© Copyright 2000 Rogers Media. The following article first appeared in the February 2001 edition of BENEFITS CANADA magazine.

The Plan Sponsor Game Plan

Pension plan sponsors need to prepare for the impact that T+1 will have on their investment strategies and partnerships. A checklist from the Canadian Capital Markets Association is a good place to start.

By Bill Lidstone

Everybody knows the scene. Terrified scientists and military leaders watch a radar screen as an unidentified monster blips across the monitor. An actor sets up the plot by recounting the terror and destruction caused the last time Godzilla, Rodan or some other creature attacked. While the transition to trade date plus one (T+1)--now widely expected by mid-2004 in the U.S. and Canada--won't have the drama of Tokyo in flames, its impact on the North American securities industry will be of the same order.

For pension plan sponsors, understanding the challenges, opportunities and possible impact this shift will have on business relationships and investment strategies is an important step in cutting the monster down to size.

John Sczelecki, director of investment services, Hospitals of Ontario Pension Plan, sees T+1 as a key strategic industry initiative that his organization has to stay abreast of in the coming years. "As a plan with a significant portion of our assets managed internally, we're starting to upgrade our own systems, which will facilitate the move to straight-through processing with brokers and custodians."

Sczelecki says achieving straight-through processing (STP) is key to attaining T+1 capability. In fact, T+1 was one of the main business drivers put before his board when systems upgrades were under discussion this year.

When it comes to T+1, Sczelecki expects custodians to be ready to accept information electronically, avoiding any re-keying that would interrupt the flow of information to their back offices.

"Our external managers will also have to demonstrate that their processes and systems are capable of meeting the trade flow requirements in a T+1 environment," he adds.

And while T+1 isn't a criteria for the organization's use of a particular custodian or investment manager, Sczelecki says he could see "it becoming an administrative requirement investment managers and custodians will have to comply with."

That day isn't too far off, according to Gary Stephenson, a consultant with Katamax Solutions and chair of the Canadian Capital Markets Association's institutional trade processing working group.

Stephenson, who has years of experience at the Canadian Depository for Securities (CDS), warns plan sponsors that T+1 could lead to a new custody pricing environment. "Plan sponsors appoint money managers to invest their money for them. If the manager goes along with the industry and does everything electronically, that makes everything easier, cheaper and faster," he says.

"If a manager doesn't communicate electronically and custodians need to assign a person to clean up transactions, then in the T+1 world, this could mean higher prices," adds Stephenson.

While Stephenson has a healthy skepticism about the numbers being bantered around on the cost of T+1, he does think the securities industry will spend more on this project than on Y2K.

Although large costs will be attributed to T+1, there will be savings too, and Stephenson says pension funds should start asking their money managers and custodians, "How are we going to benefit from this change--through lower costs or better service?"

Before anyone starts fighting over the spoils, Stephenson says all the players have to address the fundamental issue standing in the way of straight-through processing: How to send, receive and handle information.

Making the flow of information happen in real time, electronically, and with a minimal amount of human interference is essential. Today's system of faxes, hand keying information and constant back checking for errors and omissions has to give way.

System changes are happening everywhere, and especially at the Canadian Depository for Securities where its 25-year-old clearing and settlement batch process, Securities Settlement Services, which handles all equity and some corporate debt transactions, is being changed. Work is under way to modify and expand the CDS debt clearing service, which handles all money market transactions in real time, so it can give the same functions to the equity market.

In its real-time debt system, CDS handles about 6,000 trades worth, on average, $100 billion to $150 billion a day. Its batch-processing system for equities handles 150,000 to 300,000 transactions per day, worth about $10 billion to $15 billion.

The new system needs to have the reliability and volume capability to reduce the risk of failed trades in a T+1 environment.

What happens if there is no dependable T+1 capability in Canada by 2004? Any difference between settlement times in the U.S. and Canada could generate a settlement price benefiting the U.S., drawing trading away from Canadian markets, money managers and custodians.

Plan sponsors need to know the technological capabilities of both their custodian and their money managers when it comes to executing seamless and transparent trades and settlements, according to Don Smith, vice-president, securities services at Royal Trust Global Securities Services. Crucial to any successful T+1 environment will be the replacement of batch over-night processing systems, he adds.

As a member of the CDS X-System conversion steering committee, Smith believes its new system will be able to handle the demands of T+1.

"We're already able to turn around trade information from brokers and money managers and forward it to CDS on T+1 for money market trades," says Smith. He adds that "the crucial issue is getting the trade information from the money managers and brokers in a timely fashion. This means ensuring all information is handled electronically."

CHANGING THE MINDSET

Smith says plan sponsors should ask their brokers and money managers if they have the infrastructure in place to deliver this information on trade date. This will be a greater achievement than it sounds, says Smith, requiring a change in mindset as well as technology. Canada is not alone in facing this challenge. Recent estimates show that only about 12% of U.S. trades are affirmed on T+1. "There is a long way to go," says Smith, "but I'm confident we'll make it."

The implementation of T+1 should have minimal impact on pension plans in terms of securities lending, says Susan Pike, director global securities lending and finance at Royal Trust.

"The market requires trade date notification of sales and this will not change with T+1. If anything, it should improve the success rate of such notification as the client and/or their managers will need to become more efficient in their general trading to meet T+1 market settlement requirements," says Pike. "We already successfully operate in a T+1 environment for certain markets and instruments like treasury bills."

In the end, T+1 will be wrestled to the ground by the securities industry and its chief benefit--reduced risk in the settlement system--will be achieved.

It's going to take money, systems expertise and, most importantly, co-operation and open communication among brokers, sponsors, money managers and custodians to make it happen.

Bill Lidstone is a communications consultant with Royal Trust Corporation of Canada in Toronto. billlidstone@royalbank.com.

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T+1 checklist

The Canadian Capital Markets Association (CCMA) has compiled a list of questions plan sponsors should ask themselves about T+1. Here's a snapshot of that list. The full checklist is available on the CCMA's Web site at www.ccma-acmc.ca.

Planning: What stage are you at in terms of ... ?

• Being aware of T+1 and its implications.
• Setting up a process to keep informed.
• Naming a T+1 coordinator.
• Developing a project plan.
• Getting staff resources.
• Developing a budget.
• Identifying knowledgeable vendors with proven track records who can support straight-through processing.
• Developing a communications plan covering staff, clients and partners.

Current systems and processes: Does your firm or your supplier ... ?

• Have the results of capacity planning stress tests.
• Benchmark your operation for error rates, speed of corrections, etc.
• Operate real-time trade information and settlement systems.
• Manually input data.
• Reconcile data automatically from all sources daily.
• Have automated interfaces/links with other parties.
• Make optimal use of industry standard messaging protocols.
• Have the capability to determine your own STP performance.

Organizational readiness: Does your firm have ...?

• A T+1 recruitment plan.
• Updated training reflecting T+1 needs.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."