The Impacts of Transitioning to a T+1 Settlement Cycle on Corporate Actions Processing

The U.S. financial markets are on the brink of a significant change with the expected implementation of the T+1 settlement cycle in 2024. This shift from the current T+2 cycle is designed to reduce market risk, enhance liquidity, and decrease settlement failures. However, the transition introduces several complexities, particularly in the realm of corporate actions processing. Here’s a closer look at the key impacts and challenges that financial institutions will face.

Ex-Date and Record Date Adjustments

One of the most notable changes under the T+1 settlement cycle is the adjustment of the ex-date and record date. Currently, there is a one-day gap between these dates, allowing investors some leeway to trade shares and still be entitled to dividends or other corporate action benefits. Under T+1, the ex-date will coincide with the record date, compressing the timeline significantly. This adjustment means investors will have a narrower window to execute trades and receive the benefits of corporate actions, which may lead to heightened trading activity and potentially increased market volatility around these dates.

Operational and Technological Challenges

Financial institutions will need to undergo substantial operational and technological overhauls to accommodate the accelerated settlement timeline. Systems for trade matching, settlement, and corporate actions processing must be upgraded to handle the faster pace. Larger institutions may have the resources and infrastructure to adapt more easily, but smaller firms could face significant challenges due to resource constraints. These firms may need to invest heavily in new technologies and possibly expand their operational hours across multiple time zones to meet the demands of the new cycle.

Dividend Reinvestment and Entitlement Capture

The processes for dividend reinvestment and entitlement capture will also need to be revised under the T+1 cycle. Ensuring that dividends and other entitlements are processed accurately and timely will be crucial. Financial institutions must adjust their workflows and systems to align with the shorter settlement period, ensuring that all transactions are completed within the compressed timeframe. This change will require meticulous planning and execution to avoid errors that could impact investors.

Increased Complexity for Voluntary Corporate Actions

Voluntary corporate actions, such as rights issues or tender offers, will become more complex under T+1. The cover/protect period, which allows investors to participate in corporate actions even if they do not yet hold the securities, will be reduced. This shortened period increases the risk of settlement failures, as there is less time to complete the necessary transactions. Financial institutions will need to implement robust risk management strategies and enhance communication with investors to mitigate these risks and ensure the smooth processing of voluntary corporate actions.

Conclusion

While the transition to a T+1 settlement cycle offers long-term benefits, such as reduced market risk and enhanced liquidity, it requires significant preparation and adaptation by financial institutions. The compressed timelines and increased operational demands pose substantial challenges, particularly for corporate actions processing. By investing in technological upgrades and refining operational processes, financial institutions can navigate these challenges and capitalize on the advantages of a faster settlement cycle. As the industry moves toward this significant change, careful planning and execution will be essential to ensure a smooth transition and maintain market stability.