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Settlement Disciplines

System Updates for settlement Information

Introduction

Many maintenance procedures, such as collateral or loan instruction release, are dependent on timely settlement status updates. Those status updates are in turn dependant on the turnaround of custodial networks, whose response times may vary by location or service provider.

To ensure the smooth operation of markets, it is reasonable expect that both counterparts will have updated instructions and status within an hour of events. I.e. when settlement occurs, both parties’ systems should reflect that status in an hour or less.
(IBP-121)

Opposing settlement Information

A counterparty should not directly contact the custodial network of another counterparty. However, in more complex cases, it may be necessary to bring all parties together to resolve any disputes/unreconciled positions. This can only be done with both counterparties agreement. In the event Counterparty A sees a trade unmatched/failing but Counterparty B sees it as matched/settled, then Counterparty B is responsible for providing the market reference for that matched/settled trade typically sourced from their custodian network to Counterparty A. (IBP-122)

Notifying a Counterparty Regarding Amended Status/ Valuations

There is no requirement to update trading the market that has been received from a custodian. Where a counterparty cancels a loan or return, vendor platforms should be used to advise the counterparty. Where it is not possible to use a vendor platform, there is a requirement to notify the counterparty directly that a transaction has been cancelled. Pre-matching and fails reporting between counterparties is recommended. Timing, frequency and responsibilities are to be agreed on a bilateral basis. (IBP-123)

Best Effort Time Frames for Settlement

Transactions

Although best practice may recommend guide cut-off times, it is recognised that counterparts to a loan will want to retain a flexible approach. However, should notifications, instructions and settlement occur outside the recommended guide-times, parties should acknowledge that settlement will be on a best efforts basis.

It should also be noted that, to avoid any back-dating of activity, instructions should be processed/instructed on the date they are negotiated.

The guide-times for activity are therefore:
- New Loans - Should be instructed on trade date no later that 1 hour prior to the relevant market cut-off. Collateralisation of new loans will occur at different times relative to the trade and settlement. See the section "Process for Collateral" in this handbook for best practice timing.
- Returns - Notification of a loan return should be processed electronically and where possible via an electronic platform no later than 1 hour prior to the relevant market cut-off.

(IBP-124)

Best Effort Time Frames for Settlement

Back Dated Activity

Back dated trades may only be processed if permitted by each counterparty's internal policies and are agreed bilaterally.

Due to additional approval requirements for back dated trades, and potential for manual intervention, notification times should be agreed bilaterally between parties. (IBP-308)

Partial Deliveries

Introduction

In 2019 the ISLA CSDR working group published ‘CSDR: Settlement Discipline Impact to Securities Lending (Feb 2019), which investigated areas of improvement required to increase settlement efficiency. This initial paper was followed by second paper of aspirational recommendations, one of which was to investigate the implementation of a best practice that required auto-partial be the default mechanism. This proposal noted public statements by other trade associations and therefore a desire to be as aligned as possible with those statements.

However, the Securities Lending market operates under two distinct models which require a more nuanced approach than a simple default. The following paragraphs therefore split best practice depending on operating model.

Useful links include:
CSDR: Settlement Discipline Impact to Securities Lending - Phase 2: Recommendations, Guidance & Future Practices
Insights on Partial Settlement (Oct 2017)
AFME Recommendations for Partial Settlement (IBP-125)

Partial Deliveries

Between Principal Borrower/Lenders

Where both parties to a transaction act as principal, both parties should default their instruction to allow automatic partial settlement.

Parties may bilaterally agree to a time or quantity limitation to provide reasonable and adequate opportunity to maintain collateral.
(IBP-306)

Partial Deliveries

Loans with Agent Lenders

Where one party to a loan is an agent lender that operates a many-to-one settlement process:
- New loan - The agent will only instruct if sufficient assets area available to lend. If assets are sold by the beneficial owner between loan execution and settlement, the agent may either reallocate to another fund or cancel the loan,
- Partial or full close of loan - If a borrower, after instructing a reduction or full close-out, is no longer able to fulfil that delivery, the closing instruction may be cancelled until asset are available or parties bilateral agree to partial settlement.
- Loan recall - If an agent recalls a loan, due to beneficial owner instruction, parties should bilaterally agree to partial settlement which may include autopartial limited by time or quantity as required. (IBP-307)

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