Is two years enough time?

The Securities and Exchange Commission has set 2004 as the deadline for when fund companies must begin settling trades a day after they are executed. The events of Sept. 11, however, have increased firms' awareness of disaster recovery plans and highlighted a host of potential problems related to next day settlements-- known as T+1--that had not been previously considered. As a result, the industry is farther from being prepared for T+1 than many had thought, according to industry observers.

The industry responded extremely well following Sept. 11 in terms of recovering data and maintaining trading stability, said Jesse Cole, a VP at Goldman Sachs Mutual Funds. However, that was in a T+3 environment.

"Next day [settlements] add to the stress and complexity of everything," Cole said. "During the aftermath of Sept. 11, with some of our products we could say, We'll look at that tomorrow.' But what if you're unable to run nightly and you're operating at T+1? There are a lot more questions and things to ponder as we move those products down that continuum--more questions than answers."

Cole spoke about disaster recovery execution last week at the National Investment Company Service Association's 20th Annual Operations Conference in Miami.

The terrorist attacks exposed the flaws of some of the back-office initiatives that are intended to cut costs and make it easier to achieve T+1, said Deloitte & Touche regional director of secure e-Business Ted Dezabala, who also spoke at the conference.

Creating a Single Target

Although globalization has its advantages, it also creates increased vulnerabilities. The brand linkage of American financial firms to American politics has created greater targets for terrorists, hackers and others, Dezabala said. Also, the consolidation of technology systems, which has been increasingly implemented to streamline processes and reduce costs, means firms have a higher single point of failure and a higher dependency on service providers, he said.

"There are tremendous benefits to consolidating on single platforms and there's been more consolidation at an infrastructure level to increase efficiencies and get to STP [Straight Through Processing] and T+1," he said. However, by consolidating infrastructure, a firm, in effect, creates a single target. If a disaster strikes the consolidated platform, all of that firm's services will be wiped out.

Efficiency vs. Contingency

A higher dependence on service providers to maintain consolidated technology platforms combined with increased disaster recovery awareness has increased firms' expectations of third-party providers. As a result, many firms have revisited system design requirements, said Kenneth Beraduce, managing consultant at Access Data Corp. and another speaker at the conference. That will likely slow the development of technology solutions for T+1, which was already well underway.

Continuity Concerns

Also, firms have become concerned about the continuity agreements they have with their service providers, Dezabala said. In the aftermath of the terrorist attacks, many firms had services terminated or delayed.

For example, one firm had procured duplicate telecommunication lines so that if one went down, the other would continue to function, said Cristobal Conde, president and COO of SunGard and the NICSA conference's keynote speaker. As it turned out, however, both telecommunication providers had sub-contracted work to the same vendor. As a result, neither of the lines were operational.

"They were paying two bills, but really only had one physical line," Conde said .

While many firms may not have fully considered all disaster scenarios, the fact that the industry has been working toward increased efficiencies like T+1 for some time has proven extremely worthwhile, according to Cole.

"The situation validated some of the things we were already doing, perhaps without us even knowing why we were doing them," Cole said.

The Lessons of 9/11

For example, because firms have begun setting up systems to allow clients to enter trades on their own and eliminate error-prone activities such as faxing, disaster recovery processes were inherently being enhanced.

"One thing we learned from Sept. 11 is that the systems that were highly automated and didn't rely on human intervention were much more reliable," Conde said.

Protection, Not Efficiency

Still, increased system protection, not increased system efficiency, is the current priority for the industry. Altough the industry will continue to work toward next day settlements, increased disaster recovery awareness has exposed a multitude of potential problems that could delay that process.

"We came out of Sept. 11 asking a lot of questions," Cole said. "Are we less comfortable moving to T+1? What are the effects of a midday disruption?...It's a long process that the industry has been going through, from T+5 to T+3, and now looking at T+1. Does this change the urgency of moving [to T+1]? It's certainly not going to happen sooner. It's still an open question."

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