U.S. securities firms will argue that the shift to straight-through-processing should be a business decision, rather than a regulatory one, TowerGroup says.

In March, the Securities and Exchange Commission issued its long-awaited comment on the state of straight-through processing in the post-trade settlement of U.S. securities transactions. The SEC is soliciting commentary from the industry on the efficiency and vulnerability of U.S. clearance and settlement mechanisms.

“Ultimately at question is whether the goals set forth in the SEC paper will serve as a basis for industry best practices, or new regulatory mandates,” TowerGroup says in a new report.

“There is no question that encouraging sound business practice such as the same-day affirmation of trades will minimize the impact of trading errors. Nevertheless, TowerGroup believes that business imperative, not regulation, is the best mechanism to drive the efficiency of post-trade operations,” said Tim Lind, senior analyst in the investment management practice at TowerGroup and author of the research. “If there is a compelling case for systemic vulnerability originating from credit risk, than the securities industry will embrace change for its own sake – not just for the sake of regulation.”

The consulting firm says that the securities industry has a tendency to move quickly toward the mechanics of solutions before assessing the true nature of the problem.

“In this case, the impact of additional rulemaking is too great to merely stipulate that there is post-trade risk,” it cautions.

TowerGroup says it believes most institutions will contend the magnitude of replacement cost risk (aka credit risk) does not represent a systemic risk. “Securities participants will be very receptive to the goals and objectives outlined in the release, but will recommend that these principles take the form of industry best practices not law.

TowerGroup believes market participants will suggest there are higher priorities to deal with in the form of regulatory compliance,” it says.

Lind noted that eight of the Securities Industry Association’s original 10 building blocks essential to realizing speed, safety and efficiency in the post-trade process will be achieved without shortening the settlement cycle. “Achieving these initial goals should be a precursor to any serious discussion on T+1 and will represent key milestones in the industry’s ability to take the next step toward actually changing the settlement cycle,” he said.