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T+1: the first step in business continuity planning

T+1: the first step in business continuity planning

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Shortening the settlement cycle to T+1 should be the securities industry's first step to ensuring business continuity argues Mike Brennan, principal consultant with Computer Sciences Corporation.

T+1 resurfaced over the past few weeks with the release of a new survey from Deloitte & Touche filled with statistics reflecting how the securities industry has (or hasn't) responded to the issue. Included were some possible implementation dates ranging from 2006 to 2010. Not mentioned was the fact everyone knows, but won't publicly address: the securities industry will NEVER voluntarily move to T+1.
There will always be a reason not to: ROI, bear market, not all participants engaged, etc. Remember, this is an industry that culturally doesn't embrace long-term projects. Wall Street operates in the short term, closing out one trade and immediately looking at the next trade and the one after that. Issues requiring long-term projects like decimalisation or after hours trading are immediately challenged until they are pushed back. If Y2K could have been pushed back, it would have been.
However, changing times have changed the T+1 issue.
USA Patriot Act versus T+1
Consider this - six weeks after 11 September the USA Patriot Act was signed into law. Seventy-four weeks after 11 September, T+1 is off the table and the securities industry continues to debate the correct approach to business continuity planning (BCP).
Seventy-four weeks!!
Why the difference? Simple. There was no commentary period and no debate regarding the adoption of the USA Patriot Act. Industry participants had no opportunity for deferral. Is the legislation perfect? No. The alternative was endless discussions and industry committees focused on how best to implement OFAC checking, anti money laundering policies and suspicious activity reporting – and nothing would have happened.
Some issues are critical enough to require immediate action. Is T+1 such an issue? Prior to 11 September it was not, after 11 September - absolutely. Today we should address T+1 for what it is, the first step in the securities industry's business continuity plan.
Can the industry have BCP without T+1?
It's an interesting coincidence that the resurgence of interest in T+1 occurs just as New York City observes the 10th anniversary of the first attack on the World Trade Center, and the terror alert was downgraded from orange to yellow everywhere except New York City (which has been at orange since the system was created).
With New York City the capital of the global securities industry and primary target of enemies of the United States, it is interesting that T+1 is almost never discussed in the context of BCP and the impact a terrorist attack has on the current T+3 settlement cycle.
History tells the story - the attack on 11 September, 2001 impacted transactions conducted on Thursday 6 September, Friday 7 September and Monday 10 September. These transactions were scheduled to have settled within three business days including Tuesday 11 September. With the Industry closing down on 11 September and not re-opening until the following week, the settlement process was disrupted and substantial amounts of transactions did not settle as scheduled.
When the industry finally re-opened, operations professionals faced the challenge of settling three days worth of activity in one day. At no other time in the history of the US securities industry has the risk associated with an extended settlement date been so apparent.
Yet if New York City was attacked and shut down today, the same thing would happen despite 74 weeks going by. What industry leader or regulatory organisation would want to explain that?
The securities industry BCP strategy is primarily focused on keeping exchanges open and industry participants functional through back-up locations. The plan assumes industry employees can either be transported to those locations the day of an attack or there are enough off site employees to keep the industry functioning. Not likely. So at least one day is lost and depending on the scale of the attack maybe more. This results in some transactions not settling. When transactions don't settle buyers and sellers don't exchange ownership, and business continuity does not happen.
Therefore shortening the settlement cycle should be the first step in the Securities Industry business continuity plan. Not convinced? Consider this. For many years, the SIA has based the move to T+1 on the premise that a shorter cycle lowers operational risk. Specifically, by embracing straight-through processing best practices necessary for a T+1 environment, the operational performance of the industry would improve - thereby lowering risk.
To support this premise, various operational metrics were collected and published over a period of many years. Examples include processing exceptions and matching and settlement statistics. These metrics supported the SIA's position that the amount of operational risk was great enough to warrant shortening the settlement cycle.
This raises a critical question. What happens to those metrics (which were collected when employees present are their desks and have access to all the tools necessary to accomplish their daily tasks) in the event of another 11 September? Clearly, operational risk goes off the chart.
So what's to be done?
Five suggestions for the SIA
The SIA has done an incredible amount of work to understand and determine WHY there could be a need for an industry-wide movement to T+1. It's time for a new approach based solely on HOW to make it happen. The five suggestions below outline how to overcome existing barriers to T+1.
1) Start looking at T+1 as the first step in the securities industry business continuity plan — not as a settlement date initiative.
2) Bite the bullet and go all the way to T+0. Successfully participating in a T+1 environment means industry participants must already be operating internally in a T+0 environment.
3) Stop looking for ROI. The T+1 issue should be considered in the same manner as the USA Patriot Act, wartime legislation.
4) Determine a realistic implementation date. As mentioned, 2010 was discussed as a possible implementation date. To put that in perspective, the 1987 crash put the idea of shortening settlement cycles in the spotlight but it wasn't until 1995 that the Industry moved from T+5 to T+3. It is unthinkable that it would take nine years after an event such as the 11 September terrorist attack to effect a change.
5) The time has arrived to stop the debate. The SIA, along with the SEC, should consult with the Treasury Department and the Department of Homeland Security to either position T+1 under the USA Patriot Act umbrella or create new legislation. One of the key benefits of the USA Patriot Act is ALL industry participants must comply. No industry participant can claim the Act doesnt apply to them.
The alternative to these recommendations is that at some point in the future the SIA will re-open the T+1 project office and re-assemble all of the committees. How much enthusiasm will there be for that?
Additionally, the 74 weeks that have already gone by will quickly become 174 weeks or more, and along the way the securities industry operates with an incomplete business continuity plan.
Clearly, the time has come for a very different approach to T+1.

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