When will Canada and the U.S. move to a standard T+1 securities settlement practice?

Canada and the U.S. are transitioning to T+1 at the same time.  Capital markets participants in both countries will make systems change to convert to a shortened standard securities settlement cycle – that is, from today’s two days after a trade (or T+2) to the next day (or T+1) – on the May 25/26, 2024 weekend.  The last date securities will be traded on the current two-day standard in Canada and the U.S. will be Friday, May 24, 2024.  The first day trading on a T+1 basis will be the next business day.  In the U.S., the U.S. Securities and Exchange Commission (SEC) mandated Tuesday, May 28, 2024 (after the Memorial Day long weekend) as the transition date and so the first day to trade for next-day settlement. In Canada, securities markets are open on Monday, May 27, 2024, and so Monday will be the first day trades to be settled on a T+1/next-day basis will be transacted in Canada.  Trading volumes are historically lower when one market is open and the other is closed.

Most capital markets participants in Canada and the U.S., and some global organizations, had urged the SEC to adopt the Labour Day 2024 weekend – a long weekend in both countries – for a simpler conversion.  That said, firms in both markets have extensive experience adapting to situations when one market is closed and the other is open, long weekends can differ throughout the year when Canadian markets may be open and U.S. markets are closed (e.g., the mid-January Martin Luther King Jr. Day); there also are holidays where Canadian markets do not operate (e,g,, Canada Day) while American are open.

What does this mean for market participants?

Below is a table that shows market implications for market participants and investors.  The last trades to settle on a T+2 basis in North America will be placed on Friday.  Market participants on both sides of the border will transition and test systems conversion on the weekend. The first T+1 trading date and the double settlement date (the settlement of both the last T+2 and the first T+1 trades) will be Monday and Tuesday respectively in Canada and, in the U.S., they will be Tuesday and Wednesday.  The two countries will again be on identical trading and settlement cycles from Thursday, May 30, 2024 on.

Why is Canada choosing to move to T+1 on a different day from the U.S.?

If Canada were to transition to T+1 on May 28, 2024, Canadian firms would have to implement T+1 system changes on the night of Monday, May 27, which will not allow enough time to validate changes have been made effectively before trading commences on Tuesday, May 28.  Also, Memorial Day is a holiday in the U.S., there will be minimal impact of being out of sync for one day. In fact, Memorial Day has historically been a light trading day in Canada and so Monday, May 27 will provide an additional day to confirm that all systems changes have been effective.

Were other options considered and if so what were they and why were they rejected?

One other alternative was discussed: that Canada treat May 27th as a non-trading, non-settlement day.  The following concerns of a number of market participants, and how the concerns were addressed, are as follows:

1. A T+1 trading date in Canada but not the U.S. would require product-/situation-specific timing issues to be addressed – while this is correct, the majority were common to all ‘holiday-processing’ dates and so resolvable based on past practice; new ones are being added to the CCMA’s Operations Issue Log to be addressed, with ‘workarounds’ to be identified before implementation.
2. For U.S. based firms trading and settling in Canada, additional U.S. staff will be required to work on a holiday – while a valid concern, this was felt to be a lesser issue than the risk of Canadian firms having to rush systems changes overnight on May 27, 2024.
3. There would be additional work for the Canadian industry in the very unlikely case there is a need to back out systems changes for any reason – while this is a risk for any project, CCMA members will be working with American counterparts to ensure that, as in the 2017 move from T+3 to T+2, there is an appropriate ‘go-/no-go date multiple weeks before implementation to avoid the need for a last-minute backout.
4. Make May 27, 2024 a non-trading/non-settlement day in Canada would affect multiple industry stakeholders, including marketplaces (such as exchanges), the Bank of Canada and other regulators, the Canadian Depository for Securities Ltd., the Canadian Payments Association/Payments Canada, CLS Bank, and possibly other organizations; market participants and investors would also have to know and prepare for a one-time change. There was also a thought that the Victoria Day holiday could be advanced was raised, but this also would require agreement from governments across the country, which would be a challenge  to achieve.

In summary, it is the Canadian industry member consensus that Monday, May 27 should be the first day of T+1 trading in 2024 because:

• Trying to have May 27, 2024 declared a non-trading/non-settlement day would be resource-intensive and was highly unlikely to be successful
• Canadian market participants need certainty now so firms can proceed to make change decisions with confidence
• Having to implement T+1 overnight between Monday and Tuesday was considered much more risky
• The few challenges identified will be addressed by CCMA committees well in advance of implementation.

(all times shown are Eastern Time)

Canadian regulators have proposed amendments to National Instrument 24-101 Institutional Trade Matching and Settlement (NI 24-101) that would require 90% of institutional trades to be matched by 9:00 p.m. on trade date (T).[i]  The U.S. Securities and Exchange Commission (SEC) has proposed a rule requiring 100% of institutional trade matching (i.e., allocations, confirmations, and affirmations) to be completed by midnight on T,[ii] with the U.S.’s DTCC setting a 9:00 p.m. on T operational deadline for affirmations.[iii]  Canadian market participants believe that a 90% matching deadline just prior to 4 a.m. on T+1, still before the next business day settlements starts, is the best option, for several reasons, one being that the SEC’s T+1 rule is not yet final.

The SEC’s proposed deadline for transitioning to T+1, published in February 2022, is Q1 2024 .  The U.S. and Canadian industries responded to the SEC’s request for comments last year, strongly recommending six months later – Q3 2024.  If the SEC chooses Q1 2024 despite leading industry group requests for Labour Day weekend 2024, the transition effort – much more difficult than previous settlement cycle reductions – becomes significantly more challenging, making the Canadian industry’s call for 3:59 a.m. on T+1 matching cut-off even more important.

Why has the Canadian industry recommended 90% trade matching by 3:59 a.m. on T+1 for regulatory and operational purposes instead of a 9:00 p.m. on T deadline?

This deadline was proposed because it maximizes the flexibility for Canadian capital markets participants across the country, and benefits counterparties operating in non-Canadian time zones. Specifically:

1. Custodians and buy-side firms will have more time with a 3:59 a.m. T+1 deadline to affirm trades before the day’s netting settlement processes start at 4:00 a.m. on T+1.
2. Sell-side firms will be best able to reduce their collateral requirements and complete settlement.
3. Each firm can choose an earlier matching deadline before 3:59 a.m. on T+1 (such as 9:00 p.m. on T).

There are two other important considerations:

1. Canada’s processing systems differ from those in the U.S. and, therefore, so do solutions.
2. Canada and the U.S. have different regulatory approaches: the proposed U.S. rules apply directly to broker-dealers, custodians, and investment managers, while Canada’s NI 24-101 trade-matching deadlines currently apply directly only to registered firms,[iv] leaving other critical market players outside the regulatory framework.

A unified or at least harmonized approach to deadline regulation is more efficient.  Don’t different deadlines in Canada and the U.S. mean Canadian companies dealing in the U.S. must have a different process for each country?

Having different deadlines doesn’t mean firms need two separate processes.  Canadian firms can adopt the U.S. operational 9 p.m. matching deadline for both their Canadian and U.S. business if they determine this makes sense for their organizations.

Operational rationalization and automation are important (as recommended in the CCMA/industry’s T+3 to T+2 Post Mortem Report).[v]  To facilitate greater automation, CDS is, among other things, replacing its CDSX clearing, settlement, and corporate actions systems as part of its post-trade modernization project (PTM).[vi]  With (as of the start of February 2023) a minimum of 12 ½ months and a maximum of 19 months until T+1 implementation, achieving full automation (the best solution) is not possible in light of continued unknowns.  The lack of a firm SEC transition date and details, in particular, has meant firms have not been able to devote the necessary attention to T+1 while they work on other regulatory projects with clear implementation dates.

Don’t Canadian firms have to operate until 3:59 a.m. on T+1 if Canadian regulators set that time as a deadline for attaining 90% matching?

NI 24-101 doesn’t prescribe a firm’s hours of operations, or that it must stay open until 3:59 a.m. on T+1, if that is the Canadian deadline, as long as the firm meets the 90% affirmation threshold.

Trade-matching currently requires at least some interaction with internal and external counterparties, so wouldn’t these parties need to be available to resolve issues through to 3:59 a.m. on T+1, demanding more staff to affirm all trades?

There is no requirement for more staff between DTCC’s 9:00 p.m. on T operational deadline and what we believe should be Canada’s 3:59 a.m. on T+1 operational and regulatory cut-off.  Indeed, some buy-side firms, have advised their custodian that they have little interest in extending their current workdays.  However, a 3:59 a.m. on T+1 deadline allows firms (buy-side, custodian, or sell-side) in European markets to affirm or correct trades at the start of their business day on T+1, and for those in Asian markets to have an extra 3.5 hours towards the end of their business day on T+1 to match or address errors.

Doesn’t a later cut-off time for matching mean less time to fix mistakes?

To meet the 100%-matched-at-midnight U.S. regulatory deadline, DTCC has had to advance its system jobs schedule to 9:00 p.m. on T.  In fact, a 3:59 a.m. T+1 deadline gives Canadian firms that need, or may need it, an additional seven hours (from 9:00 p.m. on T to 3:59 a.m. on T+1) to match trades or address issues.

Wouldn’t it be more effective if one organization – CDS – compressed the timeline to achieve affirmation by 9:00 p.m. on T, which also sets us up better for T+0?

First, if the CSA’s proposed 9:00 p.m. on T timeline were adopted, sell-side dealers would need to know all of their buy-side allocations by about 5:00 p.m. so buy-side firms and custodians could affirm trades by 7:30 p.m. for institutional trades to be received by 8:00 p.m. at CDS.  It is uncertain whether sell-side firms could meet the 5:00 p.m. deadline on T, and equally uncertain that market players, not subject to Canadian regulation, would make (or be able to make) this change.  It would also require a significant processing change in how trades are reported by marketplaces to CDS.

Second, if CDS were to have to further change systems now, project risk would increase for both the T+1 and PTM projects as the timelines of the two already overlap.  This could mean CDS would have to change both the CDSX (current) and PTM (future state) systems.  It might require dealers, custodians, and service providers to also change internal systems, and to test on both the CDSX and PTM systems, increasing resource demands.

Third, rushing to meet a 9:00 p.m. on T deadline on the premise that it might help achieve T+0 is not a persuasive reason because when T+0 might be mandated, and how T+0 might be interpreted, are as yet unclear.  It would be more prudent to discuss further globally automated systems, especially because North America moving to T+1 (or less), when Europe and Asian counterparts remain largely on a T+2 standard settlement basis, has generated issues that have yet to be fully resolved, and any move to T+0 could create a completely different set of issues.

———————

[i]     https://www.osc.ca/en/securities-law/instruments-rules-policies/2/24-101/csa-notice-and-request-comment-proposed-amendments-national-instrument-24-101-institutional-trade.
[ii]     https://www.govinfo.gov/content/pkg/FR-2022-02-24/pdf/2022-03143.pdf.
[iii]    https://www.dtcc.com/-/media/Files/PDFs/T2/T1-Functional-Changes.pdf.
[iv]    Dealers and advisers registered under securities legislation in Canada.
[v]     https://ccma-acmc.ca/en/wp-content/uploads/T2-Project-Post-Mortem-Report-April-19-2018.pdf.
[vi]    https://www.cds.ca/about/post-trade-modernization.

While exchange-traded and closed-end funds will move to T+1, conventional mutual funds may or may not change to the shorter cycle.  CSA Staff Notice 81-335 – Investment Funds Settlement Cycles, published December 15, 2022, explains that:  “We are not proposing to amend sections 9.4 and 10.4 of National Instrument 81-102 Investment Funds (NI 81-102) at this time to shorten the settlement cycle [from T+2 to T+1] for primary distributions and redemptions of mutual fund securities. If the standard settlement cycle for listed securities moves from two days to one day in Canada, we are of the view that, where practicable, mutual funds should settle primary distributions and redemptions of their securities on T+1 voluntarily. We think it is important, however, to enable each mutual fund to have flexibility to determine whether a T+1 settlement cycle can work for them. Requiring a T+1 settlement cycle in NI 81-102 would not allow for such flexibility.”

Fund managers with material holdings of securities traded in jurisdictions with longer settlement cycles (e.g., Europe and Asia) want the flexibility to remain at T+2 because the purchase or redemption of securities directly with a fund can cause liquidity issues when there is a settlement date ‘mismatch,’ especially as European and Asian markets close much earlier than North-American ones.

Note:  55,028 (56%) of non-segregated-fund products, and a high percentage of segregated funds processed through Fundserv as at the end of 2022 settled on a T+2 basis.  It is not known at this time what percentage of these funds will move from T+2 to T+1, nor is it known when this will be known.

Fundserv is adopting the same approach used for the successful 2017 transition from T+2 to T+1.  Fund companies will send fund set-up (FD) or product update (MD) files to notify Fundserv of those funds whose settlement cycle will be reducing to T+1 in advance of the implementation weekend (between Q1 and Q3 2024; specific date unknown).  Dealers able to use these files can import them into their systems.  For dealers unable to use FD or MD files, Fundserv will host a spreadsheet of funds that are transitioning to T+1 and these dealers will use the information from the spreadsheet to update their records.

The settlement cycle of conventional mutual funds and other securities have been in sync for many years, however, they do not need to be on the same cycle, as evident in the U.S. (refer FAQ #16).   U.S. mutual fund orders have settled on a T+1 basis for a number of years while debt and equities have required a longer time frame.  T+1 settlement of conventional mutual funds in the U.S. is possible because U.S. securities markets are much more liquid than Canada’s.  Also, the U.S. has rules (such as higher borrowing limits and permitted inter-fund borrowing) as well as practices (advance notice of major mutual fund orders) to help funds manage liquidity needs.]

Note:  To be answered at a later date.

Note:  To be answered at a later date.

There will not be a CDS white paper, impact assessment, or roadmap because Canadian market players have agreed, through the CCMA, that the Canadian capital markets industry must move to T+1 for competitive reasons, or face the negative consequences of arbitrage, additional cost, and greater risk that a longer standard settlement cycle than the U.S. would pose.

To move to a standard settlement cycle of T+1 on the same date as the U.S., CDS worked with the CCMA to arrive at a revised CDS Schedule (approved by the CCMA T+1 Steering Committee on June 28, 2022) and CDS and exchanges have since committed to:

• Receiving batch files on an hourly basis, starting at 11:00 a.m. ET (CDS is meeting quarterly with the TMX and other exchanges/marketplaces in this regard)
• Generating/delivering exchange-trade messages and files back to participants and their service bureaus on an hourly basis intraday
• Receiving reconciliation files by 19:30 on T.

CDS will issue a requirements document once all material CDS-related issues in the CCMA Operations Working Group (OWG) Issue Log have been addressed.  For this to happen as rapidly as possible, industry participants must drill down now into trade, allocation, confirmation, and settlement systems and processes to identify, discuss, and address at OWG meetings what prevents trades from being confirmed by the end of trade date.  The CCMA would like to see the related issue logs closed in Q3/Q4 2022.  CDS also expects to issue a requirements document and test plan in Q4 2022.

Canadian and U.S. mutual funds have been on different standard settlement cycles for purchases and redemptions of their units/shares for a while, with apparently most U.S. funds settling purchases and redemptions on a T+1 cycle for many years.  Most Canadian funds, on the other hand, have settled for decades on the same schedule (currently T+2) as Canadian debt, equity, and exchange-traded products, against which mutual fund investments may compete. The difference between Canadian and U.S. fund settlement cycles has not been, and is not expected to be an issue, because unlike in the case of secondary market trading of debt, equity and exchange-traded products, and particularly securities interlisted on Canadian and U.S. exchanges, Canadian and American mutual funds do not compete.  Essentially, Canadian mutual funds are not an investment option in the U.S., nor are U.S. mutual funds an option in Canada. One key issue for the Canadian mutual fund industry in the case of shortening the purchase and redemption settlement cycle to T+1 is that many foreign jurisdictions other than the U.S. are not currently proposing to also move to a T+1 settlement cycle. The settlement cycles of certain types of portfolio securities may be problematic for Canadian funds that hold significant amounts of the types of securities/instruments that will remain at a T+2 or greater settlement cycle (e.g., T+3 in some foreign jurisdictions). With U.S. mutual fund market participants being so much larger than that in Canada, Canadian mutual fund industry representatives have been told that these timing differences are not as problematic for them.

 The CCMA is not issuing an equivalent to the U.S.’s T+1 Playbook for several reasons:

• Such a tool is needed in the U.S. because of the proportionally larger volume of capital markets participants, much broader range of service providers and vendors, and greater complexity of some systems and markets, as well as the lead that the U.S. is taking in the move to T+1.
• It is not required in Canada (nor was a Canadian version of the U.S. T+2 Playbook published for the T+2 move) because the Canadian marketplace is quite similar in many ways to the U.S. capital markets and, due to Canada’s comparatively smaller capital markets size, it cannot reasonably go in a direction that differs materially from that of the U.S. The well-designed U.S. T+1 Playbook is therefore useful not just for American industry participants but also for Canadian ones.
• Finally, Canada’s capital markets are more concentrated, with only a handful of large infrastructure providers, custodians, service bureaus, and vendors – many of which also operate in the States – linking all parties in the end-to-end processing chain, and significantly reducing delays and simplifying co-ordination.

We encourage CCMA members to review the U.S. T+1 Playbook and use its workbooks.  The CCMA will, as for T+2, provide complementary support where needed:  a T+1 schedule that dovetails with the U.S.’s, Canadian checklists and Canada-specific frequently-asked questions (FAQs), as well as other tools.

Corporate actions relative to exchange-traded securities trade with or without any associated income distribution depending on the corporate action’s record date. The security trades without a dividend on the ex date – the trading day before the date of record in today’s T+2 environment.  In a T+1 environment, the ex and record dates will be the same – T+1 – in the U.S. and Canada.

In some cases, an exchange may set a later ex-date, for example, due to challenges with stock or large cash dividends, and the securities will trade with a ‘due bill.’  The U.S. has indicated that for trades with due bills, the ex date will be the same as the due bill redemption date, and Canada will adopt the same practice at the time of T+1 transition.

Also impacted are ‘protect’ or letter-of-guarantee periods for voluntary corporate action event (e.g., rights subscription or tender offer) expiries, which usually align with the standard settlement structure (currently T+2) – investors can purchase securities even on the offer’s expiration date, with the protect feature “covered” once the securities settle in two days’ time.  In a T+1 settlement cycle, the cover/protect or letter-of-guarantee period will be the expiration date plus one (1) trading day.

There will be a CDS external procedure change requiring regulatory non-disapproval, but no system or rule changes required for CDS.

Finally, to reduce risk, the industry is requesting marketplaces to recommend that issuers try to avoid setting corporate-action-related dates during the days chosen to both start trading on a T+1 basis and the following day (T+1), which is a ‘double settlement’ date (trades the previous day due to be settled on T+1, as well as those from two business days prior settling on the ‘old’ T+2 basis).

CDS will align Canadian buy-in processes with the changes being implemented in the U.S. as follows:

Buy-in process	Current:  Buy-in intent can be submitted on T+2 and the intent will be executed on:	Future buy-in process: Buy-in intent can be submitted on T+1 and the intent will be executed on:
From prior to 4:00-4:45 PM EST	Notification Date plus 2 (N+2)	The intent will be executed on Notification Date plus 1 (N+1)
From 4:45 PM –7:30 PM EST	Notification Date plus 3 (N+3)	The intent will be executed on Notification Date plus 2 (N+2)

Yes. First, Canadian market participants have effectively managed the reduction in the North-American settlement cycle in the past.  Second, at the two-years-to-T+2 implementation mark, the CCMA had only just hired T+2 project resources, and was able to successfully migrate to T+2 on September 5, 2017 with the U.S., whereas the CCMA started working on the T+1 project three years before scheduled T+1 transition.  At the two-year mark for T+1 – although more challenging than the move to T+2 – the CCMA and its members already have agreed on a T+1 Asset List, achieved consensus on CDS Scheduler changes, and made material progress on operations and legal/regulatory issue logs of issues.  As well, many of those who worked on the T+2 project are again working on T+1, reducing the learning curve.  Lastly, without any systems or operational changes at all, 90% of trades already could settle without difficulty at 4:00 p.m. ET.  Whatever the 2024 migration date the U.S. Securities and Exchange Commission (SEC) chooses for T+1, Canadian capital markets will be ready to test and transition to the shorter cycle with American counterparts.

If there is a pricing error that impacts trades that have already been reported in the Contract File (FS), fund companies have several options. They can issue new price files, reverse and reprocess the transactions with the correct price, or compensate accounts or deduct units.

Late prices may delay the start of the overnight batch run. if it is extremely late, it may cause a fund company to miss the 6 a.m. ET Contract File (FS) cut-off. This could mean penalties and negative feedback from dealers that won’t receive the file in time to match pending orders. If this occurs, advisors will not see the trades contracted in investor accounts.

 

No, prices are created only once a day.

 

Prices are normally struck by 5:30 pm, but it depends on the complexity of the portfolio. There isn’t a formal deadline, but they must be calculated before the Fundserv nightly batch run starts.

Canadian market participants have committed to moving to T+1 on the same day as U.S. counterparts.  Whatever the final date chosen, Canadian firms should target completing system and operational changes, and be well along in industrywide testing, by December 31, 2023.  We are continuing to work with industry members and our American colleagues to confirm an integrated timeline, which will be posted once approved.

T+1 (and T+0, T+2, and T+3) refers to the number of days (as in a one-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.

Please visit www.ccma-acmc.ca or e-mail Keith Evans at kevans@ccma-acmc.ca.

They don’t need to be, but should be harmonized to reduce risk, complexity and ultimately cost. A CCMA_commissioned study was completed in 1999 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 roughly 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.

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.

In general, the main securities that are expected to 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.

Many investors might 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.

There will not be a CDS white paper, impact assessment, or roadmap because Canadian market players have agreed, through the CCMA, that the Canadian capital markets industry must move to T+1 for competitive reasons, or face the negative consequences of arbitrage, additional cost, and greater risk that a longer standard settlement cycle than the U.S. would pose.

To move to a standard settlement cycle of T+1 on the same date as the U.S., CDS worked with the CCMA to arrive at a revised CDS Schedule (approved by the CCMA T+1 Steering Committee on June 28, 2022) and CDS and exchanges have since committed to:

• Receiving batch files on an hourly basis, starting at 11:00 a.m. ET (CDS is meeting quarterly with the TMX and other exchanges/marketplaces in this regard)
• Generating/delivering exchange-trade messages and files back to participants and their service bureaus on an hourly basis intraday
• Receiving reconciliation files by 19:30 on T.

CDS will issue a requirements document once all material CDS-related issues in the CCMA Operations Working Group (OWG) Issue Log have been addressed.  For this to happen as rapidly as possible, industry participants must drill down now into trade, allocation, confirmation, and settlement systems and processes to identify, discuss, and address at OWG meetings what prevents trades from being confirmed by the end of trade date.  The CCMA would like to see the related issue logs closed in Q3/Q4 2022.  CDS also expects to issue a requirements document and test plan in Q4 2022.

Canadian and U.S. mutual funds have been on different standard settlement cycles for purchases and redemptions of their units/shares for a while, with apparently most U.S. funds settling purchases and redemptions on a T+1 cycle for many years.  Most Canadian funds, on the other hand, have settled for decades on the same schedule (currently T+2) as Canadian debt, equity, and exchange-traded products, against which mutual fund investments may compete. The difference between Canadian and U.S. fund settlement cycles has not been, and is not expected to be an issue, because unlike in the case of secondary market trading of debt, equity and exchange-traded products, and particularly securities interlisted on Canadian and U.S. exchanges, Canadian and American mutual funds do not compete.  Essentially, Canadian mutual funds are not an investment option in the U.S., nor are U.S. mutual funds an option in Canada. One key issue for the Canadian mutual fund industry in the case of shortening the purchase and redemption settlement cycle to T+1 is that many foreign jurisdictions other than the U.S. are not currently proposing to also move to a T+1 settlement cycle. The settlement cycles of certain types of portfolio securities may be problematic for Canadian funds that hold significant amounts of the types of securities/instruments that will remain at a T+2 or greater settlement cycle (e.g., T+3 in some foreign jurisdictions). With U.S. mutual fund market participants being so much larger than that in Canada, Canadian mutual fund industry representatives have been told that these timing differences are not as problematic for them.

 The CCMA is not issuing an equivalent to the U.S.’s T+1 Playbook for several reasons:

• Such a tool is needed in the U.S. because of the proportionally larger volume of capital markets participants, much broader range of service providers and vendors, and greater complexity of some systems and markets, as well as the lead that the U.S. is taking in the move to T+1.
• It is not required in Canada (nor was a Canadian version of the U.S. T+2 Playbook published for the T+2 move) because the Canadian marketplace is quite similar in many ways to the U.S. capital markets and, due to Canada’s comparatively smaller capital markets size, it cannot reasonably go in a direction that differs materially from that of the U.S. The well-designed U.S. T+1 Playbook is therefore useful not just for American industry participants but also for Canadian ones.
• Finally, Canada’s capital markets are more concentrated, with only a handful of large infrastructure providers, custodians, service bureaus, and vendors – many of which also operate in the States – linking all parties in the end-to-end processing chain, and significantly reducing delays and simplifying co-ordination.

We encourage CCMA members to review the U.S. T+1 Playbook and use its workbooks.  The CCMA will, as for T+2, provide complementary support where needed:  a T+1 schedule that dovetails with the U.S.’s, Canadian checklists and Canada-specific frequently-asked questions (FAQs), as well as other tools.

Corporate actions relative to exchange-traded securities trade with or without any associated income distribution depending on the corporate action’s record date. The security trades without a dividend on the ex date – the trading day before the date of record in today’s T+2 environment.  In a T+1 environment, the ex and record dates will be the same – T+1 – in the U.S. and Canada.

In some cases, an exchange may set a later ex-date, for example, due to challenges with stock or large cash dividends, and the securities will trade with a ‘due bill.’  The U.S. has indicated that for trades with due bills, the ex date will be the same as the due bill redemption date, and Canada will adopt the same practice at the time of T+1 transition.

Also impacted are ‘protect’ or letter-of-guarantee periods for voluntary corporate action event (e.g., rights subscription or tender offer) expiries, which usually align with the standard settlement structure (currently T+2) – investors can purchase securities even on the offer’s expiration date, with the protect feature “covered” once the securities settle in two days’ time.  In a T+1 settlement cycle, the cover/protect or letter-of-guarantee period will be the expiration date plus one (1) trading day.

There will be a CDS external procedure change requiring regulatory non-disapproval, but no system or rule changes required for CDS.

Finally, to reduce risk, the industry is requesting marketplaces to recommend that issuers try to avoid setting corporate-action-related dates during the days chosen to both start trading on a T+1 basis and the following day (T+1), which is a ‘double settlement’ date (trades the previous day due to be settled on T+1, as well as those from two business days prior settling on the ‘old’ T+2 basis).

CDS will align Canadian buy-in processes with the changes being implemented in the U.S. as follows:

Buy-in process	Current:  Buy-in intent can be submitted on T+2 and the intent will be executed on:	Future buy-in process: Buy-in intent can be submitted on T+1 and the intent will be executed on:
From prior to 4:00-4:45 PM EST	Notification Date plus 2 (N+2)	The intent will be executed on Notification Date plus 1 (N+1)
From 4:45 PM –7:30 PM EST	Notification Date plus 3 (N+3)	The intent will be executed on Notification Date plus 2 (N+2)

Yes. First, Canadian market participants have effectively managed the reduction in the North-American settlement cycle in the past.  Second, at the two-years-to-T+2 implementation mark, the CCMA had only just hired T+2 project resources, and was able to successfully migrate to T+2 on September 5, 2017 with the U.S., whereas the CCMA started working on the T+1 project three years before scheduled T+1 transition.  At the two-year mark for T+1 – although more challenging than the move to T+2 – the CCMA and its members already have agreed on a T+1 Asset List, achieved consensus on CDS Scheduler changes, and made material progress on operations and legal/regulatory issue logs of issues.  As well, many of those who worked on the T+2 project are again working on T+1, reducing the learning curve.  Lastly, without any systems or operational changes at all, 90% of trades already could settle without difficulty at 4:00 p.m. ET.  Whatever the 2024 migration date the U.S. Securities and Exchange Commission (SEC) chooses for T+1, Canadian capital markets will be ready to test and transition to the shorter cycle with American counterparts.

If there is a pricing error that impacts trades that have already been reported in the Contract File (FS), fund companies have several options. They can issue new price files, reverse and reprocess the transactions with the correct price, or compensate accounts or deduct units.

Late prices may delay the start of the overnight batch run. if it is extremely late, it may cause a fund company to miss the 6 a.m. ET Contract File (FS) cut-off. This could mean penalties and negative feedback from dealers that won’t receive the file in time to match pending orders. If this occurs, advisors will not see the trades contracted in investor accounts.

 

No, prices are created only once a day.

 

Prices are normally struck by 5:30 pm, but it depends on the complexity of the portfolio. There isn’t a formal deadline, but they must be calculated before the Fundserv nightly batch run starts.

Canadian market participants have committed to moving to T+1 on the same day as U.S. counterparts.  Whatever the final date chosen, Canadian firms should target completing system and operational changes, and be well along in industrywide testing, by December 31, 2023.  We are continuing to work with industry members and our American colleagues to confirm an integrated timeline, which will be posted once approved.

T+1 (and T+0, T+2, and T+3) refers to the number of days (as in a one-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.

Please visit www.ccma-acmc.ca or e-mail Keith Evans at kevans@ccma-acmc.ca.

They don’t need to be, but should be harmonized to reduce risk, complexity and ultimately cost. A CCMA_commissioned study was completed in 1999 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 roughly 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.

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.

In general, the main securities that are expected to 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.

Many investors might 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.

There will not be a CDS white paper, impact assessment, or roadmap because Canadian market players have agreed, through the CCMA, that the Canadian capital markets industry must move to T+1 for competitive reasons, or face the negative consequences of arbitrage, additional cost, and greater risk that a longer standard settlement cycle than the U.S. would pose.

To move to a standard settlement cycle of T+1 on the same date as the U.S., CDS worked with the CCMA to arrive at a revised CDS Schedule (approved by the CCMA T+1 Steering Committee on June 28, 2022) and CDS and exchanges have since committed to:

• Receiving batch files on an hourly basis, starting at 11:00 a.m. ET (CDS is meeting quarterly with the TMX and other exchanges/marketplaces in this regard)
• Generating/delivering exchange-trade messages and files back to participants and their service bureaus on an hourly basis intraday
• Receiving reconciliation files by 19:30 on T.

CDS will issue a requirements document once all material CDS-related issues in the CCMA Operations Working Group (OWG) Issue Log have been addressed.  For this to happen as rapidly as possible, industry participants must drill down now into trade, allocation, confirmation, and settlement systems and processes to identify, discuss, and address at OWG meetings what prevents trades from being confirmed by the end of trade date.  The CCMA would like to see the related issue logs closed in Q3/Q4 2022.  CDS also expects to issue a requirements document and test plan in Q4 2022.

Canadian and U.S. mutual funds have been on different standard settlement cycles for purchases and redemptions of their units/shares for a while, with apparently most U.S. funds settling purchases and redemptions on a T+1 cycle for many years.  Most Canadian funds, on the other hand, have settled for decades on the same schedule (currently T+2) as Canadian debt, equity, and exchange-traded products, against which mutual fund investments may compete. The difference between Canadian and U.S. fund settlement cycles has not been, and is not expected to be an issue, because unlike in the case of secondary market trading of debt, equity and exchange-traded products, and particularly securities interlisted on Canadian and U.S. exchanges, Canadian and American mutual funds do not compete.  Essentially, Canadian mutual funds are not an investment option in the U.S., nor are U.S. mutual funds an option in Canada. One key issue for the Canadian mutual fund industry in the case of shortening the purchase and redemption settlement cycle to T+1 is that many foreign jurisdictions other than the U.S. are not currently proposing to also move to a T+1 settlement cycle. The settlement cycles of certain types of portfolio securities may be problematic for Canadian funds that hold significant amounts of the types of securities/instruments that will remain at a T+2 or greater settlement cycle (e.g., T+3 in some foreign jurisdictions). With U.S. mutual fund market participants being so much larger than that in Canada, Canadian mutual fund industry representatives have been told that these timing differences are not as problematic for them.

 The CCMA is not issuing an equivalent to the U.S.’s T+1 Playbook for several reasons:

• Such a tool is needed in the U.S. because of the proportionally larger volume of capital markets participants, much broader range of service providers and vendors, and greater complexity of some systems and markets, as well as the lead that the U.S. is taking in the move to T+1.
• It is not required in Canada (nor was a Canadian version of the U.S. T+2 Playbook published for the T+2 move) because the Canadian marketplace is quite similar in many ways to the U.S. capital markets and, due to Canada’s comparatively smaller capital markets size, it cannot reasonably go in a direction that differs materially from that of the U.S. The well-designed U.S. T+1 Playbook is therefore useful not just for American industry participants but also for Canadian ones.
• Finally, Canada’s capital markets are more concentrated, with only a handful of large infrastructure providers, custodians, service bureaus, and vendors – many of which also operate in the States – linking all parties in the end-to-end processing chain, and significantly reducing delays and simplifying co-ordination.

We encourage CCMA members to review the U.S. T+1 Playbook and use its workbooks.  The CCMA will, as for T+2, provide complementary support where needed:  a T+1 schedule that dovetails with the U.S.’s, Canadian checklists and Canada-specific frequently-asked questions (FAQs), as well as other tools.

Corporate actions relative to exchange-traded securities trade with or without any associated income distribution depending on the corporate action’s record date. The security trades without a dividend on the ex date – the trading day before the date of record in today’s T+2 environment.  In a T+1 environment, the ex and record dates will be the same – T+1 – in the U.S. and Canada.

In some cases, an exchange may set a later ex-date, for example, due to challenges with stock or large cash dividends, and the securities will trade with a ‘due bill.’  The U.S. has indicated that for trades with due bills, the ex date will be the same as the due bill redemption date, and Canada will adopt the same practice at the time of T+1 transition.

Also impacted are ‘protect’ or letter-of-guarantee periods for voluntary corporate action event (e.g., rights subscription or tender offer) expiries, which usually align with the standard settlement structure (currently T+2) – investors can purchase securities even on the offer’s expiration date, with the protect feature “covered” once the securities settle in two days’ time.  In a T+1 settlement cycle, the cover/protect or letter-of-guarantee period will be the expiration date plus one (1) trading day.

There will be a CDS external procedure change requiring regulatory non-disapproval, but no system or rule changes required for CDS.

Finally, to reduce risk, the industry is requesting marketplaces to recommend that issuers try to avoid setting corporate-action-related dates during the days chosen to both start trading on a T+1 basis and the following day (T+1), which is a ‘double settlement’ date (trades the previous day due to be settled on T+1, as well as those from two business days prior settling on the ‘old’ T+2 basis).

CDS will align Canadian buy-in processes with the changes being implemented in the U.S. as follows:

Buy-in process	Current:  Buy-in intent can be submitted on T+2 and the intent will be executed on:	Future buy-in process: Buy-in intent can be submitted on T+1 and the intent will be executed on:
From prior to 4:00-4:45 PM EST	Notification Date plus 2 (N+2)	The intent will be executed on Notification Date plus 1 (N+1)
From 4:45 PM –7:30 PM EST	Notification Date plus 3 (N+3)	The intent will be executed on Notification Date plus 2 (N+2)

Yes. First, Canadian market participants have effectively managed the reduction in the North-American settlement cycle in the past.  Second, at the two-years-to-T+2 implementation mark, the CCMA had only just hired T+2 project resources, and was able to successfully migrate to T+2 on September 5, 2017 with the U.S., whereas the CCMA started working on the T+1 project three years before scheduled T+1 transition.  At the two-year mark for T+1 – although more challenging than the move to T+2 – the CCMA and its members already have agreed on a T+1 Asset List, achieved consensus on CDS Scheduler changes, and made material progress on operations and legal/regulatory issue logs of issues.  As well, many of those who worked on the T+2 project are again working on T+1, reducing the learning curve.  Lastly, without any systems or operational changes at all, 90% of trades already could settle without difficulty at 4:00 p.m. ET.  Whatever the 2024 migration date the U.S. Securities and Exchange Commission (SEC) chooses for T+1, Canadian capital markets will be ready to test and transition to the shorter cycle with American counterparts.

If there is a pricing error that impacts trades that have already been reported in the Contract File (FS), fund companies have several options. They can issue new price files, reverse and reprocess the transactions with the correct price, or compensate accounts or deduct units.

Late prices may delay the start of the overnight batch run. if it is extremely late, it may cause a fund company to miss the 6 a.m. ET Contract File (FS) cut-off. This could mean penalties and negative feedback from dealers that won’t receive the file in time to match pending orders. If this occurs, advisors will not see the trades contracted in investor accounts.

 

No, prices are created only once a day.

 

Prices are normally struck by 5:30 pm, but it depends on the complexity of the portfolio. There isn’t a formal deadline, but they must be calculated before the Fundserv nightly batch run starts.

Canadian market participants have committed to moving to T+1 on the same day as U.S. counterparts.  Whatever the final date chosen, Canadian firms should target completing system and operational changes, and be well along in industrywide testing, by December 31, 2023.  We are continuing to work with industry members and our American colleagues to confirm an integrated timeline, which will be posted once approved.

T+1 (and T+0, T+2, and T+3) refers to the number of days (as in a one-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.

Please visit www.ccma-acmc.ca or e-mail Keith Evans at kevans@ccma-acmc.ca.

They don’t need to be, but should be harmonized to reduce risk, complexity and ultimately cost. A CCMA_commissioned study was completed in 1999 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 roughly 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.

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.

In general, the main securities that are expected to 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.

Many investors might 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.