The industry move to a T+1 settlement cycle took place in the United States on May 28, 2024, while Canada transitioned similarly on May 27. Here’s an overview of what this change entails and its implications for investors, particularly in relation to withholding tax recovery.
Understanding T+1, T+2, and T+3 Settlement Cycles
When you buy or sell a security, the settlement cycle determines the time taken for the transaction to be finalised.
- Transaction Date (T): The date the transaction is executed.
- Settlement Date (T+1, T+2, T+3): The number of days after the transaction date by which the actual settlement occurs. For instance, T+1 means if you transact on Monday, the settlement happens on Tuesday.
Historically, the U.S. has transitioned through several settlement cycles:
Why the Change?
The U.S. Securities and Exchange Commission (SEC) adopted the move to T+1 to reduce market volatility and enhance liquidity. The change aims to:
- Reduce counterparty risk: By shortening the time to settle, participants are exposed to risk for a shorter period.
- Improve operational processes: Modernisation and standardisation of industry practices will enhance efficiency.
- Increase market liquidity: Lower collateral and margin requirements will lead to greater liquidity.
Anticipated Challenges
While the shift to T+1 is expected to reduce settlement risk, it may pose significant operational challenges in the short term. The shortened timeframe means banks and brokers have less time to process settlements, potentially leading to a higher rate of late settlements. This could increase the cost of failed settlements.
Transition Experience
Market participants have reported that the transition to the T+1 settlement cycle has been proceeding smoothly, despite some initial challenges. While an increase in failed trades was anticipated as firms adjusted to the new regime, the overall transition has been largely successful. Though there have been some instances of settlement failures, the adjustment process is expected to stabilise within a few weeks as all market participants adjust to the new cycle and implement minor tweaks to the process where required.
Effect on Withholding Tax Recovery
For institutional investors, the shift to T+1 may have implications on withholding tax relief in scenarios where relief at source may be missed due to untimely settled trades. On the other hand, quicker settlement could result in improved accuracy through efficiencies once T+1 trading becomes fully integrated into straight-through processing (STP) workflows across all intermediaries.
With shorter settlement cycles, timely and accurate processing remains crucial. At WTax, we understand the nuances of the evolving withholding tax landscape. Our services are designed to help investors navigate these changes, ensuring compliance and maximising returns in faster-paced environments.
Should you wish to talk to one of our experts on how to reclaim entitled tax relief that may not have been applied at source, please reach out to us here.
| As the industry adapts to T+1, WTax is committed to providing the necessary expertise to help our clients manage the complexities of withholding tax recovery efficiently. |
