Canada has moved to a T+1 settlement cycle for equity and long-term debt market trades. The shift, which is in line with similar regulatory changes in the US, promises to simplify the settlement process and reduce the risks associated with delayed trades.
Improving market liquidity
The Canadian Securities Administrators (CSA) confirmed in a statement on their website that amendments to the National Instrument 24-101 Institutional Trade Matching and Settlement are now effective. These changes reduce the time frame for matching institutional trades from two days after the trade date (T+2) to one day (T+1). This step is consistent with the US market, which will adopt the T+1 settlement on May 28, 2024.
National Instrument 24-101 provides a framework to ensure timely and efficient settlement of institutional trades by registered traders and advisers. It requires registered companies to implement and enforce policies aimed at achieving the new T+1 conformity, thus enhancing market stability and reducing the risk of unstable transactions.
Effective June 3, 2024, auctions of Canadian securities, including Treasury bills, bonds and cash management bond repurchases, will adhere to the T+1 settlement cycle. This shift came after the switch to T+1 settlement by the Canadian secondary market today (Monday).
Treasury auctions will continue on alternating Tuesdays, with settlements moving to Wednesdays. Likewise, bond auctions will be settled on the business day following the auction. The Bank of Canada and government authorities will monitor this transition to ensure a smooth transition.
Coordination of Canadian and US markets
The CSA's decision to move to T+1 settlement is in line with changes in the US market to ensure cross-border consistency and facilitate smoother international transactions. This coordination is expected to enhance investor confidence and enhance the overall efficiency of North American capital markets.
By reducing the settlement cycle to one day, Canada aims to mitigate counterparty risk and improve liquidity in the markets. The T+1 settlement cycle represents a significant step forward in modernizing financial infrastructure, placing Canada alongside leading global markets in terms of settlement efficiency.
Settlement in securities trading refers to the transfer of securities to the buyer's account and cash to the seller's account. Currently, the standard settlement cycle, T+2, allows two business days between the transaction date and the settlement date.
The introduction of T+1 settlement shortened this timeline to just one business day. Likewise, investors who purchase securities subject to the T+1 settlement cycle will pay for their transactions one business day in advance.
This article was written by Jared Kirroy at www.financemagnates.com.