CSA / ACVM CSA Notice 24-301 Responses to Comments Received on Discussion Paper 24-401 on Straight-through Processing, Proposed National Instrument 24-101 Post-trade Matching and Settlement, and Proposed Companion Policy 24-101CP to National Instrument 24-101 Post-trade Matching and Settlement
CANADIAN SECURITIES ADMINISTRATORS NOTICE 24-301 RESPONSES TO COMMENTS RECEIVED ON DISCUSSION PAPER 24-401 ON STRAIGHT-THROUGH PROCESSING, PROPOSED NATIONAL INSTRUMENT 24-101 POST-TRADE MATCHING AND SETTLEMENT, AND PROPOSED COMPANION POLICY 24-101CP TO NATIONAL INSTRUMENT 24-101 POST-TRADE MATCHING AND SETTLEMENT
Introduction On April 16, 2004, the Canadian Securities Administrators (the CSA or we) published for comment the following documents (collectively, STP Release): 1 • Discussion Paper 24-401 on Straight-through Processing and Request for Comments (Paper)
• Proposed National Instrument 24-101 — Post-Trade Matching and Settlement (National Instrument)
• Proposed Companion Policy 24-101CP — To National Instrument 24-101 — Post-Trade Matching and Settlement (Companion Policy)
The CSA published the STP Release to: (a) acknowledge the importance of post-execution functions; (b) advance the industry discussions on straight-through processing (STP); and (c) build upon previous initiatives to improve the securities clearing and settlement system in the Canadian capital markets. The Paper described the industry-wide STP efforts and proposed CSA regulatory measures to address inefficiencies in certain clearing and settlement and post-settlement processes. The topics addressed in the STP Release include: (i) the post-execution, pre-settlement process for institutional trades in Canada, particularly the confirmation and affirmation process; (ii) the process of disseminating entitlement information on publicly traded securities (also known as corporate actions); (iii) entitlement payments made by issuers or offerors (such as dividend, interest, redemption, repurchase or take-over bid payments) to the clearing agency in funds that are not same-day final funds; (iv) the post-execution processing of investment fund transactions in the context of the client name business model as compared to the nominee name business model; (v) the processing of securities lending transactions; and (vi) the continued use of physical securities in connection with the settlement of transactions in publicly traded securities.
1. 1 See (2004) 27 OSCB 3971 to 4031.
Canadian Autorités Securities canadiennes Administrators en valeurs mobilières
2 Because the CSA and the industry, through the Canadian Capital Markets Association (CCMA), identified the confirmation and affirmation—or matching—process for institutional trades as the most pressing STP initiative, we published for comment the proposed National Instrument and Companion Policy. Generally, the proposed National Instrument requires that, as of July 1, 2005, institutional trades be matched as soon as practicable after a trade is executed and in any event no later than the close of business on trade date (or T). In addition, dealers and advisers would be required to enter into a trade matching compliance agreement before allowing an institutional client to trade with delivery-versus-payment / receive-versus-payment (DVP/RVP) privileges. Under the National Instrument, the CSA also proposed to adopt a general settlement cycle rule of trade date plus three (T+3) and a good delivery rule.
This Notice provides an update on industry and regulatory STP developments and a summary of the comments received on the STP Release. The Notice also discusses the CSA process going forward. The CSA remain committed to supporting an institutional trade-matching (ITM) rule in force by January 1, 2006, but intend to pursue this objective through a co-operative approach with the self-regulatory organizations (SROs) that also have an interest in establishing ITM requirements. Our objective is to have the appropriate rule or rules finalized by December 31, 2005.
Recent Developments A. Industry Developments - Capco Study Partly in response to a November 2003 letter from the CSA asking the CCMA to identify the key tasks in the critical path to STP, the CCMA commissioned Capital Markets Company (Capco) to assess the readiness of the Canadian capital markets to achieve industry-wide STP and a standard settlement cycle of trade date plus one (T+1). Capco was asked to compare efforts in Canada with U.S. efforts, and recommend the critical path for Canada to align its efforts with the United States. Some of the key findings from the Capco report 2 include the following: o The institutional market is the key area on the critical path—it is the market most subject to global competitive forces, with multiple dispersed market participants. o Retail trade processing, securities lending, dematerialization or immobilization, as well as the centralized entitlements notification hub were not deemed to be on the critical path.
Capco assessed Canada to be approximately 14 months behind the U.S. in terms of STP/T+1 readiness. The primary component of this gap is in the institutional trade processing area. 3 Capco listed a number of key activities to progress toward STP and the eventual shortening of the settlement cycle. The list includes the need for the Canadian market to agree on the entity that will supply the governance necessary to mobilize and lead efforts in Canada toward STP and T+1 readiness, with a strong program management office and appropriate budget and
1. 2 The Capco report is entitled “Assessment of Canada’s STP/T+1 Readiness and a Comparison of Canada’s vs. United States’ T+1 Readiness—STP/T+1 Readiness Assessment Report for Canada,” July 12, 2004 (Final), available on the CCMA’s Web site at www.ccma-acmc.ca. 3 Capco’s report says that this is due primarily to the following factors: the U.S. has long had a system connecting the four key parties to an institutional trade (broker-dealer, investment manager, custodian and depository) and widely used Standing Settlement Instructions (SSI) databases. As well, the SRO rules in the U.S. mandate how and when confirmation/affirmation occurs. Canada has no equivalent system linking all four parties, no widely used SSI database, no confirmation/affirmation rule that is effectively enforced, and a relatively low affirmation rate on trade date compared with the current U.S. rate.
3 resources. It also includes the need to foster common action—including through an ITM rule— to jumpstart improvements in institutional trade processing, as well as other “enablers” of STP and T+1, such as standardized entitlement reporting.
- Change of CCMA Focus and Governance Structure The CCMA decided to realign its priorities and focus its efforts on the institutional trade processing area. Based in part on the results of the Capco study, the CCMA felt that achieving institutional trade matching on T, through a phased-in approach, would be the area of greatest benefit for the Canadian marketplace. 4 As a result of this new focus, the CCMA reshaped its committee structure by folding a number of the working groups and creating an Institutional Program Steering Committee (IPSC). The IPSC will oversee six new subcommittees to address the various components for achieving institutional trade matching, including a Buy-Side Subcommittee and a Custodian/Broker Subcommittee. Desiring to maintain the momentum achieved in other areas, certain industry organizations have, according to the CCMA, stepped forward to carry on the efforts of the disbanded CCMA working groups:
o the Canadian Depository for Securities Limited (CDS) has undertaken to continue the efforts of the Corporate Actions Working Group to establish an entitlements reporting hub; o the Securities Transfer Association of Canada (STAC) has assumed the Dematerialization Working Group’s work program going forward; and o the Investment Funds Institute of Canada and FundSERV Inc. are considering taking on some of the Retail Trade Working Group’s initiatives within their respective purviews. 5 - Identification of Critical Path In revising its governance structure, the CCMA is in the process of employing a chief executive officer and has employed a project manager to provide increased resources and professional project management expertise for its efforts to move the industry toward STP. While a work plan has been developed, a detailed critical path has not been prepared at this time.
B. Regulatory Developments - Second CSA Survey The CSA undertook in 2004 a second STP Readiness Assessment Survey to determine the progress made by market participants towards achieving STP. The survey was nearly identical to the 2003 survey except for slight modifications to some questions and the elimination of two questions. A total of 532 registrants completed the 2004 survey. 6 The main conclusions arising from the survey are as follows: o There continues to be a low commitment to investment, planning and resource allocation to the STP initiative;
1. 4 See CCMA News Release, October 12, 2004, “CCMA to Focus on Institutional Trade Matching to Enhance the Competitiveness of Canada’s Capital Markets Globally;” and CCMA News, Vol. 21, October 22, 2004; available on the CCMA’s Web site at www.ccma-acmc.ca. 5 CCMA News, Vol. 21, October 22, 2004, at p. 2. 6 See CSA Staff Notice 33-312 - The CSA STP Readiness Assessment Survey Report is Now Available on the OSC Website, (November 5, 2004) 27 OSCB 8953; CSA Staff Notice 33-308 - The CSA STP Readiness Assessment Survey Report (Survey Report) is Now Available on the OSC Web Site, (September 19, 2003) 26 OSCB 6429; and CSA Staff Notice 33-309 - The CSA STP Infrastructure Survey Report is Now Available on the OSC Web Site, (December 19, 2003) 26 OSCB 8149. These notices, the survey reports and other related notices and news releases are available on the OSC Web site at http://www.osc.gov.on.ca.
4 o While large firms are making progress, small firms are still unsure of the implications for their organizations; o While there is an increase in the degree of automation, there is still a significant amount of manual processing for post-execution trade processing activities; o The proportion of exceptions (mistakes) in transactions has increased from 2003 to 2004; and o The top three issues that appear to impede STP are: uncertainty about outside vendors’ plans; a low sense of urgency; and a lack of standards driving minimum requirements.
- LVTS Working Group At the urging of the heads of financial regulatory agencies in Canada, 7 a working group (LVTS working group) comprising staff from CDS, the Bank of Canada, Canadian Payments Association (CPA), Ontario Securities Commission (OSC), and Autorité des marchés financiers (Québec) was struck in April 2004 to find ways to require or encourage issuers and their agents that are still using cheques to make entitlement payments to CDS for distribution to CDS participants, to instead use the Large Value Transfer System (LVTS). While this entitlement payments issue is not perceived to have a systemic risk impact on our markets, the regulatory agencies have concerns with the effect that the continued use of cheques to make entitlement payments could have on the efficiency and competitiveness of our capital markets. As discussed in the Paper, international standards and best practices require the use of same-day, irrevocable final funds for all payments made into a central securities depository utility like CDS. The LVTS working group has met four times to discuss alternative solutions.
The CSA support initiatives to increase the use of LVTS by issuers. The CSA propose to publish a CSA notice to all reporting issuers in Canada whose securities are immobilized with CDS. The notice would strongly encourage all reporting issuers and their transfer agents to make their entitlement payments to CDS in LVTS funds.
C. International Developments - SEC Concept Release In the Paper, we briefly discussed the March 2004 Concept Release of the United States Securities and Exchange Commission (SEC) entitled Securities Transactions Settlement. 8 The SEC Concept Release sought public comment on methods to improve the safety and operational efficiency of the U.S. clearance and settlement system and to help the U.S. securities industry achieve STP. A number of U.S. market participants and industry groups, including the Securities Industry Association (SIA), appear to support a regulatory mandate, phased in over a reasonable time period, to achieve institutional trade matching on T. 9 The SIA 1. 7 The heads of certain financial regulatory agencies in Canada meet periodically to discuss key issues regarding our financial markets. They include the chairs of some of the CSA jurisdictions, the Governor of the Bank of Canada, the Assistant Deputy Minister of Finance, and the Superintendent of the Office of the Superintendent of Financial Institutions (OSFI).
8 Concept Release: Securities Transactions Settlement; Securities and Exchange Commission; 17 CFR Part 240 [Release No. 33-8398; 3449405; IC-26384; File No. s7-13-04] (SEC Concept Release). The release is available on the SEC Web site at: http://www.sec.gov/rules/concept/33-8398.htm. See supra, note 1, at p. 3986 for the discussion in our Paper.
9 Comment letters on the SEC Concept Release http://www.sec.gov/rules/concept/s71304.shtml. A number of Canadian market participants and industry groups provided comments on the SEC Concept Release, including the CCMA, CDS and STAC. The CCMA emphasized the close integration of the Canadian and U.S. capital markets and the importance of ensuring “that initiatives on both sides of the border do not work at cross-purposes and will enhance rather than impede cross-border transactions.” In particular, it was suggested that any move to shorten the settlement cycle should be coordinated among the two countries.
can be found on the SEC Web site at:
5 suggested in its comment letter dated June 16, 2004 that it did not believe that same-day affirmation/matching will happen without an SEC rule that obligates regulated entities to agree to trade details on trade date. 10 The SEC has not yet published its responses to the comments, nor published any further releases directly on the issues discussed in the SEC Concept Release. However, the SEC and other U.S. regulatory agencies have been increasingly focused on improving the U.S. national clearing and settlement system. Among other things, the SEC implemented a rule in 2004 to address related settlement issues in the context of short selling transactions. 11 - Other International Developments The Group of Thirty (G-30) announced last year the formation of a senior Monitoring Committee of industry leaders and technical experts that will conduct assessments of the implementation of the G-30’s recommendations set out in its January 2003 report Global Clearing and Settlement—A Plan of Action. 12 The Committee will undertake periodic evaluations of progress against the recommendations and will issue a public scorecard on implementation that will identify problem areas. In July 2004, the Committee made important progress in establishing a framework to assess and report progress against the recommendations. Key organizations have agreed to take a role in promoting and monitoring progress against each of the recommendations. 13 Improving clearing and settlement systems continues to be a major objective of the European Union (EU). The European Commission issued its second consultative Communication on securities clearing and settlement, aimed at ensuring EU securities clearing and settlement systems are efficient, safe and provide a level playing field for participants. The Communication takes into account the first and second Giovannini reports on Cross-Border Clearing and Settlement. 14 Since July 1, 2004, the Securities and Exchange Board of India (SEBI) has been requiring all institutional trades executed on stock exchanges to be processed through its STP System. The SEBI released guidelines in May 2004 supporting an STP centralized hub, facilitating a platform for communication between different STP service providers. 15 Summary of Comments and Responses 1. 10 The SIA’s letter explains the rationale for this view: “Previously, the [SIA’s Institutional Oversight Committee] explored the feasibility of an SRO rule that would prohibit broker-dealers from extending [DVP/RVP] privileges to any customer unless all trades with that customer are confirmed and affirmed on T+0, but determined that such a rule would place the onus of enforcement on broker-dealers who have limited control over the behavioural changes that would have to occur, particularly with respect to their buy-side customers.”
11 Regulation SHO was adopted by the SEC on June 23, 2004. See Release No. 34-50103; File No. S7-23-03. For example, Rule 203 of Regulation SHO, which is intended to address “naked” short selling in equity securities, forces clearing agency participants to close out open positions in securities that are experiencing substantial settlement failures within ten days after normal settlement date (i.e., 13 consecutive settlement days).
12 See supra, note 1, at p. 3983-6 for a brief discussion or citations of the G-30 report in the Paper. 13 This includes a mix of important regional committees for Europe, the Asia-Pacific and soon for North America, and key organizations with particular expertise in the each area of recommendation. As progress takes place in this complex field it will be mapped on the G-30’s website, highlighting key areas where further effort is still required and enabling interested parties to target their activity. More information on the G-30’s report and monitoring activities can be obtained from the G-30’s website (www.group30.org).
14 See CCMA News, Vol. 20, June 16, 2004, at p. 6. See supra, note 1, at p. 3986 for a brief discussion of the Giovannini reports in the Paper.
15 Ibid.
6 The comment period on the STP Release ended on July 16, 2004 and we received 26 comment letters. The list of commenters is attached as Appendix “A” to this Notice. We thank the commenters for taking the time to consider the STP Release. The comments will be useful in assisting the CSA to fine-tune its regulatory approach to STP and broader securities clearing and settlement issues.
We have provided a summary of comments received on the STP Release together with our responses in the attached table Appendix “B”. We also briefly outline below our response to the issue of an ITM rule. The CSA have also received a number of technical and drafting comments on the proposed National Instrument and Companion Policy. Given our responses and the general direction that we propose to take on the matter of an ITM rule, we are not publishing a summary of, nor responding to these technical and drafting comments at this time.
Almost all the commenters thought the STP Release was helpful in focussing the discussion on the various clearing and settlement issues with which the industry is currently faced. Many agreed with the broad objectives of the STP Release to: (i) reduce risk in, and improve the overall efficiency of, clearing and settlement and post-settlement processes and (ii) maintain the global competitiveness of our markets.
More specifically, we received many comments on the proposed National Instrument. The majority of comments on this issue—including some from the buy-side community—supported a CSA ITM rule. However, almost all of these comments found it unfeasible to require institutional trade matching on T by July 1, 2005. Rather, the consensus was for an ITM rule to provide for phasing in the requirement to match institutional trades, starting with T+1 and progressively shortening the period to T when the industry is ready. Commenters felt that such incremental steps would provide market participants with an opportunity to address a number of concerns about an accelerated confirmation and affirmation process. Some of the comments also suggested that, as an alternative to exclusive CSA or SRO rules, we should consider complementary CSA and SRO rules.
We have carefully considered the comments and new developments described above. We are of the view that a rule is required to support institutional trade matching within phased-in timeframes. However, we agree that we should work with the Investment Dealers Association of Canada (IDA), other interested SROs and CDS to consider whether there should be one or more rules to require dealers and advisers to report, match and settle their trades in accordance with best practices and standards.
It is our intention to have the appropriate rule or rules in place by January 1, 2006. The regulatory solution will take into consideration who has effective jurisdiction over the different market participant groups involved in the ITM process and what are the practical methods to enforce compliance with best practices and standards (including: whether the timing of trade reporting should be subject to clearing agency penalties, price incentives or restrictions and/or additional SRO net capital requirements; the criteria for regulatory escalation; and who has responsibility for monitoring). It will also take into consideration how to ensure a viable Standing Settlement Instructions database that will be used widely by Canadian market participants.
We intend to publish the results of our discussions with the IDA, other interested SROs and CDS, including any proposed amendments to the National Instrument and Companion Policy, by the Spring of 2005.
7 While working with the SROs and CDS, we will continue to monitor industry efforts and liaise with industry on other issues discussed in the Paper to reassess what action may be needed in addition to those set out in our responses in Appendix “B”.
Questions may be referred to: Randee Pavalow Director, Capital Markets, Ontario Securities Commission Tel: (416) 593-8257 Email: rpavalow@osc.gov.on.ca
Maxime Paré Senior Legal Counsel, Market Regulation Capital Markets, Ontario Securities Commission Tel: (416) 593-3650 Email: mpare@osc.gov.on.ca
Emily Sutlic Legal Counsel, Market Regulation Capital Markets Ontario Securities Commission Tel: (416) 593-2362 Email: esutlic@osc.gov.on.ca
Patricia Leeson Senior Legal Counsel Alberta Securities Commission Tel.: (403) 297-5222 Email: patricia.leeson@seccom.ab.ca
Serge Boisvert Analyste en réglementation Service de l'encadrement des marchés Autorité des marchés financiers Tel.: (514) 395-0558, ext. 4358 Email: serge.boisvert@lautorite.qc.ca
Veronica Armstrong Senior Legal Counsel British Columbia Securities Commission Tel.: (604) 899-6738 E-mail: varmstrong@bcsc.bc.ca
February 11, 2005
8 APPENDIX “A” TO CSA NOTICE 24-301 DISCUSSION PAPER 24-401 ON STRAIGHT-THROUGH PROCESSING, PROPOSED NATIONAL INSTRUMENT 24-101 POST-TRADE MATCHING AND SETTLEMENT, AND PROPOSED COMPANION POLICY 24-101CP TO NATIONAL INSTRUMENT 24-101 POST-TRADE MATCHING AND SETTLEMENT
List of Commenters ADP BMO Financial Group Canadian Capital Markets Association The Canadian Depository for Securities Limited CIBC Mellon CIBC Confident Financial Services (1969) Limited eClientscope Inc. E*Trade Canada Securities Corporation Hydro-Québec Investment Dealers Association of Canada Mackenzie Financial Corporation Ministère des Finances du Québec Omgeo LLC OMERS Pension Investment Association of Canada—Section Québec Peters and Co. Limited RBC Dominion Securities Inc. RBC Global Services Sceptre Investment Counsel Limited Scotiabank State Street Trust Company Canada Simon Romano, Stikeman Elliott LLP TD Bank Financial Group TSX Group Inc. UBS Securities Canada Inc.
9 APPENDIX “B” TO CSA NOTICE 24-301 DISCUSSION PAPER 24-401 ON STRAIGHT-THROUGH PROCESSING, PROPOSED NATIONAL INSTRUMENT 24-101 POST-TRADE MATCHING AND SETTLEMENT, AND PROPOSED COMPANION POLICY 24-101CP TO NATIONAL INSTRUMENT 24-101 POST-TRADE MATCHING AND SETTLEMENT
Summary of Comments and Responses on Discussion Paper Question/Theme Summary of Comments CSA Response General support A number of commenters noted that the STP for the STP Release was helpful in focusing the initiatives discussion on the various clearing and settlement issues with which the industry is currently faced.
One commenter agreed with the Paper’s precepts, namely, that: (i) the continued success of the Canadian capital markets depends on our market’s ability to compete on the global front; (ii) STP will position the Canadian capital markets to remain globally competitive, as well as reduce firm-specific and systemic risk; and (iii) solutions for industry-wide STP must take into account the industry’s characteristics, including differences in the types and sizes of market participants.
One commenter stated that it is their understanding that STP for the Canadian market is a vital component of an efficient post-trade execution processing model, which helps to maintain and enhance the competitiveness of the Canadian capital markets. The commenter noted that many other markets have similar issues as the Canadian capital markets, notably:
• the desire to reduce processing costs through greater processing efficiency;
• the need to minimize operational, systemic and credit risk; and
• the need to reduce the rate of trade reclaims and/or trade failures, particularly as transaction volumes grow.
10 Question/Theme Summary of Comments CSA Response One commenter questioned the need for STP.
Question 1 – If Thirteen commenters stated that the CSA At this time, there appears to the CSA were to should not implement mandatory STP be no need for mandatory implement readiness certificates. Reasons cited STP readiness certificates. mandatory STP include: Nonetheless, we will readiness certificates, what • STP is different than Y2K (e.g. there is no continue to assess the need should be the perception of commonality of interest and for mandatory readiness no material systemic risk if the industry is certificates in the future. subject matter of such certificates? not STP ready); • the completion of an STP readiness certificate will not guarantee that the organization completing the certificate is capable of achieving the targeted results;
• STP is an evolution towards end-to-end automation inside and outside the firm that will continue indefinitely. It will be virtually impossible to maintain an unambiguous definition of STP readiness; and
• the potential cost and burden to market participants will not be offset by the benefits of mandatory readiness certificates.
Two commenters supported the implementation of STP readiness certificates because the certificates would be helpful to determine the status of industry participants and would ensure senior management commitment to STP.
One commenter advocated the use of readiness certificates in the future as Canada approaches the move to a T+1 settlement cycle, in order to ensure that all market participants will be in a position to make the adjustment from T+3 to T+1.
Question 2 – Is it Eleven commenters agreed that it is important to the important for the Canadian capital markets competitiveness to reach T+1 at the same time as the U.S. of the Canadian
While achieving STP will help the Canadian capital markets to prepare for a shorter settlement cycle,
11 Question/Theme Summary of Comments capital markets Ten commenters stated that it is not to reach STP at important for the Canadian capital markets the same time as to reach industry-wide STP at the same time the U.S.? Please as the U.S. Reasons cited include: provide reasons for your answer. • the consequences of failing to affirm are Are there any quite different from the consequences of factors or failing to settle; challenges • Canada and the US should adopt similar unique to the processes and standards to maximize Canadian capital operational efficiencies without reaching markets? STP; • STP can progress at a different pace as long as the settlement day remains T+3 in both countries; and
• there is no evidence to suggest that a gap in STP rates (e.g. measured by trade dated and T+1 affirmation) is having a negative effect on the competitiveness of the Canadian market.
Nine commenters thought that it would be important for the Canadian capital markets to reach STP at the same time as the U.S. Reasons cited include:
• if the US becomes discernibly more efficient and cheaper to trade in, then Canadian dealers may be motivated to trade inter-listed securities in the U.S. to keep costs down;
• there is an unusually short linkage between Canada and the US, therefore, Canada must remain competitive; and
• if it is determined that STP is the precursor to achieving T+1, then close tracking of the U.S. progression towards STP to ultimately achieve T+1 would be beneficial.
Question 3 – Twenty commenters agreed that it should be We agree that the CCMA Should it be one the CCMA’s task to identify the critical path should identify the critical of the CCMA’s to reach specific STP goals. Some of the path to reach specific STP tasks to identify commenters made particular goals. In October 2004, the the critical path recommendations in this regard, such as: CSA sent another letter to
CSA Response there are no current plans to shorten the standard T+3 settlement cycle in Canada and the U.S. However, we agree that the Canadian capital markets must move to T+1 at the same time as the U.S. when that decision is made. Therefore, the STP efforts in Canada need to be reasonably in sync with U.S. efforts, particularly with respect to institutional trade processing.
12 Question/Theme Summary of Comments to reach specific • the CCMA should narrow their focus and STP goals? If concentrate on the most pressing areas of so, what steps STP (e.g. institutional trade matching— and goals should improving affirmation rates); be included? • identify the critical paths necessary to reach specific cross-industry STP goals, including identifying transaction paths that support critical business process, real time measures of performance, trend analysis, industry benchmarks and compliance measurements; • the primary concern should not be the establishment of a critical path for each core objective but rather to identify what the regulators (e.g. the CSA, OFSI and SROs) can do from a rulemaking standpoint to assist in achieving these milestones; and • the steps and goals should be consistent with the G-30 recommendations. Question 4 – Twelve commenters were of the view that Should the CSA the CSA should require market participants require market to match institutional trades on trade date for institutional trade matching participants to the following reasons: match in order to govern investment managers, institutional • trades on trade as they are otherwise unregulated date? Would regarding operational matters; amending SRO • trade matching on T and achieving true rules to require STP will never happen without a CSA trade matching mandate; and on T be more effective than the • a clear indication of CSA resolve to see proposed the Canadian capital markets move to National matching on T will instil a sense of urgency The regulatory solution will Instrument? Is and imperativeness among market the effective date participants. of July 1, 2005 A majority of the commenters who supported achievable? the mandating of institutional trade matching suggested that the CSA phase in the implementation of the proposed National Instrument and co-ordinate trade matching rules with other regulators (e.g. OFSI) and
CSA Response the CCMA asking it to identify the critical path in light of the conclusions and recommendations of the Capco report. We understand that the CCMA has revised its governance structure and is in the process of employing a chief executive officer and has employed a project manager to provide increased resources and professional project management expertise for its efforts to move the industry toward STP. While a work plan has been developed, a detailed critical path has not been prepared at this time. We are of the view that a rule is required to support with phased-in timeframes. We agree that the CSA should work with the IDA, other interested SROs and CDS to consider whether there should be one or more rules. It is our intention to have the appropriate rule or rules in place by December 31, 2005. take into consideration who has effective jurisdiction over the different market participant groups involved in the ITM process and what are the practical methods to enforce compliance with best practices and standards
13 Question/Theme Summary of Comments SROs. Six commenters thought that amending SRO rules would be more effective than the proposed National Instrument for the following reasons: • it is important to use the existing framework of SRO rules to the maximum extent possible in order to minimize changes to the existing regulatory framework and to avoid jurisdictional questions where possible; and SRO regulation is the most effective and • efficient method of achieving STP. One commenter stated that, where possible, regulation should come through the SROs, but as all market participants are not members of SROs, a non-prescriptive CSA rule could be considered to ensure industry and jurisdictional consistency. Two commenters are of the view that market participants should not be required to match institutional trades on trade date. Eighteen commenters believed that the effective date of July 1, 2005 is not achievable.
One commenter was of the view that the date of July 1, 2005 is technically feasible for large and sophisticated institutional market participants and most brokers who will already be required to meet the one-hour reporting requirements under the recent IDA broker-to-broker trade matching rule.
Question 5 – Is Sixteen commenters agreed that a close of We agree that it is important a close of business definition is required. A number of to specify a cut-off time for business commenters suggested that the designated the reconciliation of the trade definition time should be linked to the time (e.g. 7:30 details (trade matching). required? If so, p.m. Eastern time) that CDS begins to what time should process daily trades. be designated as close of One commenter noted that work will be required by industry participants to establish
CSA Response (including: whether the timing of trade reporting should be subject to clearing agency penalties, price incentives or restrictions and/or additional SRO net capital requirements; the criteria for regulatory escalation; and who has responsibility for monitoring). It will also take into consideration how to ensure a viable Standing Settlement Instructions database that will be used widely by Canadian market participants. We intend to publish the results of our discussions with the IDA, other interested SROs and CDS, including any proposed amendments to the National Instrument and Companion Policy, by the Spring of 2005.
14 Question/Theme Summary of Comments CSA Response business? a definition for “close of business” which satisfies a variety of issues including: service providers, depository cut-off times, time zone issues and industry standards and practices.
Three commenters did not support a close of business definition because, in today’s world, many financial businesses are operating on a 24-hour basis. Whatever time is chosen, individual participants will be left with a variety of deadlines to meet according to infrastructure processing cut-off times and CCMA institutional best practices and standards.
Question 6 – Sixteen commenters stated that it is We agree that it is sufficient Should the sufficient for the proposed National for a CSA rule to rely on proposed Instrument to impose a general requirement industry best practices and National to match as opposed to expressly identifying standards to address the Instrument and requiring the matching of each data required data elements, expressly identify element. Reasons cited include: provided such best practices and require matching of each • in different markets (debt, equity) and standards are trade data somewhat different data elements may be referenced in a rule to avoid element, or is it required and these data elements may any regulatory uncertainty. sufficient for the change over time making the NI outdated; proposed and National • it is far more flexible and practical to rely Instrument to on industry best practices and standards. impose a general requirement to Three commenters believed that the match on T and proposed National Instrument should rely on industry expressly identify and require matching of best practices each trade data element because defined and standards to trade elements will allow service bureaus to address the be consistent with their programming when details? reporting trades. Question 7 – Seventeen commenters were of the view We generally agree that the Should the CSA that the CSA should rely on the best CSA should rely on the best rely on the best practices and standards established by the practices and standards practices and CCMA ITPWG. Reasons cited include: established by the CCMA. standards established by • the best practices and standards were We propose to confirm this with the IDA and other
15 Question/Theme Summary of Comments CSA Response the CCMA developed after an exhaustive public interested SROs. Institutional consultative process involving brokers, Trade investment managers, custodians, Processing depositories, transfer agents, regulators Working Group and others in Canada; and (ITPWG)? • the best practices and standards are a reasonable starting point and must continue to develop in line with international and US standards and guidelines for the effective implementation of STP in the Canadian market place.
Question 8 – Seventeen commenters confirmed that the We believe that a CSA rule The CSA seek CSA have captured the appropriate should, at a minimum, apply comments on the transactions and types of securities that to all DVP/RVP trades in scope of the should be governed by the requirements to CDS-depository eligible proposed effect trade comparison and matching by the securities that currently National end of T and settlement by the end of T+3. A settle on T+3 or less. Instrument. number of commenters also confirmed that Derivatives would generally Have we the CSA have appropriately limited the rule not be included in the CSA captured the to public secondary market trades. rule. We will review the appropriate transactions and Two commenters requested clarification scope of a CSA rule with the types of and/or consideration of the following: IDA and other interested SROs, including whether securities that • whether segregated funds are excluded by trades executed in Canada should be the exclusion of mutual fund securities but settled in the U.S. should governed by governed by National Instrument 81-102— be caught by the rule. requirements to Mutual Funds; effect trade comparison and • whether futures or options, which settle matching by the through CDCC, are included in the end of T and instrument’s scope; and settlement by the • including transactions that have been end of T+3? traded in Canada irrespective of where Have we they are going to settle, or even traded appropriately outside of Canada/settled outside of limited the rule to Canada but with Canadian public secondary participants/clients. market trades?
Question 9 – Is Ten commenters were of the view that the We are of the view that, to the contractual contractual method is not the most feasible implement trade matching, it method the most way. Reasons cited include: is necessary to require feasible way to • not only do contractual requirements dealers to enforce an
16 Question/Theme Summary of Comments CSA Response ensure that all or operate indirectly, but their implementation obligation to match each substantially all could impose costly burdens on everyone, trade. The obligation may of the buy side of and generate additional paperwork of the arise as a condition of the the industry will very type the CCMA is trying to reduce; trade or under a trade match their a rule applying directly to regulated entities matching compliance trades by the end • agreement or by other of T? is far more preferable then the contract method; and enforceable means. We will consider other alternatives to • the most effective way to ensure that buy requiring a trade matching side firms can meet requirements for compliance agreement. matching on trade date is a sound business case.
Six commenters were of the view that the contractual method is the most feasible way for ensuring buy side compliance. A number of commenters recommended that any contractual method include the custodian in addition to the adviser and dealer.
Question 10 - Eighteen commenters felt that an exception Should an to the requirement to match a trade on T exception to the should be allowed. However, a number requirement to commenters suggested the following match a trade on restrictions to the exception: T be allowed when parties are • consideration should be given to balancing unable to agree the interests of STP timelines and the to trade details legitimate resolution of errors; before the end of • the participants must notify CDS that the T and are trade cannot match with a reason code to required, as a explain why; result, to correct the trade data • should only be allowed when parties are elements before unable to agree to the trade details before matching? the end of trade date; • is acceptable only in the initial phases of the STP implementation; • mandatory exception reporting should be required by the close of business on T and the match should take place no later than the close of business on T+1; and • caution should be taken to ensure that accommodating matching exceptions after T does not open a loophole for wholesale
As noted, we agree a rule is required to mandate institutional trade matching within phased-in timeframes, commencing with T+1 and progressively shortening the trade-matching period to T over a reasonable period of time (intended matching date). We agree that an exception to the requirement to match a trade on the intended matching date should be allowed when parties are unable to agree to trade details before the end of the intended matching date. We will discuss what restrictions, if any, to exception reporting should be adopted with the IDA and other interested SROs.
17 Question/Theme Summary of Comments CSA Response processing of transactions outside the established timeframes.
One commenter argued that providing exceptions within the rule could have a negative impact on compliance and would make measurement and enforcement a more complicated process.
Question 11 – Eleven commenters believed that registrants In lieu of reporting all Should should not be required to report all exceptions, we will consider registrants be exceptions from matching by the close of requiring registrants to required to report business on T. Reasons cited include: maintain an electronic audit all exceptions trail of their orders and from matching by • measurement and reporting to senior the close of levels within an organization on a firm’s trades. This information can rating against an industry benchmark will then be reviewed by business on T? help bring about industry pressure to regulators as part of routine If so, who should receive the report improve (e.g. Crestco in the U.K.); examinations. The CSA will also require all matching (e.g. recognized • exception trade information should be service utilities and CDS to clearing agency, retained and made available upon request keep a record of all SROs, and/or to the SRO and/or securities regulatory exceptions processed. securities authority by either the registrant or, where regulatory a trade matching utility is being used, by authorities)? the recognized clearing agency or the trade matching facility operator;
• it would create an unnecessary amount of paper and overhead; and
• the best and most consistent source of data relating to trade matching and settlement is CDS – CDS should be the utility to report this information.
Three commenters were of the view that if a trade cannot be matched on T then it should be tracked at CDS or an appropriate trade matching utility.
Question 12 – Is Sixteen commenters to these questions felt At this time, there is no need it necessary to that it is not necessary to mandate the use to mandate the use of a mandate the use of a matching service utility (MSU) in matching service utility in of a matching Canada. Reasons cited include: Canada. service utility in Canada? If so, • third party technology vendors are now
18 Question/Theme Summary of Comments CSA Response how would the coming up to the market with solutions; appropriate centralized trade • industry best practices and standards have matching system been developed both with and without be identified? MSUs, and STP can be achieved without a Are there MSU; institutional • concerns about the financial burden it investors or potentially has on the broker-dealer investment community, especially small firms that managers that would otherwise satisfy STP requirements; may not benefit from being forced • buy-side firms with relatively low trade into an volume would be particularly automated disadvantaged if they were forced to use a centralized trade MSU; and matching • mandating a MSU would hamper normal system? Can competitive forces and discourage STP trade investment in research and development matching be to the detriment of the marketplace. achieved without
a matching Two commenters stated it may be necessary service utility? to mandate MSUs in Canada if there is a high level of industry consensus. A number of commenters were of the view that STP trade matching in Canada can be achieved without a matching service utility.
Question 13 – Three commenters were of the view that the We will consider these Should the scope functions of a MSU should not be broader comments when reviewing of functions of a while two commenters felt that the scope of this issue in the future. matching service a MSU should be broader. utility be broader [than the One commenter recommended that the CSA functions focus on two core functions of a MSU: trade described in the matching and delivery to the depository. Paper]? Another commenter recommended that the functions be broader to support complete trade processing, including cancels and amendments that surface after a matched trade has been reported to CDS.
One commenter recommended that the following functions be added to the scope:
• the matching service utility should not be limited to equities, but support
19 Question/Theme Summary of Comments CSA Response all types of securities transactions; • when there is a discrepancy in a transaction, provide real-time or near real-time advice of the particulars of the discrepancy to all parties; and
• systems should be inter-operable with both the Canadian and U.S. markets.
Question 14 – Four commenters were of the view that the We are of the view that the Are the filing and filing requirements are sufficient. filing and reporting reporting requirements set out in the requirements set Five commenters stated that a MSU should out in the not be recognized as a clearing agency. proposed National Instrument for a matching proposed Two commenters felt that the CSA should service utility are sufficient. National consider recognizing a MSU as a clearing Instrument for a agency. matching service A few commenters on this issue believed utility sufficient, that a MSU should be tightly regulated due or should a matching service to the potentially systemic problems that utility be required may arise should the MSU not be able to provide its services and the MSU’s direct to [seek access to CDS accounts. recognition] as a clearing agency under provincial securities legislation?
Question 15 – Three commenters stated that the Canadian We agree that multiple Can the marketplace cannot support more than one MSUs must be inter-Canadian capital MSU. operable. markets support more than one Ten commenters are of the view that matching service market/competitive forces will determine the utility? If so, what appropriate number and type of MSUs. should be the Ten commenters stated that multiple MSUs inter-operability should be inter-operable. requirements?
Question 16 – Sixteen commenters were of the view that Should the CSA the CSA should not mandate a T+3 mandate a T+3 settlement cycle. Reasons cited include: settlement cycle?
We agree that the vast majority of trades currently settle within T+3 or less, without any significant
20 Question/Theme Summary of Comments Should the CSA • mandating would not serve any useful mandate a T+1 purpose given the low fail rates today; settlement cycle when the U.S. • mandating would cause confusion in the moves to T+1 market and divert the focus from STP and the SEC implementation and not solve any known amends its T+3 existing problems; Rule? • largely a philosophical question since it will have no impact on the marketplace; and • CSA mandating is not required since SRO rules were adopted to mandate the change from T+5 to T+3. Similarly, the majority of commenters on this issue felt that the CSA should not mandate a is reconsidered in the future. T+1 settlement cycle. Reasons cited include:
• any rule changes that are required can be adequately accommodated at the SRO level;
• a CSA rule was not required when Canada moved successfully from T+5 to T+3; and
• a CSA rule is not necessary given the competitive pressures to move to T+1.
Three commenters suggested that the CSA take direction from the SEC in order to ensure operational consistency.
Question 17 – Eleven commenters were of the view that The CCMA Corporate Should the CSA the CSA or other appropriate authorities Actions Working Group require the should require the reporting of corporate (CAWG) had been studying reporting of actions into a centralized hub. Reasons cited the implementation of a corporate actions include: centralized hub, and was into a centralized mandated reporting of entitlement assessing the need for a hub? If not, is it • cost-benefit analysis. Such more appropriate information by issuers in field based format would maximize market efficiencies; and an analysis would be for exchanges important before we and other • it seems unlikely that a hub would be consider a CSA rule marketplaces to developed without legislation. mandating the reporting of impose this requirement However, a number of commenters noted corporate actions to a centralized hub. It would through listing or that the mandating of corporate actions into other a centralized hub was not an immediate also be useful for priority. determining which requirements? stakeholder groups should
CSA Response problems. As a result, we do not propose to adopt a specific T+3 settlement cycle rule. However, we may consider a rule that confirms the basic principle that settlement must occur within the current recognized intended settlement date for the security type. We will also consider the need for a specific T+1 settlement cycle rule when a move to shorten the settlement cycle to T+1
21 Question/Theme Summary of Comments Who should pay The commenters were divided as to who for the should pay for the hub. Some commenters development and stated that it should be just the issuers while maintenance of others believed that it should be all “users” the central hub? including issuers, offerors, and custodians. One commenter noted that further analysis of cost benefits associated with the development of the hub is needed prior to making a decision to proceed. The commenter also noted that undertaking a cost benefits analysis would allow equitable development and maintenance of cost distribution among all industry participants. Without completion of a cost benefit analysis, and a clear understanding of the functionality and mandating requirements, it is difficult to estimate the cost impact of the hub development and decide who should pay for it.
Question 18 – Nine commenters were of the view that the See response above to Should the CSA CSA should not wait until a hub has been question 17. wait until a hub developed by the industry before the CSA has been impose any requirements. Reasons cited developed by the include: industry before it imposes any • to avoid confusion, the CSA should impose requirements? specific requirements in advance of any development; and • CSA regulation is the only way to make a central hub a reality.
One commenter noted that the implementation of a corporate-actions industry solution must include clear policies and penalties regarding non-compliance.
Question 19 – Nine commenters stated that the CSA The CSA propose to publish Should the CSA should require issuers and offerors to use in the Spring of 2005 a CSA require issuers the LVTS. Reasons cited include: notice to all reporting issuers and offerors to make their • the current situation, in which entitlements in Canada whose securities entitlement are paid using funds that cannot be are immobilized with CDS. considered final until the next day at the The notice would strongly
CSA Response pay for the development and maintenance of the hub. As noted above, the CCMA has realigned its efforts to focus exclusively on institutional trade matching. The reporting of corporate actions to a centralized hub is no longer a priority for the CCMA at this time. We understand, however, that CDS has undertaken to continue the work of the CAWG to establish the benefits of a centralized hub and is working to expand its entitlement services to deliver as many of the desired features identified in the CCMA hub model as possible.
22 Question/Theme Summary of Comments CSA Response payments by earliest, creates unnecessary risks (albeit encourage all reporting means of the not systemic) in the securities settlement issuers and their transfer LVTS? system; and agents to make their • the relatively small costs of using LVTS entitlement payments to are more than offset by the benefits of CDS in LVTS funds. having a single consistent, reliable and irrevocable payment system.
Three commenters are of the view that the CSA should not mandate entitlement payments via LVTS.
Question 20 – If Five commenters felt that a requirement to See response above to there is a CSA pay in LVTS funds should apply to all Question 19. requirement to payments—there should be no minimum make entitlement value. payments in LVTS funds, Four commenters suggested the following should the minimum values: requirement • the minimum value should be the same as apply only to the CPA requirement (currently $25 payments in million); and excess of a certain minimum • consideration should be made by the CPA value? If so, what to reduce the general ceiling to $5 million. should that minimum value be?
Question 21 – Eight commenters were of the view that the We will continue to monitor Should the CSA CSA should consider implementing the progress of the industry consider additional rules to encourage and facilitate groups that have assumed implementing the investment funds sector to move towards responsibility for the various any additional an STP business model. CCMA Retail Trade rules to encourage and A number of commenters suggested that Processing Working Group facilitate the the CSA consider the following: initiatives, with a view to ultimately publishing for investment funds • a single funds depository for Canadian comment proposed industry to move fund settlement with a requirement that all amendments to National towards an STP distributors and manufacturers be Instrument 81-102—Mutual business model? participants of this utility; Funds and Companion If so, what issues Policy 81-102CP to facilitate should be • continued work on Documentation addressed by the Agreements, under which the the processing of investment CSA? documentation to be exchanged between fund transactions on an STP a broker/distributor and a fund company in basis. Concurrent with those
23 Question/Theme Summary of Comments relation to client transactions would be governed; rules to modify the current processing of • investment funds; and • subjecting the investment funds industry to the same STP requirements being implemented industry wide.
Question 22 – Ten commenters stated that the CSA should Should the CSA develop rules in this area. Reasons cited develop rules include: that require the immobilization • the risks associated with the handling of and, to the extent physical certificates are extremely high; permitted by • it would reduce risks associated with corporate and catastrophic events, such as the events of other law, September 11, 2001 in the U.S., where dematerialization millions of physical share certificates in of publicly traded vaults or in transit were destroyed and had securities in to be replaced at great cost prior to Canada? trading, while computerized book-entry systems, such as DTC and the U.S. direct registration system, were up and running from off-site locations within hours or days; and • the use of certificates is an impediment to STP and results in increased risk when processing entitlements.
Four commenters were of the view that the CSA should not develop immobilization and dematerialization rules since only small numbers of trades involve certificates.
Question 23 – Only one commenter felt that the CSA We are considering the best To the extent should not regulate transfer agents method for providing direct registration operating or using a DRS system. regulatory oversight of DRS systems (DRS) operate in All other commenters on this issue were of systems operating in Canada, should the view that securities regulatory authorities Canada. a securities should regulate transfer agents if they operate or use DRS systems. Reasons cited
CSA Response amendments, the OSC and Alberta Securities Commission (ASC) will propose amending OSC Policies 5.3 and 5.4 and ASC Policies 4.3 and 4.4 to remove the requirement for certain unincorporated closed-end investment funds to issue certificates to their security holders.
As noted above, the CCMA has realigned its efforts to focus exclusively on institutional trade matching. Dematerialization issues are no longer a priority for the CCMA at this time. Nevertheless, we will continue to monitor the progress of the industry groups that have assumed responsibility for the various CCMA Dematerialization Working Group initiatives, and consider these comments when reviewing this issue in the future.
24 Question/Theme Summary of Comments CSA Response regulatory include: authority regulate transfer agents • given the importance DRS systems would that are play in maintaining client accounts, it is operating or important that they be considered essential using such DRS infrastructure in the same way as a MSU systems? or depository; and • processes and controls should be established for operating DRS systems to ensure public confidence in book based direct holdings.
Question 24 – The majority of commenters said that there Should there be will be separate DRS systems and inter- separate DRS operability was not an issue in this context. systems and Six commenters are of the view that DRS should they be required to be systems should not be required to be inter-inter-operable? operable. Five commenters are of the view that DRS systems should be inter-operable.
Question 25 – Is The majority of commenters on this issue We propose to review this it sufficient for believed that it is sufficient for the Canadian issue after the proposed the Canadian capital markets to rely solely on existing provincial Uniform Securities capital markets SRO segregation rules. Transfer Act has been to rely solely on existing SRO Two commenters were of the view that the enacted in a number of CSA jurisdictions. segregation current segregation rules should be rules? Or, given reviewed in order to assess the impact to the the growing indirect holding system and the recent reliance on the changes in the bankruptcy laws. indirect holding system, should the CSA consider an active role in developing comprehensive rules on segregation of customer assets?
We are of the view that separate DRS systems should nevertheless develop common standards that would facilitate communication among the transfer agent for the securities in question, and the investors, dealers, custodians and CDS holding or dealing in such securities.