A lack of discussion between all market participants on securities lending recall cutoff times has become a main concern during the move to T+1, according to Mathilda Yared, managing director of global securities finance at National Bank of Canada.
During a discussion on the move to a shorter settlement cycle for the US and Canada at the 13th Annual Conference on Canadian Securities Lending, Yared advised borrowers and lenders to continue to communicate and collaborate to ensure they meet the May 2024 implementation deadline, while avoiding any unintended or detrimental market consequences.
For Keith Evans, executive director at the Canadian Capital Markets Association, there is a 鈥渢remendous amount of work to be done鈥� in the upcoming move to T+1 and it has become a 鈥渕uch bigger challenge鈥� for all market participants when compared with the move from T+3 to T+2.
This is due to 鈥渄rastically different systems, implementations and changes that need to happen鈥� in this shorter settlement cycle compared with the previous move to T+2鈥�, said Ahmed Shadmann, vice president, head of agency lending trading, Toronto at State Street.
Currently, there is an impetus to modernise how the Canadian securities lending market works, Yared highlighted, especially in terms of securities lending recalls.
Yared continued: 鈥淭he Canadian CDS market is still functioning on the basis of email recalls, which is very different from what happens in the US where automation has been available for quite a while.
鈥淎nother main difference between moving from T+3 to T+2, compared to moving from T+2 to T+1, is that we are questioning securities lending market practices this time around and it's causing quite a bit of confusion and noise.鈥�
Thomas Veneziano, North American head of product at Pirum, also indicated a need for increased automation, suggesting that the recall process in Canada and international markets remain highly manual and email oriented. Consequently, he highlighted the importance of global solutions to automate the recall process across markets.
As a response to this concern, Pirum created a global recall manager solution which works across regions and is designed to have issuance, acceptance and an acknowledgment of recalls on the platform.
The solution is rules-based so that clients can configure to accept a recall that is based on certain sets of rules and guidelines per market and per counterparty, Veneziano confirmed.
Discussing his biggest concern for the move to T+1, Evans pinpointed the amount of automation required for securities lending, as well as trade lifecycle, corporate actions and foreign exchange (FX).
He reminded panellists that testing for the shorter settlement cycle in the US will begin in August 2023, with Canadians initiating test cycles in January 2024.
He added: 鈥淭here鈥檚 a lot of operational considerations that we initially have to go through, I鈥檓 not sure how much time we have. We all know that the regulators are very focused on failed trades. The biggest failure of T+1 will be increased fails in the equity and the corporate debt space.鈥�
A lack of proper infrastructure in place during the implementation could result in increased fails, Shadmann indicated. If this were to occur, Shadmann hypothesised, he would, as an agent lender 鈥渟tart to mitigate risk鈥� by 鈥� keeping buffers in stock鈥�, which could ultimately lead to reduced liquidity in the market.
The overall solutions are probably the things that keep people up at night, affirmed Veneziano. The cut off times are moving for continuous net settlement (CNS), for affirmations and, potentially, recalls. 鈥淭he market lenders and borrowers need to come to a common ground,鈥� he urged.
Sharing his concerns, Veneziano indicated a need for market participants to think about how much lift internally is needed to achieve the required automation level and straight-through processing to operate on a more real-time basis.
Veneziano concluded: 鈥淭+1 is going to be a major challenge and it is likely to be followed by T+0. T+1 is top of mind right now and a priority that everyone is concerned about, but T+0 will come so we should start thinking about that right now.鈥�
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