Straight-through processing (STP) entered the lexicon of the securities service industry a decade ago. Some would say it has remained there ever since. STP is the automated passage of a securities trade from execution to settlement without manual intervention.

Swift, the Brussels-based securities messaging network, reckons one in five securities trades still fail to settle on due date, while Tower Group says one in five cross-border trades fails to settle at all.

According to a survey by Sungard last year, two out of three trades need to be cancelled, amended, or repaired. But there is now a renewed sense of urgency.

Without dramatic improvement there are fears the industry will be unable to cope with a rising volume of transactions, especially across borders, as world markets move to shorter settlement timetables.

With the giant US market moving to settlement on T+1 (day of trade plus one day) in June, 2004, STP is now an urgent necessity rather than an aspiration.

With settlement on T+3, there is enough time to communicate by telephone or fax or file transfer, haggle with counter-parties across time-zones about trade terms, and process polished trades in batches several times a day rather than continuously in real-time.

But T+1 is different. It requires fund managers and broker-dealers to agree the terms of trades and despatch them to custodians for settlement on the day the bargain is struck. At present the terms of only one trade in eight in the US market are agreed the same day. The European record is worse.

However, the industry has learned one thing over the last 10 years: that there is no single, all-encompassing solution. It is in the nature of STP that it can't be achieved by any part of the industry acting alone.

Though consolidation and a growing willingness to out-source administrative tasks means the division of labour is not as neat as it was, fund managers still order, broker-dealers still execute and custodians still settle.

It follows that, to achieve genuine STP, this trio have to exchange accurate information as soon as possible. Their ability to do so depends on improvements to both internal efficiency and the external infrastructure with which they work.

Internally, progress is patchy. "Our research suggests that 60 per cent of the industry fund managers, broker-dealers, and custodians have yet to get started on STP solutions," says Colin Close, chief information office at Netik, a leading supplier of STP solutions. "Large firms are reasonably well-prepared but small and mid-sized houses have usually done next to nothing."

The big custodians, having invested in exception-processing technology which allows staff to focus on trades that are likely to fail and repair them quickly, have made progress.

"We are measurably more efficient than we were two years ago," says Paul Stillabower, managing director, global custody, at Royal Trust in London.

But years of fat trading profits have robbed broker-dealers of the same incentive to invest in the back office.

As a result, STP often breaks down at the first hurdle: the link between the front office order management system and the back office accounting system. A Securities Industry Association (SIA) paper on preparedness for the switch to settlement on T+1 in the US in June 2004 reckoned spending of $8bn is necessary and that nine out of 10 of these dollars will be spent on improving internal STP.

Faced with costs of this magnitude, it is not surprising that fund managers are increasingly inclined to outsource responsibility for securities processing to custodian banks and third party vendors such as axion4gstp and Omgeo.

Omgeo and the industry-funded axion4gstp consortium have become synonymous with the drive to global STP. In fact, both focus on a relatively narrow segment of the securities transaction cycle: the post- trade, pre-settlement environment. Their aim is to ensure fund managers and broker-dealers confirm trade details quickly and accurately, mainly by matching them in a central utility known as the Central Trade Manager (CTM) at Omgeo and the Transaction Flow Monitor (TFM) at axion4gstp.

"The conventional wisdom about STP is that all you need is a matching engine," explains Kevin Milne, managing director of Omgeo. "But that would have little or no impact on 90 per cent of problem trades. You also need information management and performance measurement tools."

So the CTM and the TFM will limit the manual keying and re-keying of data by parking unchanging information which can be agreed in advance - currency, trade and settlement date, commissions, fees and taxes, security identification codes and the like - on to accessible databases. They will also provide automated links to the third party to any securities transaction: the custodian banks which take delivery of the cash or securities.

Unfortunately, agreeing on a common language for the links is more difficult than it sounds. Swift, which doubles as registration authority of the International Organisation for Standardisation (IOS) for financial message standards, has overcome its traditional hostility to admitting fund managers and broker-dealers to its messaging network. But its need to secure the consent of more than 2,000 members means it still takes aeons to develop the standardised message formats which would facilitate the exchange of trade data between the three parties to a trade.

Since traders and investors cannot wait, message types such as FIX and XML have proliferated, forcing Swift to adopt a pragmatic approach without abandoning its long-term aim of ensuring the entire securities industry conforms to a single message standard.

"Our approach is two-fold," says Francis Remacle, head of the securities industry division at Swift. "In the short-term, we must enable inter-operability, and ISO 15022 provides a solid foundation for achieving interoperability. But our ultimate goal must remain convergence on a single standard. Our work with FIX and other industry bodies under the ISO XML umbrella will enable convergence."

Meanwhile, systems suppliers are already delivering inter-operability. "Our solutions have to provide real-time translation between different message types, including Swift ISO 7775 and ISO 15022, FIX, ISITC, XML and dozens of other proprietary standards," says Netik's Mr Close.

Mr Stillabower says only two-thirds of instructions received by Royal Trust as global custodians arrive in Swift formats. He adds that, because fund managers have multiple clients with custodial relationships and preferences of their own, they end up dealing with dozens of custodian banks.

It is hard to automate communication between such a large number. "So many fund managers use fax to communicate with their numerous custodial providers," says Mr Stillabower.

Fortunately, a solution to this problem has emerged. A number of commercial providers, such as TradingLinx and Encompys, have agreed to act as message "concentrators" for Omgeo and axion4gstp, accumulating and cleaning up messages from fund managers and broker-dealers for onward transmission to the two global STP utilities.

Concerns that users of Omgeo and axion4gstp would be unable to communicate with each other are also receding. The two providers are presently engaged in a discussion intended to deliver full interoperability, and most big custodians are expecting to support both.

"We see the GSTPA initiative as a key step to building a higher level of STP in a T+1 environment," says Neil Henderson, a senior vice-president at JP Morgan Investor Services. "But we also support the Omgeo initiative, and will adapt our systems to interface with them. Interoperability between GSTPA, Omgeo and any yet-to-be-announced services is an industry priority because clients may want to use one system but will need to link to counter-parties using another."

In fact, the history of hostility between GSTPA and Omgeo is now likely to be superseded by controversy between fund managers and broker-dealers, as the performance measurement tools provided by the CTM allow fund managers effectively to name and shame their least STP-enabled broker-dealers.

"The benchmarking tools allow a fund manager to drill down and see where the bottlenecks in his own processes are," says an Omgeo spokesman. "He will also be able to see how his brokers perform and rank against each other. As a result he will be able to put pressure on them if he so wishes. High performing brokers, on the other hand, can use the benchmarking reports as marketing tools."

But Omgeo and axion4gstp are not alone in believing that benchmarking the operational performance of fund managers, broker-dealers and custodians will embarrass under-performers into raising their game on penalty of losing business to more efficient competitors.

"We have been providing our clients with this kind of information for years," says Mr Stillabower from Royal Trust. "It helps them understand and resolve problems in particular markets."

But the need for performance measurement is a reminder that the STP problem has to be solved within firms as well as between them. The Tower Group estimates that between them, fund managers, broker-dealers and custodians around the world will spend $19.1bn over the four years prior to the introduction of settlement on T+1 in the US.

No-one doubts it is worth doing: the SIA study reckoned the greater efficiency that results will save the US securities industry alone $2.7bn a year. Swift puts the global STP prize at $12bn a year.

Dominic Hobson is executive editor of Global Custodian Magazine