Three years after 23 European countries made the move, and 18 months after Australia and New Zealand implemented such a change, most North American financial products moved to a T + 2 settlement period on Tuesday.

As a result of moving the settlement of trades to trade date plus two business days from the longstanding T+3 period, investors who buy equity or debt securities will now see the ownership of such securities recorded in their account one day earlier.

For investors who sell such affected securities — the list includes, equities, corporate bonds, municipal bonds and unit investment trusts — the change means they will receive the cash from their transactions one day earlier as well.

Cutting risk

While the move is expected to be a positive for investors, the change is motivated by a bigger-picture desire to reduce risk — particularly counter-party risk associated with the other side of the transaction. Such risk reduction was identified by the Boston Consulting Group, which completed a major study in 2012. “There was broad consensus on the risk reduction benefits of a shorter cycle,” said the report that was prepared for the U.S.’s Depository Trust and Clearing Corporation.

In a report released Tuesday, Fitch Ratings said T + 2 settlement will “reduce operational and systemic risks between each party and improve capital and efficiency in the financial system.” Over the longer term, the ratings agency said there should be “cost savings for trading firms, including trust and processing banks, broker dealers and buy-side firms.”

But getting there, will be a challenge — and costly. In its 2012 report the Boston Consulting Group pegged those costs for U.S. firms at US$550 million with the benefits not spread uniformly between the buy and sell side and between firms in those two sectors.

Of course, nothing is guaranteed: in its report, Fitch Ratings said “the operational track record was mixed,” when Europe moved to T + 2 settlement.

In 1995, largely in response to financial events of 1987 (Black Monday when the Dow index fell by 22 per cent), the trade settlement date moved to T + 3 from T + 5.

But continued progress is considered unlikely given the complexity of the issues involved and the costs of trying to become more efficient. (Boston Consulting estimated it would cost US$1.8 billion to get to T + 1.)

In Canada, progress was slow and deliberate. In July 2016, the Investment Industry Regulatory Organization of Canada (IIROC) issued a notice for comment amendments that would facilitate the planned move to T + 2. But it was clear that the agenda was being driven by events in another capital market.

“The primary objective of the amendments is to ensure that IIROC’s requirements support the investment industry’s move to T + 2 settlement at the same time as the U.S. which is scheduled for Sept. 5 2017,” said the executive summary of the 37 page document. Elsewhere IIROC said the move to T + 2 “is a U.S.-led initiative intended to reduce systemic risk and inefficiencies in the investment industry.”

In its report, IIROC said that it considered two alternatives: maintaining the current T + 3 settlement cycle, or make amendments to move to T + 2. “We selected the second alternative because it is important that Canada’s settlement cycle continue to be harmonized with the U.S. investment cycle as the two countries’ capital markets are closely connected.”

And they are connected because of the high proportion of stock trades being in inter-listed securities and due to the high percentage of trades processed through CDS (the Canadian Depository for Securities) being in Canada-U.S. cross border transactions.

Financial Post
bcritchley@postmedia.com