Not a problem. Like I said, we could argue it eternally.
Northern Trust's disclosure last week that it will write off $4.8 million for its investment in the defunct Global Straight-Through-Processing Association highlights the financial losses across the securities industry due to the virtual matching utility's failure, and underscores a lack of buy-side support for such a post-trade offering.
The Chicago-based global custodian is one of 41 members that together invested EUR91 million ($90.14 million) in the creation of the matching system connecting fund managers, brokers and global custodians. The Transaction Flow Manager (TFM) went live in September after several months of delays, but while the technology worked, volumes passing through the service were low as the venture failed to attract a critical mass of fund manager participants.
"We never received sufficient support from the buy side," said Art Thomas, a former operations head at Merrill Lynch who has been serving as a special adviser to the GSTP, the operating unit of the GSTPA. He attributed the slow uptake to the decline in cross-border trading and the postponement of one-day settlement in the United States, which steered investment managers' attention away from participating in any matching service. Add to that list a shift in IT spending habits toward disaster-recovery sites, and the need to invest resources to link to a virtual matching utility (VMU) began to fade.
With start-up funds exhausted, shareholders late last month voted to dissolve the GSTP rather than invest more cash in keeping the TFM afloat; incorporated in Switzerland, the GSTP will file for bankruptcy in Zurich.
GSTP officials would not disclose how much they were short, but sources said the unit was behind budget by at least $5 million and many millions more would be needed to cover the TFM's operating costs for at least the next year—until the system mustered sufficient volume to be self-funded.
Not only will custodian banks, broker-dealers and their fund manager clients have to write off the cost of their equity investments in the TFM, but additional expenditures in technological enhancements and IT licensing fees could well bring that price tag to the multimillions. Software vendors such as Mercator, Dovetail, HelioGraph and SeeBeyond—which were part of a growing cottage industry developing connectivity packages for the TFM—also stand to lose from the GSTP's demise, even though their software was designed to link to other VMUs.
"There were costs involved with establishing connectivity to the TFM and other technological enhancements," said Theresa Parker, SVP of Northern Trust's worldwide operations and a GSTPA board member. The bank is still calculating how much of the additional investment can be directly attributed to the GSTP initiative. "Some was also used for other projects, such as the Continuous-Linked Settlement System," Parker added. Indeed, some of the expenditures have already been expensed on Northern Trust's books, while more could be capitalized (or amortized) over a several-year period.
Parker acknowledged that the slow uptake in the TFM from buy-side firms indicated the potential lack of interest in central matching services in general. "Buy-side firms have diverted some of their IT spending to other industry initiatives and the current post-trade communications providers do provide sufficient benefits," she said, alluding to the GSTP's competitors—Omgeo and SunGard Data Systems.
Parker said many of her bank's buy-side clients already rely on Omgeo's existing products, and some fund managers have indicated they would like to migrate to the company's Central Trade Manager. However, the timetable for such a shift is still up in the air.
Others agree that the GSTP's demise has dealt a serious blow to the case for central matching. "The need to use a matching utility was one of the easiest milestones to prove in preparing for T+1," said Jerome Dumaine, a partner at Accenture. "However, with one-day settlement off the drawing board, and the post-9/11 environment shifting IT expenditures to disaster-recovery plans, the need for central matching services such as the TFM dwindled.
Penny King Holdings Corporation, a Delaware Investment Holding Company.
