One-day stock trade settlements in doubt
November 5, 2001 (Computerworld)
The events of Sept. 11 have caused some financial services executives to question the viability of reducing the time it takes to settle stock market trades from three days to one. The $8 billion industrywide "trade plus one day" initiative has been derailed by disaster recovery considerations.
The Securities Industry Association last month moved the target date for the launch of T+1 from 2004 to June 2005, citing the terrorist attacks on the U.S. and the fact that many brokerage houses and banks are focusing more on business continuity planning than on shortening settlement times. But not everyone is convinced that T+1 will happen by 2005—or at all, for that matter.
"I don't know if it's doable by 2005. There are going to be a lot of issues that will come up," said Steven Schutze, director of e-strategies at the American Bankers Association in Washington. "We're still rethinking things like the reliance on the infrastructure outside the financial services industry: telecommunications, airplanes and mail, things like that."
Schutze's concerns were echoed by other financial services IT managers who questioned whether 24 hours is enough time to correct common errors in a trade, such as misplaced decimal points or numbers, and especially whether one day would be enough time to get systems back up and running in the event of another disaster like the Sept. 11 terrorist attacks.
The Securities and Exchange Commission is pressuring the financial services industry to clear and settle all trades within 24 hours. The last time IT systems were enhanced to speed up clearing and settlement was 1995, when processing time was reduced from five days to three.
Among other things, T+1 would reduce settlement risks and resolve open credit extensions created by waiting three days.
Clearing and settlement is a complex process that involves the seller and the buyer registering a transaction with a central clearing organization, such as The Depository Trust & Clearing Corp. (DTCC) or the New York Clearing House. The buyer and seller then have to reconcile their accounts, and any errors have to be corrected in a process that can involve half a dozen people.
"In a major disaster, being forced to settle that day is a major issue," said Ed Alsberg, information systems operations director at the New York-based DTCC.
Damaged Lines
The Bank of New York Co., which is the only major clearing firm that houses its operations in downtown New York, faced major difficulties getting trades settled after Sept. 11. The problems didn't involve settlement systems, but rather the transmission of settlement data through telecommunications lines that had been cut or damaged. As a result, the transfer of settlement instructions was slowed, according to Meridien Research Inc. in Newton, Mass.
"To get from T+5 to T+3, you hire more people. To get from T+3 to T+1, you really have to be automated," said Deborah Williams, a research analyst at Meridien. "I don't think it is one issue. There are hundreds of issues, some small and some large, revolving around ensuring that trades settle quickly and accurately."
One key technology hurdle facing settlement and clearing is straight-through processing (STP), a technology infrastructure and business processes that link brokerages, clearinghouses and banks. STP would provide a nonstop flow of information from trade execution to settlement.
Larry Tabb, an analyst at Needham, Mass.-based TowerGroup, said T+1 is "the right thing to do," but he added that STP issues have to be resolved first.
For example, Tabb said, U.S. firms need to link into an international TCP/IP network being established by the Global Straight Through Processing Association, a financial services industry group that focuses on cross-borrder securities transactions.
"The other issue would be creating a process around data efficiency—consistent customer databases and settlement instruction databases," Tabb said. "You need to create one system that repopulates that information in a master database."
What happened to the clearing and settlement system on September 11?
There problems were the result of limited amount of available bandwidth due to major disruptions in local telecommunications capacity.
Source: Meridien Research
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