Quick Answer
Under T+1 settlement, the ex-dividend date equals the record date, so a buyer must purchase before the ex-date to receive the dividend. Open orders below the market are automatically reduced by the dividend amount on the ex-date unless marked Do Not Reduce, and a due bill transfers a distribution when settlement lands after the record date.
With settlement cycles established, you need to understand how they affect dividend entitlement. The ex-dividend date determines who receives a declared dividend, and under T+1 settlement, this date has shifted significantly.
How Is the Ex-Dividend Date Set Under T+1 Settlement?
Under T+1 settlement, the ex-dividend date equals the record date for regular cash dividends. This is a major change from T+2, where the ex-date was one business day before the record date.
- A buyer must purchase the stock before the ex-date to receive the dividend
- On the ex-date, the stock opens trading with the price reduced by the dividend amount
- The ex-date rules govern dividends, rights, and warrants
Key point: To receive the dividend, you must buy the stock before the ex-date. Buying on or after the ex-date means you do NOT receive the dividend.
Exam Tip: Gotchas
- Under T+1, the ex-date and record date are the SAME day. Under the old T+2 rules, the ex-date was one business day before the record date.
What Is the Key Date Sequence?
| Date | Definition |
|---|---|
| Declaration date | Board of directors announces the dividend |
| Ex-dividend date | First day the stock trades WITHOUT the dividend (same as record date under T+1) |
| Record date | Date on which shareholders of record are entitled to the dividend |
| Payment (payable) date | Date the dividend is actually paid |
The flow: Declaration -> Ex-date/Record date (same day under T+1) -> Payment date
How Do Ex-Rights and Ex-Warrants Dates Work?
- Same concept as ex-dividend: on the ex-date, the stock trades without the right or warrant attached
- A buyer purchasing before the ex-date receives the rights or warrants
- A buyer purchasing on or after the ex-date does NOT receive them
- The entitlement rule is the same. The date-setting rule is not. Ex-warrants dates follow the record-date convention, together with ex-dividend dates. Ex-rights dates do not
- For a transferable rights subscription offering, the ex-rights date is the first business day after the effective date of the registration statement
Gotcha: Do not assume all three ex-dates are set the same way. Ex-dividend and ex-warrants dates key off the record date. The ex-rights date keys off the effective date of the registration statement. The exam tests candidates who apply the record-date convention to a rights offering.
What Is a Due Bill?
A due bill is a document attached to a security certifying that the seller owes the buyer a pending distribution (dividend, rights, or interest).
- Used when a trade settles after the record date but was executed before the ex-date
- Due bills ensure the buyer receives the distribution to which they are entitled
- Due bill checks: the actual payment instrument used to transfer a cash dividend owed via a due bill
When due bills are needed: Trade executed before ex-date -> Trade settles after record date -> Seller receives the distribution but buyer is entitled to it -> Due bill transfers the distribution to the rightful owner
How Are Open Orders Adjusted?
Open orders must be adjusted on the ex-dividend date to reflect the reduced value of the stock. The key rule is: orders below the market are reduced; orders above the market are not.
How Are Orders Adjusted for Cash Dividends?
- Open orders below the market must be reduced by the dividend amount on the ex-date
- Applies to cash dividends of $0.01 or more
- Orders marked "Do Not Reduce" (DNR) are exempt from automatic adjustment
- The adjustment rule only covers open buy orders and open sell stop orders. It does not apply to an open buy stop order, an open sell order, an exchange-governed order, or a distribution the issuer did not report as required
- After the dividend is subtracted, the new order price is rounded down to the next lower minimum quotation variation
Which Orders Are Reduced?
| Order Type | Position Relative to Market | Reduced? |
|---|---|---|
| Buy limit | Below the market | Yes |
| Sell stop | Below the market | Yes |
| Buy stop | Above the market | No |
| Sell limit | Above the market | No |
Memory Aid: "Reduce below" - only orders placed BELOW the current market price are reduced on the ex-date.
How Are Orders Adjusted for Stock Dividends and Splits?
- Open order prices are adjusted and share quantities are adjusted proportionally
- For a 2-for-1 split: price is halved, shares are doubled
- The value of the distribution is rounded up to the next higher minimum quotation variation before reducing the price; order size is adjusted by the split ratio and rounded down to the next whole share, unless marked Do Not Increase
- For an optional cash-or-stock distribution, use the greater of the two values; for a combined cash-and-stock distribution, calculate the cash adjustment first and the stock adjustment second. If the distribution value cannot be determined, the order must be reconfirmed before it executes
What Happens to Orders on a Reverse Split?
- All open orders are cancelled (not adjusted)
- Customers must reenter their orders after a reverse split
Exam Tip: Gotchas
- Only orders BELOW the market are reduced on the ex-dividend date. Buy limit and sell stop are reduced; buy stop and sell limit are NOT. Remember: "reduce below."
- DNR orders skip the price adjustment for cash dividends but are still adjusted for share quantity on stock dividends.
- Reverse splits cancel all open orders entirely. Customers must reenter them.
What Should You Check on Exam Day?
- Under T+1, ex-date equals record date. Buy before the ex-date to receive the dividend; buying on or after the ex-date means no dividend.
- Apply "reduce below": only buy limit and sell stop orders adjust for cash dividends of $0.01 or more, and only if they are not marked DNR.
- Distinguish stock dividends/splits (orders adjusted proportionally) from reverse splits (orders cancelled outright).