By Duncan Carpenter, Head of Securities Lending Post Trade
If I’m honest, when I opened our securities lending T+1 webinar by asking if the UK and EU transition was just "copy and paste" from the US I already suspected that wasn’t the case, however, if I was in any doubt Claire Burns from Morgan Stanley, Andrew Geggus from BNP Paribas, and Tim McLeod from BlackRock quickly set me straight: it’s absolutely not.
Tim laid out the complexity: "You've got 40-odd trading exchanges, 18 CCPs, something like 14 or 15 currencies, 30 odd CSDs. And as we all know, a very complex web in terms of the regulatory framework."
The US market is significant in size but singular in model, one currency, one settlement system for equities, one for fixed income. Their T+2 to T+1 transition was in some ways more about dealing with volume than it was variety. The EU and UK on the other hand have structural challenges the US never faced.
Tim's point resonated: "We can't just stumble into it and think that we're going to be OK. If we do that, then it won't be OK, and we won't achieve the objectives of the SIU (Savings and Investment Union) and there'll be a significant cost of getting it wrong."
T+1 is a critical component of the Savings and Investments Union agenda. The CSDR penalty framework makes failing expensive. And unlike the US, the EU has significant cross-border challenges and free of payment activity to contend with.
Tim shared a stat from Firebrand research: €70.43 million a month was paid on average in 2024 for settlement failures on the T2S platform, that's €850 million annually.
That number spans all securities settlements of which securities lending is just a part, but lending is a contributing component, and that's a huge amount of money being spent on things that have gone wrong.
It says two things to me: yes, there's a huge number. But it's also an opportunity.
I remember when I started in securities lending and someone explained to me one of the primary drivers was for to help settlement – a back-office tool where two settlement teams were agreeing to something to help settle another trade.
Securities finance still provides that role and if as an industry we can be more efficient, there's an opportunity to both reduce the amount securities finance trades contribute to that €850 million of fail costs but also to help prevent fails and reduce costs across securities settlements.
Claire's response: "Not only do we need to continue to do that role, but it actually becomes more critical in making sure this works for the full market."
If anything, T+1 heightens that utility of securities lending in easing settlement flows.
Tim made the critical point about automation: "There's a big difference between people sending recalls out at 5:00pm in the evening and 7:00pm in the evening. The 5:00 in the evening is when it's fully STP, fully automated."
Why does this matter?
Vast majority of recalls are covered by borrowing from elsewhere. But borrowers need time to line up those borrows. If you're borrowing on a free payment basis, collateral needs to be posted in time to receive the stock to deliver back.
At 5pm, borrowers can start positioning. At 7pm or 9pm, you're into time zone coverage issues and compressed timelines.
Automating the recall itself isn't a guarantee of settling on time, but it gives visibility, audit trails, and that additional time which gives it a much better chance of happening.
Tim delivered a strong candidate for line of the webinar: "SSIs is still the second biggest reason why securities lending trades fail. There's just no excuse for that."
There are plenty of ways to make sure counterparties constantly have the same SSIs for every transaction. Real-time books of records confirmation, pre-trade validation, automated matching – the solutions exist.
The goal is moving from contract compare identifying problems that happened yesterday to preventing them before they occur.
From my point of view at Pirum, I'm firmly of the opinion that's a perfectly achievable, realistic goal. In fact, there are cases where it already happens. We know we can book, collateralise and settle loans in 30 minutes on a T+0 basis today when the right tools are used. We can do that both in the US and we can do that in the EU and UK on non-cash collateralised books . If you've got the right links between you and your counterparty and tri-party agents, everything flows through efficiently.
What stops us from getting there on scale? What do we need to do to make that the standard rather than the exception?
This was Tim's insight for the securities lending market: "Probably less than half of that work needs to be done internally. The other, call it, 60% if you like, is our custodians who are our route to the market. It is then the CSDs, the ICSDs and it is our counterparties."
You can't settle faster than the person you're trading with. You both have to settle as quickly as you can. It's a common goal.
Tim referenced something Andrew Douglas said at a Forvis Mazars event that stuck with him: he'd never seen so many different parts of the capital markets ecosystem in a room together, all aligned on an objective.
That's rare common interest. As Tim said: "It would be a real wasted opportunity not to surf that wave."
As a lender, you need to know what's going on with your underlying asset manager, the repo markets, ETF market makers. Lending is part of the ecosystem – you can't solve it in isolation.
Andrew raised a challenge I think about constantly at Pirum: "What we don't want to do as a market is create silos of liquidity and then cause additional strain on the market by your choice of provider for certain types of post trade or pre trade activities."
There are solutions out there to make sure SSIs match in a pre-trade environment. But there are also multiple providers. The expansion of Fintech solutions is positive, but only if there's some form of interoperability.
From our perspective, we've partnered with firms numerous times - for SFTR years we partnered with S&P Cappitech because we quickly realised a combined solution was more efficient for all parties in helping people achieve their regulatory goal. For US T+1 on recalls we partnered with FIS to make it more efficient for clients on both platforms to be able instruct recalls seamlessly between each other rather than having disparate solutions covering different market segments.
Where that rationale exists, we're keen to work with partners where it makes sense. You don't want 19 point-to-point solutions – you want an optimum number providing both wide coverage but also crucially some level resiliency, and redundancy.
From Claire: "If you're not already deep in planning, get there quickly. If there is a borrower or a lender who causes you a problem, who makes your life more difficult, let us know so we can embed that in our plans for next year."
From Andrew: "Start having the communication dialogues now with counterparts and your clients. Make sure you have everything tidy inside your own shop. Is this right for T+1 and is this right for T+0 in the future? Build it once and use it again."
From Tim: "Don't fear being disruptive in a good way. Do some honest navel gazing around where your true pain points are. Learn about the tools that are there and invest. Don't just rely on throwing bodies at it. Be wary of doing nothing and gently sleepwalking into T+1."
From our perspective at Pirum, if you've got technology challenges or process challenges around T+1, come and talk to us. We're always keen to understand where we can help and where we fit.
If it's something we're not already talking about or you're looking at your T+1 processes and you've got a question, always happy to have that dialogue. Contact us.
Watch the episode now: T+1 Industry-led webinars - Episode 2
Watch the whole series now: T+1 Industry-led webinars