The Securities Industry Association, which has long been one of the strongest proponents for moving the financial-services industry to a one-day-settlement cycle, now says that the next two years should be spent focusing on assorted straight-through-processing initiatives rather than shortening the settlement cycle from its current three-day timeframe.
"Up until today we have had a goal of reaching T+1 in the U.S. for equities and corporate bonds by 2005," says Don Kittell, SIA executive vice president. "What we have done is replaced that goal with a set of STP goals for individual projects and also said that we would re-evaluate the settlement date in 2004."
The new key projects include: improved processing of institutional trades; electronic book entry to replace physical securities and payments, and a range of other automation projects which address the processing of corporate actions (such as recapitalizations and dividends), stock lending, syndicate underwriting and other operations functions.
It is unclear, however, what incentives, other than those of rising above competitors, will entice firms to meet the new STP goals, which will be announced at the SIA's next STP conference on Oct. 2.
Pat Tsien, a partner with Accenture, says that firms generally fall into one of three categories when it comes to STP. Some firms, she says, don't take on any initiatives unless they are forced to and will simply take the postponement as a license to do nothing, other firms have short-term tactical STP programs, and still others employ long-term strategic STP programs.
The last type of firm, says Tsien, needs no T+1 stick to drive them forward. However, the former two may prove to be the impediments that prevent an extremely interconnected industry from moving closer to STP (Kittell notes the SIA must work with the DTC, exchanges, asset managers, broker/dealers, custodians, trade associations, retail investors, issuers and regulators). Tsien says that she expects some monitoring will be required to ensure that all segments of the industry are meeting their newly created T+1 goals.
"You know that if we don't have a disciplined program that's monitored for compliance that it's just not going to happen," says Tsien. "I think that the SEC could facilitate that with a new ruling that is being discussed around the requirement to use a matching engine. I think that would be a key enabler of STP and clearly of T+1."
Any discussions around matching utilities, however, are often theoretical as the GSTPA, Omgeo and SunGard are still in the preliminary phases of production.
The SIA's Kittell says that, short of mandating T+1, the SEC could institute certain rule changes, such as that mentioned by Tsien, which would force the industry closer to STP.
The Securities and Exchange Commission, however, is a wild card in the T+1 decision, as it has announced plans to float a T+1 rule-change proposal in late summer/early fall. It is unclear how the SEC views the SIA's recent decision but Kittell says that SEC representatives regularly attend SIA T+1 Steering Committee meetings (now renamed the SIA STP Steering Committee), so the latest decision should be no shock to the SEC.
Kittell says that the SEC will likely be met with mixed reactions to its T+1 proposal and thus he expects the lack of industry consensus will prevent the regulatory body from ordering such a fundamental change in the way the U.S. capital markets function. The real question comes down to whether or not a T+3 environment equals a high degree of risk.
"We are aware that the (SEC) is interested in moving to T+1," says Kittell. "We don't see a lot of risk in the T+3 system that would drive you to an accelerated settlement. That will be the principal issue that will be debated in the SEC concept release and in the industry response."