Single day trading to cost financeindustry double Y2K

The financial services industry will spend £5.5bn during the next four years in order to clear trades in a single day, according...

The financial services industry will spend £5.5bn during the next four years in order to clear trades in a single day, according to the Securities Industry Association (SIA).

The industry currently operates on a three-day cycle, known as T+3, and shifting to T+1 could cost up to twice the amount it spent on the Y2k problem.

At the SIA's annual operations conference in California last week, some bankers and brokers said that they did not expect firms to be ready for T+1 until 2005.

The challenges it poses are spurring some organisations to consider spending money now to upgrade computer systems and integrate databases and back- and front-end systems.

SIA Executive vice-president Donald Kittell warned that IT managers would be hard-pressed in the early stages of their T+1 initiatives to squeeze money from senior management to move toward straight-through processing (STP) because the return on investment would not be immediately apparent.

The industry needed pressure from regulators to get finance houses moving on T+1 initiatives, said Kittell. "We need urgency."

Another issue confronting financial services firms in moving to STP and T+1 is the changeover to a standard electronic messaging format being dictated by the Society of Worldwide Interbank Financial Telecommunications (SWIFT), which has set a 16 November deadline for the shift.

SWIFT, a Belgium-based international banking co-operative, created a messaging service used by more than 7,000 financial institutions for overnight payment clearance. The shift from the existing ISO 7775 messages to the new standard, ISO 15022, will include additional data fields such as "place of settlement" and information such as bank identification codes.

T+1 will require systems automation to achieve the speeds and efficiencies needed to clear trades in a single day or on the same day. A standard messaging format would allow front-end and back-end systems to communicate efficiently.

At present, financial institutions use either a proprietary messaging format, the SWIFT message format or a combination of both. As a result, data input is inconsistent, according to Francis Ramacle, head of SWIFT's securities industry division.

Ramacle said he expects most of the Global 1,000 finance houses to be compliant by the November deadline. But he and others are concerned that many of the smaller firms will still be using old formats, making it difficult for everyone.

In order to move towards STP, Deutsche Bank is developing an application in conjunction with New York-based Capco, a financial services consulting firm that will convert brokers' trade messages into SWIFT's new format.

Those messages can then be processed by Deutsche Bank's back-end systems and clearing houses, according to Genevy Dimitrion, vice-president of product development at the Frankfurt-based bank.

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