New rules could be especially significant for trades involving US-listed funds
.jpg)
ETF investors and brokers have been put on notice as new rules are set to impact the way they trade.
Canadian and US financial markets are moving from T+3 to a T+2 settlement cycle, according to an article by Seeking Alpha. Expected to affect financial institutions and their intermediaries, the change will also have ramifications for those who invest in ETFs through online brokerages.
“A trade is considered settled when the buyer has delivered the cash to the seller, at which point ownership of the security officially changes hands,” the report said. With the new T+2 settlement cycle for ETFs, the seller won’t get a cash credit to their account until two business days after the sale of ETF units.
Generally, this is an improvement for investors as cash from sales will be coming sooner (under the T+3 cycle, it would take three business days for the buyer to deliver the cash). But investors will still need to consider a few issues under the new T+2 cycle.
For example, Canadian holidays and US holidays differ, which could be a problem when selling investments across borders. If a Canadian investor were to sell ETF units one or two days before an American holiday, they might expect to get a cash credit in two business days, but instead get it a day later. That could be a problem if they’re planning to do another trade right away; if the investor doesn’t have enough cash to fund the new transaction, they’re at risk of getting hit with interest charges.
It’s also an issue when buying or selling an ETF near the dividend record date. When an ETF declares a dividend payment, a record date is specified; an investor must have shares of ETF on that date to be qualified for dividends. Therefore, anyone who wants to benefit from the dividend should buy shares of the fund at least two business days before the record date.
The new T+2 cycle is set to take effect on Tuesday, Sep. 5.
For more of Wealth Professional's latest industry news, click here.
Related stories:
CSA moves to shorten settlement cycles
CSA seeks comment on proposed move to T+2 settlement cycle
Canadian and US financial markets are moving from T+3 to a T+2 settlement cycle, according to an article by Seeking Alpha. Expected to affect financial institutions and their intermediaries, the change will also have ramifications for those who invest in ETFs through online brokerages.
“A trade is considered settled when the buyer has delivered the cash to the seller, at which point ownership of the security officially changes hands,” the report said. With the new T+2 settlement cycle for ETFs, the seller won’t get a cash credit to their account until two business days after the sale of ETF units.
Generally, this is an improvement for investors as cash from sales will be coming sooner (under the T+3 cycle, it would take three business days for the buyer to deliver the cash). But investors will still need to consider a few issues under the new T+2 cycle.
For example, Canadian holidays and US holidays differ, which could be a problem when selling investments across borders. If a Canadian investor were to sell ETF units one or two days before an American holiday, they might expect to get a cash credit in two business days, but instead get it a day later. That could be a problem if they’re planning to do another trade right away; if the investor doesn’t have enough cash to fund the new transaction, they’re at risk of getting hit with interest charges.
It’s also an issue when buying or selling an ETF near the dividend record date. When an ETF declares a dividend payment, a record date is specified; an investor must have shares of ETF on that date to be qualified for dividends. Therefore, anyone who wants to benefit from the dividend should buy shares of the fund at least two business days before the record date.
The new T+2 cycle is set to take effect on Tuesday, Sep. 5.
For more of Wealth Professional's latest industry news, click here.
Related stories:
CSA moves to shorten settlement cycles
CSA seeks comment on proposed move to T+2 settlement cycle
