What does 'Straight Through Processing - STP' mean
Straight through processing (STP) is an initiative that financial companies use to optimize the speed at which they process transactions. This is performed by allowing information that has been electronically entered to be transferred from one party to another in the settlement process without manually re-entering the same pieces of information repeatedly over the entire sequence of events.
BREAKING DOWN 'Straight Through Processing - STP'
While presently only a concept that many are working toward, STP represents a major shift from present-day T+3 trading to same-day settlement. One of the benefits of STP is a decrease in settlement risk. Shortening transaction-related processing time will increase the probability that a contract or an agreement is settled on time.
The primary purpose of STP is to streamline the processing of transactions across multiple points. By allowing information to pass along electronically, this eliminates the need for a hands-on reentry of data that has already been completed at the source. Additionally, information could be sent to more than one party simultaneously if it is appropriate for the transaction type.
Elimination of Processing Delays
Since STP is designed to complete most, if not all, of a financial transaction without human intervention, it has the potential to eliminate costly delays during the processing period. Since human interaction is not required, there is no delay between one party receiving information and it being able to proceed.
In normal processing, information must be handled by the multiple persons involved. This requires taking the time to accept and review the information, rekeying data as required, and then sending it forward to the next part of the transaction process. STP eliminates the human factor, allowing an automated process to complete any steps needed for a transaction to proceed. By eliminating these delays, the transactions can be more cost-effective as they require less time to manage. This is particularly attractive to investors looking for lower fee options.
Current T+3 System
In contrast to STP, the T+3 is based on a settlement cycle of three days, and is said to stand for “trade date plus three days.” This requires an investor who is selling a security to deliver the certificate within three business days, and for investors buying securities to send payment within three business days.
This process involves elevated risk through the presence of unsettled trades. Since market conditions are variable and may change dramatically within the three-day window, there is an inherent risk that investors who experience unexpected losses may be unable to pay for, or settle, their transactions.