The US Securities & Exchange Commission has renewed the debate in America over straight-through processing, but it is now clear that any move towards shortening the T+3 settlement cycle is moribund, says Lee Cutrone, New York-based managing director at vendor Omgeo. But the industry agrees in principle on encouraging same-day affirmation of trades (a process referred to as SDA).
The prevailing mood is that SDA and central matching can lay the groundwork, or obviate the need, for a reduced settlement cycle.
For fund managers, brokers and custodians in the Asia-Pacific, the US debate about moving from T+3 to T+1 was not, in itself, that important. Several Asian markets, founded more recently with the benefits of up-to-date technology, already boast shorter settlement times. Hong Kong is T+2 and Taiwan is T+1, for example.
But the US debate about SDA and other aspects of straight-through processing (also known as STP in this acronym-heavy industry) does set standards for the global industry and ultimately sets the pace for required levels of automation and efficiency in the back and middle office.
STP in America had been pitched as shortening settlement times, but in the wake of massive tech upgrades to prepare for the feared Y2K bug at the millennium, followed by budget cuts in the post-Nasdaq bubble era that followed, the industry shelved the idea. The SEC has now revived discussion about STP with a long-awaited paper that found widespread support for the notion of moving toward same-day trade affirmations.
Now the big fight is over whether SDA should be mandated; many smaller fund managers say their relatively small volumes allow them to handle affirmations manually, and fear the costs of having to automate everything. The fixed-income houses are also arguing for a middle road, where block trades must be automated, but individual ones can be left to other processing methods.
Vendors such as Omgeo - which is a joint venture between the Depository Trust & Clearing Corporation in New York and Thomson Financial Services in Boston - say the obvious way to promote SDA is via central matching, which is a service Omgeo provides.
SDA rates remain "abysmal", says Cutrone. In the US, around 24% of trades are affirmed on the same day. But that figure is more like 80% for clients using Omgeo's central trade matching service. SDA rates in Europe and Australia are comparable, and worse for Japan. Moreover in the US around 13% of all trades go to settlement without ever having been affirmed, which is a recipe for errors.
Hong Kong and Singapore are exceptions, with SDA rates closer to 70% to 80% for the global houses, but that is because the players in these two hubs tend to be the biggest, most highly automated firms. But local players are mostly manual.
The SEC has now received comments from over 50 industry bodies on its STP paper and will probably release a set of proposals in 2005. Some options include making SDA mandatory, or block trades SDA mandatory. The SEC could simply encourage self-regulating industry groups to promote it. Or it could encourage brokers and custodians to impose higher fees on fund managers that send trades by fax or phone.
Whatever the outcome, Cutrone believes the US has revived the debate over straight-through processing, and it is likely to result in more firms requiring automated processing. He notes that regulators in Canada and Europe are involved in similar studies. The end result is that industry standards are going to change, although whether they change enough to wean Asian financial providers off the cheap manual labour found throughout the region remains to be seen.