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.

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