The following was adapted from a keynote presentation made by Paul Thomas, director of sales and marketing at Wilco International, at the second annual Electronic Trading Forum, “Japan’s T+1 Challenge” in Tokyo on March 6. T+1 refers to the proposed change in the settlement period for equities and some fixed income products from three business days after the date of the trade ("trade date + 3" or " T+3") to one business day after the date of the trade.
T+1 is both a catalyst for change, and also a key component that complements other drivers for change, all to the benefit of the marketplace as a whole and to those who are active within it. During the past year we have seen substantial changes that impact market practitioners in Japan. Some of these changes are global, some specific to Japan.
There has been the release of the Security Industry Association’s (SIA's) T+1 Business Case for the US, which includes a timeline for November 2004. While 2004 may seem some distance away, there is an industry consensus that this is likely to be a demanding target and one that requires a great deal of planning. Firms in North America are already making preparations for their systems infrastructures and business procedures, and it’s generally recognized that firms in other markets should bear T+1 in mind when upgrading their processing capabilities.
We have also witnessed the progress of the Global Straight-Through Processing Association (GSTPA), an initiative that will prove vital to the success of T+1. One year ago the GSTPA was preparing to approach the industry for funding. Since then it has not only met but exceeded its initial funding targets for its Transaction Flow Manager. This has added credibility and tangibility to this industry utility’s goal of reducing the cost and risk associated with cross-border securities processing while improving the flow of information.
Then there has been the creation of Omgeo, the combined Thomson/DTCC entity, and the emergence of its plans for straight-through processing (STP) between industry participants.
We have seen the mergers and acquisitions of some of the biggest names in financial services in all regions, including Japan. This has taken global competition onto a new level as these powerhouses prepare to take advantage of their economies of scale, increased product offerings and geographical reach. And for these institutions, early planning for T+1 becomes all the more imperative, as it is likely to be done in parallel with the operational integration of the merged entities.
Globalization within our industry has increased, and over the past year this has been particularly evident for Japan with its deregulation program offering very real opportunities to investment firms, as well as to the Japanese investors themselves.
And of course we must not forget Japan’s transition to real time gross settlement (RTGS) in January of this year for the government bond and domestic money markets. Clearly a successful achievement, yet perhaps one that will give an important foretaste of the impact of T+1 in terms of how such industry changes can impact on operational processes, procedures and business practices.
This time last year the industry was emerging from its considerable efforts to ensure Y2K compliance, and was adding detail to its agenda for operational advancement. This year we are able to look ahead to a year that will bring our operational ambitions a step closer to reality and there are many opportunities that lie ahead.
The industry faces a climate of continued change: change in operational practices; change in regulations; change in the level and intensity of market competition; and of course, change in the expectations of clients.
And it is out of these changes that opportunities arise: opportunities to improve operational efficiency while reducing risk; opportunities to attract increased foreign investment in Japan, and to service that investment; opportunities to increase competitiveness through the provision of superior, global services at a lower margin, while maximizing profitability.
There are a number of opportunities raising their profile over the coming year, all of which are very closely linked. And to be more specific, I would suggest that the common link is STP. Yes, there is the move towards T+1 for the Japanese markets, and that certainly remains an ultimate goal. But what we will see over the coming year are more of the foundations and components moving into position, which will effectively deliver improvements on a phased basis.
One contributor to putting these foundations in place is JASDEC, commencing with this year’s planned roll-out of its Pre-Settlement Matching System and Standing Settlement Instruction database which will improve settlement performance and reduce fails. At the same time, these initiatives will pave the way for Delivery Versus Payment (DVP) settlement and T+1.
Indeed, the Tokyo Stock Exchange plans to implement a DVP system for settlement of transactions between local stock market participants this year.
We are expecting to see the GSTPA implementing its Transaction Flow Manager solution, bringing increased cross-border efficiency and reduced settlement risk through the centralized tracking, matching and time-stamping of transactional movements.
And likewise, we wish similar successes to Omgeo’s initiatives, and to the interoperability of these two services.
In terms of market regulations, there is an anticipation of continued initiatives to attract foreign investment in Japan to build on the deregulation of recent years. One such initiative is a proposal to allow foreign investors to access Bank of Japan's BOJ-NET through global custodians non-resident in Japan, enabling overseas investors to qualify for withholding tax exemption on Japanese Government Bonds. But that is just one example - the point here is that the Japanese authorities, over the past few years, have put in place the solid building blocks that will enable ongoing market deregulation in Japan.
At the same time, it is important that firms plan their own specific strategies for taking advantage of the opportunities that I have mentioned. By that, I mean taking advantage of these industry initiatives through direct participation, while also advancing competitive position through the opportunities that are available for revenue growth, and by embracing change to deliver the services that clients will demand in the future.
So, how can companies advance their own competitive position? Well to start with, they have an opportunity to become more efficient. Industry initiatives such as the GSTPA mainly address external STP across the industry. But what about internal processes? How efficient are they? Can a company enter a T+1 environment with legacy IT infrastructure? Can current systems handle the increased volumes anticipated for the Japanese marketplace? How can a company position itself to offer clients real time access to international markets?
Firms involved in mergers and acquisitions may need to consider the degree to which they require operational integration and consolidation across their merged entities.
And revenue growth: what are the revenue growth opportunities and how can they be captured? Certainly there are cross-border opportunities, as there are opportunities for those servicing investors from overseas, but only for those whose infrastructure is geared in that direction. And as Japan continues to relax its regulations, speed to market and an early market presence may well prove critical.
There are revenue growth opportunities from the ongoing escalation of transaction volumes, but only for firms that have made the necessary investments in their internal infrastructure.
And as I have stated, clients’ needs and service expectations are continuing to evolve, and increasingly companies will need to distinguish themselves in their eyes. Some questions a financial institution should ask themselves: Will I be able to offer clients cost effective services in a T+1 market? Will my service offer real time STP, and will I be sensitive to volume hikes or market changes? Do I offer access to the US and European markets? Will I support extended trading hours, and can I cover collateral requirements and failed trades without incurring risk?
So throughout the coming year and beyond, financial services in Japan will continue to undergo change, much of which will stem from market-driven initiatives on the road to T+1. This change takes place against a backdrop of increasing competition and a broadening of service expectations, and brings with it tremendous opportunities for market participants in Japan, and for the Japanese economy as a whole.
My message therefore is: "See change as an opportunity for growth, adopt strategies in line with the markets you serve, and for those that you aspire to serve, do not delay in your planning.”
Paul Thomas is director of sales and marketing at Wilco International.
