T+1 and the impact on stock transfer agents
Now that trade settlement happens one day after trade date (“T+1”…effective 5/28/24), we asked many stock transfer agents if this has significantly impacted their operations or procedures. The short answer was no. The full answers were a little more interesting….
- All industry participants not only had seven years of “lead time” for T+1, following T+2’s change from T+3 in 2017, but the well-defined “playbook” they all retained for the T+2 transition was very similar for T+1.
- T+1 is more onerous for brokers, who now have to “deliver” shares bought and sold the following day, rather than in two days (amended SEC Rule 15c6-1).
- What facilitated the move to T+1 from T+2 was the continuing dematerialization in securities ownership – i.e., the steady disappearance of cumbersome paper certificates and move to efficient “book-entry” – which has reduced the risk of failed transactions.
- T+1 will result in brokers often asking transfer agents to expedite processing restricted stock transfers involving legal opinions, legend removals and broker representation letters (subject to the transfer agent’s discretion).
- T+1 similarly shortens the required delivery time for documentation relating to initial public offerings, which could be a big deal.
- In addition, transfer agents cannot delay issuing shares to brokers out of share reserve accounts that agents maintain for issuers’ stock option or restricted stock transfers, and brokers cannot delay processing the ensuing share sales – especially if it is a sell-to-cover taxes and fees scenario.
- Deposit/Withdrawal at Custodian (“DWAC”) transactions will not be impacted at all by T+1, because they have historically been same day events. However, Direct Registration System (“DRS”) transfers may not always happen within 24 hours depending on the broker and DTC interfaces with the transfer agent.
- Interestingly, with T+1 there is no ex-date for dividend-related trades. Ex-date is record date.
- Smaller transfer agents, in their desire to help brokers with whom they work a lot adapt to T+1, have in some cases had to “staff up” a little, but not significantly.
- The strike point on T+1’s challenge to industry participants is, thus, where stock transfers are not routine, but rather legal, documentary and/or restricted in nature, involving more human intervention.
- Bottom line: there will now be a need for more careful preparation before the closure of many transactions.
T+1 has not been a serious obstacle for the industry’s best minds. What could be exciting down the road, though, is the move to T+0!