SEC considers rules for trade automation

The US Securities and Exchange Commission is weighing the idea of mandating that financial services firms shorten their...

The US Securities and Exchange Commission is weighing the idea of mandating that financial services firms shorten their stock-trade confirmation and settlement cycles and fully automate exchanges of settlement data.

The SEC on 11 March  issued a letter seeking comments on a variety of proposals for improving the security and efficiency of the trade settlement system and helping companies do straight-through processing (STP) of trades with one another. 

John Panchery, managing director of systems and technology at the Securities Industry Association in New York, praised the SEC's effort "to streamline the pipeline used for handling securities transactions". 

However, SIA spokeswoman Margaret Draper acknowledged that it would be a challenge to get financial management firms to spend money on STP technology when a return on investment may not be as obvious for them as it is for the investment banks that sell stocks.

"But we're working with the buy side," Draper said. "It'll be a more efficient process all around." 

The SEC's proposals include creating a new rule requiring brokerages to complete the trade confirmation and affirmation process on the date a trade takes place, or T+0.

The SEC said it is also seeking feedback on reducing the settlement cycle from the existing three days to one, or T+1. The commission originally said it might create new rules mandating the use of STP and T+1 two years ago. 

"This kind of thing is going to generate push-back. It's real simple: Brokers don't want to do industry projects," said TowerGroup analyst Robert Iati, referring to IT investments that are widespread and do not offer any differentiation. 

TowerGroup estimated that achieving T+1 would cost the financial services industry more than $8bn.

Even the SIA is not pushing hard for adoption of T+1 settlements.

Two years ago, the trade group rescinded a mid-2005 deadline it had set for the industry to move to T+1 in favour of promoting STP, which involves creating interconnected networks that let data flow from brokers and dealers to the back-end systems of banks, brokerages and clearinghouses.

Many brokerages still use fax machines and phones to handle that process. 

Omgeo offers a trade-matching service that acts as a central hub and manages the electronic handshakes between systems at different companies.

Lee Cutrone, managing director of industry relations at Omgeo, said he saw the SEC's move as "a very positive thing" because it refocuses the industry's attention on STP. 

Lucas Mearian writes for Computerworld

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