On September 5, 2017, a new SEC rule will take effect that shortens the standard settlement cycle for most broker-dealer transactions from three business days after the trade date, known as T+3, to two business days after the trade date, known as T+2. The purpose of the shorter T+2 settlement is to reduce credit, market and liquidity risk, and as a result, reduce systemic risk for U.S. market participants. Simply put, fewer events can disrupt the settlement of securities transactions if they occur faster.
The change is broadly supported by consumers, Wall Street trade groups and regulators alike, and will align U.S. markets with many other foreign exchanges, including exchanges throughout Europe. The SEC has pledged to release a report on the feasibility of further shortening of the settlement cycle, perhaps to T+1, within three years following the effectiveness of the T+2 change.
Public companies should be aware that T+2 settlement will change the ex-dividend date for dividend payments. The “ex-dividend date” is the date on which a security is first traded without the right to receive a previously declared dividend. Under T+2 the ex-dividend date will be just one business day prior to the record date. References to the ex-dividend date should be adjusted accordingly in future announcements of dividends.
The NYSE and Nasdaq have each advised that the transition to T+2 trading will mean September 7, 2017, is the settlement day for trades that occurred on both September 1 (settling T+3) and September 5 (settling T+2). Consequently, to avoid confusion, the NYSE related exchanges, Nasdaq and other self-regulatory organizations have agreed with DTCC that no securities will become ex-dividend on September 5, 2017. The following summarizes how ex-dividend trading dates will be set during this transition period for both the NYSE and Nasdaq.
- Securities paying a dividend with a record date of September 5 will be traded ex-dividend on August 31 (because of the Labor Day holiday on September 4).
- Securities paying a dividend with a record date of September 6 will be traded ex-dividend on September 1.
- Securities paying a dividend with a record date of September 7 will be traded ex-dividend on September 6.
- Securities paying a dividend with a record date of September 8 will be traded ex-dividend on September 7.