In an effort to modernize its fee model, industry clearing agency CDS Clearing and Depository Services Inc. (CDS) is proposing an overhaul that includes scrapping certain rebates and cutting its core clearing fees.
In a notice published Thursday, CDS set out its latest proposal for revising its fee structure. The plan would eliminate a couple of rebates to dealer firms — the required rebate of 50% of any increase in annual clearing revenue and the additional volume-based annual rebate — eliminate certain “non-core” fees and reduce certain clearing and settlement fees by 35%.
“CDS’s current fee model is outdated and in need of a modernization,” the notice said.
According to the notice, the proposed changes would result in an overall increase of about $12.6 million in clearing fee revenue, based on 2024 data. This amounts to an average annual increase of approximately 0.7% in CDS’s fees since 2012, when CDS was acquired by TMX Group Ltd.
“The purpose of the proposed changes is to update and modernize the CDS fee structure and to better position CDS to respond to changes and challenges of operating [Financial Market Infrastructure] FMI services in a rapidly evolving environment,” it said. “It has been 13 years since CDS was acquired by TMX Group. In that time, the costs to run CDS’s business, including costs associated with significant enhancements in FMI operational resiliency, adherence to global standards, and maintaining modern, stable and reliable technological and processing systems, have risen dramatically.”
Despite those rising costs, fees have remained static over that time.
“Given the unprecedented threats to the global competitiveness of our domestic capital markets, an FMI’s fee structure needs to encourage investment and innovation in post-trade services to ensure that CDS does not fall out of step with global peers,” the notice said.
The impact of the rising costs won’t be distributed evenly across firms. The proposed changes also aim to ensure the effect on dealers is proportional to their use of CDS services — with most of the higher fees falling on larger dealers that account for the majority of transaction volume.
Based on 2024 data, the 10 largest firms by transaction volume would have borne 70.3% of the estimated revenue increase, or about $8.8 million.
“A large majority of smaller, independent clearing participants will either benefit from lower annual clearing fees resulting from setting off the discontinuance of the rebates against the reduced core clearing and settlement fees, or the package of changes effectively will be neutral for these firms,” it said.
CDS previously proposed eliminating certain rebates in 2019 and again in 2021. The primary change from earlier proposals is the 35% reduction in core fees, the notice said — a move made possible by the “recent transition to new technology which will enhance the efficiency, resilience and adaptability of CDS’s critical systems.”
Given its new proposals, the agency also formally withdrew its 2021 proposals.
The changes are now out for comment until Nov. 3.
“The proposal will result in: a fair and reasonable fee structure; clear and predictable fees; and a sustainable model that supports continued investment in the operational resiliency expected of a systemically important [financial market infrastructure] that is more consistent with CDS’s global peers,” it said.
“The proposal is a crucial step towards ensuring that CDS is a more modern, efficient, operationally sound organization, while remaining reasonably priced, all factors which are essential for competitive Canadian capital markets.”