Call it Wall Street's version of March Madness.
The pressure-packed atmosphere that grips collegiate basketball at this time of year is also being felt in the back offices of investment firms, brokerages, and custodian banks, as they all gear up for a big change fast approaching about how they transact business with each other.
The shift, known by the industry rubric of T+3, is an attempt by the U.S. securities business to squeeze out the operational risk in the settlement of the hundreds of thousands of stock trades that take place every business day in the United States.
Under current rules, it takes five days from the moment a stock broker executes an order to the time an investor actually pays for the purchased securities.
But under a new Securities and Exchange Commission regulation that takes effect June 5, the various parties to a securities trade will now have only three days from the trade date to settle their accounts.
The need to move to a shorter settlement cycle was recognized by Wall Street after the stock market crash in October 1987, when the five-day settlement period gave many investors the opportunity to welsh on their trade orders, further reducing the stock market's liquidity.
But while the benefits of a shortened cycle between the trade and payment dates are recognized by regulators and most market participants, the operational problems of moving to T+3 are many.
That's because despite the fact Wall Street has spent billions of dollars over the past 10 years to install flashy computer systems so traders could analyze and execute trades at a click of a button, many brokers' and investment managers' back offices are still highly labor- intensive and flooded with paper, industry insiders admit.
Today, a large number of securities trades are still settled using a flurry of mail, faxes and telephone calls between brokers, investment managers and their custodian banks. All parties agree that this method just won't cut it when T+3 goes into effect less than three months from now.
"They're getting into full-court press time now," said Harold C. McIntyre, a former trust banker and president of the Summit Group, a trust operations consulting firm based Murray Hill, N.J., alluding to industry effort to reengineer operations to comply with the SEC rules by June.
But despite the cries of "regulatory burden" that seem to arise whenever new rules go into effect, many trust and custody bankers have positive things to say about T+3 and its potential effect on their business.
Along with the overall reduction of settlement risk, "A derivative of moving to T+3 and a benefit to us and our clients is that we can eliminate discrepancies and errors in the process," said Padelford Lattimer, a vice president and senior product manager at Chase Manhattan Corp.'s Global Securities Services division.
"In order to meet a shortened settlement window, (investment managers and their brokers) have to look at electronic trading," said Robert Schnibbe Jr., vice president and operations manager of global investment manager services at State Street Bank and Trust Co. in Boston. "And to the degree we can get trades sent to us in the right format, it clearly will streamline our operation, improve cost efficiency and reduce risk."
Mr. McIntyre said an important T+3 milestone will be reached April 1, when Depository Trust Co. will switch to new electronic messaging formats used for the confirmations and affirmations of trades that flow between brokers, investment managers, and custodians.
Depository Trust, the securities clearing house owned by Wall Street's biggest players, is the arbiter of T+3 compliance, because U.S. stock exchange rules require market participants to use it to settle their trades.
The problem is that its new messaging system, called Interactive ID, is just starting to be used by Wall Street, Mr. McIntyre said. As of two weeks ago, only about 10% of confirmations and affirmations coming from the 330 largest firms and service bureaus that have computer-to-computer links with Depository Trust were using the new message formats, he noted.
"Maybe it will be up to 25% by April 1, so they still have a long way to go," Mr. McIntyre said.
Mr. Lattimer said Chase was the first custodian bank to switch to Interactive ID last year. "If my client is using a broker who inputs a confirmation, the minute it goes in, my system is polling DTC and taking that information."
State Street is also preparing to move to Interactive ID as soon as next month, said Michael Stein, a vice president and financial transaction reengineering program manager at the bank. The April 1 format changeover is "a great milestone to pass, but until more and more people become interactive, obviously there's not going to be much information out there to use," he said.
It's this chicken-or-egg dilemma that has bank custodians in the somewhat awkward position of trying to persuade their investment manager clients to reengineer their back offices and spend money on technology in order to comply with T+3.
Both State Street and Chase officials said they are actively meeting with clients to keep them informed about T+3 developments and to discuss the options in retooling their operations.
Not surprisingly, some technology vendors see T+3 as a business opportunity. A handful companies, including Shaw Data, Merrin Financial Services, and Thomson Financial Services (part of the Thomson Corp., which also owns the American Banker) have software and network services aimed at accelerating trade settlement. These companies won a big victory last month when the Depository Trust proposed to the SEC that these third-party systems could connect to Interactive ID.
Some brokers are also touting their technical prowess in order to help banks and investment firms comply with the new SEC rule. One New York-based firm, ESI Securities Co., has over the past six years invested in fault- tolerant computers and transaction switching software to completely automate the transaction flow from the front office to the back office of their clients.
"Trades come into our system, are routed to their execution destinations of choice with the execution information electronically transmitted to the custodian banks for automatic posting to their back-office system," said Jeanne L. Murtaugh, vice chairman of ESI. "From the time a trade is entered by a portfolio manager, it is never again touched by swivel-chair technology to reenter it."