Equilend sees critical role for DLT for T+1 securities lending – Ledger Insights

This February, the Securities and Exchange Commission (SEC) confirmed that May 2024 is the deadline to shorten settlement times to T+1, with securities lending being one of the most affected sectors. EquiLend, the securities lending provider that processes $2.8 trillion in transactions daily, is developing a distributed ledger solution, 1Source, that addresses the core of the challenge. It was started before the SEC deadline was set, so its main goal is to eliminate settlements.

The impact of T+1 on securities lending

The difficulty with the T+1 transition is when someone sells a security that was lent out. The broker has to use shares from a different client (reallocate it) or recover the value from the borrower. If the values ​​are not returned in time, this could result in further business failures.

Equilend’s Gary Klahr noted that the concern at a recent conference was “How are we going to get the information to remember fast enough?” He thinks he has the answer: DLT. If the data is in a shared ledger, the parties simply need to verify the ledger.

“I think DLT is a must for T+1 and there is no obvious way to go to T+0 (without DLT), which is the ultimate goal,” Klahr said.

These concerns exist despite the fact that the SEC deadline is less than a year away. However, the 1Source DLT solution has a scheduled release date of Q3 2024, which is after the T+1 transition.

One can only imagine the pressure to move up the target date. On the other hand, it is not uncommon for regulatory compliance dates to be delayed.

How to Delete Securities Loan Reconciliations

The original goal of the DLT platform was to eliminate reconciliations. EquiLend already has solutions that guarantee the coincidence of the initial securities lending contract between the parties. Problems arise with later changes which are invariably done manually by each side and therefore often disagree.

For example, rate changes often do not match. Smart contracts will allow one party to propose a fee change and the other to accept it with the result stored on the permissioned 1Source blockchain.

A second key area being addressed is settlement instructions that will need to match at all times. And the third aspect is withdrawals, returns and reallocations that will be based on shared data.

A working group of borrowers and lenders have assigned staff to the project and decide priorities. July marks the first major milestone in which five companies will pilot contract initiation on 1Source. Fee changes will be next, followed by multiple iterations with additional functionality.

The Q3 2024 launch will be a Minimum Viable Product (MVP) focused on US cash securities against cash collateral. After that, the target is certain markets in EMEA and then Asia. Over time, the functionality will expand to include corporate actions and asset service events.

But Klahr stressed that if MVP is expanded, then the project will “lose focus on where we’re going.”

An interoperability roadmap

The first stage of 1Source positions itself as a data exchange DLT, versus the more transaction-oriented value DLT. Data is essential. “Our goal is to interoperate with other DLTs because that’s really how customers are going to get what they want out of the product,” Klahr said.

EquiLend selected Digital Asset as the technology provider after considering four other providers. One of the draws was the recently released Canton ledger that enables interoperability with other DAML smart contract networks involving the likes of BNP Paribas, Deutsche Börse, and Goldman Sachs.

DLT repo and collateral products already exist on the market. What EquiLend will release next year is just the first phase with more features to come.

“Equilend won’t need to build distributed ledgers for other products,” Klahr said. “EquiLend will have interoperability to connect to other DLT platforms.” It has already had high-level talks with other networks.

Ultimately, the 1Source project is all about future proofing.

“I have called 1Source the art of the possible. This is a pivotal project,” Klahr said. “We know that the distributed ledger is the future.”

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