Will G30 initiatives affect your bank?

The Group of Thirty's efforts to streamline settlement of securities will affect large and small banks, particularly those whose clients eye overseas markets

By some accounts, the Group of 30 (G30) needs a public relations firm to help gets its message out to the financial services

One concern is that banks in this country, in general, aren't moving fast enough to comply with some of the recommendations. A second concern is that small- and mid-sized U.S. banks, where the recommendations have a less immediate impact, aren't studying and preparing for the implementation of the recommendations. Among the possible effects on all banks are changes in income, interest, and dividend payments; changes in float and the amount of daylight overdrafts; and the ability to collateralize loans with securities should they be available only in electronic, or book-entry, form.

To be sure, U.S. banks have had plenty of other issues to deal with recently, including weak consumer credit demand, intense regulation, mergers, and proposed national banking reform. Still, several of the nine recommendations were to have taken effect by the end of this year. Others took effect in 1990 in most major markets, and one did not specify a deadline year. The two particularly troublesome recommendations in this country concern shortening the settlement cycle of securities transactions from trade date plus five days (T+5) to T+3 and the use of same-day funds in payments associated with securities transactions. Lingering problems. The likelihood that full implementation of the recommendations in the United States and other markets will be further delayed is strong, by some estimates. Implementation of the T+3 recommendation has already been postponed to 1993 from this year. Differ-ences persist surrounding the feasibility of eliminating paper securities certificates from the settlement system, for example. And a standardized securities numbering system is needed to facilitate the cross-border movement of funds and securities. Most major financial markets use their own securities identification system.

"Everyone would like to move ahead with the recommendations as fast as possible, but we're running into a little difficulty," says Jeremiah O'Leary, senior vice president at Chemical Bank, in New York, and a member of the G30 U.S. Working Committee, which was formed to address recommendation implications in this country. "The big issue is whether we can settle securities in three days or five days and whether or not we should have securities certificates," says O'Leary. "But that's a retail brokerage issue more than anything else." DTC initiatives. Of concern to all institutions involved in the handling or custody of securities in their ability to interact with The Depository Trust Co. (DTC) more frequently than is necessary in a T+5 environment. In January, DTC proposed enhancing its institutional delivery (ID) system to include interactive links to member firms. In the current environment, trade confirmations from brokerage firms are transmitted to institutions from DTC. Many banks use proprietary systems for capturing, processing, and transmitting the confirmations to their customers.

"The new environment will require a lot of retooling of those systems, because today we're in a batch mode," says John Dashner, a vice president at Bankers Trust who is monitoring the systems modifications the G30 recommendations will require. Most banks broadcast their confirms in batch mode overnight to their customers for verification. The confirms are then transmitted back to the bank, which then broadcasts them back to DTC the following night. "In a T+5 environment, that doesn't present a problem," says Dashner. "But if a bank has to have all its affirmations completed by T+2 or T+1 [in order to comply with T+3], the bank needs to be interactive with DTC."

A second element in DTC's January proposal involves errors in the confirmation process. The enhanced DTC ID system would include providing advice of corrections to the broker/dealer through the system, thus reducing the number of telephone calls involved in problem transactions. "That has big implications for trades, because until now, banks haven't been involved in that process," says Dashner. "We'll have to build some sort of instruction entry mode in our systems and confirm files that allows the customer to make those changes so we can take them in and send them to DTC without having to manually re-key them." Banks could be looking at investments in the neighborhood of $1 million to retool their systems so they can operate with an interactive DTC ID setup. Cost justification. "The factor that helps justify the expense is that once the recommendations are implemented, global securities processing will be standardized," says Robert Gallagher, assistant vice-president at Investors Bank & Trust Co., Boston. Gallagher manages the bank's global custody holdings, amounting to about $1.8 billion in assets. The bank uses the Trust 3000 domestic trust accounting system from SEI Corp., Wayne, Pa., but plans to upgrade its in-house, IBM-based system to handle global assets.

"Once we invest the money in the automation, we'll be able to use it for years to come," says Gallagher. "We won't be making many revisions to it, which is important, because it's not inexpensive to keep a system like that running."

Banks also will need systems that can process intraday credits, adds Gallagher, as well as multicurrency accounting and securities processing systems that give banks more accurate snapshots of their holdings' value.

But banks also stand to gain greater efficiency and therefore increased savings, at least from the proposed changes to DTC's system. For example, DTC estimates that the advice-of-correction function alone would save several million dollars annually industrywide through reduced clerical functions and eliminated telephone calls. Also, a proposed trade matching feature would eliminate the clerical costs incurred by institutions that maintain their own matching systems. Such savings could be as much as several million dollars, notes the proposal. Single message system. Implemen-tation of the G30 recommendations also calls into question whether or not a single financial transaction messaging system is to be used by banks, brokerage firms, and other parties associated with global trades. If so, questions remain as to which system--an existing one such as SWIFT (Society for Worldwide Interbank Financial Telecommunication) or a newly designed one--would handle that role.

Complicating that issue has been reluctance on the part of many banks to allow investment managers for institutional investors access to the SWIFT network. SWIFT, based in La Hulpe, Belgium, is owned by a consortium of banks and broker/dealer firms around the world. "The concern the banks mention is security," says Gallagher. "We intend to do most of our communications with our custodians around the world with SWIFT. Without that, we're still faxing information back and forth, and we're trying to get away from that."

Bank opposition to investment advisor participation in the SWIFT network appears to be softening. "Any network that facilitates the electronic transmission of data and replaces paper would promote more orderly clearing," says O'Leary of Chemical Bank. SWIFT is a natural for the securities business, says O'Leary. It is already in the business to some extent, he adds, but not in the broad-based way that it could be. SWIFT "is one of the candidates that could bring efficiency to the market."

O'Leary says that his institution was one of the banks that voted early on to allow investment managers to become members of SWIFT. More banks are likely to vote in favor at a shareholder meeting this month, adds O'Leary." Institutional factor. Current business trends are pushing large banks toward compliance with the G30 recommendations in order to reduce risks.

"Institutional investors are increasingly looking to invest in global markets, including the emerging global markets," says Pavan Sahgal, editor of Global Investment Technology, a New York-based newsletter.

"In order to participate in developing markets, institutions want to ensure the safety and predictability of their trades," says Sahgal.

Even the regional and superregional banks are starting to take seriously such international clearance and settlement issues as the G30 recommendations, says Rosemary Rush, a managing director with Vista Concepts, Inc., New York, a vendor of securities processing and trust accounting systems. "Institutional customers of banks want to talk about multicurrency systems today, not in two years." Priorities. The good news is that many banks with a vested interest in clearing and settling securities are generally in good shape operationally.

"The mechanics of securities transfer certainly could be improved, but they work," says Michael Balk, managing partner of Price Waterhouse's consulting practice in New York and the Northeast.

"That doesn't mean banks shouldn't work in the direction of the G30 recommendations," says Balk. But resources need to be devoted to such efforts as improving commercial loan portfolios, developing better credit analysis techniques, asset/liability management models, or treasury hedging techniques, he says. "I would put those efforts in front of fixing something that already works or where it's just a matter of gaining more efficiency."

Ultimately, the Group of Thirty recommendations will affect more areas of banks than just the investment or global custody departments. "There will be a significant impact on cash management, wire transfers, corporate trust, and the loan department," says Mary Powers, president of Investment Operations Advisors, a financial industry consulting firm in Minneapolis. "Suddenly a loan officer is holding a physical certificate as collateral, which is no longer valid, because it has been converted to book-entry status," she suggests.

For that reason, the time to study the recommendations' impact on the whole organization is now, before banks, especially smaller ones, are caught off guard.