What I Learned from T+2

Get some of your best people to work on the transition

Stephen Isgar, Head of Network Management, Americas at RBC Investor & Treasury Services, reflects on how Canada dealt with the shift to T+2 in 2017, outlining what lessons can be taken from that experience ahead of the country's adoption of T+1 in 2024.

What recollections do you have of your experiences during the transition to T+2?

Isgar: Canada's decision to migrate to T+2 was in response to the US decision to shorten its trade settlement cycle. Given that the two markets are completely intertwined, Canada followed the US lead.

At RBC, we had a project management team involved in the planning, testing and implementation of T+2 adoption in Canada. As the largest participant at the local CSD (central securities depository), the transition to T+2 was a huge undertaking for RBC. This involved multiple working groups and close engagement with financial market infrastructures and industry bodies such as the Canadian Capital Markets Association (CCMA). There was so much going on internally during this time and I learned quickly that there is no limit to the number of meetings you can attend.

What went well during the transition to T+2?

Isgar: Although there were occasional bumps in the road, the project management team at RBC functioned really well. The fact that T+2 was delivered on time, on budget and without any market disruption or materially unexpected negative effects is a testament to the industry's excellent efforts.

In particular, the CCMA did a great job of managing the various participants involved in the proceedings. There was close cooperation between custodians, broker dealers, mutual funds, industry associations and regulators—most notably the Ontario Securities Commission and Canadian Securities Administrators. That Canada has a small, tight-knit capital markets community certainly made the whole process of transitioning to T+2 easier.

The fact that T+2 was delivered on time, on budget and without any market disruption or materially unexpected negative effects is a testament to the industry's excellent efforts.

How is the T+1 transition differing from T+2?

Isgar: Amid the transition to T+1, market participants are speaking more openly to each other in high-level terms about technology. This includes trends fuelled by changing consumer habits, the rise of digital ecosystems and the emergence of crypto-exchanges, together with the growing applications for RPA (robotic process automation) and AI (artificial intelligence). During the transition to T+2, these sorts of conversations about technology—and what it meant for trade settlements—did not really take place.

Also, while Canada and the US will work in lock step on T+1, the loss of another 24 hours in the settlement cycle is likely to result in additional focus on synchronizing with markets that are retaining T+2 and T+3. We have the ability to support clients that trade in multiple markets and different settlement cycles. However, there will be challenges with respect to different time zones and FX (foreign exchange) management.

What advice would you give to those working on the transition to T+1?

Isgar: It is vital to build a solid business case, and get the budget and resources in place to properly manage these sorts of major projects. Since the adoption of T+1 is a mandatory market change, it is essential for firms to plan and develop their strategies, and be proactive from an early stage. For example, the DTCC (Depository Trust & Clearing Corporation) started talking about moving to T+1 in 2021, despite T+1's adoption not taking place in the US until 2024. It is crucial that market participants engage with the key stakeholders from across the industry—including regulators—and lobby the main market infrastructures when implementing changes of this magnitude.

Since the adoption of T+1 is a mandatory market change, it is essential for firms to plan and develop their strategies, and be proactive from an early stage.

Elsewhere, firms should ensure that they have the best SMEs (subject matter experts) in their businesses working on the transition. The benefits and potential challenges of the transition should also be communicated to key stakeholders. Organizations ought to be listening to discussions at a wider market level to identify the main issues, such as the impact of the transition on corporate actions and settlement fail risk. Other questions that need to be answered include whether or not there will be a move from overnight batch processing to intraday or real-time, and how that would work. These are the sorts of areas where firms should be focusing their attention.

From a Canadian perspective, it is vital that we keep a close eye on what is happening in the US, given the interconnectedness of our two markets. In other words, we need to know what the likes of the DTCC and SIFMA (Securities Industry and Financial Markets Association) are thinking about during the whole T+1 transition process. SIFMA, for instance, is expected to publish a playbook on T+1 in order to help US market participants acclimatize to the changes, and this will have a downstream impact on Canadian players such as RBC. In 2017, the involvement by SIFMA, and specifically DTCC, was instrumental in the Canadian planning to get the US perspective, and also helped us understand where Canada differs from the US market.

 

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