Exchanges ready for T+1

Canada’s major exchanges are prepared for Monday’s transition to next-day trade settlement.

“The market’s done a sterling job in getting ready across the industry,” said Steve Everett, head of post trade innovation with TMX Group Ltd. “From a systems-change perspective, everything is ready from our side.”

Everett said this weekend will involve final testing and then pushing the changes live. “Settlement day actually starts on Sunday,” he said, “so from Sunday everything will be in place.”

Joacim Wiklander, president and CEO of Cboe Canada, said Cboe Canada has been ready since the end of 2023.

“We had to provide facilities for testing in January so the rest of the industry could do their testing,” Wiklander said. He added that Cboe typically pushes software changes on weekends to minimize disruptions, so Monday’s effective date fits their existing process.

“I know it’s a big change for the industry — I don’t want to downplay it — but from our perspective, it’s actually a relatively small change,” Wiklander said.

Trades made in Canada on and after May 27 will settle in one business day instead of two, with the same to occur for trades made in the U.S. on and after May 28. (May 27 is a statutory holiday in the U.S. and markets will be closed.)

May 28 in Canada and May 29 in the U.S. will be a double settlement date, when trades from both May 24 and the previous day will settle.

Europe and Asia will not be moving to T+1, however. As a result of that mismatch and the change in general, Everett said “there might be an initial spike of [trading] fails; there may be a period of the market getting used to things, and different regions catching up, particularly around FX.” Foreign currency exchanges settle on a T+2 basis.

However, this short-term pain should yield long-term gain. “Fail rates eventually end up improving in a shortened settlement cycle,” Everett said. “What history shows us is that all metrics improve a year or two post shortening a settlement cycle.” Canada and the U.S. moved to a T+2 settlement standard in 2017.

Other potential risk areas include securities-lending transactions and ETF unit creations and redemptions.

Securities lending often involves several parties, and T+2 provides enough time — on average, 19 hours, Everett said — to address issues and, where necessary, recall a security in time for settlement. Recall communications are typically done via phone or email.

Everett said under T+1, the average window to address issues drops to four hours.

In response, TMX and the Canadian Securities Lending Association created a hub that will automate securities lending recalls. The hub is in testing and is slated to go live in the summer.

As for ETFs, even though they’re moving to T+1 settlement, their underlying securities may not all settle during the same timeframes, particularly European and Asian securities. That makes the creation and redemption process more challenging.

“It’s all solvable; it just adds some operational complexity for fund manufacturers,” Wiklander said.

Everett said preparations for T+1 have caused firms across the industry to increase their automation levels and to strengthen their trading processes.

“From an industry resiliency perspective, T+1 has been really great to achieve those two things,” he said. “The big difficulty with T+1 is it reduces your time to react. … Your processes have to be better; your ability to make decisions has to be better.”

After May 27 and 28, the work isn’t done. Everett said about a third of T+1-related initiatives will occur after the changeover, which will include monitoring and addressing trade failures.

According to the Canadian Capital Markets Association, which is co-ordinating the move to T+1, a January 2024 survey found the average trade failure rate could increase to 4.1% from 2.9% after the changeover.

“It’s a really good objective to try to get to lower fail rates as much as possible,” Everett said.

A successful move to T+1 will probably amplify calls for same-day settlement, Wiklander said. And reducing settlement in general is a positive, he said: “It’s just a more efficient use of capital when things are not tied up in settlement systems.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.