Building a Transit Account Framework for an Agent Lender: Enhancing Trade Settlement and Operational Efficiency

In the high-volume, fast-moving environment of securities lending, operational timing is everything. Among the most common friction points is the misalignment between the return of loaned securities and the delivery of client-sold assets, which can cause settlement fails, regulatory exposure, and reputational risk. To address this, a leading Agent Lender partnered with Fairman Consulting to design and implement a transit account (also known as a “wash account”)—an elegant, strategic solution to synchronize the flows and reduce settlement risk.

This article explores how Fairman Consulting helped build this solution end-to-end, enabling the Agent Lender to operate more efficiently while maintaining full compliance and transparency.

What is a Transit (Wash) Account in Securities Lending?

A transit or wash account is a temporary holding mechanism—often set up within a custodian or settlement agent environment—that allows a loaned security to pass through an intermediary account before final settlement. In the context of Securities Lending, it usually allows timing mismatch buffering called substitution between borrower returning a security and the client’s sale instruction; recall management by reducing the risk of fails due to borrower delays in returning securities and inventory management by streamlining internal positioning without disrupting end-client books.

Transit accounts act as neutral buffers, preventing hard fails while still tracking ownership, timing, and compliance.

The Problem: Operational Bottlenecks in Trade Settlement

Before the implementation of the transit account, the Agent Lender faced:

• Frequent settlement fails when borrowers returned securities after the client’s sale delivery instruction (CSDR penalty or claims).

• Manual repositioning efforts across books to align custody and lending platforms.

• Increased buy-in risk, especially under regulations like CSDR in Europe.

• Internal resource strain during peak periods (e.g., quarter-end, dividend season).

• Difficulty in establishing a clear audit trail when timing mismatches led to trade breaks.

These issues also led to negative client experience, especially when fails impacted trade confirmations or asset servicing in the Securities Lending context in which most of competitors have a transit account.

Fairman Consulting Solution: Designing a Transit Account Architecture

Fairman Consulting applied an end-to-end process definition and validation (including in the case of a corporate actions events) with all the key stakeholders while ensuring with both the Legal and the Compliance departments the solution architecture (i.e.: for which assets and for which markets). Once done, Fairman has also validated the final approach with the Global Sponsor to start designing and implementing the wash account framework.

1. Process Mapping and Pain Point Isolation

Fairman has conducted detailed workflow analysis across loan lifecycle, settlement instructions, custody interface, and recall timelines. This work was done to map data flows and handoffs between loan desks, middle office, and custodians while quantifying cost of settlement fails (buy-ins, penalties, manual resolution) over a 12-month lookback.

2. Transit Account Framework Design

Once, end-to-end workflow definition was completed, Fairman proposed a multi-layered architecture: 

1. Creation of dedicated Transit Account opened within existing custody structure (same beneficial owner, different sub-account) with the correct account details (name; account type; ownership etc.…)

2. Automated Instruction Linkage for which all instructions (internal and street instructions) settle at the same time to avoid long position in the transit account.

3. Automated Loan Return Routing for which all borrower returns automatically booked into the transit account for system to re-routes the security either to the end-client’s custody account (if sale not yet settled) or directly into the market settlement instruction (if sale is pending or live).

4. Rules-Based Movement Logic built into the middleware (or via SWIFT MT54x messages), triggered by status of trade in the settlement system (for exception management workflow in some specific market)

5. Real-Time Inventory Visibility tracked with T+0 reporting dashboard flagged to operations and front office automatically.

3. Control, Oversight, and Compliance Safeguards

Given the sensitivity of transit accounts (especially with regulatory scrutiny on beneficial ownership and asset re-use), Fairman implemented strict intraday usage windows and exception workflow management for specific markets to ensure Transit account positions is flat by end of day. This process protocol was validated following a legal assessment provided both internally and externally for Target Operating Model Definition and Validation with all key stakeholders such as Custodian, Agent Lender, and client agreements updated to reflect new flow.

Benefits Realized

Within six months of deployment, the Agent Lender observed measurable improvements across several dimensions thanks to the integration of multiples brokers and clients into the new Transit Account and the Collateral Buckets (refers to Fairman article on Collateral Bucketing Implementation):

1.⁠ ⁠Significant Reduction in Settlement Fails

• 50% drop in fails due to borrower-return/client-sale mismatches.

• Near elimination of manual trade break investigations tied to recalls.

2.⁠ ⁠Operational Efficiency

• 50% reduction in touchpoints across operations teams during peak volume periods.

• Loan desk focus shifted from reactive firefighting to proactive client servicing.

3.⁠ ⁠Regulatory Compliance

• Improved STP (Straight-Through Processing) enabled better alignment with CSDR, SFTR, and internal audit requirements.

4.⁠ ⁠Client Confidence and Retention

• Transparent handling of timing mismatches improved trust with beneficial owners.

• Transit account disclosures included in monthly reporting, increasing transparency.

Lessons Learned

The engagement offered several broader takeaways such as how system readiness is crucial between custodian, front-to-back platforms, brokers, and middleware to align on message formats and real-time data flows. 

Besides, governance is non-negotiable since a misused or poorly tracked transit account creates reputational and regulatory risk. Indeed, all key stakeholders must be onboarded from the start for this strategic new architecture to be clearly defined, mapped and implemented.

Finally, although transit account is invisible to clients in practice, client communication is essential to explain clearly this new structure in legal and operational terms as client willingness to integrate this new structure is key.

Conclusion

Transit accounts, when designed and governed effectively, offer a powerful mechanism to bridge timing gaps in Securities Lending. With the support of a Fairman Consulting expertise, this Agent Lender transformed a long-standing operational pain point into a scalable, automated, and compliant infrastructure—reducing risk, improving performance, and reinforcing client trust.

As the industry continues to evolve toward T+1 settlement and stricter collateral transparency, solutions like transit accounts will become even more vital to protecting liquidity and ensuring flawless execution.