SIA Moves T+1 to 2005

One month and a day after the events of Sept. 11 sent Wall Street's firms scrambling to recover the most basic operations in their back-up sites, the Securities Industry Association announced that it was pushing out its deadline for conversion to a one-day settlement cycle from June 2004 to June 2005. A source present when the decision was made, says his firm -- a global sell-side institution, "participated in the deliberations fully" and describes a scene in which firms debated both sides of the postponement decision and quickly reached a high level of support for moving the deadline.

However, the root cause for the postponement -- received as welcome news by most financial institutions -- may actually be an initial deadline which was never realistic to begin with, say many Wall Street insiders. A fact which seems borne out when strong proponents of the T+1 initiative use terms like "optimistic," "tight" or "best-case scenario" to describe the initial 2004 goal.

John Fiore, chief information officer with State Street, says institutions were questioning the 2004 deadline well before Sept. 11. "We basically got the general sense that the industry as a whole was questioning whether the original timeframe was working," he says.

Art Thomas, chairman of the SIA's T+1 Steering Committee, admits the presence of deadline anxiety before the attacks. "Prior to Sept.11, I think a few firms had mentioned, on the side, that they thought the date was very aggressive. In my opinion it was aggressive, but it was doable," says Thomas, who is also chairman of Merrill Lynch's Securities Services Division.

The amount of pressure firms feel from the T+1 deadline depends on a number of factors. Contrast, for example, an institution like State Street -- a large investment manager, global custodian and outsourcing venue for investment managers -- which assumes responsibility for not only its own operations but looks to handle others, with a firm like Lehman Brothers, which has outsourced its back-office operations to ADP.

While perceived negatives, such as a loss of control over sensitive data, cause some firms to reject the outsourcing option, others see it as the only way to go. Jon Beyman, chief information officer with Lehman Brothers, seems quite relaxed about the prospects of moving to one-day settlement.

"I am pretty indifferent about the change because we have outsourced our back office to ADP," says Beyman. "One of the reasons you go with a service bureau is just for things like this, regulatory things like Y2K -- the onus is on them. I would rather spend money on things that make us different, not on doing the same thing that everybody else has to do."

Looking back, it seems that a number of factors contributed to changing the T+1 conversion date. Among them: the economy, the attacks, a tight deadline and a plan which, some say, left critical questions unanswered. According to many, the industry still waits for answerers to questions like, "What exactly constitutes T+1 in the myriad scenarios that confront a global institution trading in multiple time zones?"

"If someone passes the book, especially an investment manager -- when does T+1 start with respect to different geographies? What are the boundaries of when it starts vs. when settlement is expected to occur?" asks State Street's Fiore. "Until you have those answers you can't assess what you need to do."

While the financial community waits for the SIA to answer such questions, some like Morgan Stanley, are finding that postponement will allow for a completely new T+1 approach. A high-level source at the firm says Morgan Stanley will discard its interim T+1 solution -- necessitated by the 2004 deadline -- and move straight to its long-term, strategic T+1 architecture. "Now, with the postponement, we won't have throwaway work to do," says the source. "It will allow us to focus on business continuity and disaster recovery as well as going straight to our strategic STP plan."

Bank of New York Senior Executive Vice President Thomas Perna says similar business-plan adjustments will probably take place throughout the industry. "It gives everybody a little breathing on project timing, allowing people to take a step back and ask, 'Do I do any of my technology designs a different way now that I have more time?'"

Perna, who also sits on the board of Omgeo, agrees with the sentiment that any hopes of maintaining the 2004 deadline were lost after the attacks on Sept. 11. Tim Theriault, chief technology officer with Northern Trust, says the extension will provide him with extra time for testing and "might mean we don't have as robust a team" working on the T+1 project. For those on track to meet the original deadline, the extra year means resources can be diverted to other projects.

Other firms like Citigroup's Salomon Smith Barney are also taking the opportunity to find money for new priorities -- those that came to the forefront on Sept. 11. "There is a certain amount of triage that firms have to do with their 2002 budgets," says a high-level source at the firm, who adds that disaster recovery is at the top of that new list.

But despite the opportunities presented by the delay, sell-side firms like Salomon also see some negatives, such as the probability that it's going to be 2005 before their counter parties stop faxing in orders and allocations. "There has to be a greater level of responsibility on the buy side for the sell side to get prompt information," says the source.

The source also notes that as firms automate, the cost of doing business with those that don't may soon be prohibitive. "We are continuing to be caught in a marketplace that is challenging commission levels. To survive, you need to handle more volume more efficiently," he says. A postponed deadline for T+1 means efficiency may be a year further off.

That is most likely the case because despite all the business cases and white papers singing the praises of T+1, many firms don't spend money they don't have to. And while high-trading volumes require some to automate just to stay alive, smaller players still seem to find the fax mightier than the TOM (trade-order management system). As a result, it's often the large broker/dealer that has to accommodate both highly automated buy-side counter parties and those at the lower end of the technology spectrum.

"Unless you have a line in the sand or a law, firms will still get to make their individual determinations (regarding automation) and brokers will want to keep (investment managers) happy," says the source.

Moving that line in the sand from 2004 to 2005 was the last thing financial-services consultants and vendors wanted to hear.

"I think financial organizations are falling into two groups: one group is breathing a sigh of relief and saying it's another year before they have to think about STP; the other is saying, 'This is great and allows me to focus on my STP program and look at the reengineering more strategically to give me a competitive advantage,'" says Pat Tsien, a partner with Accenture.

Tsien adds that she sees no need for a postponement of the T+1 deadline and fears that firms will take the delay as license to ignore STP for another year. "Personally, I don't think it was necessary," she says.

Along those lines, some wonder whether the new date will cause firms to postpone their analysis of which post-trade service provider to work with: GSTPA or Omgeo. The industry's move to T+1 is dependent on the automation of post-trade matching by changing the current system -- highlighted by a series of sequential messages sent between broker/dealers, investment managers and global custodians -- into a central-utility model, where trade information is enriched in real time.

Don Thomas, chief executive officer with axioni4gstp, the company formed to build the GSTPA's Transaction Flow Manager, says that his firm has questioned whether the postponement will affect business. "Your call is as good as mine," he says. "We doubt there will be any significant change -- those that are serious about STP are going to keep the gas pedal on the floor."

Merrill's Thomas says that firms should take that advice and remain focused on STP. "They should take advantage of this extra time. If you waste it, then your alternatives are going to be narrowed. If it was aggressive before and it's not quite so now, take advantage of it."