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Countdown to T+1: Preparing for the Canadian Securities Settlement Shift in May 2024

T+1 securities settlement is around the corner: How Canadian investment firms can prepare

The U.S. Securities and Exchange Commission (SEC) and its Canadian equivalent, the Canadian Securities Administrators (CSA), have adopted a rule amendment shortening the securities transaction settlement cycle to trade date plus one day (T+1). Currently, settlements in these markets for applicable securities occur on trade date plus two days (T+2). This material change takes effect this year on May 27 in Canada and May 28 in the United States impacting most buy/sell-side transactions.

What’s behind the move to T+1?

Over the last two decades, a slew of events impacting global financial markets has created a need for more stable liquidity and an increased requirement for brokers to provide clearing agents with more collateral while waiting for trades to settle. This in turn has created greater liquidity, market, and credit risks for all stakeholders.

The rationale for shortening the time between transactions and settlement dates is that market volatility will be more tightly managed, and the risk of default by trading parties will be reduced. 

This securities settlement change affects most buy/sell-side transactions, with a few exceptions, such as government bonds, commercial paper, and certain limited partnership interests.

What’s the impact on investment firms?

Trade allocations for block trades, confirmations, and matching must now occur no later than the end of the trade date. Effectively, the window for securities clearing and the time available to prepare for closing and addressing errors within the settlement lifecycle will be cut in half.

These compressed timelines introduce a new set of headaches. Offices at many buy-side firms traditionally close at 17:00, while settlement issues often arise after hours. If investment firms operate under the same working hours in a T+1 environment, their operations teams might not identify potential settlement issues until the following morning. That leaves them just one working day to take remedial action.

With only a few working hours to deal with any settlement snags, automation will be vital in ensuring that the transition to T+1 is successful.

Steps for preparing for T+1 securities settlement

While the anticipated benefits of the shortened settlement time are compelling (for example, market liquidity, reduced risk, and other efficiencies that will be realized over time), right now investment firms need to concentrate on day-one readiness.

With time running out to prepare, investment firms need to review their end-to-end trade settlement model and implement operational and behavioural changes. Perhaps most importantly, as we touched on earlier, they need to invest in technology-driven automation. The right solution will increase efficiencies in core trade settlement activities, specifically by:

  • Affirming all activity on the trade date, with minimal exception queues needing repair and resolution
  • Enabling straight-through processing (STP)
  • Automating trade interfaces between order management/execution platforms and settlement and matching applications
  • Providing clear, systematic trade instructions to custodians and other affected stakeholders
  • Introducing data and oversight mechanisms to facilitate automated receipt of real-time settlement status updates from both custodians and brokers
  • Delivering settlement-focused workflow management and oversight tools

In closing

The move to T+1 will drive further automation of the transaction lifecycle and encourage investment firms still using manual processes and communication to modernize their infrastructure and upgrade their workflows.

Although firms are actively considering the implications of T+1, many still have much to overcome before they’re ready. The sooner they move to digital automation, the cheaper and more efficient their operational processes will become. Those that delay will find it more difficult to change established institutional behaviour and eliminate aging, inefficient trade processes.

At FCC, we’re engaging proactively with our clients to ensure they’re aware of the critical implications of the move to T+1 and helping them make the transition a smooth one for you and your customers.

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Learn more about how partnering with Fidelity Clearing Canada and our industry-leading uniFide® business platform can help you confidently navigate the move to T+1 – while transforming effort into efficiency, and grind into growth.