Starting Sept. 5, market transactions for individual stocks and bonds and ETFs in the U.S. will settle just two days after a trading transaction instead of the current three when T+2 takes effect.
The SEC and industry trade groups like the Securities Industry and Financial Markets Association say the shorter settlement period will reduce the risk of default between the time after a trade is done and before it settles, and will align U.S. standards with those in many European countries. Canada, Mexico and Peru are also adopting T+2 on Sept. 5.
(Related: SEC Issues More Guidance on Form ADV Changes)
The change will primarily affect firms involved in clearing, custody and settlement services, like BNY Mellon’s Pershing, but it also has implications for financial advisors, says Steven Dapcic, director of the Corporate Actions Group at Pershing.
“Advisors need to understand that the regulatory rules are changing and they need to tell their clients that trades will settle more quickly,” says Dapcic. He recommends that they also talk with their custodians about the change.
Here are some of the key implications for advisors, according to Dapcic.
Funds to Finance Trades Have to Available One Day Sooner
Under T+2, funds must be available for a purchase within two trading days after a transaction in order for the trade to settle successfully. Until Sept. 5, when T+3 is still in effect, the requisite time is three days.
The T+2 timeframe applies to transactions for stocks, bonds, including municipals, unit investment trusts, ETFs and certain mutual funds. It does not apply to Treasury securities, which already operate under a T+1 regime.
Eligibility for Dividend Payments Moves Up One Day
When companies announce a stock dividend, they set a record date by which investors are eligible to collect the dividend. In reality, however, the more important date for investors is the ex-dividend date, which is set by the stock exchanges and accounts for the time it takes for a stock purchase to settle.
Investors must own a stock before the ex-dividend date in order to receive payment. Otherwise the seller collects the dividend. Investors who purchase a stock on the ex-dividend date — the date when the stock price declines to account for the dividend payment — cannot collect the dividend.
Under the current T+3 regime, the ex-dividend date is set two days before the record date. Under T+2, it will be one day before the record date, so investors will have to purchase a stock two days before the record date to qualify for the dividend payment.
Sept. 7 Will Be a Double Settlement Day
Because of the Labor Day Holiday on Monday, Sept. 4, when T+3 will still be in effect, trades done on Friday, Sept. 1, won’t settle until Sept. 7. (That’s because Sept. 2 and 3 are the weekend and Sept. 4 is a holiday, so three trading days after Sept. 1 is Sept. 7.
Trades on Sept. 5 will also settle on Sept. 7 because T+2 will be in effect then.
Sept. 7 will also be the first record date affecting dividend payments under the new T+2 rules. Since the ex-dividend date will be set one day prior to the record date, on September 6, investors will need to have purchased the stock by Sept. 5 to qualify for payment.
Cover Protect Dates for Tender Offers Also Accelerate by a Day
Investors who miss the deadline to deliver shares in a voluntary tender offer because they aren’t in possession of their shares usually have a few extra days to do so provided they communicate their intention, usually with a letter of guarantee. Under T+3 they had three additional days, known as the cover/protect date; under T+2 they’ll have two.
SIFMA has set up a command center for the T+2 change, which will operate from Sept. 1 through Sept. 8. The first industry call is scheduled for Sept. 1 between 4:30 and 5:30 p.m. EDT.
— Related on ThinkAdvisor: