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Proposed Rule2022-03143

Shortening the Securities Transaction Settlement Cycle

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Published

February 24, 2022

Issuing agencies

Securities and Exchange Commission

Abstract

The Securities and Exchange Commission ("Commission") proposes rules to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date ("T+2") to one business day after the trade date ("T+1"). To facilitate a T+1 standard settlement cycle, the Commission also proposes new requirements for the processing of institutional trades by broker-dealers, investment advisers, and certain clearing agencies. These requirements are designed to protect investors, reduce risk, and increase operational efficiency. The Commission proposes to require compliance with a T+1 standard settlement cycle, if adopted, by March 31, 2024. The Commission also solicits comment on how best to further advance beyond T+1.

Full Text

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<title>Federal Register, Volume 87 Issue 37 (Thursday, February 24, 2022)</title>
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[Federal Register Volume 87, Number 37 (Thursday, February 24, 2022)]
[Proposed Rules]
[Pages 10436-10501]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-03143]

[[Page 10435]]

Vol. 87

Thursday,

No. 37

February 24, 2022

Part II

Securities and Exchange Commission

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17 CFR Parts 232, 240 and 275

Shortening the Securities Transaction Settlement Cycle; Proposed Rule

Federal Register / Vol. 87 , No. 37 / Thursday, February 24, 2022 /
Proposed Rules

[[Page 10436]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, and 275

[Release Nos. 34-94196, IA-5957; File No. S7-05-22]
RIN 3235-AN02

Shortening the Securities Transaction Settlement Cycle

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'')
proposes rules to shorten the standard settlement cycle for most
broker-dealer transactions from two business days after the trade date
(``T+2'') to one business day after the trade date (``T+1''). To
facilitate a T+1 standard settlement cycle, the Commission also
proposes new requirements for the processing of institutional trades by
broker-dealers, investment advisers, and certain clearing agencies.
These requirements are designed to protect investors, reduce risk, and
increase operational efficiency. The Commission proposes to require
compliance with a T+1 standard settlement cycle, if adopted, by March
31, 2024. The Commission also solicits comment on how best to further
advance beyond T+1.

DATES: Comments should be received on or before April 11, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#186a6d747d357b7775757d766c6b586b7d7b367f776e"><span class="__cf_email__" data-cfemail="99ebecf5fcb4faf6f4f4fcf7edead9eafcfab7fef6ef">[email&#160;protected]</span></a>. Please include
File Number S7-05-22 on the subject line.

Paper Comments

<bullet> Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-22. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
website (<a href="http://www.sec.gov/rules/proposed.shtml">http://www.sec.gov/rules/proposed.shtml</a>). Comments are also
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Operating
conditions may limit access to the Commission's public reference room.
All comments received will be posted without change. Persons submitting
comments are cautioned that the Commission does not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Matthew Lee, Assistant Director, Susan
Petersen, Special Counsel, Andrew Shanbrom, Special Counsel, Jesse
Capelle, Special Counsel, Tanin Kazemi, Attorney-Adviser, or Mary Ann
Callahan, Senior Policy Advisor, Office of Clearance and Settlement at
(202) 551-5710, Division of Trading and Markets; Amy Miller, Senior
Counsel, at (202) 551-4447, Emily Rowland, Senior Counsel, at (202)
551-6787, and Holly H. Miller, Senior Policy Advisor, at (202) 551-
6706, Division of Investment Management; U.S. Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission proposes rules to shorten the
standard settlement cycle to T+1 and improve the processing of
institutional trades by broker-dealers, investment advisers, and
certain clearing agencies. First, the Commission proposes to amend 17
CFR 240.15c6-1 (``Rule 15c6-1'') to shorten the standard settlement
cycle for most broker-dealer transactions from T+2 to T+1 and to repeal
the T+4 standard settlement cycle for firm commitment offerings priced
after 4:30 p.m.,\1\ as discussed in Part III.A. Second, the Commission
proposes 17 CFR 240.15c6-2 (``Rule 15c6-2'') to prohibit broker-dealers
from entering into contracts with their institutional customers unless
those contracts require that the parties complete allocations,
confirmations, and affirmations by the end of the trade date, a
practice the securities industry has commonly referred to as ``same-day
affirmation,'' as discussed in Part III.B. Third, the Commission
proposes to amend 17 CFR 275.204-2 (``Rule 204-2'') to require
investment advisers that are parties to contracts under Rule 15c6-2 to
make and keep records of their allocations, confirmations, and
affirmations described in Rule 15c6-2, as discussed in Part III.C.
Fourth, the Commission proposes 17 CFR 240.17Ad-27 (``Rule 17Ad-27'')
to require a clearing agency that is a central matching service
provider (``CMSP'') to establish policies and procedures to facilitate
straight-through processing, as discussed in Part III.D. To assess and
manage the potential impact of a T+1 settlement cycle, the Commission
is also soliciting comment on the following Commission rules and
regulations: Regulation SHO; the financial responsibility rules for
broker-dealers; requirements in 17 CFR 240.10b-10 (``Rule 10b-10'');
and requirements related to prospectus delivery. The Commission
proposes to require compliance with each of the proposed rules and rule
amendments by March 31, 2024. The Commission solicits comment on this
proposed compliance date in Part III.F.
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\1\ See infra Part III.A, notes 83-85, and accompanying text
(discussing the types of securities to which Rule 15c6-1 applies,
which includes equities, corporate bonds, unit investment trusts
(``UITs''), mutual funds, exchange-traded funds (``ETFs''), American
Depositary Receipts (``ADRs''), security-based swaps, and options).
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In addition, accelerating beyond a T+1 settlement cycle to a same-
day standard settlement cycle (i.e., settlement no later than the end
of trade date, or ``T+0'') is an objective that the Commission is
actively assessing; however, the Commission is not proposing rules to
require a T+0 standard settlement cycle at this time. In Part IV, the
Commission discusses and requests comment regarding potential pathways
to T+0, as well as certain challenges to implementing T+0 that have
been identified by market participants. The comments received will be
used to inform any future action to further shorten the settlement
cycle beyond T+1.

Table of Contents

I. Introduction
II. Background
A. Relevant History
B. Current State of Post-Trade Processing
1. Clearing Agencies--CCPs, CSDs, and CMSPs
2. Broker-Dealers
3. Retail and Institutional Investors
C. Recent Initiatives and Market Events
III. Proposals for T+1
A. Shortening the Length of the Standard Settlement Cycle
1. Proposed Amendment to Rule 15c6-1(a)
2. Basis for Shortening the Standard Settlement Cycle to T+1
3. Proposed Deletion of Rule 15c6-1(c) and Conforming Technical
Amendments to Rule 15c6-1

[[Page 10437]]

4. Basis for Eliminating T+4 Standard for Certain Firm
Commitment Offerings
5. Request for Comment
B. New Requirement for ``Same-Day Affirmation''
1. Proposed Rule 15c6-2 Under the Exchange Act
2. Basis for Requiring Affirmation No Later Than the End of
Trade Date
3. Request for Comment
C. Proposed Amendment to Recordkeeping Rule for Investment
Advisers
1. Request for Comment
D. New Requirement for CMSPs To Facilitate Straight-Through
Processing
1. Policies and Procedures To Facilitate Straight-Through
Processing
2. Annual Report on Straight-Through Processing
3. Request for Comment
E. Impact on Certain Commission Rules and Guidance and SRO Rules
1. Regulation SHO Under the Exchange Act
2. Financial Responsibility Rules Under the Exchange Act
3. Rule 10b-10 Under the Exchange Act
4. Prospectus Delivery and ``Access Versus Delivery''
5. Changes to SRO Rules and Operations
F. Proposed Compliance Date
IV. Pathways to T+0
A. Possible Approaches to Achieving T+0
1. Wide-Scale Implementation
2. Staggered Implementation Beginning With Key Infrastructure
3. Tiered Implementation Beginning With Pilot Programs
B. Issues To Consider for Implementing T+0
1. Maintaining Multilateral Netting at the End of Trade Date
2. Achieving Same-Day Settlement Processing
3. Enhancing Money Settlement
4. Mutual Fund and ETF Processing
5. Institutional Trade Processing
6. Securities Lending
7. Access to Funds and/or Prefunding of Transactions
8. Potential Mismatches of Settlement Cycles
9. Dematerialization
V. Economic Analysis
A. Background
B. Economic Baseline and Affected Parties
1. Central Counterparties
2. Market Participants--Investors, Broker-Dealers, and
Custodians
3. Investment Companies and Investment Advisers
4. Current Market for Clearance and Settlement Services
C. Analysis of Benefits, Costs, and Impact on Efficiency,
Competition, and Capital Formation
1. Benefits
2. Costs
3. Economic Implications Through Other Commission Rules
4. Effect on Efficiency, Competition, and Capital Formation
5. Quantification of Direct and Indirect Effects of a T+1
Settlement Cycle
D. Reasonable Alternatives
1. Amend 15c6-1(c) to T+2
2. Propose 17Ad-27 To Require Certain Outcomes
E. Request for Comment
VI. Paperwork Reduction Act
A. Proposed Amendment to Rule 204-2
B. Proposed Rule 17Ad-27
C. Request for Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Regulatory Flexibility Act
A. Proposed Rules and Amendments for Rules 15c6-1, 15c6-2, and
204-2
1. Reasons for, and Objectives of, the Proposed Actions
2. Legal Basis
3. Small Entities Subject to the Proposed Rule and Proposed Rule
Amendments
4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
5. Duplicative, Overlapping, or Conflicting Federal Rules
6. Significant Alternatives
7. Request for Comment
B. Proposed Rule 17Ad-27

Statutory Authority and Text of the Proposed Rules and Rule Amendments

I. Introduction

In the 1920s, capital markets maintained a one-day settlement cycle
for transactions in securities.\2\ Over the course of the twentieth
century, the length of the settlement cycle grew to five days--a
response to the ever-growing number of investors, the rising volume of
transactions, and the increasing complexity of the processing
infrastructure necessary to facilitate the settlement of those
transactions.\3\ Since the late 1980s, the Commission, seeking to
protect investors and reduce risk, has been working with the securities
industry to minimize the time it takes for securities transactions to
settle. The first initiative to shorten the standard settlement cycle
emerged following studies by government and industry groups after the
October 1987 market break, including the Report of the Bachmann Task
Force on Clearance and Settlement Reform in U.S. Securities Markets.\4\
The Bachmann Report presented multiple recommendations to improve the
securities market by improving the safety and soundness of the National
C&S System.\5\ The Bachmann Report, submitted to the Commission in May
1992, recommended that by 1994 the Commission shorten the standard
settlement cycle from five days to three days.
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\2\ See Kenneth S. Levine, Was Trade Settlement Always on T+3? A
History of Clearing and Settlement Changes, Friends of Financial
History No. 56, at 20, 22 (Summer 1996), <a href="https://archive.org/details/friendsoffinanci00muse_12/page/20/mode/2up?view=theater">https://archive.org/details/friendsoffinanci00muse_12/page/20/mode/2up?view=theater</a>.
\3\ See Levine, supra note 2, at 23-25.
\4\ See Report of the Bachmann Task Force on Clearance and
Settlement Reform in U.S. Securities Markets, Submitted to The
Chairman of the U.S. Securities and Exchange Commission (May 1992)
(``Bachmann Report''), <a href="https://www.govinfo.gov/content/pkg/FR-1992-06-22/pdf/FR-1992-06-22.pdf">https://www.govinfo.gov/content/pkg/FR-1992-06-22/pdf/FR-1992-06-22.pdf</a>. The task force was headed by John W.
Bachmann, the Managing Principal of Edward D. Jones & Co. of St.
Louis, Missouri. The recommendations in the Bachmann Report were
intended to help inform the Commission's approach to considering
reforms of the national system for clearance and settlement
(``National C&S System'').
\5\ See id.
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To support its recommendation, the Bachmann Report used the concept
``time equals risk'' to illustrate that ``less time between a
transaction and its completion reduces risk.'' \6\ In addition, the
report stated that a ``shorter settlement cycle will also uncover
potential problems sooner, before they mushroom or begin to cascade
throughout the industry.'' \7\ In recommending that the Commission
shorten the standard settlement cycle, the Bachmann Report also stated,
``[t]he system and legal initiatives necessary to accomplish the T+3
settlement for corporate and municipal securities should serve as a
stepping stone to further reductions in settlement periods over time as
technology and systems permit.'' \8\
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\6\ See id. at 4. Specifically, the concept posits that the
length of time between the execution and settlement of a securities
transaction correlates to the financial risk exposure inherent in
the transaction, and that shortening this length of time can reduce
the overall risk exposure.
\7\ Id.
\8\ Id. at 6.
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In 1993, the Commission adopted Rule 15c6-1 to shorten this process
by requiring the settlement of most securities transactions within
three business days (``T+3''),\9\ and in 2017, the Commission amended
the rule to require settlement within two business days (``T+2'').\10\
The Commission believes that further shortening of the settlement cycle
would promote investor protection, reduce risk, and increase
operational efficiency. This view has been informed by two recent
episodes of increased market volatility--in March 2020 following the
outbreak of the COVID-19 pandemic, and in January 2021 following
heightened interest in certain ``meme'' stocks.
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\9\ Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891
(Oct. 13, 1993) (``T+3 Adopting Release''). In adopting Rule 15c6-1,
the Commission set a compliance date of June 1, 1995.
\10\ Exchange Act Release No. 80295 (Mar. 22, 2017), 82 FR
15564, 15601 (Mar. 29, 2017) (``T+2 Adopting Release'').

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[[Page 10438]]

These two episodes have highlighted potential vulnerabilities in the
U.S. securities market that shortening the standard settlement cycle
could help mitigate.\11\ Accordingly, the Commission is proposing a
transition to a T+1 standard settlement cycle. The Commission also
believes that achieving settlement by the end of trade date (``T+0'')
could benefit investors as well.\12\ While the Commission is not
proposing a T+0 standard settlement cycle at this time, the Commission
would like to better understand the challenges that market participants
may need to address and resolve to achieve T+0. Accordingly, the
Commission solicits comments on potential paths to and challenges
associated with achieving a T+0 standard settlement cycle in Part
IV.\13\
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\11\ See, e.g., Staff Report on Equity and Options Market
Structure Conditions in Early 2021 (Oct. 14, 2021), <a href="https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf">https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf</a>. This report represents the views of
Commission staff. It is not a rule, regulation, or statement of the
Commission. The Commission has neither approved nor disapproved its
content. This report, like all staff reports, has no legal force or
effect: It does not alter or amend applicable law, and it creates no
new or additional obligations for any person.
\12\ In this release, the Commission uses ``T+0'' to refer to a
settlement cycle that is complete by the end of the day on which the
trade was executed (``trade date''). This is sometimes referred to
as ``same-day'' settlement and is distinct from real-time
settlement, which contemplates settlement in real time or near real
time (i.e., immediately following trade execution) on a gross basis.
See infra Part IV (further discussing the concept of ``T+0'' as used
in this release, as well as the related concepts of real-time
settlement and rolling settlement, where trades are netted and
settled intraday on a recurring basis).
\13\ Part IV discusses potential paths to and challenges
associated with implementing a T+0 settlement cycle. For example,
activities that are linked to the length of the settlement cycle
include securities lending activities. See infra Part IV.B.6.
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On December 1, 2021, the Depository Trust and Clearing Corporation
(``DTCC''),\14\ the Investment Company Institute (``ICI''),\15\ the
Securities Industry and Financial Markets Association (``SIFMA''),\16\
and Deloitte & Touche LLP (``Deloitte'') \17\ published a report that
presented industry recommendations to implement a T+1 standard
settlement cycle in the U.S.\18\ The Commission has considered the
potential requirements, benefits, and costs associated with further
shortening the standard settlement cycle in the U.S., and proposes to
require that the standard settlement cycle transition to T+1, if
adopted, by March 31, 2024.\19\ As the securities industry considers
how it would implement T+1, the Commission believes that market
participants also generally should consider investments in new
technology or operations now that can be effective over the long term
at maximizing the benefits of risk reduction and improved efficiency in
post-trade processing that accompany shortening the settlement cycle,
mindful of efforts to shorten the settlement cycle beyond T+1.
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\14\ DTCC is the holding company for three registered clearing
agencies: The Depository Trust Company (``DTC''), the National
Securities Clearing Corporation (``NSCC''), and the Fixed Income
Clearing Corporation (``FICC''). It is also the holding company for
DTCC ITP Matching (US) LLC (``DTCC ITP Matching''), which operates a
CMSP pursuant to an exemption from registration as a clearing
agency.
\15\ ICI is an association representing regulated funds
globally, including mutual funds, ETFs, closed-end funds, and unit
investment trusts in the United States, and similar funds offered to
investors in jurisdictions worldwide.
\16\ SIFMA is a trade association for broker-dealers, investment
banks, and asset managers operating in the U.S. and global capital
markets.
\17\ See infra note 18.
\18\ Deloitte, DTCC, ICI, & SIFMA, Accelerating the U.S.
Securities Settlement Cycle to T+1 (Dec. 1, 2021) (``T+1 Report''),
<a href="https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf">https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf</a>. See
infra Part II.C (summarizing the recommendations in the T+1 Report).
\19\ See infra Part III.F (discussing the proposed compliance
date). The T+1 Report contemplates implementation of T+1 in the
first half of 2024, and the Commission believes that sufficient time
is available to achieve T+1 by March 31, 2024, as discussed further
in Part III.F.
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In Part II, the Commission provides (i) a history of the key
Commission and industry efforts to shorten the standard settlement
cycle, including past concerns related to T+1 and T+0 settlement
cycles, (ii) an overview of the current state of post-trade processing
in the market for U.S. equity securities, and (iii) a summary of other
recent market events related to this rule proposal. In Part III, the
Commission describes the rule proposals that are necessary to achieve
T+1. In Part IV, the Commission discusses the potential pathways and
challenges associated with implementing a standard T+0 settlement cycle
and requests comment on any and all aspects of achieving T+0.

II. Background

In developing the rule proposals included in this release, the
Commission considered the history related to shortening the standard
settlement cycle, the current state of post-trade processing in the
U.S. equities market, and recent initiatives and market events that
have focused attention in the securities industry and the public on the
appropriate length of the standard settlement cycle. Each of these is
discussed further below.

A. Relevant History

The first industry-level engagement on T+1 began in the late 1990s
and developed a business case for using straight-through processing to
achieve T+1,\20\ estimating that an industry investment of $8 billion
in improved settlement technologies and processes could reduce
settlement exposures by 67% and return $2.7 billion in annual savings.
Implementation of the building blocks described in the Securities
Industry Association (``SIA'') Business Case Report was postponed when
improving operational resilience following the terrorist attacks of
September 11, 2001 took priority,\21\ although many of them were
subsequently achieved.
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\20\ The term ``straight-through processing'' generally refers
to processes that allow for the automation of the entire trade
process from trade execution through settlement without manual
intervention. See infra Part III.D.1 (further discussing the concept
of straight-through processing).
\21\ See SIA, T+1 Business Case Final Report (July 2000) (``SIA
Business Case Report''), <a href="https://www.sifma.org/wp-content/uploads/2017/05/t1-business-case-final-report.pdf">https://www.sifma.org/wp-content/uploads/2017/05/t1-business-case-final-report.pdf</a>.
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In 2012, DTCC commissioned a new study that found moving to a T+2
settlement cycle would be significantly less costly and take less time
to implement than either an immediate or gradual transition to T+1,
while still delivering significant benefits with respect to reducing
risks and costs.\22\ The BCG Study ruled out as infeasible at the time
a settlement cycle with settlement on trade date (i.e., T+0) ``given
the exceptional changes required to achieve it and weak support across
the industry.'' \23\ It concluded that a T+0 settlement cycle would
face major challenges with processes such as trade reconciliation and
exception management, securities lending, and transactions with foreign
counterparties (especially where time zones are least aligned). It also
concluded that payment systems used for final settlement would need to
be significantly altered to enable transactions late in the day. The
BCG Study noted that market participants were aware that a T+2
settlement cycle could be accomplished through mere compression of
timeframes and corresponding rule changes but that implementing T+2
without certain building blocks would limit the amount of savings that
would be realized across the industry.
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\22\ See The Boston Consulting Group (``BCG''), Cost Benefit
Analysis of Shortening the Settlement Cycle (Oct. 2012) (``BCG
Study''), https://www.dtcc.com/~/media/Files/Downloads/WhitePapers/
CBA_BCG_Shortening_the_Settlement_Cycle_October2012.pdf.
\23\ Id. at 9.

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[[Page 10439]]

The BCG Study further concluded that moving to a T+1 settlement cycle
would require new infrastructure to enable near real-time trade
processing and would also require transforming the securities lending
and foreign buyer processes.\24\
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\24\ Id.
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In 2014, DTCC, ICI, SIFMA, and other market participants formed an
Industry Steering Group (``ISG'') to facilitate a transition to
T+2.\25\ The ISG and PricewaterhouseCoopers LLP published a white paper
describing certain ``industry-level requirements'' and ``sub-
requirements'' that the ISG believed would be required for a successful
migration to a T+2 settlement cycle.\26\ In conjunction with the ISG,
Deloitte published in December 2015 a ``T+2 Playbook'' setting forth
the requested implementation timeline with milestones and dependencies,
as well as detailing ``remedial activities'' that impacted market
participants should consider to prepare for migration to T+2.\27\ The
ISG White Paper also included an implementation timeline that targeted
the transition for the end of the third quarter of 2017.
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\25\ See Press Release, DTCC, Industry Steering Committee and
Working Group Formed to Drive Implementation of T+2 in the U.S.
(Oct. 16, 2014), <a href="http://www.dtcc.com/news/2014/october/16/ust2.aspx">http://www.dtcc.com/news/2014/october/16/ust2.aspx</a>.
\26\ PricewaterhouseCoopers LLP & ISG, Shortening the Settlement
Cycle: The Move to T+2 (June 2015) (``ISG White Paper''), <a href="http://www.ust2.com/pdfs/ssc.pdf">http://www.ust2.com/pdfs/ssc.pdf</a>. This release uses ``ISG'' rather than
``ISC'' (``Industry Steering Committee,'' the term used in the ISG
White Paper) when referring to the T+2 effort so that this release
clearly distinguishes between the ISC's current work on T+1, as
reflected in the T+1 Report, supra note 18, from past work on T+2.
\27\ Deloitte & ISG, T+2 Industry Implementation Playbook (Dec.
18, 2015) (``T+2 Playbook''), <a href="http://www.ust2.com/pdfs/T2-Playbook-12-21-15.pdf">http://www.ust2.com/pdfs/T2-Playbook-12-21-15.pdf</a>.
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In 2015, the Commission's Investor Advisory Committee recommended
that the Commission pursue T+1 (rather than T+2), noting that retail
investors would significantly benefit from a T+1 standard settlement
cycle.\28\ In the event that the Commission determined to pursue a T+2
standard settlement cycle, the IAC recommended that the Commission work
with industry participants to create a clear plan for moving to T+1
shortly thereafter.\29\
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\28\ Investor Advisory Committee (``IAC''), U.S. Securities and
Exchange Commission, Recommendation of the Investor Advisory
Committee: Shortening the Settlement Cycle in U.S. Financial Markets
(Feb. 12, 2015), <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/settlement-cycle-recommendation-final.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/settlement-cycle-recommendation-final.pdf</a>.
\29\ Id.
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The Commission amended Rule 15c6-1 in 2017 to shorten the standard
settlement cycle from T+3 to T+2 and set a compliance date for
September 2017.\30\ The Commission recognized that the clearance and
settlement process for securities transactions encompassed by the rule
involved a number of market participants and entities whose functions
and capabilities would be impacted significantly by a change in the
standard settlement cycle, and the Commission considered these in its
analysis supporting the move to T+2. Among these entities were the NSCC
and the DTC, which respectively operate the central counterparty
(``CCP'') and central securities depository (``CSD'') for transactions
in U.S. equity securities,\31\ three CMSPs,\32\ and the diverse
population of market participants that depend on the clearance and
settlement services provided by NSCC, DTC, and the CMSPs. These market
participants include but are not limited to, retail and institutional
investors, registered investment advisers, broker-dealers, exchanges,
alternative trading systems, service providers, and custodian banks.
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\30\ T+2 Adopting Release, supra note 10; see also Exchange Act
Release No. 78962 (Sept. 28, 2016), 81 FR 69240 (Oct. 5, 2016)
(``T+2 Proposing Release'').
\31\ NSCC and DTC are subsidiaries of DTCC and each a clearing
agency registered with the Commission. See supra note 14.
\32\ See Order Granting Exemption from Registration as a
Clearing Agency for Global Joint Venture Matching Services--U.S.,
LLC, Exchange Act Release No. 44188 (Apr. 17, 2001), 66 FR 20494,
20501 (Apr. 23, 2001); Order Approving Applications for an Exemption
from Registration as a Clearing Agency for Bloomberg STP LLC and
SS&C Techs., Inc., Exchange Act Release No. 76514 (Nov. 24, 2015),
80 FR 75388, 75413 (Dec. 1, 2015) (``BSTP and SS&C Order''). In the
T+2 Adopting Release, the Commission also referred to these entities
as ``matching and electronic trade confirmation service providers.''
T+2 Adopting Release, supra note 10, at 15566.
---------------------------------------------------------------------------

In the T+2 Adopting Release, the Commission explained that a T+1
standard settlement cycle could produce greater reductions in market,
credit, and liquidity risk for market participants than a move to T+2,
but that shortening beyond T+2 would require significantly larger
investments in new systems and processes.\33\ In an effort to analyze,
among other things, the impacts of further shortening beyond T+2, the
Commission directed Commission staff to study the issue.\34\ As a
result of the staff's study and analysis of the settlement cycle, the
Commission believes that, among other things, improvements to
institutional trade processing are critical to promoting the
operational efficiency necessary to facilitate a standard settlement
cycle shorter than T+2, as discussed further in Part III.B below.
---------------------------------------------------------------------------

\33\ T+2 Adopting Release, supra note 10, at 15582.
\34\ Id. at 15582-83.
---------------------------------------------------------------------------

B. Current State of Post-Trade Processing

In the T+2 Proposing Release, the Commission provided a detailed
overview of post-trade processing for transactions in equity
securities, including the roles of the CCP, the CSD, and CMSPs.\35\ The
Commission also provided a summary of the affected market
participants--investors, broker-dealers, prime broker-dealers (``prime
brokers''), and custodian banks--and described at a high level the
different paths to settlement available depending on whether a
transaction involves a retail or institutional investor.\36\ While this
overview remains an accurate summary of the post-trade process, the
Commission recognizes that shortening the standard settlement cycle
beyond T+2 will require particular focus on improving institutional
trade processing.
---------------------------------------------------------------------------

\35\ T+2 Proposing Release, supra note 30, at 69243-46.
\36\ As in the T+2 Proposing Release, the distinction between
``retail investor'' and ``institutional investor'' is made only for
the purpose of illustrating the manner in which these types of
entities generally clear and settle their securities transactions.
---------------------------------------------------------------------------

To provide context for understanding the Commission's rule
proposals and the related economic analysis that follows in this
release, the Commission provides below an overview of the current state
of post-trade processing, including a brief summary of trade flows
relevant to the processing of institutional trades. As a general
matter, investors often rely on securities intermediaries to facilitate
the clearance and settlement of their securities transactions. These
intermediaries include broker-dealers, which maintain a securities
account on the investor's behalf to facilitate purchases and sales of
securities, and clearing agencies, which provide a range of services
designed to facilitate the clearance and settlement of a securities
transaction. As relevant to this release, a clearing agency may act as
a CCP, a CSD, or a CMSP. The role of each of these entities is
explained further below.
1. Clearing Agencies--CCPs, CSDs, and CMSPs
As explained more fully in the T+2 Proposing Release,\37\ a CCP
interposes itself between the counterparties to a trade following trade
execution, becoming the buyer to each seller and seller to each buyer
to ensure the performance of open contracts. One critical function of a
CCP is to eliminate bilateral credit risk between individual buyers and
sellers. NSCC is a registered

[[Page 10440]]

clearing agency that provides CCP services for transactions in U.S.
equity securities to its members.\38\ NSCC facilitates the management
of risk among its members using a number of tools, which include: (1)
Novating and guaranteeing trades to assume the credit risk of the
original counterparties; (2) collecting clearing fund contributions
from members to help ensure that NSCC has sufficient financial
resources in the event that one of the counterparties defaults on its
obligations; \39\ and (3) netting to reduce NSCC's overall exposure to
its counterparties.\40\
---------------------------------------------------------------------------

\37\ T+2 Proposing Release, supra note 30, at 69243.
\38\ As discussed further in the T+2 Proposing Release, NSCC
also provides CCP services for other types of securities, including
corporate bonds, municipal securities, and UITs. Id.
\39\ Commission rules require a covered clearing agency that
provides CCP services to have policies and procedures reasonably
designed to maintain financial resources that cover a wide range of
foreseeable stress scenarios that include, but are not limited to,
the default of the participant family that would potentially cause
the largest aggregate credit exposure for the covered clearing
agency in extreme but plausible market conditions. See 17 CFR
240.17Ad-22(e)(4)(iii).
\40\ These functions are discussed in more detail in the T+2
Proposing Release. See T+2 Proposing Release, supra note 30, at
69243. Since publication of the T+2 Proposing Release, NSCC has
amended its rules to provide a trade guarantee as soon as NSCC has
validated the trade upon submission for clearing.
---------------------------------------------------------------------------

As discussed further in Part V.B.1, CCP netting reduces risk in the
settlement process by reducing the overall number of obligations that
must be settled. NSCC's netting and accounting system is called the
Continuous Net Settlement System (``CNS''). NSCC accepts trades into
CNS for clearing from the nation's exchanges and other trading venues,
and it uses CNS to net each NSCC member's trades in each security
traded that day to a single position for each security, either long
(i.e., the right to receive securities) or short (i.e., an obligation
to deliver securities). Throughout the day, NSCC records cash debit and
credit data generated by its members' activities, and at the end of the
processing day, NSCC nets the debits and credits to produce one
aggregate cash debit or credit for each member.\41\
---------------------------------------------------------------------------

\41\ The operation of CNS is explained more fully in the T+2
Proposing Release. See id. at 69244.
---------------------------------------------------------------------------

While NSCC provides final settlement instructions to its members
each day, the payment for and transfer of securities ownership occurs
at DTC, which serves as the CSD and settlement system for U.S. equity
securities. At the conclusion of each trading day, an NSCC member's
short and long positions are compared against its corresponding DTC
account to determine whether securities are available for settlement.
If securities are available, they will be transferred to cover the NSCC
member's short positions. Specifically, on settlement date NSCC submits
instructions to DTC to deliver (i.e., transfer) securities positions
for each security netted through CNS to each NSCC member holding a long
position in such securities. Cash obligations are settled through DTC
by one net payment for each NSCC member at the end of the settlement
day.\42\
---------------------------------------------------------------------------

\42\ The interaction between NSCC and DTC to achieve settlement
is explained more fully in the T+2 Proposing Release. See id. at
69245.
---------------------------------------------------------------------------

As noted above, DTC is a CSD, which is an entity that holds
securities for its participants either in certificated or
uncertificated (i.e., immobilized or dematerialized) form so that
ownership can be easily transferred through a book entry (rather than
the transfer of physical certificates) and provides central safekeeping
and other asset services. Additionally, a CSD may operate a securities
settlement system, which is a set of arrangements that enables
transfers of securities, either for payment or free of payment, and
facilitates the payment process associated with such transfers. DTC
serves as the CSD and settlement system for most U.S. equity
securities, providing custody and book-entry services.\43\ In
accordance with its rules, DTC accepts deposits of securities from its
participants, credits those securities to the depositing participants'
accounts, and effects book-entry transfer of those securities. DTC
substantially reduces the number of physical securities certificates
transferred in the U.S. markets, which significantly improves
operational efficiencies and reduces risk and costs associated with the
processing of physical securities certificates.
---------------------------------------------------------------------------

\43\ DTC's role as CSD is discussed more fully in the T+2
Proposing Release. See id. at 69245-46. As of 2017, DTC retained
custody of more than 1.3 million active securities issues valued at
$54.2 trillion, including securities issued in the U.S. and 131
other countries and territories. See DTCC, Businesses and
Subsidiaries: The Depository Trust Company (DTC), <a href="https://www.dtcc.com/about/businesses-and-subsidiaries/dtc">https://www.dtcc.com/about/businesses-and-subsidiaries/dtc</a>. The corporate
bond market accounted for another $30 billion and the municipal bond
market saw over $10 billion on average traded every day in 2016. See
SIFMA, T+2 Fact Sheet, <a href="https://www.sifma.org/wp-content/uploads/2017/09/Sep-8-T2-Update-Fact-Sheet.pdf">https://www.sifma.org/wp-content/uploads/2017/09/Sep-8-T2-Update-Fact-Sheet.pdf</a>.
---------------------------------------------------------------------------

In addition to a securities account at DTC, each DTC participant
has a settlement account at a clearing bank to record any net funds
obligation for end-of-day settlement. Debits and credits in the
participant's settlement account are netted intraday to calculate, at
any time, a net debit balance or net credit balance, resulting in an
end-of-day settlement obligation or right to receive payment. DTC nets
debit and credit balances for participants who are also members of NSCC
to reduce fund transfers for settlement, and acts as settlement agent
for NSCC in this process. Settlement payments between DTC and DTC's
participants' settlement banks are made through the National Settlement
Service (``NSS'') of the Federal Reserve System.\44\
---------------------------------------------------------------------------

\44\ The relevance of NSS to achieving money settlement in a T+0
environment is discussed in Part IV.B.3.
---------------------------------------------------------------------------

CMSPs electronically facilitate communication among a broker-
dealer, an institutional investor or its investment adviser, and the
institutional investor's custodian to reach agreement on the details of
a securities trade.\45\ These entities emerged as a result of efforts
by market participants to develop a more efficient and automated
matching process that continues to be viewed as a necessary step in
achieving straight-through processing for the settlement of
institutional trades.
---------------------------------------------------------------------------

\45\ The role of the CMSP in facilitating settlement is
discussed more fully in the T+2 Proposing Release. See T+2 Proposing
Release, supra note 30, at 69246.
---------------------------------------------------------------------------

CMSPs provide the communication facilities to enable a broker-
dealer and an institutional investor to send messages back and forth
that results in the agreement of the trade details, generally referred
to as an ``affirmation'' or ``affirmed confirmation,'' which is then
sent to DTC to effect settlement of the trade.\46\ In general, the
formatting and content of messages used to communicate confirmations
and affirmations varies and may include use of, for example, SWIFT,
FIX, ISITC, or other formats. The delivery method of such messages also
may vary across market participants. The CMSP, by acting as a
centralized hub, helps promote standardization and facilitate
communication.
---------------------------------------------------------------------------

\46\ Specifically, the CMSP will send the affirmed confirmations
to DTC where the DTC participants, who will deliver the securities,
will authorize the trades for automated settlement.
---------------------------------------------------------------------------

In addition, a CMSP may offer a ``matching'' process by which it
compares and reconciles the broker-dealer's trade details with the
institutional investor's trade details to determine whether the two
descriptions of the trade agree, at which point it can generate an
affirmation to effect settlement of the trade. As part of such process,
the CMSP may offer services that can assist with the automated
identification of trades that do not match, allowing market
participants to identify errors and remediate any trade information
that does not match.

[[Page 10441]]

2. Broker-Dealers
Broker-dealers are securities intermediaries that, among other
things, may hold accounts on behalf of investors to facilitate the
purchase and sale of securities transactions. Broker-dealers that are
direct members of clearing agencies are typically referred to as
``clearing brokers.'' Clearing brokers must comply with the rules of
the clearing agency, including but not limited to rules for operational
and financial requirements.\47\ Broker-dealers that submit transactions
to a clearing agency through a clearing broker are typically referred
to as ``introducing brokers.'' In general, broker-dealers executing
trades on a registered securities exchange are required to clear those
transactions through a registered clearing agency. Broker-dealers
executing trades outside the auspices of a trading venue (e.g., on an
internalized basis) may clear through a clearing agency or may choose
to settle those trades through mechanisms internal to that broker-
dealer.
---------------------------------------------------------------------------

\47\ The requirements for membership or participation
established by the clearing agencies are discussed more fully in the
T+2 Proposing Release. See T+2 Proposing Release, supra note 30, at
69247.
---------------------------------------------------------------------------

3. Retail and Institutional Investors
As discussed in the T+2 Proposing Release, institutional investors
are entities such as, but not limited to, pension funds, mutual funds,
hedge funds, bank trust departments, and insurance companies.\48\
Transactions involving institutional investors are often more complex
than those for and with retail investors due to the volume and size of
the transactions, the entities involved in facilitating the execution
and settlement of the trade, including CMSPs, bank custodians, or prime
brokers, and the need to manage certain regulatory or business
obligations.\49\ By contrast, the settlement of retail investor trades
generally occurs directly with the investor's broker-dealer,\50\
without relying on a separate custodian bank or prime broker.
---------------------------------------------------------------------------

\48\ Institutional investors also include employee-benefit
plans, foundations, endowments, insurance companies and registered
investment companies (``RICs'') (of which mutual funds are one
type), among other investor types.
\49\ See T+2 Proposing Release, supra note 30, at 69247
(discussing the same).
\50\ As previously discussed, if the broker-dealer is an
introducing broker-dealer, the broker-dealer may use a clearing
broker-dealer to facilitate clearance and settlement. See id.
(discussing the same).
---------------------------------------------------------------------------

Institutional investors may choose to trade through an executing
broker-dealer that clears and settles its securities transactions using
NSCC and DTC. However, depending on the size and complexity of the
trade and the number of trading partners involved in the transaction,
institutional investors may also choose to avail themselves of
processes specifically designed to address the unique aspects of their
trades. Specifically, as described below, many institutional trades
settle on an allocated trade-for-trade basis through a custodian bank.
Many hedge funds settle their trades using prime brokers.
Below are diagrams that illustrate at a high level the typical path
to settlement for retail trades and institutional trades.
(a) Retail Trades
In general, individual retail investors rely on their broker-
dealers to execute trades on their behalf as customers of their broker-
dealers. As previously discussed, a broker-dealer may choose to
internalize a customer's order using its own inventory of securities.
However, the broker-dealer may also take other steps, away from its
customer, to deliver securities to its customer's account. Depending on
how the broker-dealer executes such trades away from its customer,
these other trades may clear through a clearing agency or may settle
bilaterally.
Retail investors may engage in ``self-directed'' trading. Figure 1
illustrates, at a high level, the activities that take place for a
self-directed retail trade. In this scenario, when a retail investor
places an order to trade with its counterparty, the counterparty--
typically, the broker-dealer through which the retail investor holds
its securities account--will execute the trade. The counterparty will
issue a trade confirmation identifying certain trade details, such as
the transaction type, the account information, the security and
quantity of shares traded, the trade and settlement dates, and the net
amount of money to be received or paid at settlement.\51\ The
confirmation may also include other financial details, such as
commissions, taxes, and fees. A retail investor generally would review
the information provided in the confirmation and contact its broker-
dealer to correct any errors. In the absence of errors, the broker-
dealer can proceed with settlement processing.
---------------------------------------------------------------------------

\51\ See infra Part III.B.1 (further discussing trade
confirmations and distinguishing the requirements with respect to a
confirmation under existing Rule 10b-10 and a confirmation under
proposed Rule 15c6-2).
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 10442]]

[GRAPHIC] [TIFF OMITTED] TP24FE22.000

In some instances, self-directed retail trades and trades directed
by an investment adviser are executed together as part of a block trade
initiated by an investment adviser, which could also engage the use of
a CMSP to communicate the allocations of the block trade to
participating accounts.\52\ Further discussion of institutional trades
and the use of block trades by institutional investors follows below.
---------------------------------------------------------------------------

\52\ See supra Part II.B.1 (discussing the services provided by
a CMSP); infra Part II.B.3.c) (discussing block trades).
---------------------------------------------------------------------------

(b) Institutional Trades
Institutional investors often engage a broker-dealer or another
counterparty for trade execution, and separately, a bank custodian to
provide custodial safekeeping and asset servicing for their
investments.\53\ Because the counterparty and the custodian are
different entities in this scenario, additional steps are necessary to
complete the post-trade process, as identified by the black shapes in
Figure 2. Specifically, the institutional investor or its investment
adviser will need to instruct the bank custodian on the details of each
transaction and authorize the bank custodian to settle the trade. The
black shapes in Figure 2 also illustrate how the investor's
counterparty generally will provide the institutional investor or
investment adviser with execution details prior to issuing a trade
confirmation.\54\
---------------------------------------------------------------------------

\53\ Some institutional investors use broker-dealers to custody
their securities, and in such cases their transactions will trade
and settle as described in Figure 1. In this release, we have
grouped such circumstances under the retail investor scenario
because of the similar transaction flow.
\54\ An electronic copy of the execution details is sometimes
referred to as a ``notice of execution.''

---------------------------------------------------------------------------

[[Page 10443]]

[GRAPHIC] [TIFF OMITTED] TP24FE22.001

Institutional investors, along with their broker-dealers and bank
custodians, may rely on the services of a CMSP to transmit
confirmations and affirmations or match the trade details to prepare a
trade for settlement. Alternatively, they may use other standardized
messaging protocols, such as FIX and SWIFT,\55\ to communicate trade
information. Some market participants, however, still rely on manual
processes to communicate trade information, such as through the use of
fax machines or email, and may use Excel data files rather than
standardized data protocols.\56\ Whichever the mechanism, achieving an
affirmed confirmation by the end of trade date is considered a
securities industry best practice.\57\ According to data from DTCC,
however, only 68% of trades are affirmed on trade date.\58\ Figure 2
illustrates a scenario where the institutional investor does not rely
on a CMSP to complete the confirmation/affirmation process.
---------------------------------------------------------------------------

\55\ See T+1 Report, supra note 18, at 5.
\56\ Protocols are the rules that govern the exchange or
transmission of data and may refer to the specific content and
formatting of trade information (i.e., ISO15022, FIX, SWIFT or an
Excel template), the method for delivery trade information (i.e.,
file transfer protocol (FTP), SSH file transfer protocol (SFTP),
SWIFT, DTC ITP, email, etc.), or both. They may also refer to the
frequency of transmission, deadlines for data delivery, and whether
data is sent for individual trades or a group (or ``batch'') of
trades. Some delivery mechanisms may offer a hub-and-spoke model for
delivery, in which the sender delivers data to a central hub and the
hub passes the data on to identified recipients. Other delivery
mechanisms are bi-lateral, in which the sender and receiver have a
direct communication with one another without transmission through a
hub.
\57\ See T+1 Report, supra note 18, at 8-9.
\58\ Sean McEntee, Executive Director, ITP Product Management,
DTCC, Remarks at the DTCC ITP Forum--Americas (June 17, 2021)
(``DTCC ITP Forum Remarks'') (recording available at <a href="https://www.dtcc.com/events/archives">https://www.dtcc.com/events/archives</a>).
---------------------------------------------------------------------------

For some institutional investors, such as hedge funds, a prime
broker may act as both the counterparty to the trade and the custodian
of the securities. In this scenario, the institutional investor or its
investment adviser provides trade details to the prime broker, and the
prime broker will affirm the transaction to facilitate settlement. As a
broker-dealer, the prime broker may also use NSCC to clear the
transaction. Generally, the Commission understands that the prime
broker will ``disaffirm'' a transaction if the institutional investor
does not make margin payments required of the investor by the prime
broker.
(c) Use of Block Trades
Investment advisers commonly trade in ``blocks'' to manage the
accounts of their institutional clients. In such a scenario, investment
advisers aggregate the orders of multiple clients into a block for
trade execution. After trade execution of the block order by the
broker-dealer, the investment adviser

[[Page 10444]]

will allocate securities within the block to the accounts of its
clients participating in the block, as reflected in Figure 3. These
allocation instructions are communicated to the broker-dealer so that
the broker-dealer can generate a confirmation of the trade details for
each account for the investment adviser to affirm.
[GRAPHIC] [TIFF OMITTED] TP24FE22.002

BILLING CODE 8011-01-C

C. Recent Initiatives and Market Events

Efforts to facilitate a settlement cycle shorter than T+2 began
soon after the transition to a T+2 standard settlement cycle had been
completed. For example, DTCC announced two initiatives in January 2018
to achieve additional operational and capital efficiencies, dubbed
``Accelerating Time to Settlement'' and ``Settlement Optimization.''
\59\ Among other things, the DTCC-owned clearing agencies have been
exploring steps to modify their settlement process to be more
efficient, such as by introducing new algorithms to position more
transactions for settlement during the ``night cycle'' process (which
currently begins in the evening of T+1) to reduce the need for activity
on the day of settlement. Portions of these two initiatives have been
submitted to the Commission and approved as proposed rule changes.\60\
---------------------------------------------------------------------------

\59\ DTCC, Modernizing the U.S. Equity Markets Post-Trade
Infrastructure (Jan. 2018) (``DTCC Modernizing Paper''), https://
www.dtcc.com/~/media/Files/downloads/Thought-leadership/modernizing-
the-u-s-equity-markets-post-trade-infrastructure.pdf. These
initiatives are relevant to the discussion of T+0 building blocks
related to netting and batch processing, as discussed in Part IV.B.1
and Part IV.B.2.
\60\ See, e.g., Exchange Act Release No. 87022 (Sept. 19, 2019),
84 FR 50541 (Sept. 25, 2019) (order amending NSCC's settlement guide
to implement a new algorithm for night cycle transactions); Exchange
Act Release No. 87756 (Dec. 16, 2019), 84 FR 70256 (Dec. 20, 2019)
(order extending the implementation timeframe for the new algorithm
for transactions processed in the night cycle); Exchange Act Release
No. 87023 (Sept. 19, 2019), 84 FR 50532 (Sept. 25, 2019) (order
amending the CNS Accounting Operation of NSCC's Rules & Procedures
with respect to receipt of securities from NSCC's CNS System).
---------------------------------------------------------------------------

More recently, periods of increased market volatility--first in
March 2020 following the outbreak of the COVID-19 pandemic, and again
in January 2021 following heightened interest in certain ``meme''
stocks--highlighted the significance of the settlement cycle to the
calculation of financial exposures and exposed potential risks to the
stability of the U.S. securities market.\61\

[[Page 10445]]

Specifically, these two events have expanded a public debate over the
length of the settlement cycle, and whether a shorter settlement cycle
could have reduced the impact of the market volatility on investors by,
among other things, reducing the length of time over which a broker-
dealer member of NSCC is required to provide margin deposits with
respect to a given transaction, thereby also potentially reducing the
size of the deposits required per portfolio to manage the increased
volatility.
---------------------------------------------------------------------------

\61\ According to DTCC, on March 12, 2020, NSCC processed over
363 million market-side transactions in equity securities, topping
by 15% its prior peak set in October 2008 during the financial
crisis. On an average day, NSCC processes approximately 106 million
market-side transactions. DTCC, Advancing Together: Leading the
Industry to Accelerated Settlement, at 4 (Feb. 2021) (``DTCC White
Paper''), <a href="https://www.dtcc.com/-/media/Files/PDFs/White%20Paper/DTCC-Accelerated-Settle-WP-2021.pdf">https://www.dtcc.com/-/media/Files/PDFs/White%20Paper/DTCC-Accelerated-Settle-WP-2021.pdf</a>.
---------------------------------------------------------------------------

In February 2021, DTCC published the DTCC White Paper stating that
accelerating settlement beyond T+2 may bring significant benefits to
market participants but requires careful consideration and a balanced
approach so that settlement can be achieved as close to the trade as
possible without creating capital inefficiencies or introducing new,
unintended consequences--such as inadvertently reducing or eliminating
the benefits and cost savings provided by multilateral netting.\62\
DTCC suggested that shortening the settlement cycle to T+1 could occur
in the second half of 2023, and it estimated that a T+1 settlement
cycle could reduce the volatility component of NSCC margin requirements
by up to 41%.\63\ DTCC also contended that achieving T+1 could be
largely supported by using existing systems and available tools and
procedures.\64\ With respect to a T+0 settlement cycle, DTCC
distinguished between netted T+0 settlement and real-time gross
settlement,\65\ noting that in a netted settlement environment, trades
would be netted either during the day or prior to settlement at the end
of the day; with real-time gross settlement, trades would be settled
instantaneously without netting. Currently, the DTCC clearing agencies
can facilitate settlement on either T+1 or T+0 pursuant to their rules
and procedures for accelerated settlement.\66\ The DTCC White Paper
explained that DTCC's participants believe ``the hurdles to T+0
settlement,'' especially real-time gross settlement, are ``too great at
this time.'' \67\ Furthermore, DTCC noted that real-time gross
settlement could require trades to be funded on a trade-for-trade
basis, eliminating the liquidity and risk-reduction benefits of
existing CCP netting processes.\68\ Additionally, DTCC indicated that
over the past year it has been working collaboratively with a cross-
section of market participants to build support for further shortening
of the settlement cycle, and has outlined a plan to increase these
efforts to forge a consensus on setting a firm date and approach to
achieving a transition to T+1.\69\
---------------------------------------------------------------------------

\62\ Id. at 2. The DTCC White Paper notes that centralized
multilateral netting reduces the value of payments that need to be
exchanged each day by an average of 98%, and netting is particularly
important during times of heightened volatility and volume.
\63\ Id. at 5, 8.
\64\ Id. at 5.
\65\ See supra note 12 and accompanying text (making the same
distinction); infra Part IV (discussing three potential models for
T+0 settlement, and soliciting comment on these models).
\66\ See, e.g., DTCC, Same-Day Settlement (SDS), <a href="https://www.dtcc.com/sds">https://www.dtcc.com/sds</a>.
\67\ DTCC White Paper, supra note 61, at 7.
\68\ Id.
\69\ See Press Release, DTCC, DTCC Proposes Approach to
Shortening U.S. Settlement Cycle to T+1 Within 2 Years (Feb. 24,
2021), <a href="https://www.dtcc.com/news/2021/february/24/dtcc-proposes-approach-to-shortening-us-settlement-cycle-to-t1-within-two-years">https://www.dtcc.com/news/2021/february/24/dtcc-proposes-approach-to-shortening-us-settlement-cycle-to-t1-within-two-years</a>.
---------------------------------------------------------------------------

Following publication of the DTCC White Paper, the securities
industry formed an Industry Steering Committee (``ISC'') and an
Industry Working Group (``IWG'') \70\ with the intent of developing
industry consensus for an accelerated settlement cycle transition,
including to understand the impacts, evaluate the potential risks, and
develop an implementation approach. To support this effort, the ISC
engaged Deloitte to facilitate the IWG's analysis of the benefits and
barriers to moving to T+1, and coordinate with the industry on
recommending solutions for the transition.\71\ In April 2021, DTCC,
ICI, and SIFMA issued a joint press release to announce their
collaboration ``on efforts to accelerate the U.S. securities settlement
cycle from T+2 to T+1.'' \72\
---------------------------------------------------------------------------

\70\ IWG participation consisted of over 800 subject matter
advisors representing over 160 firms from buy- and sell-side firms,
custodians, vendors, and clearinghouses. T+1 Report, supra note 18,
at 4.
\71\ Id.
\72\ See Press Release, DTCC, SIFMA, ICI and DTCC Leading Effort
to Shorten U.S. Securities Settlement Cycle to T+1, Collaborating
with the Industry on Next Steps (Apr. 28, 2021), <a href="https://www.dtcc.com/news/2021/april/28/sifma-ici-and-dtcc-leading-effort-to-shorten-us-securities-settlement-cycle-to-t1">https://www.dtcc.com/news/2021/april/28/sifma-ici-and-dtcc-leading-effort-to-shorten-us-securities-settlement-cycle-to-t1</a>.
---------------------------------------------------------------------------

As stated above, on December 1, 2021, DTCC, SIFMA and ICI, together
with Deloitte, published the T+1 Report, which outlined the ISC's
recommendations for achieving a T+1 standard settlement cycle, and
proposed transitioning to T+1 settlement by the second quarter of
2024.\73\ These recommendations focused on the following topics:
Allocation and confirmation of institutional trades, trade
documentation, global settlement and FX markets, corporate actions,
prime brokerage services, securities lending, settlement errors and
fails, creation and redemption of exchange traded funds (``ETFs''),
equity and debt offerings, and regulatory requirements.\74\
---------------------------------------------------------------------------

\73\ See T+1 Report, supra note 18.
\74\ Id.
---------------------------------------------------------------------------

In addition to presenting the ISC's recommendations regarding the
requirements for moving to T+1, the T+1 Report stated that the IWG also
considered the impacts and benefits of moving to T+0 settlement.\75\
The ISC and IWG concluded, by consensus, that T+0 is not achievable in
the short term given the current state of the settlement ecosystem.\76\
The T+1 Report stated that a move towards a shortening of the
settlement cycle to T+0 would require an overall modernization of
current-day clearance and settlement infrastructure, changes to
business models, revisions to industry-wide regulatory frameworks, and
the potential implementation of real-time currency movements to
facilitate such a change.\77\ Additionally, the IWG indicated that
``adoption of such technologies would disproportionately fall on small
and medium-sized firms that rely on manual processing or legacy systems
and may lack the resources to modernize their infrastructure rapidly.''
\78\ The T+1 Report also described several ``key areas'' that the IWG
concluded would be significantly impacted by a move to T+0 settlement.
These areas included: Re-engineering of securities processing;
securities netting; funding requirements for securities transactions;
securities lending practices; prime brokerage practices; global
settlement; and primary offerings, derivatives markets and corporate
actions.\79\ The Commission is assessing these challenges, and in Part
IV, includes further discussion of them in requesting comment on
considerations related to T+0 settlement.
---------------------------------------------------------------------------

\75\ Id. at 10.
\76\ Id.
\77\ Id.
\78\ Id.
\79\ Id. at 11.
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III. Proposals for T+1

The Commission is proposing the following rules to implement a T+1
standard settlement cycle. First, the Commission proposes to amend Rule
15c6-1 to establish a standard settlement cycle of T+1 for most broker-
dealer transactions.\80\ In so doing, the Commission also proposes to
repeal Rule 15c6-1(c), which currently establishes a T+4 standard
settlement cycle for certain firm commitment offerings.\81\ Second, the
Commission proposes three additional rules applicable, respectively, to
broker-

[[Page 10446]]

dealers, investment advisers, and CMSPs to improve the efficiency of
managing the processing of institutional trades under the shortened
timeframes that would be available in a T+1 environment. Specifically,
the Commission proposes new Rule 15c6-2 to prohibit broker-dealers who
have agreed with a customer to engage in an allocation, confirmation or
affirmation process from effecting or entering into a contract for the
purchase or sale of a security on behalf of that customer unless the
broker-dealer has also entered into a written agreement that requires
the allocation, confirmation, affirmation to be completed as soon as
technologically practicable and no later than the end of the day on
trade date in order to complete settlement in the timeframes required
under Rule 15c6-1(a). The Commission also proposes to amend the
recordkeeping obligations of investment advisers to ensure that they
are properly documenting their related allocations and affirmations, as
well as retaining the confirmations they receive from their broker-
dealers. Finally, the Commission proposes a requirement for CMSPs to
establish, implement, maintain, and enforce written policies and
procedures designed to facilitate straight-through processing. Each
proposal is discussed further below.
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\80\ See infra Part III.A.1.
\81\ See infra Part III.A.3.
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In addition, the Commission also discusses the anticipated impact
of T+1 on other Commission rules and existing Commission guidance on
Regulation SHO, the financial responsibility rules for broker-dealers
under the Exchange Act, Rule 10b-10, prospectus delivery, and rules and
operations of self-regulatory organizations (``SROs''). Finally, the
Commission proposes to require compliance with each of the above rule
proposals, if adopted, by March 31, 2024. The Commission is soliciting
comment on all aspects of the proposals, and in each section below also
solicits comment on specific aspects of the proposed rules and rule
amendments, the anticipated impact on the other Commission rules noted
above, and the proposed compliance date.

A. Shortening the Length of the Standard Settlement Cycle

Existing Rule 15c6-1(a) under the Exchange Act provides that,
unless otherwise expressly agreed by the parties at the time of the
transaction, a broker-dealer is prohibited from entering into a
contract for the purchase or sale of a security (other than an exempted
security, government security, municipal security, commercial paper,
bankers' acceptances, or commercial bills) that provides for payment of
funds and delivery of securities later than the second business day
after the date of the contract.\82\ Rule 15c6-1(a) covers contracts for
the purchase or sale of all types of securities except for the excluded
securities enumerated in paragraph (a)(1) of the rule. The definition
of the term ``security'' in Section 3(a)(10) of the Exchange Act
covers, among others, equities, corporate bonds, UITs, mutual funds,
ETFs, ADRs, security-based swaps, and options.\83\ Application of Rule
15c6-1(a) extends to the purchase and sale of securities issued by
investment companies (including mutual funds),\84\ private-label
mortgage-backed securities, and limited partnership interests that are
listed on an exchange.\85\
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\82\ 17 CFR 240.15c6-1(a).
\83\ 15 U.S.C. 78c(a)(10). Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Public Law 111-203, 124
Stat. 1376 (2010), amended, among other things, the definition of
``security'' under the Exchange Act to encompass security-based
swaps. The Commission in July 2011 granted temporary exemptive
relief from compliance with certain provisions of the Exchange Act,
including Rule 15c6-1, in connection with the revision of the
Exchange Act definition of ``security'' to encompass security-based
swaps. See Order Granting Temporary Exemptions Under the Securities
Exchange Act of 1934 In Connection With the Pending Revision of the
Definition of ``Security'' To Encompass Security-Based Swaps,
Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927, 39938-39
(July 7, 2011). This temporary exemptive relief expired on February
5, 2020. See Order Granting a Limited Exemption from the Exchange
Act Definition of ``Penny Stock'' for Security-Based Swap
Transactions between Eligible Contract Participants; Granting a
Limited Exemption from the Exchange Act Definition of ``Municipal
Securities'' for Security-Based Swaps; and Extending Certain
Temporary Exemptions under the Exchange Act in Connection with the
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, Exchange Act Release No. 84991 (Jan. 25, 2019), 84 FR
863 (Jan. 31, 2019) (extending the expiration date for the relevant
portion of the temporary exemptive relief to February 5, 2020);
Order Extending Temporary Exemptions from Exchange Act Section 8 and
Exchange Act Rules 8c-1, 10b-16, 15a-1, 15c2-1 and 15c2-5 in
Connection with the Revision of the Definition of ``Security'' to
Encompass Security-Based Swaps, Exchange Act Release No. 87943 (Jan.
10, 2020), 85 FR 2763 (Jan. 16, 2020) (allowing the relevant portion
of the temporary exemptive relief to expire on February 5, 2020).
\84\ The Commission applied Rule 15c6-1 to broker-dealer
contracts for the purchase and sale of securities issued by
investment companies, including mutual funds, because the Commission
recognized that these securities represented a significant and
growing percentage of broker-dealer transactions. See T+3 Adopting
Release, supra note 9, at 52900.
\85\ With regard to limited partnership interests, the
Commission excluded non-listed limited partnerships due to
complexities related to processing the trades in these securities
and the lack of an active secondary market. In contrast, the
Commission included listed limited partnerships primarily to ensure
exclusion of these securities would not unnecessarily contribute to
the bifurcation of the settlement cycle for listed securities
generally. See id. at 52899.
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Rule 15c6-1(a) allows the parties to the trade to agree that
settlement will take place later than two business days after the trade
date, provided that such an agreement is express and reached at the
time of the transaction.\86\ This provision is sometimes referred to as
the ``override provision.'' When the Commission first adopted Rule
15c6-1(a), it stated that use of the override provision ``was intended
to apply only to unusual transactions, such as seller's option trades
that typically settle as many as sixty days after execution as
specified by the parties to the trade at execution.'' \87\ The override
provision in 15c6-1(a) continues to be intended to apply only to these
unusual transactions.\88\
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\86\ 17 CFR 240.15c6-1(a).
\87\ T+3 Adopting Release, supra note 9, at 52902. In the T+2
Proposing Release, the Commission stated its preliminary belief that
the use of this provision should continue to be applied in limited
cases to ensure that the settlement cycle set by Rule 15c6-1(a)
remains a standard settlement cycle. T+2 Proposing Release, supra
note 30, at 69257 n.153.
\88\ To date, the Commission has not identified instances
indicating a risk of overuse of this provision.
---------------------------------------------------------------------------

Rule 15c6-1(b) provides an exclusion for contracts involving the
purchase or sale of limited partnership interests that are not listed
on an exchange or for which quotations are not disseminated through an
automated quotation system of a registered securities association.\89\
Pursuant to Rule 15c6-1(b), the Commission has granted an exemption
from Rule 15c6-1 for securities that do not have facilities for
transfer or delivery in the U.S.\90\ However, if the parties execute a
transaction on a registered securities exchange, the transaction will
be subject to both the rules of the exchange and Rule 15c6-1.\91\ Under
the exemption, an ADR is considered a separate security from the
underlying security.\92\ Thus, if there are no transfer facilities in
the U.S. for a foreign security but there are transfer facilities for
an ADR based on such

[[Page 10447]]

foreign security, only the foreign security will be exempt from Rule
15c6-1.\93\ The Commission has also granted a separate exemption for
contracts for the purchase or sale of any security issued by an
insurance company (as defined in Section 2(a)(17) of the Investment
Company Act \94\) that is funded by or participates in a ``separate
account'' (as defined in Section 2(a)(37) of the Investment Company Act
\95\), including a variable annuity contract or a variable life
insurance contract, or any other insurance contract registered as a
security under the Securities Act of 1933 (``Securities Act'').\96\
---------------------------------------------------------------------------

\89\ 17 CFR 240.15c6-1(b). In recognition of the fact that the
Commission may not have identified all situations or types of trades
where T+2 settlement would be problematic, Rule 15c6-1(b) provides
that the Commission may exempt by order additional types of trades
from T+2 settlement, either unconditionally or on specified terms
and conditions, if the Commission determines that such an exemption
is consistent with the public interest and the protection of
investors. Id.
\90\ See Exchange Act Release No. 35750 (May 22, 1995), 60 FR
27994, 27995 (May 26, 1995) (granting an exemption from Rule 15c6-1
for certain transactions in foreign securities). The exemption also
provides that if less than 10% of the annual trading volume in a
security that has U.S. transfer or deliver facilities occurs in the
U.S., the transaction in such security will be exempt from the
requirements in the rule.
\91\ Id.
\92\ Id. at n.7.
\93\ Id.
\94\ 15 U.S.C. 80a-2(a)(17).
\95\ 15 U.S.C. 80a-2(a)(37).
\96\ See Exchange Act Release No. 35815 (June 6, 1995), 60 FR
30906, 30907 (June 12, 1995) (granting an exemption from Rule 15c6-1
for transactions involving certain insurance contracts). The
Commission determined not to rescind or modify the exemptive order
when it shortened the settlement cycle from T+3 to T+2. See T+2
Adopting Release, supra note 10, at 15581.
---------------------------------------------------------------------------

Rule 15c6-1(c) establishes a T+4 settlement cycle for firm
commitment underwritings for securities that are priced after 4:30 p.m.
Eastern Time (``ET'').\97\ Specifically, the rule states that the
standard settlement cycle set forth in Rule15c6-1(a) does not apply to
contracts for the sale of securities that are priced after 4:30 p.m. ET
on the date that such securities are priced and that are sold by an
issuer to an underwriter pursuant to a firm commitment offering
registered under the Securities Act or sold to an initial purchaser by
a broker-dealer participating in such offering. Under the rule, the
broker or dealer must effect or enter into a contract for the purchase
or sale of those securities that provides for payment of funds and
delivery of securities no later than the fourth business day after the
date of the contract unless otherwise expressly agreed to by the
parties at the time of the transaction.
---------------------------------------------------------------------------

\97\ 17 CFR 240.15c6-1(c).
---------------------------------------------------------------------------

Rule 15c6-1(d) provides that, for purposes of paragraphs (a) and
(c) of the rule, parties to a contract shall be deemed to have
expressly agreed to an alternate date for payment of funds and delivery
of securities at the time of the transaction for a contract for the
sale for cash of securities pursuant to a firm commitment offering if
the managing underwriter and the issuer have agreed to such date for
all securities sold pursuant to such offering and the parties to the
contract have not expressly agreed to another date for payment of funds
and delivery of securities at the time of the transaction.\98\
---------------------------------------------------------------------------

\98\ 17 CFR 240.15c6-1(d).
---------------------------------------------------------------------------

1. Proposed Amendment to Rule 15c6-1(a)
The Commission proposes to amend Rule 15c6-1(a) to prohibit a
broker-dealer from effecting or entering into a contract for the
purchase or sale of a security (other than an exempted security, a
government security, a municipal security, commercial paper, bankers'
acceptances, or commercial bills) that provides for payment of funds
and delivery of securities later than the first business day after the
date of the contract unless otherwise expressly agreed to by the
parties at the time of the transaction.\99\ The Commission's proposal
to amend Rule 15c6-1(a) would change only the standard settlement date
for securities transactions covered by the existing rule, and would not
impact the existing exclusions enumerated in the rule. In addition, the
Commission's proposal would retain the so-called ``override
provision,'' and the Commission continues to intend for the ``override
provision'' to apply only to unusual cases to ensure that the
settlement cycle set by Rule 15c6-1(a) is in fact the standard
settlement cycle.\100\
---------------------------------------------------------------------------

\99\ 17 CFR 240.15c6-1(a).
\100\ See supra note 88.
---------------------------------------------------------------------------

2. Basis for Shortening the Standard Settlement Cycle to T+1
First, the Commission preliminarily believes that market
participants have made substantial progress toward identifying the
technological and operational changes that would be necessary to
establish a T+1 standard settlement cycle, and significant industry
support for such a move has emerged. By contrast, at the time the
Commission proposed to shorten the standard settlement cycle to T+2,
market participants generally supported moving to T+2 and many believed
that moving to T+1 would be substantially more costly and take longer
to achieve than moving to T+2.\101\ At that time, neither the
Commission nor the industry supported moving to a T+1 standard
settlement cycle.\102\ Since then, Commission staff has continued to
study the potential impact of further shortening the settlement cycle,
and the ISC has recommended that the securities industry implement a
T+1 standard settlement cycle.\103\
---------------------------------------------------------------------------

\101\ See T+2 Adopting Release, supra note 10, at 15598-99.
\102\ See id. at 15572.
\103\ See supra notes 73-74 and accompanying text (discussing
the recommendations in the T+1 Report).
---------------------------------------------------------------------------

The Commission acknowledges that a transition from a T+2 to T+1
standard settlement cycle, and implementation of the necessary
operational, technical, and business changes, will likely result in
varying burdens, costs and benefits for a wide range of market
participants.\104\ The Commission has remained mindful and observant of
industry initiatives and progress targeted at facilitating an
environment where a shortened standard settlement cycle could be
achieved in a manner that reduces risk for market participants while
also minimizing the likelihood of disruptive burdens and costs. Having
taken current industry initiatives and their relative progress into
consideration, the Commission preliminarily believes there has been
collective progress by market participants sufficient to facilitate a
transition to a T+1.
---------------------------------------------------------------------------

\104\ See infra Part V (analyzing the economic effects of
shortening the standard settlement cycle to T+1).
---------------------------------------------------------------------------

Furthermore, when the Commission adopted a T+2 standard settlement
cycle, it identified a number of incremental improvements to the
functioning of the U.S. securities market likely to result relative to
a T+3 standard settlement cycle.\105\ The Commission preliminarily
believes that a T+1 settlement cycle would produce similar incremental
improvements to the functioning of the U.S. securities market relative
to a T+2 settlement cycle. These benefits, discussed further in Part
V.C.1, are summarized briefly here.
---------------------------------------------------------------------------

\105\ See T+2 Adopting Release, supra note 10, at 15569-75.
---------------------------------------------------------------------------

First, as a general matter, time to settlement determines a
significant portion of a market participant's risk exposure on a given
securities transaction. As a result, all else being equal, shortening
the time to settlement reduces exposure to credit,\106\ market,\107\
and liquidity risk.\108\ In addition, assuming that trading volume
remains constant, shortening the time to settlement also decreases the
total number of unsettled trades that exists at any point in time, as
well as the total

[[Page 10448]]

market value of all unsettled trades.\109\ This reduction in the number
and total value of unsettled trades should correspond to a reduction in
a market participant's overall exposure to risk arising from unsettled
transactions.
---------------------------------------------------------------------------

\106\ Credit risk refers to the potential for the market
participant's counterparty to a given transaction to default on the
transaction and therefore the market participant will not receive
either the cash or securities necessary to settle the transaction.
\107\ Market risk refers to the potential for the value of the
security that underlies the transaction to change between trade
execution and settlement.
\108\ Liquidity risk refers to the risk that the market
participant will be unable to timely settle a transaction because it
does not have access to sufficient cash or securities. The market
participant may not have access to sufficient cash or securities for
a given transaction if, for example, it has recently been exposed to
the default of a counterparty on a separate transaction and did not
receive the anticipated proceeds of that transaction.
\109\ In other words, a T+2 settlement cycle results in two days
of unsettled transactions at any given time, whereas a T+1
settlement cycle would result in one day of unsettled transactions
at any given time.
---------------------------------------------------------------------------

Second, the above dynamics produce noticeable effects for
transactions that are centrally cleared because they reduce the CCP's
exposure to credit, market, and liquidity risk arising from its
obligations to its participants, promoting the stability of the CCP and
thereby reducing the potential for systemic risk to transmit through
the financial system. For example, when the CCP faces a participant
default, the CCP will liquidate open positions of the defaulting
participant and use the defaulting participant's financial resources
held by the CCP to cover the CCP's losses and expenses. The CCP may
face losses if the market value of the defaulting participant's open
positions has moved significantly in the time between trade execution
and default.\110\ While the CCP works to close out the defaulting
participant's open positions, it also needs to continue to meet its
end-of-day settlement obligations to non-defaulting participants, and
so the CCP is exposed to liquidity risk when a member defaults because
it may need to use its own resources to complete end-of-day
settlement.\111\ In each instance, the amount of risk to which the CCP
is exposed is determined in part by the length of the settlement cycle,
and shortening the settlement cycle would reduce the CCP's overall
exposure to these risks.
---------------------------------------------------------------------------

\110\ For example, if the open position is net long, to close
the position the CCP would obtain replacement securities in the
market, possibly at a higher price than the original transaction.
Conversely, if the open position is net short, to close the position
the CCP would sell the defaulting participant's securities in the
market, possibly at a lower price than the original transaction.
\111\ The costs associated with deploying such resources are
ultimately borne by the CCP members, both in the ordinary course of
the CCP's daily risk management process and in the event of an
extraordinary event where members may be subject to additional
liquidity assessments. These costs may be passed on through the CCP
members to broker-dealers and investors.
---------------------------------------------------------------------------

Third, reducing these risks to the CCP would reduce the overall
size of the financial resources that the CCP requires of its
participants,\112\ thereby reducing the risks and costs faced by the
CCP participants (i.e., broker-dealers) and, by extension, their
customers (i.e., investors).\113\ CCP participants may choose to pass
these reductions down to their customers.
---------------------------------------------------------------------------

\112\ See T+2 Proposing Release, supra note 30, at 69251 n.77
(discussing mutual fund settlement timeframes and related liquidity
risk, which may be exacerbated during times of stress). The
Commission preliminarily believes that shortening settlement
timeframes for portfolio securities to T+1 will generally assist in
reducing liquidity and other risks for funds that must satisfy
investor redemption requests that settle pursuant to shorter
settlement timeframes (e.g., T+1).
\113\ See id. at 69251.
---------------------------------------------------------------------------

Fourth, the Commission anticipates that the above effects would
reduce the potential for systemic risk.\114\ When the Commission
proposed to shorten the standard settlement cycle from T+3 to T+2 it
explained that its ``views are even more apt today given the increasing
interconnectivity and interdependencies among markets and market
participants.'' \115\ In particular, in periods of market stress,
liquidity demands imposed by the CCP on its participants, such as in
the form of intraday margin calls, can have procyclical effects that
reduce overall market liquidity.\116\ Reducing the CCP's liquidity
exposure by shortening the settlement cycle can help limit this
potential for procyclicality,\117\ enhancing the ability of the CCP to
serve as a source of stability and efficiency in the national clearance
and settlement system.\118\
---------------------------------------------------------------------------

\114\ As the Commission noted when it adopted Rule 15c6-1,
reducing the total volume and value of outstanding obligations in
the settlement pipeline at any point in time will better insulate
the financial sector from the potential systemic consequences of
serious market disruptions. See T+3 Adopting Release, supra note 9,
at 52894.
\115\ T+2 Proposing Release, supra note 30, at 69258 n.160
(citing Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220,
66254 (Nov. 2, 2012) (``Clearing Agency Standards Adopting
Release'') and DTCC, Understanding Interconnectedness Risks--To
Build a More Resilient Financial System (Oct. 2015), <a href="http://www.dtcc.com/news/2015/october/12/understanding-interconnectedness-risks-article">http://www.dtcc.com/news/2015/october/12/understanding-interconnectedness-risks-article</a>).
\116\ For a discussion regarding procyclicality, see T+2
Proposing Release, supra note 30, at 69250-52.
\117\ See T+3 Adopting Release, supra note 9, at 52894.
\118\ See Standards for Covered Clearing Agencies, Exchange Act
Release No. 71699 (Mar. 12, 2014), 79 FR 16865 (Mar. 26, 2014),
corrected at 79 FR 29507, 29598 (May 22, 2014) (``CCA Standards
Proposing Release''). Clearing members are often members of larger
financial networks, and the ability of a covered clearing agency to
meet payment obligations to its members can directly affect its
members' ability to meet payment obligations outside of the cleared
market. Thus, management of liquidity risk may mitigate the risk of
contagion between asset markets.
---------------------------------------------------------------------------

Finally, shortening the standard settlement cycle to T+1 would
enable investors to access the proceeds of their securities
transactions sooner than they are able to in the current T+2
environment. In particular, in a T+1 environment, sellers would have
access to cash proceeds one day sooner and buyers would see purchased
securities in their accounts one day earlier relative to a T+2 standard
settlement cycle.
In addition, as noted above, the Commission has evaluated the
potential for shortening the settlement cycle to impose costs on market
participants, which are likely to vary across market participants
depending on a number of facts. These costs and considerations are
discussed in Part V.C.2. The costs include those costs associated with
investments in improved operations and new technologies to manage the
compression of time resulting from a shorter settlement cycle.
Shortening the settlement cycle may have other effects as well. For
example, shortening the standard settlement cycle to T+1 for equity
securities would disconnect settlement with foreign exchange (``FX'')
transactions, which settle on a T+2 basis. Mismatched settlement
timeframes between equities and FX transactions may increase the cost
needed to fund and hedge related securities transactions.\119\ In
addition, the Commission recognizes that a disorderly transition to a
shorter settlement cycle could lead to an increase in settlement fails.
However, as discussed in Part V.B.4, in analyzing the shortening of the
settlement cycle from T+3 to T+2, the Commission found no marked change
in the volume of such failures. The Commission preliminarily believes
that an orderly transition to a T+1 standard settlement cycle can limit
the negative effects of settlement fails. The Commission also believes
that facilitating an increase in same-day affirmations helps mitigate
the effects of settlement fails, as affirmations on trade date can
limit the potential for processing errors on settlement day that cause
fails.\120\ More generally, the Commission preliminarily believes that
the anticipated benefits of a shortened settlement cycle justify the
anticipated costs.
---------------------------------------------------------------------------

\119\ See infra Part V.C.2 (noting that market participants will
have a choice between bearing an additional day of currency risk or
incurring the cost related to hedging away this risk in the forward
or futures market).
\120\ See infra Part III.B (proposing new Rule 15c6-2 to
increase same-day affirmations); Part V.C.1 (noting that the
proposed rule can facilitate an orderly transition to T+1).
---------------------------------------------------------------------------

3. Proposed Deletion of Rule 15c6-1(c) and Conforming Technical
Amendments to Rule 15c6-1
As explained above, Rule 15c6-1(c) establishes a T+4 settlement
cycle for firm commitment offerings for securities that are priced
after 4:30 p.m. ET, unless otherwise expressly agreed to by the parties
at the time of the transaction.

[[Page 10449]]

The Commission proposes to delete this provision. Deleting Rule 15c6-
1(c) would, in conjunction with the proposed amendment to Rule 15c6-
1(a), set a T+1 standard settlement cycle for firm commitment offerings
priced after 4:30 p.m. ET. However, the so-called ``override''
provisions in paragraphs (a) and (d) of Rule 15c6-1 would continue to
allow contracts currently covered by paragraph (c) to provide for
settlement on a timeframe other than T+1 if the parties expressly agree
to a different settlement timeframe at the time of the transaction.
In proposing to delete paragraph (c) of Rule 15c6-1, the Commission
also proposes conforming amendments to paragraphs (a), (b), and (d) of
the rule. Specifically, the Commission is proposing to delete all
references to paragraph (c) of Rule 15c6-1 that currently appear in
paragraphs (a), (b) and (d) of the rule.
4. Basis for Eliminating T+4 Standard for Certain Firm Commitment
Offerings
The Commission believes that expanded application of the ``access
equals delivery'' standard for prospectus delivery supports removing
paragraph (c) from Rule 15c6-1 because delays in the process that made
delivery of the prospectus difficult to achieve under the standard
settlement cycle have been mitigated by the ``access equals delivery''
standard. In addition, if paragraph (c) is removed as proposed,
paragraph (d) would continue to provide underwriters and the parties to
a transaction the ability to agree, in advance of a particular
transaction, to a settlement cycle other than the standard set forth in
Rule 15c6-1(a) when needed to manage obligations associated with the
firm commitment offering.
The Commission adopted paragraphs (c) and (d) of Rule 15c6-1 in
1995, two years after Rule 15c6-1 was originally adopted.\121\ At the
time, the rule included a limited exemption from the requirements under
paragraph (a) of the rule for the sale for cash pursuant to a firm
commitment offering registered under the Securities Act.\122\ The
exemption for firm commitment offerings was added in response to public
comments stating that new issue securities could not settle on T+3
because prospectuses could not be printed prior to the trade date (the
date on which the securities are priced).\123\
---------------------------------------------------------------------------

\121\ See Prospectus Delivery; Securities Transaction Settlement
Cycle, Exchange Act Release No. 34-35705 (May 11, 1995), 60 FR 26604
(May 17, 1995) (``1995 Amendments Adopting Release'').
\122\ The exemption was limited to sales to an underwriter by an
issuer and initial sales by the underwriting syndicate and selling
group. Any secondary resales of such securities were to settle on a
T+3 settlement cycle. T+3 Adopting Release, supra note 9, at 52898.
\123\ Id.
---------------------------------------------------------------------------

When the Commission proposed to amend Rule 15c6-1 in 1995, it
stated that, since the adoption of the rule, members of the brokerage
community had suggested the Commission eliminate the exemption and ease
the problems associated with prospectus delivery by other means. The
primary reasons expressed for requiring T+3 settlement of such
offerings were: (i) The secondary market for a new issue may be subject
to greater price fluctuations or instability, which in turn may expose
underwriters, dealers and investors to disproportionate credit and
market risk; and (ii) the bifurcated settlement cycle created for
initial sales and resales of new issues would be disruptive to broker-
dealer operations and to the clearance and settlement system.\124\ In
particular, it was explained that if a purchaser of a new issue sells
on the first or second day after pricing, the purchaser's broker will
not be able to settle with the buyer's broker on a T+3 schedule because
the securities would not yet be available for settlement purposes.\125\
As a result, all such trades by the purchasers would ``fail'' and
result in expense, inefficiencies, and greater settlement risk for all
participants. A bifurcated settlement cycle also may require the
maintenance of separate computer systems and additional internal
procedures.
---------------------------------------------------------------------------

\124\ See Exchange Act Release No. 34-35396 (Feb. 21, 1995), 60
FR 10724 (Feb. 27, 1995) (``1995 Amendments Proposing Release'').
\125\ Id.
---------------------------------------------------------------------------

The vast majority of commenters submitting feedback in response to
the 1995 Amendments Proposing Release supported T+4 as the standard
settlement cycle for firm commitment offerings price after 4:30
p.m.\126\ Several of these commenters reasoned that it is difficult to
print prospectuses within a T+3 timeframe when securities are priced
late in the day. These commenters also stated that the potential
systemic and market risks associated with the proposed T+4 provision
should be limited because most secondary market trading in the subject
securities would not begin trading until the opening of the market on
the next business day, and therefore the primary issuance of securities
would be available to settle secondary trading in the security.\127\
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\126\ 1995 Amendments Adopting Release, supra note 121, at
26608.
\127\ Id.
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The T+1 Report stated that paragraph (c) is rarely used in the
current T+2 settlement environment, but the IWG expects a T+1 standard
settlement cycle would increase reliance on paragraph (c).\128\ The T+1
Report further stated that the IWG recommends retaining paragraph (c)
but amending it to establish a standard settlement cycle of T+2 for
firm commitment offerings.\129\ The T+1 Report cited issues with
respect to complex documentation and other operational elements of
equity offerings that may delay settlement to T+2 in a T+1 environment.
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\128\ T+1 Report, supra note 18, at 33-35.
\129\ Id. at 33.
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With respect to debt offerings, the T+1 Report stated that many
such offerings frequently rely on the exception provided in Rule 15c6-
1(d).\130\ In describing the reasons debt offerings ``have historically
needed, and will continue to need, this exemption if the standard
settlement cycle is moved to T+1,'' the T+1 Report stated that such
offerings are ``document-intensive and typically have more
documentation than equity offerings.'' \131\ According to the T+1
Report, this documentation includes indentures, guarantees, and
collateral documentation, all of which are individually negotiated and
unique to the transaction.\132\ Thus, the T+1 Report states, a
substantial portion of debt offerings settle later than T+3.\133\
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\130\ Id.
\131\ Id.
\132\ Id.
\133\ Id.
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While the Commission appreciates that documentation relating to
firm commitment offerings for equities must be completed prior to
settlement of such transactions, the T+1 Report did not explain why or
how timely completion of such documentation would not be possible if
the exception in paragraph (c) of Rule 15c6-1 were eliminated. In
contrast, the T+1 Report states, as discussed above, that firm
commitment offerings generally settle in alignment with the standard
settlement cycle. As the Commission is not currently aware of any data
or facts indicating that the documentation associated with firm
commitment offerings cannot be completed by T+1, the Commission
preliminarily believes that the need to complete transaction
documentation prior to settlement does not justify proposing a separate
standard settlement cycle of T+2 for equity offerings. Rather, to the
extent that documentation may in some cases require more time to
complete than is available under a T+1 standard settlement cycle, the
parties to the

[[Page 10450]]

transaction can agree to a longer settlement period pursuant to
paragraph (d) when they enter the transaction. In this way, deleting
paragraph (c) does not prevent the parties from using paragraph (d) to
agree to a longer settlement period; it only removes the presumption
that such firm commitment offerings should be subject to a different
settlement cycle than the standard settlement cycle set forth in
paragraph (a).
In addition, as discussed further in Part III.E.4, 17 CFR 230.172
(``Rule 172'') has implemented an ``access equals delivery'' model that
permits, with certain exceptions, final prospectus delivery obligations
to be satisfied by the filing of a final prospectus with the
Commission, rather than delivery of the prospectus to purchasers. As a
result of these changes, broker-dealers generally would not require
time to print and deliver prospectuses--a point originally cited by
many commenters in support of adopting paragraph (c)--and the
Commission preliminarily believes that broker-dealers are able to
satisfy their obligations with respect to these firm commitment
offerings on a timeline much shorter than the current T+4 standard
settlement cycle for these firm commitment offerings.
In addition, establishing T+1 as the standard settlement cycle for
these firm commitment offerings, and thereby aligning the settlement
cycle with the standard settlement cycle for securities generally,
would reduce exposures of underwriters, dealers, and investors to
credit and market risk, and better ensure that the primary issuance of
securities is available to settle secondary market trading in such
securities.\134\ The Commission believes that harmonizing the
settlement cycle for such firm commitment offerings with secondary
market trading, to the greatest extent possible, limits the potential
for operational risk.
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\134\ As noted above, prior to the Commission's 1995 amendments
to Rule 15c6-1 members of the broker-dealer community expressed the
view that (i) the secondary market for a new issue may be subject to
greater price fluctuations or instability, which in turn may expose
underwriters, dealers and investors to disproportionate credit and
market risk; and (ii) a bifurcated settlement cycle created for
initial sales and resales of new issues would be disruptive to
broker-dealer operations and to the clearance and settlement system.
See supra notes 124, 125, and accompanying text. While these
arguments were made by market participants when the standard
settlement cycle in the U.S. was still T+3, the Commission
preliminarily believes that they remain relevant to the Commission's
proposed amendment to Rule 15c6-1(a) and proposed deletion of Rule
15c6-1(c). In particular, if the Commission were to adopt the
proposed amendment to Rule 15c6-1(a) without deleting Rule 15c6-
1(c), a broker-dealer settling on behalf of a customer who sells
shares of a new issue on the first day after pricing might, in some
cases, not be able to settle with the purchaser's broker-dealer
because the securities may not yet be available for settlement.
Specifically, if the new issue settled on T+2 and the secondary
market transactions executed on the first day of trading settled on
T+1, the primary issuance would presumably not be available for
timely settlement of the secondary market transactions. Conversely,
if the Commission adopts both the proposed amendment to Rule 15c6-
1(a) and the proposed deletion of Rule 15c6-1(c), the settlement
cycle would not be bi-furcated and the basis for the above-described
concerns raised previously by the broker-dealer community related to
bi-furcation of the settlement cycle would not be applicable.
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Therefore, in the Commission's view, deleting paragraph (c) while
retaining paragraph (d) provides sufficient flexibility for market
participants to manage the potential need for longer than T+1
settlement on certain firm commitment offerings priced after 4:30 p.m.
that may include ``complex'' documentation because paragraph (d) would
continue to permit the underwriters and the parties to a transaction to
agree, in advance of entering the transaction, whether T+1 settlement
or some other settlement timeframe is appropriate for the transaction.
In addition, the Commission believes that having the underwriters and
the parties to the transaction agree in advance of entering the
transaction whether to deviate from the standard settlement cycle
established in paragraph (a) would promote transparency among the
parties, in advance of entering the transaction, as to the length of
the time that it takes to complete documentation with respect to the
transaction. The Commission requests comment on these views. To the
extent that commenters agree with the T+1 Report, the Commission
requests that such commenters provide data or other detailed
information explaining why a T+1 settlement cycle is an inappropriate
standard for all firm commitment offerings priced after 4:30 p.m., such
as an explanation or description for what specific documentation cannot
be completed consistent with a T+1 settlement cycle.
5. Request for Comment
The Commission is requesting comment on all aspects of the proposed
amendments to Rule 15c6-1 to shorten the current T+2 and T+4 standard
settlement cycles to T+1. The Commission also solicits comment on the
particular questions set forth below, and encourages commenters to
submit any relevant data or analysis in connection with their answers.
1. Should the Commission amend Rule 15c6-1 to shorten the standard
settlement cycle to T+1 as proposed? Why or why not?
2. Are efforts to shorten the standard settlement cycle to T+1 a
logical step on the path to T+0 settlement, or would shortening to T+1
require investments or processes that would be outdated or unnecessary
in a T+0 environment? \135\ Please explain why or why not.
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\135\ See supra note 12 and accompanying text (explaining that
T+0 in this release is intended to refer to netted settlement by the
end of trade date); see also infra Part IV (discussing the same).
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3. Is the current scope of securities covered by Rule 15c6-1,
including the exclusions provided in the text of Rule 15c6-1(a), still
appropriate in light of the Commission's proposal to shorten the
standard settlement cycle to T+1? Are there any asset classes,
securities as defined in Section 3(a)(10) of the Exchange Act, or types
of securities transactions for which the proposed amendment to Rule
15c6-1(a) would present compliance problems for broker-dealers? What
would be the quantitative and qualitative impacts of maintaining those
exclusions?
4. The Commission requests that commenters provide information
regarding securities transactions that, in today's T+2 settlement
environment, generally settle later than T+2. To what extent does this
occur, and what are the circumstances that motivate market participants
to settle later than T+2? If Rule 15c6-1(a) is amended to shorten the
standard settlement cycle from T+2 to T+1, would market participants
continue to settle such securities transactions on a longer settlement
cycle? Would market participants who frequently settle certain
securities transactions later than T+2 settle such transactions later
than T+1 if the Commission adopts the proposed amendment to Rule 15c6-
1(a)? Conversely, under what circumstances are securities transactions
settled on an expedited basis (i.e., on timeframes less than T+2), and
how often how common is such settlement? What are the circumstances
that motivate earlier settlements? If Rule 15c6-1(a) is amended to
shorten the standard settlement cycle from T+2 to T+1, how will the
proposed amendment affect these expedited settlement decisions?
5. To what extent do market participants currently rely on the
override provision in Rule 15c6-1(a)? Would market participants expect
use of the provision to increase or decrease in a T+1 environment? Why
or why not?
6. As noted above, the Commission previously issued an order that
exempted security-based swaps from the requirements under Rule 15c6-1,
and

[[Page 10451]]

subsequently extended that exemptive relief on several occasions, but
the exemptive relief that previously covered compliance with Rule 15c6-
1 expired in 2020.\136\ Should the Commission issue a new order
providing exemptive relief from compliance with Rule 15c6-1 for
transactions in security-based swaps? If so, why or why not?
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\136\ See supra note 83.
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7. Should the Commission amend any other provisions of Rule 15c6-1
(other than the proposed amendments to the rule) for the purposes of
shortening the standard settlement cycle to T+1? If so, which
provisions and why?
8. Are the conditions set forth in the Commission's exemptive order
for securities traded outside the U.S. still appropriate? \137\ If not,
why not? If the exemption should be modified, how should it be modified
and why?
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\137\ See supra note 90 and accompanying text.
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9. Are the conditions set forth in the Commission's exemptive order
for insurance contracts still appropriate? \138\ If not, why not? If
the exemption should be modified, how should it be modified and why?
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\138\ See supra note 96 and accompanying text.
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10. Should the Commission provide exemptive relief under Rule 15c6-
1(b) for any other securities or types of transactions?
11. Would shortening the standard settlement cycle to T+1 as
proposed make it difficult for broker-dealers to comply with the
requirements of Rule 15c6-1? Please provide examples.
12. How would retail investors be impacted by new processes that
broker-dealers may implement in support of a T+1 standard settlement
cycle? For example, do commenters believe that broker-dealers would
require changes to the way that retail investors fund their accounts in
a T+1 environment? If so, how? Would shortening the standard settlement
cycle to T+1 result in retail investors encountering ongoing costs due
to a delay in their ability to make investments? Would shortening the
standard settlement cycle to T+1 result in any benefits to retail
investors?
13. How would institutional investors be impacted by new processes
that broker-dealers may implement in support of a T+1 standard
settlement cycle? For example, do market participants anticipate an
increase in prefunding requirements for institutional investors in a
T+1 environment?
14. What impact, if any, would the proposed amendment to Rule 15c6-
1(a) have on market participants who engage in cross-border
transactions? To what extent would shortening the standard settlement
cycle in the U.S. to T+1 result in increased or decreased operational
costs to market participants? To what extent would shortening the
standard settlement cycle for securities transactions in the U.S.
increase or decrease risks associated with cross-border transactions or
related transactions, such as financing transactions?
15. What impact, if any, would the proposed amendment to Rule 15c6-
1(a) have on market participants who engage in trading activity across
various financial product classes, each potentially involving a
different settlement cycle? For example, what would be the impact on
market participants conducting transactions in U.S. equities and U.S.
commercial paper on the same day? Alternatively, are there benefits to
alignment of the settlement timeframes across most U.S. security types
to one day? For example, options and government securities currently
settle on T+1 while equities, corporate bonds, and municipal debt
settle on T+2.
16. What impact, if any, would the proposal have on trading
involving derivatives and exchange-traded products (``ETPs'')? \139\
Would shortening the settlement cycle for ETPs affect the costs of
creating or redeeming shares in ETPs that hold portfolio securities
that are on a different settlement cycle, such as net capital charges
related to collateral requirements? \140\ If so, would such a change in
costs affect the efficiency or effectiveness of the arbitrage between
an ETP's secondary market price and the value of its underlying assets?
Would such a change lead to other downstream effects, such as an
increase in the use of cash or custom baskets? \141\ Similarly, would
the proposed amendments affect transactions in derivatives instruments
if a derivative were to settle on a different timeframe than its
underlying reference assets?
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\139\ ETPs constitute a diverse class of financial products that
seek to provide investors with exposure to financial instruments,
financial benchmarks, or investment strategies across a wide range
of asset classes. ETP trading occurs on national securities
exchanges and other secondary markets that are regulated by the
Commission under the Exchange Act, making ETPs widely available to
market participants, from individual investors to institutional
investors, including hedge funds and pension funds. The largest
category of ETPs are ETFs, which are open-end fund vehicles or UITs
that are registered investment companies under the Investment
Company Act. See Request for Comment on Exchange-Traded Products,
Exchange Act Release No. 75165 (June 12, 2015), 80 FR 34729 (June
17, 2015).
\140\ For example, the way a market participant executes a
creation or redemption of an ETF share resembles a stock trade in
the secondary market. A market participant typically referred to as
an ``Authorized Participant'' or ``AP'' submits an order to create
or redeem (``CR'') ETF shares much like an investor submits an order
to his broker to buy or sell a stock. Also, similar to a stock
trade, the CR order settles on a T+2 settlement cycle through NSCC.
See ICI, 20 ICI Research Perspective, no. 5, Sept. 2014, at 14,
<a href="https://www.ici.org/pdf/per20-05.pdf">https://www.ici.org/pdf/per20-05.pdf</a>; see also DTCC, Exchange Traded
Fund (ETF) Processing, <a href="http://www.dtcc.com/clearing-services/equities-trade-capture/etf">http://www.dtcc.com/clearing-services/equities-trade-capture/etf</a>; DTCC, ETF and CNS Processing Facts,
<a href="https://dtcclearning.com/content/220-equities-clearing/exchange-traded-fund-etf/about-etf/3613-etf-cns-processing-facts.html">https://dtcclearning.com/content/220-equities-clearing/exchange-traded-fund-etf/about-etf/3613-etf-cns-processing-facts.html</a>.
\141\ Rule 6c-11 under the Investment Company Act permits ETFs
to use ``custom baskets'' if their basket policies and procedures:
(i) Set forth detailed parameters for the construction and
acceptance of custom baskets that are in the best interest of the
ETF and its shareholders, including the process for any revisions
to, or deviations from, those parameters; and (ii) specify the
titles or roles of the employees of the ETF's investment adviser who
are required to review each custom basket for compliance with those
parameters. See infra note 257 and accompanying text (further
discussing the creation unit purchase and redemption process for
ETFs).
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17. What impact, if any, would shortening the standard settlement
cycle to T+1 have on the levels of liquidity risk that may currently
exist as a result of mismatches between the settlement cycles for
different markets? For example, would shortening the standard
settlement cycle to T+1 eliminate or reduce any liquidity risk that
mutual funds may face as a result of the mismatch between the current
T+1 settlement cycle for transactions in open-end mutual fund shares
that are settled through NSCC and the T+2 settlement cycle that is
applicable to many portfolio securities held by mutual funds?
18. The Commission solicits comment on the status and readiness of
the technology and processes currently used by market participants to
support a T+1 settlement cycle.
19. What impact would the Commission's proposed deletion of
paragraph (c) of Rule 15c6-1 have on underwriters, broker-dealers, and
other market participants?
20. Have the technological and operational capabilities of broker-
dealers and their service providers improved sufficiently to allow
prospectuses to be printed and delivered on time if the standard
settlement cycle for firm commitment offerings priced after 4:30 p.m.
is shortened to T+1? Please describe such improvements and why they
would or would not be sufficient to support shortening the standard
settlement cycle for such transactions.
21. Should the Commission shorten the standard settlement cycle for
firm commitment offerings priced after 4:30 p.m. to a time frame other
than T+1 (e.g., T+2, or T+3)? If so, why?

[[Page 10452]]

22. Would any additional technological and operational changes, if
any, be necessary for broker-dealers to print and deliver prospectuses
on time for firm commitment offerings priced after 4:30 p.m. if a T+1
standard settlement cycle is adopted for such transactions? What costs
would be associated with such improvements?
23. Would the Commission's proposed deletion of paragraph (c) of
Rule 15c6-1 decrease exposures of underwriters, dealers and investors
to market and credit risks related to the bifurcated settlement periods
for new issues and secondary market transactions? Please explain why or
why not.
24. With respect to corporate actions, in most cases the ex-date
will be the record date (``RD''), meaning that RD-1 will be the last
day that a purchaser will gain the dividend or entitlement.\142\ Given
the shorter timeframes, the Commission requests comments on this
dynamic and statements in the T+1 Report urging a concerted effort
among exchanges, other authorities, and issuers to standardize some
currently fragmented procedures to set up and announce corporate
actions.\143\
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\142\ See, e.g., ISITC Virtual Winter Forum, DTCC presentation
to Corporate Actions Working Group (Dec. 13, 2021).
\143\ T+1 Report, supra note 18, at 20.
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25. Regarding corporate actions that concern voluntary
reorganizations, the Commission solicits comments on the impact of a
T+1 settlement cycle on DTC's ``cover/protect'' process for certain
tenders, exchanges, or rights offerings.\144\ This procedure enables
DTC participants to allow their investors to make or change their final
elections until the end of an offer's expiration date; where an offer
allows, participants provide DTC with a notice of guaranteed delivery,
allowing later delivery of the shares or rights. How would this process
affect operations under a T+1 settlement cycle? Would any changes to
this process be needed?
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\144\ Id. at 19-20; see also ISITC Virtual Winter Forum, DTCC
presentation to Corporate Actions Working Group (Dec. 13, 2021).
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26. The Commission generally requests comment on the deadlines and
timeframes set forth in the T+1 Report. For example, the Commission
requests comment on their impact on DTC's IVORS function, used for
retiring a UIT by withdrawing assets and transferring them to a new
UIT.\145\
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\145\ See DTC, IVORS Service Guide, https://www.dtcc.com/~/
media/Files/Downloads/Settlement-Asset-Services/EDL/IVORS.pdf.
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27. If the Commission adopts the proposed deletion of paragraph (c)
of Rule 15c6-1 and the proposed conforming technical amendments to
paragraphs (a), (b) and (d) of the rule, should the Commission adopt
any additional amendments to Rule 15c6-1 in connection with such
changes?

B. New Requirement for ``Same-Day Affirmation''

As discussed in Part II.B.1, integral to completing the
institutional trade process is achieving an affirmed confirmation,
which can require a series of communications between a broker-dealer
and its institutional customer. Since 2000, market participants have
identified accelerating this process, which requires agreement among
the parties regarding the trade details that facilitate trade
allocation when needed, as well as trade confirmation and affirmation,
as one of the core building blocks to improve the speed, safety, and
efficiency of the trade settlement process, and ultimately to achieve
shorter settlement cycles.\146\ In particular, in the SIA Business Case
Report, the securities industry noted the need to prioritize ensuring
that a higher number and proportion of trades were confirmed and
affirmed on trade date.\147\ These improvements were considered
essential to compressing the settlement cycle and facilitating an
environment less prone to operational risk.\148\ This objective, where
broker-dealers and their institutional customers allocate, confirm, and
affirm the trade details necessary to achieve settlement by the end of
trade date has sometimes been referred to as ``same-day affirmation.''
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\146\ See SIA Business Case Report, supra note 21; BCG Study,
supra note 22; see also T+2 Proposing Release, supra note 30, at
69252, 69254 (describing in detail the SIA Business Case Report and
the BCG Study). The building blocks are described generally as the
core initiatives that need to be implemented prior to shortening the
settlement cycle. See SIA Business Case Report, supra note 21, at
18.
\147\ See, e.g., Press Release, SIA, SIA Board Endorses Program
to Modernize Clearing, Settlement Process for Securities (July 18,
2002) (statement from the SIA Board of Directors endorsing straight-
through processing); letter from Jeffrey C. Bernstein, Chairman, SIA
STP Steering Committee, Securities Industry Association (June 16,
2004) (``SIA Letter''). The comment letter is available at <a href="https://www.sec.gov/rules/concept/s71304.shtml">https://www.sec.gov/rules/concept/s71304.shtml</a>.
\148\ T+2 Proposing Release, supra note 30, at 69252.
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In its 2004 concept release seeking comment on methods to improve
the safety and operational efficiency of the National C&S System to
achieve straight-through processing,\149\ the Commission explored
whether to adopt its own rule or whether the SROs should amend their
existing rules to require the completion of the confirmation and
affirmation process on trade date.\150\ Many market participants
supported a Commission rule to mandate it, but believed that such
requirements should be implemented in phases to allow for the
development of certain processing improvements.\151\ Recommendations
for such improvements included: (i) Achieving 100% of trades as matched
or affirmed as soon as possible after execution on trade date; (ii)
achieving asynchronous (non-sequential) and electronic communication
between all trade parties, including notices of execution, allocations,
match status, confirmation status, and settlement instructions; (iii)
adoption of an industry standard electronic format for message
communication; and (iv) adoption of standards that allow manual
processing on an exception-only basis.\152\
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\149\ Exchange Act Release No. 49405 (Mar. 11, 2004), 69 FR
12922 (Mar. 18, 2004) (``Concept Release'').
\150\ Id.
\151\ See SIA Letter, supra note 147 (commenting on the Concept
Release); letter from Margaret R. Blake, Counsel to the Association,
Dan W. Schneider, Counsel to the Association, The Association of
Global Custodians (June 28, 2004) (commenting on the Concept
Release). Copies of the comment letters are available at <a href="https://www.sec.gov/rules/concept/s71304.shtml">https://www.sec.gov/rules/concept/s71304.shtml</a>.
\152\ See supra note 151.
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Since 2004, the industry has made significant progress in
developing new centralized systems and processes designed to automate
and streamline the institutional trade processing environment, both
from an operational and technological perspective.\153\ Market
participants also rely on a variety of ``local'' matching tools that
allow them to compare trade information received from another party
against their own trade information. Further, industry coordination has
facilitated improved communication between the parties to a trade using
standardized messaging protocols, such as FIX, and the SWIFT network.
When the Commission proposed to shorten the settlement cycle to T+2,
the Commission observed that the market has improved these
confirmation, affirmation, and matching processes through the use of
CMSPs.\154\
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\153\ For example, DTCC ITP Matching has introduced centralized
matching with its CTM platform that continues to automate the trade
confirmation process and includes connectivity via FIX and the SWIFT
network to custodian banks for the purposes of settlement
notification. See DTCC, Why Is DTCC Migrating US Trade Flows to CTM
and Terminating OASYS?, <a href="https://dtcclearning.com/content/1439-cat-institutional-trade-processing/cat-ctm/us-trade-flows/us-trades-on-ctm-faqs/us-trades-on-ctm-general-faqs/7353-why-is-dtcc-migrating-us-trade-flows-to-ctm-and-terminating-oasys.html">https://dtcclearning.com/content/1439-cat-institutional-trade-processing/cat-ctm/us-trade-flows/us-trades-on-ctm-faqs/us-trades-on-ctm-general-faqs/7353-why-is-dtcc-migrating-us-trade-flows-to-ctm-and-terminating-oasys.html</a>.
\154\ T+2 Proposing Release, supra note 30, at 69258.

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[[Page 10453]]

A 2010 white paper issued by Omgeo (now DTCC ITP) also described
same-day affirmation as ``a prerequisite'' of shortening the settlement
cycle because of its impact on the rate of settlement fails and on
operational risk.\155\ According to data published in 2011 regarding
affirmation rates achieved through the use of one CMSP, on average, 45%
of trades were affirmed on trade date, 90% were affirmed by the end of
T+1, and 92% were affirmed by noon on T+2.\156\ Existing processes for
matching institutional trades rely on a number of manual elements, and
currently only about 68% of trades achieve affirmation by 12:00
midnight at the end of trade date.\157\ While these rates have improved
over time, the improvements have been incremental and, in the
Commission's view, insufficient. Failing to affirm by the end of trade
date increases the likelihood that errors or exceptions will not be
resolved in time for settlement. The sooner the parties have affirmed
the trade information for their transaction, the lower the likelihood
of a settlement fail because the parties will have more time to
identify and resolve any potential errors. The T+1 Report highlights
the need for achieving affirmation on trade date and encourages that on
trade date allocations be completed by 7:00 p.m. ET and affirmations by
9:00 p.m. ET to facilitate shortening of the standard settlement cycle
to T+1.\158\ As discussed below, the Commission proposes Rule 15c6-2 to
require completion of institutional trade allocations, confirmations,
and affirmations by the end of trade date.
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\155\ Omgeo, Mitigating Operational Risk and Increasing
Settlement Efficiency through Same Day Affirmation (SDA), at 2, 7
(Oct. 2010) (``Omgeo Study'').
\156\ DTCC, Proposal to Launch a New Cost-Benefit Analysis on
Shortening the Settlement Cycle, at 7 (Dec. 2011), <a href="https://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-cost-benefit-analysis-on-shortening-the-settlement-cycle.aspx">https://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-cost-benefit-analysis-on-shortening-the-settlement-cycle.aspx</a>.
\157\ DTCC ITP Forum Remarks, supra note 58.
\158\ See T+1 Report, supra note 18, at 13.
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1. Proposed Rule 15c6-2 Under the Exchange Act
The Commission proposes Rule 15c6-2 to require that, where parties
have agreed to engage in an allocation, confirmation, or affirmation
process, a broker or dealer would be prohibited from effecting or
entering into a contract for the purchase or sale of a security (other
than an exempted security, a government security, a municipal security,
commercial paper, bankers' acceptances, or commercial bills) on behalf
of a customer unless such broker or dealer has entered into a written
agreement with the customer that requires the allocation, confirmation,
affirmation, or any combination thereof, be completed as soon as
technologically practicable and no later than the end of the day on
trade date in such form as may be necessary to achieve settlement in
compliance with Rule 15c6-1(a). As explained in further detail below,
the Commission believes that implementing a T+1 standard settlement
cycle, as well as any potential further shortening beyond T+1, would
require a significant improvement in the current rates of same-day
affirmations to ensure timely settlement in a T+1 environment. In this
way, the Commission also believes that proposed Rule 15c6-2 should
facilitate timely settlement as a general matter, regardless of
shortening the settlement cycle, because it will accelerate the
completion of affirmations on trade date. Because broker-dealers and
their institutional customers will review and reconcile trade data
earlier in the settlement process, the Commission believes that same-
day affirmation can improve the accuracy and efficiency of
institutional trade processing. In particular, conducting these
activities earlier in the process, and as soon as technologically
practicable, will allow more time to resolve errors, an important
consideration as shorter settlement cycles compress the available time
to resolve errors.
Proposed Rule 15c6-2 applies requirements to a broker-dealer's
contractual arrangements with its institutional customers because the
Commission preliminarily believes that broker-dealers are best
positioned to ensure (through their contractual arrangements) that
their customers, including those acting on behalf of their customers,
will perform the required allocation, confirmation, and affirmation
functions on the appropriate timeframe and as soon as technologically
practicable. Because broker-dealers are the party to a transaction most
likely to have access to a clearing agency, the broker-dealer is also
the party best positioned to ensure the timely settlement of
institutional trades, and as such, should be able to ensure via its
customer agreements that institutional customers or their agents also
comport their operations to facilitate same-day affirmation.\159\ In
addition, requiring broker-dealers to enter into written agreements
that require the allocation, confirmation, and affirmation processes be
completed as soon as technologically practicable and no later than the
end of trade date may help increase the use of standardized terms and
trade details across market participants, which may enable the parties
to reduce their reliance on manual processes in favor of more automated
methods.
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\159\ In an effort to also encourage investment advisers to
ensure that their own operations and procedures for institutional
trade processing can accommodate T+1 or shorter settlement
timeframes, in Part III.C the Commission proposes an amendment to an
existing recordkeeping rule for registered investment advisers.
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As proposed, Rule 15c6-2 does not define the terms ``allocation,''
``confirmation,'' or ``affirmation.'' As discussed in Part II.B.3.c),
trade allocation refers to the process by which an institutional
investor (often an investment adviser) allocates a large trade among
various client accounts or determines how to apportion securities
trades ordered contemporaneously on behalf of multiple funds or non-
fund clients.\160\ The terms ``confirmation'' and ``affirmation'' refer
to the transmission of messages among broker-dealers, institutional
investors, and custodian banks to confirm the terms of a trade executed
for an institutional investor, a process necessary to ensure the
accuracy of the trade being settled. Broker-dealers transmit trade
confirmations to their customers to verify trade information, and
customers provide an affirmation in response to affirm the confirmation
so that the transaction can be prepared for settlement. The Commission
believes that these terms are widely used and generally understood by
market participants who engage in institutional trade processing.
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\160\ For example, DTCC ITP's OASYS platform is a trade
allocation and acceptance service that communicates trade and
allocation details between investment managers and broker-dealers.
DTCC ITP is in the process of decommissioning OASYS and replacing it
with CTM, an enriched automated system that offers central matching
workflow (including allocation) settlement notification and ALERT
services. ALERT provides a database for the maintenance and
communication of account and SSI information so that investment
managers, broker-dealers, custodian banks and prime brokers can
share account information electronically. See DTCC, ALERT, <a href="https://www.dtcc.com/institutional-trade-processing/itp/alert">https://www.dtcc.com/institutional-trade-processing/itp/alert</a>.
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Proposed Rule 15c6-2 uses the term ``confirmation'' to refer to the
operational message that includes trade details provided by the broker-
dealer to the customer to verify trade information so that a trade can
be prepared for settlement on the timeline established in Rule 15c6-
1(a).\161\ In contrast,

[[Page 10454]]

confirmations required by Exchange Act Rule 10b-10 concern a series of
disclosures that broker-dealers are required to provide in writing to
customers at or before completion of a transaction.\162\ While some
matching or electronic trade confirmation services may use the
operational confirmation process described in proposed Rule 15c6-2 to
produce a confirmation for purposes of compliance with Rule 10b-10,
others may not. Accordingly, the term ``confirmation'' as used in
proposed Rule 15c6-2 should be understood to refer to the institutional
trade processing message or verification and not the disclosure
required under Rule 10b-10. Below the Commission solicits comment as to
whether these terms are sufficiently understood to facilitate
compliance with the proposed rule.
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\161\ Confirmations will include the following trade
information: transaction type, security (including an identifier and
description), account ID and title, trade date, settlement date,
quantity, price, commission (if any), taxes and fees (if any),
accrued interest (if appropriate) and the net amount of money to be
paid or received at settlement. A confirmation will also include the
broker name and whether the broker-dealer was acting as principal or
agent on the trade.
\162\ 17 CFR 240.10b-10. For more information on confirmations
required under Rule 10b-10, see Part III.E.3.
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Proposed Rule 15c6-2 would also require broker-dealers to enter
into a written agreement with a ``customer'' that has agreed to engage
in the allocation, confirmation, or affirmation process. For purposes
of the rule, the term ``customer'' includes any person or agent of such
person who opens a brokerage account at a broker-dealer to effect an
institutional trade or purchases or sells a security for which the
broker-dealer receives or will receive compensation. In the
institutional trade processing environment, the Commission understands
that at times, a broker-dealer may accept instructions or trades from
entities acting on behalf of the institutional investor. The term, as
used in proposed Rule 15c6-2, is intended to cover both the
institutional investor and any and all agents acting on its behalf. As
stated below, the Commission is seeking further comment on whether the
obligations imposed by proposed Rule 15c6-2 should explicitly state
that contracts of such agents acting on behalf of the broker-dealer's
customer are subject to the proposed rule or whether the proposed rule
text as written is sufficiently clear.
Finally, the written agreement executed pursuant to proposed Rule
15c6-1 requires that the allocation, confirmation, and affirmation
processes, or any combination thereof, related to these trades be
completed as soon as technologically practicable and no later than the
end of the day on trade date in such form as may be necessary to
achieve settlement in compliance with Rule 15c6-1(a).\163\ The
Commission is proposing ``end of the day on trade date'' rather than
requiring a specific time earlier than end of day to allow firms to
maximize their internal processes to meet the appropriate cutoff times
and other deadlines, as soon as technologically practicable. The
Commission expects that different sectors of the market, different
types of asset classes or market participants, and different
operational processes (e.g., cross-border transactions) may have
varying processing deadlines, some of which may need to be earlier than
end of the day to facilitate trade processing. For example, as noted
above, the T+1 Report contemplates moving the ``ITP Affirmation
Cutoff'' from 11:30 a.m. on the day after trade date to 9:00 p.m. on
trade date to facilitate a T+1 settlement cycle.\164\ Accordingly, the
parties would be able under the rule to require earlier timeframes when
appropriate. Moreover, the SROs could consider whether and how to use
earlier than end of day deadlines, such as those recommended by the T+1
Report.
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\163\ For purposes of this rule, ``end of the day'' has the same
meaning as it is generally understood: no later than 11:59:59 p.m.,
Eastern Standard Time or Eastern Daylight Saving Time, whichever is
currently in effect on trade date.
\164\ See T+1 Report, supra note 18, at 39.
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2. Basis for Requiring Affirmation No Later Than the End of Trade Date
As discussed in Part II.B, aspects of post-trade processing for
institutional transactions remain inefficient and costly for several
reasons. Although same-day affirmation is considered a best practice
for institutional trade processing, adoption is not universal across
market participants or even across all trades entered by a given
participant.\165\ Market participants continue to use hundreds of
``local'' matching platforms,\166\ and rely on inconsistent SSI data
independently maintained by broker-dealers, investment managers,
custodians, sub-custodians, and agents on separate databases.\167\ As
discussed in Part II.B, processing institutional trades requires
managing the back and forth involved with transmitting and reconciling
trade information among the parties, functionally matching and re-
matching with the counterparties to the trade, as well as custodians
and agents, to facilitate settlement. It also requires market
participants to engage in allocation processes, such as allocation-
level cancellations and corrections, some of which are still processed
manually.\168\ This collection of redundant, often manual steps and the
use of uncoordinated (i.e., not standardized) databases can lead to
delays, exceptions processing, settlement fails, wasted resources, and
economic losses. While the proposed rule does not require any changes
to manual processes or existing uses of databases and exceptions
processing, the Commission preliminarily believes that market
participants may pursue improvements to these existing processes to
manage their obligations under Rule 15c6-2, if adopted.
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\165\ While the concept of completing these functions on trade
date has often been referred to a ``same-day'' affirmation, the
Commission is proposing instead to use the term ``trade date'' in
the rule to be clear that the allocation, confirmation, and
affirmation process should be completed on the trade date.
\166\ Local matching platforms include, for example, the trade
reconciliation and inventory management tools that market
participants use to reconcile trade information. See DTCC, Embracing
Post-Trade Automation: Seven Ways the Sell-Side Will Benefit from
No-Touch Future (Nov. 2020) (``DTCC Embracing Post-Trade
Automation''), <a href="https://www.dtcc.com/itp-hub/dist/downloads/broker_supplement_11.11.20z.pdf">https://www.dtcc.com/itp-hub/dist/downloads/broker_supplement_11.11.20z.pdf</a>. Examples of such service providers
include Bloomberg, Corfinancial, Lightspeed, and SS&C Technologies.
\167\ For more information about the use and impact of ``local''
matching platforms, see supra note 166. A 2020 DTCC survey of global
broker-dealers found that certain institutional post-trade
processing costs could be reduced by 20-25% through leveraging post-
trade automation, which would in turn eliminate redundancies and
manual processing and mitigate operational risks. See DTCC, DTCC
Identifies Seven Areas of Broker Cost Savings as a Result of Greater
Post-Trade Automation (Nov. 18, 2020), <a href="https://www.dtcc.com/news/2020/november/18/dtcc-identifies-seven-areas-of-broker-cost-savings-as-a-result-of-greater-post-trade-automation">https://www.dtcc.com/news/2020/november/18/dtcc-identifies-seven-areas-of-broker-cost-savings-as-a-result-of-greater-post-trade-automation</a>; see also DTCC
Embracing Post-Trade Automation, supra note 166.
\168\ See DTCC, Re-Imagining Post-Trade: No-Touch Processing
Within Reach, at 4 (Sept. 2019), <a href="https://www.dtcc.com/-/media/Files/Downloads/Institutional-Trade-Processing/ITP-Story/DTCC-Re-Imagining-Post-Trade.pdf">https://www.dtcc.com/-/media/Files/Downloads/Institutional-Trade-Processing/ITP-Story/DTCC-Re-Imagining-Post-Trade.pdf</a>.
---------------------------------------------------------------------------

Although proposed Rule 15c6-2 does not require settlement of the
transaction on trade date, the Commission preliminarily believes the
proposed rule helps ensure that institutional trades will timely settle
on T+1 because, by promoting the completion of these processes as soon
as technologically practicable and no later than the end of trade date,
it reduces the likelihood of exceptions or other errors with respect to
trade information that can prevent a transaction from settling. In the
Commission's view, because the rule requires that allocation,
confirmation, and affirmation be completed as soon as technologically
practicable and no later than the end of trade date, it can also
facilitate shortening the settlement cycle, both with respect to T+1
and potentially for shortening beyond T+1 in the future. By elevating
an industry best practice to a Commission

[[Page 10455]]

requirement, the Commission believes that proposed Rule 15c6-2 can
significantly improve the current 68% rate of affirmations on trade
date by standardizing the obligations of broker-dealers and their
institutional customers with respect to the timing of achieving
affirmations. This, in turn, could facilitate increases in operational
efficiency necessary to support an orderly transition to shorter
settlement cycles. The Commission also anticipates that SROs will
consider whether to propose rule changes to incorporate the
requirements in new Rule 15c6-2 if adopted,\169\ and proposed Rule
15c6-2 would likely encourage further development of automated and
standardized practices among market participants to facilitate
settlement of institutional trades.
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\169\ For example, Financial Industry Regulatory Authority
(``FINRA'') Rule 11860 does not require that a broker-dealer send a
confirmation of trade details until the day after trade date, which
can delay the affirmation process until T+1 (in a T+2 environment)
and reduce the time available to manage trade exceptions. FINRA, as
well as DTC and DTCC ITP Matching may propose new rules, procedures
or services to further enhance the ability of market participants to
settle in shorter timeframes.
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3. Request for Comment
The Commission solicits comment on the particular questions set
forth below, and encourages commenters to submit any relevant data or
analysis in connection with their answers.
28. Would proposed Rule 15c6-2 accomplish the stated objectives?
Would the proposed rule encourage further standardization and
automation in the processing of institutional trades? What effect will
the proposed rule have on improving efficiencies and reducing errors
and fails? Please provide a basis or explanation for your position.
29. Proposed Rule 15c6-2 uses such terms as ``allocation,''
``confirmation,'' and ``affirmation.'' As discussed above, the
Commission believes that these are well understood concepts. Should
these terms be defined for purposes of the proposed rule? If so, please
explain which terms need further definition and why? Please include the
recommended elements of such definitions.
30. Similarly, does the term ``end of the day on trade date'' need
to be defined? If so, please provide information as to why and include
recommended elements of such a definition.
31. Proposed Rule 15c6-2 uses the term ``customer.'' Given that
often agents of the customer are providing allocation, confirmation or
affirmation instructions or communications to the broker-dealer on
behalf of the broker-dealer's customer, does the rule as written
address this scenario? Does the use of the term ``customer''
sufficiently incorporate any and all agents of the customer? Is the
Commission's understanding of these terms consistent with the
industry's use of these terms? Why or why not? Should the term
``customer'' be defined for purposes of Rule 15c6-2? If so, please
include the recommended elements of such a definition.
32. What effect would proposed Rule 15c6-2 have on the relationship
between a broker-dealer and its customer?
33. Do the perceived benefits of proposed Rule 15c6-2 or the
benefits of trade date confirmation and affirmation accrue to all
participants--brokers-dealers (including prime brokers), institutional
customers, custodians, or matching utilities? If not, why? Do they
accrue differently based on size of the entity? Please explain.
34. Does proposed Rule 15c6-2 introduce any new risks? If so,
please describe such risks and whether they can be quantified. Can
these risks be mitigated? If so, how?
35. If proposed Rule 15c6-2 is adopted by the Commission, what
should be the necessary time frame for implementing such a rule? What
factors should the Commission consider in determining the
implementation date?
36. Would proposed Rule 15c6-2 affect cross-border trading or
cross-border trade processing? If so, how would it do so?
37. As proposed, Rule 15c6-2 excludes exempted securities,
government securities, municipal securities, commercial paper, bankers'
acceptances, and commercial bills. For those asset classes that do not
already settle on T+1, should the proposed rule apply to any or all of
these excluded securities? Please discuss the reasons why any or all of
these securities should or should not be excluded from Rule 15c6-2.
38. What if anything should the Commission do to further facilitate
the use of standardized industry protocols and standardization of
reference data by broker-dealers and institutional customers, including
investment advisers and custodians? What if anything should the
Commission do to further facilitate efficiency in processing
institutional trades and reducing errors and fails?
39. Would the adoption of further Commission rules be necessary to
require or further facilitate the objective of ensuring that
institutional trades are operationally capable of settling on a T+1 or
shorter timeframe?
40. The T+1 Report indicates that market participants may cancel
and rebill an affirmed trade because of a monetary change to the trade
and states that these instances occur frequently in a T+2 settlement
cycle.\170\ Why are trades affirmed when monetary amounts may not
agree? Should it be permissible to cancel an affirmed trade? Why or why
not?
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\170\ See T+1 Report, supra note 18, at 26.
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41. Are investment advisers matching their records about a trade
against the received confirmation prior to affirming? If not, why not?
If so, what criteria are used to determine that a `match' has occurred?
Which fields must match? Should financial values, such as unit price,
total commission, accrued interest for fixed-income trades and net
amount to be paid or received be matched? What steps does or should the
adviser take to ensure the affirming party, if not the adviser, is
matching adviser-provided trade information against the broker or
dealer confirmation before affirming trades?
42. When matching trade information on a given transaction between
the investment adviser and the broker-dealer, the parties to the
transaction may view differences, such as differences in amounts, as
minor and therefore within a satisfactory ``tolerance'' range to match,
whereas in other cases a party may be unwilling to match if any
discrepancy in trade information exists. These differences in trade
information may be perceived to be small in absolute terms or relative
to the size of the trade. Parties also may set ``tolerance'' thresholds
in their systems to ignore some differences, such as trade information
where an element differs by ``one penny'' or less than 0.01% of the
value being compared. To what extent do advisers apply such tolerances
when matching trades? What fields are subject to such tolerance
thresholds and what size tolerances are generally used? For example, if
the net money for settlement as calculated by the adviser differs from
the net money for settlement as calculated by the broker or dealer as
part of the confirmation by a dollar, is that trade a ``match''? And if
so, which value is used for settlement, the amount on the confirmation
or the adviser's records? Does the other party then adjust its records
to the amount used for settlement? Are investors ever harmed by this
approach? Is there general consensus on tolerances? Are there industry
groups that define guidelines or best practices on the use of
tolerances and, if so, do they all agree?
43. Should advisers be expected to affirm trades or should this
always be a

[[Page 10456]]

function of the broker-dealer or bank custodian holding the account
where securities will be delivered? How should the adviser proceed if
the deadline to notify a broker-dealer or bank custodian is approaching
yet a confirmation has not been received? If advisers delay
notification of the custodian until after affirming the trade in such a
scenario, will this create delays in recalling loaned securities or
securities that may have been pledged as collateral?
44. In some cases, bank custodians may receive a copy of a
confirmation (a ``duplicate confirmation'') as an early alert of
potential trade activity. Are these duplicate confirmations relied upon
to affirm the trade information? Do custodians ever settle trades based
solely on information received in a duplicate confirmation? Should this
practice be permitted? Please explain why or why not. Do custodians use
these duplicate confirmations as an early alert to call a security back
from being on loan or to identify a security that may be pledged as
collateral?
45. Elements of FINRA Rule 11860 could be used to help facilitate
compliance with proposed Rule 15c6-2, if adopted. Is proposed Rule
15c6-2 consistent with the approach to RVP/DVP settlement set forth in
FINRA Rule 11860 and, more generally, the Uniform Practice Code
(``UPC'') set forth in the FINRA Rule 11000 series? \171\ If not,
please explain.
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\171\ The UPC is a series of FINRA rules, interpretations and
explanations designed to make uniform, where practicable, custom,
practice, usage, and trading technique in the investment banking and
securities business, particularly with regard to operational and
settlement issues. These can include such matters as trade terms,
deliveries, payments, dividends, rights, interest, reclamations,
exchange of confirmations, stamp taxes, claims, assignments, powers
of substitution, computation of interest and basis prices, due-
bills, transfer fees, ``when, as and if issued'' trading, ``when, as
and if distributed'' trading, marking to the market, and close-out
procedures. The UPC was created so that the transaction of day-to-
day business by members may be simplified and facilitated; that
business disputes and misunderstandings, which arise from
uncertainty and lack of uniformity in such matters, may be
eliminated; and that the mechanisms of a free and open market may be
improved and impediments thereto removed. See, e.g., Exchange Act
Release No. 91789 (May 7, 2021), 86 FR 26084, 26088 (May 12, 2021).
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46. Should proposed Rule 15c6-2 have separate requirements and
deadlines for each step in the allocation, affirmation, and
confirmation processes? And if so, should deadlines be relative to a
prior dependent activity? For example, should allocations be
communicated within an hour of, or no later than three hours after,
receipt of the notice of execution and affirmations be communicated
within an hour of, or no later than three hours after, receipt of the
confirmation? Or is it acceptable to require end of day for all
activity? What changes would be recommended for a T+0 environment?

C. Proposed Amendment to Recordkeeping Rule for Investment Advisers

Under proposed Rule 15c6-2, a broker-dealer would be prohibited
from entering into a contract on behalf of a customer for the purchase
or sale of certain securities \172\ unless it has entered into a
written agreement with the customer that requires the allocation,
confirmation, affirmation, or any combination thereof to be completed
no later than the end of the day on trade date in such form as may be
necessary to achieve settlement in compliance with proposed Rule 15c6-
1(a).\173\ Investment advisers, as customers of a broker or dealer, may
become a party to such an agreement. Proposed Rule 15c6-2 does not
specify which party would be obligated to provide the necessary
allocation, confirmation, and affirmation, although the Commission
understands that, generally, the customer (here, the investment
adviser) customarily provides the broker or dealer with instructions
directing how to allocate the securities to be purchased or sold, and
the broker or dealer confirms the trade details, which the adviser, in
turn, affirms.
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\172\ As discussed in Part III.B.1, proposed Rule 15c6-2 would
not apply to an exempted security, government security, municipal
security, commercial paper, bankers' acceptances, or commercial
bills.
\173\ See supra Part III.B (discussing the proposed new
requirement for ``same-day affirmation'').
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Based on staff experience, the Commission believes that advisers
generally have recordkeeping processes that include keeping originals
and/or electronic copies of such allocations, confirmations, and
affirmations. However, in some instances this may not be the case. Some
activities, such as affirmation, may be performed on the adviser's
behalf by a third party, such as middle-office outsourcing provider, a
custodian or a prime broker, and advisers may not maintain these
records.\174\ In addition, based on staff experience, the Commission
also believes that some advisers do not maintain these records or
maintain them only in paper. Accordingly, the Commission is proposing
an amendment to the investment adviser recordkeeping rule designed to
ensure that registered investment advisers that are parties to
contracts under proposed Rule 15c6-2 retain records of confirmations
received, and keep records of the allocations and affirmations sent to
a broker or dealer.\175\ Specifically, the Commission proposes to amend
Rule 204-2 under the Investment Advisers Act of 1940 (the ``Advisers
Act'') by adding a requirement in paragraph (a)(7)(iii) that advisers
maintain records of each confirmation received, and any allocation and
each affirmation sent, with a date and time stamp for each allocation
(if applicable) and affirmation that indicates when the allocation or
affirmation was sent to the broker or dealer if the adviser is a party
to a contract under proposed Rule 15c6-2. As with other records
required under Rule 204-2(a)(7), advisers would be required to keep
originals of confirmations, and copies of allocations and affirmations,
described in the proposed rule, but may maintain records electronically
if they satisfy certain conditions.\176\
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\174\ See DTCC ITP Forum Remarks, supra note 58 (stating that up
to 70% of institutional trades are affirmed by custodians).
\175\ See proposed Rule 204-2(a)(7)(iii), infra Part 0.
\176\ See Rule 204-2(a)(7) (requiring making and keeping
originals of all written communications received and copies of all
written communications sent by an investment adviser relating to the
records listed thereunder). But see Rule 204-2(g) (permitting
advisers to maintain records electronically if they establish and
maintain required procedures).
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While the Commission believes that retaining records of all of
these documents is important, we understand that the timing of
communicating allocations to the broker or dealer is a critical pre-
requisite to ensure that confirmations can be issued in a timely
manner, and affirmation is the final step necessary for an adviser to
acknowledge agreement on the terms of the trade or alert the broker or
dealer of a discrepancy. The proposed amendment to Rule 204-2 therefore
would require advisers to time and date stamp records of any allocation
and each affirmation. The proposed time and date stamp for these
communications would occur when they were ``sent to the broker or
dealer.'' To meet this proposed requirement, an adviser generally
should time and date stamp records of each allocation (if applicable)
and affirmation to the nearest minute.
Based on staff experience, the Commission believes many advisers
send allocations and affirmations electronically to brokers or dealers,
and many records are already consistently date and time stamped to the
nearest minute using either a local time zone or a centralized time
zone, such as

[[Page 10457]]

coordinated universal time, or ``UTC.'' \177\ The Commission believes
that date and time stamping these records to the nearest minute would
evidence that the advisers have met their obligations to timely achieve
a matched trade.
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\177\ See U.S. Naval Observatory, Systems of Time, <a href="https://www.cnmoc.usff.navy.mil/Organization/United-States-Naval-Observatory/Precise-Time-Department/The-USNO-Master-Clock/Definitions-of-Systems-of-Time/">https://www.cnmoc.usff.navy.mil/Organization/United-States-Naval-Observatory/Precise-Time-Department/The-USNO-Master-Clock/Definitions-of-Systems-of-Time/</a>. The Commission understands that
some firms have systems that date and time stamp records with
greater precision. Certainly as volumes increase and the timeframes
to complete operational activities, such as settlement, shorten, the
Commission believes from a practical perspective that many firms
will find value in having increased precision in the time stamps on
trade-related activities.
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The Commission recognizes that requiring these records and adding
time and date stamps to records would, however, add additional costs
and burdens for those advisers that do not currently maintain these
records or do not use electronic systems to send allocations and
affirmations to brokers or dealers or maintain confirmations. For
example, some advisers may incur costs to update their processes to
accommodate these records. For advisers that use third parties to
perform or communicate allocations or affirmations, they also could
incur costs associated with directing the third parties to
electronically copy the adviser on any allocations or
affirmations.\178\
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\178\ For additional discussion on this and other initial costs
and burdens of the proposed amendment to Rule 204-2, see infra Part
V.C.5.b).
---------------------------------------------------------------------------

We believe that requiring these records and requiring a time and
date stamp of all affirmations and any applicable allocations (but not
confirmations) would help advisers establish that they have timely met
contractual obligations under proposed Rule 15c6-2 and ultimately help
ensure that trades involving such advisers would timely settle on T+1.
In addition, we believe the proposed requirement would aid the
Commission staff in preparing for examinations of investment advisers
and assessing adviser compliance.
1. Request for Comment
We request comment on the proposed amendment to the investment
adviser recordkeeping rule:
47. Should the Commission amend Rule 204-2 to specifically
correspond to the proposed Rule 15c6-2 and require advisers that are
parties to contracts under proposed Rule 15c6-2 to retain records of
the documents described in that rule?
48. Should the Commission require that these records be retained
under a different provision of the recordkeeping rule? For example,
should the Commission instead amend Rule 204-2(a)(3) (requiring
advisers to retain ``memorandums'' of orders) to explicitly include
these records? If so, the determination of whether to maintain the
relevant allocations, confirmation, and affirmations would depend on if
they were part of an ``order.'' Given that certain orders may never be
executed, and that certain executed trades potentially might not have
orders associated with them, would including the requirement in the
recordkeeping requirement related to ``orders'' result in advisers not
retaining some allocations, confirmations, and affirmations?
Separately, would maintaining the proposed records under Rule 204-
2(a)(3) create confusion about whether advisers need to maintain
originals and/or duplicate copies of relevant allocations,
confirmations, and affirmations, when the specified record is the
memorandum? Or, do advisers currently maintain records of allocations,
confirmations, and affirmations under this provision to document the
orders they describe in the memoranda?
49. Should the Commission require time and date stamping of the
allocations and affirmations to the nearest minute, as proposed? Would
advisers need to make system changes to accomplish such time and date
stamping of allocations and affirmations? Is there an approach other
than time and date stamping that would allow Commission staff to verify
that an adviser has completed the steps necessary to facilitate
settlement in a timely manner? Should the Commission require time and
date stamping of just the affirmation or just the allocation? Is the
requirement to time and date stamp the allocation or affirmation when
it is ``sent to the broker or dealer'' clear? Should we require the
time and date stamp at a different point in time? If so, when?
50. Should we require time and date stamping of receipt of the
confirmation as well? What additional costs or burdens would such time
stamping incur?
51. Under what circumstances do third parties, such as prime
brokers or custodians, affirm trades instead of advisers, and in those
instances do the third parties send copies of the affirmations to the
advisers? Does this happen for all accounts an adviser manages or only
some accounts and why?
52. If advisers are matching adviser records to confirmations, some
trades will not match. In other instances, an adviser may receive a
confirmation for a trade that the adviser does not ``know,'' such as
when an adviser did not execute a trade or when the adviser's trading
desk has not notified the adviser's middle or back office. In such
cases, do advisers proactively notify the broker-dealer that the trade
does not match (often referred to as ``don't know'' or sending a
``DK'')? Should the proposed rule be more specific about recordkeeping
when an adviser does not agree with or does not ``know'' a trade for
which a confirmation was received? How often do trades not match? How
frequently do advisers receive confirmations they do not ``know?''

D. New Requirement for CMSPs To Facilitate Straight-Through Processing

Because of the rising volume of transactions for which CMSPs
provide matching and other services,\179\ CMSPs have become
increasingly critical to the functioning of the securities market.\180\
As described in Part II.B.1, CMSPs facilitate communications among a
broker-dealer, an institutional investor or its investment adviser, and
the institutional investor's custodian to reach agreement on the
details of a securities transaction, enabling the trade allocation,
confirmation, affirmation, and/or the matching of institutional trades.
Once the trade details have been agreed among the parties or matched by
the CMSP, the CMSP can then facilitate settlement of the transaction.
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\179\ See, e.g., Press Release, DTCC, Over 1,800 Firms Agree to
Leverage U.S. Institutional Trade Matching Capabilities in DTCC's
CTM (Oct. 12, 2021), <a href="https://www.dtcc.com/news/2021/october/12/over-1800-firms-agree-to-leverage-dtccs-ctm">https://www.dtcc.com/news/2021/october/12/over-1800-firms-agree-to-leverage-dtccs-ctm</a>; DTCC's Trade Processing
Suite Traffics One Billion Trades, Traders Magazine (Feb. 13, 2017),
<a href="https://www.tradersmagazine.com/departments/clearing/dtccs-trade-processing-suite-traffics-one-billion-trades/">https://www.tradersmagazine.com/departments/clearing/dtccs-trade-processing-suite-traffics-one-billion-trades/</a>.
\180\ CMSPs are clearing agencies as defined in Section 3(a)(23)
of the Exchange Act, and as such, are required to register as a
clearing agency or obtain an exemption from registration. The
Commission has currently exempted three CMSPs from the registration
requirement. The Commission also has adopted rules that apply to
both registered and exempt clearing agencies, including CMSPs
operating pursuant to an exemption from registration. See, e.g.,
Regulation Systems Compliance and Integrity, Exchange Act Release
No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014) (``Regulation
SCI Adopting Release'').
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While the introduction of new technologies and streamlined
operations such as those offered by CMSPs have improved the efficiency
of post-trade processing over time, the Commission believes more should
be done to facilitate further improvements, particularly with respect
to the processing of institutional trades. Currently, some SRO rules
require the use of CMSP services for institutional

[[Page 10458]]

trade processing.\181\ The Commission has previously explained that a
shortened settlement cycle may lead to expanded use of CMSPs, as well
as increased focus on enhancing the services and operations of the
CMSPs themselves.\182\ In particular, the Commission believes that
eliminating the use of tools that encourage or require manual
processing, alongside the continued development and implementation of
more efficient automated systems in the institutional trade processing
environment, is essential to reducing risk and costs to ensure the
prompt and accurate clearance and settlement of securities
transactions.\183\ Below is a discussion of the elements of the
proposed rule.
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\181\ See e.g., FINRA Rule 11860 (requiring a broker-dealer to
use a registered clearing agency, a CMSP, or a qualified vendor to
complete delivery-versus-payment transactions with their customers).
\182\ T+2 Proposing Release, supra note 30, at 69258.
\183\ See T+1 Report, supra note 18, at 9.
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1. Policies and Procedures To Facilitate Straight-Through Processing
Proposed Rule 17Ad-27 would require a CMSP to establish, implement,
maintain and enforce policies and procedures to facilitate straight-
through processing for transactions involving broker-dealers and their
customers.
The term ``straight-through processing'' generally refers to
processes that allow for the automation of the entire trade process
from trade execution through settlement without manual
intervention.\184\ In the context of institutional trade processing
under this rule, straight-through processing occurs when a market
participant or its agent uses the facilities of a CMSP to enter trade
details and completes the trade allocation, confirmation, affirmation,
and/or matching processes without manual intervention. Under the rule,
a CMSP facilitates straight-through processing when its policies and
procedures enable its users to minimize or eliminate, to the greatest
extent that is technologically practicable, the need for manual input
of trade details or manual intervention to resolve errors and
exceptions that can prevent settlement of the trade. A CMSP also
facilitates straight-through processing when it enables, to the
greatest extent that is technologically practicable, the transmission
of messages regarding errors, exceptions, and settlement status
information among the parties to a trade and their settlement agents.
Under the rule, policies and procedures generally should establish a
holistic framework for facilitating straight-through processing, as
just described, on a CMSP-wide basis. CMSPs should also generally
consider and address how the services, systems, and any operational
requirements a CMSP applies to its users ensure that the CMSP's
policies and procedures advance the goal of achieving straight-through
processing for trades processed through it. For example, a CMSP's
policies and procedures generally should explain the criteria that the
CMSP applies to determine when a ``match'' has been achieved, including
any relevant tolerances that it or its users might apply to achieve a
match, and the extent to which such criteria should be standardized or
customized. With respect to the use of electronic trade confirmation
services, which often rely on legacy technologies, a CMSP's policies
and procedures generally should establish a timeline for transitioning
users away from manual processes to matching services that reduce a
party's reliance on the manual, often sequential, entry and
reconciliation of trade information.
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\184\ See SIA Business Case Report, supra note 21, at app. E
(defining ``straight-through processing'').
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The Commission believes that increasing the efficiency of using a
CMSP can reduce the risk that a trade will fail to settle, as well as
the costs associated with correcting errors that result from the use of
manual processes and data entry, thereby improving the overall
efficiency of the National C&S System. CMSPs have become increasingly
connected to a wide variety of market participants in the U.S.,\185\
increasing the need to reduce risks and inefficiencies that may result
from use of a CMSP's services. Because the proposed rule would preclude
reliance on service offerings at CMSPs that rely on manual processing,
the Commission preliminarily believes the proposed rule will better
position CMSPs to provide services that not only reduce risk generally
but also help facilitate an orderly transition to a T+1 standard
settlement cycle,\186\ as well as potential further shortening of the
settlement cycle in the future.
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\185\ See, e.g., DTCC, About DTCC Institutional Trade
Processing, <a href="https://www.dtcc.com/about/businesses-and-subsidiaries/dtccitp">https://www.dtcc.com/about/businesses-and-subsidiaries/dtccitp</a> (noting that DTCC ITP, parent to DTCC ITP Matching, serves
6,000 financial services firms in 52 countries).
\186\ As discussed in Part III.B.2, the T+1 Report contemplates
moving the ``ITP Affirmation Cutoff'' from 11:30 a.m. on the day
after trade date to 9:00 p.m. on trade date. See supra note 164.
Proposed Rule 17Ad-27 is consistent with, and should help promote,
efforts to shorten the processing time for institutional trades in a
T+1 environment.
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The Commission has taken a ``policies and procedures'' approach in
developing the proposed rule because it preliminarily believes such an
approach will remain effective over time as CMSPs consider and offer
new technologies and operations to improve the settlement of
institutional trades. The Commission also believes that improving the
CMSP's systems to facilitate straight-through processing can help
market participants consider additional ways to make their own systems
more efficient. In addition, a ``policies and procedures'' approach can
help ensure that a CMSP considers in a holistic fashion how the
obligations it applies to its users will advance the implementation of
methodologies, operational capabilities, systems, or services that
support straight-through processing.
In considering how to develop policies and procedures that
facilitate straight-through processing, a CMSP generally should
consider the full range of operations and services related to the
processing of institutional trades for settlement. For example, as
noted above, the CMSP often acts as a communication platform for
different market participants to transmit messages regarding errors,
exceptions, and settlement status information among the parties to a
trade and their settlement agents. Under proposed Rule 17Ad-27, a CMSP
also generally should consider the extent to which its policies,
procedures, and processes restrict, inhibit, or delay the ability of
users to transmit such messages to any agent that assists said users in
preparing or submitting the trade for settlement. In the Commission's
view, the CMSP generally should consider having policies and procedures
that promote the onward transmission of messages among the relevant
parties to a transaction to ensure timely settlement and reduce the
potential for errors. Similarly, in structuring its process for
submitting transactions for settlement, the CMSP generally should
consider ensuring that its systems, operational requirements, and the
other choices it makes in designing its services enable and incentivize
prompt and accurate settlement without manual intervention.
As explained above, the Commission recognizes it may not be
technologically or operationally practicable to eliminate all manual
processes immediately. Indeed, the Commission believes that in certain
circumstances, the parties to a trade may need to engage in manual
interventions to ensure the accuracy of trade information and minimize
operational or other risks that may prevent settlement, and proposed
Rule 17Ad-27 does not require CMSPs to remove a manual processes if
doing so would clearly undermine the prompt and accurate clearance and
settlement of

[[Page 10459]]

securities transactions. However, pursuant to the policies and
procedures approach described above, where a CMSP continues to permit
manual reconciliation or other types of human intervention, it
generally should explain in its policies and procedures why those
manual processes remain necessary as part of its systems and processes.
In addition, the CMSP should consider developing processes that
ultimately would eliminate the underlying issues that drive the use of
manual processes in order to facilitate a more automated approach.
2. Annual Report on Straight-Through Processing
Proposed Rule 17Ad-27 also would require a CMSP to submit every
twelve months to the Commission a report that describes the following:
(a) The CMSP's current policies and procedures for facilitating
straight-through processing; (b) its progress in facilitating straight-
through processing during the twelve month period covered by the
report; and (c) the steps the CMSP intends to take to facilitate and
promote straight-through processing during the twelve month period that
follows the period covered by the report. The Commission preliminarily
intends to make this annual report publicly available on its website to
enable the public to review and analyze progress on achieving straight-
through processing. A CMSP would submit this report to the Commission
using the Commission's Electronic Data Gathering, Analysis, and
Retrieval system (``EDGAR''), and would tag the information in the
report using the structured (i.e., machine-readable) Inline eXtensible
Business Reporting Language (``XBRL'').\187\
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\187\ This requirement would be implemented by including a
cross-reference to Regulation S-T in proposed Rule 17Ad-27, and by
revising Regulation S-T to include the proposed straight-through
processing reports. Pursuant to Rule 301 of Regulation S-T, the
EDGAR Filer Manual is incorporated by reference into the
Commission's rules. In conjunction with the EDGAR Filer Manual,
Regulation S-T governs the electronic submission of documents filed
with the Commission.
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The Commission believes that the proposed reporting requirement
would enable the Commission to evaluate actions taken by the CMSP to
ensure compliance with the rule and to help fulfill the Commission's
responsibility for oversight of the National C&S System, both as it
relates to the CMSP specifically and the National C&S System more
generally. The proposed requirement would also inform the Commission
and the public, particularly the direct and indirect users of the CMSP,
as to the progress being made each year to advance implementation of
straight-through processing with respect to the allocation,
confirmation, affirmation, and matching of institutional trades, the
communication of messages among the parties to the transactions, and
the availability of service offerings that reduce or eliminate the need
for manual processing. In particular, the Commission preliminarily
believes that a CMSP generally should include in its report a summary
of key settlement data relevant to its straight-through processing
objective. Such data could include the rates of allocation,
confirmation, affirmation, and/or matching achieved via straight-
through processing. In describing its progress in facilitating
straight-through processing, the CMSP could also identify common or
best practices that facilitate straight-through processing. In
addition, after the CMSP has submitted its initial report, in
subsequent years a CMSP generally should include in its report an
assessment of how its progress in facilitating straight-through
processing during the twelve month period covered by the report under
paragraph (b) compares to the steps it intended to take to facilitate
straight-through processing under paragraph (c) from the prior year's
report.
Because this information would be useful to the industry and the
general public in considering potential ways to increase the
availability of straight-through processing, the Commission believes
that the report should be made public. The Commission preliminarily
believes that the proposed requirement generally would not require the
disclosure of proprietary information, trade secrets, or personally
identifiable information. To the extent that an annual report includes
confidential commercial or financial information, a CMSP could request
confidential treatment of those specific portions of the report.\188\
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\188\ See 17 CFR 240.24b-2.
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As the National C&S System continues to evolve, the Commission
believes that CMSPs will continue to play an increasingly critical role
in efforts to facilitate the prompt and accurate clearance and
settlement of securities transactions and to eliminate inefficient and
costly procedures that effect the settlement of securities
transactions, particularly institutional transactions. Furthermore,
because of the CMSP's role in submitting matched or confirmed and
affirmed trades for overnight positioning of settling transactions, the
Commission believes that a CMSP generally should evaluate how it
participates in that process and consider how it can support
improvements to the timing and manner of settlement obligations (e.g.,
intraday) to increase efficiency in the National C&S System.
Requiring CMSPs to file the reports on EDGAR would provide the
Commission and the public with a centralized, publicly accessible
electronic database for the reports, facilitating the use of the
reported data on straight-through processing. Moreover, requiring
Inline XBRL tagging of the reported disclosures, which would
specifically comprise an Inline XBRL block text tag for each of the
three required narrative disclosures as well as detail tags for
individual data points, would make the disclosures more easily
available and accessible to and reusable by market participants and the
Commission for retrieval, aggregation, and comparison across different
CMSPs and time periods, as compared to an unstructured PDF, HTML, or
ASCII format requirement for the reports.\189\ Detail tags could be
helpful to the extent the reports disclose individual data points,
including the rates of allocation, confirmation, affirmation, and/or
matching achieved via straight-through processing.
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\189\ See Release No. 33-10514 (June 28, 2018), 83 FR 40846,
40847 (Aug. 16, 2018). Inline XBRL allows filers to embed XBRL data
directly into an HTML document, eliminating the need to tag a copy
of the information in a separate XBRL exhibit. Id. at 40851.
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The Commission is proposing a 12-month requirement in the rule
because the Commission preliminarily believes that a yearly review and
report on progress with respect to straight-through processing is the
appropriate timescale on which the CMSP should consider, develop, and
implement iterative improvements over time, while also ensuring that
progress towards straight-through processing is expeditious.
Specifically, a 12-month period would provide the CMSP with a
sufficient look-back period to complete a meaningful review on an
organization-wide basis and time to test and implement material changes
to technologies and procedures. An annual reporting requirement, as
opposed to a monthly or semi-annual requirement, should help ensure
that the information provided to the Commission reflects meaningful and
substantive progress by the CMSP, as opposed to focusing the
Commission's attention on smaller, technical changes in services and
policies that would be less relevant to improving the Commission's
understanding of the overall progress towards achieving straight-
through processing by the CMSP. The

[[Page 10460]]

Commission believes that the reporting requirement should continue
indefinitely because changes in technology will require ongoing review
and consideration of how such changes might impact policies and
procedures to facilitate straight-through processing.
3. Request for Comment
The Commission requests comment on all aspects of proposed Rule
17Ad-27, as well as the following specific topics:
53. Is the proposed policies and procedures approach appropriate
and sufficient to achieve the proposed rule's stated objectives? Why or
why not? Would more specific or directive requirements, such as those
discussed above be more effective at facilitating straight-through
processing than the proposed policies and procedures approach? Please
explain why or why not.
54. Is proposed Rule 17Ad-27 consistent with the approach to RVP/
DVP settlement set forth in FINRA Rule 11860 and, more generally, the
UPC set forth in the FINRA Rule 11000 series? \190\ If not, please
explain.
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\190\ See supra note 171 and accompanying text (describing the
UPC).
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55. Is the proposed use of the term ``straight-through processing''
clear and understandable? Why or why not? Should the Commission define
the term for purposes of the proposed rule? If so, please describe the
elements that the Commission should consider including in the
definition to make it clear and understandable.
56. Should the Commission require a CMSP to enable the users of its
service to complete the matching, confirmation, or affirmation of
securities transactions as soon as technologically practicable?
Alternatively, should the Commission impose a specific deadline on such
a requirement, such as requiring that these processes be completed
within a certain number of minutes or hours? Should the Commission
require specific deadlines, when using a CMSP, for completing each of
the allocation, confirmation, affirmation, or matching processes? Why
or why not? If the Commission were to impose a specific deadline, what
would be the appropriate deadline for each process--allocation,
confirmation, affirmation, and matching?
57. Should the Commission require a CMSP to forward or otherwise
submit a transaction for settlement as soon as technologically and
operationally practicable, as if using fully automated systems? Should
the Commission specify to whom a CMSP should forward such information
to facilitate straight-through processing? To what extent do CMSPs not
forward such trade information as soon as technologically practicable?
Are certain parties excluded? What are the reasons preventing such
forwarding of trade information?
58. Is it appropriate for proposed Rule 17Ad-27 to require a CMSP
to retire any electronic trade confirmation services, where the users
of a CMSP may transmit sequential messages back and forth to achieve
allocation, confirmation, and affirmation of a transaction? If so,
should the rule be modified to accommodate electronic trade
confirmation services offered by CMSPs? Why or why not?
59. More generally, are electronic trade confirmation services
consistent with the concept of ``straight-through processing?'' Why or
why not? Please explain.
60. With regard to the proposed requirement for a CMSP to provide
an annual report, does the proposed rule include the appropriate
aspects or level of detail that should be included in such a report?
Why or why not? Should the Commission require that the public report be
issued in a machine-readable data language? Why or why not?
61. Are the time periods (i.e., every 12 months) described in the
rule concerning the submission and content of the annual report
sufficiently clear? If not, please explain.
62. Should a CMSP be required to tag its annual report using Inline
XBRL? Why or why not? Rather than requiring block text tags for the
narrative disclosures as well as detail tags of individual data points
(including those nested within the narrative disclosures), should we
only require block text tags for the narrative disclosures? Should the
annual report be tagged in an open structured data language other than
Inline XBRL? If so, what open structured data language should be used
and why?
63. Is EDGAR an appropriate submission mechanism for the annual
report? Why or why not? Should the Commission use an alternative
submission mechanism, such as the Electronic Form Filing System
(``EFFS'')? An EFFS submission requirement would not be compatible with
a requirement to use Inline XBRL or other open structured data language
for the annual report.
64. Should the Commission make public the annual report required to
be submitted to the Commission under the proposed rule? Why or why not?
Would making the report public alter the type or detail of information
included by the CMSP in the report or in its policies and procedures?
If so, why? If the public availability of any information required
under the proposed rule would raise issues related to confidentiality
or the proprietary nature of the CMSP's operations, please explain.
65. CMSPs generally allow their users to define the criteria that
will constitute a ``match,'' and the users may set different tolerances
under those criteria depending on their business strategy. Should a
CMSPs be required to disclose in the annual report its matching
criteria? Should a CMSP be required to disclose data regarding
confirmations, affirmations, and/or matches in its annual report, such
as the percentage of successful confirmations, affirmations, and/or
matches achieved on trade date, or the average time users take to
achieve confirmation, affirmation, and/or a match from trade
submission? Should a CMSP be required to disclose any other data to
help facilitate straight-through processing, such as average time to
submit a trade to a registered clearing agency for settlement, or the
average number of messages that a CMSP transmits among the parties to a
trade before the trade is submitted to a registered clearing agency for
settlement? Please explain.
66. More generally, should CMSPs be required to make their policies
and procedures for straight-through processing public? Please explain
why or why not?
67. The Commission has issued exemptive orders for three CMSPs,
pursuant to which each CMSP is subject to a series of operational and
interoperability conditions.\191\ Should the Commission amend the
respective exemptive orders to add conditions similar to the proposed
requirements in Rule 17Ad-27 instead of adopting this proposal? Why or
why not?
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\191\ See supra note 32 (providing citations to the exemptive
orders for DTCC ITP Matching, BSTP, and SS&C).
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68. In the Matching Release, the Commission stated that, even
though matching services fall within the Exchange Act definition of
``clearing agency,'' it was of the view that an entity that limits its
clearing agen

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