Transition to T+1

Introduction and Background

What is T+1 settlement?

T+1 settlement means that the security transactions are settled one business day after the transaction date (or the date when the trade is executed), denoted by ‘T.’ Likewise, T+0, T+2, or T+3 indicate that the settlement takes place on the same day, two business days later, or three business days later, respectively. During the trade settlement process, the buyer and seller swap payments and ownership of the securities.

When is the T+1 settlement live date in Canada and the US?

The transition from T+2 to T+1 settlement will happen on different dates for Canada and the US. The last day of the T+2 settlement will be Friday, May 24, 2024, for both countries. Canada (and soon-to-be-confirmed Mexico) will switch to T+1 on Monday, May 27, 2024, while the US will do so on Tuesday, May 28, 2024 (after the Memorial Day long weekend). It means Canada will have a double settlement day on Tuesday, May 28, 2024, and the US will have one on Wednesday, May 29, 2024.

T+1 Settlement Cycle Transition Timeline

	Friday        May 24, 2024	Saturday        May 25, 2024	Sunday        May 26, 2024	Monday        May 27, 2024	Tuesday        May 28, 2024	Wednesday        May 29, 2024	Thursday   May 30 & on
Canada/ Mexico	Last T+2 Trade Date	Conversion Weekend	Conversion Weekend	First T+1 Trade Date	Double Settlement Date	Trade and Settle T+1	Trade and Settle T+1
US	Last T+2 Trade Date	Conversion Weekend	Conversion Weekend	Conversion Weekend (Markets Closed)	First T+1 Trade Date	Double Settlement Date	Trade and Settle T+1

Why is Canada moving to T+1 on a different day from the US?

The US will move to the T+1 settlement cycle on May 28, 2024, following the final requirements from the Securities Exchange Commission (SEC). Canada will also adopt the T+1 settlement cycle one day earlier, on Monday, May 27, 2024. This is because May 27, 2024, is a US holiday (Memorial Day) and, therefore, a light trading day in Canada. It will minimize the impact of being out of sync for one day. Also, this will give Canadian firms more time to test and validate their system changes before trading with the US on a T+1 basis.

How and why is Canada moving to a shorter settlement cycle for securities transactions?

The Canadian financial industry has decided to follow the US regulatory decision to move to T+1, considering the close ties and interactions between the two markets. In Canada, this decision is an industry initiative, not a regulatory mandate. However, the Canadian Securities Administrator (CSA) provides the necessary regulatory framework to enable the industry to make this change.

What are the benefits of T+1 settlement?

The T+1 settlement cycle is expected to benefit the financial markets. It is expected to reduce credit and counterparty risk, lower collateral costs, and increase market liquidity. The shorter settlement cycle will also provide faster access to funding as trades will be settled sooner. Additionally, it will reduce clearing capital requirements and pro-cyclical collateral/margin requirements.

Which markets are moving to T+1?

India and China have already adopted the T+1 settlement cycle. In May 2024, the US, Canada, and soon-to-be-confirmed Mexico will move their settlement cycle to T+1.

Other markets, such as the UK, Europe, and Australia, are also considering moving to T+1 but have yet to announce definitive plans or dates.

What makes the move to T+1 unique from previous settlement date compressions?

Moving from a two-day to a one-day trade settlement cycle is a more significant challenge than transitioning from T+3 to T+2. Under T+2, firms have until noon on the second day to affirm/match counterparty trades; under T+1, firms need to affirm/match on the same day as the transaction (9 pm on T in the US, 3:59 am on T+1 in Canada). While manual operations were still feasible under T+1, the 24-hour time lost will require more automation, higher quality information and more straight-through processes than before.

What is the NI-24 101 and the Companion Policy 24-101, and why is it important?

National Instrument (NI) 24-101 is a Canadian regulation for matching and settling institutional trades; it is accompanied by Companion Policy 24-101 (CP), which clarifies how to follow it.

• On December 15, 2022, the Canadian Securities Administrators (CSA) published proposed rule amendments to NI 24-101 to support the transition from a two-day Canadian trade settlement cycle to a one-day settlement cycle in May 2024.
• On August 10, 2023, the CSA published Staff Notice 24-319 regarding NI 24-101 which contained an update and staff recommendation on the T+1 transition.

The proposed amendments and recommendations require market participants to review their procedures and processes.

What are the main challenges of moving to T+1?

According to a survey conducted by The Value Exchange sponsored by The Depository Trust and Clearing Corporation (DTCC) and the Canadian Depository for Securities (CDS)[1], market participants consider Middle Office, Funding, Settlement, Fails Management, Corporate Action, Securities Lending and FX as the most significant areas of impact when transitioning to T+1 settlement cycle. Other considerations include account opening and onboarding, trade execution, collateral management, valuations, and risk management. From a process perspective, manual processes, legacy systems, dependencies in operating models and time zone coverage would also be challenges to address.

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RBCIS T+1 Program and Services

What is RBCIS’ status of the transition to T+1 settlement?

RBC Investor Services (RBCIS) launched a program in 2022 to address the transition to the shorter settlement cycle of T+1 in the US and Canada. We actively participate in several association and industry discussions to ensure a smooth transition. Current developments include mandatory changes in systems and processes, while analyses continue on challenges that require market standards and solutions.

For more insights into the status of the T+1 transition and how it will impact institutional investors, please read our article: Tracking the global shift to T+1.

RBCIS is on course to be fully ready for the T+1 go-live.

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Trade Timing and Process

What is the new T+1 settlement deadline for trade matching in Canada and the US?

Under the US SEC rules, the regulator expects a 100% matching at 9:00 pm EST on the trade date (T).

According to CSA Staff Notice 24-319, Canada will revise its institutional trade-matching deadline to 3:59 am EST on T+1 before the netting settlement processes begin at 4:00 am EST, instead of the current draft regulation of 9:00 pm EST on T. While the rules are still not final, if validated, this will provide the Canadian market with an additional 7 hours to match their trade.

RBCIS continues to monitor the final publication before communicating the new deadline. However, similar to the process under T+2, RBCIS may apply an earlier trade settlement instruction deadline to allow time for client referral and discrepancy resolution.

Will trades prior to the implementation date continue to settle on a T+2 settlement basis until settlement?

Friday, May 24, 2024 will be the last T+2 trade date for the US and Canadian market.

What securities will be affected by the shortened cycle?

The Canadian Capital Markets Association (CCMA) has published a list of securities that are expected to move from a standard T+2 to a standard T+1 settlement cycle in 2024.

What are the different steps of the trade matching process (in Canada)?

The trade matching process is a crucial first step in the post-trade process that involves verifying the trade data elements to reconcile or agree to the trade details. According to the Companion Policy 24-101 published by the Canadian Securities Administrators (CSA), matching requires that any custodian holding the institutional investor’s assets be in a position to affirm the trade so that the trade can be ready for the clearing and settlement process through the facilities of the clearing agency.

The following activities are usually involved in trade matching:

• The registered dealer notifies the buy-side manager that the trade was executed.
• The buy-side manager advises the dealer and any custodian(s) how the securities traded are to be allocated among the underlying institutional client accounts managed by the buy-side manager.
• The dealer reports and confirms the trade details to the buy-side manager and clearing agency.

The custodian(s) of the assets of the institutional investor verifies the trade details and settlement instructions against available securities or funds held for the institutional investor. After trade details are agreed, the buy-side manager instructs the custodian(s) to release funds and/or securities to the dealer through the facilities of the clearing agency.

What is the difference between matching, affirmation, confirmation, and allocation in trade settlement?

According to the Companion Policy 24-101, trade matching is a process that is also referred to as trade confirmation and affirmation.

Trade confirmation is the process of comparing the trade details entered by the counterparties (such as the buyer and seller) to ensure that they agree on the terms of the transaction, while trade affirmation is the process of verifying and approving the trade details by the investment manager or its agent.

Allocation is the process of distributing the trade details to the relevant accounts or sub-accounts of the investment manager or its clients. Allocation is necessary for trades that involve multiple accounts or sub-accounts.

Is there a process, similar to the Match to Instruct (M2i) workflow proposed by the Depository Trust and Clearing Corporation (DTCC) in the US, available in Canada?

A match-to-instruct process is considered by numerous market participants a key enabler to achieving faster settlement cycles, such as T+1, by reducing the time and manual intervention required for trade confirmation. An M2i process is a workflow that automatically triggers trade affirmation and delivery to the settlement agent when a trade match between two parties occurs. This eliminates the need for either party to take further action.

Canadian Depository for Securities (CDS) do not currently support an M2i process. RBCIS, and most Canadian market participants, have been made aware that this is a topic of discussion and consideration at the CDS level. RBCIS continues to monitor the ongoing conversation and will inform our clients of any opportunities that may be presented.

Will there be penalties for non-compliance with NI 24-101?

Although no penalties have been specified under NI 24-101 for failing to meet different cut-off times; there may be some consequences for the registered dealers and advisers who do not meet the trade matching target requirements. For example:

• The Commission may request additional information from the registered firms that do not meet the exception reporting thresholds, such as the reasons for the delays and the steps taken to address them.
• The Commission may conduct compliance reviews of the registered firms with persistent or significant trade matching issues and take enforcement actions if necessary.
• The Commission may impose terms and conditions on the registration of the registered firms that do not comply with NI 24-101, such as requiring them to submit regular reports or to implement corrective measures.

Regarding the implementation of the T+1 settlement cycle, no new penalties would be introduced.

It should be noted as well that the Bank of Canada is introducing a failed trade fee targeting T-Bills and Government Bonds. This fee will be fully introduced after the complete transition to T+1.

Will there be penalties for failing to settle bonds and trades?

The Bank of Canada is considering a fee for failed government bond trades. The fee would only apply after the transition to T+1. The fee would undergo a trial period before being permanently implemented.

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 AM EST on T+1, demanding more staff to affirm all trades?

The trades sent promptly and with good data quality do not require specific extended-hour treatments as they can be processed STPs. However, if there are any errors or discrepancies that need to be repaired, the staff on both the buy-side and sell-side must be available. RBCIS will consider a follow-the-sun model to support the back-office activity in several areas. While some buy-side firms have indicated that they do not want to extend their current workdays, firms with such an approach may need to consider further how to ensure early communication of trades and undergo further data quality checks.

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Client Preparation and Actions

How can North American investment managers prepare for the transition to T+1 settlement?

Industry participants must shorten and update their internal processes, both automated and manual, such as trade reconciliation, correction, matching, and confirmation, to adapt to a shorter settlement cycle.

At a high-level, to prepare for the transition to T+1 settlement, North American investment managers should consider the following aspects of their operations:

• System: Ensure that their system is compatible with the new settlement cycle and can handle the higher volume and speed of transactions.
• Operating model: Review their internal processes and workflows to eliminate any manual processes, especially during the exchange of information with their brokers, dealers, or custodians.
• Volume: Anticipate the potential increase in trading activity and liquidity demand due to the shorter settlement cycle and plan accordingly. They should also ensure that they provide their custodian(s) with trade details as soon as possible on the trade date, avoiding any delays or bottlenecks at the end of the day.
• Activity: Evaluate the impact of T+1 on their specific types of transactions, such as cross-border trades, securities lending, derivatives, etc., and adjust their strategies accordingly.
• Global footprint: Consider the implications of T+1 on their interactions with other markets and jurisdictions that may have different settlement cycles or regulations.

How can non-North American investment managers prepare for the transition to T+1 settlement?

At a high-level, to prepare for the transition to T+1 settlement, non-North American investment managers should consider the following aspects of their operations:

• Be aware of the challenges and opportunities that the shorter settlement cycle will create for their foreign exchange (FX) transactions. They will need to either prefund the transaction with USD / CAD as applicable or arrange for a shorter T+1 FX settlement, which may have higher costs and risks.
• Be mindful of the time zone differences that will affect the timing of trade execution and confirmation, especially if they are operating in different time zones than the Eastern Time zone. They may need to extend their hours of operation in their local country or establish a local presence in North America to ensure timely and efficient settlement.
• Leverage the best practices and standards of the industry to enhance their automation and standardization in the trade lifecycle, from order placement to settlement confirmation. They should review their systems, processes and workflows to identify any gaps or inefficiencies that may hinder their readiness for T+1.

Refer to our article, Automation paves the way to T+1, for more information on these and other important considerations.

Securities Lending: How can clients prepare for T+1?

Clients should take the opportunity to identify and minimize areas of friction that may impede their ability to provide timely settlement instructions on trade date. This is critical to a well-functioning securities lending program in a compressed settlement cycle environment.

How can firms leverage technology and operations to adapt to T+1 settlement?

T+1 settlement requires faster and more efficient processing of trades, which can be achieved by investing in technology and optimizing operations. Firms can simplify their front-to-back technology to reduce costs and increase agility in a changing market landscape. They can also re-think their resource strategy to support accelerated settlement, such as using a follow-the-clock approach or outsourcing some settlement operations.