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T+1 on Hold

Following the Securities Industry Association's recent T+1 conference, it would seem that the push for one-day settlement has lost enthusiasm.

Delaying a decision on T+1 until June 2004-a deadline which itself represents an extension of an earlier June 2003 timetable-is one of three options to be reviewed by the SIA's board of directors on July 18. The other two choices are to retain the current timetable or scrap T+1 altogether.

A variety of reasons came to light for the mood shift among SIA membership, but the most obvious was the lack of enthusiasm among many of the big wirehouses that had once most strenuously advocated T+1 adoption. After 9/11, one-day settlement has taken a back seat to business continuity plans and, to boot, some firms are tackling huge regulatory issues-such as the conflict of interest between their research and investment banking roles. Sources said even Merrill Lynch, a longtime T+1 advocate, has asked the SEC to back down from its June 2005 timetable.

That deadline extension would give the U.S. market sufficient legroom to meet one-day settlement without tying the SIA to a definite timetable. It should also give them enough time to work out the cost-benefits. An $8 billion figure put forth in a recent SIA-commissioned report on T+1 by CapCo and Accenture is being criticised by buy- and sell-side firms as being too low and not taking into account operational risk.

At the end of the day, it appeared to some attendees that only the big name consultancies are left blowing the T+1 trumpet; and they stand to gain the most financially in advising clients how to reengineer their systems to accommodate a one-day settlement cycle.

Without benefits for all the players involved clearly defined it would be folly to press ahead and so it would seem likely that the SIA will reinvigorate its drive to promote straight through processing.

Robert Colby, deputy director of the Securities and Exchange Commission, who addressed the conference, said the SEC would issue a "rule proposal" on T+1 after the SIA's July 18 decision. "The rule proposal will flesh out the costs and benefits of one-day settlement," he said, implying that the SEC could opt to mandate one-day settlement. However, Colby repeatedly declined to disclose any required timetable for T+1.

What seemed unclear to many of the SIA conference attendees was whether the SEC would mandate one-day settlement even if the SIA's board of directors opted to postpone a final decision until June 2004 or whether the SEC will continue on its previous path of adhering to the SIA's direction. Colby suggested that the SEC would be listening to the SIA and some attendees believe that the U.S. regulator could once again seek industry comment on the cost-benefits of T+1 without setting a timetable.

"Setting a deadline for T+1 will not be an important aspect of the rule proposal," he said, leading some to predict that the SEC could still allow the industry to set its own deadline for when T+1 should occur.

However, the SIA acknowledged that while questions remain on whether one-day settlement is better than three, there are also concerns about whether the industry can move itself toward a straight-through processing environment without a T+1 mandate as a catalyst. And other conference attendees argued that without a set date for T+1, the impetus for improving the U.S.' post-trade infrastructure simply didn't exist.

Joe Anastasio, Chairman at CapCo, which serves as the project manager for all of the SIA committees working on the T+1 initiative: "I haven't seen a voluntary effort in my entire career in the securities industry that has worked."

The June 2004 date is critical because market players must have key stepping stones in place before T+1 can occur to allow sufficient time for testing. Key steps to T+1 now in progress include: implementing central matching services such as Omgeo's Central Trade Manager and the Global Straight-Through-Processing Association's Transaction Flow Manager; reducing certificates; redesigning the National Securities Clearing Corp.'s Continuous Net Settlement System (CNS) and an array of payment, standardization, corporate actions and securities lending initiatives.

Omgeo and the Global Straight Through Processing Association are also in the development stages of their own central matching services-central trade manager and transaction flow manager, respectively. Those facilities will need to be in sync with the latest version of the SIA's Institutional Trade Processing Committee's recommendations, although it is unclear just how widespread they will be used if T+1 is not mandated.

At least some securities players are going ahead with changes regardless of whether T+1 takes place. "It doesn't matter to us whether T+1 occurs or not," said James Lafaman, managing director at Morgan Stanley in referring to the firm's preparations in the prime brokerage arena. Hedge funds will most likely turn to prime brokers to serve as the front line for connectivity to a central matching service.

"We don't require a hard date for T+1," said Carmine Barbato, a vice president at the Bank of New York responsible for its STP/T+1 plans. The bank, the world's largest global custodian, is already building a centralized securities database, preparing for connectivity to central matching services and establishing multiple data centers. The later, however, appears to be more of a reaction to the events of the World Trade Center disaster where BNY faced operational difficulties as the result of having a single data center.

For its part, Depository Trust & Clearing Co., parent of the U.S. central depository and clearinghouse, is also not strictly setting itself to the T+1 timetable for all of its expected systems changes. For example, DTCC subsidiary National Securities Clearing Corp. will still revamp its continuous net settlement system from a multibatch to a real-time platform while its sister company Depository Trust Co. is providing a new inventory management platform next year-well before the T+1 timetable.

 

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