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© Copyright 2000 Rogers Media. The following article first appeared in the February 2001 edition of
BENEFITS CANADA magazine.
The Money Manager's Challenge
With T+1 looming, the investment industry must focus on accelerating the flow of trade information.
Money managers, custodians and plan sponsors are working together to develop effective T+1 plans.
By David Toyne
Trade date plus one (T+1) is on the horizon and it's time for all parties in the securities industry to
prepare for this new way of doing business. There are numerous advantages to T+1--which will take effect in
June 2004--for those in the industry as well as institutional and individual investors.
The Canadian Capital Markets Association (CCMA) has made a solid business case for T+1, pointing out that
it will lower the market's operational and credit risks, improve investor service, increase market
productivity, enhance liquidity and pave the way for 24-hour trading. Ultimately, T+1 will result in a
significantly more efficient global processing infrastructure.
Domestic and global investment trends underly the move to T+1. Over the past decade, annual trade volume on
Canadian exchanges has risen at a 12% compound annual growth rate to $640 billion in 1999, up from
approximately $199 billion in 1990. Trades have increased to 42 million from 12 million during the same
period.
Looking beyond our borders, combined annual trading volume over the past decade on the Hong Kong, Tokyo,
London and the New York stock exchanges rose at an 18% compound annual growth rate to a staggering $14.3
trillion from $3.2 trillion. Recent projections indicate that the total number of cross-border trades will
triple to 108 million next year from 36 million in 1999.
As global capital markets continue to open up to the pension and group savings market, asset managers will
further diversify these investments. Non-home country investment by public and private pension funds
worldwide is projected to shoot up to more than $3 trillion in the next few years, up from $350 billion in
1990.
Meanwhile, countries around the world continue to pursue regulatory reforms that will expand public pension
investing in global capital markets. Examples of this trend at home include Ottawa's decision to permit
pension funds to increase their investment in foreign securities to 30% this year, up from 20% in 1999.
These trends pressure domestic and global parties to reduce counterparty and clearing corporation credit
exposure--the very forces behind the move in North America to shorten settlement cycles over the next three
years. Before the move to T+1 is made though, the industry's immediate focus must be on accelerating the
flow of trade information.
It's crucial for all parties involved in the trade process to work from the same data to eliminate errors
and discrepancies. Every pension plan sponsor, asset manager, broker, trader and asset service provider
participating in the evolving securities processing system must begin formulating internal approaches to
real-time management and problem resolution for all of their processing activities. This includes
identifying and implementing internal changes, whether they be systems- or process-related.
Accelerated information flows are the first step toward greater T+1 efficiencies. North American industry
developments within the past five years from T+5 to T+3 and Y2K were substantial undertakings. Similar to
the scope of Y2K efforts, the current CCMA T+1 readiness checklist includes: raising internal awareness;
securing commitment from senior management; project planning and coordination; developing a communications
plan; internal testing; industry group synchronization; establishing high-quality straight-through
processing partnerships; benchmarking; external testing; and, overall, ensuring the organization is ready
for T+1.
Trade information is the essential raw material for a wide range of critical services, ranging from
portfolio valuation to exposure control, securities lending to settlement, and portfolio accounting to cash
management. Accurate information is needed on trade day for all investments, regardless of settlement
cycles.
Under current practices, the exchange of trade information is synchronized with the settlement cycle
attached to the securities being traded. Regardless of the need for daily pricing or same-day risk
management, many trades are made today with an attempt to make comparisons the following day. If
successful, information is given to agents on a T+2 basis and local markets match and settle the trade the
following day. This delay prevents the timely and accurate incorporation of trade information into
portfolio accounting and valuation.
Straight-through processing will inject speed and accuracy into the trade process. It will also ensure the
proactive management of same-day counterparty, foreign exchange and market volatility exposure.
Straight-through processing requires a simple trading environment. Communication between the broker/dealer
and the clearing agents as well as between global custodians and sub-custodians is largely automated
already. When the quality and speed of information flowing among broker/dealers, investment managers and
service providers accelerates and improves, the timeliness and standard of information flowing to local
markets will, in turn, advance significantly.
The basic principles of Canada's proposed T+1 model are:
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Interconnectivity which will link all parties to a trade at the earliest point in the cycle.
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A single communications channel that provides investment managers with access to all counterparties and
agents.
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Custodians and asset managers simultaneously viewing allocations and enriching transaction data with
custodians initiating time-critical steps based on allocation information received in order, for
example, to recall a securities loan.
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Broker/dealers that deal on a block basis for notices of execution.
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An event management-based system that monitors data continuously across the entire trade cycle.
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Trade matching at three levels: total allocations with execution; net amounts; and settlement
instructions.
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Easy access to market participants of any size.
CHALLENGES AHEAD
One of the major concerns among money managers surveyed for the U.S.-based Securities Industry
Association's T+1 business case is the management of real-time data. Almost two-thirds (73%) of these
individuals plan to improve automation of the allocation process, while 50% plan to migrate to a single
order management system. Another 43% say they will automate the amount calculation process and 29% indicate
that they are willing to move to a single internal portfolio system using trading/order management and
booking systems.
Other considerations for Canadian and U.S. managers include the generation of allocations on a near
real-time basis. Today, 50% of allocations are generated within 30 minutes of a notice of execution, but
the remainder can take up to five hours. As communication standards are a key concern in the industry,
asset managers will need to ensure that all standing instructions are accurately reflected on industry
databases. And with the advent of abbreviated settlement periods and extended trading hours, resource
allocation for off-hours coverage may be necessary to flag potential errors.
Since investment partners' systems must integrate seamlessly in a T+1 world, plan sponsors and asset
managers need to talk to their global partners now to determine their T+1 plans. They must know what
technology investments their own organizations are making and how these are positioning them for real-time
processing.
Perhaps the greatest challenge of all the operational changes that need to be made to implement T+1 will be
converting industry professionals to a new way of thinking and managing business processes. The inevitable
transition to global straight-through processing and the T+1 (ultimately T+0) environment will
fundamentally alter the way the industry conducts business. Industry participants must put aside cultural
biases in order to reap the numerous benefits that new technologies bring to all parties.
David Toyne is managing director with State Street Trust Company Canada in Toronto. dtoyne@statestreet.com.
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