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Task of Preparing for T+1 Looms Large

Mutual fund companies and other investment firms are not prepared for the SEC's forthcoming "T+1" requirement that they clear and settle trades within one day of the initial trade, fund industry executives said.

Fully aware of the obstacles, costs and the challenges of T+1, the SEC does not expect to enforce the T+1 regulation until 2004, said Dan Michaelis, assistant vice president for corporate communications at the Securities Industry Association. The association, the trade organization of financial technology service providers, and the Global Straight Through Processing Association are working with the SEC on T+1.

T+1 will be difficult, industry executives said. The transition will be more difficult than that to T+3, which took place five years ago, they said. It will be akin to and on the order of Y2K, said Barry McConville, director of sales and marketing for Global Investment Services of Hackensack, N.J. Global Investment Services is a fund accounting service company.

T+1 will require a great deal of time, talent, and technological overhaul at asset management firms, industry executives said. The industry will spend about $8 billion preparing for T+1, approximately the same amount it spent on Y2K, according to a study by Andersen Consulting of New York for the Securities Industry Association.

The benefits will be considerable, however, once the trading cycle is advanced from T+3 to T+1, fund executives said.

The industry will recoup its $8 billion investment within three years and will save an additional $2.7 billion a year indefinitely, according to the Securities Industry Association study. This annual $2.7 billion savings would shave 28 percent off of trade-processing expenditures industry-wide, according to the association study.

A two-day reduction in the settlement period will also dramatically reduce the industry's risk exposure, said Joseph Gramlich, chairman of PFPC Trust Company, a fund accounting, custody and transfer agent service company in Westboro, Mass. Approximately $1 trillion worth of trades are made in U.S. securities each day, and the potential for error on those trades is great, Gramlich said. Because T+1 is premised on near-total automation, it would reduce the potential for errors on those $1 trillion worth of trades, Gramlich said.

Clearing and settling equities trades would also bring settlements in the equities markets up to the speed of settlements of other types of investments, Gramlich said.

"In the U.S. today, equity securities are settled at T+3, Treasury bonds, bills and notes are settled at T+1, and commercial paper is settled at T+0," Gramlich said. "Increased coordination will enable more flexible trading that will benefit investors."

T+1 would also make the U.S. investment markets competitive with others worldwide that already are at T+2 or even T+1, Gramlich said. Hong Kong and South Korea already process trades in T+2, and Taiwan and Switzerland are at T+1, Gramlich said.

Not only will T+1 enable the U.S. markets and mutual fund industry to remain competitive with the rest of the world, but it will enable mutual fund service providers and post-trade fund accounting firms to remain competitive and continue to lead the world, according to the association study.

T+1 "will enable the U.S. market to continue to maintain its global competitiveness by serving as a catalyst for enhancing the current post-trade processing and settlement process," according to the study. "The changes will result in a significant economic benefit to the industry."

Just as the move from T+5 to T+3 helped the markets handle investors' increased appetite for ever more complicated trades, the move from T+3 to T+1 will enable the markets to handle an even greater volume, said Sam Sparhawk IV, vice president at PFPC.

T+1 could help mutual fund companies and others serve both their retail and institutional customers better, according to the study.

"T+1 will enable trade participants, exchanges, DTCC [The Depository Trust and Clearing Corporation] and industry infrastructure providers to communicate electronically . . . in a seamless and cost-effective manner," according to the study.

But to be ready for T+1 in 2004 and the move to T+0 that is likely to follow, fund companies will have to begin preparing either by the fourth quarter of this year or the first quarter of next, according to the study.

It will also require a tremendous amount of cooperation among technology and fund service vendors, fund companies and the trading parties they do business with (including both customers and brokers) and the clearing corporation, which will need to rewrite its continuous net settlement process, said Gramlich of PFPC.

The securities industry will also have to standardize reference data and move to shared protocols, said Gramlich. This entails the standardization of formats and values for such trade-related data as commissions and Financial Information Exchange standards, a trade protocol introduced in 1995. These changes will transform how industry participants communicate, Gramlich said.