Plato: looking at the bigger picture of T+1

With global policy makers looking to reduce unnecessary risk and improve efficiency in capital markets, there is increased regulatory focus on shortening the settlement cycle. The US Securities and Exchange Commission (SEC) is the latest regulator to introduce rules to move securities settlement from two business days after the trade date (T+2)to one (T+1) by May 28th 2024.

For European asset managers, the main reason for trade failures is cited as broker or inventory shorts which is becoming a far larger issue due to the Central Securities Depositories Regulation (CSDR) regime, and the fines incurred as a result. The International Securities Lending Association (ISLA) estimated the value of securities on-loan globally hit a new record of €2.7 trillion ($2.9tn) in December 2021.

The difficulty in managing this process currently is the manual nature of the transactions. By introducing FIX standards for inventory to understand loan and lender availability, short sale availability, standards for new loans, loan recalls, returns and buy-in notices enables the information flows to be speeded up as well as automate the stock loan workflow process and manage collateral workflows.

This would include the real-time status on new loans, return messages containing Unique Trade Identifiers (UTIs), loan modifications and cancellations and the securities available to lend or put out on loan at the end of the day. Additional standards are also being addressed to cover repo and reverse repo.

“Sec Lending at the custodian is our main issue, they will loan that stock to someone, we don’t even know who it is. We need to automate the process. Right now, if I sell a stock, I send the custodians a Swift. Once they receive that swift and book to trade in their system, they will then start the recall process. We all struggle with the whole stock loan recall process, especially for under the CSDR regime. The fines aren’t large but we get 200-250 fails a day because we are doing anything between 20 and 25,000 allocations a day,” said a head of Operations at a global asset manager cited in the report.

Workflows are improving through the use of greater standardization in the netting and allocating of trades as well as automated alerts for outlier trades to be addressed. However, this has yet to extend to stock loan, although there is work currently underway within the FIX Post Trade Working Group to address this. Currently, in the US, buy-ins operate on a T+1/0 basis, whereas the standard securities lending contract in Europe is a minimum of 48 hours, making it impossible to arrange the return of lent assets without being in breach of timely settlement. The removal of the buy-in mandate from CSDR regulation means it may be less costly for brokers to fail trades than attempt to borrow to settle on time.

Read the full report

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