CDS: clearing, settlement and T+1

After the trade

A trade on an exchange is an agreement, not a transfer. Three separate things have to happen before the buyer owns the shares and the seller has the cash, and the exam tests them as three verbs that learners treat as one.

Clearing is working out who owes what to whom. Across a trading day a dealer buys and sells the same security hundreds of times; the clearing house nets those obligations to one figure per dealer per security, and typically steps in as the central counterparty — buyer to every seller, seller to every buyer — so that no dealer is exposed to another's failure.

Settlement is the actual exchange: the cash moves one way and the securities move the other, on the settlement date. Until then the trade is unsettled — agreed, cleared, but not yet done.

Depository is the holding of the securities themselves, in book-entry form — electronic records rather than paper certificates — so that settlement is a change of ownership on the depository's books, not a courier.

In Canada all three are done for equities and debt by CDS Clearing and Depository Services (part of TMX Group). Derivatives traded on the Montréal Exchange are cleared by a different body, the Canadian Derivatives Clearing Corporation (CDCC) — the near-miss distractor.

Worked example — 500 Tamarack Foods shares on a Wednesday

On Wednesday, a client of Northshore Securities buys 500 Tamarack Foods shares from a client of Maritime Securities on the TSX.

• Wednesday (T), after the close — clearing. CDS takes every Tamarack trade between Northshore and Maritime that day, nets them, and tells each dealer its single net obligation.
• Thursday (T+1) — settlement. CDS moves the cash from Northshore to Maritime and the 500 shares, in book-entry form, from Maritime's account to Northshore's.
• Thursday onward — depository. The shares sit in CDS, recorded to Northshore for the benefit of its client. No certificate ever moves.

T+1 — and the calendar

Since 27 May 2024 Canada settles equities and most bonds on T+1: one business day after the trade, matching the United States, which moved the same week. Before that the cycle was T+2 (2017–2024) and T+3 before 2017. A trade done on a Friday therefore settles on Monday: 1 business day later, but 3 calendar days. In Excel: =WORKDAY(trade_date,1) gives the settlement date and =settle_date-trade_date counts the calendar days. Watch the register of an older question — a paper written before 2024 will say T+2, and the expected answer is the one its author knew.

Money-market instruments such as T-bills settle on a shorter cycle than T+1, same-day or next-day depending on the instrument; the paper's safe answer is that they settle faster than equities.

Three descriptions to label

"CDS nets the day's obligations between two dealers" — clearing. "Cash and shares change hands on Thursday" — settlement. "The shares are held electronically at CDS" — depository. And one that is none of the three: "Northshore holds the shares in its nominee name for the client" — that is custody by the dealer, one layer above the depository.