A move to T+1 should not be a top priority for the US securities industry, according to new research from TowerGroup which challenges the rationale behind reduced cost and risk from mandating shorter settlement cycles.
TowerGroup reports that many senior financial executives have yet to be convinced that the risks of not implementing T+1 outweigh the costs and risks of pursuing it.
To analyse the impact of shorter settlement cycles, TowerGroup argues that T+1 should be divorced from straight-through-processing (STP) and assessed on its own merits. When the benefits of T+1 became co-dependent on the benefits of STP, the advantages of automation became unduly associated with a change in settlement cycle, says the firm.
"A T+1 mandate on STP spending will significantly alter the industry's IT spending priorities, as well as force firms to give up their current or planned STP efforts," says Dushyant Shahrawat, TowerGroup senior analyst and co-author of the report. "This reallocation would represent a forced change in spending priorities for the industry - all for a regulatory mandate that has very little support among industry participants in the first place."
Spending on T+1 is collectively estimated at $6.49 billion - costing investment managers $1.12 billion and broker/dealers $5.37 billion. However, not all of this will be new spending, says the research house. An estimated $1.68 billion will be generated by reallocating money from currently budgeted STP projects, 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.
T+1 preparation will require firms to re-engineer their back-office systems which may represent significant technology risk. TowerGroup believes the risk and benefits surrounding a shorter settlement cycle, per se, are not compelling enough to force the SEC to mandate T+1 and are particularly weak for the buy-side and the individual investor.
"We don't believe that the industry will green-light T+1 given the magnitude of the technology changes and technology risk factors, versus the soft benefit quantification from reducing the settlement period," says Tim Lind, TowerGroup senior analyst and co-author of the report.