T+1: Reshaping Securities Lending in a Faster - Paced Market
July 19, 2024
The Recall Rush: A Challenge for Lenders
The new T+1 environment has thrown a curveball when it comes to managing recalls; the process by which lenders request borrowers to return shares typically in order to settle a sale.
Shorter Window: In this new landscape, Lenders have less time to identify and initiate the recall process with borrowers, and the borrowers themselves have less time to source the securities to return. This necessitates improved communication and coordination with borrowers to ensure a smooth and timely return of shares.
A Behavioral Shift: With the new regulation in play, EquiLend’s recall platform has seen a seismic shift in behavior, especially around the time of day lenders are initiating recalls as well as an increase in clients turning to the new recalls product.
Prior to May 28, 2024, the majority of US recalls were initiated between 8:00-9:00am EST (33%). This is indicative of the fact that recalls for sale notifications received after market close were not processed on trade date but were held until the morning of T+1. There was also a smaller spike in activity between 2:00pm and 3:00pm EST (18%) to account for intra-day sale notifications. Post 3:00pm EST it was rare to see much recalls initiation activity, with April seeing no recalls at all after 3pm EST.
Looking Ahead: Standards and Next Steps
Seeking Clarity: The question of recall notification deadlines is a major point of discussion and collaborative efforts among industry stakeholders including custodians, agent lenders and technology providers will be crucial in developing best practices and efficient workflows for the T+1 environment. Establishing a clear and widely adopted cut-off time across time-zones for recall notifications would be a major step forward. This would provide much-needed clarity and predictability for both lenders and borrowers, facilitating a smoother recall process. Standardizing data formats and communication protocols will also help strengthen these new, time limited processes.
The Rest of the World: Both the UK and EU have established task forces surrounding T+1. The UK government has confirmed that they will move to a T+1 settlement cycle by the end of 2027, however the EU is yet to commit to a deadline but are actively monitoring the early effects of the changes in the US market.
By embracing automation, agreeing clear industry standards, and leveraging real-time data, lenders can navigate the new landscape and mitigate the risks associated with tighter recall deadlines. While challenges exist, those who can adapt their recall strategies effectively will be better positioned to thrive in the fast-paced world of T+1 securities lending.