Canada has transitioned to a T+1 settlement cycle for equity and long-term debt market trades. This shift, which aligns with similar regulatory changes in the United States, promises to streamline the settlement process and reduce risks associated with delayed trades.
Improving Market Liquidity
The Canadian Securities Administrators (CSA) confirmed in a statement on its website that amendments to National Instrument 24-101 Institutional Trade Matching and Settlement are now in effect. 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 aligns 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 dealers and advisers. It requires registered firms to implement and enforce policies aimed at achieving the new T+1 matching, thereby enhancing market stability and reducing the risk of unsettled trades.
Starting June 3, 2024, Canada's securities auctions, including treasury bills, bonds, and cash management bond buybacks, will adhere to the T+1 settlement cycle. This transition followed the shift to T+1 settlement by the Canadian secondary market today (Monday).
Treasury bill auctions will continue to occur on alternating Tuesdays, with settlements moving to Wednesdays. Similarly, bond auctions will settle on the business day following the auction. The Bank of Canada and government authorities will monitor this transition to ensure a smooth shift.
Harmonizing Canadian and US Markets
The CSA's decision to move to T+1 settlement aligns with changes in the US market to ensure cross-border consistency and facilitate smoother international transactions. This harmonization is expected to boost 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 risks and improve liquidity in the markets. The T+1 settlement cycle represents a significant step forward in modernizing the financial infrastructure, positioning 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 for two business days between the transaction date and the settlement date.
The introduction of the T+1 settlement shortened this timeline to just one business day. Similarly, investors buying securities subject to the T+1 settlement cycle will pay for their transactions one business day earlier.
