Prepare for a Revolution

Prepare For A Revolution
by David Dunlop
 

Market efficiency, administrative costs and risk management in the trade settlement process globally are critical issues for all of us, and, in my view, we are heading for some very unpleasant surprises unless radical changes are implemented over the next two to four years.

First, I'd like to discuss some market and industry trends which are facing all of us, and are critical elements in the push towards T+1.

Key changes include increasing Internet usage, the move to seeing the world as a single global market rather than 90 individual markets, and aging populations requiring the establishment of broader pension arrangements in many jurisdictions. These are producing continuous growth and change in our industry, and radical shifts in our traditional business models and competitive framework.

Globally, we are facing several challenges, which on a combined basis represent an unacceptable scenario. What's more, with a projected tripling of cross-border trades by 2002 and further enormous growth beyond that, there is a potential crisis in the offing, with substantial risk implications.

The Global Straight Through Processing Association (GSTPA) is an industry response to these challenges. This group is building a global utility to re-engineer and automate the way in which cross-border trades are handled.The core of the GSTPA solution is the transaction flow manager--known as the TFM--which will be a global system to provide real-time matching between investment managers and broker/dealers. It will forward the matched instruction to the global custodian by the close of business on trade date.

The Canadian Situation
On a comparative, worldwide basis, Canada has improved its position in recent years. However, we do face serious challenges.

For competitive reasons, we need to be consistently aligned with the U.S. in terms of product, regulations and implementations of major changes. To do otherwise would be disastrous!

For a mature market that has been operating in a T+3 environment since 1995, it is, in my view, totally unbelievable that the following is still occurring (based on Royal Trust statistics):

* 4-5% of all trades are failing
* about 11% of all trade contracts being received from brokers are wrong
* more than 3% of all contracts are received after T+3
* only 57% of trades from investment managers are handled on a Straight Through Processing (STP) basis
* two of the largest investment managers have no trades being processed through STP
* We believe it will be necessary to move the overall STP rate to 80% by the end of this year and 95% by the end of 2001 for the Canadian market to have any chance of meeting the current T+1 deadline of June 2002.
* We have not even begun to consider what will be required for T+0, which is where the trade settlement process is ultimately moving later this decade.What, in my view, needs to take place in Canada? I will present this in two phases:

 

Phase I: Awareness
Step #1 is for a much broader recognition by all sectors in the financial industry that we are facing a very serious, time-sensitive challenge, and for speakers and interviewees to draw attention to the issues.

Step #2 is we need to work cooperatively, but persuasively, to convince those that are consistently out of step to mend their ways. Anyone who isn't complying today will inevitably face a nightmare scenario in 24 months (and will negatively impact the rest of us).

Step #3 is for leaders in our industry to ask more questions of their suppliers (brokers, investment managers and custodians).