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T + 1 War Rooms – Asia :
Even with a smooth transition , securities lending complexities are arising
The shift to a shorter settlement has raised concerns within the realm of securities finance , prompting firms to contemplate scaling back their lending activities until the new settlement system proves its reliability .
The securities lending sector is still adjusting to some of the realities of operating in a T + 1 environment in the US , experts have highlighted during Global Custodian ’ s T + 1 War Rooms initiatives .
Securities lending was one of the big areas of concern in the build-up to T + 1 , and despite the main takeaway being that it has also been a smooth transition – a genuine success , to put it succinctly – the practice hasn ’ t come through entirely unscathed .
Some of the worries prior to 28 May included participants not being able to meet reallocations / recall deadlines , and possibly exiting their lending programmes altogether . What we are seeing is some conservative inventory management , a slight uptick in fails and some issues with cut-offs and deadlines . No exits though .
Specifically , a lack of consensus on the new recall notification cut-off is causing some headaches . The RMA ’ s best practice of a 7pm ET came out late in the day and reportedly isn ’ t ideal because it precedes the affirmation cut-off for custody clients , creating a gap .
“ Broadly speaking , borrowers still want the 3pm market close for T + 1 settlement . However , they are working with lenders to ensure securities are returned in time to satisfy the sale , but a grey area does remain here ,” Eusebio Sanchez , head of execution services , asia clusters , securities services , Citi , explained . This discrepancy has prompted Citi to engage in direct bilateral discussions with borrowers to ensure compliance with the new settlement timelines .
This was something echoed during our European webinar , where a participant said : “ I think there still is this grey area where the borrower will broadly view it as 3pm ET as per what was historically in place . And the lending community is either adhering to something that aligns to what the RMA published as the best practise of 7pm ET , or even in the most extreme example using 11:59pm .
“ That said – and we could all debate on what ultimately T should look like in terms of capturing that date – what we have seen is there ’ s broad-based willingness across the industry to accept and acknowledge the recall – regardless of your definition of T .” Despite the success narrative of the initial weeks of T + 1 , some real tests for the securities lending space are nigh with major indices rebalances – notably Russell on 28 June . The discussion pointed to significant events like these rebalances reintroducing concerns about strains on securities lending programmes . This pressure has prompted some market participants to consider reducing their lending activities until the new processes proves stable .
The custodians discussed that rebalancing often strains securities lending operations due to the high volume of trades and recalls . Despite that , Sanchez noted , “ Nothing really changes with how we manage passively managed tracking funds . We maintain some level of buffer for all index tracking names to account for intrarebalancing reductions .”
Proactive strategies , such as restricting and recalling deletion names ahead of settlement dates , were discussed to minimise the impact on trade settlements and lending activities . Emphasis was placed on visibility and pre-emptive actions to handle index changes smoothly .
Sanchez added : “ Heading into the rebalance date , we typically restrict and start recalling those deletion names ahead of settlement dates . Nothing really changed at all with our passively managed clients . Overall , the experience has been positive ,
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