(Added June 21, 2017) Are there any major outstanding legal changes with respect to a T+2 transition?
There are outstanding rules to be finalized in Canada, including IIROC rules (awaiting CSA approval) and updates to National Instrument 81-102 Investment Funds
. There is no question that these will proceed and so have no impact on implementation. In the U.S., the Investment Company Institute is pursuing rule changes from the FDIC and OCC, where rules permit settlement on T+3 or less, to avoid potential mismatches between the settlement/redemption period of mutual funds and other investment companies and the securities that underlie them.
(Added June 21, 2017) Has there been progress with respect to the issue of corporate actions with a September 5 ex date?
CDS, DTCC, and the CCMA have discussed the subject and DTCC volunteered to document the issue of ex-date timing, using different scenarios, during the transition period. The exchanges are analyzing how best to avoid a September 5 ex-date, which could lead to different calculations for the double settlement date on September 7 (this could include advising issuers not to declare an ex date on the relevant day or some form of mandatory prohibition depending on tools/rules available to the exchanges). Despite efforts to avoid the issue, industry members are being advised to be prepared in the event of a September 5 ex date, which may require trade-for-trade settlement, or forms of manual intervention. The CCMA and CDS will publish more information as it become available.
(Added June 21, 2017) Has there been any additional information on derivatives from the U.S.?
The U.S. is discussing the issue of OTC equity derivatives that are or have been entered into before September 5, 2017. As at the date of this FAQ, International Swaps and Derivatives Association (ISDA) members were divided on whether these should remain on a T+3 cycle, which is the basis on which they were entered into, and could be manually handled, or be moved to settle on T+2. The CCMA will provide additional information once known.
(Added June 21, 2017) Are there any outstanding T+2 issues regarding securities lending?
The U.S. T+2 team has identified that some firms’ tailoring of the industry’s Master Securities Lending Agreement mentions T+3 and possibly also a standard settlement cycle. A draft form Amendment to Master Securities Lending Agreement has been prepared, which replaces a reference to the third business day following notice of a loan termination with the termination date being no later than the standard settlement date of the loaned securities. The UST2 Secretariat now has published a new FAQ
on the subject.
(Added June 21, 2017) Is there any difference between the CDS and the CCMA “T+2 Project Acknowledgement Form”?
There is no difference in content. The only variation is in the signature section, where the CDS version specifies that the signatory should be a Schedule B authorized signer, as defined in CDS rules. The CCMA expects that the CCMA T+2 Project Acknowledgement Form
will be signed by authorized signers of the 37 key infrastructure, service providers, custodians and intermediaries
that received the form. Both CDS and the CCMA have received some signed forms already.
(Added April 27, 2017) Will investment funds be moving to T+2 with the debt and equities currently settling on a T+3 basis?
Yes. Service providers representing over half the active T+3 funds on the Fundserv network have confirmed they are not aware of any funds not making the move to T+2, other than some funds not domiciled in Canada (or U.S.) or some of the alternative funds not currently settling on a T+3 basis that are out of scope. Results
of Fundserv’s February 2017 survey of all members corroborated the findings that the overwhelming number of funds processed through Fundserv will move to T+2. Industry participants may contact managers of the specific funds they hold long-term for information; alternatively, each manufacturer will have to update their fund profiles for the funds that will be transitioning from a T+3 to a T+2 settlement period by way of Fund Setup (FD) or Product Update (MD) files on or prior to August 1, 2017. For general details, Fundserv members may e-mail T2Feedback@Fundserv.com
The most recent and important development is the Canadian Securities Administrators release on April 27 2017 of a Notice and Request for Comment: Adoption of a T+2 Settlement Cycle for Conventional Mutual Funds
(NI 81-102) – which states that with the Proposed Amendments, the CSA intends “to codify the expectation that conventional mutual funds will settle on T+2 to remove any possibility of confusion.”
(Added April 27, 2017) When are Canadian regulatory changes expected to be published?
CSA rule changes have just been published
and we expect final T+2-related rule amendments further to IIROC Rules Notice 16-0177 to be released in the very near future.
(Added April 27, 2017) Is the CCMA expecting any amendments that will impact the industry’s T+2 builds and testing to date?
No. We are reviewing the CSA documents released April 27, 2017 in more detail but are not anticipating negative impacts from the CSA’s and the expected IIROC rule amendments.
(Added April 27, 2017) What transitional relief has the industry sought from the CSA and IIROC? Why is relief needed?
With implementation of T+2 scheduled for mid-third-quarter 2017, certain industry parties could be affected by short-term transitional issues that would result in additional work for clients and regulated entities, as well as unnecessary cost for registrants. The CCMA’s letter
responding to the CSA’s request for comments
asked that firms be permitted to implement trade-matching exception reporting for effect the first full quarter that all trades must be matched by noon on T+1, that is, the fourth quarter of 2017, with the third quarter being reported as if the current rule applied through September 30, not September 5. The CCMA’s letter
to IIROC asked that those IIROC dealers, which already are permitted to suppress institutional trade confirmations due to these firms’ high matching rates, be permitted to continue to suppress confirms for the third and fourth calendar quarters of 2017 even should their trades matched drop temporarily below the 90% threshold due to transition.
(Added April 27, 2017) Will the industry be granted transitional relief?
The CSA has granted relief
with respect to National Instrument 24-101 and the CCMA is reviewing the specific details in the final rule
released on April 27, 2017. The CSA chairs must review and sign off on CSA Committee recommendations for IIROC rule changes and relief. Final information is expected shortly.
(Added April 27, 2017) Other than getting the final IIROC rule and ideally notice of transition relief, and testing readiness, are there any other outstanding issues before T+2 implementation?
Remaining issues are few and not expected to be roadblocks to implementation: they can be found on the Issues Lists of the CCMA’s Operations Working Group
and Legal and Regulatory Working Group
. See also ‘How will the double settlement date of September 7 impact corporate actions?’ below.
(Added April 27, 2017) How will the double settlement date of September 7 impact corporate actions?
The ex-date of corporate actions will change to one day before the record date instead of the current two days. Investors must still purchase securities before the ex-date in order to be entitled to the corporate action – whether a dividend or income payment or compensation in securities. While exchanges have identified the required rule amendments, an additional transition workaround is required to avoid a September 5 ex-date. The transition workaround will reduce the potential for an influx of settlement claims having to be completed during the transition. A mutually satisfactory solution is being discussed by DTCC, CDS, and the Canadian and U.S. exchanges and will be communicated to the industry at large. It is expected that the solution will not require systems changes.
(Added April 27, 2017) Is there anything to learn from infrastructure and other industry participants that have already started testing?
The key finding is that participants should make sure that they are set up and connectivity-tested before starting the T+2 testing. As well, DTC/NSCC, while receiving a tremendous number of inquiries that are T+2-related, identified that a significant number of enquiries were not specific to T+2, but rather to people trying to understand basic clearing and settlement concepts or regular DTC/NSCC processing details unchanged for T+2. In order to ensure that the time spent by DTC/NSCC support teams relates to “real” T+2 testing issues, DTC/NSCC asked participant testers to work closely with their back-office SMEs to determine if questions are ones that can be answered internally before engaging the DTC/NSCC T+2 teams. Other than these issues, hurdles to date have reportedly been minor and solved.
(Added April 27, 2017) What is the best form and timing of customer T+2 communications for institutional clients? Retail ones?
The content, delivery channel and timing for effective T+2 communications with clients will depend on each firm’s business model and customer profile. Firms should recognize that their clients have less time than ever to keep up with what they need to know. One institutional firm has decided to contact a representative of each firm directly since written client notification with quarterly report packages did not lead to preparations for behavioural changes to manage cash for payment a day earlier. A firm with retail clients likely also will determine that a broad approach is needed and use online account prompts/messages, text on statements (both with ways to obtain more information online and through advisors or via a call centre), in-branch (if applicable), signs/flyers and training material prepared for advisors (who may best know which clients are likely to be affected), the call centre and website. To the extent that clients only get quarterly packages/statements, firms will have to identify alternative means of reaching clients.
(Added April 27, 2017) Are there examples of retail communications?
The UST2 website provides an example of a one-pager on how to explain the impact of T+2 on investors at http://www.ust2.com/news/explaining-t2/
and early CCMA FAQs provide additional information that may be useful to communications To the extent that firms want to further simplify and briefly describe clearing and settlement, the following wording may be used as the basis for communications to Canadian investors:
IMPORTANT CHANGES WHEN YOU BUY OR SELL SECURITIES
On and after September 5, 2017, when you buy stocks, bonds, or mutual funds, you will have to pay for the securities a day earlier than now. Similarly, if you sell these securities, you will receive payment a day sooner.
At present, the actual exchange of most securities for cash takes place three business days after you trade due to the many steps in the process. Canada and the U.S. will shorten this period from the current three days after trade date to two days, just as European and other countries already have done. This will reduce risks and improve efficiency – good news for everyone.
If you have money, or securities you want to sell, in your account on the date you buy securities, a two-day timetable to pay for the securities will not be a problem. But if you still deliver a cheque for payment, or must bring in a securities certificate to sell to pay for the purchase, you will likely need to make new arrangements. If you have questions about how you may be affected, talk to your advisor, call 1-800-xxx-xxxx or visit <www.<yourwebsite’sname>.com/link>.
(Added February 22, 2017) If options already settle on T+1, why does the CDCC test plan include options?
Options already settle for cash on T+1, however, the underlying interest (equity security) is delivered currently on T+3; CDCC’s test will allow participants to fully test the end-to-end option/underlying equity security transaction.
(Added February 22, 2017) Are there any issues with respect to securities lending in a T+2 environment as a number of parties have identified that there may be a problem in this area?
Securities on loan need to be recalled if needed for settlement purposes and each firm should identify if any changes are needed to allow for the quicker return of securities on loan. Areas to consider include: whether lending agreements need to be amended (it appears no standard industry agreements do, but check that all agreements in force are standard ones), what internal processes/procedures/systems may need modification, and what steps utilities/vendors can take to accommodate any foreseeable issues. Consider testing securities recall during the testing period and contact any parties in the securities-lending process that have on more than the odd occasion not been able to return securities as contracted to see what their plans are to ensure timeliness in a shorter settlement environment.
(Added February 22, 2017) What is being done and what should a firm do to prepare for the challenges associated with holiday processing when a holiday in one country that is not in another country shortens what should be a T+2 settlement to effectively T+1? When there are differences between holidays within Canada?
Using the example of Canada Day, a T+2 trade in a security on a U.S. exchange on June 30th
will settle on July 2nd
. If no staffing adjustments are made, Canadian firms will not see the trade reported until T+2. This means that if there are problems with the transaction, there is no time to make corrections prior to settlement date.
Similarly, in the case of a province-specific holiday in a Canadian financial centre, there will be a day less to review and correct trade errors. A trade on the TSX on, say, June 23th, will settle on June 25th. A Montreal-based firm will contract the trade on the 23rd, but due to the Saint Jean-Baptiste holiday on the 24th, will not see the trade until the morning of the 25th – T+2 – and, if trades do not match and no alternative arrangements have been made, there may be no time to make corrections prior to settlement.
Also, at CDS, trades will be marked to market on the evening of T, meaning CDS participants will not have an opportunity to correct trades prior to the mark-to-market calculation.
Recognizing the holiday-related challenges, CDS and the exchanges have implemented an enhanced communication process to manage expected settlement dates during all holidays throughout the year. As well, CDS has said that, if trades reported incorrectly impact the collateral determined by the CDS risk management systems, CDS will work with individual firms (or the broader community) to mitigate any adverse impact on the participant(s) (for example, through the reversal of collateral calls for a single security, incorrect price or entire trade file) and communicate the correction process to those affected by the error.
Individual firms are encouraged to review staffing levels around mismatched holidays and generally to ensure enough staff are available to manage unmatched trades or collateral errors. Options include shift work, split work streams, additional automation, etc.
(Added February 22, 2017) Will there be an impact on T+2 implementation from the change in start date for Fundserv V.27 testing?
No. The change from March 1 to March 21, caused by the need to accommodate additional tax reporting requirements related to the Common Reporting Standard, will have no impact on Fundserv participant T+2 testing. In fact, the March 21 timeframe has historically been the start of that particular year’s version implementation testing.
(Added February 22, 2017) Will there be any T+2 impact on record and payable dates?
In Canada, the ex date on declared events such as dividends or other distributions will become one business day prior to record date instead of two business days prior. The exchange on which a security is listed provides the ex date to CDS, and CDS populates the date into its system. In the U.S., there will likewise be a one-day change.
(Added December 20, 2016) Will there be an impact on collateral management and, if so, what?
With respect to CDS’s risk systems, which calculate the collateral requirements on a daily basis, as settlement moves from T+3 to T+2 there will be a corresponding and seamless one-day advance from the evening of T+1 to the evening of T in the timing of novation – the replacement of transactions between counterparties to a trade with one to the central counterparty that guarantees settlement through assignment of collateral. Individual firms will be impacted differently, based on the number, value and buy/sell positions on any given day. CDS has completed an analysis of the overall impact, and firms should contact CDS directly to determine their individual impact.
(Added December 20, 2016) What differences are there between the Canadian and U.S. product lists of investments affected by T+2?
These lists are generally the same, however, there are some minor differences, for example, in the following areas:
- A small number of existing settlement cycle differences: The settlement cycle for Fed-eligible products is not expected to change, for example, as it is already less than T+2.
- Money market instruments: In the U.S. list, there are several money market instruments that are in scope for the move from T+3 to T+2 settlement. In Canada, money market instruments typically settle on a same-day or next-day (T+1) basis, and therefore are not expected to be affected.
- Derivatives: The Canadian list identifies derivatives that are expected to be changing to T+2 settlement; the American group working on the in-T+2-scope asset list suggested a review, which is ongoing, of over-the-counter (OTC) derivative products to determine the impact, if any, of the move to T+2.
- Country-specific products: g., ADRs and 144A-eligible securities are particular to the U.S.; Canadian-controlled private corporations (CCPCs) and Qualified Small Business Corporations (QSBCs) are specific to Canada.
- List wording: Canada has included currently T+3-settling private placements and alternative investments as ‘in scope’, whereas they may fall under general categories (e.g., equity or debt) in the U.S. list.
- Level of detail in the break-outs within a general category: The level of detail varies in, for example, the funds and bond categories, however, the products within the categories are expected to be the same, e.g., note types are broken out in more detail on the U.S. list, while mutual funds and ETFs are listed in more detail on the Canadian list.
- Notes: On the Canadian list, there are three types of notes identified – two are forms of structured notes (PRNs and PPNs) that are out of scope for T+2 because they are subject to the issuer’s involvement, rather than cleared and settled through CDS and exchange-traded notes (ETNs) are not identified as in scope (moving from T+3 or more to T+2) but rather the settlement cycle is determined by the any related prospectus. In the case of the U.S., a participant in the UST2 secretariat has advised that ETNs are included on the U.S. Asset List as moving to T+2, although not specifically listed. The UST2 has been asked to clarify under what currently listed asset category ETNs fall.
(Added December 20, 2016) When will we know what Canadian funds are moving to T+2?
Fund manufacturers using Fundserv will update the settlement cycle of their funds from T+3 to T+2, by August 1, 2017, with an effective date of September 5, 2017. Fundserv will be tracking changes and sending regular communications and updates to its members as required in a timely fashion. On the weekend of the implementation, Fundserv members can download either a Fundlist (xml) or abridged Fundlist (csv format) for a final check.
(Added December 20, 2016) While most T+2 changes will be invisible to clients, this is not the case when it comes to redeeming mutual funds where some may stay at a T+3 settlement cycle. As most will be on a T+2 cycle, what is an example of a fund that will not move from T+3 to T+2 and the reason?
With respect to funds that may not move to T+2 settlement, large fund manufacturers that operate global funds – with clients across multiple continents – and having to manage two- and three-day securities settlement cycles and fund settlement cycles at three and sometimes four days with only one subscription/redemption cycle per 24-hour-period must manage additional complexity. For this reason, pooled and mutual funds are considered as in-scope to change to a shorter T+2 settlement cycle if they invest in assets whose cycle is changing from T+3 to T+2.
(Added December 20, 2016) Is there any information about the impact T+2 may have on inter-listed stocks, particularly if a stock is listed on both the Toronto and New York Stock Exchanges?
The U.S. and Canadian markets both plan to implement T+2 on the same day (September 5, 2017
). Therefore, it is not anticipated that the Canadian and U.S. markets will be on different settlement cycles. The U.S. FAQs state that the T+2 Command Center, in conjunction with the U.S. Industry Steering Committee (ISC), plans to identify and track risks that would occur if the U.S. and Canadian markets were to be on two different settlement cycles. While work in the U.S. on this is scheduled to begin later in 2016, the CCMA had commissioned a study of Charles River Associates in 1999, which concluded when released that if the U.S. shortens its settlement cycle, so too must Canada at the same time, and neither before nor after.
(Added December 20, 2016) Are CDS-DTCC cross-border movements (“flips”) “in scope”, that is affected by conversion to T+2 settlement?
No, flips are out of scope in Canada and the U.S. since they are a post-settlement activity and so unaffected by T+2.
(Added December 20, 2016) What will be the effect of T+2 on the ‘create and redeem’ process for ETFs?
The Operations Committee of the Canadian Exchange-Traded Funds Association (CETFA) has considered this issue and determined that there are no known issues related to this process going into a T+2 environment. The ETF industry currently deals with some products that settle on T+2 with no issues. It is not expected that the greater volume in a shorter period will prove to be an issue, however, this should be verified during the test period.
(Added December 20, 2016) Will the CCMA be reviewing and updating best practices issued when the industry was looking to move to T+1?
This issue has been raised and will be reviewed to determine the need for this work.
(Added December 20, 2016) Will T+2 have an impact on retail investors?
Securities (IIROC) dealers believe that there will be no expected or only rare impacts on retail clients as clients have cash or securities that can be sold to finance a purchase or may have made arrangements to borrow on margin. The one exception, which would not be a problem for investors that can borrow on margin, would be in the case of physical certificates that clients may hold in their own name. The de-registration process may not be able to be accommodated in the shorter timeframe, in which case the investor will need to bring the certificates to the firm according to the firm’s specified timeframes.
In the case of mutual fund (MFDA) dealers, it may be that advisers will not place trades until a cheque is received unless a purchase is financed by the redemption of funds on the same settlement or a shorter cycle. While any decisions will be up to the individual firms or advisors, the fund community has been asked to review this question and provide a more detailed response.
(Added November 1, 2016) Do you have tips for transition that can be derived from European, Australian and New Zealand moves to T+2?
Communicate, communicate, communicate: From a New Zealand industry representative who was asked about what Canada could learn from the Australian/New Zealand transition to T+2 in March 2016 – what had surprised him about the implementation – was that despite having made what they considered to be good communications efforts, still some industry participants seem surprised to learn of T+2. There had ultimately been no major problems, however, even in Canada we hear of people who should but do not know about the change to T+2. No industry participant should assume all their counterparties, infrastructure or vendors know about T+2, and so the CCMA encourages all stakeholders to continue to communicate with counterparts.
Ask around in-house: Once a project gets going, it can be easy to forget that others may have knowledge that can help or may be critical. Don’t forget to ask people who know about corporate actions as the cost of getting these wrong can be large and affect corporate reputations. Check with lower-level or long-standing staff who may have quick excel macros or other “off-system” tools to help manage the day’s work to make sure nothing’s been missed. Remember Y2K – preparations for the biggest thing that wasn’t meant that many firms finally fixed little errors, especially ones that had been known about for a long time but that could be worked around and so hadn’t been addressed.
(Added November 1, 2016) Europe’s move to T+2 includes a settlement discipline regime as part of CSD-R while the U.S. does not plan to implement such a regime. How effective do you think a move to T+2 will be without any failed trade penalties and buy-in obligations? Are sanctions/penalties needed in order to drive behavioural change?
While we cannot comment on the U.S. situation, NI 24-101 was implemented successfully without failed-trade penalties or different buy-in rules. An IIROC study cited in the August 18, 2016 CSA request for comments identified a general downward trend in accumulated fail value as a percentage of the aggregate value of trades processed in CDS’s Continuous Net Settlement (CNS) System following implementation of NI 24-101, possibly attributable to a general decline in the length of time a "failed" trade is outstanding and/or in the rate of trade failures. The CSA request for comments includes data from quarterly reports that show a doubling in the percentage of trade volume entered by midnight on T and approaching a quadrupling in matching by that time as well as a 16% increase in the percentage of trades entered by noon on T+1, with almost a 50% increase in matching by T+1 noon between 2007 and the end of 2015.
(Added November 1, 2016) Do you think any amendments to the matching targets of NI 24-101 are necessary to achieve T+2?
The Canadian Securities Administrators (CSA) have proposed, and CCMA supports, an amendment to NI 24-101 to align the matching target of trades initiated from outside North America to that already required for North-American trades (T+1 at noon).
(Added November 1, 2016) Do you think same-day affirmation (SDA) is a key enabler/requirement for a move to T+2?
Same-day affirmation – essentially achieving matched trades on trade date through either a matching utility or both trade data entry and matching by a counterparty – is not a requirement, but firms able to achieve same-day affirmation are already well positioned to meet T+2.
Why are we going to T+2 settlement when block-chain technology will enable same-day if not close to real-time settlement in the future?
Block-chain technology presents opportunities and will continue to draw considerable attention. With securities regulatory and central bank concerns – and worries of investors – with respect to major losses already experienced due to cyber-security attacks against firms and infrastructure in the financial industry, the broad adoption of block-chain technology may realistically take some time for review. Moving to T+2 will bring reasonable improvements in the meantime.
(Added November 1, 2016) How likely do you think a subsequent move to T+1 is? In what timeframe?
There are currently no real discussions about a move to T+1 of which we are aware. There are additional reductions in credit risk possible from a move to T+1, however, a study commissioned in the U.S. assessed that the costs of moving to T+1 would be materially greater. It would require firms still using overnight batch processing to make an investment in technology that would allow intraday multiple batches or real-time processing.
(Added November 1, 2016) Is there any attention being paid to the inconsistent settlement cycles among countries?
Differences in practices between countries do create “friction” – operational problems and costs – in the clearing and settlement process, and so this issue will continue to be discussed. There will be a balance between the benefits and costs of implementing greater consistency.
(Added November 1, 2016) When will we know if the September 5, 2017 date will go ahead?``
At present, there is every expectation that September 5, 2017 will be the T+2 implementation date. For formality’s sake, a “go” decision will be confirmed in mid-to-late July/early August. The Canadian and U.S. clearing and settlement infrastructure are world-class, and the CDS and DTCC participant bases respectively are confident T+2 will go ahead as it has in Europe, Australia and New Zealand.
(Added November 1, 2016) Why is the CDS testing cycle shorter than Fundserv’s?
Fundserv has a standard industry technology update cycle, with implementation of each annual version update taking place usually in mid-June of every year. Fundserv and its members have integrated the annual upgrade with T+2 testing, so a good part of the testing schedule is anticipated to be attributable to Version 27 – this year’s system update package.
(Added November 1, 2016) Why are there many more testing scenarios provided as part of the U.S. test plan than for CDS and Fundserv?
The more concentrated nature of the Canadian capital marketplace, combined with the progress fostered by the innovative trade-match timeline-tightening approach of National Instrument (NI) 24-101, means that CDS and Fundserv participants do not expect to need the same testing format as our southern neighbours. The CSA’s August 18, 2016 request for comments shows the Canadian industry’s increase to a high average level of trade entry and matching by noon on T+1 today, even with non-North-American trades having an extra day for agreement on trade details.
|Debt and Equity Institutional Trade Match Rates by Volume (Source: CDS)
|Transactions for Quarter Ending
||Trades Entered by Midnight on T
||Trades Matched by Midnight on T
||Trades Entered by Noon on T+1
||Trades Matched by Noon T+1
|First report ‘07
(Added Sept. 3, 2016) What is(are?) the implementation date(s?) of T+2 settlement?
The implementation date actually has two parts:
- September 5, 2017 is the first trade date that trades are targeted for T+2 settlement. Firms should make sure clients making these trades know they have a day less to finance settlement if a funding source has not already been defined clearly.
- September 7, 2017 is the last day trades are set to settle on a T+3 basis and the first day that new T+2 trades will settle – this will mean firms must use the intervening day to correct all/as many errors as possible as the number of transactions settling will be more or less double the typical daily settlement numbers and value.
(Added Sept. 3, 2016) What are the highest-impact issues remaining and the status of each?
Testing (OWG-001): The process of industry-wide testing is very complex, involving in-firm, firm-to-infrastructure/service providers and cross-industry – including cross-border— testing. Key outstanding questions are:
- Will testing be mandatory, voluntary or a blend of both?
- Is there a need for – and, if so, what is the nature of – certification/attestation by individual participants or key infrastructure?
Addressing this issue is a high priority in Canada and the U.S.
Holiday Processing (OWG-023): System and operational processes may need to change to accommodate different statutory holidays in Canada and with the U.S. With shorter settlement, a trade on T (with T+1 being a holiday) will not be reviewed for errors until T+2, leaving little or no time to make corrections that were possible on T+2 in a T+3 settlement environment. Key outstanding issues are:
- Developing back-up operational plans, e.g., arrangements to have staff in on all holidays that differ among provinces, or between Canada and the U.S., to ensure trades are corrected on a timely basis
- Verifying trade and settlement dates before processing and/or
- Managing trade corrections intraday.
While the above topic includes firm-specific issues, a joint technology solution could be used to address the problem but no decisions have been made yet on an industry-wide approach.
(Added Sept. 3, 2016) What do I need to know to use the CCMA Issue Logs?
The Issue Lists were put together by the subject-matter expert committees, and reviewed by the T+2 Steering Committee at each of its meetings. At this stage, it is very rare new issues are added, and issues are being identified, one by one, as Closed.
What is an ‘issue’? To be an ‘issue’ included on the issue list, it must have the possibility of impeding a material portion of Canadian firms’ migration to T+2 on the same day as the U.S. or cause regular problems for a meaningful number of firms’ ability to settle on T+2. The quantum of “material” or “meaningful” will be being discussed by Canadian and American T+2 committees in the next two months or so.
What is a ‘closed’ issue?
Issues can be opened or closed if they are identified by committees and their inclusion on or elimination from the list has been approved by the T+2 Steering Committee. The T2SC will determine issues are ‘closed’ where they:
- Are being satisfactorily managed under another party, such as Fundserv or CDS. In this case, the infrastructure will report on the status of the project at CCMA working group and steering committee meetings.
- Are a known area of existing inefficiency even under T+3 that can be addressed in other ways and are not going to cause a substantial number of failed settlements. These items can be raised in responses to the CSA’s consultation paper.
- g., the continued (although reduced) effect of physical securities – Canada’s financial industry has made significant progress towards dematerializing securities and speeding up the processing of those that are not yet in book-based (electronic) form. Individual firms, however, may need to revise their policies regarding the acceptance and handling of physical securities, but there are known solutions and the choice of approaches is left to each firm based on its business model and client base.
- Affect only a small number of firms or a larger group but will not materially impede switching to T+2 for the overwhelming majority of firms. In this case, it is expected that these parties will work with their vendors and/or each other to address concerns.
(Added Sept. 3, 2016) Are over-the-counter (OTC) transactions included in the transition to T+2 or is it just exchange trades?
All securities that currently settle customarily on a T+3 basis will transition to the new T+2 standard. This includes traded securities, whether acquired through an exchange or on an OTC basis, and non-traded securities, for example, funds that are bought and redeemed. As currently, on occasion, trades can be agreed on between counterparties with a different settlement period, and some funds, for example, may be set up with a longer-than-standard settlement period.
(Added Sept. 3, 2016) What are the effects on each industry segment of the move to T+2?
While the steps to address T+2 vary among industry segments and within segments, the effects are common: there will be consequences (fails) and costs (interest, operational) if there are delays and errors meaning T+2 is not achieved for assets currently settling on a standard T+3 basis. The effects of making systems and procedural changes, on the other hand, will be improving efficiency, speed and certainty – and reducing risk – of settlement, improving client service.
(Added Sept. 3, 2016) What are the steps each industry segment must take to address T+2?
A considerable amount of work has been done by the infrastructure joining the different parties to a trade and by industry members working together through the Canadian Capital Markets Association, so relatively little may be required of individual firms. The common steps most firms in the different segments are taking include:
- Mapping all current downstream and upstream processes to find steps to eliminate or accelerate
- Reviewing any related impacts of a T+3 to T+2 move on reports, files, databases, audit and regulatory compliance
- Making any required changes to:
- Internal systems (e.g., trading, portfolio valuation, cash management) and procedures
- Reports, contracts, and other documentation
- Confirming service providers and suppliers are T+2-aware, and will be tested and ready
- Preparing and delivering internal communication and building awareness of process changes, whether directly impacted or not
- Considering and communicating to clients regarding how they may be affected and what will change.
Below are high-level implications that firms in each segment would typically consider:
- Investment Managers/Buy Side:
As this segment is the largest by number of firms, and firms in the segment vary considerably in size and are widely dispersed across the country, the CCMA prepared a special-purpose investment manager checklist, outlining the possible steps to prepare for T+2 (mutual fund managers should also see ‘Infrastructure’ – Fundserv – below).
- Dealers/the Sell Side may have to:
Speed up data transfer/communication, especially allocations from international clients, trade reconciliation and error correction
- Determine a policy (if not already in existence) regarding the acceptance of physical securities
- Communicate with/prepare to make changes in system and procedures (notably timelines), with The Canadian Depository for Securities (or back-office provider) and service bureaus/providers (e.g., Broadridge, IBM, NBCN, intermediaries) as well as vendors
- Make system changes or bring on additional shifts for processing in cases when Canadian and U.S. (or inter-provincial) holidays differ
- Test as required internally and with infrastructure
- Communicate and work with clients to ensure they are prepared for the changes.
Canada’s global custodians are largely prepared for T+2 in light of their existing need to manage all manner of clearing and settlement cycles from around the globe. Any major changes would likely have been done when Europe moved to a T+2 cycle. Custodians, however, still will have to address any systems and procedural changes with CDS and DTCC, as well as develop testing plans with CDS and for clients.
- Infrastructure – Exchanges, CDS, Fundserv:
- The exchanges have concluded that minor system parameter changes are required.
- CDS and Fundserv have:
- Analyzed processes and worked with their member firms/participants to identify what systems or procedures and timing need to be changed to enable the firms to meet T+2 requirements.
- These parts of the infrastructure are making systems changes and developed detailed test plans
Service bureaus/providers/vendors will have to ensure their build and test plans are co-ordinated with infrastructure. Work is underway on what is appropriate certification or attestation to deliver the comfort level that the overall Canadian industry is ready to move on September 5, 2017.
A list of issues and notes of meeting discussions with additional details can be found on CCMA Committee pages for the Operations Working Group, Mutual Fund Working Group, Legal and Regulatory Working Group and Communications and Education Working Group. Members operating directly with the U.S. should also be monitoring for information at www.UST2.com.
(Added Sept. 3, 2016) Where can I find the regulatory changes?
There are different regulatory and quasi-rule-setting bodies that are T+2 stakeholders. For the list of items reviewed and status of each, please visit the Legal and Regulatory Working Group
Issues Log. For two areas of change published for comment, please view IIROC Notice 16-0177
(comments due October 26, 2016) and CSA Notice 24-312
(comments due November 16, 2016).
(Added Sept. 3, 2016) What can registrants expect from regulators when it comes to T+2?
Registrants would be expected by their regulators to comply with rules, as amended (see above question), to ensure appropriate policies and procedures are in place to match and settle trades for institutional and other clients. In addition, registrants would be expected to take into consideration any related regulatory guidance. Before implementation of the cutover to T+2, scheduled for September 5, 2017, registrants may expect regulators to rely on results from industry tests and/or surveys, and also to consider adding questions about T+2 preparations during examinations, including whether trade-matching statements or agreements are being updated.
(Added Sept. 3, 2016) Will the same NI 24-101 provisions for trade-matching statements or agreements with counterparties apply in a T+2 environment (i.e., that confirm the attesting firm has policies and procedures to ensure trade matching according to required matching rates in National Instrument 24-101)?
Yes, the need for trade-matching statements or agreements is expected to continue to apply. However, as NI 24-101 is expected now to require earlier matching of trades whether institutional decisions are made in or outside the North-American region, it is expected that most firms will have to make changes to policies and procedures. Regulators may ask to look at these on examination or look to see if statements or agreements have been updated with a 2017 date.
(Added Sept. 3, 2016) What is the cost to the Canadian industry of the changes to accommodate a shorter settlement cycle?
The Canadian industry has not conducted, nor asked for, an industry-wide benefit-to-cost analysis of the move to T+2 in light of three factors:
- The U.S. industry, through the Depository Trust and Clearing Corporation (DTCC) commissioned the Boston Consulting Group (BCG) to do a study that showed a material net benefit to U.S. firms on a segment-by-segment basis. Because clearing and settlement in the Canadian marketplace is similar in many ways to that in the U.S., the quantum of benefits and costs might be expected to have some commonality, adjusting for marketplace size. While costs and savings will vary between Canada and the U.S., and between firms within Canada, because each party has a different level of technology to support their capital markets, the BCG study, drawn from U.S. input and using U.S. assumptions, stated:
“Cost-benefit analysis showed material differences between the investments required for each model as well as across constituent groups. Moving to a T+2 environment would require approximately $550 Million (M) in incremental investments, whereas upgrading systems and processes across the market to support T+1 would require nearly $1.8B. Although these values are large in aggregate, the required investments are small on a per-firm basis. For example, large institutional broker-dealers would need to invest, on average, $4.5M for T+2 and about $20M for T+1, driven by various degrees of systems/platform enhancements and end-to-end testing and analysis. Similarly, large retail broker-dealers would need to invest, on average, $4M for T+2 and $15M for T+1 for a comparable set of changes. Custodian investments would involve enhancements to interfaces to increase automation and standardization of data formats, with average investments for large firms of $4M for T+2 and $16.5M for T+1. Average investments for large buy-side firms would be $1M for T+2 and $2M for T+1, driven primarily by automation and standardization to enhance interfaces with broker-dealers and custodians and enable compressed timeframes.”
The benefits of each model vary by constituent group. The primary benefit to the buy side was attenuated loss exposure associated with market risk on in-process institutional trades, whereas it is operational cost for the other constituents. Broker-dealers would also gain from reduced Clearing Fund requirements, and significant additional cost reductions can be achieved in T+1 from full “trade date” adherence. T+2 would result in $170M in annual operational savings and $25M in annual return on reinvested capital from Clearing Fund reductions, whereas T+1 would result in $175M in operational savings and $35M in return on reinvested capital. The assumed cost of capital in the above numbers is 3.5% and assumes firms are investing the proceeds in Fed Funds. Three and a half percent was the average Fed Fund rate for the 10-year period prior to the 2008 financial crises. If these funds were invested in alternative ways to Fed Funds, that yielded a 5% or 10% return, annual returns would be $30M and $60M for T+2, and $50M and $100M for T+1, respectively. For institutional broker-dealers, buy side firms and custodian banks, key drivers of operational savings included streamlining of institutional trade processing and exceptions management. Retail broker-dealers and custodian banks also anticipated savings associated with a reduction in physical certificate processing.”
- While Canada’s smaller capital marketplace could be expected to experience higher relative total costs of implementation compared to the U.S., there have been certain aspects of clearing and settlement that have been made easier due to Canada’s more concentrated marketplace, greater reduction in physical certificates, less reliance on cheques and in light of Canada’s National Instrument (NI) 24-101 – Institutional Trade Matching and Settlement. That rule required Canadian buy-side and sell-side firms to improve the percentage of trades entered and confirmed/matched to at least 90% by noon on T+1.
The feedback to the CCMA May/June 2016 survey of the Canadian marketplace supported this view. The results showed a number of firms had concluded that they were already T+2-capable: some because they manage on a T+2 basis in Europe or other parts of the globe that are already on a T+2 (or less) settlement cycle and others because their small size permits them to correct any data entry errors rapidly.
Combined, this might mean that while U.S. capital markets are an estimated 10 times the size of Canada’s, the advances promoted by NI 24-101 may offset American economies of scale. Very roughly, this might mean an aggregate $55M USD cost for the whole Canadian industry, an amount that ultimately may be offset fully by savings from greater efficiencies. A 2002 study promoting straight-through processing (STP), STP Primer – STP Is Everyone’s Business, estimated that “inefficient securities settlement processes cost the Canadian securities industry an estimated $140 million a year,” based on a Cap Gemini Ernst and Young study (Note: Some of these costs will have been eliminated due to improvements in intervening years).
- The CCMA had commissioned a study in 1999 by Charles River Associates (CRA) that showed that the Canadian marketplace MUST change settlement cycles at the same time as the U.S. – neither earlier nor later – or face risks. These include additional operating costs and arbitrage opportunities.
(Added Sept. 3, 2016) What is the range of costs for smaller firms?
In the short term, there will be some upfront costs for most companies as is to be expected from any change affecting many parties. This includes direct technology or infrastructure costs, or in terms of management and staff time, associated with speeding up the steps in the settlement process and reducing time-demanding errors. Ongoing, there may be some systems and labour costs, and these could be more than offset or matched fully or in part by operational savings over time. Small firms can sometimes be more heavily impacted by the cost of changes, however, the need for infrastructure and service providers to incur the main costs of systems changes, and the greater flexibility of today’s technology design may leave small firms with small implementation costs. Most firms currently are waiting for their service providers and settlement infrastructure to finalize plans before any specific cost effects can be known.
What is T+2?
T+2 (and T+0, T+1, and T+3) refers to the number of days (as in a two-day gap) between trade execution (or T) and the related trade settlement (defined as the exchange of the buyer’s payment for the trade to the seller in conjunction with the transfer of these securities from the seller to the buyer.
Why are Canada and the U.S. moving to T+2 later than Europe?"
Since there is no global body governing securities regulation, regions are free to act independently and on timelines that meet their needs. The current focus on shortening settlement cycles has come mainly from the financial crisis of 2008.
The differing timeframes evident in Europe (versus North America) were a function of how European regulators and politicians decided to address the issues that emanated from the crisis.
As far back as 2010, the European Commission announced a proposal for a Central Securities Depository Regulation (CSD-R), which included measures for the harmonization of settlement cycles to T+2. Furthermore, the European Central Bank led another initiative called Target2Securities (whose acronym T2S still creates confusion with T+2 settlement). T2S was a proposal to create a single European platform for securities settlement of 21 countries with T+2 settlement being a pre-requisite for T2S implementation. In combination, these initiatives forced a state of readiness on the European Union member countries, and they adopted T+2 in late 2014 ahead of the T2S and CSD-R deadlines.
Compare this single rule change in Europe to the U.S. where the matrix of regulation is broader and more complex and there was not the same pressure for a single platform, given the existing efficient and more cost-effective links between the U.S. Depository Trust and Clearing Corporation (DTCC)-Canadian Depository for Securities (CDS). In the U.S. (and by extension, Canada), it was left to the industry to find the time and the impetus to focus on addressing shortening the settlement cycle. DTCC engaged the Boston Consulting Group (BCG) to assess the feasibility and benefits of shortening the settlement cycle.
Even though the BCG study reported in favour of shortening the settlement cycle (T+1 was also considered), in the absence of a regulated timetable the process of gaining agreement and consensus simply took longer as it had to compete with other items on a crowded agenda as well perhaps, as a general malaise about change. The regulatory certainty that existed in Europe (almost from outset) didn’t manifest itself in the U.S. until October 2015 when the SEC confirmed it would implement the regulatory changes for shortening the settlement cycle. Even then, there are more than 10 other U.S. regulators, industry groups, or SROs that need to make changes to their own rules to accommodate the shortened settlement cycle.
Is Q3 2017 achievable and how well-positioned are Canadian firms to move to T+2 at the same time as the U.S.?
Q3 2017 is achievable, and Canadian firms will meet the chosen cut-over date along with their U.S. counterparts. Considerable groundwork has been done since the last settlement date cycle was shortened from T+5 to T+3 in 1995. As more investors began participating in securities markets after interest rates fell through the 1980s and 1990s, participants in capital markets invested substantially in technology and straight-through processing (STP). STP meant converting as many manual steps in securities processing from trade to settlement to automated electronic processing in order to reduce manual errors and risk, and to increase speed. A securities commission rule, called National Instrument (NI) 24-101, introduced in [20xx], led to a significant increase in the trade matching rate – the first key step in the post-trade process leading to the second and final step, settlement (or the exchange of payment for securities at the same time to protect the buyer and seller).
Why will it take longer to shorten the settlement cycle in North America than it took in Europe?
In Europe, the timetable was political and not based on market readiness. European member states were forced to accept the CSD-R deadline and work backwards; this was achieved despite the fact that there was no centralized project management. Conversely, the U.S. approach is primarily based on market readiness and, consequently, they have built out a detailed implementation plan that includes time-consuming aspects, such as end-to-end testing and certification which did not exist for the European migration.
How can I know if my firm is involved or how can I get involved myself?
Please visit www.ccma-acmc.ca
or e-mail Keith Evans at email@example.com.
Is it best that the settlement cycles in the U.S. and Canada need to remain harmonized and, if so, why?
Yes, they should be harmonized. A study was completed in1999 by Charles River Associates that indicated the Canadian capital markets should change the settlement cycle at the same time as the U.S. – neither before, nor after. About 40% of trades on Canadian stock exchanges are inter-listed securities (that is, a single security is listed on both Canadian and American exchanges) and Canada- U.S. cross-border transactions make up nearly 25% of the millions of trades processed annually through CDS. Different settlement dates would cause confusion for investors and increase the risk of errors with the associated cost of manual corrections.
Why should I care? Why is the move to T+2 being undertaken, and why now?
- On the competitive side, major markets in the Asia/Pacific region already have shortened the settlement cycle for stocks and bonds to T+2 or, for some, even to T+1. Most European Union countries harmonized their settlement cycles for these instruments and unit investment trusts (UITs) to T+2 in 2014. Singapore, Australia and New Zealand are actively looking to reduce their settlement cycle from T+3, and may move as early as 2016. With the increasing globalization and integration of capital markets, standards between markets will become increasingly harmonized, and Canada cannot afford to be at odds with other markets without incurring costs, potentially losing business, and increasing risk.
- On the positive side, there are also benefits to the shortened cycle. Shortening the settlement cycle to T+2 will contribute to greater certainty, improved safety, and increased soundness of Canadian capital markets. It will help reduce systemic and operational risks by diminishing the exposure between different parties to a trade, between these parties and the clearing/ settlement infrastructure, and within that infrastructure itself. Specifically, the benefits of T+1 settlement include:
- Reduced credit and liquidity risk, with their associated costs
- Fewer errors and lower operational risk and costs
- Improved investor service and the facilitation of 24-hour trading
- Increased time availability for client relations as a consequence of enhanced automation.
- The good news is that a lot of work is already underway, and we certainly are better prepared for a shorter settlement cycle than we were earlier this century. The challenge is the short timeframe within which to align with the U.S. for a co-ordinated implementation in Q3 of 2017, in light of changes to the rules, procedures, internal processes, and related development and testing.
Does every firm have to change the settlement cycle of relevant securities?
While European regulators mandated a change in cycle, between Canada and the U.S. many systems and operational improvements are undertaken as industry-wide standards. If mandated in Canada, there will be a consultation period. But at present, indications are that, even without rule changes, all firms will change because their clients will want and expect them to. Most people would prefer to eliminate uncertainty and have the securities they have bought, or cash for investments they have sold, in their account as soon as possible.
Who is involved in shortening the settlement cycle in Canada?
Directly or indirectly, every firm in the securities industry is (or will be) involved. Key securities infrastructure, such as The Canadian Depository of Securities (CDS), FundSERV, and exchanges along with their dealer, custodian, asset manager users and users’ associations are active under the coordinating umbrella of the Canadian Capital Market Association (CCMA). Regulators are reviewing laws, regulations and other requirements with industry representatives to identify those that need to be updated. A list of current organizations participating in the CCMA is available by e-mailing Keith Evans at firstname.lastname@example.org or visiting www.ccma-acmc.ca].
Why do securities have different settlement cycles, and why aren’t they the same day just as I can withdraw money from my account and it is processed the same day?
The automation of both cash and securities markets advanced considerably during the 1980s, 1990s, and first decade of this century. However, the transfer of cash still remains much more straightforward than is the case with securities. A cash transfer requires agreement on and transfer of usually relatively small amounts on a particular date. In the case of securities, there are many more details to agree upon. For example, investment managers have 18 mandatory data elements per transaction to send to the broker-dealer and custodian, if allocating at the individual client level -- and the amounts at risk can be considerably greater. Also, some investments involve on and offshore structures, where the offshore part will take longer to transact or involve illiquid securities where it may take extra days to sell an asset at a reasonable price.
How does this affect me as a foreign investor in widely different time zones?
You will likely already be subject to the new timelines if you are investing in Europe as well as North America, and so have experience in aligning payments and securities on different cycles. Speak to your dealer(s) or custodian(s) to learn about the effect of any changes they will be implementing.
What securities will be affected by the shortened cycle?
In general, the main securities that will be impacted are: all stocks or equities, all corporate bonds, and long-term government bonds with a remaining term to maturity of more than three years (TBC) as well as investment funds, including conventional mutual funds, exchange-traded funds or ETFs and hedge funds, as well as segregated funds and principle-protected notes. The CCMA is working on a list of all the security types that would be affected.g.
How does this affect me as an investor?
Many investors may experience no change at all, if they buy and sell using securities and cash they already have in their accounts. If they hold securities as certificates in physical form, however, investors have to deliver them to their dealer beforehand. If they are not selling securities already in their accounts or don’t have enough cash, they will have to deposit cash to cover the transaction. Speak to your dealer or custodian to learn more details about the effect of any changes.