Alert:
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New Self-Regulatory Organization of Canada (New SRO) is proposing amendments to the Universal Market Integrity Rules (UMIR) and Investment Dealer and Partially Consolidated Rules (IDPC Rules) (collectively, the Proposed Amendments) to facilitate the investment industry’s move from a trade date plus two business days (T+2) settlement cycle to a trade date plus one business day (T+1) settlement cycle.
The primary objective of the Proposed Amendments is to ensure that the New SRO’s requirements support the investment industry’s move to T+1 settlement.
The Proposed Amendments:
How to Submit Comments
Comments on the Proposed Amendments should be in writing and delivered by June 19, 2023 (60 days from the publication date of the notice) to:
Member Regulation Policy
New Self-Regulatory Organization of Canada
Suite 2000
121 King Street West
Toronto, Ontario M5H 3T9
e-mail: [email protected]
A copy should also be provided to the Recognizing Regulators by forwarding a copy to:
Market Regulation
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West
Toronto, Ontario M5H 3S8
e-mail: [email protected]
Commentators should be aware that a copy of their comment letter will be made publicly available on the New SRO website at www.iiroc.ca.
In 1997 and in 2017, as technology and automation evolved, the investment industry shortened the standard settlement cycle for equity and long-term debt market trades to reduce processing times and increase market efficiency. Currently, the standard securities settlement cycle in Canada and the United States is two days after the date of the trade.
On December 1, 2021, the investment industry in the United States, represented by the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC), published a report targeting the first half of 2024 to shorten the United States securities settlement cycle further from two days after the date of the trade to one day after the date of the trade. The move to a T+1 settlement cycle will increase the overall efficiency of the securities markets and reduce credit, market and liquidity risks associated with securities transactions. On February 15, 2023, the Securities and Exchange Commission (SEC) adopted rule changes to shorten the standard settlement cycle to T+1. The industry must implement the move to T+1 by May 28, 2024 to comply with the SEC rules.
It is important that Canada’s settlement cycle continues to be harmonized with the U.S. settlement cycle, because of the close connections between our capital markets. The Canadian Capital Markets Association (CCMA) is coordinating the move to T+1 in Canada across the key investment industry stakeholders to ensure all stakeholders are prepared for the implementation in 2024. The New SRO participates on the CCMA Board, the CCMA T+1 Steering Committee and the CCMA Legal and Regulatory Working Group (LRWG).
The text of the Proposed Amendments is set out in Appendix B and a blackline of the changes is set out in Appendix A.
We reviewed UMIR, IDPC Rules, Mutual Fund Dealer Rules (MFD Rules), Form 1 and standard agreements to identify any provisions that may require revision due to the move to a T+1 settlement cycle. We identified one definition within UMIR and multiple provisions within the IDPC Rules that require amendments, which are described in section 1.3. No amendments were identified in the standard agreements, MFD Rules or Form 1.
Although we did not identify any required amendments to the clauses with the standard agreements, we recommend that Dealer Members review their executed agreements and accompanying schedules, to determine whether they may have instructions, deliver or payment obligations, and interest calculations that are dependent on or specific to a T+2 settlement cycle.
The standard agreements are:
The Proposed Amendments:
The text of the Proposed Amendments1 is set out in Appendix B and a blackline of the changes is set out in Appendix A.
We have amended the following rules as described to shorten the appropriate time periods to harmonize with the T+1 settlement cycle:
Fixed income delivery
IDPC Rule subsection 4805(1) defines regulary delivery for government and other bonds and debentures and includes the terms for stopping of accrued interest. This subsection defines regular delivery as the second business day after the transaction date and requires interest to stop accruing, where applicable, on the second business day after the transaction takes place.
We have shortened the timeline in subsection 4805(1) to harmonize with the T+1 settlement cycle for:
(Appendix A – Proposed Amendment #8)
During our review of the T+1 settlement impact on the delivery, trading and settlement rules, we identified delivery rules that required modernization as follows:
Part B of IDPC Rule 4700 sets out the general trading and delivery requirements applicable to all transactions including requirements for Dealers to match non-exchange trades executed between Dealers (broker-to-broker). Dealers are required to enter, accept and reject these trades in an acceptable trade matching utility by 6pm on the day the trade is executed. We are not proposing to amend the 6pm cut-off time as this time is considered sufficient to support a T+1 settlement. In response to the move to T+1, the Canadian Securities Administrators (CSA) has proposed revisions to National Instrument 24-101 – Institutional Trade Matching and Settlement (NI 24-101) which would repeal requirements for Dealers to file institutional trade matching exception reports. We are proposing similar amendments to the broker-to-broker trade matching rules as follows:
Industry practice for trading of MBS is set under Canada Mortgage and Housing Corporation’s NHA MBS Program. MBS trades occurring from the first business day of the month to the fourth business day of the month cannot be settled prior to the fifth business day due to the time required to determine the remaining principal amount factor and other settlement details. During our review of the T+1 settlement impact on the IDPC rules, we identified the MBS trading rules that require updates for the T+1 settlement cycle and the current industry practices as follows:
We did not consider alternative proposals as maintaining the existing rules would be inconsistent with a T+1 settlement cycle and create potential confusion for Dealers and clients on settlement and delivery requirements.
The move to a T+1 settlement cycle will align Canada with the U.S. capital markets and other major international capital markets that elect to move to a T+1 settlement cycle. The Proposed Amendments to shorten the timelines for settlement and delivery are consistent with the Securities and Exchange Commission proposed changes to reduce the settlement cycle for securities transactions from T+2 to T+1.
On December 15, 2022, the CSA published for comment proposed revisions to National Instrument 24-101 Institutional Trade Matching and Settlements. The CSA’s proposed revisions focus on shortening the standard settlement cycle and repeal the exception reporting requirements for institutional (DAP/RAP) trade matching. The Proposed Amendments to repeal the broker-to-broker trade matching exception reports are similar to the CSA’s proposal to repeal institutional trade matching exception reports.
The move to a T+1 settlement cycle will benefit Dealers, clients and other industry stakeholders by improving the overall market efficiency and reducing credit, market and liquidity risks associated with securities transactions. The Proposed Amendments will benefit Dealers and clients by aligning the rules related to delivery and settlement with the T+1 settlement cycle processes. Dealers will also benefit from the reduced regulatory burden due to the removal of the requirement to file trade matching exception reports. The change in settlement cycle to T+1 will require the Dealers and other industry stakeholders to incur costs to revise their systems, processes and operational procedures. The Proposed Amendments are not expected to have any significant incremental costs to Dealers or clients beyond the operational and system costs associated with the industry’s movement to the T+1 settlement cycle.
We believe that the Proposed Amendments will have no material negative impacts on investors, issuers, registrants, the New SRO, CIPF and the Canadian capital markets generally. There are no regional-specific effects as the move to T+1 will impact all industry stakeholders trading in capital markets across Canada and US.
A detailed assessment of the impact of the Proposed Amendments has been prepared and is included as Appendix C.
Once the recognizing regulators approve the Proposed Amendments, we will publish an implementation notice with an implementation date that aligns with industry’s date for the move to a T+1 settlement cycle.
The purpose of these amendments is to support the investment industry’s move to T+1 settlement by aligning the New SRO’s requirements with the shortened settlement cycle. The Proposed Amendments are considered to be in the public interest because they would:
The Proposed Amendments do not involve any rules that New SRO, its Members or Approved Persons must comply with in order to be exempted from a requirement of securities legislation.
The Board of Directors of New SRO (Board) has determined the Proposed Amendments to be in the public interest and on March 30th, 2023 approved them for public comment.
We consulted with the following New SRO advisory committees on this matter:
We also consulted with the CCMA LRWG and CCMA Operations Working Group.
After considering the comments on the Proposed Amendments received in response to this Request for Comments together with any comments of the recognizing regulators, New SRO staff may recommend revisions to the Proposed Amendments. If the revisions and comments received are not of a material nature, the Board has authorized the President to approve the revisions on behalf of New SRO’s behalf. The revised amendments will be subject to approval by the recognizing regulators.
If the revisions or comments are material, New SRO staff will submit the Proposed Amendments, including any revisions, to the Board for approval for republication or implementation as applicable.
Appendix A - Black-line comparison of the Proposed Amendments to current rules
Appendix B - Clean copy of the Proposed Amendments
Appendix C - Impact Assessment
04/20/23
23-0054
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