While the shift to T+1 settlement in the Canadian securities industry was a success, there’s room for improvement, and there are lessons from the exercise for an eventual move to even faster settlement, which will be a much tougher change, says the Canadian Capital Markets Association (CCMA).
The industry-led group that oversaw the effort to reduce the settlement cycle in Canada published a post-implementation report Thursday — officially declaring the project a success, and signalling its intention to wind down its active work for now.
The report cited improvements in trade matching rates and the generation of collateral savings, even as settlement failures remained in line with prior rates.
“Due to the many people who worked sometimes very long hours to achieve a smooth transition, the project was delivered on time and without market disruption or unexpected effects for institutional and other investors,” it said. “Some initial transitional issues were experienced but these ultimately had little negative impact on industry members. CCMA’s role was completed on budget.”
However, the group also noted that the industry hasn’t reached the level of trade matching that was expected from the project’s participants.
“The goal of 90% matching by 3:59 a.m. ET on T+1 in Canada has not been achieved,” it said.
And, while it was expected that the move to faster settlement would be driven by increased automation, the report noted, “more manual workarounds were used due to the undesirably long period of effective date uncertainty.”
“The board expects more improvements in coming months as firms further optimize their systems and process automation,” said Bruce Macdonald, chair of the CCMA board of directors, in a release.
Additionally, he said the board has determined that the CCMA should cease active operations, now that the project is effectively complete.
“The CCMA remains ready to be re-activated the next time there is a project affecting multiple segments of the financial sector that would benefit from the strong central coordination of the CCMA, with participation across the capital markets industry,” he said.
Looking ahead, the CCMA suggested that the industry should be prepared for a possible move to even faster settlements at some point, given that the U.S. Securities and Exchange Commission (SEC) saw the move to T+1 as an interim step.
“Canada must be ready to adopt a shorter cycle at the same time as the U.S. should the SEC proceed with rule-making or the American industry announce the intention to move to less than T+1,” it said.
Yet, it cautioned that this would likely be a fundamentally tougher project.
“Any further move will require substantially more work, time, reliance on technology, money, and coordination. It will entail much greater transition risk than did the move to T+1,” it said.
“There would need to be a drastic overhaul of industry and individual firms’ infrastructure and operating models in any transition to T+0 on an order of magnitude higher than any T+1 considerations, mainly due to an industry that still heavily relies on overnight batch processes,” it said.