The securities industry's effort to move to a shorter, three-day settlement cycle - known as T+3 - will mean fundamental changes in the way some Wall Street players conduct business.
Accelerating the settlement cycle will not just affect settlement. It will also, over time, force a redefinition of accountability, responsibility, and organizational ownership for every market participant.
The Securities and Exchange Commission, which mandated the shorter settlement cycle beginning last month, believes that moving to T+3 from T+5 is the most prudent response to the increased volume and volatility in the marketplace.
Almost everyone agrees that the change will reduce the risk related to open security positions as well as producing greater conformity in settlement time frames as the marketplace becomes more globalized.
Usually such regulations require system modifications and sometimes staffing increases, but for most organizations there is not a significant amount of change that takes place.
Is this regulation really just like all the rest? Perhaps not.
On the surface, the change may appear as a minor adjustment. But it may well have a major impact down deep inside many organizations, as accountability begins to move from the back office to the front office - or perhaps to a new "middle" office.
Reengineering the whole process may be what is really needed in many organizations. Be sure of one thing: This change will have a cost associated with it before the industry settles down to business as usual. Personnel may have to be added, the cost of settlement will go up, and the margins may go down - at least in the short term.
Most securities professionals recognize that these changes are occurring and will continue to occur. Others have not, or really do not fully understand the implications to their businesses. Readiness, in its broadest meaning, is the real issue.
To be successful, all of us must meet change head on. Awareness and involvement must begin at the highest level within an organization, from the chairman and president on down.
Beyond just supporting the change in theory, the entire community needs to be willing, when needed, to change the fundamentals supporting the entire securities settlement processes.
Turning a critical eye inward is the most crucial part of this assessment process. Industry participants need to focus on being sure that they have the ability to affirm their trades by noon the day after a trade is executed. Otherwise they run the risk of an increase in interest requirements that affect their cost of doing business.
As a market participant, ESI Securities believes that to be successful at T+3, you need to reach affirmations on the trade date or no later than the morning after trade date.
Ready or not, T+3 and the technology required to implement it will require that we all focus a considerable amount of energy and money over the next few years on how we do business.
Mr. Titus is a managing director at ESI Securities Co., a New York-based brokerage firm.
