Kevin, how have market events and client demand in the past 12 months shaped where TMX is today, and where the firm is heading?
Kevin Sampson: As the industry comes under increased funding pressure, in terms of more diverse demands on collateral, resources and funding, and as our clients continue to diversify and scale, market participants are looking to market infrastructures to help drive greater efficiencies and optimise their processes and funding as much as possible.
There are a variety of considerations from a central market infrastructure perspective that requires TMX Group to review the capabilities and the expertise that we provide, to understand how we can derive enhanced value for our customers, and to relieve some of those pressures. Depository, clearing, settlement, and asset services may also dovetail with more innovative and customised solutions for the Canadian market, and our clients, in the collateral, funding, and technology space. These pressures facing our clients translate into demand for our services.
Steve, can you tell me about the key features of the CCMS service?
Steve Everett: One of the key tenets of the Canadian Collateral Management Service (CCMS) is that it aims to reduce collateral fragmentation. In other words, it does not separate the worlds of settlement and collateral, but instead views these two as vitally dependent on each other. Solutions like the CCMS can facilitate — through unlimited substitution — the ability to release assets in time to settle obligations in full. The transition to the T+1 settlement cycle, beginning on 27 May 2024, makes this aim a key feature.
Another core aspect of the service is collateral optimisation without fragmentation — the ability to use the resources a firm has to the maximum benefit, across multiple exposures across the market — interoperating between custodians and Canadian Depository for Íø±¬³Ô¹Ï (CDS) participants. The CCMS achieves this through its partnership with Clearstream, in using a well proven service and algorithm internationally and now within the Canadian market.
We started off facilitating repo transitions on the CCMS, which was certainly timely due to the cessation of CDOR and banker’s acceptances in the Canadian market. However, it is also important to note that optimisation reaches its full potential when you can add other exposures. Those exposures include securities lending, which will benefit from all of the same features as provided for repo. In the second half of 2024, we aim to enable the entire Canadian ecosystem to take advantage of the same types of features.
How have you seen this initiative develop over the past year, and how will it enable the improvement of Canadian infrastructure in terms of post-trade and collateral mobilisation?
Everett: The fundamental tenet of the initiative has been that it is highly collaborative; it is not something that we are doing in isolation. TMX Group has taken a market driven approach to how we have shaped the CCMS, as well as all of our new products, by listening to the market requirements, meeting those standards, and progressing with market needs. We will continue to do that across every market segment that we participate in.
How is TMX Group working to battle post-trade challenges and inefficiencies within the Canadian market?
Sampson: We are in a unique position in the market, where we are a central hub that supports the fundamental function of Canada’s financial markets. By operating a diverse portfolio of businesses in the financial services, TMX Group benefits from having a broad range of capabilities that we can bring to bear within our post-trade business, to be able to better serve the market. Our core mandate is to make our markets better.
The market and our clients are looking for us to not only continue to operate best-in-class technology and post-trade services that are resilient, stable, scalable, and secure — which are table stakes for our core business — they are looking for us to provide downstream value and benefits. This is foundational to what we are doing around our post-trade modernisation initiative, as well as how we look at T+1 operationally and from a solutions perspective. We can serve the broader market, and as a result of that, our clients are looking for us to play a part in their journey to scale and become more efficient, automate, and, ultimately, make our markets better.
What role does the firm’s post-trade modernisation project play in improving the post-trade arena
in Canada?
Sampson: The post-trade modernisation initiative is fundamentally introducing new technology in a new system that underpins our depository, clearing, settlement, and asset services business. It is a very complex and broad project that is critical to the efficient operation of the Canadian financial markets. We began modernising this critical infrastructure within the market quite a few years ago, and we are on the one-yard line in introducing this to the street. It provides us with a foundational platform in post-trade, to be able to future proof our services for the market — it is more scalable, flexible and secure. It provides additional and enhanced features in terms of standardised messaging, user interfaces, and transparency around risk. We are looking forward to rolling out the new platform in the near future.
T+1 is right around the corner, from your understanding, how is the Canadian market handling the transition in comparison to its counterparts (US, Mexico)?
Everett: Each jurisdiction has its own challenges, but there are also some common themes. The lost day represents a resiliency challenge to any market, which is where the unexpected comes in. For every market, participants require predictability, and a high level of automation to produce a predictable settlement day — that is the aim of T+1.
The US is a much larger market, there is a more diverse range of players and a greater number of them, so it is often difficult to compare the US with Canada. However, for years there have been a number of fit-for-purpose products within the US market that have helped the T+1 transition.
In Canada, we have started to build quite a few of those types of products, such as the TMX Recalls Hub for securities lending, which is an initiative that TMX Group has collaborated on with the Canadian Íø±¬³Ô¹Ï Lending Association (CASLA). The hub works to automate the recall notifications and plays a key role in the readiness for the move.
There was not that much time to get ready for T+1 — from the time it was announced to the go-live date. There is only so much automation each firm and an industry can actually do. The survey results we have seen across the US and Canada are very similar, in that automation has been adopted where it can be, but there has been far more weight placed on process improvements from where automation was not possible. Residual automation will be done post T+1.
Sampson: Given the interdependencies between the Canadian and the US markets, it is extremely important that we have settlement symmetry between the two jurisdictions. Some of the most liquid and highly traded securities on TMX Exchanges are cross listed in the US. The CDS and the Depository Trust and Clearing Corporation (DTCC) have the most active cross border, post-trade, linkage in the world in terms of allowing for fungibility and efficient position movement cross border between the two jurisdictions.
As a result, we share a common purpose with the US in terms of supporting settlement efficiency, the symmetry between the two jurisdictions in that settlement regime, and share that common interest in ensuring that it is successful. We have collaborated with DTCC, and have shared a lot of information and communication to ensure we are in sync.
How do post-trade complexities affect Canada’s readiness for the implementation of T+1? How are you working with your clients to prepare for the shorter settlement cycle?
Sampson: We play a significant role in terms of industry readiness. We have conducted industry testing quite thoroughly, and facilitated this for the industry on our systems and our platforms. This was done to provide confidence in the market, from a post-trade, critical infrastructure perspective, so that CDS and the market is T+1 capable and ready. We are actively engaged with the industry on that journey, as we all prepare for the 27 May go-live date in Canada.
We play a dual role in terms of ensuring that the market is functionally and operationally ready to interact with the central securities depository, and there is an education and awareness element to that as well. We are extremely active out in the market with our participants, not only domestically, but also globally, talking about T+1. TMX Group has been discussing what the transition means for the market, what the challenges are, and how we are going to successfully transition. In addition, we have been looking to solve the market challenges that are going to be amplified, or new challenges that will emerge as a result of T+1.
In terms of innovation, how have regulatory changes and an ever-evolving market pushed the development of TMX’s portfolio, as well as the Canadian market overall?
Everett: In terms of regulation, and given the market infrastructure role that we play, TMX Group works to reduce risk and improve efficiencies across the industry. We must do this in a collaborative way. We have to take inputs into account and be able to synergise them for the best value and benefit of the industry. Our approach to this has been multipronged.
TMX Group has become a lot more involved in industry and international forums — more than we have almost ever been as an organisation. We also contribute to the thought leadership fabric and narrative in the industry, providing a useful feedback mechanism for future roadmaps and approaches.
Regulatory change, market needs, and technology cannot be looked at in isolation; an organisation such as TMX Group must look at these three components together, with a synergistic view across everything, and look at how the firm is going to move forward over time. Most changes to post-trade in the market are not quick, and there needs to be a high degree of buy-in from the industry. A clear roadmap, which takes into account important components, including regulation and technology, is very important.
What are the key strategic initiatives for your development strategy in H2 2024 and 2025?
Sampson: From a sequential perspective, T+1 is critical for the industry, and for us, and so priority number one is ensuring a successful transition. We feel very comfortable and confident with where we are right now in terms of readiness for that transition.
With the TMX post-trade modernisation initiative, we are working very closely with the industry and regulators to ensure that we have system and participant readiness, and that we are aligned with the industry for the transition to this modernised platform.
There is certainly a portfolio of innovations and market-driven solutions that we are eager to advance within the market, including the CCMS. We are just at the starting line with the CCMS, and we are appreciative of the interest and support we have had from the industry, enabling us to go-live with this system this past April.
The vision for the CCMS is to scale this quickly and significantly in terms of both the breadth of collateral exposures that the service supports beyond repo, and in terms of the user base that it services — from broker-dealers, banks, pension funds, asset managers, to corporate issuers as well.
Building and scaling this ecosystem will amplify overall benefits for the market as that scaling takes place. Ultimately, our focus will turn from the domestic side of this service to the potential opportunities from a more global perspective. We intend to use our collaboration with Clearstream to create greater cross-jurisdictional collateral mobility efficiencies and automation. From a future roadmap perspective, this is something we will be looking at closely.
Everett: We are going to be releasing equities as collateral for use in baskets in the immediate term. Currently, we have the ability to do title transfer securities lending. We will then expand this into pledge for securities lending later in 2024. For the Canadian securities lending industry, ease and mobility of collateral, and the way that the CCMS can do it, is unique. With the new features that it presents, and the level of standardisation we are getting from industry bodies that we are working alongside, we anticipate that this initiative will be of significant benefit to the securities lending industry.
Also on the roadmap is the TMX Recalls Hub, which is going to be live around the T+1 implementation date. It is an interoperable recalls facility — firms can submit their own formats, send it through to TMX, and it will go to the other counterparty in the format that they require it to be. In addition, we have a dashboard to monitor recalls across the market. Smaller lenders can use the dashboard to book recalls. This will become an extension point for us to innovate with the industry.
The biggest concern for the industry is fail rates. Certainly, part of the innovation roadmap for us is the role we play to facilitate the reduction of fails in the market. TMX Group looks to innovatively expand this platform to facilitate a reduction in fails, where possible.
In terms of the rest of our portfolio, we are investigating a very exciting private markets initiative, which relates to dematerialising the private markets industry in Canada.
We are going to see extensions of every single one of these products. We also have a few potential new products that will require us to collaborate with existing partners and vendors in the industry.
Sampson: The capabilities and experience TMX Group has in post-trade, and the value that it can add to the market, are quite significant. The opportunities for us to drive more efficiencies, reduce risk, and provide greater automation in the market for post-trade businesses, are quite meaningful. We are putting a large focus on engaging with the community and, as a result, we have seen some great progress with advancing our initiatives.
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