The securities lending and broader securities finance market has long been a cornerstone of the global financial system. By facilitating the temporary transfer of securities, the market underpins various activities, including market making, short selling, collateral management, and portfolio optimisation, while supporting market liquidity and price discovery. With the financial system transitioning to a T+1 settlement cycle, the role of securities lending is becoming even more critical in ensuring timely settlement, reducing counterparty risk, and maintaining operational efficiency.
“The market already adds considerable value to cash market liquidity in that on a daily basis lenders and borrowers work together to settle trades and recalls more quickly than standard market settlement. Unfortunately there are legacy inefficiencies across the cash market/securities finance ecosystem that must be addressed to successfully adopt a T+1 environment” — Roy Zimmerhansl, member of the UK Accelerated Settlement Taskforce
Securities lending is structurally more complicated than standard equity or fixed income cash market transactions due to its reliance on the availability of securities, collateral management, and the need for daily monitoring of market risks based on “shadow” positions that are on loan/borrowed.
Roy Zimmerhansl chairs a working group for the UK Accelerated Settlement Taskforce and plays a strategic advisory role for the Global PSSL initiative. He brings deep expertise in Securities Finance, Collateral Management, and Capital Financing. At Pierpoint Financial Consulting he delivers top-tier securities lending, securities finance and collateral management solutions.
In this article, Roy, along with Planixs liquidity expert Nick Applebee, discuss the key challenges market participants face as they adapt to T+1 settlement, the critical role of automation in enhancing transaction efficiency, and how regulators have influenced securities lending since the 2008 financial crisis.
Transitioning to T+1 settlement in securities lending is like trying to speed up a highly complex relay race where each runner is responsible for running their leg and managing and delivering equipment between exchanges. In the old race format (T+2), runners had more time to hand off the baton, coordinate with teammates, and adjust if something went wrong. But with T+1, the pace has quickened, and now everything—from running the race to delivering the baton and coordinating moves—has to happen almost instantaneously.
Challenges in transitioning to T+1 settlement
As financial markets shift toward shorter settlement cycles, Roy observes that the transition to T+1 in the U.S. and other markets will compel participants to navigate a new set of operational challenges:
- Faster Transaction Flows: The requirement for quicker settlement means lenders and borrowers must accelerate their processes. Securities lending transactions must be completed faster than ever, and firms may not have the right software, hardware, or technical infrastructure to support real-time processing.
- Information Flow Limitations: Execution information, which drives the creation of lendable supply and triggers recalls, is controlled by the cash market, not securities lending participants. The high volume of trades near market close means recalls often cannot occur during the trading day, complicating the availability of securities and creating bottlenecks in the lending process.
- Incentive Structures: Current operating models often include adverse incentives that will be unsustainable in a T+1 environment. For instance, the lack of automation in the recall process places inefficiencies on intermediaries and borrowers, which will no longer be feasible with shorter settlement cycles.
- Increased Competition: As borrowers need to source securities more rapidly, whether for new loans or to cover recalls, the competition for certain high-demand securities will intensify. This could impact liquidity and further challenge the timely completion of transactions.
- Collateral Management Pressures: T+1 also introduces additional pressures on collateral management. Lenders and borrowers must identify, allocate, and transfer appropriate collateral on the same day as the trade, necessitating real-time collateral optimisation—another operational hurdle that must be overcome.
Pressures on liquidity
Firms risk not having the liquidity needed to meet obligations, potentially causing disruptions. Participants require immediate access to both securities and cash for purchases, and time zone differences can further complicate the coordination of these resources. This puts significant pressure on a bank’s treasury and intraday liquidity management, especially as certain jurisdictions face increasing funding challenges under the new regime. Under T+1, banks must adapt by managing liquidity more efficiently within the compressed settlement window.
“Massively reducing settlement times creates lots of pain. You have less contingency to work out how much liquidity you need and where you need it, and you have less time to fix problems and avoid fails. So make sure you are tracking liquidity and settlement in real-time, all the time.” — Pete McIntyre, liquidity expert at Planixs
Delays in accessing timely data can lead to suboptimal liquidity management, so having accurate, real-time information is critical in this environment.
How automation can solve operational complexity
As the securities finance market shifts to T+1 settlement, Roy believes that automation is vital in ensuring participants can operate with the necessary precision and speed. Financial institutions are being forced to rethink their operational and technological frameworks, making strategic adjustments and targeted investments.
The benefits of automation are clear
- Streamlined Workflows: Automated platforms reduce manual errors, minimising delays and counterparty risks, and enhancing efficiency throughout the transaction lifecycle.
- Alerting and Throttling Payments: Automation enables real-time alerting and throttling of payments, helping teams prioritise transactions and manage liquidity more effectively under pressure or as risks materialise, ensuring that resources are allocated where they are needed most.
- Speed and Accuracy: Technologies like big data analytics and AI improve transaction speed and accuracy, allowing participants to respond rapidly to market dynamics.
- Cost Reduction: Automation lowers operational costs by minimizing manual processes, enabling firms to scale efficiently and remain competitive.
- Real-Time Risk Management: Automation allows for continuous monitoring of “shadow” positions, enabling dynamic risk management in a volatile market.
Regulators are dialing up the real-time pressure
The transition to real-time risk management and reporting aligns with regulatory shifts that have reshaped the securities lending market post-2008. Stricter regulations like Basel III, ESMA’s SFTR, and the SEC’s Rule 10c-1a, which focus on transparency and risk reduction, are driving firms to invest in technology and automation. These investments, essential for managing faster transaction flows and real-time collateral management, also ensure firms can meet the heightened compliance requirements and reporting demands that accompany these regulatory changes.
Roy has seen that regulators are increasingly demanding real-time reporting of securities lending activities and collateral movements. This facilitates better monitoring of market risks, aligning with the push towards more automated and transparent market operations.
…the question remains
Moving to T+1 and beyond will step up the demand for real-time settlement, and will revolutionise securities lending by reducing the time between the agreement and delivery of collateral. This data-driven approach will improve efficiency and liquidity, especially in less liquid securities or during volatile market conditions. Roy says:
“Intraday real-time processing will need to become the standard, not the exception. T+1 will require users to adapt, hopefully creating conditions for a new market accessible to a wider universe of users, improved cash markets liquidity all delivered with lower inherent risks through real-time risk management.”
The question remains: how will firms adapt their operational and technological infrastructures to handle faster transaction flows, real-time collateral management, and increased regulatory demands, while maintaining liquidity and efficiency in a more competitive and complex environment?
