OSI Spend Higher than Expected

LONDON - Despite the initial concerns regarding how the industry would cope with conversion to the new options symbology symbol (OSI) in February 12, a survey conducted by the Financial Information Forum (FIF) to explore how the OSI initiative was addressed by the industry in terms of allocated resources, testing opportunities and external entity support, revealed market participants think it has been a successful project.

New York-based Tom Jordan, chairperson of the Financial Information Forum's (FIF) advisory committee, and president and chief executive officer of Jordan & Jordan, says "A concern one firm highlighted to the FIF prior to the survey was whether they had staffed too much for this particular initiative."

An initial survey carried out by FIF in August 2008 estimated that the cost of the OSI project would be $245 million without considering the cost to exchanges, OCC and non-participating vendors. The March survey results revealed the final figure was $372 million, meaning the industry project costs are likely to have been approximately $400 million.

But the survey results showed it was very much on target, and while the numbers were a little bit higher than what the industry projected, overall it was considered a success, says Jordan.

The Next Big Thing

Meanwhile, the complexity and increasing costs that have surrounded the OSI initiative have led to concerns regarding how firms will be able to comply with the Internal Revenue Service's (IRS) Cost-Basis Reporting legislation, which creates new reporting obligations for brokers and issuers of securities, shifting the reporting responsibility from taxpayers.

While the OSI and Cost-Basis Reporting initiatives are not similar in nature, experts suggest lessons learnt from the OSI initiative could give insight into the challenges some firms may face if they do not start preparing for the changing reporting requirements, particularly in terms of allocating budgets to make the necessary changes.

A Cost-Basis Reporting survey carried out by Jordan & Jordan in April revealed 25% of firms had yet to implement a cost basis system, while 12% said they are currently implementing one. "Quite a few firms don't have to develop a new cost basis system for 2011," says Jordan, adding that at the moment there is no-one in the industry ready for cost basis.

Jordan says while some firms have cost basis systems in place, those systems may not work and some will have to change them dramatically. Unlike the OSI initiative, Cost-Basis Reporting compliance is expected to be more complicated and costly due to its phased nature. The reporting requirements depend on the type of specified security that is sold. The deadline for stock in or of a corporation other than stock in a regulated investment company (RIC) or acquired in connection with a dividend reinvestment plan is January 1, 2011. January 1, 2012 applies to stock in a RIC or acquired in connection with a dividend reinvestment plan. The deadline date for any other specified security is January 1, 2013.

"You as a firm may be ready for the 2011 deadline, but if the person or broker you are dealing with, who is going to send you the transfer information, isn't, and they give you incorrect data, it will not be successful," says Jordan, adding that a mistake in the initial 2011 phase will lead to problems in the 2012 and 2013 phases too.

Still, the IRS is yet to issue the final guidance on the changes, and some firms may wait with overhauling systems until the details have been published. "People are busy, regulatory changes are ongoing, and the fact that the final rules are not out yet can cause people to wait and only address this once they are issued," says Jordan, explaining that these firms that wait will face the risk of running out of time.

Carla Mangado.