DONALD D. KITTELL
REMARKS TO THE OPERATIONS CONFERENCE
MAY 7, 2003
Thank you, Bob. I am delighted to be here. I would like to thank Bob Hogan for chairing this year's conference (and I believe last year's as well) and also thank Ernie Pittarelli for chairing the SIA Operations Committee this year.
The real strength of SIA is its volunteers - who are holding down challenging jobs at their firms and still find time to work on behalf of the industry. Ernie - we appreciate your commitment to the industry. The agenda you laid out this morning is impressive.
I. Some comments on John Schaefer's remarks:
First, I am glad that you gave John the task of addressing Public Trust and Confidence. PT&C is clearly the overwhelming priority in our industry and we have much to do. By comparison, my job (to discuss STP) appears easy.
Second, John's comments about the industry's efforts to address profitability are an excellent introduction for STP. STP is clearly a major part of the solution to the industry's need for greater productivity.
Finally, the industry is fortunate to have John as chairman of SIA this year. He has been a strong, conscientious, and thoughtful leader for SIA during the most difficult period the industry has seen in decades.
I have watched the evolution of the T+1/STP program over the last four years very carefully. From my vantage point, STP has always been about just two things:
(1) The vision of what the industry wanted to accomplish, and
(2) The project management and technical competence to make it happen
II. Let's spend a moment or two on the vision.
There were two things about the vision that were critical. First, the T+1 vision was ambitious. It was bigger than T+3, bigger than Y2K, and bigger than decimals. It was higher stakes, involved greater behavioral change and required the buy-in of more market participants than any of the industry's prior projects.
Second, T+1 was self-initiated - initiated by the industry. There was no regulatory mandate - like T+3 and decimals - and there was no irreversible deadline like Y2K. The drivers were efficiency, capacity, risk reduction and competition.
Those two critical factors - the ambition and self-initiation of T+1 - placed a tremendous premium on the industry's leadership in operations and technology, on the development of the business case and on the marketing of the vision to the key industry participants who would be asked to make the significant financial and behavioral investments required by the program.
The program began well in 1999 and 2000. The vision had strong support from senior and operations management in broker-dealers, from DTCC, custodian banks, exchanges, the SEC and Federal Reserve.
Just as the program gained momentum, the market bubble burst and we were hit by 9/11. Without going into details that you are all familiar with, the securities industry went from the best of times to the worst of times any of us had ever experienced.
Aside from the turnabout in the market and the industry environment, the T+1 vision came under attack internally on three important fronts. This is important as we look to the future. This is a case study we need to understand.
First, the buy-side was not convinced that the business case made sense for them. There was good support among the largest buy-side firms, but not from mid-size and smaller organizations. We found that we had very little leverage with the buy-side and that we did not have strong working relationships with them.
Second, the global players challenged the vision of the US moving to T+1 on its own and championed the need for a global solution. The creation of the Global Straight-Through Processing Association (GSTPA), which was conceived with a perfectly legitimate vision of its own (to address inefficiencies in cross-border trading), evolved into an extremely divisive presence within the US T+1 program.
Third, the vision of converting to T+1 came under fire as some firms reached the conclusion that T+1 was too expensive - that important benefits could be achieved more easily with STP, independent of a T+1 settlement date.
As a result of these battles, SIA decided in July 2002 to focus on STP, rather than on T+1. That decision was foreshadowed at this conference a year ago. The backers of GSTPA decided to shut down that effort in November 2002, with a write-off of over $100 million.
Firms responded by cutting back or reallocating resources previously dedicated to T+1.
The SEC, observing all this from its unique vantage point, deferred the issuance of its T+1 concept release until further notice.
So, today, the STP vision is quite different. Gone is the "Big Bang" concept of T+1. And in its place is a portfolio of automation projects that succeed or fail based on their respective merits. In the absence of an overall industry conversion date for T+1, each project has its own timetable, determined by the direct participants in each project.
There is no question that this STP portfolio of projects is positive for the industry. The efficiencies, cost saving, capacity increases, reductions in risk and improved service made possible by these projects come at a time when firms are looking harder than ever for improved productivity.
Let's turn to the second piece of the STP program. The first was vision. The second is project management and technical competence.
III. Project Management and Technical Competence
There is no question that the industry is making solid progress with STP. In the twelve months since last year's Operations Conference, the results have been truly remarkable.
In fact, most of the deliverables that had been scheduled for 2003 are on track in spite of the redefinition of the STP vision.
I would like to acknowledge the work of Jeff Bernstein, chair of the STP Steering Committee, the chairs of each of the sub-committees, each of the many industry volunteers, the Capco PMO team, And John Panchery and his staff.
Trade Matching
- The ITPC Model was completed a year ago. Omgeo is committed to developing the systems and the client migration plan to support as many firms and their clients as possible. Additional vendors are also active in automating institutional trade processing. Amendments to the model include prime broker processing, correspondent clearing, when-issued and pre-allocated trades. The ITPC Model is not a fixed concept - continues to be refined.
- Although much has been made of the buy-side's reluctance to support T+1, there is encouraging progress occurring at the enterprise level and by the service providers who support buy-side automation. So we are not discouraged by the buy-side's position at this point.
- Omgeo's Bill Hodash and the SIA Institutional Processing Committee speak later this afternoon.
DTCC issued its new, ambitious and impressive development plan last December.
DTCC Development Program
- Real time trade input from the exchanges and NASDAQ by the end of this year
- Intra-day trade contract reporting to participants by the end of this year
- Implementation of a new trade repository processing system to replace the twenty-year-old compared trade information database by the end of this year
- Implementation of the redesign of Continuous Net Settlement (CNS) in two phases - the first in 2003 and the second in 2004.
- Consolidation of NSCC and DTC settlement reporting by the end of this year
- Implementation of initial components of a universal messaging hub - to accommodate stock loan recall messages in 2003 and corporate action liability notices in 2004
- Implementation of a new inventory management system for transaction settlements early in 2004
- Completion of the fixed income Real Time Trade Matching system (RTTM) for all types of fixed income securities
- The launch of a new Global Corporate Actions messaging hub to support communications between custodians and investment managers in 2003.
These are the most important of the DTCC STP projects - but only part of DTCC's overall development program.
We have made remarkable progress on street side STP - particularly between the exchanges, DTCC and DTCC participants.
DTCC is on your conference program in a number of sessions between now and Friday.
The Group of Thirty issued its recommendations in January. We take these recommendations seriously and look forward to working with G30 in their implementation.
G30 Recommendations
I.Eight of these dealt with creating a strengthened, interoperable network
II.Seven deal with mitigating risk, and
III.Five deal with improving governance
We agree with all 20 of these recommendations and have indicated our support by letter to G30. Our letter placed special emphasis on:
#1 Eliminating paper certificates
#2-4 Standards for messaging/connectivity and reference data
#5 Matching on day of trade
#12 Effective BCP
John Walsh, executive director of the Group of 30, will present these recommendations later today.
Physical Certificates
Two significant events occurred last year with the decision by AT+T to convert to 100% book entry for its securities.
Is Claudia Holcombe here? Claudia is an example of people who make a difference. Claudia is going to talk about the AT+T experience with electronic shareholdings later this morning.
Following AT+T's lead, the SIA is working with other issuers to build momentum on dematerialization. We have completed a cost study on dematerialization that Norm Eaker will cover in the same panel discussion.
The Physical Certificate Committee, chaired by Ron Kessler has also forwarded its views to the SEC. It seems clear that further work on DRS and on investor education will be a priority for the coming year.
The SIA Risk Committee was started in June last year and is working to release its white paper later this spring. The objective here is to separate the risk reduction that can be achieved by STP in a T+3 environment from the risk reduction of a conversion to T+1.
This is a key subject of concern for the SEC - as it is for all of us - and a very complicated analysis.
The Bond Market Association has issued its RFI for a common messaging hub for fixed income and is evaluating responses from a wide range of vendors.
The Buy-Side Committee is scheduled to issue its white paper later this month.
All of these efforts are scheduled to come together at the SIA STP Conference to be held in New York on May 19 and 20.
As many of you know, the industry's Business Continuity Planning efforts have been extensive in the last year and a half. SIA has been active with DHS, FBIIC, FSSCC, the FS-ISAC and with the Federal Reserve and SEC with respect to the clearance and settlement white paper. We have also been engaged with GAO and the SEC with respect to trading facilities backup.
It is true that BCP activities have drawn resources away from STP over the last ear. It is also true that STP is a necessary building block for BCP.
The STP working groups have made solid progress over the last year. Evidence of this progress is scheduled throughout your conference agenda the next three days.
Conclusion
SIA is very comfortable with the new vision statement for STP. There has been no second-guessing about the decision to defer T+1 last July. Zero. In July, we said we would revisit settlement dates in 2004 - and we will.
We are very comfortable with the progress that is being made in the STP portfolio of projects. DTCC is essentially on track with its original development plan. Omgeo is a committee and talented partner in the evolution toward trade matching. Recent surveys - our own as well as others - indicate that there continues to be strong sponsorship for STP within the industry.
The industry's downsizing in the last three years slows the STP program in the short run, but gives it more long-term credibility.
And we have learned something about industry network development and management in the process.
No one wants to go through the GSTA experience again.
At the same time, the issues that GSTPA initially tried to address are still there.
And there will come a time when the industry will again address cross border clearance and settlement issues in a comprehensive way.
The G30 initiative is a good place to start. SIA will support that effort as vigorously as possible and will be reaching out to partner with other organizations wherever appropriate.
We better understand our partnership roles with DTCC and Omgeo and have agreed with those organizations to work more closely together.
We understand better our partnership roles with TBMA, ICI, ISTC-IOA, Swift and other organizations.
Finally, we understand the value of leadership and engagement within the firms - at the senior levels, the business unit levels and the operations and technology levels - in designing industry-wide technology and operations development programs and their implementation.
Looking ahead to 2004 and 2005, we at SIA are bullish on the economy.
We are bullish on the securities markets.
And we are bullish on the securities industry.
We are bullish on the contributions to be made in straight-through processing - in operations and technology generally.
You should be bullish about the outlook for your business and proud of what you do.
Thank you.
