Murray Bender: RBC Investor Services presents insights on the challenges and opportunities confronting corporate and institutional investors. Today’s podcast is part of our series of communications on Canada’s transition to a compressed T+1 trade settlement cycle planned for mid-2024. We’re pleased to welcome Mario Brizar, Director of Business Development at RBC Investor Services, who’ll be answering some key questions regarding T+1. Welcome, Mario.
Mario Brizar: Hi there, Murray. A pleasure to be here.
Murray Bender: So, Mario, why exactly is Canada moving to a shortened T+1 settlement cycle?
Mario Brizar: As an industry, we’ve learned a lot from the 2008 global financial crisis. The move to T+1 has been driven by regulators and market participants who have increased their focus and emphasis on reducing operational and market risk. Shortening the settlement cycle, not just in Canada, but other financial centres like the US, India, and China will promote a timely and efficient exchange of securities and will support increased liquidity in the market. Ultimately, a compressed settlement window will reduce the amount of trades in a pending or unsettled status, which will decrease credit and counterparty risk.
Murray Bender: When is the transition to T+1 taking place here in Canada?
Mario Brizar: This one’s a little tricky because there is a slight difference between the implementation timelines with Canada and the US So Friday, May 24 is the last T+2 trade date for both countries. Saturday and Sunday will be the conversion weekend on the stock exchanges.
In Canada, on Monday, May 27, we will see the first T+1 trade date, with Tuesday, May 28 being the so-called double settlement date, where T+2 trades from Friday and T+1 trades from Monday will both settle on the Tuesday. This will be the first big test as we’re anticipating a 50% increase in settlement volume on that day.
In the US, markets will be closed on Monday, May 27 for the Memorial Day weekend, meaning the US will have three days for their conversion. On Tuesday, May 28, the US will have its first T+1 trade date, with Wednesday, May 29 as a double-settlement date. From Thursday, May 30, both markets will be operating in a T+1 environment.
Murray Bender: Now you mentioned Canada and the US What’s happening in other jurisdictions as far as T+1 is concerned?
Mario Brizar: Yeah. This has been really interesting to observe from a global perspective. We’ve really seen four groups arise, each with their own timelines and milestones.
The first group, which consists of China and India, are deemed to be the early movers or the early adopters. They’re currently operating in a T+1 environment, with some trades in Hong Kong settling on T. This group has showed us that it can be done and has given other stock exchanges a blueprint as to how to manage the conversion.
The next group consists of Canada, the US, and Mexico. This is seen as the significant market movers. Given the size and significance of the North and Central American markets, all moving in unison, this group signifies the point of no return for T+1.
The third group consists of markets like the UK and Australia, who are currently in consultation and are closely observing the outcomes in North America. These jurisdictions are expected to release their findings at the end of the year and could also move to T+1 within the next 12 to 18 months.
The fourth and final group, out of the remaining major players, include the European markets. The European markets adopted a penalty regime under CSDR to try and increase efficiency and improve market settlement rates. At a high level, their approach was to issue fines to market participants for failed trades in a T+2 environment. Their view was that penalties would deter late settlement and would really encourage market participants to automate and improve their operating models.
Unfortunately, CSDR hasn’t had the desired approach, at least in the short term. The rate of T+2 fails hasn’t reduced significantly, while lots of resources have been deployed to monitor and enforce the penalties. Ultimately, each jurisdiction has the same overarching goal, to reduce credit, operational, market and counterparty risk.
It’s been really fascinating to see how the carrot-and-the-stick approach are being played out across the world, with the carrot being the move to T+1, where your operating model is either efficient enough to trade within a compressed settlement window, or you’re out of the market, versus the stick approach, where you’re being penalized for failed trades.
Murray Bender: How is moving to T+1 different from the transition to T+2 that occurred, what, some six years ago now?
Mario Brizar: Yeah. That’s a great question, Murray. It doesn’t exactly sound like a big change, does it, to go from T+2 to T+1, especially given that, like you said, we were able to take one day out of the settlement cycle, just six years ago, with really limited impact on market participants.
In practice, however, the move from T+2 to T+1 has some significant differences to what we experienced six years ago. As it stands today, market participants have a one-day buffer to repair and fine-tune instructions, allowing trades to match and affirm one day after trades are placed and well ahead of T+2 settlement.
Looking at the US as an example, when we move to the new settlement regime, the affirmation deadline will be 9 p.m. on T, meaning trades need to be matched and affirmed only a few hours after market close. This requirement to complete the operational heavy lifting of trade execution, enrichment, allocation, and matching on the same day was not experienced when we moved from T+3 to T+2.
Moreover, the staggered implementation of T+1 across jurisdictions will add additional operational challenges to investment managers who are trading in markets that really lack that synchronization across the settlement side. Think about the difficulty of managing the timing discrepancy between, say, a sell in a T+1 market like Canada or the US, and a buy in a T+2 market in Europe. These complexities will really shine a spotlight on trade and cash management.
And a final point on the key differences is the consideration investment managers need to make with regard to their BCP or recovery plans. With the settlement window being squeezed, there isn’t much room for system outages or downtime. So if settlements are being managed in-house, the investment manager needs to ask themselves if they have a robust fallback solution in the case of a system or operating model interruption.
Murray Bender: So last question, Mario. What types of securities will T+1 apply to?
Mario Brizar: Yeah. There’s a—there really is an extensive list of securities that will fall under the T+1 regime. These include equities, bonds, even ETFs. The Ontario Securities Commission and the Canadian Capital Markets Association have provided detailed summaries of the instruments in scope. These useful resources can be found online.
Murray Bender: So interesting times ahead. Thanks for being with us today, Mario.
Mario Brizar: Pleasure to be here, Murray. Thank you.
Murray Bender: We’ll be continuing the T+1 discussion as part of our upcoming communications in preparation for Canada’s move to a shortened settlement time frame in May of next year, so please stay tuned. In the meantime, for insights on a range of topics relevant to corporate and institutional investors, including our previous podcasts, visit rbcis.com/insights.
I’m Murray Bender. Thanks for listening.
This content is provided for general information and does not constitute financial, tax, legal, or accounting advice and should not be relied upon in that regard. Neither RBC Investor Services nor its affiliates accepts any liability for loss or damage arising from use of the information in this podcast.