T+1 to increase costs and volumes in ETF securities lending

Financial Times

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Exchange traded fund providers face additional costs in their securities lending activity due to the US moving its settlement cycle to T+1 at the same time as industry observers expect stock lending to increase.

The US, Canada and Mexico moved to a shortened settlement cycle at the end of May for US equities and corporate bonds from two business days after the trade date, referred to in the industry as T+2, to one day, or T+1.

The move has significant implications for the industry because many of the largest ETF issuers, representing 80 per cent of global ETF assets, engage in securities lending programmes to earn additional revenue on behalf of their ETFs, according to Brown Brothers Harriman.

However, the International Securities Lending Association said the difference in settlement cycles between the US and Europe creates a “misalignment” that will lead to extra costs in the ETF securities lending market.

This article was previously published by Ignites Europe, a title owned by the FT Group.

Tony Holland, regulatory and markets consultant at Isla, said the US move to T+1 created a “funding gap from misalignment” for ETFs engaging in securities lending.

“How can you pay for something on T+1 if you are not receiving the cash proceeds from the investor until T+2?” said Holland.

He said it was not clear “if a fund will go overdrawn to pay for the US security”, whether the authorised participant would “swallow” the funding cost, whether the cost will be passed back to the ETF creator, or whether the cost will be passed to the end fund investor once they settle on T+2.

ETFs may have to “move more levers to get into a position to raise the cash financing to pay for the US security on T+1, he added.

Others agreed that the move to T+1 would trigger more activity in the securities lending market.

Matthew Chessum, director, securities finance at S&P Global Market Intelligence, said: “We are expecting to see an increase in volumes as a result of this change.

“Securities lending will be required to assist in providing liquidity to asset owners, who need to cover short positions that are expected to be generated by a mismatch in either settlement dates or [foreign exchange]

The full article is available here. This article was published at FT Markets.