Substantial changes to the current method of processing retail securities in Canada are needed to meet a mid-2005 target date for a shortened settlement cycle aimed at reducing costs and risks for investors.

The changes required are set out in a white paper issued Tuesday by the Canadian Capital Markets Association’s Retail Trade Processing Working Group.

The white paper details why Canada must accelerate securities clearing and settlement to next-day settlement (T+1), allowing investors to receive proceeds of securities sold faster and to take possession of securities purchased sooner.

In March 2001, the CCMA Institutional Trade Processing Working Group issued a white paper recommending that all institutional trades move to settle on T+1. The CCMA’s Retail Trade Processing Working Group.similarly recommends that retail trades move to settle on the day following the transaction date.

“We considered leaving mutual funds out of the change, however, we believe that this would cause a shift between investment classes as investors will move to the product that gives them cash first,” said Jerry Beniuk, chair of the CCMA RTPWG. He added: “As well, leaving mutual and segregated funds and other retail transactions to settle on T+3 while institutional equities and debt transactions move to settle on T+1 would create confusion in the marketplace. Risk would increase, not decrease.”

The changes identified in the retail trade processing white paper will require rationalization and automation of manual processes, adoption of standards and standard procedures and reduced reliance on paper to transmit documentation, payments, certificates and other information.

New options for holding securities will be introduced as retail investors will need to convert securities certificates to electronic positions before being able to sell their securities. As well, new electronic payment options will be examined as investors will have to pay more quickly for their purchases, while at the same time receiving faster payment following sales of their securities.

“The amount of time we have to implement these changes is short; the amount of time before testing is expected to start is shorter still,” said CCMA chair Thomas MacMillan. “I encourage all stakeholders in Canadian securities markets to look at the recommendations and work to implement a viable model with maximum flexibility and efficiency,” he concluded.

The CCMA invites comments on the white paper until May 31.