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.
