What opportunities does T+1 present and what does it mean for securities lending?
T+1 is a turning point in the industry’s drive toward automation. The move to shorter settlement cycles offers an ideal opportunity to evaluate and update systems as it requires increasingly efficient trade processing. This will lead to broader benefits across investment operations and create a competitive advantage for those asset managers who use this moment to improve their use of technology and automation.
For example, this is a perfect time to push toward SWIFT and secure file transfer protocol (SFTP) communications, which will not only reduce turnaround time for a shorter settlement cycle environment but reduce manual errors and mitigate the risk of an increase in failed transactions.
From a securities lending perspective, a shorter settlement cycle will not inherently create greater demand for borrowed securities, but it could create situations where counterparties may look to the securities lending market to source securities to meet those settlement needs.
What operational changes should asset managers be focused on now?
Generally, we expect minimal interruption to the broader securities lending market with market open and close times, reinvestment vehicle cutoff times, and any other current market deadlines all to remain in place. However, there are several areas where the shorter settlement cycle may have a significant impact, including: method and timing around sale notifications, and recall issuance.
- Sale notifications: It will be important for managers to ideally transmit sale notifications to their agent lenders prior to close of the relevant exchange, typically 4:00 pm, on trade date (“T”) to ensure that recall due date and contractual settlement date for sale transactions are aligned.
- Recall issuance: Managers should be aware of their current process and how their sale notifications are delivered to their agent lender. Those that require manual upload or processing will present challenges for issuing recalls within contractual obligated timelines.
This is where SWIFT and SFTP communications become critical.
Are there areas of the mandate that are still evolving?
As expected with a rule of this magnitude, there are still many moving parts. A couple that we’re paying close attention to include:
- Settlement timing for those managers domiciled in Europe and Asia, where the U.S. move to T+1 stands to cut the time for receiving a sale notification and issuing a recall to as little as two hours in some instances. We anticipate an agreeable standard will emerge to ensure lending programs continue to operate in an efficient manner.
- The timing of recall issuance, up to 11:59pm ET on trade date, remains unresolved and in need of a best practice that balances the needs of market participants. While agent lenders may prefer a later deadline for a recall to be recognized on trade date, pushing the recall issuance deadline only shortens the window by which counterparties can effectively process returns. It is not in the best interest of either agent lenders or counterparties to have recalls fail, potentially impacting sale transactions.
What questions should you be asking?
To assist lending activity and mitigate impacts, managers should ask the following questions of their agent lender:
- Has the agent lender undertaken a critical review of their technology, business process, and legal arrangements with managers and counterparties? An expert lender will also be able to draw on past initiatives, such as the implementation of the Central Securities Depositories Regulation (CSDR) Settlement Discipline Regime (SDR), to help plan for T+1.
- Does the agent lender have sufficiently automated capabilities to ensure a shorter timeline from receiving a sale file to issuing a recall? Although these enhancements may not automate the process completely, they can significantly reduce the time between receiving a sale notification to issuing a recall.
- Has the agent reviewed sale notification timing from the manager while the market awaits a consensus on what time counterparties are willing to recognize recalls issued on trade date? Regardless of where the industry settles on a best practice, a skilled lending agent will look to modify their operational capabilities to process U.S. recalls over multiple time zones.
For more insights on reviewing your processes in preparation for U.S. T+1, contact your BBH Relationship Manager and follow BBH Market Insights on LinkedIn.
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