T+1? 2010, 2004, or Today

In what appears to be an effort to get firms back on the technology-spending bandwagon, a number of analysts have recently used white papers and surveys to bring STP and T+1 back to center stage.

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 time frame. 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.

One recent paper promoting the virtues of STP was penned by Mason Snyder, senior manager with Deloitte & Touche Consulting, who says that even though T+1 will probably not be a reality until 2010, firms should keep their focus on achieving straight-through processing.

"We wanted to identify to our clients the areas that, in a post-T+1 world, they should continue to place their focus on - given the current pressures on cost reduction and for creating a business case - that will provide results both in the short term and for a longer term STP vision," says Snyder, the primary author of Deloitte Consulting's "STP in a Changed Environment" white paper.

Notes, such as the one from Snyder, appear focused on countering a bunker-mentality which sees technology executives not only clamping down on spending but doing everything in their power to reduce the bloated budgets still in place from better economic times.

Such a bunker mentality has certainly taken hold at one large custodian bank whose IT director says that, at least at his firm, STP is dead and gone. The IT director, who asked not to be named, says that while his firm was active in STP projects during 2000 and 2001, the topic is no longer even discussed. Rather, his time is spent on consolidating the bank's numerous market-data feeds in an effort to cut costs and streamline the flow of information.

The IT director says that it's all about how much you can save the firm, not how much you are spending on technology - no matter what you claim it can do. But, he says, despite the fact that his friends at other firms are experiencing the same thing, don't expect to hear such sentiments at the next industry conference.

"I think that saying you have an STP strategy is a fashion statement. I think that my firm would deny that we are not working on STP initiatives but, to be honest, those resources have been reallocated," he says. At the current time, he says, initiatives focused on cutting costs and instituting sound business-continuity plans "are so dominant that the group which we are in doesn't get time to think about anything else." He says that the market-data project will most likely take up all his time for the remainder of this year and part of 2004.

But cost, namely return on investment, is something that Mike Brennan, a principal in CSC's Consulting Group, says should not be tied to T+1. That's because Brennan sees T+1 as the first step in developing a sound BCP plan, which, he says, the industry still sorely lacks.

Brennan cites the attacks of Sept. 11 as the clearest example that a three-day-settlement cycle equals three times the risk of T+1. He notes that the day the markets opened after the attacks, three-days worth of trades had to be settled, as opposed to what would have been one day worth of trades had the industry been operating in a T+1 environment.

"Before Sept. 11, T+1 was an issue of shortening the settlement date and reducing operational risk but after Sept. 11 it became an issue of BCP," claims Brennan. As such, he says that, much like the USA Patriot Act became law without years of debate, a T+1 mandate should be enforced because it is the right thing to do for the financial-services industry.

In a short essay, Brennan writes, "There was no commentary period and no debate regarding the adoption of the USA Patriot Act. In short, market participants had no opportunity for deferral. Is the legislation perfect? No. The alternative was ongoing discussions and industry committees focused on how best to implement OFAC checking, and anti-money-laundering policies and suspicious-activity reporting - and nothing would have happened."

"Some issues are critical enough that immediate action is required. Is T+1 such an issue? Prior to Sept. 11 it was not in this realm but after Sept. 11 - absolutely," he writes.

Brennan goes so far as to say implementing T+1 would enhance national security. "People chuckle when I say that," he admits, "but I mean it."

Though he is a strong proponent of STP, Snyder doesn't see firms being ready for T+1 anytime soon. "I can't say (T+1) is gone forever, but I don't think they will decide in 2004. I don't see a deadline being established at that time. I think the industry is still very mixed in its opinion as to whether or not it makes sense to move to T+1," he says.

A survey recently released by Deloitte & Touche says 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 T+1.

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.

Rick Borelli, a principal covering investment management with Deloitte & Touche, 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 correct 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?

Envisioning a different time frame than Snyder, 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.

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 matching."

But the IT director, who asked not to be named, says it takes much more than a VMU to be STP ready. "STP has an external and internal phase ... Let's say my response time for a message today is three hours and I'm not making any efforts to reduce that to real time. I just say, 'OK, instead of sending to my counter party, I'm going to send my message to a VMU,' but I still take three hours ... I haven't done anything to reduce the response time in my organization. I don't see how that gets us any closer to STP."