 Lee Cutrone
Managing Director, Industry Relations
22 March, 2010
The Canadian Securities Administrators (CSA), the regulatory body in Canada that oversees all ten provinces and each of the three territories, has taken a leadership role in promoting greater middle- and back-office processing efficiency in the Canadian market through its efforts to bring about improved performance in institutional trade matching (ITM) rates, i.e, a regulation (NI 24-101) requiring trade date matching. Because of their leadership, much needed attention has also been brought to this area of the post-trade processing cycle in other markets around the world. However the momentum this effort had been stirring throughout the industry has recently been threatened by the possibility that the CSA will indefinitely postpone the final phase-in of NI 24-101’s trade date matching requirement and therefore stay at T+1 matching.
It has always been widely believed that meaningful change in this part of the trade lifecycle will not come about without a regulatory mandate. And despite the proposed extensive delay in the timeframe for phasing in ITM on T-0 (trade date) – also known as Same Day Affirmation – to 2015, the CSA’s commitment to ultimately make that change remains a critical driver for our industry. Were that commitment to change, much of this momentum could potentially be lost.
Successful implementation of ITM on T-0 requires a myriad of changes within participating firms – be they behavioral or technological in scope. And without concerted industry-wide effort to drive such change in a focused manner, it is often too easy to de-prioritize or otherwise delay implementation of these important processing improvements. However, if the events of the last few years have taught us anything, it is that we must be on a constant vigil for ways to improve processing efficiency in order to mitigate operational and settlement risk and improve audit trails.
In a recent letter to the CSA in response to a “request for comment” on the proposed extension of time to implement the final phase of NI 24-101, one respondent summed up the issue facing the CSA very well when they said that the CSA is trying to achieve a long-term benefit, but the only thing member firms are focusing on are the short-term costs.
This dilemma cements my long-standing belief that this type of change will never happen without a regulatory mandate that forces the market to endure the short-term costs for the longer term benefit. The fact that all or nearly all of the respondents who are proposing an indefinite delay in the move to T-0 matching are, at the same time, praising the progress of NI 24-101 to date, demonstrates this reality and I believe shows what the CSA must do to bring about real change in the Canadian market.
One of the early rationales for the movement to improve middle- and back-office processing was to close the competitive gap with the U.S. financial industry in terms of STP and T+1 settlement preparedness. The early success of the CSA’s move has already made considerable strides in closing the gap with the U.S. But Canada’s work is far from done. The U.S. market is far from a global model of ITM processing efficiency and there are in fact other markets around the world (albeit not of the same size as the U.S. market in trading capacity) that operate more efficiently. Therefore, to be truly recognized as a global leader in post-trade efficiency, the CSA must keep the Canadian market focused on finding ways to reduce operational risk, lower post-trade processing costs and reduce trade fail rates – efforts where they have had considerable momentum over the past few years.
The CSA’s efforts have been a driving force in the positive change we’ve seen to date. ITM on T-0 rates in April 2004, only a little less than six years ago, were a meager 2.98% in Canada, compared to 24% in the U.S. By December 2008, the Canadian SDA rate was approximately 42%, compared to just 34% in the U.S. And by June 2009, the Canadian rate was approximately 48%, well over the 35% in the U.S. This increase came largely because the market had recognized that regulators had made a serious commitment to change.
However, while growth in Canadian ITM rates has been significant, the rate of growth has slowed recently. Many believe this was partly a result of the market’s expectation that the CSA would extend the date to move to ITM on T-0 to 2015, or stay in the current phase of T+1 matching, something which, in fact, may very well happen in the coming weeks. Thus, the CSA and the market may now find themselves in a “Catch-22” situation in that the industry believes that more time (or some other external events, such as a global move to a shorter settlement cycle) is needed to phase in ITM on T-0, while allowing for more time takes away a strong impetus for change and therefore could lead to further delays.
The challenge that is now ahead of the CSA is to set a timeframe for full implementation of NI 24-101 that is reasonable without extending (or indefinitely postponing) it such that it loses the incentive for industry participants to move expeditiously to improve systems and change behaviors and processes necessary to comply with forthcoming regulations. This will require the CSA to carefully consider the legitimacy of the reasons postulated for delaying implementation in the first place. It is important to remember that the technology to achieve ITM on T-0 already exists and is in fact being embraced in many markets around the world. As such, the CSA needs to remain focused on its desire to improve its competitive position in the global marketplace. However, though it has already made significant strides in accomplishing that goal, the task is not done. And without the external driver of regulatory reform, the momentum that has built up over the last few years will surely dissipate. In order to maintain this momentum, the CSA should stay the course without amending NI 24-101. This will help ensure that meaningful change benefitting not only Canada, but the entire global community, remains on target.
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