Billion dollar burden looms for financial services

Trimming 48 hours off the time it takes to clear trades will cost the financial services industry $16 billion, according to the Securities Industry Association (SIA).

Moving to T+1, versus the current three-day cycle known as T+3, will cost an estimated at $4 billion to $8 billion more than the sector collectively spent on the Y2K problem.

At the SIA's annual operations conference in California this month, bankers and brokers said that while they don't expect firms to be ready for T+1 until 2005, many question the business case for moving to straight-through processing (STP) of trades.

US Securities and Exchange Commission deputy director of market regulation Robert Colby has acknowledged the move to STP/T+1 is "exceptionally harder" than the move from T+5 to T+3 in 1995, because it marks a complete overhaul of the settlement process.

Colby said the US Government will be proposing rules that could eventually require next-day trade settlements. Speaking at the SIA's STP/T+1 conference, he said his agency could announce the proposed rule as early as next month.

The SIA board of directors is scheduled to approve on July 18 one of three plans for moving forward on T+1. Then it will either commit to T+1 by June 2005; commit to STP but not to T+1, which would then become only a design standard; or commit to aspects of T+1 that have a speedy ROI, such as an institutional electronic trade processing model, the creation of corporate processing hubs or reducing paper stock certificates in favour of electronic book entry.

The challenges it poses are spurring some organisations to consider spending money now to upgrade computer systems and integrate databases and back- and front-end systems.

Stephen Goh, chief executive of Perth-based financial services provider Sanford Securities warns IT and banking executives not to ‘underestimate' the impact of T+1 compliance.

Technology will play a significant part in T+1 compliance at the online brokerage, according to Goh. Over the past three years Sanford has invested $2 million in developing Plato II, an in-house T+3 processing platform for equities trading. The firm has more than 120 accounting and financial planning group clients for wholesale financial services and around 43,000 retail clients.

Goh claims that the Plato II application was designed for brokers with "T+1 compliance in mind" and that Sanford can be ready for T+1 trading in a "very short period of time".

Westpac Banking Corporation and ANZ Bank would not comment on any of their T+1 initiatives.

One investment firm that's moving ahead on the T+1 front is the large US-based AG Edwards & Sons, which is planning to change out all of its core processing systems. According to Gregory Vitt, who works in the firm's information processing unit, the company is currently evaluating vendors to outsource its processing systems to.

"The cost to move to STP (straight-through) or real-time processing is going to be big," said Vitt, who was unable to quantify the investment needed, but estimated that the project would take two years to complete.

For back-end processing many Wall Street traders rely on service providers like State Street Corp, which to date has had to delay more than half the settlements it processes while a staffer confirms, by phone or fax, information missing from the original sales notice.

With an eye to T+1 level performance, State Street has built a Financial Transaction Management (FTM) system, which is custom-coded in Java, using Oracle databases running on Sun servers. It is tied to underlying processing systems on the mainframe using IBM's MQSeries message-oriented middleware for communication among applications.

The FTM system now automatically processes more than 80 per cent of the requests that flow through it by identifying the source of the fax and automatically filling in missing information from a database of information on traders. Fewer than half of all trades go through FTM at this point, but the system will be complete in the first quarter of next year.

FTM is said to put State Street in the forefront of two movements on Wall Street, according to Tim Lind, an investment management practice analyst at TowerGroup.

The first is a push to automate the settlement process to the point where trades can be finalised one day after they're made, also known as T+1. The second is a move to outsource automation to companies like State Street so brokers don't have to pay the cost of automation themselves.

Another issue confronting financial services firms is the changeover to a new standard electronic messaging format dictated by the Society of Worldwide Interbank Financial Telecommunications (Swift), which has set a November 16 deadline for the shift.

Banks and brokerages currently use a proprietary messaging format, the current Swift message format or a combination of both. The result: data inputting isn't consistent, according to Francis Ramacle, head of Swift's securities industry division.

Swift is a Belgium-based international banking cooperative that created a messaging service used by more than 7000 financial institutions for overnight payment clearance. The shift from the current ISO 7775 standard messages to the new standard, ISO 15022, will require coding for extra data fields such as ‘place of settlement' and information such as bank identification codes.

The new messaging standard, it is claimed, will allow front-end and back-end systems to communicate more efficiently and better support the speed of T+1 trading. Ramacle expects most of the Global 1000 brokerages and custodial banks to be in compliance by the November deadline. - Kevin Fogarty contributed to this article

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