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Whatever happened to T+1?

Whatever happened to T+1?

Source: Mike Brennan, CSC

Mike Brennan, a partner in CSC's Consulting Group asks will it ever be possible to get the industry mobilised around shortening the settlement cycle again?

It was 10 years ago this June that the US securities industry moved from a T+5 to T+3 settlement date cycle.

It certainly has been an eventful ten years. So much has happened — except, of course, the next step in shortening the cycle — moving to T+1.

Everyone remembers T+1 as one of the top issues focused on by operations and technology professionals in the latter half of the 1990s up until September 2001. It stayed around for a period of time after that but with limited enthusiasm.

So, why couldn’t the US securities industry move to T+1 in ten years?

Before the industry went silent on the issue, there was no shortage of opinions as to why T+1 couldn’t be accomplished: bear markets, bull markets, Y2K, focus on e-commerce, September 11th, too costly, front office had all the budget, ambiguous ROI, buy side not ready, Patriot Act, Sarbanes-Oxley, no specific mandatory regulatory event, and so on.

Today, no one is asking, and no one is telling what they think about T+1. The issue is completely off the industry radar screen.

But the anniversary prompts some questions, and before the issue is completely forgotten, here are ten questions currently under the "don’t ask don’t tell" umbrella:

1) The more time passes the more the industry loses people who were around in 1987 and remember the reasons why settlement date changes were proposed. Will it take another 1987 for the issue to resurface?

2) Regarding all those conferences, studies and white papers over the years that addressed the risks associated with T+3 and highlighted the subsequent risk reductions in moving to T+1 — were they correct, somewhat correct, incorrect? Is the risk today greater, less, or the same as in years past?

3) What about the business case that said if the industry spent billions to move to T+1 it would save billions? Is that still accurate?

4) Is anyone really talking about straight-through processing (STP) anymore, or was it so closely linked to T+1 that it has it gone the way of B2B and B2C?

5) Haven’t a decade worth of technology improvements made the industry more efficient? After all, it isn’t as if some organisations have done little or nothing to improve their operating environment over the last ten years - is it?

6) What’s happening with the buy side? Haven’t there been substantial improvements in portfolio management systems over the last ten years, facilitating communication with the sell side and lowering the degree of difficulty in processing allocations — long identified as a major impediment to same-day matching and conversely in moving to T+1? Isn’t it about time small and mid-size managers abandon faxing and embrace technology? Should a regulatory organisation step in and make them change?

7) Should T+1 be a part of the industry-wide business continuity planning (BCP) strategy? The Wall Street Journal said, "When a once in a lifetime calamity befalls the financial district twice in eight years, old assumptions are up for rethinking." While "calamity" really doesn’t describe the first attack on the World Trade Centre in February 1993 or the second on 11 September 2001, should old assumptions also include a three-day settlement cycle? In the event of another "calamity", wouldn’t the industry be in a better position without two days of transactions pending settlement?

8) Wasn’t T+0 the better option? Isn’t a T+0 processing, reconciling and matching environment necessary for T+1 — why not add settlement and be done with it?

9) Hasn’t the introduction of new regulatory requirements from the USA Patriot Act, Sarbanes-Oxley and others forced the industry to strengthen internal processes? Aren’t they all about data integrity, flow and management — core components of long time STP models?

10) Will it ever be possible to get the industry mobilised around shortening the settlement cycle again?

While these questions are interesting, they are not likely to be discussed for some time or at least until June 2010, the 15th anniversary of the T+5 to T+3 change. Hopefully all goes well until then with no events demonstrating there really was risk associated with a three-day settlement cycle after all.

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