems associated with data and message standard incompatibilities are eliminated, thus reducing participants’ error rates, costs and risks. This approach can also dramatically improve users’ ability to retrieve, translate, and validate the SSI data that are key to the success of the settlement process. It also makes the creation and use of a centralised SSI data source a workable reality. Copyright Rapid Addition 2011 Page 11 of 12