Thanks to improvements in technology, trade settlement periods are gradually getting shorter. Beginning May 28, 2024, the settlement period for most U.S. securities traded through the Depository Trust Company (DTC) — including cash equities, corporate and municipal bonds, and unit investment trusts — will by default be reduced from two business days after the trade date (T+2) to the next business day (T+1). This is unless different terms have been expressly agreed upon by the parties involved.
While this new standard is expected to increase capital efficiency and liquidity, reduce counterparty risk and lower costs, it will also introduce some challenges. For instance, firms will need to focus on streamlining settlement systems and processes from both an operational and technological standpoint before T+1 goes live. As such, collaboration and coordination among all players involved in the trade lifecycle will be imperative to ensure a smooth transition.
Learn more about what the move to T+1 means for different market participants below.
What does T+1 mean for depositary receipt (DR) issuers?
DR issuers will need to account for the added time pressures on their physical documentation responsibilities when engaging in primary market offerings involving extensive paperwork.
Otherwise, operational and settlement issues could arise during the DR issuance process, running the risk of impacting the company’s own capital raising from the offering.
DR issuers will also need to factor in the accelerated timeframe when it comes to dividend events. When T+1 is live, the ex-date and record date of dividends will become the same for regular ex-date processing. Similarly, in events that have due bills, such as stock splits, the redemption date will now fall on the ex-date. Issuers should take the adjusted timetables into account when announcing key dates for these events to the public.
How will T+1 change securities lending and collateral management?
Securities lending programs may need to condense recall timeframes to align with the shortened settlement cycle. Borrowers may need to adapt their processes accordingly to avoid any potential settlement failures and subsequent penalties.
Receiving collateral in a timely fashion will be key. Firms that are not currently using a tri-party agent to manage their non-cash collateral may experience operational challenges, especially where there is a need for greater automation to settle collateral through a series of disconnected workflows.
How will T+1 impact securities-related foreign exchange (FX), and how can J.P.Morgan help?
The shorter settlement timeframe may require changes to operational processes for clients who manage their freely tradeable currencies via an in-house execution desk.
J.P.Morgan can provide a range of fully outsourced FX services, which would ingest clients’ security instructions post-match — up to and after U.S. equity market close. This would provide uninterrupted execution capabilities, maintaining clients’ choice of execution methodologies and netting ratios regardless of custodian.
Does T+1 have any implications for exchange-traded funds (ETFs)?
Authorized Participants (APs) are expected to be required to post larger amounts of cash collateral for creation orders where funds have non-U.S.-listed underlying assets. The rationale is that post T+1 compliance date, creation orders will more frequently settle on T+1, while underlying markets for the portfolio trades will largely still settle in cycles longer than T+1. Because of this mismatch in the ETF settlement cycle and underlying portfolio trade settlement cycles, APs will have to post collateral for the ETF issuer to release/deliver the ETF shares.
For ETF redemptions, APs have expressed concern about ETF issuers’ ability to raise cash to pay ETF redemption order cash components within the T+1 timeframe. This potential cash shortfall stems from issuers’ tendency to raise some cash by trading in foreign markets with longer settlement cycles. Issuers have agreed to remove this point and arrange credit lines to facilitate timely cash obligation settlements. Issuers are also expected to offer T+0 settlement cycles on create/redeems for some funds. The T+0 offering will be enabled at the issuer’s discretion and operate under dedicated order windows. The industry is working to facilitate T+0 settlement solutions in a scalable way that mitigates issuer and AP risk.
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