The Message is Clear: “T+2” is Two Days Too Long
Toronto-based research and consulting firm Forefactor Inc. recently completed an in-depth study of the various clearing and settlement rules, policies and preventative measures currently being implemented by North American market participants in an effort to mitigate risk throughout the trading cycle.
According to Forefactor President, Renée Colyer, “Clearing and settlement risk has become a particularly hot topic during the recent months of market uncertainty. Investment managers are methodically examining any risk that might be opaque to them now, including exposure caused by carrying broker/ introducing broker relationships.” To provide strategic guidance to the buy-side, a rigorous compilation, analysis and summary of the various North American clearing and settlement entities, related regulatory authorities and other trade-related associations was undertaken by Forefactor. The research also captured data through in-depth telephone interviews with a sample of clearing brokers by thoroughly probing experiences with, and perspectives on, clearing operations policies, procedures and client servicing.
One noteworthy finding of the research is how different each country is in terms of the level of protection being offered by the various clearing and settlement entities. For example, in equities markets, while the National Securities Clearing Corporation (NSCC) in the US is making strides towards offering the market a real-time, or ‘accelerated’ guarantee for the trades that it handles, CDS Clearing and Depository Services Inc. (CDS) in Canada is still stuck at T+2. Conversely, the Canadian Derivatives Clearing Corporation (CDCC) has implemented a system that more closely reflects the high industry standards of clearing and settlement in global derivatives markets (i.e. US, UK).
The policing of “trouble-makers” within each jurisdiction is also handled differently. Some global markets including the US and Singapore impose fines and penalties to help prevent inappropriate trading behaviour and reduce the incidence of trade fails. According to Ms. Colyer, “in Canada, National Instrument 24-101 (NI 24-101) has gone a long way toward reducing all types of risk associated with trade matching and the subsequent clearing and settlement processes. However, absent any consequences (as is currently the case in Canada) it becomes difficult to enforce. A capital levy on trade fails and on falling short of targeted match rates would serve to encourage Canadian market participants to increase efficiencies and achieve lower levels of risk”.
As global markets stabilize, investment managers will undoubtedly want to ensure that their assets are safe and that trading partners have solid balance sheets along with policies to protect against loss. Ms. Colyer adds that “there are clearly several ‘layers’ of protection in Canada that safeguard investors throughout the trading cycle, however, we are still lagging the US and other international markets. By accelerating our trade guarantee, and incorporating a penalty system for failing trades, Canada can pull itself up onto equal footing with other global markets in terms of clearing and depository risk management”.
For more information about the study or to inquire about Forefactor’s capabilities, please contact:
Justin Canivet
Chief Operating Officer
Forefactor Inc.
(416) 907-0431 x2
sales@forefactor.com
