Wave Your Hand: Why Bar Codes Are Needed for Securities
June 7, 2010
Wal-Mart has two assets, data and process, just like you. The securities industry should be chastised for falling so far behind, not only the retail industry but the manufacturing industry, in its lack of ability to communicate across individual firm boundaries.
If Straight-Through Processing, the holy grail of hands-off, all-electronic order placement, execution, allocation, payment and settlement is ever to be realized, securities need bar codes.
Or at least a standard way of identifying stocks, bonds, futures, options, derivatives and instruments of all types as well as the buyers and sellers of these products.
This will save costs and reduce systemic risk. If you can't identify a security, you can't track it. If you can't track it, you can't judge your own company's assets and liabilities. And if you can't judge a company's status, you can't judge the condition of the entire financial system.
You can see a sample of the inconsistent ways a single security or counterparty or business entity gets identified, in the chart on this spread.
Most industries have invested in universal product and supply chain identification coding systems to uniquely identify their physical products and documents, and their manifestation in electron transactions.
They further have standardized their identifiers for transportation intermediaries, delivery locations and counterparties. Nearly four decades ago, this Universal Product Code was identified and then translated into the ubiquitous bar code seen on virtually all physical products sold anywhere around the globe.
Nearly 30 industries, comprising 1.5 million businesses in more than 100 countries, have invested in a global nonprofit identifying facility and network to administer standards, called GS1, to indicate it is setting one global standard, combining the work of what was the Uniform Code Council in the United States and what was the European Article Numbering Association.
About 2,500 people work at GS1, administering standards and synchronizing referential databases. This is what it takes to create "straight-through processing" of physical goods, in an increasing global and automated supply chain.
Scanning items at checkout allowed automated replentishment of store inventories, which led to just-in-time delivery systems, to manufacturing plants, distribution centers and stores. The tagging system also mitigated systemic risk. In a pharmaceutical scare, regulators tracked a tainted Tylenol capsule back to its manufacturing process, to figure out how it was tampered with. In the food industry, regulators can find the source of tainted cows' meat across the globe.
In the finance business, however, regulators could not find the mortgage that was defaulted on in a U.S. city that wound up as a toxic asset on the balance sheet of a failing bank in Australia. Financial regulators could not see the counterparty positions allegedly held by convicted financial con artist Bernard Madoff at a London OTC options dealer. And they certainly missed the numerous movements of securities bundled into the infamous Lehman Brothers Repo 105 program, where collateral was moved surreptitiously from the United States to the United Kingdom and back again to keep its reported level of debt, its leverage of its shareholder-owned assets, down.
This is an industry that has gotten caught flat-footed more than once-like in the Long-Term Capital Management meltdown in 1999 and in the global bad-mortgage-based credit crisis whose causes and effects are still being traced.
