T+1 Won't Happen Soon

June 19, 2002 (PLANSPONSOR.com) - Although the issue of shortening settlement cycles in securities markets has been widely discussed on recent months, a financial research firm says actually implementing T+1 isn't likely to happen anytime soon.

A report by TowerGroup said senior executives of financial services companies that would be affected by new settlement rules aren’t yet convinced that the potential benefits would outweigh the risks.

Also retarding the T+1 initiative’s progress, according to TowerGroup researchers, is the fact that institutions are focusing on a return on investment and are generally skeptical of any industrywide programs.

If proponents can convince executives that the shorter settlement is required for business reasons and that staying with the current system could hurt them, things might move along faster, TowerGroup said.

Risk, Tech Investment, Participant Behavior

According to the research firm, T+1 must be evaluated in terms of how shorter settlement cycles impact risk, technology investment and the behavior of market participants.

“TowerGroup believes the risk and benefits surrounding a shorter settlement cycle, per se, are not compelling enough to force the Securities and Exchange Commission to mandate T+1 and are particularly weak for the buy-side and the individual investor,” the report concluded.

T+1 Would Cost $6.4 Billion

Additional research findings include that spending on T+1 is collectively estimated at $6.4 billion with investment managers paying $1.1 billion and broker/dealers shouldering the remaining $5.3 billion.

However, not all of this will be new spending.  An estimated $1.68 billion will be generated by reallocating money from currently budgeted projects dealing with straight-through processing (STP), and $1.33 billion of new money will have to be raised from other areas.

While these amounts may seem modest when compared to total IT spending, it will require institutions to reassess and reallocate their spending, the TowerGroup researchers pointed out.

T+1 preparation will require firms to rearchitect and reengineer their back-office systems, which may represent significant technology risk.

That may prove another critical challenge in convincing senior executives that the risks of not implementing T+1 outweigh the risks of pursuing a shortened settlement cycle, TowerGroup said.

The TowerGroup report is titled T+1: Cost, Risk, Benefit and Other Urban Legends.