The United States is not officially adopting a one-day settlement cycle (T+1) until June 2004, but in reality all its institutions must be ready to trade on a T+1 basis one year in advance. Other countries will be forced to keep up. But Japan's progress may be impeded by structural issues.
At issue is the role of trustees. Trust banks are responsible to clients for ensuring compliance and confirming trades, among other roles. In Japan this occurs via a statement known as the sashizusho (say that five times really fast). Say, for instance, a large London-based fund manager has a global equities mandate from a Japanese corporate pension fund. Whenever the fund managers in London decide to make a trade, their Tokyo branch notifies the institution's trust bank of its plans. This trustee, given its fiduciary responsibility to the pension fund, must confirm the trade รป or "DK" it ("don't know"), which means the trade fails because the numbers don't add up.
In a T+3 environment, it is no big deal to DK a trade. There is enough time to re-confirm the order with the seller and the buyer. Not so under T+1.
Furthermore, if a trade fails, whether in America or Japan, it means someone else can buy into the trade because there is an order in the market, and they can buy it at a better price. Therefore if the price of the securities the fund manager is purchasing for its client falls, the client must still buy at the original, higher price.
This is not expected to be a problem in the United States because of a regulation allowing 'dual-passive authorization'. What this means is if the trade is matched between the institution and the broker, then the trade automatically goes to the depositary. Unless a trustee is tied in electronically by the client to comment on a client's proposed trades before they are executed, there is no role for the trust bank.
Custodian banks are not very happy with this rule either, for it reduces the value they can add to a transaction. But with the hyper-efficiency of T+1, "Instead of having three days to fix things, you only have an hour and a half," says Timothy Knox, managing director for Omgeo Japan, a joint venture between Thomson Financial and the US Depositary Trust and Clearing Corporation providing straight-through processing trade services.
Custodians in America may be grumbling, but there is little they can do about it. But Japan is a different story, because trust banks wield tremendous power. They tend to manage the bulk of retirement assets and are loathe to surrender any ground, including the duty of issuing sashizusho statements. As these trustees are often part of a web of mutually supporting business interests with clients, they take their fiduciary role very seriously.
But the likely outcome, however, is that eventually trustees in Japan will have to give ground. It will not be tenable for the world's second largest capital market to avoid T+1 for long if the US does indeed go that way; and there are other elements in Japan pushing T+1 keenly. This means either that Japanese trust banks must be able to review trades with far greater speed, or accept some form of dual-passive authorization.
This may take time, however. Trust banks are already seeing their roles as investment managers dwindle in the face of stiff competition from foreign and domestic investment trust companies. The introduction of defined contribution threatens to further weaken their grip. Trust banks face yet another challenge, one that will arrive sooner than they think.
