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.
FOR INSTITUTIONAL & PROFESSIONAL CLIENTS ONLY — NOT INTENDED FOR RETAIL CUSTOMER USE
This is not a product of J.P.Morgan Research.
J.P.Morgan is a marketing name for the Securities Services businesses of JPMorgan Chase Bank, N.A. and its affiliates worldwide.JPMorgan Chase Bank, N.A. is regulated by the Office of the Comptroller of the Currency in the U.S.A., by the Prudential Regulation Authority in the U.K.and subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority, as well as the regulations ofthe countries in which it or its affiliates undertake regulated activities. Details about the extent of our regulation by the Prudential Regulation Authority, orother applicable regulators are available from us on request.
J.P.Morgan and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is notintended to provide, and should not be relied on for, tax, Legal, regulatory or accounting advice. You should consult your own tax, Legal, regulatory andaccounting advisors before engaging in any transaction.
This document is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. Rather,this document has been prepared exclusively for the internal use of the J.P.Morgan’s clients and prospective client to whom it is addressed (includingthe clients’ affiliates, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, certain products or services that may beprovided by J.P.Morgan. This document is provided for informational purposes only and is incomplete without reference to, and should be viewed solelyin conjunction with, the oral briefing provided by J.P.Morgan. Any opinions expressed herein may differ from the opinions expressed by other areas ofJ.P.Morgan. This document may not be disclosed, published, disseminated or used for any other purpose without the prior written consent of J.P.Morgan.The statements in this material are confidential and proprietary to J.P.Morgan and are not intended to be legally binding. All data and other information(including that which may be derived from third party sources believed to be reliable) contained in this material are not warranted as to completeness oraccuracy and are subject to change without notice. J.P.Morgan disclaims any responsibility or liability to the fullest extent permitted by applicable law,whether in contract, tort (including, without limitation, negligence), equity or otherwise, for any loss or damage arising from any reliance on or the use ofthis material in any way. The information contained herein is as of the date and time referenced only, and J.P.Morgan does not undertake any obligationto update such information.
J.P.Morgan is the global brand name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. All product names, company names andlogos mentioned herein are trademarks or registered trademarks of their respective owners. Access to financial products and execution services is offeredthrough J.P.Morgan Securities LLC (“JPMS LLC”) and J.P.Morgan Securities plc (“JPMS plc”). Clearing, prime brokerage and brokerage custody services areprovided by JPMS LLC in the U.S. and JPMS plc in the U.K. Bank custody services are provided by JPMorgan Chase Bank, N.A. JPMS LLC is a registered U.S.broker dealer affiliate of JPMorgan Chase & Co., and is a member of FINRA, NYSE and SIPC. JPMS plc is authorized by the PRA and regulated by the FCAand the PRA in the U.K. JPMS plc is exempt from the licensing provisions of the Financial and Intermediary Services Act, 2002 (South Africa). J.P.MorganSecurities (Asia Pacific) Limited is regulated by the HKMA. J.P.Morgan Europe Limited, Amsterdam Branch does not offer services or products to clientswho are pension plans governed by the U.S. Employee Retirement Income Security Act of 1974 (ERISA). For additional regulatory disclosures regardingthese entities, please consult:www.jpmorgan.com/disclosures.
The products and services described in this document are offered by JPMorgan Chase Bank, N.A. or its affiliates subject to applicable laws and regulationsand service terms. Not all products and services are available in all locations. Eligibility for particular products and services will be determined byJPMorgan Chase Bank, N.A. and/or its affiliates.
© 2024 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC.