On August 3, 2017, the CSA published Staff Notice 24-316-Feedback on CSA Consultation Paper 24-402 Policy Considerations for Enhancing Settlement Discipline in a T+2 Settlement Cycle Environment, indicating that no additional measures are currently proposed in regards to enhancing the existing settlement discipline regime in response the September 5, 2017 move from a T+3 to a T+2 settlement cycle for certain securities. As previously discussed, amendments to National Instrument 24-101 Institutional Trade Matching and Settlement (the T+2 Revisions) became effective as of September 5, 2017 resulting in the standard settlement timeframe for certain securities to be shortened to trade date plus two days (T+2). Consultation Paper 24-402 (the Consultation Paper), previously discussed here, was published in anticipation of the transition to the T+2 cycle and sought to address certain risks that might arise in the context of this shortened settlement cycle.
Objectives of the Consultation Paper
The Consultation Paper was published on August 18, 2016 as part of the request for comments on the T+2 Revisions, with the general objective of seeking stakeholders’ views on the adequacy of the current settlement discipline regime in a T+2 environment. Of particular concern to the CSA was the risk that a standard T+2 settlement cycle might increase settlement failures. Accordingly the CSA sought stakeholder comments on policy approaches to mitigate that risk including:
- Whether additional settlement discipline measures might be required, including additional amendments to NI 24-101; and
- Whether other settlement discipline mechanisms for the Canadian equity and debt markets might be needed to deter settlement failures, such as a settlement-fail “penalty” mechanism or a close–out forced buy-in requirement.
Seven comment letters were received and five specifically addressed the questions posed by the CSA in the Consultation Paper.
Stakeholders were generally of the view that the settlement discipline regime in Canada is adequate in ensuring timely settlement of trades in equity and debt markets in a T+2 cycle environment. However, some concern was expressed regarding the lack of real-time or intra-day batch trade reporting and the ensuing delays for market participants to reconcile their marketplace trading activity. The current practice in Canada is to report executed trades to CDS in an end-of-day batch file which delays the processes for reconciliation and reporting by CDS. Suggestions of certain commentators to promote timely settlement and support market efficiency included:
- A requirement similar to that used in the United States to report trades to CDS in real-time (or near real time);
- More real time reporting through intraday files from the exchanges and CDS; and
- Moving from an overnight batch system to a multiple intraday batch system.
Next Steps: Review of Trade Reporting Practices
As a result of stakeholders’ feedback, the CSA has proposed a further engagement process with stakeholders to assess whether the lack of real-time or intra-day batch reporting of trades will pose a problem for trade reconciliation purposes in a T+2 environment and what the costs would be to move to real-time or intra-batch trade reporting, with a view to determining if any action is warranted by early 2018.