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© Copyright 2000 Rogers Media. The following article first appeared in the December 2000 edition of
BENEFITS CANADA magazine.
T minus 800 and counting
The money management industry is ill-prepared for T+1.
By Keith Martin
Pension fund sponsors must now start asking their managers, custodians and brokers what steps they are
taking to prepare for the implementation of T+1 in June 2004.
T+1 will reduce the securities clearing and settlement cycle from the current standard of three days
following a trade (T+3) to the day following a trade (T+1). There are about 800 business days to June 2004
and the industry will need every one of them.
Meeting this deadline will require far greater time, effort and expenditure than that involved in
addressing Y2K. Systems will need a major overhaul or, in many cases, will have to be completely replaced.
Operating procedures must change dramatically or be outsourced. Some players may not be able to justify the
investment and will be forced to merge or even go out of business.
Today, the Canadian Capital Markets Association, a new association representing Canada's banks, brokers,
dealers, investment funds, fund managers, securities clearing and settlement organizations, stock exchanges
and regulators, estimates that about only half of the institutional trades done in Canada are reported to
the central depository by close of business on the trade date. Virtually none of these trades are affirmed
by the counterparty on the trade date. If T+1 were now in effect most, if not all, transactions would fail
to settle on time.
The situation is not much better in the U.S. Failed trades mean cash requirements to meet pensioner
payments may not be covered, systemic risk is increased and portfolio returns suffer.
Operating in a T+1 world requires a complete change in thinking. No longer does the portfolio manager have
three days to pay for a security purchase. Shorter settlement periods will result in custodians seeing
changes in clients' cash balance levels. For funds being switched from a foreign market to Canada, the
timing of the sale will have to be moved up by three days or the domestic purchase delayed. Securities
lending program procedures will have to ensure immediate availability of securities borrowed.
That said, custodians may be able to facilitate certain transactions by swapping positions, netting
settlements and offering contractual settlement to more clients.
Straight-through processing is essential to operating on a T+1 basis. Once an order is released into the
system, no manual intervention can be allowed. To operate in the compressed time frame, back office
procedures--including compliance checks and controls--must be re-engineered. Allocation of block trades to
individual accounts will have to be fully integrated into the straight-through environment.
Managers will have to decide whether they can afford the systems needed to comply with T+1. For some, it
may mean they have to fully outsource their back office.
Outsourcing raises issues of confidentiality of portfolio strategies and client information, as well as
maintaining customer service standards. For managers located in other time zones, there will have to be
further adjustments to trading and operating hours.
In July, the T+1 Business Case Final Report, published by the Securities Industry
Association, Andersen Consulting and The Capital Markets Company, was released in the U.S. It calls for
firms to commit by the fourth quarter 2001 to building or outsourcing internal processes to comply with the
shortened settlement time frame. This means work has to start now to reach that milestone.
No investor, least of all pension funds, can afford to be placed in a position where securities trades do
not settle on the due date.
Keith Martin is managing partner with Keith Martin & Associates in Milton, Ont. keithmartin@look.ca.
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