SIAFIF STP Front Office White Paper - October 2003 - Final by tek31120

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									       Financial Information Forum


SIA/FIF STP Front Office Committee

 Identifying Obstacles and Potential
Solutions To Achieve STP in the Front
               Office
                     October 2003

                      Version 1.0


                         FINAL
  Please submit all inquiries to the SIA STP PMO at stp@sia.com.
                             Financial Information Forum
                             STP Front Office Committee

                   Identifying Obstacles and Potential Solutions
                        To Achieve STP in the Front Office


                                     Table of Contents

                                                                      Page

       Introduction                                                    3
              Figure 1. The Institutional Trade Process                6

I.     Order Submission                                                 8
       A. Trade Order Management
       B. Use of FIX Protocols
       C. Data Access
       D. Order Submission – Summary

               Figure 2. Buy-Side Process for Equities Transactions    13

II.    Security Master File                                             14
       A. Current Operations
       B. Areas that May Become Obstacles to STP
       C. Security Master File – Summary

III.   Account Master File                                              18
       A. New Account Set Up
       B. Monitoring Existing Accounts
       C. Industry Solutions
       D. Account Master File – Summary

IV.    Allocations Processing                                           24
       A. Allocations Instructions in the Current Environment
       B. Automating the Allocations Process
       C. Allocations Processing – Summary

V.     Summary of Conclusions, Recommendations and
       Suggested Action Items                                          29


       Appendix – STP Front Office White Paper Contributors            31




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                             Financial Information Forum
                             STP Front Office Committee

Introduction
This document has been prepared by the STP Front Office Committee of the
Financial Information Forum. The committee is part of a larger overall structure of
committees working under the direction of the Securities Industry Association to
implement straight through processing on an industry-wide basis. Specifically,
the Financial Information Forum (FIF) STP Front Office Committee (STP/FO)
seeks to identify areas of STP impact in the pre-trade through trade execution
and allocation phases of the order lifecycle for US equities, options, and single
stock futures. The committee addresses the associated workflow, data, and
connectivity issues as well as exploring some of the existing and emerging STP
front office solutions in the marketplace. The STP/FO objective in writing this
paper is to identify obstacles and potential solutions in technology and data that
will minimize the number of repairs necessary downstream in the trade cycle.

Front Office Technology in Today’s Market Environment
STP projects are being implemented in a manner similar to that of most other
automation projects; that is, projects funded are those that are able to show a
return on investment consistent with the firm’s financial benchmarks. Front office
technology decisions ranging from network selection to integration of order
management and trade execution systems are focused on proving their ROI – by
reducing expenses, attracting clients or simply complying with market and
regulatory requirements.       While the guiding principles of automation,
standardization, and exception processing are being considered, only discretely
defined initiatives that produce a near term return or are necessary to meet
regulatory requirements are being implemented.            Vendors and in-house
development teams are supporting front office needs with a variety of services
and technology solutions.

Electronic Connectivity
The ultimate goal of connectivity is that a single point of entry (with appropriate
back-ups) would link a firm to all their counterparties, utilities and 3rd party service
bureaus. For now, what seems achievable and is underway across asset
classes is the adoption of FIX and SWIFT messages for front, middle and back-
office communications. FIX version 4.4 augments its equities trade order
management and execution capabilities with more robust allocations processing
messages and the addition of both fixed income and listed derivatives. Ease of
connectivity to counterparties is an excellent test of how well a firm is handling
STP. While standards are nothing new, the dramatic increase in interest and
implementation of electronic messages for cross-company communication both
pre-trade and post-trade indicates widespread acceptance that firms no longer
wish to compete at the protocol level. The use of standards have become a
legitimate means of realizing cost savings, particularly for dealers in processing
standardized electronic orders versus oral/fax orders requiring manual
processing. The evolution of connectivity standards in the securities industry

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front office processing environment parallels that of the more broadly focused
Enterprise Application Integration (EAI) technology trend where internal and
external applications are integrated via messaging implementations.

Order Routing Technology
Demands of the market place are increasing the need for electronic processing.
For reasons of compliance and client pressure to achieve control over routing in
order to meet best execution objectives, firms not only need to determine which
market center to direct order flow to but also when and how much order flow to
send at any given time. Program trading tools offer the capability to slice orders
and can access historical VWAP (Volume Weighted Average Price) and other
performance information to assist traders in timing the placement of their orders.

The complexity of order routing has only been magnified by the sheer volume
and multiplicity of sources of order book data. SuperMontage, ArcaEx, ECNs
and NYSE all offer depth of book market data. Increasingly order routing
technology requires integration with real-time market data to apply rules in order
to dynamically control routing under differing market conditions.

Far from replacing the human element, intelligent order routing services aim to
increase institutional sales productivity. One of the goals of intelligent order
routing is that order flow can be broken up based on the difficulty of filling the
orders. Essentially, this extends the exception-based processing model to the
front office. Small orders for high liquidity securities can flow automatically
through the system based on pre-set business rules whereas illiquid or block
orders can be worked. Being able to divide order flow in this manner also helps
traditional brokerage firms more effectively compete with direct access
broker/dealers. If desired, firms employing intelligent order routing could
conceivably reduce expenses on fully-automated trades while adding value by
offering market insight with increased access to liquidity for more complex
orders.

Just as intelligent order routing improves the performance of institutional agency
brokers, we see the trend moving to the buy-side where this technology can be
integrated with order management systems. Institutions may begin to view
brokers as direct access routing providers instead of order working agents.

Downstream Processing
Increasingly, front office systems are adding modules to handle a firm’s internal
middle office functionality requirements (e.g. input of allocations linking to Oasys
and back office systems). While take-up of matching utility services has not been
rapid or widespread, firms are still interested in reducing costs and errors by
streamlining processes and promoting a closer link between the front and middle
office. One cost reduction methodology that some firms are pursuing is the use
of FIX for point-to-point allocation and confirmation distribution. Another is the
use of order management services being expanded by vendors to include
matching capabilities. Both the use of FIX and trade management systems for

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middle office purposes highlights the extension of front office tools to include
some post-trade processing functions.

The Institutional Trade Process
Figure 1 (to follow) traces the trade flow from the institution’s placement of an
order, through the broker/dealers’ order management system, and routed to an
execution venue. Executions are reported and trades are processed for clearing
and settlement by the respective organizations and their clearing agents. The
diagram also indicates the methods/formats that may be employed to exchange
trade messages throughout the process.

The FIF STP Front Office Committee has examined the order cycle depicted in
Figure 1 from the point of order origination through execution, and through the
post-trade steps immediately prior to clearing and settlement of U.S. equities and
options trades. In analyzing the various sub-components of each activity, the
STP/FO Committee identified areas that may present serious obstacles to
implementation of STP industry-wide, including access to timely and consistent
data.




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Figure 1.
              Institutional Transaction Flow for US Equities, Options & Single Stock Futures
                                                            Order Entry Through Pre-Settlement

                     Buy Side                                                  Sell Side                                                           Market Centers
                                                      Direct Access
                                       Orders                 Orders                                        Orders
                                       Routed                 Entered                                       Routed
                                    FIX                    FIX                                           FIX
                                    Proprietary            Proprietary           Order                   CMS
            Trade                 Electronic Format      Electronic Format                               Proprietary
                                                                              Management/                                                                 Execution
         Management                 Phone/FAX              Keyed into Order                            Electronic Format
                                                         Entry Screen           Trading                  Phone/FAX                                         System
           System                    Executions                                 System
                                      Reported                                                        Order & Trade
                                                                                                         Reports
                                     FIX
                                     Proprietary                                                      OTC – OATS
                                                         Compliance
                                   Electronic Format                                                  Listed – Rule 123
                                                           Rules                                                                  Executions
                                     Keyed into Trade
                                   Management Screen                                                                      FIX       Reported
             Portfolio               Phone/FAX            Securities                                                      CMS
            Management                                    Database                                                        Proprietary Electronic Format
              System                                                                                                      Manually Keyed
                                         Alert                                 Broker Dealer Middle Office
                                                         Account File
                                                                                                                                 Open Orders                     Trades
        Compliance                                                             New Account      Open Order                        Reconciled                    Reported
                                                                                  Setup        Recon & Adjust
                                                                                                                             NYSE – LOR file                  OCS   IDCE
                                                          Allocations                                                        Proprietary Electronic Format    ACT   Regional
        Reference         Allocations Sent                                       Securities        ID                        Manual                           ADF Exchanges
          Data                                              Entered
                                                                                  Setup          Confirms
                              Oasys (& O Global)           FIX
                              FIX                          Proprietary
                              SWIFT                      Electronic Format
              Portfolio
                              Proprietary                  Manually Keyed      Broker Dealer Back Office                               Omgeo                          OCC
             Accounting
                            Electronic Format
               System
                              Phone/FAX                                           P&S            Settlement
                                                                               Trade Blotter    Authorization
                                                                                                                                                      NSCC


                       Custodian                                                                                                                          DTC


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Purpose of this Document
This paper is intended to sound a call to the industry for action related to the
implementation of STP solutions. In some instances, appropriate technology is
already available to market participants. The committee has outlined the
alternatives that may be taken and encourages individual firms and all market
participants to adopt solutions that will facilitate electronic communication and
process automation.

The FIF STP Front Office Committee has also looked at current transaction
process flows to identify areas where other industry changes may be required to
achieve an STP environment. This document highlights very specific instances
where certain sectors of the industry could come together to institute standards
and procedures to achieve a common solution.

Document Summary
The committee selected four critical process sub-components for examination in
this document:
1. Order Submission
2. Security Master File
3. Account Master File
4. Allocations Processing

At the end of each section, the committee presents its conclusions,
recommendations and suggested action items. The following serves as both an
example of the format for each section as well as a document summary.

Conclusions: Many STP obstacles can be overcome by employing existing commercial
services. Other issues require industry resources (e.g. exchanges, utilities and
standards bodies) to come together to effect change.

Recommendations: Widespread adoption is needed to provide full benefit to those that
have implemented STP solutions. Financial incentives/disincentives should be offered to
market participants that continue to operate in a manual mode.

Action Items: Work with SIA Committees to further educate participants regarding STP
solutions. Bring together industry resources to reach agreement on use of standards.
Encourage industry entities to develop ROI metrics to support and promote STP
initiatives. Create clear incentives to support program adoption that can be embraced by
the industry.




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STP Front Office Whitepaper v. 1.0                                                    7
I. Order Submission
A primary impediment to STP between counterparties lies with the buy-side
institution’s order submission and trade entry process. Orders that are submitted
from the buy-side (or other party) to the sell-side (or executing party) are
transmitted using a variety of manual and electronic methods. While “manual
mode” requires a series of phone calls and faxes between the buyer and the
seller, Trade Order Management Systems (TOMs) can streamline
communication using either proprietary formats or using FIX to send transaction
type, security symbol, quantity and limit price (if applicable).

A study recently completed by GartnerG2 and the Securities Industry Association
(SIA)1 concluded that “only 49% of respondents use direct electronic links to
communicate trades between internal and external counterparts. More than one-
half still rely on a manual method such as telephone, e-mail or fax for this
function.”

Findings were consistent in a limited buy-side survey conducted by the SIA2
which described a scenario where although 83% of the orders were being
generated electronically, just half of those, amounting to only 41% of all orders,
are being delivered electronically.

Many buy-side firms have been slow to embrace electronic order transmissions
to the sell-side due to their lack of size/volume and the proportionally large
spending required. The cost equation of implementing a TOMs is such that it is
difficult for the smaller 80% or 6000 (of approximately 7500) investment
managers to justify based on their trading volumes and assets under
management. Some have elected to use prime brokers who provide technology
services, which often include front ends to facilitate trade submission to multiple
executing brokers. There are still opportunities for “low-end” commercial products
such as browser-based solutions to be offered to small asset managers, as
broker/dealers may consider supplementing transaction costs on orders received
from their smaller clients if the solution enabled dealers to receive/respond to
orders electronically using a standard protocol such as FIX.

Although there has been much progress made within the last ten years in the
acceptance of TOMs by approximately 20% of the universe of investment
managers, there is still resistance to the idea of “showing one's hand” to the
Street for fear of having one's orders seen or causing a market movement with
an order of significant size. Fixed income and derivatives systems are even less
automated than the equity side of the business.



1
 For complete survey results see http://www.sia.com/stp/pdf/rpt-0703-0057.pdf
2
 See “STP/T+1 Business Case Update Results – Asset Managers; September 2002” available at
http://www.sia.com/stp/pdf/assetmgr.pdf

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For those that have automated, one investment management firm estimated that
use of a fully automated trade order management system has enabled their
traders to triple their trading volumes without any increase in staffing. This they
attribute primarily to the use of electronic order routing and receipt of electronic
notices of execution (“NOEs”) from their dealers.

       A. Trade Order Management
Trading systems used by investment management firms vary in scope and level
of functionality. While numerous vendors offer comprehensive solutions, many
firms chose to develop internally. To operate effectively in an STP environment, a
trade order management system must interface with the firm’s internal processes
as well as manage external communications. Figure 2 (to follow) illustrates the
types of activities and the interaction required among systems within an
investment management firm. A trade order management system should, at
minimum, generate orders, route orders, receive trade executions electronically
and update trading positions real-time.

For firms whose trade order management systems do not effectively integrate
processes, middleware is often viewed as a solution. Middleware may be used to
bridge disparate internal and external systems, normalize data across platforms,
and format messages to support real-time connectivity and e-commerce.

               1. Portfolio Management
In some cases, systems are unable to process real-time information. For
example, many portfolio management systems cannot handle real-time updates,
which cause portfolio management systems to be out of synch with trading
systems. In lieu of an integrated system, portfolio managers should have some
other mechanism to track trade executions as they occur, in order to analyze the
portfolio implications of completed transactions and act accordingly.

                2. Compliance
Another critical component of the institutional trade process is compliance. Due
to the largely manual nature of communication for a significant percentage of
orders, transmission of order and transaction information is error-prone. The buy-
side is often unaware of the status of the order and cannot respond to market
conditions appropriately. There is also no electronic “audit trail” for these orders,
making compliance with systems such as OATS and NYSE Rule 123 more
difficult for the sell-side as incoming orders must be manually input and time-
stamped.

Pre-trade compliance tests are needed in an STP environment, where proposed
trades are checked against a series of trading guidelines and securities
restrictions set by both the investment manager and the client. When pre-trade
compliance engines are integrated with the trade order management system or
applied against some other system that maintains real-time holdings positions,
inappropriate trade ideas can be caught early to reduce the need for post-trade

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STP Front Office Whitepaper v. 1.0                                                 9
cancellations and post-trade exception processing. In contrast, when compliance
modules use an accounting system or other portfolio management system that is
not updated real-time with trade executions, the opportunity for trade errors is
increased dramatically.

At some firms, an additional end-of-day process runs compliance programs
against portfolios (which reflect the current day’s trades) using the accounting
system after pricing and NAV (Net Asset Value) calculations are completed.
Major pricing changes or market shifts that affect portfolio holdings could cause a
concentration to be exceeded or will reveal unacceptable issuer credit exposure
that did not show up in pre-trade compliance checks run earlier. This may
require the portfolio to be rebalanced with subsequent trade execution(s)
designed to counter-act the compliance violations.

       B. Use of FIX Protocols
While FIX (Financial Information eXchange Protocol) has been adopted by many
buy-side trade order management systems, it is not utilized industry-wide for the
majority of transactions. There are also many exchanges that do not currently
support FIX interfaces. Many exchanges that provide high STP levels between
brokers and street-side functions such as NYSE ERC (Extended Report
Correction) though these messages are not implemented in TOMs interfaces,
thus requiring corrections to be made manually. Post-trade exceptions are almost
always manual and managed via verbal communications.

There are numerous versions of FIX currently in use, as FIX users often do not
migrate to new versions as they are released. In addition, there has been a
substantial amount of “customization” by users of the FIX protocol and no
industry-wide certification process is currently in place to promote adherence to a
standard.3 These conditions have forced broker/dealers to support many different
interfaces to their clients and trading destinations, including multiple versions of
FIX and other proprietary formats in addition to manual/verbal methods.

Often buy-side organizations will attempt to execute small orders through
electronic means but continue to rely on their verbal relationships to trade large
blocks. FIX implementations today do not have significant basket trading
capabilities and most are not utilizing the allocation and confirmation messages.
This will remain a gap until the vendors upgrade to the more recent FIX versions
and utilize full FIX messaging capabilities.

Program Trading (or Baskets) is more prone to spreadsheet or other semi-
automated means of communication to the executing party. Rarely will verbal
means be used for a large program; however, re-keying information into an Excel
spreadsheet for emailing or faxing purposes is a common practice.

3
  FPL’s Global Fixed Income Committee is presently initiating a Certification Program aimed at certifying
users of FIX 4.4 for fixed income messages. Successful implementation will likely lead to program expansion
to include other security types.

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STP Front Office Whitepaper v. 1.0                                                                      10
       C. Integration of Data with Trade Order Management Systems
To achieve STP, a firm must share information across platforms in a way that
provides consistency. Trading, order management systems, risk management,
compliance, processing, accounting and performance reporting should all have
access to information that is both uniform and timely in order to avoid
discrepancies.

               1. Reference Data
Certain reference data such as standard securities identifiers, broker/dealer
codes and custodian bank identification codes (BIC) must be on hand and
accessible by the trade order management system.4 Some TOMs enable the
trade to be entered without the security details, allowing the back-office to set up
the security in the master file in an end-of-day batch process.

              2. In-house Data Reconciliation
Often, trading, analytics and support applications require their own “view” of an
information set. At many firms, this has led to decentralization and the use of
several security masters or several client-account databases, each tailored to
meet the needs of a specific product type or geographic region.

Reference data is obtained from various sources and used differently in
numerous applications within a firm. While automation and file transfers can
facilitate the movement of information, the need to upload/download and
translate information from one system to another leaves room for error.
Information generated and used by various legacy programs, distributed
systems, standalone applications and multiple internal databases should be
standardized internally and formatted for use in many applications, such that
each can retain its unique view of shared data from a central repository.
Middleware is being used in many firms to normalize the shared information
within an organization.

Where information is input manually, there is greater chance of error. Security
descriptions, account names and counterparty information are often entered by
various people who use alternate abbreviations or spellings. Discrepancies in this
information used across the firm may well impact the accuracy of risk
assessment, compliance modules and performance reporting. Data integrity is
critical for all types of financial institutions including investment management and
broker/dealer firms.




4
 Issues related to reference data are discussed more completely in Section II “Security Master File” and
Section III “Account Master File”

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STP Front Office Whitepaper v. 1.0                                                                         11
       D. Order Submission - Summary

Conclusions: Less than half of the buy to sell-side transactions are being sent
electronically. Electronic order submission can be accomplished using commercial Trade
Order Management systems (TOMs); or, through technology services offered by
broker/dealers such as under prime brokerage arrangements; as well as through in-
house development leveraging industry accepted FIX protocols. A well-planned front
office workflow, pre-trade through post-execution, and real-time connectivity to related
internal systems is integral to achieving STP and reducing downstream processing
errors.

Recommendations: Select a commercial vendor, prime broker solution or implement
FIX in-house to automate order submission in a standardized manner. Use middleware
to support internal connectivity and real-time information sharing.

Action Items: Work with FIX to ensure that all order submission requirements are
properly accommodated. Encourage TOM vendors to adopt FIX standards and support
the full range of FIX capabilities.




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Figure 2.
                          Buy-Side Process for Equity Transactions
                                                        Investment Management Firm                                     External
                                                                                                                       Parties


                      Orders         Trade Order                  Trade Order                                Orders
                                     Management System            Routing System
        Notices of Execution                                                                   Notices of Execution
                                     •Prepares orders             •Directs orders and                                  Broker
                                     •Receives IOIs               receives fills                                       Dealers
                  Allocations                                                                            Allocations
                                     •Devises allocations         •Seeks best execution
                                                                                                                       Direct
                                     strategies                     prices
                                                                                                                       Access/
                                     •Provides a view to          •Provides audit trail
                                     portfolio positions & cash   and order status                                     ECNs
                                     •Maintains trading history   tracking system
                                     •Monitors commissions &
                                     soft dollar credits

          Portfolio Management System &                                    Compliance System                           DTC
          Analytical Modeling Software                   Compliance        • Maintains investment parameters
                                                           Tested                 •Firm level & Client level
          •Maintains securities and cash positions
                                                           Proposed        •Tests adherence to rules
          •Facilitates investment decisions
                                                            Orders                •Pre-trade & Post-trade
          •Rebalances portfolios
          •Models trades and proposes orders                               Internal Information System
          using market data and research                                   •Maintains security master database         Custody
          •Reflects corporate actions on X-date                            •Maintains account master file              Bank
                                                                           •Maintains settlement instructions
          Portfolio Accounting System                                      •Processes market data
          •Tracks portfolio holdings
          •Posts transactions, settlements,                                Middle/Back Office Activities
          corporate actions & cash adjustments            Confirmed        •Sends instructions to custodians
          •Provides portfolio reporting                    Trades          •Monitors settlement/delivery status
          •Performs reconciliation with custodian
                                                                                                                       Front-office


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STP Front Office Whitepaper v. 1.0                                                        13
II. Security Master File
The Security Master File (SMF) contains data on every security that is processed
within a brokerage or asset management system. Important data elements for
each security record include name of issuer, security type, symbol, CUSIP or
other identifying number and other details that define the security and its
processing requirements. Records in the SMF are updated frequently as new
securities are created, terminated or impacted by corporate and regulatory
actions. Data quality is imperative, as erroneous descriptive data will frequently
result in trade breaks.

This section will examine the SMF - its data elements, its data sources, its use in
securities processing applications - and identify areas that might present
obstacles in moving to an environment of increased automation, standardization
and, potentially, shortened settlement cycles.

       A. Current Operations
While current order and processing systems are highly automated and capable of
handling large trading volumes, there are a number of areas where manual
processing is required. To a great degree, such manual processing is necessary
because of lack of standards, lateness of information on changes in securities
and the lack of certain data needed to complete the order and execution process.

Information sources for SMF data elements include issuers, CUSIP and other
numbering agencies, exchanges and others. Information recipients are
brokerage firms, asset managers, exchanges, market-makers, ECNs, DTCC and
other clearing and settlement organizations, web applications, order
management systems, buy-side systems, sell-side systems, service bureau
systems and others.

In the area of data quality, equities and options as securities in themselves are
fairly well standardized. However, identification of these securities (symbology)
differs across organizations, exchanges and vendors.5 No CUSIP number is
available for options and the Options Price Reporting Authority (OPRA) symbol
structure has become extremely complex. Further, OPRA is proposing an
extensive symbology change. Fixed income securities and futures present still
greater difficulty. Also impacting data quality is the fact that securities update
information is available from multiple vendors and inconsistencies exist among
vendors.

The SMF is core to numerous processing functions. There are application
interfaces to order systems, trade processing, customer accounting systems and
regulatory reporting systems among others. Structural changes made to SMF
databases frequently require modification to dozens of interfacing applications

5
 See http://www.fisd.net/referencedata/20030605uiipaper.pdf for “Reference Data User Group (RDUG) &
Reference Data Coalition (REDAC) Discussion Paper, June 2003: In Search of Unique Instrument Identifier”

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STP Front Office Whitepaper v. 1.0                                                                   14
and processing systems. Further, since the SMF is such a fundamental
database, there are numerous legacy systems issues that tend to limit flexibility
and expansion.

       B. Obstacles to STP
The Front Office Committee anticipates STP challenges in the following areas
related to securities information:

               1. “Reorg” and other Corporate Actions
Corporate actions that involve mergers and acquisitions pose a unique challenge
to front-end systems and the STP initiative. Open orders have to be cancelled,
clients may need to be called with an explanation of the situation, voluntary
elections must be obtained from clients that are shareholders - all within a
prescribed timeframe. Much of the burden falls on the front office to ensure that
client intentions are correctly reflected in handling open orders and maintaining
portfolio holdings. These manual procedures are time-consuming and error-
prone. While back office processing for proxy and M&A transactions is
somewhat automated today, time-constrained and unconventional “Reorgs” still
require time and effort.

Specific problems arise when corporate actions must be applied to Open Order
Files. Stock dividends and stock splits are areas in which order processing
engines and execution venues do not perform well in today’s environment. Lack
of industry standards creates an array of problems as some systems change
quantity on ex-date while others modify both price and quantity. Quite often,
order management systems will simply cancel these orders and then require
them to be re-entered at the adjusted quantities and price. If a uniform standard
were to be adopted, equity and option orders could be adjusted seamlessly
without guesswork and errors. The individual investor could rely on standardized
processing with confidence that order modification related to corporate actions
would be consistent across all execution points. Some mixed lot orders may
have to be handled differently but, for the most part, exchanges’ and ECNs’
processing of mixed lots is consistent with round lot orders.

There are a number of vendor organizations that provide daily files containing
notices of upcoming corporate actions and redemptions along with text
information associated with the notices. This file can contain corporate
actions/redemptions that have just been announced, changes to existing notices,
and/or deletions of existing notices. Brokerage systems typically have a batch
process that converts the file and interprets the data on the file to create, modify,
and/or delete corporate action/redemption declarations on the system. To
achieve STP and reduce the possibility of erroneous trade executions, the
vendor files should be sent on an intra-day basis so that reorganization
declarations can be created, changed, and/or deleted within the system.




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STP Front Office Whitepaper v. 1.0                                                15
              2. Consistency of Data
Cleansing security data is accomplished today by applying different feeds and
rules for updating security data. Some front-end systems have more accurate
information than others. The industry as a whole needs reliable security
information on a timely basis for STP to become a reality. Risk management is
not effective without a clear picture of securities under transition.

New issues are particularly difficult when processing through various front-end
systems often linked to disparate databases that are not always up-to-date or in-
synch. Many of these systems are manually updated intra-day and may have an
overnight process to add new issues from a vendor feed. This becomes a
problem when an order is routed to a system that does not have the new security
on its database.

Options provide a specific example of securities that are often missing from the
SMF at the time the trade is executed. The Options Clearing Corporation (“OCC”)
is a provider of option symbols that are either in response to new strike prices
because of price movement on the underlying stock or to replace expired
symbols with a new series of options. OCC provides a daily feed that can be
used in a batch mode for updating security master files. Sometimes new strikes
are required intra-day when an exchange adds new symbols. The method for
relaying that information to the firms is usually through a message to the order
management system. Adding these new symbols may be automated on some
systems but are more often passed to someone in the order room and keyed into
the system as time permits.

Also perplexing and prone to errors, especially in today’s Internet world of
trading, are differing symbols between front-end investment applications. Most
ticker engines have proprietary methods for displaying symbols of options,
warrants, rights, preferred stocks, classes of stocks and futures. “Street notation”
is the symbol as it is presented to an execution point and returned by most
clearing and settlement systems. Quote providers can find it difficult to use these
symbols which contain special characters and use different construction methods
including prefixes, suffixes and varied concatenations. This creates confusion for
the individual investor as well as professionals in the industry at large.




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       C. Security Master File - Summary

Conclusions: Lack of standards and timeliness in the way securities are represented
and changes are applied creates significant obstacles to achieving STP.

Recommendations: Firms must continue to work to consolidate data internally and
maintain it with more frequent intra-day updates. Exchanges and industry utilities must
also strive for cross-industry consistency and establish standards for describing
securities and events.
Examples: Corporate actions applied to open limit orders should be adjusted by both
price and quantity using the same rounding rules in place today.
Some standard messaging from the exchanges and/or OCC in real-time is necessary to
support automated set up of new securities.
Where conversion to a new standard is not feasible, an industry maintained cross-
reference table, accessible to all, would be helpful in supporting automation.

Action Items: Bring together industry resources (exchanges, utilities, standards bodies)
to determine instances where messaging standards can help to eliminate manual
processes, increase timeliness and reduce errors. Create a plan to develop and
introduce standards.
Ask SIA Corporate Actions Subcommittee to address re-org and corporate actions
issues identified in this document.




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III. Account Master File
As the industry strives to achieve straight through processing, we are also faced
with the challenge of meeting additional regulatory obligations with the
introduction of the USA PATRIOT Act.6 To ensure compliance, a Customer
Identification Program (“CIP”) (which supplements existing Know Your Customer
(“KYC”) rules) must be established by financial institutions to obtain, verify and
maintain records related to the identification of a customer in order to complete
the account opening process. Ongoing, each firm must have a mechanism to
identify and track unusual trading activity in a customer’s account.

Obtaining and maintaining customer account information is also important to
financial institutions from a risk management perspective. Upon acceptance of an
order, traders should be aware of any trading restrictions, credit limits and the
firm’s risk exposure to that particular client. Additionally, related accounts should
be linked in some fashion to provide a complete picture of credit risk. For these
reasons, access to account information is integral to front office functions.

The details maintained by a broker/dealer for an account may include a parent
account id and a sub-account id, account type, a pre-agreed commission
structure, interested parties that must be informed of all transactions and reports,
as well as custodian/settlement instructions. To facilitate risk management and
post-execution processing including allocations and settlement, reference data of
this type should be integrated with the front/middle office processing applications.
Under ideal conditions, to expedite processing with a minimal number of
downstream corrections, some level of checking of account details should take
place not only when a new account is being established, but also as each new
order is executed.

According to the Report on Operations in the Securities Industry 2001 published
by the Securities Industry Association, changes to commission charges on retail
trades “represented the most frequently cited reason for (retail) cancels/corrects,
totaling one third (33.3%) overall”, followed by account number and account type,
which “comprised the second and third most frequent reasons, 24.8% and 13.9%
respectively.” For institutional trades, incorrect account numbers and account
types were the source of 72% of the cancels/corrects, followed by errors in
commission charges that caused 9.5% of the cancels/corrects. Thus, errors
related to inaccurate account information generated an average of 72% of the
retail and 81.5% of the institutional cancels/corrects. “Overall, cancels/corrects
comprised only 1.4% of total trades” of those firms surveyed.7




6
  See H.R. 3162, Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the “PATRIOT Act”), Pub. L. No.107-56 (2001).
7
  Report on Operations in the Securities Industry, 2001; Securities Industry Association, New York (February
2002) page 32-33.

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        A. New Account Set Up
The depth of information required to set up and maintain an account often
depends on the type of account and nature of the transactions the account will
perform. The most significant differences lie in the processes applied to retail vs.
institutional trades.

               1. Minimizing Exposure to Credit Risk
Typically, financial institutions require an account to be established before a retail
transaction may be executed. Brokerage firms are generally strict in requiring
appropriate paperwork to be submitted in advance of a retail trade; however,
according to the SIA Report on Operations8, there has traditionally been little
consistency in each firm’s approach to performing credit checks on either new
accounts or their existing clients. Firms tend to be more rigorous when
establishing margin accounts or when offering their clients debit cards or check
writing privileges. Broker/dealers rely on third party information services such as
Compliance Data Center, McDonald Information Systems, Trans Union, Equifax
or their clearing brokers to conduct credit checks.

In contrast to retail, institutional accounts are often established at the time of the
trade and set-up tends to be more automated. To expedite processing, only the
information required to settle the trade is gathered immediately after execution
with necessary paperwork or account details to follow. Because many of the
large institutional trades are settled Delivery vs. Payment (DVP), there is minimal
credit risk involved with these types of accounts, but due to the size of the
transactions, dealers are more vulnerable to operational risk and settlement risk.

               2. USA PATRIOT Act
Financial services firms’ obligations to comply with the accountholder
identification provisions of the PATRIOT Act, as part of a coordinated program to
perform other Anti-Money Laundering (AML) activities, have increased the time
and expense associated with each new account as it is opened.9 Firms are now
expected to have in place a formal Customer Identification Program (“CIP”) and
also to check account information against the US Treasury Department’s Office
of Foreign Assets Control (“OFAC”) list or the Financial Civil Enforcement
Network’s list (“FinCen”) to identify individuals or organizations for which
accounts should not be opened.

While specific implementation procedures have not been mandated, firms must
demonstrate that processes are in place and fully functional to comply with these
requirements. Clearing firms and their correspondents must coordinate their


8
  Ibid; page 72.
9
    See Securities Industry Association Anti-Money Laundering Committee’s publication of Preliminary
Guidance for Deterring Money Laundering Activity for a comprehensive overview of AML obligations.
Requirements for securities firms include: (i) the development of internal policies, procedures and controls;
(ii) the designation of a compliance officer; (iii) an ongoing employee-training program; and (iv) an
independent audit function to test programs.

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STP Front Office Whitepaper v. 1.0                                                                        19
efforts to implement programs, train personnel and monitor the process to ensure
procedures are being properly followed.

There are also situations where an institution acts as an intermediary, performing
trade executions on behalf of an account that prefers not to be disclosed. As the
new rules are interpreted, in cases where both counterparties are financial
institutions subject to CIP provisions, there can be an agreement between them
to rely on the other’s process to perform the required compliance functions.

              3. Establishing Account Profiles and Preferences
Certain accounts may request that their account statements, research reports
and proxy materials be “householded”, that is, for certain types of materials,
duplicate information being sent to the same name and address may be
suppressed and/or bundled. This capability requires a firm to have an effective
means to link accounts, and to maintain account preferences. Retail accounts
also have the right to request “Privacy”, where the information contained in their
name and address files can be generally blocked from staff with access
permitted strictly on a “need to know” basis. “Householding” and “Privacy” are
but two examples of capabilities and business logic that must be considered in
building an automated account set up and account validation process.

Institutional accounts pose a different set of issues related to account set-up and
ongoing maintenance. While investment managers typically execute large block
trades, they are often allocated to numerous sub-accounts. Each sub-account
may require one or more sets of standing delivery instructions (depending on the
variety of products traded) and may override the standing instructions with
special requests at any time. It is the broker/dealer’s responsibility to obtain
standing instructions in order to effect settlement and delivery. Broker/dealers
often maintain internal databases for this purpose; however, the investment
manager must provide details at the time a new sub-account is created and
should inform the broker/dealer of changes as they occur in their sub-accounts’
delivery instructions. Many investment managers use Omgeo’s ALERT database
(formerly a product of Thomson ESG) for this purpose. For broker/dealers or
investment managers that do not use ALERT, or for broker/dealers that do not
automatically download ALERT data into their internal systems, manual
intervention is required.

               4. STP for Institutional Instructions
To achieve a total STP solution for institutional account instructions, an industry-
wide standard is needed where data is closely managed and shared by the
investment managers, broker/dealers and custodians. Strict data validation by all
parties is key to success.

Omgeo’s ALERT database has made good progress over the last few years as a
repository for settlement and account information enabling a global community of
investment managers, broker/dealers and custodians to communicate account

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instructions worldwide. ALERT is used in more than 35 countries and is
populated with more than 4.6 million broker internal account numbers (BIAs) and
over 150,000 investment manager accounts.10

Interfaces to ALERT from non-Omgeo systems, however, can be difficult and
users must resort to manual entry. Since ALERT is now a product offered by an
“industry utility”, Omgeo should be encouraged to make ALERT more open and
to revisit the pricing structure to promote widespread usage. This would support
several other industry initiatives underway to transmit settlement messages using
standards such as SWIFT or FIX which can utilize centralized database
resources like ALERT, or pull from an in-house proprietary database to provide
information required to effect settlement.

Separate from instructions, broker/dealers are responsible to obtain and keep on
file all the paperwork necessary to establish the institutional account under KYC
and CIP requirements. There is currently no centralized repository to facilitate
information sharing among al the financial services firms that deal with common
institutional accounts. New accounts continue to be set up and processes by
each firm individually, and must be handled as exceptions rather than in a
straight through process.

                5. Volumes and Expense
The full impact of the new requirements has not yet been assessed, as the latest
phase of the Act’s implementation is set to become effective October 2003. Firms
with primarily institutional accounts may not feel the same burden as those with a
large retail client base, simply due to the volume of new account openings.

In a recent press release, Ameritrade11 published it had opened 24,000 new
accounts for “self-directed” investors during the month of July 2003. For the
same month, E*trade Group12 posted 53,827 gross new accounts to its books.
One service bureau with a client base of mid- to small- sized firms has estimated
that brokerage firms spend on average between $25 - $100 on setting up a retail
account, including internal labor and out-of-pocket expenses. Having tracked
fifteen of its broker/dealer clients over one year, this service bureau estimates on
average, each firm has opened approximately 20,000 new accounts per month.

The sheer number of new account openings and the magnitude of associated
expense being borne by financial institutions beg a cost-effective industry
solution.




10
   See discussion of “Oasys and ALERT” in Section IV “Allocations Processing” to follow.
11
   “Ameritrade Reports New Accounts and Average Trades Per Day for July” ; BUSINESS WIRE Aug. 8,
2003
12
   See “E*Trade Group, Inc. Reports Monthly Activity for July 2003”;
https://investor.etrade.com/downloads/Historical_Aug03.pdf.

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       B. Monitoring Existing Accounts
Concerns related to Anti Money Laundering (AML) compliance and managing
credit risk are two key reasons firms need the ability to establish account
linkages and relationships in their databases.

As part of its PATRIOT Act program, each firm is expected to have in place the
ability to monitor significant transactions or unusual activity. Furthermore, KYC
obligations extend beyond the account opening process as financial institutions
must continue to collect information to update their customer records.

Additionally, in order to better manage risk in an STP environment, risk
management tools can be integrated with the front office order handling
application to provide an aggregate view of a client’s positions across accounts.
Many firms are unable to perform this function in real-time, as they rely on prior-
day information and batch reports to make customer credit decisions.

        C. Industry Solutions
As a practical matter, the size of the firm and its volumes, or the type of business
its clients typically conduct dictates whether account set-up, maintenance and
monitoring programs can be largely manual or should be automated. Some firms
have developed in-house systems while others rely on third party services.
Perhaps as financial institutions become more experienced in complying with the
PATRIOT Act requirements and other AML activities, firms can take advantage of
the new tools available to them and better integrate them into their front office
workflow to manage new accounts in a “straight through” manner rather than as
an “exception” process.

               1. Developing Standards
The need for correct linkages between legal entities has become an important
consideration in establishing counterparty and account relationships, and is
closely related to a firm’s ability to be effective in risk management and meet
regulatory requirements. The concept of creating an industry standard to assist
financial institutions in properly linking legal entities was introduced on an
international level as early as 1998 with an ISO Working Group. The effort
evolved over time but did not gain traction until recently. Industry support for a
standard “International Business Entity Identifier” (”IBEI”) is again mounting13 and
an ISO Working Group stands ready to take on the challenge.

If successful, the IBEI will address some security master file and portfolio risk
issues as well as facilitate better management of account files. Be cautioned,
however, that to create and maintain an international standard is not a trivial task,
and we should not anticipate quick resolution or rapid adoption. Once a IBEI is
definitively established, value added services can be developed such as a central
repository to house institutional account information, which will allow financial

13
  Reference Data Coalition (REDAC) Status Report, July 30, 2003; http://www.fisd.net/reference
data/20030730redacupdate.asp

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STP Front Office Whitepaper v. 1.0                                                               22
institutions to share information and reduce the burden of paperwork, data
collection and maintenance.

                2. Commercial Services
PATRIOT Act requirements do not dictate the methods to be employed to
achieve compliance, only that a comprehensive program be developed,
documented and administered. The nature and sophistication of any program
should be commensurate with a firm’s business model and client activities.
Commercially available solutions range in capabilities and price from lower-end
“filtering” products to enterprise-wide solutions that employ “profiling” technology
and “artificial intelligence” to detect patterns of activity to highlight possible
wrongdoing.

The true expense, however, comes not with the purchase of the service or
technology, but feeding it with consistent data from internal databases,
interfacing with numerous internal systems, and integrating with the overall
business workflow to make it useful and seamless in a straight through
processing environment.

More sophisticated firms have leveraged the expense of implementing AML
technology to expand their customer relationship management (CRM) and
marketing capabilities. They have applied data mining techniques and analysis of
customers’ patterns to better understand their clients’ needs, develop new
products and identify cross-selling opportunities.

       D. Account Master File – Summary

Conclusions: Increased regulatory compliance requirements have added significant
time and expense to an already manual and error prone process. While no current
industry solution has been identified to relieve the burden on financial institutions, there
are vendor services available ranging from ad-hoc queries or an ASP model, to
enterprise-wide global solutions for high volume, sophisticated users.

Recommendations: Firms should seek vendor solutions that provide information and
automation commensurate with their needs. ALERT should be viewed and priced as an
industry resource to promote industry-wide access to account information. The industry
should support ISO Working Group initiatives to establish standards that can help
identify legal entities and link associated accounts. Centralized sources for account
information including required paperwork, account preferences and settlement
instructions can allow information sharing and relieve the burden presently on each
financial institution to gather and maintain detailed account information.

Action Items: Work with SIA Committees to further educate participants regarding
available STP solutions. Reach industry agreement on use of standards and centralized
facilities by creating clear incentives to support program adoption that can be embraced
by the industry.




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IV. Allocations Processing
The process of allocating trades, or breaking down a block trade to be divided
among various sub-accounts, is a critical activity and a required step before
many institutional trades (investment manager to dealer) can be processed.
Investment management firms are typically purchasing and selling securities for
portfolios owned by their customers.

To have greater access to product and liquidity, obtain better bid or offer prices,
and achieve economies of scale, investment managers tend to aggregate the
potential purchases or sales of securities from their clients’ portfolios. They then
trade with the broker/dealer community by buying and selling securities in larger-
sized “block” transactions.

Before these trades can be settled, the blocks must be divided up among the
clients, or sub-accounts, for which the securities were purchased or sold. This
account breakdown is referred to as allocations. For each allocation, a
custodian14 is separately responsible for the exchange of cash for securities on
behalf of the client. Trade settlement then becomes a transaction between the
dealer (or dealer’s clearing agent) and the sub-account’s custodian.

       A. Allocations Instructions in the Current Environment
Allocations are not typically provided by the buy-side at the time of the trade, but
more frequently later on trade date or the next day. Until allocations can be
applied, the block trade is posted “pending allocations”. A reference number
assigned to the block trade will help to identify all the sub-account allocations
associated with that block trade.

When the investment manager provides the sub-accounts to which the block
trade will be allocated, the information provided typically includes the IM’s
account numbers or internal codes, text descriptions of the sub-accounts, or
ALERT codes to identify the sub-accounts. The sell-side, in turn, uses an internal
cross-reference account file to determine their internal account numbers for the
sub-accounts. Complications arise when securities are allocated to a new
account not already established in the broker/dealer’s system. In this case, the
account must be set up with settlement and delivery instructions provided by the
investment manager, including details such as BICs, custodian information, DTC
participant account number, SID or ALERT codes for settlement instructions.15




14
   Just as the investment management firm has been contracted by its clients to make investment decisions
for them, the clients have separately selected a custodial bank or securities firm to maintain their assets as
well as pay for, receive and deliver the securities being traded by the investment manager. For each of its
clients, the investment management firm must interact with that client’s chosen custodian in order to
reconcile funds and settle trades for the customer’s account.
15
   See discussion of “New Account Set Up” in previous Section III “Account Master File”.

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              1. Oasys and ALERT
While the allocation process remains largely manual, there are a significant
number of institutions that rely on Oasys and ALERT (formerly Thomson ESG
products now part of Omgeo) as a common practice in institutional equities
trading to automate allocations and maintain settlement instructions. Oasys uses
a proprietary format in support of their allocation messaging. Oasys (the major
electronic allocation service in the US) and Global Oasys facilitate allocations
processing with the ability to electronically forward sub-account breakdowns for
each block trade and provide an integrated facility for automated look-up of
settlement instructions in the ALERT database16. Allocations are downloaded
from Oasys for sub-account processing, along with settlement instructions from
ALERT to update the broker/dealer’s internal account master file.

              2. DTC-settled Securities Automated Through TradeSuite
For DTC-settled securities including equities and some fixed income securities,
the confirmation and affirmation process is typically handled by TradeSuite
(formerly DTC ID system now part of Omgeo17) in accordance with regulatory
requirements that have been imposed by certain SROs (e.g. NYSE Rule 387 for
equities). For each sub-account, an electronic trade confirmation (ETC) is
provided to the investment manager and/or interested parties which normally
includes the sub-account’s custodian. Affirmation by the IM or custodian of the
confirmation provided by the broker/dealer automatically “triggers” the settlement
process in the DTC book-entry system, without further intervention by the
investment manager, custodian or the broker/dealer. Omgeo has published an
industry migration plan to move buy and sell-side users from the current process
to a central matching model to streamline the process.

      B. Automating the Allocations Process
Automating the exchange of allocations or sub-account breakdown information
has been a central focus in the industry’s straight through processing initiatives.
There are in excess of 7,500 investment managers in the US markets according
to DTCC statistics. Only 1,250 use a vendor of trade order management
systems, plus an additional 150 use internally developed systems capable of
sending electronic allocation messages to their broker/dealers and custodians.
Therefore, we assume the remaining 6,100 investment managers use fax and
phone to communicate with their counterparties and support services. An SIA
survey indicated over 60% of all allocations are faxed or phoned.

16
   ALERT is used in more than 35 countries and is populated with more than 4.6 million broker internal
account numbers (BIAs) and over 150,000 Investment Manager Accounts.
17
   Omgeo has been created as the result of a merger of TradeSuite services, formerly offered by DTC, with
Thomson’s ETC product; therefore, there is currently only one “Qualified Vendor” of ETC services. The SEC
has made it clear that others are not precluded from applying for the exemptions required under this rule,
and has established specific requirements for “interoperability”. Furthermore, DTC is currently the only
“registered clearing agency” authorized for book-entry settlement of depository-eligible transactions. Among
other points, the SEC insists that DTC’s clearing agency and settlement functions for DTC-eligible securities
must be fully accessible by some method other than through TradeSuite, including other “Qualified
Vendors”.


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Cost is the primary deterrent for many mid to small-sized investment managers
and electronic allocations are beyond their grasp. Without an order management
system, an investment manager cannot send an electronic message without
keying each item into a terminal. For them, it is far easier and cheaper to send a
fax. Savings to the broker/dealer, however, would be significant if more
investment managers used automated methods.              Omgeo has introduced a
browser-based service to encourage smaller investment managers to enter
allocations in a way that can support matching and automated processing for the
broker/dealers.

              1. An Industry Model for “Matching”
The Institutional Transaction Processing Model (ITPM) set before the industry,
proposes a centralized matching utility (CMU) to facilitate the communication of
trade details and allocations to counterparties and their clearing agents, and to
provide matching services. Market participants are expected to interact with the
CMU either directly or through service providers such as custodians, clearing
banks or brokers, or service bureaus offering ASP (Application Service Provider)
models or other methods to utilize the CMU functionality.

Messages that will be passed between the investment manager and the
broker/dealer using the CMU as an intermediary are a) block trade information in
the form of a notice of execution, b) allocations instructions from the IM, and c)
acknowledgement or acceptance of the allocations by the broker/dealer18.

To expedite matching in a shortened settlement environment, an alternative
suggested by the ITPM is a “Level 1” match, which does not require additional
broker/dealer intervention once the NOE has been submitted. The model places
responsibility on the CMU to ensure that the allocations are correct vs. the block
trade. This assumes the CMU would access an industry-centralized database in
order to cross-reference the IM’s sub-account identification to the broker’s
internal account number (BIA) for that particular sub-account.

              2. Use of Standards to Facilitate Automation
Since the FIX protocol is widely used for order/NOE messaging, it would seem a
natural evolution to use the same FIX connection between the parties to
communicate allocations. Automation of the process from pre-trade to pre-
settlement can now be expedited using the FIX allocation messages introduced
with FIX version 4.4.

The exchange of block trade and allocations information electronically will enable
market participants to take trade information into their internal systems for
automated matching and processing. FIX messages have been created to



18
     This is referred to as a “Level 2” match in the ITPM.

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provide for electronic trade confirmation and affirmation.19 A current industry
initiative dubbed “STP Lite” is underway to use FIX messages to support bi-
lateral enrichment of settlement messages20 by pulling settlement instructions
from either a centralized repository or a local database. Some have envisaged
this method using FIX could supplant the use of commercial products.

Omgeo recognizes the potential of FIX in the trading workflow and has plans to
introduce “Deal Time STP” later this year for cross-border trades. This feature
allows an investment manager to submit allocations in FIX format to Omgeo for
matching and enrichment in CTM (Central Trade Manager).               Investment
managers using FIX will gain central matching capabilities without having to build
an interface to CTM.

At some point, the industry anticipates other entities will become “qualified”
providers of electronic confirmation or matching services, as Omgeo is today.21
Equally important is the interest market participants have shown in exchanging
information bi-laterally in order to match “locally” rather than using a central
service. For the US market, this raises a critical issue; that is, use of a method
other than TradeSuite for trade confirmation in the current environment makes it
difficult to seamlessly link the confirm/affirm process with the settlement process.

We believe market participants must work with DTC to ensure there is an
automated process in place using a standard message format, to allow a trade to
be passed to DTC for settlement without having been entered through, or subject
to charges by Omgeo’s TradeSuite or CTM processes. Likewise, further
regulation imposed with respect to STP must allow for alternative paths to
settlement.

Investment managers and broker/dealers should have an opportunity to improve
straight through processing with adoption of standards, and not be restricted to
use a single commercial product. To the extent that market participants as well
as vendors of order management systems, trading platforms and processing
services apply the use of standards to their business practices, the industry can
enjoy the efficiencies and cost-savings associated with an open environment.


              3. Streamlining the Process with a New Service Model
From the front office sales-trader’s perspective, the ability to process block trades
vs. allocated trades is attractive as it reduces the need to receive sub-account
breakdowns. One such model relies on a custodian or prime broker to manage


19
   At this point in time, these messages have not been deemed “10b-10 compliant”, nor has FPL submitted
any requests to the Securities and Exchange Commission related to use of these messages for US-traded
securities or with US customers. These messages are being programmed for use in non-US venues.
20
   SWIFT message formats (ISO 15022) are more widely used for this purpose in UK/Europe; however,
SWIFT is incorporating FIX XML standards for world-wide use.
21
   See prior discussion “DTC-settled Securities Automated Through TradeSuite” and footnote 17.

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sub-account allocations as a back-office process, as opposed to a front office
sales function.

For instance, investment managers are increasingly managing portfolios for trust
accounts at custodian banks, which perform all portfolio and custodial services.
The investment manager will place an “omnibus” order for execution by a
broker/dealer. After the trade execution is completed, the investment manager
must provide the custodian(s) with an allocation of the trade into the sub-
accounts. The broker/dealer processes the trade into its P&S system in order to
generate an ‘omnibus” confirmation (ex. ABC Asset Manager, A/C Bush Family
Trust Accounts, C/O First Texas Trust Company). The custodian(s) will settle the
trade as a block and internally credit the sub-accounts based on the omnibus
allocation from the investment manager.

       C. Allocations Processing - Summary

Conclusions: Alternatives are readily available for handling allocations in an automated
manner including trade order management systems, matching utilities, value-added
services offered by trade processing vendors, as well as the ability to exchange
allocations information and process locally using a common message standard such as
FIX. The industry needs more openness in sharing account data across applications and
platforms.

Recommendations: Buy-side should review alternatives and work with their
counterparties and service providers (including custodians) to select solutions that can
meet their needs cost-efficiently. Sell-side must be ready to accept allocations
electronically in FIX format and encourage vendors of order management systems to
migrate from proprietary formats to FIX. A centralized database not associated with a
“matching utility” would encourage peer-to-peer connectivity and processing of
allocations.

Action Items: Work with SIA Committees to further educate market participants
regarding available STP solutions. Reach industry agreement on use of standards and
create clear incentives to support program adoption that can be embraced by the
industry. The industry must work with DTC to ensure that achievement of STP for DTC
settled trades does not require the use of Omgeo products exclusively. Ask SIA
subcommittees concerned with settlement to address alternatives to Omgeo’s
TradeSuite and CTM.




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V. Summary of Conclusions, Recommendations and Suggested Action
Items

Conclusions:
1. Many STP obstacles can be overcome by employing existing commercial services.
   Other issues require industry resources (e.g. exchanges, utilities and standards
   bodies) to come together to effect change.
2. Less than half of the buy to sell-side transactions are being sent electronically.
3. Electronic order submission can be accomplished using commercial Trade Order
   Management systems (TOMs); or, through technology services offered by
   broker/dealers such as under prime brokerage arrangements; as well as through in-
   house development leveraging industry accepted FIX protocols.
4. A well-planned front office workflow, pre-trade through post-execution, and real-time
   connectivity to related internal systems is integral to achieving STP and reducing
   downstream processing errors.
5. Lack of standards and timeliness in the way securities are represented and changes
   are applied creates significant obstacles to achieving STP.
6. Increased regulatory compliance requirements have added significant effort and
   expense to the already manual and error prone process of setting up new accounts.
7. There are vendor services available to assist firms with PATRIOT Act and AML
   compliance ranging from ad-hoc queries or an ASP model, to enterprise-wide global
   solutions for high volume, sophisticated users.
8. Alternatives are readily available for handling allocations in an automated manner
   including trade order management systems, matching utilities, value-added services
   offered by trade processing vendors, as well as the ability to exchange allocations
   information and process locally using a common message standard such as FIX.
9. The industry needs more openness in sharing account data across applications and
   platforms.

Recommendations:
1. Widespread adoption is needed to provide full benefit to those that have
   implemented STP solutions. Financial incentives/disincentives should be offered to
   market participants that continue to operate in a manual mode.
2. Select a commercial vendor, prime broker solution, or implement FIX internally to
   automate order submission in a standardized manner.
3. Use middleware to support internal connectivity and real-time information sharing.
4. Firms must continue to work to consolidate data internally and maintain it with more
   frequent intra-day updates.
5. Exchanges and industry utilities must also strive for cross-industry consistency and
   establish standards for describing securities and events. Examples:
   • Corporate actions applied to open limit orders should be adjusted by both price
       and quantity using the same rounding rules in place today.
   • Some standard messaging from the exchanges and/or OCC in real-time is
       necessary to support automated set up of new securities.
   • Where conversion to a new standard is not feasible, an industry maintained
       cross-reference table, accessible to all, would be helpful in supporting
       automation.
6. Firms should seek vendor solutions that provide PATRIOT Act information and
   automation commensurate with their needs.


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7. ALERT should be viewed and priced as an industry resource to promote industry-
    wide access to account information.
8. The industry should support ISO Working Group initiatives to establish standards
    that can help identify legal entities and link associated accounts to assist firms in
    addressing risk management and regulatory compliance issues.
9. Centralized sources for account information including required paperwork, account
    preferences and settlement instructions can allow information sharing and relieve the
    burden presently on each financial institution to gather and maintain detailed account
    information.
10. Buy-side should review alternatives and work with their counterparties and service
    providers (including custodians) to select solutions for handling allocations that can
    meet their needs cost-efficiently.
11. Sell-side must be ready to accept allocations electronically in FIX format and
    encourage vendors of order management systems to migrate from proprietary
    formats to FIX.
12. A centralized database not associated with a “matching utility” would encourage
    peer-to-peer connectivity and processing of allocations.

Action Items:
1. Work with SIA Committees to further educate market participants regarding available
   STP solutions.
2. Encourage industry entities to develop ROI metrics to support and promote STP
   initiatives.
3. Reach industry agreement on use of standards and create clear incentives to
   support program adoption that can be embraced by the industry.
4. Work with FIX to ensure that all order submission requirements are properly
   accommodated.
5. Encourage vendors to adopt FIX standards and support the full range of FIX
   capabilities.
6. Bring together industry resources (exchanges, utilities, standards bodies) to
   • Determine instances where data and messaging standards can help to eliminate
        manual processes, increase timeliness and reduce errors
   • Devise a plan to develop and introduce standards
7. Ask SIA Corporate Actions Subcommittee to address re-org and corporate actions
   issues identified in this document.
8. The industry must work with DTC to ensure that achievement of STP for DTC settled
   trades does not require the use of Omgeo products exclusively. Ask SIA
   subcommittees concerned with settlement to address alternatives to Omgeo’s
   TradeSuite and CTM.




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                      Appendix – Financial Information Forum
                           STP Front Office Committee
                            White Paper Contributors



Contributor                              Company Affiliation
Nick Davidge, Committee Chair            Davidge Data Systems
Steve Bliss                              Sungard
Patrick Dote                             Société Générale
Nicole Goudy-Rigger                      Alliance Capital
Tom Jordan                               FIF
Mike Lavoie                              Sungard
Bob Linville                             ADP/SIS
Leo McBlain                              FIF
Kathy McGovern                           FIF
Deborah Mittelman                        Instinet
Bob Munro                                ADP/SIS
Rick Naramore                            The LPW Group
George Reis                              Sungard
Alan Streeter                            Jordan & Jordan
Mary Lou Von Kaenel                      Jordan & Jordan
Lisa Young                               Charles Schwab




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