The delay of the conversion to T+1 settlement reads like a kind of Information Age Aesop's Fable. To give firms the necessary time to switch to T+1, the deadline has been set back to 2005. Unfortunately, firms may be tempted to put their T+1 transition initiatives on the backburner since they now have a few more months to work with. However, T+1 settlement was delayed once before, --from 2002 to 2004--also to give firms more time to make the changeover.
The moral: don't put off until tomorrow what you can accomplish today. Because more than just the time pressure of last minute rollouts is at stake. Straight-Through-Processing (STP), a capability essential for T+1 settlement, impacts all levels of Investment Management Firms. To delay its implementation is to resist enhancing core business practices, whether an SEC mandate for T+1 is imminent or not.
STP Inside and Out
STP, an automated process that is expected to transform the securities industry, can play a vital role both internally and externally. Internally, STP enables a trade to be captured electronically and processed all the way through custodial reconciliation without requiring any manual handling. This cost-effective process can save the financial services industry billions of dollars on a daily basis by completing transactions faster and eliminating the duplication, redundant processing and costly human error the comes with manual intervention.
Externally, STP seamlessly integrates institutions with all outside entities involved in the lifecycle of a trade. These include the broker, the Depository Trust Clearing Corporation (DTCC), the virtual matching utilities, and the custodian. In reality, all of these different players may very well operate on different formats and networks, and have different data requirements, creating yet another challenge for these varying entities to electronically communicate with each other during the life of a transaction.
Using industry-recognized standards such as FIX, ISITC and S.W.I.F.T., STP-based software applications translate information from dissimilar IT systems, making it possible for each system to understand the other's language. The translation enables these institutions to communicate in a real-time environment, with confidence that they comprehend the electronic trade data and that it is not missing any vital information.
STP and Trading
STP directly enhances trading throughout an organization. It offers operations people relief from compliance complications and the demands of manual input. The staggering growth of volume over the last several years has led to a high number of exception items throughout the settlement period, putting the industry at higher risk. The existing manual process is fast becoming obsolete, threatening to buckle under the overwhelming weight of this tremendous growth. The only way the industry will be able to handle this constant growth is to become as efficient as possible. Only a process such as STP can conquer the constant paperflow that firms are inundated with every day. Preparing now to convert to STP and T+1 will allow the industry to accommodate the ever-increasing volume more efficiently, minimize the number of exception items and, ultimately, reduce costs and risks with the elimination of many manual procedures.
STP and Settlement
STP has a critical role to play in the settlement process as well. At the operations level, it speeds up trade affirmation, ensuring this step is completed in time to avoid failed trades. STP allows failed transactions to be found and corrected faster. Depending on specific circumstances, failed trades that are not found and rectified can place a considerable financial burden on investment managers who are required to make up the difference. According to S.W.I.F.T., 15% of transactions fail to settle, at a cost of $50 per transaction.
Even though inferior tools are to blame, when trades are not affirmed in time, rifts can emerge between operations people and traders, breaking down moral. STP in settlement is especially relevant in today's high volume trading. Limitations on the volume a firm can handle represent a strategic dead-end. If you can't handle more trades, you can't attract new clients and grow the company. With STP, the cap is off in terms of volume.
STP and Reconciliation
There is also the opportunity to take STP beyond the trade itself and the requirements of T+1. While no SEC regulation is likely to mandate it, the advantages are pure business. Manually reconciling statements on a monthly basis can become an all-consuming task, burning out employees while distracting decision-makers from profit generating activities such as new client contacts. Culturally, this mundane and exhausting chore can reduce a creative, motivated workforce to low performance and poor efficiency.
STP is Money Saved
More and more studies highlight the enormous savings potential offered by STP. Reuters reports that handling the increased volume of securities trades without STP could cost the securities industry an estimated $12 billion annually. The Global Straight-Through-Processing Association (GSTPA) has estimated the failure rate for cross-border settlement is as high as 20%. An estimated $600 million could be saved annually by reducing the fail rate to 10% over two days, assuming 200,000 trades per day, with an average value of $150,000, 5% cost of funds, and 15% failure rate over a duration of four days. And, according to a study prepared for the Securities Industry Association (SIA), while an estimated $8 billion will be spent by the industry in the T+1 conversion, operating in a T+1 environment would provide approximately $2.7 billion in annual savings for the industry, making back the $8 billion in less than three years.
Why should firms implement STP when T+1 isn't required until 2005? Because when properly executed, STP immediately improves efficiency, facilitates communications internally and externally, and reduces costs. It is a mistake to consider STP only in the context of gaining T+1 industry compliance. While implementing STP will place financial institutions well on their way to achieving T+1, it is above all a strategy for enabling firms to become more client focused. By reducing manual demands and failed trades, STP frees up people and resources to spend more time and energy exceeding customer expectations. This integration is clearly where the industry is heading, not merely for the purposes of federal compliance, but for superior customer service and overall competitive positioning. T + 1 might be the event, but STP is the goal.