July 30, 2002

The T+1 Blues

Looks like next-day trade settlement isn't right a

The Securities Industry Association (SIA) decided last month to delay implementing next-day settlement of trades until it hashes through some straight-through processing (STP) snafus over the next couple of years.

The SIA's initial goal was to convert from the current T+3 to T+1 by 2005, but it now wants to focus its efforts on reaching an effective STP strategy in 2003 and 2004. Straight-through processing attempts to seamlessly integrate "systems and processes to automate the trade process from end-to-end trade execution, confirmation, and settlement without manual intervention or data entry," according to the SIA. The SIA has decided that coming up with more effective straight-through processing needs to occur before it can evaluate a conversion to T+1.

"It's about time [the SIA] finally realized the reality of the situation," says Damon Kovelsky, an analyst at Meridien Research in Newton, Massachusetts. "What's more important is straight-through processing." The SIA's previous plan to convert to T+1 before smoothing out the kinks in STP "was almost a case of the cart before the horse."

John Panchery, STP project manager, and VP/managing director at the SIA, says "when we looked at T+1 three years ago, it made a lot of sense because at that time it seemed like it would take a lot of risk out of the equation--if you could do something in one day, why let it take three days?" Now that the SIA has gotten two and a half years into the STP/T+1 project, it has "gotten smarter" and "we have really gotten under the covers ... to analyze all the work that's got to get done so that we can do a next-day settlement," he says. "Quite frankly, we don't have all of the answers."

The current three days that it takes to settle a trade isn't just an arbitrary time period that the SIA hatched up, Panchery says. "It's taking three days because of the complexity of all the parties to do their piece for that transaction," he says. "So in today's world, an institutional trade can start out today as an order and not actually get all of the allocations and confirmations around that order until two days from now. And much of that [trading process] is either manual or done by some other electronic means like fax machine or e-mail message."

And moving to a next-day settlement at this point in time is just not feasible considering securities firms and broker/dealers have been struggling under "one of the biggest economic slowdowns in history," Panchery says.

"If you take a look at where technology spending has been going for the past two years, it's down," says Meridien's Kovelsky. "It's one of those things where if you don't have to do it, you're not going to, especially if it's going to cost you millions of dollars and is going to show up on your bottom line."

The SIA has said it will evaluate the settlement period again in 2004. And the Securities and Exchange Commission, which has been working with the SIA on the settlement project, will open the T+1 debate to public comments when it issues a "concept release" on T+1 in the late summer or early fall.

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@ia-mag.com.

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