Innovation Hibernation: The Road to Straight-Through Processing

Effective last week on September 5th, the investment industry moved to  “T+2” settlement.
This new rule makes investment transactions complete two business days after the actual transaction date.  This is a change to the long standing “T+3” settlement rule which since the 1990’s has caused investors to have to wait three business days before they could consider their transactions closed. Keep in mind this was a huge jump from the T+6 rule that existed previously.
Photo by Christine Roy on Unsplash
Photo by Christine Roy on Unsplash
What’s fascinating to me is that the last time I was thinking about this rule, it was 2001. That year, there had been a huge push by the major investment banks to move to what would be called “Straight Though Processing” or STP for short. If you worked in financial systems integration consulting, you were working on STP.  In any event, I can remember being perched in our Manhattan offices through the midnight hours to develop our several hundred page proposal.
Later that year our attention turned to 9/11, and STP was no longer as important as keeping the financial system running. Just a few years after that, we lived through another financial crisis, this time due to mortgage-backed securities fraud. That crisis which brought down several of the largest players in finance also pushed the notion of STP further away from public awareness.
So here we are, 16 years later with a reduction in settlement time of one day. The nirvana of STP is still elusive, but it’s kept alive in terms of progress toward an ideal: you’ll see clearing houses now present their STP Rate (e.g. 95% STP).  That said, the road to T+2 is one that illustrates some important points about innovation in business.
  1. You can never underestimate the ability of a crisis to sideline even the boldest business ideas. 9/11 was an event of monumental significance where the sheer emotional and destructive forces unleashed succeeded in pushing this initiative far from the minds  of those who would champion it.
  2. Incremental improvements can often be “good enough”.  In this case, 16 years later, the industry pushed to “T+2” while maintaining the spirit of STP. While this was short of the goal, the reality is that one day gained back by investors is enough to eliminate mountains of incomplete trades and put more money back into new investments.
  3. You’re going to need a bigger framework.  STP was trying to make a number of existing complex systems work together. In contrast, the greenfield Securities Process Automation (SPA) movement has shared many of the same goals as STP while also proscribing a more far-reaching ideal. That said, it has been much more modest and pragmatic in implementation recommendations.
In any event, it’s great to see something you worked on come to fruition. I wonder what we’ll be saying about Blockchain in 16 years.