SAN DIEGO, Calif. - With T+1 looming in 2002 and extended trading hours soon to become a reality, mutual fund companies must achieve straight-through-processing within the next two years, mutual fund executives said at the Investment Company Institute's tax and accounting conference here last week.
T+1 refers to the Securities and Exchange Commission's requirement that all trades be cleared and settled within one day of execution as of 2002. The SEC currently requires investment firms to clear and settle trades in T+3, or trade plus three days. Straight-through-processing refers to automated clearance and settlement of trades without paperwork or human intervention. Many mutual fund companies still rely on faxes, telephones and keypunch operators to type in, allocate and settle trades, the executives said.
A successful straight-through-processing system should not only route orders but other useful, time-saving information, such as verification and pricing data, to traders and back-office personnel so they can quickly complete a trade, said James Dobbie, operations officer of DST Systems of Kansas City, Mo.
"The system should also prioritize tasks and provide an audit trail," he said.
In addition, the system should have the intelligence to search for missing data, such as a CUSIP number and broker/dealer information, he said. If such data cannot be found, the system should automatically route the trade to a clerk in a department where it can be found, he said.
Finally, a thorough straight-through-processing system should be able to automatically price a fund's daily net asset value, using each day's trading data, Dobbie said.
However, no straight-through-processing system can be bought off-the-shelf because each mutual fund firm has its own system for handling trades and numerous trading applications for different types of securities, said Sheryl Petursson, vice president of customer integration services for State Street Bank and Trust of Boston. Petursson's department at State Street provides custody and accounting services for mutual fund companies, Petursson said.
Because of this diversity among systems and applications, State Street Bank and Trust must spend several weeks consulting with a new client's traders and accounting personnel before it can come up with a customized straight-through-processing system, Petursson said.
Fund companies that are still resisting straight-through-processing are facing international pressures to institute it as well as pressures from the need to comply with the SEC's T+1 requirement in 2002, said Robert Garrett, partner, financial services with KPMG Peat Marwick of New York. Forty-six mutual fund and brokerage companies representing 50 percent of the world's trading volume have joined together to establish international protocols to achieve cross-border straight-through-processing by 2002, Garrett said.
Members of this group, the Global Straight Through Processing Association, include Fidelity Investment Management of Boston, Alliance Capital Management of New York, State Street Global Advisors of Boston, Scudder Kemper Investments of Boston and Merrill Lynch Asset Management of New York.
Straight-through-processing will benefit the industry tremendously because it will significantly drive down operational costs and reduce the large number of trading errors that currently occur, Garrett said.