Hint: The three parties that need to learn some new steps and speed up their intricate footwork to avoid tripping in the move to T+1 are the buyside (registered advisers/portfolio managers and their institutional clients), the sellside (broker-dealers that execute trades), and custodians.

In October 2022, The Observer included an article titled And then there was one… T+1. It described U.S. plans to move to a shorter standard securities settlement cycle – going from the current two days after trade date (T+2) to next day (T+1) – and reasons for the Canadian marketplace’s intention to adopt T+1 on the same day. Now six months on, where are we?

Regulatory requirements released

On December 15, 2022, the Canadian Securities Administrators (CSA) published proposed rule amendments to National Instrument 24-101, Institutional Trade Matching and Settlement to support transitioning to T+1 at the same time as the U.S. The CSA also issued Staff Notice 81-335, Investment Fund Settlement Cycles: unlike in the 2017 move from T+3 to T+2, the CSA proposes not to amend National Instrument 81-102, Investment Funds to mandate a shorter settlement cycle for funds,  however says: “… where practicable, mutual funds should settle primary distributions and redemptions of their securities on T+1 voluntarily.” Investment fund managers will be able to decide whether to adopt a shorter settlement cycle, fund by fund, so ones with large proportions of holdings in jurisdictions that remain on a T+2 basis do not have to file multiple T+1 rule exemption requests for these funds to remain on a T+2 settlement basis. The public comment period for the proposed changes is now closed, with responses under review.

The big question:  Will the CSA accept the Canadian investment industry’s recommendation to change the proposed 9:00 p.m. ET on trade date, to 3:59 a.m. ET on the morning of T+1, as the time by which 90% of trades by volume and value must be matched?  While capital markets participants have agreed to meet a best practice of submitting allocated institutional trades by 8:00 p.m. ET on trade date, it would be difficult to confirm/affirm at least 90% of these trades by 9:00 p.m. ET. Also, it makes more sense for Canadian entities, and their counterparties in Europe, Asia, and other time zones where markets may be open, to have the longest timeframe possible (until just before the 4:00 a.m. ET start of the next business day’s settlement process) to confirm/affirm, make any mismatch corrections possible, issue securities loan recall notices, etc. 

What can you do?   Aside from hoping for a quick CSA final rule announcement (it’s hard to build something if you don’t have all the specs):

1. Look at your end-to-end order-through-settlement process to find ways to remove blockages; just because your procedures say ‘wait until end of day’ doesn’t mean you have to – or should – delay sending allocations to custodians and dealers once you have all the details.
2. If you are investing in third-party investment funds, keep an eye open next year for which funds will be moving to T+1, and which will not; what is certain, however, is that all secondary-market ETFs will clear and settle on a T+1 basis.

The U.S. sets the T+1 date

On February 15, 2023, the U.S. Securities and Exchange Commission (SEC) set May 28, 2024 as the ‘compliance date’ for the move to T+1, rejecting the September 2024 Labour Day weekend that all major global investment industry associations had recommended. Many have decried this choice of date, not only because other countries' markets will remain on a T+2 basis, but also because big issues remain to be resolved.  For example, securities lending and the T+2 settlement standard for all major currencies except the Canada/U.S.-dollar pairing are complicating the move to T+1.

The big question:  While May 28, 2024 follows the American Memorial Day long weekend, here in Canada, Monday, May 27^th is not a holiday – what to do?  As a day’s reduction to achieve T+1 settlement is already much more of a challenge than cutting 24 hours to move from T+3 to T+2 in 2017, Canadian firms have agreed that transitioning to T+1 overnight after the last T+2 batch settlement runs post-close of Canadian business on Monday and before Tuesday’s May 28^th opening of North-American markets, would be much too risky. Therefore, the Canadian industry chose Monday, May 27^th as the first T+1 trading day in Canada. While investment funds subject to NI 81-102 may choose not to move to T+1, Fundserv’s industry Standards Steering Committee has determined that mutual funds moving to T+1 also will adopt Monday, May 27, 2024 as the first day for mutual fund sales and redemptions to be made on a T+1 basis. The table below shows the impact of the above for stakeholders in Canada and the U.S.

What can you do? Because trading days when U.S. markets are closed and Canadian ones are open are typically lighter trading days – and Canadian market participants are experienced managing such ‘holiday processing’ – pension funds may think they need do little other than marking ‘First Day of T+1’ on May 27, 2024 of their calendar. However, as the T+1 implementation date is earlier than desirable, there are still things to take care of:

1. Look at the transition timetable below to figure out what you need to do and who you need to talk to now – while many see the workload as the responsibility of their service providers (especially custodians), all parts of the securities processing chain must work together to increase automation designed to allow straight-through (hands-free) processing.

2. Look at revenue impacts and processing problems associated with securities lending, while staying abreast of expected developments in securities lending and FX solutions.

3. Determine how you will improve your cash management (additional credit lines? pre-funding?) and trade remediation processes.

4. Test with your service providers when they ask.

5. Have extra staff on hand to help manage any uptick in mismatches and failed trades, at least in T+1’s early days.

Is there a problem?

The answer is clear: ‘it depends.’ Most, if not all, of Canada’s largest pension funds have invested heavily in technology, automating as much as possible through their part of the securities order-trade-allocate-match-settle process. Their offices in different parts of the world will put them ahead of the game operationally as they can pass the baton (tasks) as they ‘follow the sun’ (west from when Asian markets are open to European to North American ones). Some may have gone through India’s year-long capital market switch to T+1 that concluded earlier this year, and have useful experience. However, there will be challenges for firms that have more manual interactions and few automated systems. 

1. The early bird worries more:  Firms farther along on the road to T+1 have found it to be more challenging than those just beginning the process. This is just one of the findings of The ValueExchange Operationalizing T+1 survey. While launched in mid-late December 2022 before the SEC had set the T+1 deadline, survey results still showed a higher-than-expected level of market participants that had not or had barely started to prepare – 41% have no plan. There is also a high level of uncertainty as to whether respondents will be ready to make the move on the date set to start trading on a T+1 settlement basis. Until the end of April 2023, your organization can still benchmark itself against peers and get a personalized scorecard by completing the ValueExchange’s T+1 survey.

2. Penalties? In many cases, current systems are based on what happened in the past and so do not easily provide data that will offer insights into where trade-processing problems really are. In particular, it isn’t always clear which of the three securities trade partners – portfolio manager, broker-dealer, or custodian – has caused a delay, and with possibly higher fail rates, claim processes and potential costs should be considered. There already are fail penalties in Europe and some in the U.S.; the Canadian Fixed Income Forum, with the Bank of Canada, are examining a fee for failing to settle Government of Canada bond and T-bill transactions to incent on-time settlement. Although charges at the start of T+1 implementation are unlikely, this may change. As you prepare for T+1, being able to measure where processing breaks are occurring would be time and money well-spen

3. And three take-aways:

1. Remember, the clock is ticking (check the CCMA’s online T+1 countdown timer) and there is no escape – market participants must make changes to move to T+1 or make changes to adjust to counterparties moving to T+1.
2. Review the updated Canadian list of assets moving to T+1, now cross-referenced to a recently published American list).
3. Follow the CCMA on LinkedIn for breaking news and check out www.ccma-acmc.ca for tools and FAQs.  

Have questions or want to get involved? Email us at [email protected] to sign up for the CCMA’s bimonthly newsletter, join a committee, or ask for information.  The CCMA is here to help.