Published: December 01, 2009
STP – straight-through processing - has in the past been seen as technology that could only be afforded by banks, by other large financial institutions, and by the most complex corporate treasuries. Corporate treasury management systems have now evolved to the extent that they can deliver automated, cost-effective treasury process management, which allow workflows to be automatically managed and monitored. STP implementation is, therefore, now within the reasonable technology budget range for large and most medium-sized corporate treasuries.
There are numerous definitions of STP that relate to a range of commercial and technical environments. For the purposes of this article, STP is defined as ‘the facility to process a treasury transaction from start to finish with minimal human intervention.’ Such a high level of automation is attractive to all treasurers who struggle with their supporting technology to process the day’s business with minimal errors. Processes which are exclusively or largely manual are prone to encounter control, reliability and accuracy issues, such as the missing of critical payment deadlines, and difficulties with the preparation of the essential operational and management reporting. Such inefficiencies often lead to real financial loss, for example through interest costs incurred through failure to make timely payments. The key questions relating to evaluating STP focus on understanding the benefits that can be achieved in a specific corporate treasury environment, and quantifying their value in the course of a cost justification exercise for securing the necessary investment budget.
This article analyses, with practical examples, some of the key elements in the evaluation of potential STP benefits. It relates to a wider audience than the treasurers of large and medium-sized enterprises that manage a significant volume of transactions and level of financial risk in-house: it is also applicable to organizations who are evaluating outsourcing service providers, as the quality of the technology being used in such organizations has a direct impact on the quality of service that can be delivered to their clients.
From a corporate treasurer’s viewpoint, the underlying value of STP can best be understood in the context of their ability to respond positively to the most demanding questions that may be posed by CFOs, auditors and other inquisitors, such as:
All treasurers will agree that the ideal response to all of these questions is instantaneous, via a screen display of the appropriate information that has been updated automatically in real time. The next best response is to run a report that provides the required information in a matter of a few seconds.In both cases, the speed and dependable accuracy of the results are equally important in order to respond immediately – and this response may make the difference in avoiding or minimizing a significant financial loss. Only a secure STP solution can deliver the best practice results that are demanded in today’s financial environment. Only in an STP environment can the treasury professionals focus entirely on their cash, treasury and risk management activities without having even to think about obtaining the relevant data, confirming its accuracy, and adding it to a report. In an STP environment, treasurers need not even be consciously aware of how their supporting technology is operating, but will in practice be able to make their decisions and report to management in full confidence of the quality of their actions.
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In a corporate treasury, STP is delivered and controlled through a treasury management system, or TMS. There are a number of features that a TMS must include in order to implement effective STP, with low operational risk. Firstly, the user must be able to define, secure and document treasury processes. Process definition and automatic monitoring, control and management are described in several examples below.
Underlying these processes, the system must update all relevant treasury database tables as soon as new information becomes available, so that all required information is immediately accessible in screen displays and operating reports. This requires monitoring facilities that react in real time to the arrival of new or modified information, by direct data entry, or via import. Additionally, the system must be able to monitor and manage changing external data: examples include checking for updated versions of intra-day bank transaction reports, and of automatically detecting and acting on critical changes to market rates. These facilities are essential elements in the provision of the highly dependable and secure results that are required in an effective STP solution.
Each treasury must individually assess the benefits of full STP, and decide on the value that the elimination of each manual and spreadsheet process will bring. Human intervention is, notoriously, the source of errors and omissions that can only be minimized by intensive, expensive and unproductive checking operations. Spreadsheet based operations lack transparency and robustness, and tend to be poorly documented, which leads to maintenance difficulties, especially when the spreadsheet expert has moved out of the company. There will be cases where volumes and perceived financial risks are very small, in which full STP may not be cost-justified – but treasuries of any size or complexity will usually benefit from the more efficient use of professional staff in an automated environment – and the availability and reliability of critical decision support and management information may provide the compelling argument for implementing STP.
It is only in a hands-free STP environment that treasury management can feel fully secure that vital tasks have been performed in a timely fashion, and that decisions and management reports are based on fully reliable information. In practice, each workflow needs to be defined and documented in fulfilment of treasury policy, and then implemented as an STP process which, after thorough testing, is locked down with full security to ensure a very high level of dependability. There may be situations in which some level of manual intervention is required, for example to provide verification and additional authorization for some conditions (such as payment size) detected in the workflow monitoring; but the basic concept is that fully validated transactions should flow efficiently through the process with minimal – or zero – intervention.
Example 1 – Confirmation Processing
In this example, an STP process for managing electronic confirmations is illustrated in a ‘process map,’ which defines, documents, manages and controls a specific treasury process.
The process starts with detection by the confirmation process of 20 deals that require confirmation. The TMS automatically checks every deal against pre-defined rules, which specify whether each specific deal type /counterparty combination is defined to be eligible for electronic matching; if not, the TMS will generate a paper-based confirmation letter, and the matching results will be entered into the TMS. Otherwise, the STP process continues automatically, and the TMS builds electronic confirmation records and exports these to the client’s electronic confirmation service, such as SWIFT Accord. This service attempts to match the TMS confirmation with a confirmation submitted by the deal counterparty. The match attempt result is exported and detected automatically by the TMS in the STP confirmation management process. The TMS then initiates research and repair operations for rejected and unmatched deals, including the automatic sending of chasers to the counterparties. For matched deals, the STP workflow continues with the automatic initiation of the payments process. In the example, 15 match-confirmed deals are moved along for settlement. The reporting workbenches shown below the process map document the open confirmation items with counterparties, and also graphically illustrate some confirmation statistics.
The second example shows how a treasury can implement a secure hands-free confirmation management STP process that radically enhances the quality of independent control over the accuracy of treasury dealing. The workflow is transparent and fully documented, aiding auditability, and the automatic monitoring of open items assures management that there is a tight and clear control in place, in accordance with treasury best practice. [[[PAGE]]]
Example 2 – Payments Management
This example is a continuation of the Confirmation Management process described above.
The STP process starts with the detection of payments due for settlement originating from confirmed treasury deals, and also from a range of other sources. The example shown is – as appropriate for such a sensitive financial operation – tightly controlled. It includes verification and authorization steps, which may be controlled based on pre-defined rules (such as payment size). Foreign payments are reported to the central bank. Properly verified and authorized payments flow automatically through for release into the external payments process. Additionally, the TMS STP process monitors the status message returned by the payment system (in this case, SWIFT ‘ACK/NAK’ - Acknowledged or Not Acknowledged - messages) and then initiates action to repair and re-release failed payments, and to continue processing and reporting successful payments.
The Confirmation Processing and Payments Management processes fit into a full treasury dealing STP workflow, which can, where appropriate, include automatic interaction with electronic dealing portals, market rate feeds and interfacing with ERP systems for the export of accounting journals. Where volumes, financial risk levels and costs justify this, a fully secure end-to-end treasury dealing STP can be implemented.
This article has outlined some of the key benefits of implementing partial or full treasury STP. Each treasury operation’s management will need to apply the cost/benefit analysis to their own circumstances – and to their abilities to answer the demanding management questions about cash, financial and operational risk outlined at the beginning. Peer group experience such as that of Hunting PLC is always helpful when evaluating innovative ideas. More and more companies are objectively evaluating STP benefits – and going on to implement STP projects, because of the tangible benefits that can be achieved.
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