In his role as Omgeo's managing director of industry relations, Lee Cutrone, sits on the STP steering committee of the Securities Industry Association (SIA) in the US. Up until a few months ago the group was known as the T+1 steering committee and Cutrone helped design and write the Institutional Processing Model proposed by the SIA and served on the business case RFP sub-committee for shaving two days off the settlement cycle. Now that the T+1 deadline has been postponed the SIA is rethinking its assumptions on the cost benefits of STP. FinanceAsia spoke to Cutrone about this new line of thinking and what it means for Asia. He was joined by James E Drumm, managing director of Omgeo Asia.
Did the SIA underestimate the cost of implementing the systems needed to achieve T+1?
Cutrone: The Association recognised recently that it probably didn't do enough analysis of the implementation costs and that more is needed. The independent consultants that we hired to do the study into the business case focused very much on the manpower savings achieved by T+1. They focused less on risk mitigation and how much can be saved by moving from a 3-day settlement to a 1-day settlement. The latter requires a much more analytical and academic study. The business case also didn't take into account the different size of the firms that needed to implement T+1 and that the costs may have been prohibitive to smaller firms, particularly those firms on the buy side.
So how is the STP steering committee approaching it differently?
Cutrone: We now realise that the key to STP is getting breadth of participation - that you can't have only a few firms that are STP enabled. In the US there are about 4,000 investment managers and 80% of the volume comes from the top 500. But if you are a broker catering to the fund management community and you want to achieve STP then you need to harness the masses and focus on the entire universe, not just the big guys. Otherwise you will be running two systems - an automatic one for your big customers and a manual one for your small customers. This was the problem with the initial business case - it didn't take into account that there are some firms that do 10 trades a day and there are other firms that do 10,000 trades per day.
How long will T+1 be deferred?
Cutrone: I will be very surprised that if in June 2004 when they are due to revisit the schedule for T+1, that they don't agree to delay it further. This is my opinion and not the SIA's. But the reason it will be delayed is that we will still be in a situation where we lack breadth of participation among the buy-side.
Is the SIA starting from scratch with its new business case or has it kept any components of the original one?
Cutrone: There are still some very relevant parts of the original business case that they are moving forward with. For example they identified 10 building blocks that were needed to get STP happening. These included things like central matching, a focus on internal STP, the elimination of paper from the process and the improvement of cash management practices to speed up fund movements. The SIA is still looking at tackling these building blocks and the idea is that if they make enough progress on these between now and June 2004 then we can set a more realistic date for T+1.
What will encourage the buy side to move to STP, and what does this mean for Omgeo s central trade matching product?
Cutrone: I think the big firms will move to our Central Trade Manager (CTM) product in the short-term because of the overall efficiencies that it offers. We forget that even though overall trading volumes have declined since the economic slowdown, institutional volumes have continued to increase and sooner or later we will have problems with capacity unless we work out a better way to settle trades. The big firms realise that in order to be competitive they need to do this. The smaller firms are the ones wondering whether they can justify the cost.
Is it possible for smaller firms to implement STP initiatives in a staged process?
Cutrone: Sure, in fact this staged process is the cornerstone of Omgeo's migration strategy. When we merged the DTCC's TradeSuite business with the Thomson ESG OASYS and OASYS Global products we created a hybrid product that facilitates cheaper electronic allocations. This auto-affirm concept is called OASYS Trade Match and is the first step towards central matching which is where Omgeo really adds value. In order to make central matching achievable and affordable for smaller investment managers we offer them the auto-affirm product at a reduced cost with the view to upgrading them to our CTM product later. The idea is that transfer will be treated like a simple software upgrade.
Are customers offered the same services in Asia?
Drumm: Yes, but we are little further behind in the migration process. A lot of customers in the region are still using the OASYS product so the next step is to implement our OASYS Global confirmation product and then migrate them to CTM. So the ability for fund managers to work their way up the STP chain until they achieve same-day affirmation is essential to our Asian strategy.
So the shelving of T+1 hasn't changed Omgeo's strategy all that much?
Cutrone: No, it has affirmed what we have been trying to do all along and that is to keep the community together. We realised early on that every client has a different starting point. We had to allow them the flexibility to move at their own pace and therefore we had to continue to offer our legacy services. At the same time we are maintaining the commitment to our new matching engine. This is where all of our research is going and all the new functionality is being developed.
Once the majority of industry players are STP enabled will it be easy to shave two days off the settlement cycle in the US, or are there still more hurdles to achieving T+1?
Cutrone: Without tackling other building blocks like cash payments and the mobilization of securities then T+1 is still an ambitious project. A lot of small investors in the US still like the idea of receiving physical share certificates and this attitude has to change. I think over time the online stock trading evolution will eliminate this paper-based culture.
Do the Asian markets appreciate the difference between shortening settlement cycles and moving towards STP?
Drumm: Months before the US decided to postpone its T+1 deadline we were getting messages from the Asian stock exchanges that they were more interested in focusing on STP than T+1. They understand that the automation of trade confirmation and settlement is more important and can provide more benefits to the industry than shortening the settlement cycle.