Effects of the Shortened T+2 Settlement Cycle

Clock and calendarBy Blake Baron

In March 2017, the United States Securities and Exchange Commission (the SEC) adopted amended Rule 15c6-1(a) which shortens the standard trade settlement cycle for most broker-dealer securities transactions from three business days (known as T+3) to two business days, (known as T+2). On Tuesday, September 5, 2017, the amended rule went into effect.

What Does the Change Apply To?

The new T+2 settlement cycle applies to the same securities transactions currently covered under the T+3 cycle, which the SEC states includes “transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange.”

However, the new cycle does not apply to certain categories of securities, such as securities exempt from registration with the SEC due to being backed by a government or governmental institution.

What are the Implications of This Change?

Unless expressly agreed upon by the involved parties at the time of the transaction, applicable broker-dealer transactions must comply with the T+2 settlement cycle.

Under the amended rule, a broker-dealer is prohibited from effecting or entering into a contract for the sale or purchase of a security that provides for delivery of securities or payments of funds later than two business days from the trade date. This means that when an investor purchases a security, the brokerage firm must receive payment from the investor no later than two business days after the execution of the trade. When selling a security, the investor must deliver the security to the brokerage firm no later than two business days after the sale.

What are the Additional Implications for Nasdaq Issuers?

The shortened settlement cycle has impacted the “ex-dividend date” for most cash, warrant, or stock distributions as set forth in Nasdaq Rule 11140(b)(1). Nasdaq describes the ex-dividend date as “the date on which a security is first traded without the right to receive that distribution.” As a result of the T+2 change, this date has been changed from two business days before the record date to one business day before the record date. Nasdaq has announced that the first record date to which the new ex-dividend procedure applies to is Thursday, September 7, 2017. Accordingly, the ex-dividend date for securities transactions recorded on September 7, 2017 is September 6, 2017.

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