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.
Brown Brothers Harriman’s Tom Poppey and Rob Lees look at the changes that asset managers should prioritize and how they can use the race to T+1 to gain an edge.
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.