North America Readies For T+1 Trading

A major change is coming to the US, Canadian and Mexican securities markets at the end of May that will affect publicly listed companies in their respective jurisdictions. The market regulators have decided to reduce the time it takes to settle a trade, which involves moving securities to the buyer’s account and cash to the seller’s account, to one business day after the trade (T+1) from two business days (T+2). The Canadian and Mexican markets will move to T+1 on May 27 and the US the following day.

The migration to a shorter trade settlement time is part of a broader strategy to mitigate counterparty risk and reduce the margin posted by counterparties to the clearinghouses. The larger aim is to enhance the efficiency and stability of the securities markets, benefiting all participants.

“For corporates, it’s not as significant as for investment managers, custodians, brokers, banks and folks within the financial community,” says Larry Tabb, head of market structure research at Bloomberg. “However, it may impact corporate actions, such as dividend announcements, reverse splits, split issues with their stocks and equity issuance.”

Dividend payments, for example, would no longer have an ex-dividend date—typically, a day before the date of record. The ex-dividend date and date of record will now be the same as the trade date (T). As such, investors will have earlier access to their dividends than they did under T+2.

Corporates “are just going to have to be a little more cognizant of when announcements occur and when effective dates occur, and just to ensure that there’s enough time to process these transactions or for the banks, clearinghouses, and transfer agents to process these transactions a little bit faster,” Tabb explains.

The settlement cycle has been getting shorter for decades, but this reduction will likely be the last time. The US Securities and Exchange Commission set a T+5 settlement cycle in 1975. In 2004, the cycle was shortened to T+3, which became T+2 in 2017. Each reduction involved a great deal of industry coordination and vast back-office investments.    A future move to same-day or real-time settlement is unlikely, however, since it would not leave no room for counterparties to address failed trades.