Fireside Friday with… Citi’s Bill Mascaro

Bill Mascaro, global securities financing trading head for Citi, discusses navigating the challenges of T+1, how some of the concerns prior to the transition didn’t come to the fore and how upcoming market events may impact the sector under the newly shortened settlement cycle.

By Jonathan Watkins

Could you talk us through what’s been happening from your side, what you’re seeing in the securities lending market? Some of the talk prior to T+1 was around concerns that people might exit their lending programmes over this period – is that something you’ve seen at all?

We certainly have not seen exits. In leading up to T+1, we did quite a bit of work to ensure that all the possible remediation steps were in place. Some of those included, to the extent possible, getting pre-notification of sales but also something as simple and straightforward as being listed as an interested party on Swift sales notifications that might be passed along. If none of that was possible, that’s where we and many of the other lending agents started to introduce more conservative inventory management than we otherwise would have done.

The first test of that was really the MSCI rebalance that took place right at the end of the first week of trading. Just as a practical measure, across our book, we restricted all of the deletion names within the known index trackers so that we got ahead of the expected forced sale activity. And I think that’s going to be a feature of the market moving forward.

We already had experience in that space in some markets in Asia like Korea and Taiwan but took a different approach to the way that we managed some of that inventory historically in the US, and now there’s a change of opinion. For example, we’ve got a Russell rebalance coming up and that tends to be a market disruptive event, so we’re going to look to effectively do the same thing.

I don’t think there’s any perfect solution in this space, but it has been critical to stay engaged with clients to better understand their specific trading strategies. Some of the friction stems from sub-advised or externally managed accounts. In the case of externally managed accounts in pensions for example, the clients we interact with may not have the full picture on what the underlying strategy is. They may not also be at liberty to share it with as much clarity compared to where we have direct interactions with managers themselves.

In short, there’s been a lot of steps taken and this is not a one size fits all approach.

From a lending perspective on more of an operational side, one thing we’re not seeing a huge amount of data on is the recalls. And again, there was a lot of concern about people not being able to meet those recall deadlines. Have you got any sight of whether or not they’re being met?

So far, we’ve seen good behavior in this space. There has been no consensus yet on the definition of ‘end of day’ per the terms of the MSLA, unless a specific cut-off has been introduced. That is a feature of some MSLAs broadly that are in place across the industry. But if it’s just the definition of ‘end of day’, I think there is a grey area where the borrower will view it as 03:00 p.m. which was historically in place. And the lending community is either adhering to something that aligns to what the RMA published as the best practice of 7:00pm ET or in the most extreme example, using 11:59 pm ET.

While the debate continues on what T should be, we have seen a broad-based willingness across the industry to accept and acknowledge recalls regardless of its definition. For practical considerations, this is of paramount importance, because then at least the recall is acknowledged and it’s in the respective trading systems. People are working to cover that in the event that they need to and there’s an acceptance that this needs to come back within that compressed settlement cycle.

While it’s gone remarkably well so far, I think the piece that we don’t really have a clear picture on is if things are slightly delayed, is there going to be an uptick in overdrafts and resultant claims?

We went into this transition expecting that to be the case. We don’t have any clear-cut metrics on what that is going to look like yet, because we realistically only had three trading days or so in May, and typically we get those a month past. So, I think in early July we’ll probably have a better feel for what that looks like.

On our end, we have not seen a material uptick in delays. We will always have some settlements that just take a little bit longer to cover but there have not been any contentious buy-in situations.

So do you think there’s going to be any kind of compelling events coming up which could really stress the lending market.

In the index rebalance space, the Russell rebalance is a big event so we’re gearing up to be as prepared for that as we can.

Generally, in fixed income, the corporate bond space has been less liquid, causing concern. The equity markets tend to be much more accessible and so far, we’ve seen everything go as well as we could have hoped.

Personally, I think we will need to see what this means in the longer term for the corporate bond market. And I think if there’s a spot where we might see an incremental uptick in overdrafts, it’s likely in that space.