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Wednesday June 26 2002 Web Services and Straight Through Processing Web Services in the Financial Industry Printer-friendly HTML version. This article discusses the fundamentals of STP, the need for, driving forces behind, and benefits of STP, the current state of technology supporting STP, and the relationship of enterprise and business-to-business application integration and business process management with STP. It further looks at the critical parameters for the success of STP, and examines the application of SOA-based framework to STP. There is also a discussion on the usage of Web Services for STP. What is Straight Through Processing (STP)? Straight Through Processing (STP), a solution that automates the end-to-end processing of transactions for all financial instruments from initiation to resolution, is set to revolutionize the financial industry. STP will streamline back office activities, leading to reduced failures, lower risks, and significantly lower costs per transaction. It encompasses a set of applications, business processes, and standards that will redefine the settlement and processing paradigm within the capital markets industry. STP has the same significance to the financial industry as Supply Chain Management (SCM) has to the manufacturing industry and Customer Relationship Management (CRM) has to the service industry. The need for STP Although the financial industry has reduced its T+5 trading cycle (settlement 5 days after the actual trade has been done) to a T+3, it has been a real laggard in any kind of business process management and technological advancement as far as trade settlement and processing are concerned. Decades old, manual, and redundant operational processes are still in place without any sort of automation. There are many points within the business process where human intervention is required. Furthermore, the flow and format of data from one system to another, such as from a trade pricing system to a settlement system and from a risk management system to a collateral management system, even within the company occurs in non-standard proprietary format. The issue of non-standard formats is multiplied when communicating with external trading partners, as each company may use a different format. The drivers behind and benefits of STP There are several drivers that are forcing the entire industry to bite the bullet of STP once and for all. These driving forces are also the key benefits of STP, as follows:
The current state of technology supporting STP One word that can describe the current state within financial organizations as far as STP is concerned: confusion. In a recent conference on STP (16th January 2002), more than half of financial companies confessed that they are yet to begin work for STP - mainly due to lack of clarity as where to start, what to do, what to change, and which technology to use. STP, which was introduced more than a decade ago, still remains point-to-point and is characterized by hard coded proprietary interfaces. STP Encompasses EAI and B2Bi Straight Through processing encompasses both enterprise application integration (EAI) and business-to-business application integration (B2Bi). EAI for STP, also known as internal STP, relates to the trade and settlement processes that are internal to an industry participant. B2Bi for STP, also known as external STP, is about connecting seamlessly to all external partners in the trading and settlement process, including the industry-matching utilities such as GSCC's RTTM, and Omgeo. The external partners include custodians, exchanges, clearing corporations, central security depositories and other information providers. STP involves Business Process Management (BPM) Business process management (BPM) for STP would enable financial enterprises to automate and integrate the disparate internal and external corporate business processes. It will do so by supporting dynamic process topologies, which allow the boundary between processes and participants to be determined, either statically or dynamically on a real-time basis. Critical Parameters of STP The critical parameters of STP that determine its success or failure across the entire industry are:
Application of Service Oriented Architecture-based framework to STP The key requirements of an STP solution include:
The solution Service-oriented architecture can provide the foundation and Web Services can provide the building blocks for application architecture in order to achieve seamless trade processing. A SOA-based framework is capable of providing support for multiple XML standards at the same time, such as ISO 15022 XML and FpML, and adding additional standards support without significant redevelopment effort. With the use of Web Services as an enabling technology, STP related problems and issues would shift from connectivity among different applications in-house and with trading partner applications, to the content and structure of the information that is exchanged. Why use Web Services for STP? There are several benefits of using Web Services as one of the core technologies for STP. As we will see below, the central benefits are:
It is important to note that Web Services will be one of the technologies used for STP, not the only one. Based on open standards Web Services fully utilize open standards, and at this stage of the paper we will introduce the standards for the financial industry that will enable STP for all financial instruments. The principal standards we will look at are:
These standards will work together with Web Services rather than in competition, as they address the orchestration layer of the Web Services stack. In other words, they provide the core layer that describes business process semantics for STP. Easier Business Process Management Web Services help to separate business process logic and the participating business services for both internal and external STP, thereby making the development, execution, and management of these services much easier. The main advantage of Web Services is that companies can use Web Services interfaces for process management, logic transformation, and integration for legacy and packaged applications, instead of writing non-standards based custom code for each application. The key technologies and specifications that will enable the orchestration of internal and external STP related business processes as Web Services include Web Services Flow Language (WSFL), Business Process Modeling Language (BPML), XLANG and FpML, FIX protocol, and ISO 15022 XML. Easier Intergration A typical business process related to STP may be supported by multiple diverse applications such as C++, Java, or Excel VBA-based front-end systems; Java, C, or C++ based middle office systems; and AS400 or Mainframe-based legacy systems. It is virtually impossible to manage a workflow and execute the different tasks associated with it, which may require using APIs of other systems or exchanging messages with them, unless the underlying technology provides easy integration facilities. XML-based Web Services are an ideal technology for integration in such a diverse environment as they allow applications to communicate across the Internet or intranet in a platform- and language-independent fashion. Whether the underlying STP applications are integrated synchronously or asynchronously, Web Services enable both types of integration and provide substantial advantages over the traditional technology of achieving them. Through Web Services Definition Language (WSDL), a Web Service can be defined to have an invocation style as document (asynchronous) or RPC (synchronous). Flexibility Service-oriented architecture based Web Services can provide the required flexibility for STP in terms of architecture and changes in configuration, control and standards in the business processes. This type of flexibility is not offered by the middleware existing today. Better and Cheaper Customer Services Both user-centric and application-centric Web Services can play a major role in customizing a range of financial and non-financial product packages suited for each customer's specifications and making it cheaper and faster to deliver. This can be achieved by assembling Web Services targeted for each such product and bundling them together. Of course the assumption here is that there will be servers and tools available that will make this orchestration of Web Services possible. Advantages of Web Services over the current implementation Using a Web Services based architecture provides several advantages, as follows. Use of Internet rather than a proprietary network In its current implementation, MBCSS (Mortgage backed Securities Clearing Corporation) requires using a proprietary network for RTTM (Real-time Trade Matching) services. This effectively forces every participant, small, medium, or large, to use and pay for this network. Web Services eliminate the need for any proprietary network, as the messages can be encrypted and safely sent over the Internet. It must, however, be noted that Web Services can also be used over a proprietary network. Use of XML rather than SWIFT In its current implementation, MBCSS uses SWIFT ISO 15022 format. The use of XML rather than SWIFT has the same advantages as the much publicized and discussed advantages of using XML rather than EDI. Some of these advantages include:
It is worth mentioning that there are disadvantages of the use of XML over SWIFT, as well. Some of the major disadvantages include:
Co-existence of SWIFT and XML At this stage it is worth mentioning that we do not envision the complete replacement of SWIFT with XML. In fact, it will be naﶥ to even think so, and it is a misleading notion to claim that XML will completely replace SWIFT. It would be prudent for companies to build the XML-world based on the last decades of SWIFT rather than tear it all down. SWIFT has been highly integrated into the core business processes of financial companies. This level of integration required considerable effort. Elimination of IP-based environments Web Services will play a critical role in overcoming the communications barriers that exist within the IP-based environments that the securities industry is now embracing. IP-based environments make the integration of applications very static and inflexible, as it uses an X.25 protocol-based packet switched network. The support for this protocol, however, is being withdrawn from November 2002. Conclusion Web Services offer a platform neutral approach for integrating STP applications, so that it can be used to integrate diverse systems in a way supported by standards rather than proprietary systems. The ability of a financial institution to have access to real-time trade related information spanning across multiple companies, in-house departments, applications, platforms, and systems is one of the most important driving factors behind the adoption of Web Services. Financial institutions should first start using Web Services for their internal STP and for business processes that are non-transactional in nature, before they venture using Web Services in external STP. This article is an extract from Web Services Business Strategies and Architectures. Buy the book from Amazon.com By the same authors: Keep up to date with all the new articles and features on
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