In establishing a framework for achieving STP, the Instrument introduces a timeframe under which all details for the accurate clearing and settlement of an institutional trade must be agreed, confirmed and verified by and between the adviser, dealer and custodian ("matching"). All participants in institutional trades will be required to adopt policies and procedures on how they propose to meet the prescribed progressive trade-matching milestones and deadlines, and the Instrument also requires exception reporting for registrants who fail to meet prescribed trade-matching rate targets within specified periods (with the target being a 95% matching rate on T by January 1, 2010).
What types of trades are affected?
The Instrument generally applies to all trades executed with or on behalf of an institutional investor on delivery against payment or receipt against payment through the facilities of a clearing agency (DAP/RAP trades). An "institutional investor" is any investor (including individuals) with a DAP/RAP account. Certain types of trades (such as trades for which settlement is made on behalf of a client by a custodian that is also the dealer that executed the trade), are exempted from application of the Instrument.
Trade-matching policies and procedures
Effective October 1, 2007, registered dealers and advisers will be prohibited from accepting or giving orders to execute a DAP or RAP trade on behalf of an institutional investor unless each trade-matching party has either entered into a compliance agreement or provided a written trade-matching statement containing assurances that they have established and enforce policies and procedures to meet the requirements of the Instrument. The definition of trade-matching party captures all of the relevant parties involved in the institutional trade-match process, namely registered advisers, dealers and custodians (or the institutional investors themselves if a registered adviser is not acting for the institutional investor in the trade).
The compliance agreement/written statement does not need to be formally in place until October 1, 2007, but the expectation is that the trade-matching parties will adopt and enforce the underlying policies and processes immediately (if they have not already done so) as a first step in the transitional process. Although the actual scope and content of the policies and procedures to be adopted are not specified in the Instrument, the companion policy to the Instrument (Companion Policy) gives some guidance. Further, it is anticipated that SROs will recommend or require that their respective members use industry-wide standard templates of best practice that have been prepared or approved by the SRO (for example, the Canadian Capital Markets Association has published standard trade-matching statements to be used by market participants stating compliance with the requirements, and developed recommended best practices and standards).
Trade-matching agreement/statement
Participants who opt for the trade-matching agreement need only enter into one blanket trade-matching agreement with the other trade-matching parties for new or existing trading accounts of an institutional investor. The agreement, which may be in the form of a single multi-party agreement between the trade-matching parties or a network of bilateral agreements, may be incorporated into the institutional account opening documentation. It must set out the specific roles and responsibilities of each of the trade-matching parties and should include a description of practices for settling institutional trades (including time lines for accomplishing various steps in the trade-matching process). The trade-matching agreement should be signed by a "senior executive officer" of a participant, who may be the chair or vice-chair (provided they perform the function of their office on a full-time basis), president, CEO, COO or the senior VP responsible for operations and back-office functions.
The trade-matching statement, on the other hand, may be in the form of a single generic statement which should be signed by a senior executive officer. Registered dealers and advisers will be entitled to rely on that statement for all future trades in an account in the absence of actual knowledge that any statements or facts contained in the statement are incorrect. A single uniform trade-matching statement may be sent by mass mailing or email, or posted on the participant's website, all of which are described in the Companion Policy as acceptable ways of providing the statement to other trade-matching parties.
Transitional trade-matching targets
The Instrument adopts a phased in approach setting out progressive trade-matching milestones culminating in the expectation of matching institutional trades by the end of T by July 1, 2008. For trades executed between October 1, 2007 and before July 1, 2008, the expectation is that trades be processed by 12.00 pm (noon) on T+1. Institutional investors whose investment decisions are usually made in and communicated from a geographical region outside of the western hemisphere will have an extra day to match their trades.
Exception reporting
With the dual purpose of pinpointing any systemic industry issues which are impeding the STP initiative and identifying trade-matching parties with inadequate policies and procedures to meet the prescribed trade-matching deadlines, the Instrument introduces an exception reporting requirement under which registrants are required to report on non-compliance. These exception reporting requirements are triggered when the specified matching rate for DAP/RAP trades in any given quarter is less than the following:
Percentage triggers
for exception reporting |
for trades executed: |
| less than 80% trade-matching by 12.00 p.m. (noon) on T + 1 |
Oct. 1, 2007 - Dec. 31, 2007 |
| less than 90% trade-matching by 12.00 p.m. (noon) on T + 1 |
Jan. 1, 2008 - June 30, 2008 |
|
less than 70% trade-matching by T
|
July 1, 2008 - Dec. 31, 2008
|
|
less than 80% trade-matching by T
|
Jan. 1, 2009 - June 30, 2009
|
|
less than 90% trade-matching by T
|
July 1, 2009 - Dec. 31, 2009
|
|
less than 95% trade-matching by T
|
on or after Jan. 1, 2010
|
Exception reporting requirements become effective as at October 1, 2007, with the first reports for the quarter ended December 31, 2007 becoming due in mid-February 2008. Reports are to be made on Form 24-101F1 which requires: (i) aggregate quantitative information on equity and debt DAP/RAP trade; (ii) reason(s) why the prescribed trade matching rates have not been met; and (iii) the steps the reporting entity proposes to take in order to resolve such matching process delays in the future.
Reporting requirements for clearing agencies and matching service utilities
Clearing agencies and matching service utilities will each be required to file a quarterly institutional trade reporting and matching report (Form 24-101F2 and Form 24-101F5, respectively) within 30 days of the end of each calendar quarter. Details of aggregated trade-matching information in respect of each of their participants/users/subscribers (including information relating to the percent of client trades that have been entered and matched by the participant/users/subscribers within the time frames specified in the Instrument) will be required to be disclosed in the report.
Confidentiality of trade-matching information
While the Companion Policy indicates that generally the reports required to be filed by registrants, clearing agencies and matching service utilities under the Instrument will not be made public (unless required by freedom of information and privacy legislation), securities regulators may choose to share certain information with SROs as well as publicize aggregated quantitative matching statistics based on information in the reports.
Non-compliance
In addition to monitoring their own compliance with the terms of their respective trade-matching agreements or statements, the Companion Policy indicates that registrants are expected to take "active steps" in addressing any non-compliance of other trade-matching parties of which they are aware. Examples of "active steps" include imposing monetary penalties or requesting a third party review or assessment of the non-compliant party's policies and procedures. Registrants are also expected to identify trade-matching parties that appear to be consistently non-compliant in their exception reports, and it is intended that the regulators and SROs will be taking steps to follow up as appropriate with trade-matching parties that persist in failing to meet the deadlines and other requirements of the Instrument.
