The migration to a T+2 settlement cycle is about to get real for a lot of financial services firms. Although the Industry Steering Committee, the industry working group that is shepherding Wall Street through the long-evolved clearing and settlement process, has set a go-live date sometime in the third quarter of 2017, this coming year will be when everyone will need to roll up their sleeves and prepare their internal systems and processes for the change.
At presstime, the steering committee was still working to deliver an industry-wide implementation plan that the Securities and Exchange Commission requested to be in place no later than December 18.
“That’s a lot to do in a short amount of time,” noted John Abel, vice president, settlement and asset servicing products at the Depository Trust & Clearing Corp.
To meet the looming deadline, the committee-which consists of representatives from broker-dealers, buyside firms, custodians, industry utilities and service providers-has been holding bi-weekly meetings to develop the implementation plan.
The committee has also engaged the services of an outside consulting firm to help coordinate the bi-weekly meetings, according to Abel.
If that were not enough of a mandate, the committee is also in the midst of developing an industry-wide T+2 testing approach by the end of the year.
The steering committee aims to release a more detailed plan in the middle of 2016 before commencing six months of industry-wide testing in early 2017 to meet a go-live date sometime in the third quarter of that year.
Concurrently, the SEC will continue to develop its regulatory timeline for T+2 settlement, but regulatory officials have declined to provide their own schedule for developing the regulatory timeline.
Commission rule-making is a long and complex process, according to Stephen Luparello, director of the SEC’s Division of Trading and Markets. “It’s always difficult to anticipate when rule-making will be completed. It’s easier to tell when it starts, but harder to guess when it will end,” he said.
Off and Running
Although some on Wall Street might not be aware of the industry’s concerted push toward a T+2 settlement cycle prior to the Industry Steering Committee publishing its white paper on the topic in June, some of the largest financial services firms have made sure that they would not begin migrating their systems from a standing start. Buyside giant Fidelity, for example, began organizing its governance committee around the second or third quarter of 2014, according to Mark Katzelnick, COO of Fidelity Investments.
“One of the first important things we did was to make sure we had senior executives involved in leadership and sponsorship,” he said. “We needed to make sure that we had a seat at the table so as we plan forward, we have the right representation.”
For a vast and diverse organization like Fidelity, it meant having representatives from its operations, client service, retail, institutional and asset management units present at the planning settlement meetings.
Meanwhile, Goldman Sachs decided to leverage the experience of its European operations, which had already migrated to a T+2 settlement cycle, for its U.S. implementation.
“In essence, we already had a change-management team who will ultimately run the project,” explained Frank Tota, managing director, global operations at Goldman Sachs.
Since the migration will affect approximately 30 to 40 business areas within operations, finance, IT and other organizations within Goldman Sachs, not having a governance committee was not an option.
“Any project of this scale generally has a senior-level steering group, and this is no exception,” Tota said. “We will have representatives for all of the areas that have working members or subject-matter experts on the steering committee to make sure that we are trending in the direction that we want and that we are on time in terms of deliverables.”
But not all of the largest firms are taking such a centralized approach in managing their migration. For Wells Fargo, which operates a trust company, broker-dealer, transfer agency and an asset manager, corporate leadership thought it would be best to have each line of business manage its respective migration projects independently.
“Each of these lines of businesses has unique clients, operates in unique markets and operates unique systems to support its business,” said Gregory Vitt, managing director, streetside operations at Wells Fargo Advisors. “Wells Fargo has a pretty substantial reputational risk if any one of these lines of business fails.”
Not only did Wells Fargo begin planning its migration relatively early, but it also made sure that it began budgeting for the new mandate.
“We initiated our project when the Industry Steering Committee released its T+2 white paper in June,” Vitt said. “One of the first things we did was think how we were going to structure and approach this, and shortly thereafter estimated the cost of the project based on the white paper’s contents. We actually put money into our 2015 budget knowing that something was coming.”
The investment bank used estimation models to determine how much to allocate to the project, since it did not have all the information on what needed to be changed, he added. “We used estimating models to guess what that allocation would be so we have money in the 2016 and 2017 budgets. As we learn more, we’ll refine the process and amend what those numbers look like.”
For Fidelity, it was a matter of allocating resources to the areas within the business that would be affected most by the shorter settlement window. “We started to think of purchase and sales, settlement, corporate-actions and money-moving areas,” Katzelnick said.
“Is there some way I could go back and do some work in this space that allows me not only to work on my infrastructure, but allows me to think about the shortening of the settlement cycle as well?” Katzelnick asked himself rhetorically.
A sizable portion of Fidelity’s systems are built using batch processing, he added. “The idea is whether we as a firm could become more efficient by implementing some straight-through processing or making sure that our employees are not just key-punching information, but analyzing a lot of work that is going on.”
DTCC’s Abel sees the industry utility allocating far more resources toward the industry-wide testing in 2017 than toward preparing the internal systems of the DTCC, the National Securities Clearing Corp. and clearing firm Omgeo in the interim.
“The systemic changes that we need to make are not that sizable,” he said. “But the test support is a fairly big effort.”
