T+2 steps forward
26 October 2016
Lou Lesnika, assistant vice president of trade selttlements at CIBC Mellon, provides an update on asset servicing in Canada
Image: Shutterstock
As a fundamental requirement for asset owners, asset safety remains a priority for financial services firms in Canada as it is for firms around the world. Custodians should continue to be expected by asset owners and managers to adhere to high standards and have appropriate controls in place.
With asset safety an umbrella concern, there are market changes pending in Canada as well. A key market change on the horizon in Canada is the adoption of a shorter settlement cycle. Canadian market stakeholders and participants are likewise preparing to shorten the settlement cycle to T+2 from the current T+3 standard, which is targeted to take place on 5 September 2017. Additionally, the industry in Canada is proposing to the regulator, the Canadian Securities Administrators (CSA) to shorten the trade cycle for trade matching scorecards for the non-western hemisphere to T+1 at noon from T+2 at noon.
Safeguarding assets
Canada is known globally as a market with high standards for market participants and a known destination for market participants seeking stability, robust market infrastructure and an effective regulatory environment. A service provider with similarly high standards is important, as careful attention to organisational risk governance, transparency and personal accountability related to asset safety is critical. Asset owners and managers should expect their custodians to adhere to high standards, such as having well-defined controls and robust reconciliation procedures, to support the security and safety of assets held in custody.
CIBC Mellon applies these principles. CIBC Mellon’s operational control group is a line of a business agnostic group. Its role is to validate that the controls used by business operations in daily processes are both designed appropriately and working effectively. The group works to promote the identification, measurement and management of risk via four processes: control testing, operational loss processes, providing risk and audit support, and control and risk awareness training. Those are just some of the ways we maintain a strong risk culture at CIBC Mellon.
The adoption of shorter settlement cycles
A noticeable market change is the adoption of shorter settlement cycles in various jurisdictions. As global markets continue to move—or have already moved—to a T+2 settlement cycle, Canadian market stakeholders and participants are similarly preparing to shorten the settlement cycle to T+2 from the current T+3 standard. Canadian regulators and securities firms recognise the necessity of properly preparing Canadian stakeholders for the new cycle. The Canadian Capital Markets Association (CCMA) notes there is full Canadian industry agreement and believes that the change to T+2 settlement with the US is required given the highly interconnected nature, and relative sizes, of the Canadian and US capital markets. With the substantial volume of cross-border trading activity between Canada and the US, Canadian regulators and the CCMA have aligned the Canadian market timelines to those of the US, targeting 5 September 2017.
Given complex regulations and market structure in Canada and the US, planning a shorter settlement cycle well in advance gives stakeholders the time they need to assess and test their preparations. Every firm in the securities industry in Canada and the US will be—if not already—involved in the transition, directly or indirectly.
Affected securities that will settle on T+2
In July 2016, the CCMA issued a final list of investment vehicles affected by the change to T+2. The list of affected securities that will settle on T+2 includes: stocks/equities; corporate bonds; federal, provincial and municipal government bonds with a remaining term to maturity of three or more years; mutual funds; exchange-traded funds; hedge funds; segregated funds; and principal-protected notes.
The CCMA is working to promote industry awareness and prepare Canada for T+2. The CCMA is coordinating key securities infrastructure including the Canadian Depository of Securities (CDS), Fundserv, and exchanges along with the CCMA’s dealer, custodian, asset manager and other industry stakeholders to prepare them for the transition. The CCMA has established a T+2 Steering Committee (T2SC) to support a smooth transition to a T+2 settlement. Additionally, CDS is coordinating activities with stakeholders to position Canada for a smooth transition and it has determined that its systems will be minimally affected.
There are some key considerations for Canadian investors and investors into Canada regarding the move to T+2. These focus areas include: National Instrument (NI) 24–101 rule amendments, holiday processing, corporate actions (for example, ex and record date calculations) and buy-side client readiness. Firms preparing for T+2 may want to consider the changes that may be necessary for their relevant securities systems. Firms in Canada are not only responsible for satisfying themselves regarding their own systems, but are also expected to take steps to confirm that their linkages with other stakeholders in the settlement chain are prepared for the move.
Moving trade matching to T+1 at noon
Another market change is shortening the trade cycle for trade matching scorecards for the Eastern hemisphere to T+1 at noon. The CCMA’s operational working group is currently recommending to the CSA that trade matching for non-North American clients should move to T+1 at noon from T+2 at noon to be in line with North American clients. This is a result of the shortened settlement cycle, T+2 from T+3.
T+2 and CIBC Mellon
CIBC Mellon is playing an active role in the readiness and consultations taking place across the industry leading up to the 2017 implementation of T+2. We bring considerable settlement experience—in addition to our daily settlement activities—and will continue to remain active and provide clients with updates as they relate to the T+2 settlement in Canada and CIBC Mellon’s supportive efforts.
With asset safety an umbrella concern, there are market changes pending in Canada as well. A key market change on the horizon in Canada is the adoption of a shorter settlement cycle. Canadian market stakeholders and participants are likewise preparing to shorten the settlement cycle to T+2 from the current T+3 standard, which is targeted to take place on 5 September 2017. Additionally, the industry in Canada is proposing to the regulator, the Canadian Securities Administrators (CSA) to shorten the trade cycle for trade matching scorecards for the non-western hemisphere to T+1 at noon from T+2 at noon.
Safeguarding assets
Canada is known globally as a market with high standards for market participants and a known destination for market participants seeking stability, robust market infrastructure and an effective regulatory environment. A service provider with similarly high standards is important, as careful attention to organisational risk governance, transparency and personal accountability related to asset safety is critical. Asset owners and managers should expect their custodians to adhere to high standards, such as having well-defined controls and robust reconciliation procedures, to support the security and safety of assets held in custody.
CIBC Mellon applies these principles. CIBC Mellon’s operational control group is a line of a business agnostic group. Its role is to validate that the controls used by business operations in daily processes are both designed appropriately and working effectively. The group works to promote the identification, measurement and management of risk via four processes: control testing, operational loss processes, providing risk and audit support, and control and risk awareness training. Those are just some of the ways we maintain a strong risk culture at CIBC Mellon.
The adoption of shorter settlement cycles
A noticeable market change is the adoption of shorter settlement cycles in various jurisdictions. As global markets continue to move—or have already moved—to a T+2 settlement cycle, Canadian market stakeholders and participants are similarly preparing to shorten the settlement cycle to T+2 from the current T+3 standard. Canadian regulators and securities firms recognise the necessity of properly preparing Canadian stakeholders for the new cycle. The Canadian Capital Markets Association (CCMA) notes there is full Canadian industry agreement and believes that the change to T+2 settlement with the US is required given the highly interconnected nature, and relative sizes, of the Canadian and US capital markets. With the substantial volume of cross-border trading activity between Canada and the US, Canadian regulators and the CCMA have aligned the Canadian market timelines to those of the US, targeting 5 September 2017.
Given complex regulations and market structure in Canada and the US, planning a shorter settlement cycle well in advance gives stakeholders the time they need to assess and test their preparations. Every firm in the securities industry in Canada and the US will be—if not already—involved in the transition, directly or indirectly.
Affected securities that will settle on T+2
In July 2016, the CCMA issued a final list of investment vehicles affected by the change to T+2. The list of affected securities that will settle on T+2 includes: stocks/equities; corporate bonds; federal, provincial and municipal government bonds with a remaining term to maturity of three or more years; mutual funds; exchange-traded funds; hedge funds; segregated funds; and principal-protected notes.
The CCMA is working to promote industry awareness and prepare Canada for T+2. The CCMA is coordinating key securities infrastructure including the Canadian Depository of Securities (CDS), Fundserv, and exchanges along with the CCMA’s dealer, custodian, asset manager and other industry stakeholders to prepare them for the transition. The CCMA has established a T+2 Steering Committee (T2SC) to support a smooth transition to a T+2 settlement. Additionally, CDS is coordinating activities with stakeholders to position Canada for a smooth transition and it has determined that its systems will be minimally affected.
There are some key considerations for Canadian investors and investors into Canada regarding the move to T+2. These focus areas include: National Instrument (NI) 24–101 rule amendments, holiday processing, corporate actions (for example, ex and record date calculations) and buy-side client readiness. Firms preparing for T+2 may want to consider the changes that may be necessary for their relevant securities systems. Firms in Canada are not only responsible for satisfying themselves regarding their own systems, but are also expected to take steps to confirm that their linkages with other stakeholders in the settlement chain are prepared for the move.
Moving trade matching to T+1 at noon
Another market change is shortening the trade cycle for trade matching scorecards for the Eastern hemisphere to T+1 at noon. The CCMA’s operational working group is currently recommending to the CSA that trade matching for non-North American clients should move to T+1 at noon from T+2 at noon to be in line with North American clients. This is a result of the shortened settlement cycle, T+2 from T+3.
T+2 and CIBC Mellon
CIBC Mellon is playing an active role in the readiness and consultations taking place across the industry leading up to the 2017 implementation of T+2. We bring considerable settlement experience—in addition to our daily settlement activities—and will continue to remain active and provide clients with updates as they relate to the T+2 settlement in Canada and CIBC Mellon’s supportive efforts.
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