Brokers seek regulatory push for T+1 compliance

The financial services industry will spend US$8 billion during the next four years -- $2 billion to $4 billion more than it collectively spent on the Y2k problem -- in order to clear trades in a single day vs. the current three-day cycle, known as T+3, according to the Securities Industry Association (SIA).

At the SIA's annual operations conference here this week, some bankers and brokers said that while they don't expect firms to be ready for T+1 until 2005, the challenges posed by it are spurring some organizations to consider spending money now to upgrade computer systems and integrate databases and back- and front-end systems.

One company that's moving ahead on the T+1 front is A.G. Edwards & Sons Inc. in St. Louis, which plans 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 evaluating a group of vendors to which it can outsource its processing systems. Processing is currently handled in-house.

"The cost [to move to real-time processing] is going to be big," said Vitt. He was unable to quantify the investment needed but estimated that the project would take two years to complete.

Still, IT managers will be hard-pressed in the early stages of their T+1 initiatives to squeeze money from senior management to move toward straight-through processing (STP) because the return on investment won't be immediately apparent, said SIA Executive Vice President Donald Kittell.

To get brokerages moving on T+1 initiatives, the industry either needs a mandate, such as an SIA member vote, or regulators such as the U.S. Securities and Exchange Commission to set compliance deadlines, said Kittell. "We need urgency," he said.

Chris Sandel, vice president of execution and clearance services at New York-based Fleet Securities Inc.'s U.S. clearing division, agreed that SEC intervention will be needed.

"Back ends and front ends are out of sync. This will definitely cause another round of consolidations in this industry, because not everyone will be able to afford it," Sandel said.

Another issue confronting financial services firms in moving to STP/T+1 is the changeover to a new standard electronic messaging format being dictated by the Society of Worldwide Interbank Financial Telecommunications (SWIFT), which has set a Nov. 16 deadline for the shift.

SWIFT is a Belgium-based international banking cooperative that created a messaging service used by more than 7,000 financial institutions for overnight payment clearance. The shift from the current ISO 7775 messages to the new standard, ISO 15022, will include additional data fields such as "place of settlement" and information such as bank identification codes.

T+1 and STP will require systems automation to achieve the speeds and efficiencies needed to clear trades in a single day or on the same day. A standard messaging format would allow front-end and back-end systems to communicate efficiently.

Now, banks and brokerages either use a proprietary messaging format, the current SWIFT message format or a combination of both. The result: Data input is inconsistent, according to Francis Ramacle, head of SWIFT's securities industry division.

Ramacle said he expects most of the Global 1,000 brokerages and custodial banks to be in compliance by the November deadline. But he and others are concerned that many of the smaller firms will still be using old formats, making it difficult for everyone.

In order to move toward STP, Deutsche Bank AG is developing an application in conjunction with New York-based Capco, a financial services consulting firm, that will convert brokers' trade messages into SWIFT's new format. Those messages can then be processed by Deutsche Bank's back-end systems and clearinghouses, according to Genevy Dimitrion, vice president of product development at Frankfurt-based bank.

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