know soon whether it is on the winning or losing end of the biggest contract of its 26-year life.
At stake is the business of the Global Straight Through Processing Association, a group of nearly 60 fund managers, broker-dealers, and global custodians formed last year to promote faster settlement of trades. The group is seeking to build a system that would streamline the flow of trade data in advance of next-day, or T+1, trade settlement rules, expected to become a reality in June 2002.
Securities firms represent a vast new market for Swift, whose FIN, or financial, messaging system originally was built to clear and settle payment transactions on behalf of banks. Last year, it cleared 930 million messages, mostly between its 3,000 bank members. Now it wants to be a primary conduit in the securities world.
"We're fighting like hell" to get the GSTPA contract, said Leonard H. Schrank, Swift's chief executive officer.
The same could be said about Swift's determination to remain a primary resource for banks, as the Internet flourishes and threatens to let banks forge electronic connections of their own.
"I could show you several scenarios which demonstrate logically how Swift could simply fade away," Mr. Schrank said in his address to members at the annual Swift Sibos conference held this month in Munich.
The Internet is one of those scenarios and the reason Swift announced it would build its "Next Generation" network at its Sibos conference two years ago.
This year, Swift announced it had sorted out standards and migration issues, and begun work on developing the first phase of the network. When completed next year, the new Swiftnet will take advantage of Internet protocols to facilitate interactivity, but offer greater security and more managed services than the unregulated Internet.
"I didn't know how much it would cost and I didn't know how I would do it, but I knew I had to send a signal" about Swift's direction, Mr. Schrank said of his announcement two years ago.
Among those looking for an indication were GSTPA and Continuous Linked Settlement Services, a consortium of 63 banks formed to reduce the risk associated with foreign exchange settlements.
Swift, along with International Business Machines Corp., already has won the contract to supply the CLS banks with connectivity services, a win Mr. Schrank described as important.
But "the GSTPA is bigger," he said.
Swift said it plans to get the GSTPA contract by using the same argument that won over the CLS banks, namely, that facilitating communication between institutions is not about "just new whiz-bang stuff." A network has to be able to work with existing legacy systems as well, Mr. Schrank said.
CLS, which will be the first manifestation of Swift's Next Generation network when it goes live in October 2000, initially will use Swift's traditional store-and-forward technologies as well as Next Generation's interactive technologies.
Of his competitors for the CLS contract, mostly large systems-integrators and consulting companies, Mr. Schrank said, "They could have built it. But it would have been a closed system just for that application and everyone would have had to switch to it."
Swift's advantage is that "everyone already is all plugged into it," Mr. Schrank said.
"Do you know how much we charged the CLS banks? Zero dollars to plug in," he said. The banks will pay transaction fees, though.
In November, the GSTPA is expected to hand down its decision on which vendors it will work with. Of the 22 that responded to a request for proposals, five have dropped out. The remaining firms are now forming consortiums, as vendors align to bolster their offerings.
Swift has teamed with Depository Trust Co., Andersen Consulting, Hewlett-Packard Co., Oracle Corp., CrestCo. Ltd., a clearing house in the United Kingdom, and the Canadian Depository for Securities Ltd. A primary rival has coalesced in the form of IBM Corp., Reuters Group PLC, and Equant NV.
A win for Swift would be a boon to an already-growing segment of its customer base. It expects to transmit more than 250 million securities-related messages in 2000, up from the less than 50 million it processed in 1995, according to James Economides, director of securities markets for Swift.
In 1992, securities traffic accounted for 3% of Swift's total, while bank payment messages generated 77% of the traffic. By 2000, securities messages are expected to make up 24% and bank messages 61%, Mr. Economides said.
The key to winning the GSTPA contract is development of a transaction-flow monitor -- software that acts as a shepherd, in Mr. Schrank's words. It would be employed after trades are made but before they are settled, and perform tasks such as creating order instructions, execution notices, and confirmations.
Currently, Thomson ESG, a unit of Thomson Financial, publisher of American Banker, has about 30% of the post-trade, pre-settlement market, compared to Swift's 5%, Mr. Schrank said. Swift hasn't been able to penetrate this market because its store-and-forward FIN network was not built to handle messages dynamically, he said.
Swift has 50% of the market related to the next stage of trade processing -- clearing and settlement. So it could facilitate a "seamless flow" between the transaction-monitoring stage and the trade-settlement stage, Mr. Schrank said.
The need for an interactive network that could support transaction-flow monitoring is "what pushed me over the line" to move ahead with the Next Generation network, Mr. Schrank said, even though it would mean disturbing the status quo for the banking industry.
Industry participants are enthusiastic about Swift's move into the Internet age. "Swift's positioning is spot-on," said Stephen Kimsey, managing director of Market Advisory Services Inc., a research firm with offices in New Jersey and Britain. He admitted to being "a bit skeptical" about Swift's ability to remain relevant as the Internet takes hold, but said his fears were allayed during Swift's Sibos meeting, where he learned more about Swift's plans.
Though the Internet does lower the barriers to entry for other players, Mr. Kimsey said, Swift provides security, guarantees, credibility, and reliability.
Sue Roberts, director of the financial markets group at the U.K.-based consulting firm OSI Co., echoed that sentiment. "The need for secure messaging will not go away," she said.
"I don't think Swift's FIN network would be relevant in five or 10 years. But there's no reason why Swiftnet shouldn't be because it's Internet-based," she added.
Winning the GSTPA contract would bring enormous volume to the Swift network, and help further cut transaction prices. The average price of Swift messages already has fallen 70% since Mr. Schrank started his tenure in the early 1990s.
Swift is staying within its current budget to build the Next Generation network, allocating about $50 million of its $400 million budget this year. Mr. Schrank estimates it will end up costing several hundred million dollars to build over the next several years.
Already, banks in six countries that are involved in CLS are using elements of the Next Generation network. By February 2000, 17 CLS banks in 12 countries will be using the network. When all 63 of the CLS banks in 14 countries are on the network by the end of 2000, "we will be effectively live" with the Next Generation, Mr. Schrank said.
During a transition period that could last five to six years, Swift said it intends to use both old and new networking technologies. "We are committed to the principle of no 'big bang,' " said Joseph Eng, Swift's chief information officer.
Said Mr. Kimsey, "Swift is moving at a pace that makes sense for users and the marketplace."