The Canadian Securities Administrators have published for comment a revised rule concerning institutional trade matching and settlement, which will provide a legislative framework for ensuring more efficient and timely settlement processing of trades, particularly institutional trades.

Proposed National Instrument 24-101 Institutional Trade Matching and Settlement requires registered dealers and registered advisers to have reasonable policies in place to achieve matching of trades as soon as practicable after the trade has been executed and no later than prescribed timelines. The instrument requires each trade-matching party to enter into a compliance agreement with the registered dealer or adviser or, alternatively, provide a signed written statement to the dealer or adviser before an account for an institutional investor can be opened. It also requires dealers to have reasonable policies and procedures in place to facilitate settlement of trades by the standard settlement date.

The CSA published a discussion paper on Straight-through Processing (STP) and post-trade matching and settlement back in 2004. They received 26 comment letters. “Most commenters thought the 2004 documents were helpful in focusing the discussion on various clearing and settlement issues the industry is currently facing,” the CSA says. “The majority of comments, including some from the buy-side community, supported a CSA rule requiring institutional trade matching on trade date.”

However, it notes that, “the consensus was for the rule to phase-in the requirement to match institutional trades on T, starting with T+1 and gradually shortening the period to T when the industry is ready.”

“Commenters felt that incremental steps would provide market participants with an opportunity to address a number of concerns about an accelerated confirmation and affirmation process,” it explains.

The CSA report that they believe the proposed instrument offers several benefits to the Canadian capital markets, including: reduction of processing costs due to development of STP systems; reduction of operational risk due to development of STP systems; protection of Canadian market liquidity; reduction of settlement risk; and, overall mitigation of systemic risk in, and support of the global competitiveness of, the Canadian capital markets.

The regulators note that they recognize, that implementing the instrument may entail costs, which will be borne by market participants. “In the CSA’s view, the benefits of the instrument justify its costs,” they say. “General securities law rules that require market participants to have policies and procedures to complete matching before the end of T and settle trades within the standard settlement periods will augment the efficiency and enhance the integrity of capital markets. It promises to reduce both risk and costs, generally benefit the investor, and improve the global competitiveness of our capital markets.”

Comments are due before May 2.