PrefBlog

A little bit of good news alongside the Christmas gloom … settlement times may decrease:

Industry measures mitigate these risks. Notably, the clearinghouse that guarantees trade completion collects collateral from the dealers that are party to the transaction. These collateral requirements reached unprecedented levels during the frenzied trading of 2020 when Canada’s central securities depository, CDS Clearing and Depository Services Inc., cleared 637 million trades — 31% more than in 2019.

A simpler defence against settlement risk is to shorten the settlement cycle itself, thereby narrowing the window of opportunity for default. In doing so, the industry would benefit, including through lower collateral needs, while further protecting investors.
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When the U.S. House Committee on Financial Services examined events of last January that prompted some U.S. dealers to curtail trading in GameStop and other meme stocks, the clearing and settlement process was a key area of focus. Embroiled U.S. industry executives who testified before the committee described a flawed settlement system and pointed to the billions of dollars in additional collateral that their firms needed to sustain customers’ trading. These witnesses suggested eliminating collateral requirements altogether by moving to real-time settlement.
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While real-time settlement was considered during the U.S.’s recent deliberations, it would have introduced many complications to current market structure, potentially reducing some of the efficiencies dealers and investors benefit from today. Hence the decision to move to T+1 instead.

The U.S. can autonomously amend its settlement cycle, having one of the world’s deepest, most liquid and efficient financial markets. Canadian markets are so interconnected with those south of the border that failing to align our settlement practices risks severe disruption and inefficiencies to Canadian investors and capital markets. Therefore, as in 2017, Canada will need to mirror the U.S. approach.

PerpetualDiscounts now yield 4.81%, equivalent to 6.25% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.40%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened a little to 285bp from the 275bp reported December 15.

This entry was posted on Wednesday, December 22nd, 2021 at 9:19 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.