T+1 War Rooms – North America: Russell rebalancing represents another test today

Experts agree the big tests for T+1 after a promising start are public holidays, market volatility and index rebalances, with a big one arriving today.

By Jon Watkins

Issues stemming from the move to T+1 have been few and far between, but experts do have an eye on the impacts of the Russell Index rebalancing today, according to Global Custodian’s T+1 War Rooms initiative in partnership with The ValueExchange and Citi. 

One prominent asset manager stated in the conversation that it still has a war room in place because “we’re now into an index rebalancing cycle, with Russell coming up it will be the highest volume of trading activity on the street – it is every single year – on 28 June.”. 

Another speaker on the call noted: “We did see in the earlier MSCI rebalance a drop off in affirmation rates on that day. So, we’re spending some time with some of the clients that had those challenges.” 

They continued: “It’s interesting though, a lot of those accounts are being used – or the funds are only used – for rebalance activity. So, they hadn’t necessarily had affirmation turned on at the custodian […]We saw some teething issues as it was the first time those accounts were being used as kind of working through the rebalances. I expect there’ll be similar challenges [with S&P and Russell Index rebalances]. That’s to be expected.” 

The sentiment was echoed on the securities lending side which is also putting pressure on asset servicers and participants. 

Custodians discussed that rebalancing often strains securities lending operations due to the high volume of trades and recalls.  

Despite that, Eusebio Sanchez, head of execution services, Asia clusters, securities services, Citi, noted: “Nothing really changes with how we manage passively managed tracking funds. We maintain some level of buffer for all index tracking names to account for intra-rebalancing reductions.”  

Proactive strategies, such as restricting and recalling deletion names ahead of settlement dates, were discussed to minimise the impact on trade settlements and lending activities. Emphasis was placed on visibility and pre-emptive actions to handle index changes smoothly. 

Sanchez added: “Heading into the rebalance date, we typically restrict and start recalling those deletion names ahead of settlement dates. Nothing really changed at all with our passively managed clients. Overall, the experience has been positive, and we consider this quite a success.”  

Another custodian raised a critical point about visibility into index changes and the proactive recalling of stocks, with this proactive approach having helped mitigate the impact on trade settlements. Citi confirmed this, noting their overall positive experience with the T+1 transition, despite some frustration over the industry’s late consensus on best practices.