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Impact of National Instrument 24-101 - Institutional Trade Matching and Settlement

Robert Smythe

Vice-President, Research and Market Development

Stratix Consulting

Following several years investigating broader STP solutions, the industry through the Canadian Capital Markets Association (CCMA) and the Regulators identified Institutional Trade Matching as a priority in 2003. It was realized that to get all three parties involved in a securities trade (Investment Manager, Broker and Custodian) to make changes to accelerate trade matching, a securities rule was required. On January 12, 2007, the Canadian Securities Administrators (CSA) published NI 24-101 Institutional Trade Matching and Settlement. This instrument focuses on requiring trade matching on Trade Date (T) and does not involve changes to existing T+3 (Trade Date plus 3 days) settlement timing. The CSA expect that NI 24-101 will be in force by April 1, 2007.

CSA Member Security Commissions will monitor the implementation of NI 24-101 for the broker dealers and registered advisors that they regulate. It is anticipated that the Office of the Superintendent of Financial Institutions (OSFI) will also be sending a letter indicating their support for NI 24-101 to all financial institutions that they regulate (deposit taking institutions which include custodians, insurance companies and pension plans).

While some investment managers and pension plans may not be directly regulated by CSA Members or OSFI they are still impacted because the rules do not allow a registered dealer or advisor to execute a trade from April 1, 2007 onwards unless they have policies and procedures in place to achieve matching on T. By October 1, 2007 a registered dealer or advisor cannot open up an account or conduct a trade unless trade matching agreements or statements are in place.

NI 24-101 provides the framework for the timing and performance objectives associated with implementing a more effective trade matching process in Canada. While objectives have been established considerable latitude has been provided on how they will be achieved. NI 24-101 makes the industry responsible for developing the scope and content of trade matching policies, procedures and agreements. It also does not provide details on the procedural and system process changes needed to meet the trade matching timing and performance objectives.

While some may look on NI 24-101 as additional regulatory burden the more progressive will see it as an opportunity to streamline processes, reduce costs and decrease risk.

The requirements that come into effect on April 1, 2007 involve establishing policies and procedures required to identify how you will comply with the instrument. By October 1, 2007 trade matching agreements or statements must be in place. The exception reporting becomes effective as at Oct 1, 2007. Exception reports will be required for all broker dealers and investment managers who do not meet the required thresholds set out in the instrument. The first reports will be due by mid February, 2008 covering the quarter ended Dec 31^st, 2007.

If you do not have a plan in place to meet the requirements of NI 24-101, it is unlikely that any significant system changes can be made by October 1, 2007. Initial compliance will most likely have to be addressed by procedural changes or simple electronic file transfer processes. Some of these changes could involve people working later in the day to ensure that allocation information is sent to custodians on trade date.

Meeting a 95% trade match rate by 11:59 pm on T by December 31, 2009 will most likely involve changes to core trading and back office processes as well as interfaces with many other organizations. Investigating what system changes are needed should be started now.

There are 3 key dates that require action be taken:

April 1, 2007: Policies and procedures must be in place

Oct 1, 2007: Trade matching agreements or statements must be in place and performance must be tracked from this point forward with the first exception report due by mid February 2008. Investigation of system changes needed to achieve Matching on T including the potential use of trade matching utilities should also have been started.

June 30, 2008: Changes to trade order management systems and electronic interfaces with dealers, custodians and investment managers are expected to be required in order to achieve 70% matching by 11:59 pm on trade date (T) and prepare for 95% matching on T by December 31, 2009.

We believe the following 10 step plan will help keep you on track.

Robert Smythe is Vice-President, Research and Market Development at Stratix Consulting; a leading partner to the Canadian financial services industry providing solutions in IT Strategy, IT Governance, and IT Integration. Stratix Consulting is also the organizer of the 3^rd Annual FPL Canadian Electronic Trading Conference, being held in Toronto on May 31 and June 1, 2007.