INDUSTRY SPLIT ON WHEN, NOT IF, OF T+1 MANDATE

The financial-services industry is still undecided on whether or not reducing the settlement cycle would be good for business in the near future, but 88 percent endorse an eventual mandate.

Executives in the financial-services industry are still split on the benefits of imposing a trade-date-plus-one settlement cycle, according to a recent study conducted by Deloitte & Touche's STP practice.

On the one side of the equation are those that favor the Securities Industry Association or Securities and Exchange Commission issuing a T+1 mandate (47 percent), while on the other side (56 percent) are those that feel shortening the settlement cycle to one day from three would increase, rather than decrease, risk.

Proponents of T+1 have long contended that the three days between trade and settlement are fraught with risk, which could be greatly reduced by shortening that timeframe. However, those against T+1 feel that the three days allow firms to resolve a number of issues that come up during settlement, which could not possibly be handled in one day.

The move to T+1 seemed all but certain during the boom time of the late 1990s but was shelved by the SIA after the economy took a prolonged nosedive in 2001.

Rick Borelli, a principal covering investment management in Deloitte & Touche's STP practice explains, "With folks that were against T+1, it was evident that they were afraid risks would be increased from T+1 because then you have two less days to clear and clean up trades gone wrong."

However, he says, "As firms adopt more STP measures, they will become more comfortable that the risks of moving to T+1 have been reduced." Thus, Borelli feels the SIA is taking the right course by setting STP milestones in preparation for a T+1 mandate down the road. That such a mandate will eventually be issued, he has no doubt.

"(The SIA) is doing the right thing by pushing STP initiatives," says Borelli. "What they are doing will provide the appropriate infrastructure for T+1 and you need that infrastructure in place."

The question is: When will T+1 be implemented?

Borelli says that when the SIA convenes on the T+1 issue again in 2004, it will most likely institute a 2006 deadline, giving firms two years to get their collective act together. Theoretically, that should be no problem for the industry, as the study also indicated 88 percent of firms recommended a T+1 conversion date no later than 2006. Standing in stark contrast to that figure is the statistic that only 21 percent expected investment-management firms to have STP by end of 2004.

If borne out, the two statistics create an interesting scenario for those two years.

Borelli says that current attempts at gaining STP are focusing on small segments of the puzzle and may be losing sight of the bigger picture. "Firms are focusing narrowly on different facets or pieces, such as on the front end at things like portfolio construction and client-facing applications, and also on the back end at financial reporting, regulatory compliance, and interfaces with transfer agencies."

The problem with such an approach, he says, is that firms ignore overlaying issues like business-continuity planning and overall risk and control which need to be built into those items. "You have to do that while you're building," says Borelli. "You have to have one integrated process."

Shoring up the central-matching dilemma is another crucial STP link that the SIA will have to resolve if T+1 is ever to be seriously considered. "By implementing STP and central matching as a pre-curser to T+1, it reduces the risk," says Borelli. "The SIA has to get its arms around central marching."

He says that the approach a firm should take depends on where it is starting from. "If you are not that far along, you need to start working on it immediately. If you are far along, you can wait to see how the central matching picture clears up," adds Borelli.