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By Bruce Striegler

Jerry Beniuk, Chair of CCMA's Retail Trade Processing Working Group, spoke to FundSERV Quarterly recently about the T+1 initiative and some of the challenges the industry is facing, particularly in a "client name" environment.

"T+1 means buy today, settle tomorrow," says Beniuk. "The dealer has to find a way to move the client's cheque directly to the fund company in a T+1 world. Today we have three days - trade plus three, but when we switch by June 2005, we have got to be able to move money across town or across the country in a much shorter timeframe.

"One of the largest challenges of the T+1 transition is related to 'client name' business. Today, to complete a transaction in a client's name, the dealer representative must mail or courier the cheque and sometimes other paper, signed by the client, to the fund or life company, in order to ensure written confirmation of the transaction and that the company has received the money."

The securities industries of Canada and the U.S. are planning to shorten the time it takes to clear and settle a securities trade - to exchange securities for money - to one day after the date of the trade (T+1). The current practice is to settle a trade three days after trade date (T+3). Canadian Capital Markets Association (CCMA)

Deadlines will become much more important in a T+1 environment and the industry must develop new systems for the secure movement of money. "Within the institutional group we can move large amounts of money securely using the Large Value Transfer System (LTVS), but we do not have the same processes for retail investors," he adds.

"The shortened timeframe has very specific deadlines. Four o'clock is the deadline for inputting trades, and it is the time when funds are valued. That means that the really time consuming processes of calculating and communicating the net changes only 'begins' at the end of T. We want to ensure that customers who place their orders with us today can get their money tomorrow. We are looking to people and companies like FundSERV to help us find the answers."

The Retail Trade Processing Group's mandate includes a review of the trading process for the Canadian retail segment. "This includes trades regulated by the Investment Dealers Association (IDA) and the Mutual Funds Dealer Association (MFDA), as well as segregated funds," says Beniuk. "We have analyzed the retail group in all aspects in order to do what is required to move the sector to T+1 settlement. This is a daunting task because of the high number of retail trade products, traders, and others in the community," he adds.

Bigger and more complex than preparing for Y2K

"The Canadian financial services industry decided to follow the U.S. and move to T+1 settlement. In Canada, the team assembled to review the necessary changes is called the Canadian Capital Markets Association (CCMA). The CCMA has five key working groups including groups representing the Institutional Trade and Retail Trade working groups. The Institutional Group has made a proposal regarding the settlement of equity and bond trades. The retail trade community will adopt a similar process.

"T+1 is a global initiative that adds growing pressure to some countries that have not even had settlement in the T+3 timeframe, currently the standard in North America," says Beniuk.

Industry experts say the transition to T+1 will be more challenging and costly than the preparations for Y2K. The American Securities Industry Association (SIA) estimates the cost for the switch in the United States alone at nearly US$8 billion. In spite of that cost, experts predict their securities industry will realize savings of nearly US$2.7 billion a year from reduced manual processing, lower error rates and faster payments.

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