Canada is moving to a T+1 settlement cycle on May 27.Mark Blinch/Reuters
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North American investors and advisors will be able to settle exchange-traded funds (ETFs), debt and equities trades within one day at the end of May. The move, which is a reduction from the current two-day settlement cycle, should reduce risks for buyers, sellers and big market players.
While most investors working with an advisor likely pay little attention to settlement dates, the change is a huge undertaking for securities markets, says Keith Evans, executive director of the Canadian Capital Markets Association. The organization is working closely with the Canadian industry and its U.S. counterparts to ensure a smooth transition to T+1 (trade plus one day).
This isn’t the first time such a change has taken place. The settlement cycle – from when a trade is placed to when it is registered, settled and paid for, and the securities deposited in a buyer’s account – used to be five business days. In 1995, it dropped to three days and then to two days in 2017.
The U.S. initiated the change to T+1. As many Canadian companies are listed on both Canadian and U.S. stock exchanges and the North American securities markets are linked closely, four countries are moving together: a May 27 change in Canada, Mexico and Argentina; and a May 28 change in the U.S., when markets reopen after the Memorial Day holiday.
While advisors will need to be aware of the change, many investors won’t notice the difference, says Dan Bortolotti, portfolio manager at PWL Capital Inc. in Toronto.
From a portfolio manager’s point of view, the T+1 settlement puts equities and ETFs in line with other investments such as high-interest savings products, including guaranteed investment certificates and money-market products, that settle in a day or less. That will reduce the complexity of some trades, with less planning for portfolio managers about when to make a purchase based on different settlement times.
It will also ensure do-it-yourself investors don’t incur interest charges because they’ve forgotten to consider the different settlement times and purchased another investment before the cash from their initial investment landed in their account, he says.
“That’s going to make portfolio management much more efficient for people who do it daily,” he says.
The change also will reduce the time between trades and settlement for investors doing end-of-year tax-loss selling, and for those who like to buy a stock in time to be eligible to receive the company’s next dividend, he notes.
“I don’t expect there to be any risks or issues,” Mr. Bortolotti says. “In fact, if anything, I think it reduces a lot of the risks that are happening behind the scenes just because there’s less of a delay.”
However, he notes, investors have less time to reverse any trades made by mistake.
The Canadian Depository for Securities Ltd. manages risk in the settlement marketplace. “If I have a trade today, they ask me to provide collateral, which protects in case I default,” Mr. Evans says. “And when the trade settles, the collateral is released.”
Big players have “one big pool” to cover all their trades so “they have posted enough collateral for all of their obligations,” he says. The reduction in settlement time to one day means that there will be fewer trades that need to be covered at a time, so the amount of collateral required is less.
With a two-day settlement cycle, the U.S. Depository Trust & Clearing Corp. was holding about US$8-billion in collateral, and it’s forecasting a reduction of 42 per cent, or about $3.4-billion, due to the shortened settlement cycle.
Those figures are smaller in Canada but there will be a similar reduction, Mr. Evans says. “That’s a big chunk of money being freed up to be able to put to other use.”
There is a risk to investors when there’s a longer settlement time, he says. “If I sell today, I don’t get my money for two days, and I run the risk that a broker who I’ve sold it to, or the other party that I’ve sold it to, defaults, goes bankrupt, goes out of business.”
The shortened settlement cycle also means a seller can get their funds faster to redeploy and buyers can trade the security a day earlier, if they desire, he notes.
“Most of the world is trending toward real-time settlement,” Mr. Evans says. China has a T+0 system. Last year India moved to T+1, and Singapore, Japan and Australia are examining real-time settlement. Europe is consulting about its own move to a T+1 or T+0 settlement cycle.
While people may want an instantaneous world, the move to a T+0 or real-time trading “would be a multi-year, multi-billion-dollar initiative for North America,” he says.
Behind the scenes, a huge amount of money is being spent and work is going on to ensure market players and service vendors have the right technology in place to automate trades and other processes, Mr. Evans says. Currently, most are batch systems that run overnight.
Some of the complexities are time differences between North America, Europe and Asia, and how foreign exchange needs to be handled so the right currency is available to complete a trade – which currently takes two days, Mr. Evans says.
The key aim is to ensure the number of failed trades – those that aren’t completed for one reason or another, such as funds not being in the right place at the right time – doesn’t rise from the current range of 2.5 per cent to 3 per cent.
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