Securities lending faces up to T+1 settlement challenge
Securities finance practitioners are taking a mix of approaches to managing cash, funding and liquidity in a shortened settlement cycle.
The move to T+1 settlement in major markets creates a number of challenges, as Euromoney has previously discussed. Indeed, for the past three years, cash, funding and liquidity management have been cited as the greatest obstacles to achieving a shortened settlement cycle, according to the third edition of the Securities Services Evolution whitepaper series published by Citi in August.
Almost every organization surveyed by the US firm identified cash clearing as a key area of change needed to facilitate T+1, with 98% of respondents citing it as a top three priority.
The authors of an August 2023 report from UK Finance – Accelerated settlement: examining the case for trades to be settled more quickly in the UK – moving to T+1 – note that in a T+1 environment, market participants may have to borrow more for pre-funding purposes and that there will be market liquidity impacts to consider “which may not always be positive”.
In the context of securities lending, the focus is on ensuring securities are available in custody to meet sale obligations that ultimately fund subsequent purchases of securities. The need to manage cash funding within the investment process is elevated given the presence of higher global interest rates, and by extension the spectre of potential overdraft funding costs, observes Tom Poppey, head of product strategy in securities lending at BBH.