What is changing?
The settlement cycle for trades on the ASX is set to be shortened from T+3 (trade date plus 3 business days) to T+2 (trade date plus 2 business days). ASX has proposed (but is yet to confirm) that the move to T+2 settlement will commence with trades conducted on 7 March 2016.
Why is ‘settlement’ important when dealing in securities?
When shares, units, bonds and other financial products are traded on the ASX, there is a lag time between the date when the trade occurs and when the settlement of the transaction actually takes place. The settlement date is the date on which both the change in legal ownership of the traded securities and the transfer of funds for the transaction actually occur. ASX has provided a helpful brochure to explain the change.
Ex date and record date
In line with shortening the settlement cycle, ASX is proposing to shorten the period between the ex date and the record date for corporate actions to 2 business days.
Taking the example of one of the most common corporate actions, the payment of dividends, the record date is the date a company closes its share register to determine which shareholders are entitled to receive a particular dividend. It is the date by which all changes to registration details must be finalised. The ex date occurs before the record date, and is the date by which a shareholder must have purchased shares in order to be entitled to the dividend (ie to be recorded as the holder of shares on the register by the relevant time).
Why the change?
ASX has been gradually reducing the settlement cycle, from T+5 to T+3 in 1999, and now to T+2. With strong industry support, ASX is shortening the settlement cycle to reduce counterparty risks for individual investors and to improve efficiencies. It also means that the ASX remains globally competitive: securities markets in countries such as Hong Kong, Germany, South Korea and India already operate under a T+2 settlement cycle, and all financial markets in the European Union are in the process of moving to a T+2 settlement cycle.
What impact will this have on me?
A settlement cycle of T+2 will mean one less day for both investors and their brokers to be ready to provide either securities or cash to settle a trade. As such, it will be even more important to fund your purchases of ASX-listed securities efficiently: the use of cheques may no longer be viable, due to the length of time needed to clear the funds. Your broker may be in contact to set out the range of funding arrangements that they will support under T+2.
For listed entities and their advisers, it will be important to factor in this change to the settlement cycle when preparing future capital markets transaction timetables (eg for rights issues and bonus issues). It has become second nature to work off a T+3 settlement cycle, so we will all need to be particularly mindful of this important change once it takes effect.