Stephen Nimmo, senior manager, SunGard Global Services explores how STP can benefit energy organizations engaged in trading activities and support regulatory compliance?
The technology involved with energy trading and risk management is undergoing rapid and sometimes volatile changes, creating opportunities for companies to develop a distinct competitive advantage. Many forces, such as reduced profit margin on trading activities and increasingly complex regulatory requirements, are at work pushing companies to automate the transaction lifecycle to help increase profitability and reduce costs. Straight-through processing (STP) is the ability to have transaction data flow through a company’s different systems with little to no direct human intervention. STP infrastructure has been adopted throughout the financial services industry with great success, but has yet to be widely utilized in the energy industry.
New regulatory reporting requirements such as those in the Dodd-Frank Act (DFA) are providing a foundation to push the energy industry toward STP. In particular, for swap data recordkeeping and reporting compliance, a transaction’s data may need to be sent to a swap data repository (SDR) within 15 minutes by year two. These timeframes can create data entry scenarios where there is simply not enough time for additional manual intervention or error correction. In addition, some SDRs are choosing to bundle their confirmation services along with DFA reporting causing confirmation processes to begin immediately, something many energy traders may not be used to because common practice is for end-of-day transaction reconciliation.
How could STP benefit an organization engaged in trading activities? Automating the flow of trade lifecycle data shortens processing time by reducing manual intervention. Additionally, these activities reduce operational risk and costs by reducing errors resulting from manual data entry mistakes. This can in turn improve decision making by integrating real-time data for stronger decision support analysis. Consequently, STP is a very powerful tool to increase the profitability of energy organizations’ trading activities.
For most energy trading organizations, there are many different touch points for automating the flow of trade data, including:
· Connectivity to designated contract markets (DCMs) and swap execution facilities (SEFs) for the purpose of trade capture
· Internal connectivity between different systems handling areas such as credit, scheduling, transportation and risk
· Connectivity to external systems, including SDRs, market operators and even directly with counterparties to facilitate regulatory reporting, trade confirmation and other activities such as physical and financial settlements
· Connectivity with transmission providers such as pipelines and independent system operators (ISO) for automation of scheduling
Ultimately, the concept is simple; when a trade lifecycle event occurs, energy companies should create a representation of that event using a common communication specification and broadcast the event to allow other systems to process the event independently. The complexity lies in formulating the rules, structure and definitions of the data and events being broadcast. Adapting these procedures and systems to STP will reduce dependence on manual entry processes, assure more reliable data, and improve speed of critical decision, risk and performance information and analysis.
With the tightening profit margins on trading activities and increased transaction collateral requirements, it is up to energy trading organizations to find new and inventive ways to reduce operational costs and increase efficiency. With the right foundation of a common communication protocol and long-term strategic vision for a company’s enterprise, the possibilities seem endless.