The CSA has made it clear that the move to a T+1 cycle for mutual funds will be voluntary. CSA staff had earlier published a notice stating their view that mutual funds should voluntarily move to a T+1 cycle if the standard settlement cycle for listed securities in Canada is shortened to one day.

In a move aligned with global trends toward faster financial transactions, the Canadian Securities Administrators (CSA) are seeking to amend the regulations to facilitate a voluntary shortening of the settlement cycle for mutual fund trades. The proposal aims to change the settlement cycle from two days after the trade date (T+2) to one day after the trade date (T+1).

The proposed amendments to National Instrument 81-102 Investment Funds (NI 81-102) focus on two major areas:

Clarification on Payments: The amendments aim to clarify that payments for mutual fund purchases must be made no later than the reference settlement date disclosed by the mutual fund to the principal distributor or the participating dealer.

Redemption for Non-Payment: Another significant change involves paragraph 9.4(4)(a) of NI 81-102. Under the new rule, if a mutual fund opts for a T+1 settlement cycle, it must redeem its securities for non-payment on the next business day after the reference settlement date (T+2), as opposed to T+3 under the current regulations.

Canada already going with T+1 for equity and long-term debt

The proposal comes after the CSA published amendments to National Instrument 24-101 Institutional Trade Matching and Settlements, focusing on shortening the standard settlement cycle for equity and long-term debt trades in Canada from T+2 to T+1.

However, the CSA has made it clear that the move to a T+1 cycle for mutual funds will be voluntary. CSA staff had earlier published a notice stating their view that mutual funds should voluntarily move to a T+1 cycle if the standard settlement cycle for listed securities in Canada is shortened to one day.

The public comment period for the proposed amendments ended on March 17, 2023. The CSA received one comment letter, which supported the need for a technical amendment to facilitate a move to the T+1 cycle, particularly concerning the forced redemption for non-payment stipulated in paragraph 9.4(4)(a) of NI 81-102.

The proposed amendments are expected to have several ramifications:

Operational Efficiency: A T+1 settlement cycle will enhance operational efficiency and reduce counterparty risk.

Alignment with Global Standards: The move aligns Canada’s financial markets with global best practices, as many other jurisdictions are also considering or have already moved to a T+1 cycle.

Administrative Challenges: Without the proposed amendments, a voluntary move to a T+1 cycle could become administratively burdensome, as mutual funds would not be able to redeem securities for non-payment until two days after the settlement date.

The CSA’s proposal is now open for a 90-day comment period, and market participants are encouraged to provide their insights into these significant changes.