After aggressively pushing financial institutions to adopt by June 2004 so-called T+1 settlement - two days faster than current practice - the Securities Industry Association last month abruptly offered to extend its deadline.
By Jeffrey Kutler
November 2001
Institutional Investor Magazine
Citing time and budget pressures in the wake of the World Trade Center attack, the New York-based organization gave broker-dealers, asset managers, custodians and settlement utilities until June 2005 instead.
It wasn’t an easy decision for T+1 advocates to accept. The SIA had put its prestige - and its best cheerleading abilities - on the line to rally the industry behind the biggest collective development expenditure since the $6 billion year-2000 upgrade. Consulting firms Accenture and Capco estimated that T+1 would cost $8 billion. But unlike Y2K, quicker settlement promised financial returns: a projected $2.7 billion a year in cost savings, operating efficiencies and risk reductions.
To be sure, progress already made in setting standards and laying the technical foundations for T+1 won’t be lost. But momentum will be. Although hard-pressed technology executives might welcome the delay, some are also puzzled by the shift.
“It seemed to be a bit of a knee-jerk reaction. Everybody was moving effectively toward T+1, and I’m not sure that [the SIA] took time to fully assess the effects of September 11 in this area,” says Sam Johnson, a former vice president of electronic trading at Goldman, Sachs & Co. who is chief executive officer of New York-based trading software firm TransactTools, which is heavily involved in helping firms prepare for the changeover.
Johnson believes his 19-month-old company will weather the T+1 slowdown. TransactTools works with major buy- and sell-side firms to develop straight-through processing systems, the comprehensive order-management and trade- handling automation that is seen as a prerequisite for T+1.
Indeed, STP may now become T+1 in drag. By successfully retooling their back offices, firms will be able to speed up settlement - regardless of when they officially adopt T+1. “STP will go forward because there is no change in the paradigm to get tighter control of costs,” says Cormac Kelly, a Capco partner and CEO of a Capco- Reuters Group joint venture formed last month to help companies streamline their data management as they go to STP.
SIA vice president and T+1 project manager John Panchery agrees. “We need STP more than ever,” he says. And if paperless STP can be fully achieved, T+1 will take care of itself.
Panchery explains that the June 2004 deadline was closer than it seemed. Broker-dealers, asset managers, custodians and other processing entities actually would have had to have their systems in place by early 2003 to allow for a full year of testing.
Says Panchery: “That meant that the firms’ biggest concentration of work would be in 2002. Couple that with the lull in the economy, layoffs, the new space requirements that some firms are dealing with and the need to concentrate on business-continuity planning after what happened at the World Trade Center, and we obviously have a resource issue.”
Timothy Lind, senior analyst at Needham, Massachusetts-based research firm TowerGroup, says that T+1 fell victim to an iron law of technology prioritization: “Anything that can get pushed back, will get pushed back.” But he says this will force people to appreciate T+1’s deeper meaning: “It was meant to be a catalyst for greater efficiency and automation. The business case is there, not in faster settlement per se.”
David Csiki, who heads the technology group of San Diego-based investment management software company Indata, also sees a silver lining. “The postponement allows more time to evaluate technology investments. Firms will be more inclined to build in the systems that will get them to T+1,” he asserts.
Adds the SIA’s Panchery: “Before you are clear on the trade date [with STP], you can’t think about moving settlement up. T+1 will be the reward of an efficient trade date process.”
