Get certified - Transform your world of work today

Close

An Empirical Look: Do Agile and Work Flow Management Systems Help Financial Investment Firms Achieve Straight-Through Processing?

31 July 2017

Geoffrey Webster
Fidelity


Introduction

Changes in the financial investment sector have resulted in rising trade volumes and increasing risks for securities transactions. Key factors influencing the changes include regulatory modifications, globalization, wealth accumulation, industry consolidation, and technological advancements (Dincer 2014). All of the aforementioned key factors have made achieving straight-through processing to shorten the trade processing life cycle while minimizing the risks a monumental effort. While attempting to achieve straight-through processing, exception management continues to be critical to pass trade information within a timely, complete, and accurate manner. However, the major issue of such manually intense intervention has not been sufficiently addressed, and the approaches of automating exception management are still under investigation (Chen 2015, Khanna 2010).

In the past two decades, Agile software development has become popular and has quickly delivered flexible software solutions highly regarded as key to businesses being successful. However, it is not enough to produce software solutions that are flexible and quick; they must also be effectively implemented and integrated into the organization as well. More recently, over the past few years, the implementation effort has been increasingly driven by work flow management systems. Work flow management systems enable IT developers and business partners to handle the complexity of integrating multiple software solutions arising at different times into a seamless workable solution. Thus, the question here is: Can Agile software development and work flow management systems have a positive impact on addressing straight-through processing in the financial investment sector? And if so, how much of an impact is already being experienced? What else is being expected of Agile software development and work flow management systems?
 

Straight-through processing in the financial services industry

Straight-through processing is a dedicated commitment to settle a securities transaction within 24 hours, which is a major shift from the current U.S. settlement practice of three days. Obviously, a primary benefit of straight-through processing is a significant decrease in settlement risk because of the reduction in transaction-related processing time. The shorter processing time greatly decreases the risk that a contract or agreement will be settled outside the appropriate time frame (Williams 2012). Thus, straight-through processing can be defined as capturing and processing transactions in one pass from the point of the initial inception of the pre-trade deal to final trade settlement.

In 2001, the U.S. Security and Exchange Commission announced plans to shorten the settlement cycle to within 24 hours, also referred to as T+1, by mid-2005 (U.S. Securities and Exchange Commission, 2001). As a result of this announcement, many financial investment players were required to begin developing capabilities to reach the desired goal. Their efforts surfaced that there are many barriers to attaining a settlement within one day, including lack of automation, inefficient communication networks, and poor software solution development techniques. A key observation in regard to automating a business process is to properly define a work flow model. The work flow model describes the sequence of tasks required to be performed daily by a business (Cardoso 2009, Sharp 2009). Figure 1 displays the relationship among the trading parties in a three-day settlement scenario, also referred to T+3. Figure 2 shows the desired relationship flow in a one-day settlement environment.
 
fig-1.jpg
Figure 1. T+3 Trade and Settlement Process Flow – Entity-Relationship View

Due to the ever-increasing trading volumes in both domestic and international securities transactions, the risks faced by global financial investment firms and world markets are growing (Kumar 2014 and Pilbeam 2010). Inefficiencies and just plain waste caused by various types of manual intervention, systemic delays, lack of standardization, and numerous other miscellaneous interruptions in the securities transaction work flow have led to extremely high costs, significant operational risks, and alarming trade failure rates (Laeven 2014). Clearly, the financial investment sector is presently grappling with how to be more adept in processing trades. Straight-through processing is the end-to-end automation of security trading process from order to settlement. It consists of processing the electronic transfer of trade information in an automated seamless manner and as close to real-time as possible. Nonetheless, it is prudent that proper planning and action is taken to address trades that contain errors, unique complexities, tedious characteristics, or exceptional risk in order to identify and resolve these items expeditiously in conjunction with expanding automation (Milne 2007). Straight-through processing is only attainable if the trade information is completely and accurately processed within the expected time frame.
 
figure-2.jpg
Figure 2. T+1 Trade and Settlement Process Flow – Entity-Relationship View
 

IT project managers’ perspective

While there are numerous works incorporating feedback and thoughts from IT project managers, there is little available on their views in regard to how financial services firms operate with respect to straight-through processing, Agile software development, and work flow management systems. This research offers a methodological approach that allows for the exploration, description, and analysis of the IT project managers’ orientation toward these developments. Their opinion is invaluable because they execute projects that touch the entire securities trading process, giving them unique insights on what could make securities trading more efficient.
 

Methodology

Given the lack of empirical research on straight-through processing from the IT project managers’ perspective within the financial services industry, the researcher intended this study as exploratory and descriptive research. The study employed a survey as the instrument to collect the IT project manager’s thoughts, and an analysis was performed to identify patterns displaying the collective thinking of the respondents. The sampling technique used was purposive, because random sampling was not possible. The survey instrument was designed using a Likert scale, multiple choice questions, drop-down boxes and open-ended questions to measure the respondents’ thoughts toward the interrelationships among straight-through processing, work flow management systems, and Agile software development.
 

The use of Scrum is dominant

Table 1.0 displays that Scrum is the dominant method used by 81.5% of the respondents. Delving into the Other category, the analysis reveals that only six of the 20 respondents are using some form of Agile that is proprietary, while the remaining 14 are not using Agile software development. Among those using an Agile method, about 51% (54 of 105 respondents) have more than five years of being Project Management Professional–certified.
FIGURE-3.jpg
Table 1.0. Association between years PMP certified and the use of primary Agile method

The finding of Scrum being used significantly more than other Agile methods could be contributed to its ease of use as compared to other methods (Rubin 2012, Greene 2014). In addition, the Project Management Institute offers an Agile certification via registered education providers. This certification covers the following Agile software development methods: Scrum, extreme programming, Kanban, and test-driven development. Searching through the Project Management of Institute website, there are 86 registered education providers of Agile training, with most offering Scrum training. Fewer than 10 taught a Kanban, test-driven development, or extreme programming course. This development also coincides with the use of Scrum by the sample respondents.
 

Other findings

In measuring the attitudes on straight-through processing, a six-point Likert scale ranging from 0 (“Not at all”) to 5 (“Very Heavily”) was used on seven items. Questions 15, 20, 23, 25, 28, 31, and 33 of the research survey asked the respondents to rate their respective company’s commitment and usage of work flow management systems and Agile software development in relation to straight-through processing. Tables 1.1, 1.2, and 1.3 show the results from the respondents.

figure-4.jpg
Table 1.1. Distribution of perception for straight-through processing projects initiated

Reviewing Table 1.1 reveals that the initiation of projects to attain straight-through processing is low. Forty percent of the respondents (n=33) selected 0 or 1, meaning very little was done to initiate projects to increase straight-through processing. This is more than double the 18% of respondents (n=15) who stated that the number of projects initiated to increase straight-through processing is high. This result is surprising, especially since the Securities and Exchange Commission, the governing body over securities transaction processing, made the request for the financial services industry to be straight-through processing compliant in 2001, with a target date of 2005 (International Monetary Fund 2015). One thing that could be contributing to the low response rate thus far is that the Securities and Exchange Commission made it a request and not a directive. If the request had been a ruling due to some issue that needed to be addressed across security trade processing, either locally or globally, for legal purposes, then the firms in the financial investment sector would have been more aggressive in their approach to pursue straight-through processing. Another reason for the low response rate could be the lack of integrated connectivity among firms along the securities trading process (Aggarwal 2015, Groot 2010). Aggarwal’s research shows that issues reside in the lack of integrity of standard unique identifiers that would allow the passing of information to occur without the need for manual cross references and rekeying of data. Groot’s work shows similar findings and also adds the point that companies just started building more robust data architectures in the past few years with the recent hiring of chief data officer roles. These individuals are usually responsible for enterprise-wide governance and utilization of information as an asset via information exchanges, data processing, general data analysis, and business intelligence.
figure-5.jpg
Table 1.2. Distribution of perception for Agile software development

In addition, Table 1.2 provides the distribution of the perception of the respondents regarding the impact of Agile software development on straight-through processing. This shows that the respondents from the financial investment sector have a strong view that Agile software development has done little to achieve straight-through processing, nor has it been much of an assistant in any of the associated activities, such as automated electronic trading and adapting to regulations for securities trading. It is clear that projects to increase straight-through processing is low, as shared in the previous paragraphs, which is one contributing factor to this line of thinking. Another contributor is the fact that financial investment firms have been focused on how to best evolve the customer relationship, given the backdrop of continued disruption and ongoing political and regulatory uncertainty (Kumar 2012, Seshadri 2012, Reamer 2013). Client relationship management and associated systems have commanded the attention of financial investment firms because of the instability of customer commitment to their products and services. The instability results in lost revenue and, in this climate of ever-decreasing margins, companies cannot afford to lose accounts, especially those that happen to be very profitable. On top of this is the fear of new regulations hindering the firms from expanding their portfolios to attract new clients while maintaining current revenue streams. Declarations like the Department of Labor’s Ruling to redefine what is investment advice causes a firm to design and implement new processes to respond favorably to the ruling. However, the time to respond coupled with the available resources may not give a company enough time to try new technologies and methods in conjunction with meeting compliance deadlines.
figure-6.jpg
Table 1.3. Distribution of perception for work flow management systems

Table 1.3 highlights the distribution of the perception of the respondents regarding the impact of work flow management systems on straight-through processing. It indicates that the respondents have a view that work flow management systems do even less than Agile software development to achieving straight-through processing. This also holds true for the respondents’ perception of work flow management systems assisting in any of the associated activities, such as improving automated electronic trading and adapting to regulations. With automation being a core characteristic to work flow management systems and an essential element to achieving straight-through processing (Charter Institution of Bankers 2010), this outcome is unexpected. A reason for this occurrence could be that automation efforts in financial services seem to initially target reducing manual keying for faxes and mailed documents (Bider 2010, Nof 2009). From that point, ongoing expansion seems to be driven primarily by efforts to link to areas associated with the aforementioned items (Fischer 2010).
 

Conclusions

According to the opinions of the respondents and the findings of this research, Agile software development and work flow management systems do not have a significant impact on the advancement of straight-through processing in the financial investment sector. There was an overwhelming consensus among the IT project managers that neither were crucial to achieving straight-through processing.

The results are of significance because they represent the views of IT project managers who have played key roles in the use of Agile software frameworks as well as the development and implementation of work flow management systems for securities trading processing. These individuals work in the financial investment sector and hold positions across various types of companies. Consequently, the results of the survey should be of particular interest to all types of financial investment organizations that are either actively using Agile for software development or implementing work flow management systems, or who are evaluating using either in regard to pursuing 100% straight-through processing. Furthermore, the results should be of great interest to all IT professionals and academics who have a concern about how straight-through processing can be attained and the implications of the introduction and use of Agile practices and work flow management deployment solutions for processing securities trade transactions.

References
  • Aggarwal, Anil. 2015. Managing Big Data Integration in the Public Sector. Hershey, PA: IGI Global.
  • Bider, Ilia. 2010. Enterprise, Business-Process and Information Systems Modeling. Heidelberg, Germany: Springer-Verlag.
  • Cardoso, Jorge. 2009. Handbook of Research on Business Process Modeling. Hershey, PA: IGI Global.
  • Charter Institution of Bankers. 2010. International Chief Financial Officers and Fund Managers Reference Book. London, England: Kensington Publications Limited.
  • Chen, Whei-Jen, Rajeev Kamath, Alexander Kelly, Hector H. Diaz Lopez, Matthew Roberts, and Yee Pin Yheng. 2015. Systems of Insight for Digital Transformation: Using IBM Operational Decision Manager Advanced and Predictive Analytics. New York, NY: IBM Redbooks.
  • Dincer, Hasan and Ümit Hacioglu. 2014. Globalization of Financial Institutions A Competitive Approach to Finance and Banking. Cham, Switzerland: Springer International Publishing.
  • Fischer, Layna. 2010. 2010 BPM and Work Flow Handbook. Lighthouse Point, FL: Future Strategies Inc.
  • Greene, Jennifer and Andrew Stellman. 2014. Learning Agile: Understanding Scrum, XP, Lean, and Kanban. Sebastopol, CA: O'Reilly Media, Inc.
  • Groot, Martijn. 2010. Managing Financial Information in the Trade Lifecycle. Amsterdam, Netherlands: Elsevier Science.
  • International Monetary Fund. 2015. United States: Financial Sector Assessment Program-Financial System Stability Assessment. Washington, DC: IMF Publications.
  • Khanna, Ayesha. 2010. Straight-Through Processing for Financial Services: The Complete Guide. Cambridge, MA: Academic Press.
  • Kumar, Rajesh. 2014. Strategies of Banks and Other Financial Institutions: Theories and Cases. Cambridge, MA: Academic Press.
  • Kumar, V. and Werner Reinartz. 2012. Customer Relationship Management Concept, Strategy, and Tools. Heidelberg, Germany: Springer-Verlag.
  • Laeven, Luc, Lev Ratnovski, and Hui Tong. 2014. Bank Size and Systemic Risk. Washington, D.C: International Monetary Fund.
  • Milne, Alistair. 2007. The Industrial Organization of Post-Trade Clearing and Settlement. Journal of Banking & Finance, Volume 31, Issue 10, Pages 2945-2961.
  • Nof, Shimon. 2009. Springer Handbook on Automation. Heidelberg, Germany: Springer-Verlag.
  • Pilbeam, Keith. 2010. Finance and Financial Markets. New York, NY: Palgrave McMillan.
  • Reamer, Nortin and Jesse Downing. 2013. Investment: A History. New York, NY: Columbia University Press.
  • Rubin, Kenneth. 2012. Essential Scrum: A Practical Guide to the Most Popular Agile Process. Boston, MA: Addison-Wesley Professional.
  • Seshadri, Sridhar. 2012. Creating Value in Financial Services: Strategies, Operations and Technologies. Berlin, Germany: Springer. Sharp, Alec, and Peter McDermott. 2009. Work flow Modeling: Tools for Process Improvement and Application Development, 2nd edition. Norwood, MA: Artech House.
  • Williams, R. Tee. 2012. An Introduction to Trading in the Financial Markets: Global Markets, Risk, Compliance, and Regulation. Cambridge, MA: Academic Press.
  • U. S. Securities and Exchange Commission, Settling Securities Trades in One Day, T+1, http://www.sec.gov, October 2001.

 

Opinions represent those of the author and not of Scrum Alliance. The sharing of member-contributed content on this site does not imply endorsement of specific Scrum methods or practices beyond those taught by Scrum Alliance Certified Trainers and Coaches.



Article Rating

Current rating: 1.5 (2 ratings)

Comments

Be the first to add a comment...


You must Login or Signup to comment.

The community welcomes feedback that is constructive and supportive, in the spirit of better understanding and implementation of Scrum.

 

Newsletter Sign-Up

Subscribe