T+1 and Counting
February 24, 2003
T+1, the security industry's big technological initiative, is rolling through corporate financial systems, seemingly far removed from mutual fund portfolio managers' trading floors, or even their busy back offices.
But make no mistake, the initiative to move trade settlement from the current three days to just one day - known as trade, plus one, or T+1(the industry moved from T+5 to the current T+3 in the mid 90's) - will happen despite delays. In fact, straight-through processing (STP), the system that will lead to T+1, is already making its presence felt. Financial service professionals who think this is an issue for a handful of corporate propeller heads are missing the point.
Broker/dealer Raymond James Financial Services (RJFS), St. Petersburg, Fla., is determined not to get left behind. RJFS has incorporated portions of Comprehensive Software Systems' (CSS) Sabil software to get a head start for its 4,200 independent reps.
"We're using account profiles to set up our client accounts. It gives all of our branch offices and remote offices the ability to establish their own client accounts in real time, which enables STP," says Tom Loney, vice president of software development at Raymond James. "They don't have to call into the home office to set up an account."
First, Straight Through
Loney notes that this is a big change. "In order to accommodate [STP] in all of our systems, we need to start analyzing the impact and scope out the work necessary so we can be done when the time comes," says Loney. "Fortunately, the work that needs to be done for T+1 is the same work that straight-through processing requires."
Originally, the Securities Industry Association (SIA), Washington, had been pushing to shorten the settlement cycle from three days to one, but in mid-July the organization stated that it would not reexamine the conversion before 2004, choosing instead to focus their efforts on STP over the next two years.
"The industry needs to focus on more effective straight-through processing before it is in a position to evaluate a conversion from T+3 to T+1 settlement," said Allen Morgan, Jr., chairman of the SIA board and chairman and CEO of Morgan Keegan & Co. of Memphis, Tenn."
Meanwhile, the SIA-approved STP program will build on the SIA's STP/T+1 program, which has been underway for the past three years. Key projects include improved processing of institutional trades, electronic book entry to replace physical securities and payments, and a range of other automation projects that address the processing of corporate actions, such as recapitalizations and dividends, stock lending and syndicate underwriting.
In fact, earlier this month, in on open meeting on Feb. 4, the Securities and Exchange Commission voted to update 25-year-old laws regarding centralized depositories of stock certificates(see MFMN 2/10/03). Noting that 97% of all stocks are held in depository receivership, with transfer agents and custodians charged with the task of recording ownership, the SEC continued: "The amendments will eliminate unnecessary restrictions in the rule to reduce compliance burdens on funds and fund boards without jeopardizing investor protections."
"The big reason for the delay is converting to T+1 is going to be really expensive and will cause a lot of pain for some people," says Bill Wager, a managing partner at Hunter Green, a technology consulting firm in New York. "The fact that the SIA is backing off doesn't mean it is abandoning the idea," he said.
In fact, T+1 experts advise financial firms to adapt early to avoid the mad rush that is bound to occur as the 2004 deadline approaches. "When T+1 does become mandated, there will be a buying curve when consultants are hard to come by and authorization of books and records resources are going to become tight," said Chris Poelma, CEO and president of CSS in Denver. "Waiting to convert will cost firms more in the long run."
Conversion costs depend on the volume of trade and office size, but the brokerage industry can expect to pay about $17 billion, according to Shahin Shojai, director of strategic research at the New York-based Capco Institute. "You've got cost implications not just for a broker/dealer or for a group of CFPs [certified financial planners], but also for the exchange interfaces, which have to take the data, settle the trade and then track it," Poelma said. "Then there is in-house training and negotiation on per-price trade."
A financial planner can expect to spend 10% more per trade commission and pay training costs of between $3,000 and $5,000, Poelma added. But switching to a system like CSS, he believes, will more than offset this cost. A parent broker/dealer can expect to pay about $3 million over a five-year period to adapt, which includes installing new data center equipment.