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The implementation of T+1 could see an initial increase in settlement fails and lead to an increase in trade breaks, according to Justin Aldridge, head of agency lending at Fidelity.
This topic featured in a number of panels this week at the IMN’s 28th Annual Beneficial Owners’ International Securities Finance & Collateral Management Conference.
Speaking on the conference’s ‘Looking to the Future: The State of the Global Securities Finance Market’ panel, Aldridge said: “T+1 could have many great benefits, from the capital benefits to the reduction of counterparty risk. From a securities lending perspective, it may create some friction, overall. Initially, we may see more fail activity.”
He added: “The asset managers and beneficial owners of securities are now going to have to do their trade affirmations intraday to get them over to their custodian or their broker-dealer trading counterparts that evening — which may ultimately lead to more trade breaks.”
For the Depository Trust & Clearing Corporation (DTCC), the topic is front and centre of the organisation’s agenda as it works alongside the industry to achieve T+1.
Laura Klimpel, general manager of fixed income clearing corporation (FICC) and head of SIFMU business development at DTCC, says: “What is particularly interesting is how the acceleration of the settlement cycle is going to compress the time periods for returns and recalls. This has been a key focus of our internal discussions.
“One specific area that will continue to be under pressure as a result of T+1 is the issue of breaks related to securities lending transactions. Market participants will likely be exploring how to avoid breaks in their stock loans to be able to make sure that the recall and return process is efficient.”
During the discussion, Aldridge highlighted industry conversations that called for an extension on the recalls period and suggested an extension of lending hours.
“The securities lending market, from a DTCC perspective, is only active until 3:15pm,” he explains. “There have been conversations in the industry about the extension of allowing recalls to go later in the day, but I do not think it solves the problem, it just puts the onus on the prime broker. So the industry may likely see some friction there.”
On the asset management side or the beneficial owner side, Aldridge believes that market participants will need to include their custodian as an interested party on all their buy and sell activity intraday — which he hopes will be an important step to mitigate that friction.
He adds: “I think there should be some conversation on the extension of lending hours, people should be able to do securities lending after 3:15pm.”
As the discussion shifted from T+1 to 10c-1, CEO of eSecLending Craig Starble said that the reporting obligation from the US Securities and Exchange Commission (SEC) is going to be time-consuming and significant like the Securities Financing Transactions Regulation (SFTR).
“It is operational, time-consuming and costly — but it will be something we have to do,” Starble indicated. “Let’s hope that 10c-1 will come in with a less rigorous reporting timeline. Reporting is part of the business and, unfortunately, it is a cost part of our business, but it is something that does not really impact the client, or at least shouldn’t.”
Starble explained to the panellists at the IMN conference that firms need to change their models slightly and it has to incorporate the cost of reporting regulation. He continued: “I worry most about resource training, because all of the most powerful minds in our industry are going to have to figure out how to deal with that, if that happens to be the outcome.”
“Regulation is why we exist here, for better or for worse,” Starble concluded.
