By Jesus Benito, head of domestic custody and trade depository, SIX

Until now, so much industry discussion surrounding the shortening of the settlement cycle for North American securities has centred around trade settlement efficiency. While this is understandable given the importance of ensuring counterparties receive the securities they are expecting, the move to T+1 next May also has a major impact on corporate actions, including stock splits, mergers and acquisitions (M&As), dividend distributions and rights issues.

Shorter settlement cycles mean that, in theory, investors should receive the proceeds from say a dividend payout much more quickly. For instance, when a company distributes dividends or executes a stock split, shareholders will receive their dividends or new shares sooner, which can enhance liquidity and potentially reduce uncertainty.

In addition, unlike on T+2 where there is a longer timeframe between the announcement of a corporate action and its settlement, a shorter time period should reduce market uncertainty. In an M&A for example, where the exchange of shares is a common occurrence, a shorter settlement cycle can expedite the completion of a transaction. This can be particularly important during a hostile takeover where speed is of paramount importance. A rights issue is another area that can potentially benefit. Rights issues typically involve the issuance of new shares to existing shareholders at a discount. Shorter settlement cycles can potentially make it easier for shareholders to participate because they have less time to wait for the new shares and the associated funds to be settled. This could even result in higher participation rates.

As we are learning with T+1, it’s not all plain sailing, including for corporate actions. While all this sounds great in principle, the reality is that if financial institutions fail to make the successful operational switch to one business day settlement, they will introduce several risks to the corporate actions process – including operational inefficiencies, compliance issues and even potential missed opportunities.

For example, delays in distributing dividends or new shares could very well lead to missed investments for clients who rely on timely access to funds or shares. Inefficient handling of corporate actions due still operating on T+2 could also significantly damage a financial institution's reputation. Clients and investors may perceive the institution as unreliable or incapable of executing dividend payments on time. This is particularly important to institutional investors because if a dividend payment is made after the end of the tax year – then this may well affect their tax liabilities. Then there are the cost implications. Banks are likely to have to incur hefty fees and penalties to resolve corporate action-related failures.

The question therefore must be, with just over 250 days to go until T+1 is introduced in North America, how do financial institutions go about mitigating these risks? Well, investment in the right technology, systems and operational processes that can support the faster T+1 settlement cycle for corporate actions is a must. As is adequate testing and contingency planning to ensure a smooth transition. But above all, there needs to be effective communication with clients and coordination with industry partners, as well as regulatory bodies, to minimise the risks associated with the shift.

Mitigating the impact of trade settlement failures will naturally be of primary importance in the run up to T+1, and many market participants now have procedures in place to reconcile and rectify failed trades promptly. These procedures may involve more efficient communication with counterparties, custodians and clearing houses to resolve discrepancies and facilitate the settlement of the trade. But ultimately, if the end goal of T+1 is to increase the efficiency and integrity of the capital markets, then the impact on corporate actions must also be front of mind.