T+1 Settlement: ready, set, go!

Are you prepared for a range of 'edge-cases' and the application of corporate actions to dual & multi-listed securities? The introduction of T+1 settlement in the US (and other) markets may soon necessitate different "ex" entitlement dates be used for the trading and settlement of dual-listed stocks in their home and international markets. Misaligned "ex-dates" may continue to apply until the relevant "T+2" counterpart exchange completes its own transition to T+1 over the next few years, after which settlement periods and "ex-dates" should naturally re-align.

1. A WAKE-UP CALL: What a big weekend many of us experienced here in New York (and New Jersey): sandwiched between Friday's 4.8 (Richter scale) earthquake and this afternoon's solar eclipse!? These "bigger than any of us" events provided a perfect backdrop for a weekend of reflection and wondering what challenges may come next?
2. HEADS-UP: If you work in financial markets, chances are you're well aware and actively planning for the introduction of T+1 settlement in the US market. In just thirty-five (35) working days, US financial market participants will ease into an important 3-day long weekend to mark and honor Memorial Day (May 27th). When the US equity markets open on Tuesday, May 28th (and effective the day before on Monday 27th when the markets open in Canada and potentially Mexico), equity market trades will be executed on an accelerated settlement basis.? Thereon in the settlement period for equity trades will shorten to T+1 (trade date plus one business day), from the existing T+2 settlement discipline.? T+2 is the current standard for most equity markets globally, today, though some important markets such as India and Mainland China are already settling on a T+1 basis. These markets are not yet as seamlessly integrated with equity markets globally (e.g. due to currency restrictions etc.), so the impacts of these differences with global markets are less obvious.
3. While the North American (and Mexico) markets are in their final preparatory stages of migration, the move from T+2 to T+1 is likely to be considerably more impactful than the prior move from T+3 to T+2, since this latest reduction cuts the current two-day settlement period in half. It is an efficiency change, and a new settlement discipline, that will be watched and, to an extent, felt to different degrees around the world.
4. Over that Memorial Day long weekend, the tectonic plates of the global financial markets will shift, triggering what's likely to be an irreversible trend for global markets to adopt a T+1 settlement disciple around the world over the next 2-5 years.? Many financial markets infrastructure providers (exchange trading platforms, CCPs and CSDs) rightly say they can already settle trades faster than they do today (i.e. T+2), and it is the consequential impacts for broader market users that must first be taken into account before deciding on a timeline to make the switch.
5. It is quite unlikely to be a question of "if" other global markets will adopt T+1?, but "when" they will cutover and re-align globally?" For example, the UK aims to commit to T+1 settlement no later than 31st December, 2027. The UK is monitoring and engaging in parallel discussions in Europe debating if and when the EU region will adopt T+1. Other markets such as ASX in Australia, will soon begin a consultation with a range of market participants and wider stakeholders to determine when it should consider trading on a T+1 settlement basis. New Zealand might be expected or indeed encouraged to follow the same cut-over as ASX.
6. 'Customers', particularly those that are highly active investors in global equity markets, may well start to exert pressure, via their broker or bank service providers, for more markets to adopt T+1, if only to balance-off their funds flows and liquidity in the most efficient ways possible.? For example, selling equities in a T+2 market (e.g. UK or Australia), from circa end-May, to reinvest in equities listed and traded in the US, Canada or Mexico, will take a bit more co-ordination (e.g. re: funding their short-cash obligations on T+1) until the source markets for that liquidity also move to a T+1 regime.? Where the reverse trade flows occur, asset owners will find themselves "long cash" for a day, as the sale of US equities (in New York) will be expected to settle a business day earlier than their obligation to fund their purchases (in London or Sydney).? Market participants, customers and their respective banks will logically work through these friction points, as they always do, even if it comes at a cost in the near term. They have done this before.
7. So, while much focus will be on the Americas in the coming weeks, much discussion is already underway in other parts of the world concerning (A) when these markets will follow suit and similarly adopt a T+1 regime and (B) within each of the national markets or regions (e.g. EU), determining how much time each market, or region, will need to prepare their market participants and end-users of those markets to be ready for a shorter, more disciplined, T+1 settlement environment.
8. The implications of a staggered migration to a shorter T+1 settlement period will be felt all around the world, starting in 5 weeks' time. Global markets have managed this type of dynamic before. It is not a new thing. For instance, not all markets switched from T+3 to T+2 at the same time. The UK and Europe adopted T+2 settlement in 2014, while the US and Canada didn't move from T+3 to T+2 settlement until September, 2017.
9. This time around might be a little different however: (i) the US is going 'first' this time (though technically Canada and Mexico will go first), (ii) the markets are perhaps more technologically integrated and interdependent than ever before (iii) there is perhaps much greater retail participation in US markets directly from around the globe than in the mid-teens (2014-17), & (iv) US securities are also now more actively traded and settled in some international markets than they were back then (v) this period of misaligned settlement periods could last longer, e.g. up to say 5 years until all major markets re-align around T+1 settlement, and (vi) there are likely now more dual-listed securities in place, including more US companies that have formally dual-listed beyond the US (e.g. Block's dual listing on ASX following the acquisition of AfterPay in Australia and Yum China's dual primary listing on HKEX to complement its listing on NYSE).
10. For many purposes, these differences may not matter much to many participants as they will quickly adjust to doing business in this shorter settlement environment. However, it will be important to be aware of key differences. Issuers, particularly clients of Computershare, should feel free to consult with us to understand the potential impacts where they have dual-listing structures in place that straddle T+1 and T+2 markets. We will develop an outreach program as well.
11. While market participants are expected to reasonably promptly adjust their practices re affirmations, funding and delivery obligations to reflect these shorter settlement deadlines, the temporary misalignment of settlement periods (T+1 vs T+2), will throw up some quirks in the sphere of corporate actions, especially for dual-listed securities.? These quirks could be a feature of the markets for some time.
12. Where settlement periods, generally, are different across international markets, it will likely prove difficult to align "ex-dates" across those markets (without creating a back-office nightmare), unless those specific dual listed securities also trade in the other market (outside North America), on a T+1 basis. While this arrangement could technically work for US securities traded and settled outside North America, it doesn't easily work in the converse, where domestic names in those markets (outside N.A.), will continue to trade and settle on a T+2 basis, while the US will trade and settle the US equivalent (in the US) on a T+1 basis.
13. This issue is currently being considered by a raft of trade associations, exchanges, CSDs, global market market-participants and users, predominantly in UK/Europe. The problem is generally understood, and it can be reasonably expected that the exchanges and CSDs will communicate any changes to trading and settlement arrangements, and what needs to happen to ensure parties are properly informed.
14. Logically, the 'least-worst' option appears to be to allow the "ex-dates" for corporate actions to become misaligned for corporate actions on dual-listed securities during this transitional period. The problem is temporary and will fall away as the relevant counterpart market moves to T+1 settlement, enabling "settlement periods" and "ex-periods" to progressively re-align across those markets.
15. Caveat emptor ('buyer beware') has always applied to dealing in markets and marketable securities, and doubly so when trading across borders. However, Caveat Venditor ('seller beware') will also be an important principle to observe when trading shortly before record dates for corporate actions on dual-listed securities; and in particular by traders and investors that actively buy and sell dual-listed securities between the different exchanges.? Issuers of dual-listed securities should also be aware of these differences. Synchronizing record dates across markets will be important.
16. As it relates to corporate actions, trading in US equity markets (and I'd fully expect in Canada and Mexico as well) is expected to be conducted on an "ex-corporate action" basis starting on and from the record date for that particular corporate action, regardless of whether the security is a US security or the US 'equivalent' of the international security.? In the T+2 markets, however, (especially across the northern hemisphere), dual-listed securities are likely to be marked "ex" entitlement in the markets outside N.A. at an earlier time, i.e. from the business day before record date (where the dual-listed security trades and settles locally in that T+2 market), per current protocols.? This one day 'gap' in "ex-dates" is triggered by the misalignment of settlement dates. It is expected to apply regardless of whether the securities traded in the US are US-domestic or international securities, & regardless of whether the US listing is via a share listing or an ADR.
17. CAVEAT VENDITOR: "When a potential cross-border arbitrage opportunity appears too good to be true, its generally because someone has more information than you." Don't let this T+1/T+2 "cum/ex" related quirk be the reason for messing up a trade around a record date for a corporate action.
18. Parties trading in and between markets around this "gap" should make sure they are fully aware of this quirk.? It needs to become a routine element of setting up a trade. It could otherwise become particularly painful for any party that buys "ex-entitlement" in the international "T+2" market on the day before "record date" and sells the US equivalent of that security on that same business day (in the US), when the stock will still be quoted, traded and expected to settle on a 'cum-entitlement' basis on T+1, i.e. on record date.? In this case, the seller will need to deliver, or account for, the corporate action to the buyer in the US market (which is one reason why a bid for the US equivalent security may 'appear' higher than the quote for the security in the international market on a gap day). The basis of quotation ("ex" vs "cum"), not just the settlement period (T+2 vs T+1), may be different and both of these elements, as well as other critical factors like FX rates and ratios for ADRs, will need to be factored into pricing. ?
19. Extra care will also be needed when trading dual-listed securities between the US/Canada and the markets in Asia-Pacific in general, given markets on each side of the Pacific permanently sit on different sides of the international date line. Right now, at 4pm on April 8th, here in New York, it is already 8am 'tomorrow', April 9th, in Auckland and 6am in Sydney. Extra special care will therefore be needed to ensure that appropriate "ex-dates" are set and adopted for the respective markets that facilitate and support dual-listed structures that straddle the Pacific (e.g. for a US or Canadian company that is dual-listed on ASX or HKEX). And yes, there are a bunch of these!
20. It appears there are some compelling reasons why "ex-dates" may end up being misaligned in different dual-listed markets for a period of time.
21. THIS NOTE IS ONLY INTENDED TO CREATE AWARENESS. IT IS MOST DEFINITELY NOT FINANCIAL ADVICE AND NOT INTENDED TO BE TREATED OR CONSTRUED AS SUCH.??PLEASE DO YOUR OWN DUE DILIGENCE AND CONSULT EXPERTS IN YOUR LOCAL MARKETS. IT DOES NOT REPRESENT A COMPLETELY SETTLED SET OF POLICY POSITIONS YET. YOU SHOULD EXPECT YOUR USUAL MARKET CHANNELS TO SHARE INFORMATION ABOUT THESE PROTOCOLS IN THE COMING WEEKS.
22. As noted above, this is a transitional issue. The markets have dealt with this before albeit under slightly different circumstances.? The problem might fall away for instance if - and as and when - the markets outside North America (e.g. LSEG, ASX or HKEX) adopt T+1 for trading and settling US securities in their markets. In the short term, this seems unlikely for these dual-listed securities, especially if such plans are not already shaped up and ready to implement. This near-term approach also ignores the converse situation where the same type of 'gap', caused by a misalignment of settlement periods and "ex-dates", will apply to outbound, non-US, dual-listed companies from those very same markets. When these securities trade in the US, they will be expected to trade and settle on a T+1 basis. They are likely to trade T+2 in their home market, until that particular market adopts T+1 as the routine settlement discipline for market trades.
23. ACTION NEEDED: Be aware and prepared for critically important T+1 'edge-cases' & some potential quirks in establishing corporate action timetables, especially "ex-dates" for dual-listed securities. This quirk could be with us for a few years.
24. The drivers for the adoption of T+1 settlement are the desire to improve risk management and counterparty risk reduction, while increasing efficiency in the operation of the central clearing & settlement infrastructure, and of market participants directly connected to the CSD (and in turn the customers and clients of those market participants).? The transition to T+1 is scheduled for implementation and is happening regardless of what the 'rest-of-the-world' does as a consequence. It is therefore vitally important that early consideration is given to some of these key issues. Other quirks may apply to the application of corporate actions via cross-border CSD/custody structures, where the shares from one market are held (and sometimes traded) in another market, but where the underlying issuer is not dual listed in that second market. This note does not seek to analyze or discuss the impacts of these hybrid custody-style arrangements. The relevant CSD will need to advise participants of any changes to procedures and protocols.
25. While this critical change to T+1 in the world's largest and deepest equities market is slated for implementation on and from May 28th (and from May 27th for Canada and Mexico), the ripple effects -- like the mild earthquake here in New York on Friday - will be felt more broadly and to varying degrees all around the world.
26. The full impact and implications for corporate actions on dual-listed securities structures should become increasingly apparent over the next 10-20-30-40 working days!? The rumblings of change (and some associated grumblings) will continue to be felt (and heard), I suspect, for quite a few months yet.?
27. In the interim, we'll all need to learn how to pivot and shift and live with the quirks and the gaps until we achieve a future state of 'harmony' through settlement re-alignment.?
28. THE BOTTOM LINE: PLEASE BE PREPARED AND MAKE YOUR OWN ENQUIRIES.? THIS IS NOT FINANCIAL ADVICE. IT IS SIMPLY A POLITE HEADS-UP SHARING INFORMATION THAT IS LIKELY TO BECOME HIGHLY RELEVANT TO A WIDE RANGE OF MARKET PROFESSIONALSIN, AND USERS OF, THE GLOBAL FINANCIAL MARKETS; & ESPECIALLY IN CIRCUMSTANCES WHERE CORPORATE ACTIONS AND DUAL-LISTED SECURITIES APPLY.
29. PS: For those dual listed securities that have no nexus to the US markets, e.g. for securities that are dual listed between TMX in Canada and (say) ASX in Australia or HKEX in Hong Kong, the very same set of issues is likely to apply. These will need to be discussed and agreed between key market participants and the financial market infrastructure providers in those markets over the coming weeks, if discussions are not already underway.
30. It is also expected that Argentina may adopt a T+1 settlement period for its domestic market from end-May to coincide with the changeover in the US. This transition remains subject to appropriate regulatory approval.
31. Note: As more markets adopt T+1, the various combinations and permutations will grow in complexity until a tipping point is reached and the markets start to trend back into a realigned state, insofar as settlement periods and governing ex-periods are concerned.

(Please note: the experienced "anoraks" in our financial markets, as we understand the @FT.com sometimes refers to financial markets' plumbers, make it their job to get out of bed and identify and work through complex issues in markets, in this case: issues triggered by different trading & settlement standards, potentially different corporate action protocols and complex and connected market systems all underpinned by significant global trade flows, and more. Please be in touch with your local 'anorak', your national trade association or exchange, CSD or registrar or directly with me if you'd like to discuss this rapidly emerging topic. Corporate clients and partners should feel free to be in touch any time).

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Paul Conn

(NOTE/DISCLAIMER: just in case you missed it above. This note represents the personal views and opinions of the author and not necessarily Computershare's view. Any errors or omissions are mine. PLEASE DO YOUR OWN DUE DILIGENCE ON THE ISSUES IF YOU ARE UNSURE. Please do speak with your local market representatives or trade association reps, your national exchange or local CSD. I do not and cannot speak for them. Feel free to contact me [email protected] or the senior members of my team here at Computershare Global Capital Markets (computershare.com) to discuss this issue further and we will see what we can do to help).