Mr. Thomas C. MacMillan
Chair, Board of Directors
Canadian Capital Markets Association
85 Richmond St. West
Toronto, Ontario M5H 2C9

Dear Mr. MacMillan:

CCMA letters dated July 3 and August 21, 2002

We thank you for your letters dated July 3 and August 21, 2002. We commend and support the CCMA's efforts to harmonize the Canadian securities industry's plans concerning T+1 and straight-through processing (STP) with those of the U.S. securities industry.

We understand that the North American industries have decided to re-focus their efforts during 2002 and 2003 on implementing STP, instead of promoting at this time the formal adoption of a T+1 settlement cycle. The industries propose to re-evaluate the possible implementation of a formal T+1 requirement in 2004.

Much work has been done by the CCMA to identify potential legal and regulatory initiatives that will support a STP environment. Some of these initiatives are needed, not only to implement STP, but to achieve the broader goal of safe and efficient securities clearing and settlement systems in Canada that are in line with international standards, such as those outlined in the November 2001 report of a joint task force of the IOSCO Technical Committee and the BIS's Committee for Payment and Settlement Systems (CPSS-IOSCO report). Like the CCMA, we are committed to improve our securities clearing and settlement systems in Canada so as to ensure our capital markets remain globally competitive. This includes promoting a STP environment that is fair and cost effective for all market participants.

One of the key challenges for the industry and the regulators is to determine the scope of STP for the Canadian securities markets. This determination will be important for us to know the nature of the regulatory measures we will be required to implement.

We have set out below some comments on the proposed legal and regulatory initiatives described in your letter of August 21. A number of the proposed initiatives identified in the CCMA's DRAL are purported to be the responsibility or within the purview of the CSA. We believe it may be too early to say with any certainty that such items will require CSA regulatory measures. We are still considering these items and will need further input from the industry on developing appropriate cost-benefit analyses, including exploring available alternatives.

Mandate issuers to report entitlement events (Corporate Actions)

The CCMA has argued that the reporting by issuers of entitlement events to a central repository will enhance overall efficiency and maintain the global competitiveness of Canada's capital markets. However, it is not clear whether this goal is best achieved by a CSA regulatory measure. We will need further information to answer the following questions:

1. What information is being reported to which entities, and what information is publicly available?
   
2. Our understanding is that this requirement is not critical to achieve STP for institutional and retail securities transactions, but may be useful for a broader market efficiency goal. Is this correct? Please describe, using specific examples, if necessary, the impact of moving to STP without any changes to the current entitlement reporting regime.
   
3. What infrastructure is required to implement this proposal? Who will be responsible for the start-up costs and ongoing costs of this infrastructure? What is the CCMA's estimate as to how long such a hub would take to create, test and implement? Would such infrastructure be available in time for STP or T+1?
   
4. What is the anticipated impact of this proposed Rule on the existing processes and costs of all applicable parties, including issuers and transfer agents?
   
5. Has the CCMA initiated any cost-benefit analysis for such a hub?
   
6. What alternatives to such a hub have been considered (could an existing facility be used)?
   
7. We note that the SIA White Paper of August 2001 included a recommendation that the "various SROs consider implementing rules mandating issuers, offerors and agents to provide electronic notice of all Corporate Actions... to DTCC and any depositories on the announcement date of the action." Could a similar solution be reached here in Canada without a CSA rule, ie. a regulatory measure implemented by the SROs? What is the US solution likely to be? Is there a reason why the Canadian solution should be any different?
   
8. What are the legal implications of centralizing all corporate actions/events information in a centralized "hub" (e.g. ownership, intellectual property and privacy law issues, etc.)?
   

Mandate institutional trade-matching

The CSA recognizes that improved institutional post-trade processing is important to detect early in the processing cycle any errors or problems with trades in order to reduce risk and costs to the Canadian securities markets. The CPSS-IOSCO report recommends early confirmation of trades by "indirect" market participants (investment managers/institutional investors) by no later than T+1. However, in order to fully understand why it is necessary to implement a CSA institutional trade-matching rule, the CSA will need assistance in answering the following questions:

1. Please describe the current SRO regulatory measures that impose trade reporting, confirmation and/or affirmation requirements on direct participants (dealers, whether trading as principal or agent) and on indirect participants.
   
2. Why is a proposed CSA rule needed? Is this requirement strictly necessary for STP, or is it needed for a broader market efficiency goal?
   
3. What infrastructure is required to implement it (how will it be done), at what cost, and who will pay for it? If a "VMU" is offered for the Canadian marketplace, who will offer it and how does the CCMA envisage the CSA's role in the VMU?
   
4. What business processes and which parties (including investment managers, institutional investors and custodians) will be impacted by this rule? Have the concerns of all indirect participants been addressed?
   
5. Can it be implemented without a CSA rule?
   
6. What is the U.S. solution likely to be? Will the solution be primarily a SEC or SRO regulatory measure?
   

Mandate issuers to use Large Value Transfer System ("LVTS") funds for corporate entitlement payments to CDS

You have requested that the CSA mandate reporting issuers to use LVTS funds when paying corporate entitlements to recognized depositories. Although, conceptually, we agree that such a practice by issuers would enhance the overall safety of our securities settlement system, we are concerned that a CSA rule is not the most effective means for achieving this goal. The CSA will need to fully understand why the industry believes the CSA should mandate such a requirement. The CSA will need assistance in answering the following questions:

1. What are the anticipated costs to issuers in implementing such a Rule? Should these costs be more appropriately borne by intermediaries instead?
   
2. Why is the proposed Rule needed? Is this requirement strictly necessary for STP or is it needed for a broader market efficiency goal?
   
3. What business processes and which parties (including transfer agents) will be impacted by this rule?
   
4. Can it be implemented without a CSA rule? Is there a less intrusive way of achieving this goal (CSA notice to issuers)?
   
5. Why is the proposed CPA rule that will place a $25 million cap on ACSS payments not sufficient to deal with this issue?
   
6. What is the practise in the U.S. with respect to the use by issuers of FedWire in making corporate entitlement payments? Do issuers in the U.S already use the FedWire system as a matter of market practise without regulatory requirements? Is there or will there be a SEC Rule in respect of the use of FedWire? Are there U.S. SRO regulatory measures in connection with this issue?

T+1 Rule

It would appear that a proposed CSA trade settlement cycle rule may no longer be necessary, at least for the time being, as the industry is refocusing its efforts on STP. Your confirmation of this view would be helpful.

STP Readiness Survey

The CSA plans to proceed with a STP readiness survey in co-operation with the CCMA. In order to produce a meaningful survey, should there be a commonly accepted definition of STP and an identification of the elements required to achieve STP both internally and externally?

Detailed Required Amendments List (DRAL)

We note that the DRAL is a document prepared by the CCMA. As a result, we must emphasize that the DRAL does not necessarily represent the views of the CSA. We have expressed our tentative views in relation to certain legal and regulatory items in a document we submitted to the LRWG entitled Preliminary List of Potential Securities Regulatory Changes Required for STP (Existing and New). Although some of the DRAL items are clearly within the CSA's purview (e.g., see the "USTA" DRAL item in respect of which the CCMA received comments from the CSA USTA Task Force), other items (primarily those discussed above and the mutual fund issues) need further analysis to determine whether CSA action is needed. As mentioned above, an important step for the CSA will be to determine the scope of STP. Based on this definition and how the industry plans to achieve STP, CSA staff will continue their consultation with the CCMA for the purposes of making a clearer determination of all required changes to legislation and regulation.

Legends/Certificates

The CSA would be pleased to meet with CCMA representatives to discuss Multilateral Instrument 45-102 (Resale of Securities). We understand that the final version of National Policy 46-201 is satisfactory to the CCMA.

The CSA is very interested in continuing to work with you to address the issues raised in this letter and we would be pleased to discuss any questions and/or comments you may have at your convenience.

Yours truly,

Douglas M. Hyndman
Chair, Canadian Securities Administrators
Chair, B.C. Securities Commission