Canadian investment firms are ratcheting up their investments in operational improvements, including trade matching and collateral management, due to an onslaught of regulations.

The Canadian Securities Administrators’ (CSA) regulatory rule NI 24-101, which currently requires 90% of institutional trades to be matched by noon one day after the trade date (T+1), has driven many of the recent improvements in operations, with the Canadian market achieving the highest settlement efficiency rates in the Americas.

“Canada has become a leader in settlement efficiency over the past several years as a result of the measures that the industry put in place following the Canadian Securities Administrators’ NI 24-101 mandate,” said Matt Nelson, director of strategy at post-trade services provider Omgeo.

“That piece of regulation, which required participants to match 90% of domestic trades by noon on T+1, pushed Canadian institutions to place an increased focus on post-trade operations in order to bring greater efficiency to the trade lifecycle.”

According to a survey of Canadian investment management firms conducted by Stratix Consulting, it’s expected that the NI 24-101 goals will be met by the largest investment managers by the end of this year.

Domestically, the market is increasingly automated, with 93% of investment managers using electronic trade matching solutions for equity trades and 80% for fixed income trades. For cross-border transactions, 80% are using trade matching for equities and 74% for fixed income.

Derivatives continue to get more automated with 20% of firms using local or central matching, up from only 10% in 2010. However, 67% are still using phone, fax or email for derivative trade matching. While derivatives are only being used by 1.5% of respondents, that amount is also double what it was in 2010, showing increased interest in this asset class.

“The market needs to turn its attention to new regulations and preparing for the move of OTC derivatives to exchanges,” Nelson said. “With derivative use growing, more automation in this asset class is going to be required to both manage risk and maintain compliance with new regulatory requirements.”

There are a number of regulatory initiatives under way that will impact on post-trade services, including the global movement towards shortening the settlement cycle and the efforts to move OTC derivatives trades to central counterparties (CCPs).

In March, European regulators proposed a T+2 settlement cycle for the European Union by 2015 in their central securities depositories regulation.

“This will be a significant undertaking for the industry and one that can only be accomplished by investing in post-trade automation,” said Nelson.

With regards to OTC derivatives, both Dodd-Frank in the U.S. and the European Market Infrastructure Regulation in Europe promote the use of CCPs to reduce counterparty risk.

“What is very likely to emerge is a market consisting of both bilateral, OTC trades and traded CCP-cleared trades,” said Nelson. “As a result, market participants will need tools to help them to manage collateral and margin processing in a ‘mixed’ clearing environment.”

There is a strong need for technology systems that offer collateral optimization, as the cost savings to financial firms of optimizing their collateral are significant.

There is also a trend towards merging collateral management across business lines to allow greater efficiencies and consolidated views of a firm’s risk exposures.

“These product lines had previously been run in separate silos with individual desks for derivatives, securities lending and repo but in many cases are now being combined,” said Martin Seagroatt, global marketing manager at software provider 4sight Financial Software, which has launched a collateral optimization module for its Xpose collateral management system.