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BROKERAGE SETTLEMENT: T-time

Securities industry technologists have dodged some bullets in recent years. Now something bigger and altogether different looms: The proposal known as T 1. The objective is to reduce the time for settling a securities transaction to one day after the trade date.

Securities industry technologists have dodged some bullets in recent years. They had to prepare for the common European currency at the end of 1998, the year-2000 changeover at the end of 1999 and the first decimal pricing of stocks in August. Each event brought prophecies of back-office doom, but most of the conversions came off without a hitch.

By Jeffrey Kutler
OCTOBER 2000
Institutional Investor Magazine

Now something bigger and altogether different looms. It's bigger because the cost is expected to top even the estimated $5 billion to $7 billion that the securities industry spent on Y2K fixes. It's different because this time there could actually be a demonstrable return on the investments within a few years.

At least that is the conclusion of a Securities Industry Association analysis of the proposal known as T+1. The objective is to reduce the time for settling a securities transaction - completing all the necessary matching and reconciliation of orders - to one day after the trade date. That would be a significant operational advance from the current T+3 days.

An SIA document by Andersen Consulting and the Capital Markets Co. published in July estimates that $8 billion of up-front investments in T+1 preparation by broker-dealers, asset managers, custodians and other service providers could yield $2.7 billion of annual pretax benefits in the form of clearing and payment efficiencies and risk reductions. Brokerage firms, which would shoulder 68 percent of the costs, would be the biggest winners, getting 77 percent of the payback and recouping their expenditures in just two and a half years.

But it will be a marathon slog to that end. The SIA hopes to attract attention to the issue at its T+1 Foundation Conference on October 24 and 25 in New York, with the goal of implementing next-day settlement by June 2004. Why the protracted lead time? The changeover will require a mind-boggling array of new rules, procedures and software, not to mention coordination among thousands of firms and vendors.

The prerequisites are both fundamental and cutting-edge. Synchronizing all markets on T+1, for example (U.S. Treasuries are already there), would require a commitment to straight-through processing methods - the much-talked-about ideal of handling transactions from start to finish with no human intervention. The industry would also have to establish a centralized "matching utility" to track data on all trades and minimize botched transactions. Settlements could actually occur in something close to real time - in effect, T+0.

The preparatory steps are almost as important as T+1 itself. "We have identified a number of building blocks to get to T+1," says John Panchery, the SIA's vice president of systems and technology and the T+1 project manager. "First, we had to have the business case. We knew that with growing volume, the industry needed to change its infrastructure, otherwise something is going to break. Since we had to do that anyway, we didn't see any reason not to go to T+1."

Among the conclusions of the business case report: Moving from T+3 to T+1 will reduce settlement risk exposure from $1.1 trillion to $375 billion, improve investor liquidity and enhance U.S. markets' competitiveness against international exchanges that are placing a premium on clearing efficiency without, in most cases, having yet reached T+1.

Advocates like Panchery have good reason to emphasize the prospective ROI. Even in good times $8 billion is a lot of money (the U.S. securities industry pretax earnings were a record $16.3 billion last year). And the Y2K experience has left a bitter aftertaste. "People asked, 'Why did you waste all that money? Nothing happened,'" says SIA president Marc Lackritz.

The U.S. securities industry has successfully cut settlement times before: In 1995 it moved from T+5 to T+3. "This is not just a reengineering," says Capital Markets partner Joseph Anastasio. "It's about changing the very structure of transaction enrichment and settlement."

Cutting the settlement cycle may never achieve the high drama of millennial deadlines, but it promises to be a Street-shaking event nonetheless.

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