Operations executives at financial institutions may find this summer one of the least relaxing in recent memory. The usual panacea of a long vacation to some beachfront locale won't be able to expel one frightening thought from the back of their minds: What if the Securities and Exchange Commission, which has already promised to float a T+1 rule-change proposal in the next few months, decides to subsequently mandate the move to a one-day-settlement cycle?
Despite the fact that the financial-services industry now finds it in vogue to reject the idea of T+1 as tangential to the real goal of straight-through processing, STP doesn't make operations specialists wake up at night in a panic, a mandated T+1 conversion by June 2005 will.
As it currently stands, the Securities Industry Association, an industry body which is in contact with the SEC on important issues but certainly does not have any deciding vote in them, has jumped onto the T+1 fence after being its strongest proponent for a number of years. The downturn in the economy and the events of Sept. 11 have caused the SIA to rethink the T+1 argument, ordering a new business case to see if the pains it would take to achieve one-day settlement are worth the perceived rewards.
Larry Tabb, vice president of the Securities and Investment Practice at TowerGroup, a Mass.-based firm focused on following the impact of technology on financial services, says that some of those perceived rewards may be illusory. "The idea that people are going to trade more because of shorter settlement cycles is probably not correct. The idea that a three-day-settlement cycle incurs tremendous amounts of credit risk is probably not true," he says.
What the SIA has planned is to create a new cost/benefit analysis where firms can see the return on investment that a T+1 conversion would offer. At the recent SIA Technology Management Conference and Exhibit, John Panchery, SIA vice president, systems and technology, said that firms want the SIA to concentrate on projects that have an immediate and significant return on investment, not issues which project a payback in three to four years, such as T+1. Panchery says that decisions made at the SIA board meeting on July 18 should (barring SEC action) lay out the back-office agenda for the next 24 months.
Tabb says that the SEC will probably go in one of three directions: First, it can implement the current target date of June 2005; second, it can push off a decision until 2004 and third, it can rule that T+1 is not necessary and table the issue entirely. Tabb says that the SEC will probably chose the middle option as it waits to see how the situation develops over the next few years.
As firms wait to see how this summer's T+1 debate plays out, they can certainly keep themselves busy with internal STP work.
Across the industry, insiders agree that firms need to keep focused on integrating systems and doing away with disparate and unconnected vertical silos of information. Also touted is the importance of doing away with batch processing in favor of real-time systems.
Tom Costa, recently elected president of the Government Securities Clearing Corporation and Mortgage-Backed Securities Clearing Corporation, says that the fixed-income world is focused on such real-time systems. "We are working towards a standard approach in fixed income, in areas like corporates and municipals, with a common-message standard based on the International Organization for Standardization (ISO) 15022 data dictionary, single pipelines, a TCP/IP-access network and matching utilities," he says. "We are also developing a universal Web front end for access to the fixed-income marketplace."
A large piece of the new back-office puzzle will fall into place with the formation of the matching utilities Costa mentions, such as those being constructed by the Global Straight Through Processing Association, Omgeo, SunGard and Financial Models Company. The VUM landscape was recently muddied when the GSTPA contracted SunGard, a competitor, to be the facilities manager for its core trade-matching engine, called the Transaction Flow Manager. Tabb says that the confusion has really taken the wind out of the GSTPA sails, leaving Omgeo, a firm with established and embedded products, ahead of the pack.
"Our feeling right now is that Omgeo is in the best position to take advantage of the (new market). The GSTPA has lost a lot of steam and, even with SunGard as facilities manager, it will be difficult for the GSTPA to make inroads against Omgeo, so we think that the only way GSTPA can make it is if SunGard buys them and runs it as a commercial venture."