Rule2023-03566
Shortening the Securities Transaction Settlement Cycle
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 6, 2023
Effective
May 5, 2023
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting rule amendments 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"). In addition, the Commission is adopting new rules related to the processing of institutional trades by broker-dealers and certain clearing agencies. The Commission is also amending certain recordkeeping requirements applicable to registered investment advisers.
Full Text
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<title>Federal Register, Volume 88 Issue 43 (Monday, March 6, 2023)</title>
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[Federal Register Volume 88, Number 43 (Monday, March 6, 2023)]
[Rules and Regulations]
[Pages 13872-13954]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-03566]
[[Page 13871]]
Vol. 88
Monday,
No. 43
March 6, 2023
Part II
Securities and Exchange Commission
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17 CFR Parts 232, 240, and 275
Shortening the Securities Transaction Settlement Cycle; Final Rule
Federal Register / Vol. 88, No. 43 / Monday, March 6, 2023 / Rules
and Regulations
[[Page 13872]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 232, 240, and 275
[Release Nos. 34-96930, IA-6239; File No. S7-05-22]
RIN 3235-AN02
Shortening the Securities Transaction Settlement Cycle
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting rule amendments 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''). In
addition, the Commission is adopting new rules related to the
processing of institutional trades by broker-dealers and certain
clearing agencies. The Commission is also amending certain
recordkeeping requirements applicable to registered investment
advisers.
DATES:
Effective date: May 5, 2023.
Compliance date: The applicable compliance dates are discussed in
Part VII of this release.
FOR FURTHER INFORMATION CONTACT: Matthew Lee, Assistant Director, Susan
Petersen, Special Counsel, Andrew Shanbrom, Special Counsel, Jesse
Capelle, Special Counsel, and Mary Ann Callahan, Senior Policy Advisor,
at (202) 551-5710, Office of Clearance and Settlement, Division of
Trading and Markets; Jennifer Porter, Senior Special Counsel, Amy
Miller, Senior Counsel, and Holly H. Miller, Senior Financial Analyst,
at (202) 551-6787, Division of Investment Management; U.S. Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: First, the Commission is amending paragraph
(a) of 17 CFR 240.15c6-1 (``Rule 15c6-1'') under the Securities
Exchange Act of 1934 (``Exchange Act'') to shorten the standard
settlement cycle for most broker-dealer transactions from T+2 to T+1,
as discussed in Part II.C.1.\1\ The Commission is also amending
paragraph (b) of Rule 15c6-1 to exclude security-based swaps from the
requirements under paragraph (a) of the rule, and amending paragraph
(c) of Rule 15c6-1 to shorten the standard settlement cycle for firm
commitment offerings priced after 4:30 p.m. Eastern Time (``ET'') from
four business days after the trade date (``T+4'') to T+2, as discussed
in Parts II.C.3 and II.C.4 respectively.
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\1\ See Part II.A (discussing the types of securities
transactions that are currently covered by Rule 15c6-1(a)) and Part
II.C.1 (discussing the types of securities transactions that will be
covered by the rule following the rule changes being adopted in this
release).
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Second, to promote the completion of allocations, confirmations,
and affirmations by the end of trade date for transactions between
broker-dealers and their institutional customers, the Commission is
adopting a new rule under the Exchange Act at 17 CFR 240.15c6-2 (``Rule
15c6-2''). Rule 15c6-2 requires a broker-dealer to either enter into
written agreements as specified in the rule or establish, maintain, and
enforce written policies and procedures reasonably designed to address
certain objectives related to completing allocations, confirmations,
and affirmations as soon as technologically practicable and no later
than the end of trade date. The specific requirements of the rule are
discussed in Part III.C.
Third, the Commission is amending 17 CFR 275.204-2 (``Rule 204-2'')
under the Investment Advisers Act of 1940 (``Advisers Act'') to require
registered investment advisers to make and keep records of the
allocations, confirmations, and affirmations for securities
transactions subject to the requirements of Rule 15c6-2(a), as
discussed in Part IV.C.
Fourth, the Commission is adopting a new rule under the Exchange
Act at 17 CFR 240.17Ad-27 (``Rule 17Ad-27'') to require clearing
agencies that provide a central matching service (``CMSPs'') to
establish, implement, maintain, and enforce policies and procedures
reasonably designed to facilitate straight-through processing (``STP'')
and to file an annual report regarding progress with respect to STP.
The specific requirements of the rule are discussed in Part V.C.
Fifth, the Commission is amending 17 CFR part 232 (``Regulation S-
T'') to require that a CMSP submit the annual report required by Rule
17Ad-27 using the Commission's Electronic Data Gathering, Analysis, and
Retrieval system (``EDGAR'') and tag the information in the report
using the structured (i.e., machine-readable) Inline eXtensible
Business Reporting Language (``XBRL''). The Commission discusses this
requirement in Part V.C.4.
Finally, the Commission solicited and received comments regarding
the effect of shortening the settlement cycle on other Commission
requirements, including 17 CFR 242.200 (``Regulation SHO''), 17 CFR
240.10b-10 (``Rule 10b-10''), the financial responsibility rules
applicable to broker-dealers, requirements related to prospectus
delivery and ``access versus delivery,'' and the impact on self-
regulatory organization (``SRO'') rules and operations. These comments
are discussed in Part VI.
Table of Contents
I. Introduction
II. Exchange Act Rule 15c6-1--Standard Settlement Cycle
A. Proposed Amendments to Rule 15c6-1
B. Comments
1. Length of Standard Settlement Cycle and Exchange Act Rule
15c6-1(a)
2. Securities Excluded From Requirements Under Exchange Act Rule
15c6-1
3. Proposed Deletion of Rule 15c6-1(c)
4. Retention of Exchange Act Rule 15c6-1(d)
5. Exemptive Orders Under Exchange Act Rule 15c6-1(b)
C. Final Rule and Discussion
1. Amendment to Exchange Act Rule 15c6-1(a)
2. Response to Comments Relating to T+0 Settlement
3. Amendments to Exchange Act Rule 15c6-1(b)
4. Amendment to Exchange Act Rule 15c6-1(c)
5. Retention of Existing Exchange Act Rule 15c6-1(d) Unchanged
6. Exemptive Orders Under Exchange Act Rule 15c6-1(b)
III. Exchange Act Rule 15c6-2--Same-Day Affirmation
A. Proposed Rule 15c6-2
B. Comments
1. Existing Commercial Incentives for Timely Trade Allocations,
Confirmations, and Affirmations
2. Linking Settlement Instructions to Affirmation
3. Definitions of Certain Terms
4. Use of Third Parties To Achieve Same-Day Affirmation
5. Challenges Associated With Requiring Written Agreements in
Support of Increasing Same-Day Affirmations
6. End-of-Day Trading, Transactions Across Multiple Time Zones,
and Variations in Local Holidays as Obstacles to Same-Day
Affirmation
7. Alternative Rule Recommended in SIFMA August Letter
C. Final Rule and Discussion
1. Modifications to Requirement for Written Agreements
2. New Policies and Procedures Alternative to Written Agreements
Requirement
3. Elements of Reasonably Designed Policies and Procedures
4. Use of Defined Terms Other Than ``Customer''
5. No Requirement To Link Settlement Instructions to
Affirmations
IV. Advisers Act Rule 204-2--Investment Adviser Recordkeeping
A. Proposed Amendments to Rule 204-2
B. Comments
C. Final Rule and Discussion
V. Exchange Act Rule 17Ad-27--Requirement for CMSPs To Facilitate
Straight-Through Processing
[[Page 13873]]
A. Proposed Rule 17Ad-27
B. Comment Letters From DTCC ITP
1. Amend Policies and Procedures Requirement To Add ``Reasonably
Designed'' to the Current Text
2. Use of ETCs and Manual Processes
3. Amend the Annual Reporting Requirement to Better Achieve
Transparency
4. Support Further Standardization of Industry Protocols and
Reference Data
C. Final Rule and Discussion
1. New Rule 17Ad-27(a)--Requirement for Policies and Procedures
2. New Rule 17Ad-27(b)--Annual Report
3. New Rule 17Ad-27(c)--Timing of Filing Annual Report
4. New Rule 17Ad-27(d)--Filing Annual Report in EDGAR and
Confidentiality Issues
VI. Impact on Certain Commission Rules, Guidance, and SRO Rules
A. Regulation SHO
B. Delivery of Rule 10b-10 Confirmations and Prospectuses
C. Other Prospectus Delivery Matters
D. Financial Responsibility Rules for Broker-Dealers
E. Changes to SRO Rules and Operations
VII. Compliance Dates
A. Exchange Act Rule 15c6-1
B. Exchange Act Rule 15c6-1(b): Exclusion for Security-Based
Swaps
C. Exchange Act Rule 15c6-2 and Advisers Act Rule 204-2
D. Exchange Act Rule 17Ad-27
VIII. Economic Analysis
A. Background
B. Baseline
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 216
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. Consideration of Reasonable Alternatives
1. Delete 15c6-1(c) to T+2
2. Adopt 17Ad-27 To Require Certain Outcomes
3. Adopt Rule Changes to Rule 15c6-2 as Recommended by SIFMA's
August Comment Letter
4. Replace the Written Agreement Requirement in Proposed Rule
15c6-2 With a Principles-Based Approach
5. Select a Later Implementation Date for Adoption of the Rule
IX. Paperwork Reduction Act
A. Advisers Act Rule 204-2
B. Exchange Act Rule 17Ad-27
C. Exchange Act Rule 15c6-2
1. Summary and Proposed Use of Information
2. Respondents
3. Total Initial and Annual Reporting Burdens
4. Collection of Information Is Mandatory
5. Confidentiality
6. Retention Period
X. Regulatory Flexibility Act
A. Exchange Act Rules 15c6-1 and 15c6-2
1. Need for the Rules
2. Summary of Significant Issues Raised by Public Comment
3. Description and Estimate of Small Entities
4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
5. Description of Commission Actions To Minimize Effect on Small
Entities
B. Amendment to Advisers Act Rule 204-2
1. Need for the Rule Amendment
2. Summary of Significant Issues Raised by Public Comment
3. Description and Estimate of Small Entities
4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
5. Description of Commission Actions To Minimize Effect on Small
Entities
C. Exchange Act Rule 17Ad-27
XI. Other Matters
Statutory Authority
I. Introduction
Promoting the timely, orderly, and efficient settlement of
securities transactions has been a longstanding Commission
objective.\2\ To advance this objective, the Commission first took
steps in 1993 to establish a standard requiring the settlement of most
securities transactions within three business days of trade date
(``T+3''), shortening the prevailing practice at the time of settling
securities transactions within five business days of trade date
(``T+5'').\3\ The Commission has on multiple occasions discussed how
shortening the settlement cycle can protect investors, reduce risk in
the financial system, and increase operational efficiency in the
securities market.\4\ In 2017, the Commission shortened the standard
settlement cycle from T+3 to T+2.\5\ Now, in part informed by episodes
in 2020 and 2021 of increased market volatility that highlighted
potential vulnerabilities in the U.S. securities market,\6\ the
Commission believes that shortening the settlement cycle from T+2 to
T+1 can promote investor protection, reduce risk, and increase
operational and capital efficiency.\7\
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\2\ See Exchange Act Release No. 94196, Investment Advisers Act
Release No. 5957 (Feb. 9, 2022), 87 FR 10436 (Feb. 24, 2022) (``T+1
Proposing Release'').
\3\ See Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR
52891 (Oct. 13, 1993) (``T+3 Adopting Release'').
\4\ See, e.g., Exchange Act Release No. 31904 (Feb. 23, 1993) 58
FR 11806 (Mar. 1, 1993) (``T+3 Proposing Release''); T+3 Adopting
Release, supra note 3; Exchange Act Release No. 78962 (Sept. 28,
2016), 81 FR 69240 (Oct. 5, 2016) (``T+2 Proposing Release'');
Exchange Act Release No. 80295 (Mar. 22, 2017), 82 FR 15564, 15601
(Mar. 29, 2017) (``T+2 Adopting Release''); T+1 Proposing Release,
supra note 2.
\5\ See T+2 Adopting Release, supra note 4.
\6\ See T+1 Proposing Release, supra note 2, at 10444 n.61.
\7\ As stated in the T+1 Proposing Release, the Investor
Advisory Committee recommended in 2015 that the Commission pursue
T+1 (rather than T+2), noting that retail investors would
significantly benefit from a T+1 standard settlement cycle. See id.
at 10439 & nn.28-29.
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As discussed in the T+1 Proposing Release,\8\ the Commission
believes that substantial progress has been made toward identifying the
technological and operational changes that are necessary to establish a
T+1 settlement cycle, including the industry-level changes that would
be necessary to transition from a T+2 standard to a T+1 standard
settlement cycle. The Commission also discussed how additional
regulatory steps were necessary to improve the processing of
institutional transactions, advancing two other longstanding objectives
shared by the Commission and the securities industry: the completion of
trade allocations, confirmations, and affirmations on trade date (an
objective often referred to as ``same-day affirmation'') and the
straight-through processing of securities transactions.\9\ Accordingly,
the Commission proposed a combination of rule amendments and new rules
to shorten the standard settlement cycle to T+1, establish new
requirements for broker-dealers and investment advisers designed to
advance the same-day affirmation objective, and to establish
requirements for CMSPs to promote straight-through processing.\10\
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\8\ See id. at 10447.
\9\ As discussed in the T+1 Proposing Release, the Commission
uses ``straight-through processing,'' or ``STP,'' to refer generally
to processes that allow for the automation of the entire trade
process from trade execution through settlement without manual
intervention. See id. at 10458; see also infra note 323 and
accompanying text.
\10\ See T+1 Proposing Release, supra note 2, at 10436.
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The Commission received many comments in response to the T+1
Proposing Release.\11\ Having considered the comments received, the
Commission is adopting the proposed new rules and rule amendments with
modifications, as discussed further below. Specifically, in Part II,
the Commission discusses the comments received regarding the proposed
amendments to Rule 15c6-1 under the Exchange Act, and
[[Page 13874]]
modifications made in response to the comments. In Part III, the
Commission discusses the comments received regarding proposed Rule
15c6-2 under the Exchange Act, and modifications made in response to
the comments. In Part IV, the Commission discusses the comments
received regarding the proposed amendment to Rule 204-2 under the
Advisers Act, and modifications made in response to the comments. In
Part V, the Commission discusses the comments received regarding
proposed Rule 17Ad-27 under the Exchange Act, and modifications made in
response to the comments. In Part VI, the Commission discusses the
comments received regarding the effect of shortening the settlement
cycle on other Commission requirements, including Regulation SHO, Rule
10b-10 under the Exchange Act, the financial responsibility rules
applicable to broker-dealers, requirements related to prospectus
delivery and ``access versus delivery,'' and the impact on SRO rules
and operations.
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\11\ Copies of all comment letters received by the Commission
are available at <a href="https://www.sec.gov/comments/s7-05-22/s70522.htm">https://www.sec.gov/comments/s7-05-22/s70522.htm</a>.
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II. Exchange Act Rule 15c6-1--Standard Settlement Cycle
A. Proposed Amendments to Rule 15c6-1
In the T+1 Proposing Release, the Commission proposed to amend Rule
15c6-1(a) to prohibit broker-dealers 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.\12\ The
proposed amendment to Rule 15c6-1(a) would shorten the length of the
standard settlement cycle for securities transactions covered by the
existing rule from T+2 to T+1.\13\
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\12\ See T+1 Proposing Release, supra note 2, at 10447.
\13\ As explained in the T+1 Proposing Release, existing 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. See id. at 10446. The definition of
the term ``security'' in section 3(a)(10) of the Exchange Act
covers, among others, equities, corporate bonds, unit investment
trusts (``UITs''), mutual funds, exchange-traded funds (``ETFs''),
American depository receipts (``ADRs''), security-based swaps, and
options. See id. at 10446 n.83. Application of Rule 15c6-1(a)
extends to the purchase and sale of securities issued by investment
companies (including mutual funds), private-label mortgage-backed
securities, and limited partnership interests that are listed on an
exchange. See id. at 10446 nn.84-85.
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In addition to the proposed amendment to paragraph (a) of Rule
15c6-1, the Commission proposed to delete paragraph (c) of the
rule,\14\ which would, in conjunction with the proposed amendment to
paragraph (a), establish 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.
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\14\ See id. at 10448-49.
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In addition to proposing to delete paragraph (c) of Rule 15c6-1,
the Commission proposed conforming technical amendments to paragraphs
(a), (b), and (d) of the rule. Specifically, the Commission proposed to
delete all references to paragraph (c) of Rule 15c6-1 that currently
appear in paragraphs (a), (b), and (d) of the rule.\15\
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\15\ See id. at 10449.
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B. Comments
1. Length of Standard Settlement Cycle and Exchange Act Rule 15c6-1(a)
In response to the T+1 Proposing Release, the Commission received
numerous comment letters supporting a shorter settlement cycle for
securities transactions.\16\ Many of these comment letters supported
shortening the standard settlement cycle to T+1.\17\ Several comment
letters that supported the Commission's proposal to shorten the
settlement cycle to T+1 also supported shortening the settlement cycle
to ``T+0'' or instantaneous settlement.\18\ Other comment letters
[[Page 13875]]
were silent as to the Commission's proposal to shorten the settlement
cycle to T+1, but expressed the view that a T+0 settlement cycle should
be implemented either immediately or as soon as possible.\19\
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\16\ See, e.g., letters from Jaime N. Calaf (Feb. 9, 2022)
(``Calaf Letter''); James Kelley (Feb. 9, 2022) (``Kelley Letter'');
Kyle (Feb. 9, 2022) (``Kyle 1 Letter''); Curtis Robinson (Feb. 9,
2022) (``Robinson 1 Letter''); Ryan, Business Owner (Feb. 9, 2022)
(``Ryan 1 Letter''); L. Martin Stewart (Feb. 9, 2022) (``Stewart
Letter''); Anthony LaBree (Feb. 10, 2022) (``LaBree Letter'');
Nicolas Zach (Feb. 13, 2022) (``Zach Letter''); Richard Stauts (Feb.
14, 2022) (``Stauts Letter''); PressPage Entertainment Inc. (Feb.
15, 2022) (``PressPage Letter''); Peter Duggan, President,
Securities Transfer Association (Apr. 1, 2022), at 2 (``STA
Letter''); Kirsten Wegner, Chief Executive Officer, Modern Markets
Initiative (Apr. 4, 2022), at 1 (``MMI Letter''); Hope Jarkowski,
General Counsel, NYSE Group, Inc. (Apr. 6, 2022), at 1 (``NYSE
Letter''); Keith Evans, Executive Director, Canadian Capital Markets
Association (Apr. 9, 2022), at 1 (``CCMA April Letter''); Steven
Wager, Chair, Americas Focus Committee, Association of Global
Custodians (Apr. 11, 2022), at 3 (``AGC April Letter''); Stephen
Hall, Legal Director and Securities Specialist, and Jason Grimes,
Senior Counsel, Better Markets, Inc. (Apr. 11, 2022), at 1 (``Better
Markets Letter''); Paul Conn, President, Global Capital Markets, and
Claire Corney, Senior Managing Director, Regulatory & Market
Initiatives, Global Capital Markets, Computershare Limited (Apr. 11,
2022), at 1 (``Computershare Letter''); Birgitta Siegel, Esq.,
Adjunct Professor of Law, Cornell Law School Securities Law Clinic
(Apr. 11, 2022), at 1 (``Cornell Law Letter''); Murray Pozmanter,
Managing Director, Head of Clearing Agency Services & Global
Business Operations, The Depository Trust and Clearing Corporation
(Apr. 11, 2022), at 2 (``DTCC Letter''); Joanna Mallers, Secretary,
FIA Principal Traders Group (Apr. 11, 2022), at 1 (``FIA PTG
Letter''); Robert Adams, Chief Operations Officer, National
Financial Services LLC (Apr. 11, 2022), at 1 (``Fidelity Letter'');
Gail C. Bernstein, General Counsel, Investment Adviser Association
(Apr. 11, 2022), at 1 (``IAA April Letter''); Susan Olson, General
Counsel, and Joanne Kane, Chief Industry Operations Officer,
Investment Company Institute (Apr. 11, 2022), at 1 (``ICI Letter'');
Jack Rando, Managing Director, The Investment Industry Association
of Canada (Apr. 11, 2022), at 1 (``IIAC Letter''); Jennifer Han,
Executive Vice President, Chief Counsel & Head of Regulatory
Affairs, Managed Funds Association (Apr. 11, 2022), at 1 (``MFA
Letter''); Joseph Kamnik, Chief Regulatory Counsel, The Options
Clearing Corporation (Apr. 11, 2022), at 1 (``OCC Letter''); Fran
Garritt, Director, Securities Lending & Market Risk, and Mark
Whipple, Chairman, Committee on Securities Lending, Securities
Lending Council of the Risk Management Association (Apr. 11, 2022),
at 3 (``RMA Letter''); Joseph Barry, Senior Vice President and
Global Head of Regulatory, Industry and Government Affairs, State
Street Corporation (Apr. 11, 2022), at 3 (``State Street Letter'');
Robert McBey, Chief Executive Officer, Wilson-Davis & Co., Inc.
(Apr. 14, 2022), at 1 (``Wilson-Davis Letter''); Thomas M. Merritt,
Deputy General Counsel, Virtu Financial, Inc. (Apr. 11, 2022), at 1
(``Virtu Financial Letter''); Christopher A. Iacovella, Chief
Executive Officer, American Securities Association (Apr. 12, 2022),
at 1 (``ASA Letter''); Thomas Price, Managing Director, and Lindsey
Weber Keljo, Head--Asset Management Group, Securities Industry and
Financial Markets Association (Apr. 13, 2022), at 1-2 (``SIFMA April
Letter'').
\17\ See, e.g., AGC April Letter, supra note 16, at 3; ASA
Letter, supra note 16, at 1; letter from Jaiden Baker (Feb. 19,
2022) (``Baker Letter''); Better Markets Letter, supra note 16, at
1; CCMA April Letter, supra note 16, at 1; Computershare Letter,
supra note 16, at 1; Cornell Law Letter, supra note 16, at 2; DTCC
Letter, supra note 16, at 2; FIA PTG Letter, supra note 16, at 1;
Fidelity Letter, supra note 16, at 2; IAA April Letter, supra note
16, at 1; ICI Letter, supra note 16, at 1; IIAC Letter, supra
note16, at 1; Kyle 1 Letter, supra note 16, at 1; LaBree Letter,
supra note 16, at 1; MFA Letter, supra note 16, at 2; MMI Letter,
supra note 16, at 1; NYSE Letter, supra note 16, at 1; OCC Letter,
supra note 16, at 2; PressPage Letter, supra note 16, at 1; RMA
Letter, supra note 16, at 3; Robinson 1 Letter, supra note 16, at 1;
Ryan 1 Letter, supra note 16, at 1; SIFMA April Letter, supra note
16, at 3; STA Letter, supra note 16, at 2; State Street Letter,
supra note 16, at 3; Stauts Letter, supra note 16, at 1; Stewart
Letter, supra note 16, at 1; Wilson-Davis Letter, supra note 16, at
1; letter from Rebecca Womack (Feb. 18, 2022) (``Womack Letter'');
Virtu Financial Letter, supra note 16, at 3; Zach Letter, supra note
16, at 1.
\18\ See, e.g., Calaf Letter, supra note 16; letter from Degen
Mahdere (Feb. 17, 2022) (``Mahdere Letter''); letter from Adam
Rathbone (Feb. 17, 2022) (``Rathbone Letter''); letter from Hunter
Gage Seeton (Feb. 18, 2022) (``Seeton Letter''); letter from Sam
Oakes (Feb. 19, 2022) (``Oakes Letter''); letter from Matthew Risse
(Feb. 19, 2022) (``Risse Letter''); letter from Ryan Webster (Oct.
31, 2022) (``Webster Letter''). Several of the comment letters
referred to ``T+0'' without explaining that term. However, the T+1
Proposing Release defines T+0 as settlement no later than the end of
trade date. See T+1 Proposing Release, supra note 2, at 10436,
10438.
\19\ See, e.g., letter from Mark C. (Feb. 19, 2022) (``Mark C.
Letter''); letter from Saul Nevarez (Feb. 19, 2022) (``Nevarez
Letter''); letter from Clinton Lawler (Feb. 19, 2022) (``Lawler
Letter''); letter from Alex McKay (Feb. 19, 2022) (``McKay
Letter'').
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Commenters supporting the Commission's proposal to shorten the
standard settlement cycle to T+1 cited a number of benefits that a T+1
settlement cycle would deliver to market participants. For example,
comment letters supporting a move to T+1 stated that shortening the
settlement cycle to T+1 would result in reductions to existing levels
of risk to central counterparties (``CCPs'') and market participants
(including credit, market and liquidity risk),\20\ lower margin
requirements,\21\ improved capital liquidity,\22\ improvements to post-
trade processing and operational efficiency,\23\ increased financial
stability,\24\ and reduced systemic risk in the financial system.\25\
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\20\ See, e.g., DTCC Letter, supra note 16, at 2-3; Fidelity
Letter, supra note 16, at 2; IAA April Letter, supra note 16, at 1;
ICI Letter, supra note 16, at 1, 3; MFA Letter, supra note 16, at 1;
OCC Letter, supra note 16, at 2; RMA Letter, supra note 16, at 3;
SIFMA April Letter, supra note 16, at 2; State Street Letter, supra
note 16, at 4.
\21\ See, e.g., Cornell Law Letter, supra note 16, at 3; DTCC
Letter, supra note 16, at 2-3; Fidelity Letter, supra note 16, at 2;
MMI Letter, supra note 16, at 2; State Street Letter, supra note 16,
at 4.
\22\ See, e.g., DTCC Letter, supra note 16, at 2-3; MMI Letter,
supra note 16, at 2; State Street Letter, supra note 16, at 4.
\23\ See, e.g., Cornell Law Letter, supra note 16, at 3; DTCC
Letter, supra note 16, at 2-3; IAA April Letter, supra note 16, at
1; RMA Letter, supra note 16, at 3; State Street Letter, supra note
16, at 4.
\24\ See, e.g., ICI Letter, supra note 16, at 1; MMI Letter,
supra note 16, at 2.
\25\ See, e.g., Fidelity Letter, supra note 16, at 2; MFA
Letter, supra note 16, at 1; MMI Letter, supra note 16, at 2; RMA
Letter, supra note 16, at 3;
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In addition, several comment letters stated that shortening the
settlement cycle to T+1 would benefit retail investors.\26\ For
example, one commenter stated that retail investors would benefit from
a move to T+1 through increased certainty, safety, and security in the
financial system; access to the proceeds, or purchases, of their
securities transactions a day earlier; and aligning the settlement
cycles for ETF transactions (which now settle on T+2) with the
settlement cycle for mutual funds (which typically settle on T+1).\27\
Another commenter similarly stated that investors would benefit from
earlier access to the proceeds of their securities transactions if the
settlement cycle is shortened to T+1.\28\
---------------------------------------------------------------------------
\26\ See, e.g., Better Markets Letter, supra note 16, at 2-3;
Fidelity Letter, supra note 16, at 2; IIAC Letter, supra note 16, at
1; LaBree Letter, supra note 16, at 1; MMI Letter, supra note 16, at
2; Robinson 1 Letter, supra note 16, at 1; Ryan 1 Letter, supra note
16, at 1; Stauts Letter, supra note 16, at 1; letter from Tate
Winter (Feb. 17, 2022) (``Winter Letter'').
\27\ See Fidelity Letter, supra note 16, at 2; see also ICI
Letter, supra note 16, at 3 (stating that a T+1 settlement cycle
would enhance funds' cash and liquidity management; given that fund
shares typically settle on a T+1 basis, a shorter settlement cycle
would help align the settlement of a fund's portfolio securities and
the settlement of its shares).
\28\ See Cornell Law Letter, supra note 16, at 3 (``If [the
Commission's T+1 proposal] were adopted, buyers and sellers would
have access to their proceeds an entire day earlier relative to the
T+2 settlement cycle. If the public comments submitted to date are
any indication, this is of paramount concern to the lay
investor.'').
---------------------------------------------------------------------------
The Commission also received comment letters that raised concerns
regarding the Commission's proposal to shorten the standard settlement
cycle to T+1.\29\ These commenters, some of which were supportive of
shortening the settlement cycle as a general matter, raised concerns
about the prospective impact of mismatched settlement cycles across
global markets that would result if the settlement cycle in the U.S. is
shortened to T+1 without global coordination and harmonization of
settlement cycles.\30\ For example, a comment letter submitted by an
industry association representing the alternative investment industry
stated that the T+1 Proposing Release ``raises considerable risks for
asset managers with primary or significant exposure to markets that
will remain at T+2.'' \31\ The comment letter further stated that
``[i]n absence of further global coordination, the resulting market
misalignment from the move to T+1 poses a number of harmful unintended
consequences to these asset managers, their counterparties and overall
market health and stability.'' \32\ The commenter's letter references
specifically ``misalignment concerns'' relating to FX settlement
risk,\33\ international banking and coordination issues, and
collateral/liquidity risk.\34\
---------------------------------------------------------------------------
\29\ See, e.g., letters from Ji[rcaron][iacute] Kr[oacute]l,
Deputy CEO, Global Head of Government Affairs, Alternative
Investment Management Association (Apr. 11, 2022), at 2 (``AIMA
Letter'') (commending the Commission's intended efforts to reduce
risk in the U.S. settlement cycle and improve efficiency in post-
trade processing); Kristin Swenton Hochstein et al., International
Securities Association for Institutional Trade Communication (Apr.
8, 2022), at 2-7 (``ISITC Letter'') (not advocating for or against
shortening the U.S. settlement cycle to T+1, but identifying certain
challenges associated with moving to T+1); Scott Pintoff, General
Counsel, MarketAxess Holdings Inc. (Apr. 11, 2022), at 1
(``MarketAxess Letter'') (generally favoring a shortening of the
standard settlement cycle for most bond transactions from T+2 to
T+1); State Street Letter, supra note 16, at 4; Virtu Financial
Letter, supra note 16, at 2-3.
\30\ Several of the comment letters that raised concerns
regarding the Commission's proposal to shorten the settlement cycle
to T+1 also raised concerns regarding proposed Rule 15c6-2. Those
comments are discussed separately in Part III.B below.
\31\ AIMA Letter, supra note 29, at 2. The AIMA Letter also
cites to a letter AIMA submitted to Commission staff on October 27,
2021, which further details the concerns raised in the AIMA Letter.
AIMA's 2021 submission to Commission staff was resubmitted to the
Commission as an Annex to the AIMA Letter.
\32\ Id.
\33\ The comment letters that use the term ``FX'' do not define
the term, but ``FX'' is commonly used to refer to foreign currency
exchange. Market participants often rely on FX trades executed in
the ``spot'' markets in order to fund securities transactions in the
U.S. markets that settle in U.S. dollars, and the settlement cycle
for spot FX transactions is typically T+2. However, spot
transactions in certain FX pairs (e.g., U.S. dollars vs. Canadian
dollars) settle on T+1.
\34\ AIMA Letter, supra note 29, at 5-6. The commenter explained
its concerns relating to international banking and coordination
issues by stating that ``the rigid deadlines of banking systems pose
a significant risk, as do simple time zone or calendar differences
that otherwise can be accommodated by a T+2 settlement cycle.'' Id.
at 5. The commenter further stated that foreign banking deadlines
and cutoff times for transaction processing in related markets must
be carefully re-examined to ensure activity can be harmonized in an
accelerated U.S. settlement framework. Id.
---------------------------------------------------------------------------
With respect to FX settlement risk, the commenter stated that
accelerating the U.S. settlement cycle to T+1 raises the risk that
transaction funding dependent on FX ``may not occur on time.'' \35\ The
commenter further stated that alternative sources of funding for U.S.
trades on T+1 may therefore need to be in place, which may increase
costs and create allocation inefficiencies that may dissuade
participation in U.S. markets.\36\
---------------------------------------------------------------------------
\35\ Id. The commenter further stated that settlement of FX
transactions generally occurs on T+2, ``although the period of
irrevocability--between the unilateral cancellation deadline for the
sold currency and actual receipt of the bought currency--can extend
well beyond T+1.'' Id.
\36\ Id. The commenter further stated that ``unilateral
cancelation deadlines may need to be considered'' for FX
transactions. Id. The length of such deadlines may impact when an FX
transaction can be settled, in turn affecting the time it may take
to secure funding for a securities transaction. The T+1 Report also
states that such unilateral cancelation deadlines may need to be
considered, and discusses how these deadlines may impact asset
managers if the settlement cycle for securities transactions is
shortened to T+1. See T+1 Report, infra note 61, at 17. The term
``unilateral cancelation deadline'' generally refers to the point in
time after which a bank is no longer guaranteed that it can recall,
rescind or cancel (with certainty) a previously submitted payment
instruction. This deadline varies depending on the currency pair
being settled, correspondent payment system practices, and
operational, service and legal arrangements. See Bank for
International Settlements, Supervisory Guidance for Managing Risks
Associated with the Settlement of Foreign Exchange Transactions
(Feb. 2013), available at <a href="https://www.bis.org/publ/bcbs241.pdf">https://www.bis.org/publ/bcbs241.pdf</a>. See
infra notes 617-619 and accompanying text (further discussing the
anticipated economic effects resulting from mismatched settlement
cycles).
---------------------------------------------------------------------------
[[Page 13876]]
With respect to the commenter's concerns regarding collateral and
liquidity risks, the commenter stated that the above-described FX and
coordination issues threaten asset managers' ability to ensure funding
is available in time to settle their U.S. trades on T+1.\37\ According
to the commenter, uncertainty regarding collateral for settlement may
mean that foreign asset managers would need to redeem money market
funds to meet their financing needs, or forego transacting in U.S.
markets in order to comply with the accelerated settlement
requirements.\38\ Ultimately, the commenter stated, trade financing
issues will lead to both significantly lower trading volume and lower
overall liquidity, which pose a very real risk to overall market health
and stability.\39\
---------------------------------------------------------------------------
\37\ AIMA Letter, supra note 29, at 5.
\38\ Id.
\39\ Id.
---------------------------------------------------------------------------
Another commenter was concerned that there may not be sufficient
time for investment advisers to match foreign currency amounts to
settle all trades on T+1, citing various factors that would make it
costly and difficult for investment advisers to execute FX after the
U.S. market close.\40\ This commenter also stated that because FX
transactions largely settle on a T+2 basis, market participants that
seek to fund a cross-border securities transaction with the proceeds of
an FX transaction would be required to settle the securities
transaction before the proceeds of the FX transaction become available
and pre-fund these securities transactions, which would potentially
adversely impact client performance and increase operating and
settlement risk for advisers. The commenter said that while both
domestic and internationally based investment advisers would be
impacted by these issues, non-U.S.-based investment advisers would face
additional expenses because they would need to set up an FX trading and
settlement presence in the U.S., or add staff abroad to create,
execute, and settle FX transactions to meet a T+1 timeline.\41\
---------------------------------------------------------------------------
\40\ See IAA October Letter, infra note 222, at 3 (observing
that there are circumstances in which a U.S.-based FX trading desk
will switch over to its Asia-based FX trading desk upon the U.S.
market close to provide ongoing liquidity, but not on Friday
evenings, and certain asset owners and managers, including Sovereign
Wealth Funds, only trade from their country of domicile).
\41\ Id. at 4 (suggesting certain actions the Commission could
take to reduce disruption in FX markets, such as by (i) working with
other regulators and market participants to support the move to T+1
by, among other things, modifying the FX and equity trading day(s)
in the U.S., and (ii) ``allow[ing] for a mismatch of FX settlement
dates as a valid reason for T+2 settlement arrangements without it
breaching an investment adviser's best execution obligation'').
---------------------------------------------------------------------------
Another commenter that operates a broker-dealer and an electronic
trading platform for corporate bonds stated that it had ``serious
reservations regarding the impact the proposed amendments to Rule 15c6-
1(a) and Rule 15c6-2 will have on cross border trading unless, and
until, other global financial markets also shorten their settlement
cycle.'' \42\ Specifically, the commenter stated that if the U.S.
settlement cycle is shortened to T+1 while other major global financial
centers remain on a T+2 settlement cycle, ``there will be increased
operational cost and significant settlement risks associated with
multi-leg cross border transactions.'' \43\
---------------------------------------------------------------------------
\42\ MarketAxess Letter, supra note 29, at 1.
\43\ Id. at 2.
---------------------------------------------------------------------------
The commenter further stated that it expects mismatched settlement
cycles would result in increased financing costs associated with
transactions in which a U.S. market participant is selling to a cross-
border participant because ``we will be forced to receive (and pay for)
a securities position on T+1 for the U.S. leg, but generally be unable
to onward deliver the position on the foreign leg until T+2.'' \44\ In
this scenario, the commenter stated that it would need to fund the
position until the next settlement cycle.\45\
---------------------------------------------------------------------------
\44\ Id.
\45\ Id.
---------------------------------------------------------------------------
Additionally, the commenter stated its expectation that there will
be a significant number of settlement fails when the U.S. participant
is buying bonds and the cross-border participant is unable to deliver
the bonds until T+2.\46\ The commenter further argued that if the
Commission's T+1 proposal is adopted and other financial markets do not
move in lock-step, the increase in financing costs and settlement fails
in connection with cross-border transactions may force broker-dealers
to decrease or cease offering cross-border services to their
clients.\47\ Lastly, the commenter argued that any decrease or
cessation of cross-border trading ultimately will reduce liquidity for
U.S. investors.\48\ For these reasons, the commenter encouraged the
Commission to work with international regulators to coordinate a move
to T+1 settlement on a global basis if possible.\49\
---------------------------------------------------------------------------
\46\ Id.
\47\ Id.
\48\ Id.
\49\ Id.
---------------------------------------------------------------------------
Another commenter stated that there may not be sufficient time for
investment advisers to match foreign currency amounts to settle all
trades on T+1.\50\ In particular the comment highlighted the lack of
time between the closure of the equity markets (at 4:00 p.m. ET in the
U.S.) and the time when U.S.-based FX trading desks close for the
evening (usually an hour or so later).\51\ The commenter also discussed
the reasons it believed that ``Far East'' trading desks may not
seamlessly take over after the close of U.S.-based FX trading
desks.\52\ According to the commenter, these issues may impact both
domestic and internationally based investment advisers.\53\ However, in
the commenter's view, non-U.S. based investment advisers will face
additional expenses, as they will either be forced to set up an FX
trading and settlement presence in North America (or Asia) or add staff
abroad to create, execute, and settle FX transactions to meet a T+1
timeline.\54\
---------------------------------------------------------------------------
\50\ Letter from Suzanne Quinn, Head of North America
Compliance, Ballie Gifford Overseas Limited (Nov. 17, 2022), at 1
(``Ballie Gifford Letter'').
\51\ Id.
\52\ Id. at 1-2.
\53\ Id. at 2.
\54\ Id.
---------------------------------------------------------------------------
Finally, the commenter suggested certain ``options'' for actions
that could be taken to reduce disruption in the FX markets. While
recognizing that some of these options would be ``troublesome to
implement,'' the commenter stated that two would be the most effective
in alleviating the commenter's concerns.\55\ First, the commenter
suggested that appropriate market authorities mandate a change in ``the
official equity trading day'' for U.S. markets to close one hour
earlier, at 3:00 p.m. rather than 4:00 p.m. ET, which would provide
firms more time to match trades and ensure the settlement FX is in
place for the following day, without negatively impacting liquidity and
trading volume.\56\ Second, the commenter stated that the Commission
could allow for a mismatch of FX settlement dates as a valid reason for
T+2 settlement arrangements ``without [such arrangements] breaching an
investment adviser's best execution obligation.'' \57\
---------------------------------------------------------------------------
\55\ Id.
\56\ Id.
\57\ Id.; see also supra note 41 and accompanying text
(discussing the same, including other related recommendations from
the IAA).
---------------------------------------------------------------------------
In the proposing release, the Commission asked commenters whether
efforts to shorten the standard settlement cycle to T+1 is a logical
step on the path to T+0 settlement, or would moving to a T+1 standard
settlement cycle require investments or processes that would be
outdated or unnecessary
[[Page 13877]]
in a T+0 environment.\58\ Although no commenters discussed whether
moving to a T+1 standard settlement cycle would require investments or
processes that would be outdated or unnecessary in a T+0 environment,
as discussed below, the Commission received numerous comments relating
to T+0 settlement.
---------------------------------------------------------------------------
\58\ See T+1 Proposing Release, supra note 2, at 10450.
---------------------------------------------------------------------------
Several of the commenters that supported moving to a T+1 settlement
cycle also stated that moving to a T+0 settlement cycle, or
instantaneous settlement, is either not achievable or not practical in
the near term.\59\ These commenters cited several challenges associated
with a prospective move to a T+0 settlement cycle,\60\ including in the
case of several comment letters, many of the same challenges that were
cited in the ``T+1 Report,'' which the Commission discussed in the T+1
Proposing Release.\61\ For example, one commenter stated that moving to
T+0 ``would require the redesign of many securities processing
functions, including [i]nstitutional [t]rade [p]rocessing, ETFs
processing, options, margin investing, securities lending, FX markets,
and global settlements across jurisdictions to meet the regulatory,
operational, and contractual requirements.'' \62\ Another commenter
stated that:
---------------------------------------------------------------------------
\59\ See, e.g., DTCC Letter, supra note 16, at 6 (``[W]e do not
believe the industry is currently ready to move to a T+0 standard
settlement cycle . . .''); FIA PTG Letter, supra note 16, at 1-2;
MMI Letter, supra note 16, at 3 (expressing commenter's concern that
a move to T+0 would be potentially infeasible in the short term);
NYSE Group Letter, supra note 16, at 2 (expressing commenter's view
that T+0 settlement cycle is not practical in the near term); OCC
Letter, supra note 16, at 4 (``OCC agrees with the consensus view
reflected in [the T+1 Report] that same-day settlement is not
achievable in the short-term, and that moving towards shortening the
settlement cycle to T+0 would require an overhaul of the U.S.
clearing and settlement infrastructure.''); SIFMA April Letter,
supra note 16, at 15-20 (expressing commenter's view that T+0
settlement is not practical in the near term); Virtu Financial
Letter, supra note 16, at 3-4 (``T+0 [settlement] is not feasible or
attainable at this time.'').
\60\ See, e.g., DTCC Letter, supra note 16, at 5; NYSE Group
Letter, supra note 16, at 2 (``T+0 settlement cycle would pose
significant challenges to the industry, including eliminating the
benefits of netting for settling trades, requiring that every
transaction be funded instantly and individually, and additional
complexities for foreign investors, options, ETFs and futures.'');
SIFMA April Letter, supra note 16, at 16 (describing numerous
challenges associated with moving to T+0 settlement); Virtu
Financial Letter, supra note 16, at 3-4 (describing various
challenges associated with moving to T+0 settlement); see also State
Street Letter, supra note 16, at 5-10 (providing high-level
observations on the implications of same-day settlement for various
operational processes and investment products which are central to
the custody bank business model).
\61\ See T+1 Proposing Release, supra note 2, at 10438, 10445
(citing to Deloitte & Touche LLP, the Depository Trust and Clearing
Corporation, the Investment Company Institute, and Securities
Industry and Financial Markets Association, 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>).
\62\ SIFMA April Letter, supra note 16, at 16 (quoting T+1
Report, supra note 61).
[I]mplementing T+0 as the required standard settlement cycle
across the industry remains a significant undertaking that would
require foundational changes to the way securities trade and settle
today. Moreover, moving the entire industry to a T+0 standard
settlement cycle would necessitate significant changes in industry
conventions and major investments in automating processes and
technology that will greatly exceed similar investments needed for
T+1.\63\
---------------------------------------------------------------------------
\63\ DTCC Letter, supra note 16, at 5.
Another commenter argued that moving to T+0 would require a
``rewrite'' of not only the current clearing and settlement
infrastructure, but also the associated banking, securities custodian,
and money market systems that are critical components of the clearing
and settlement ecosystem.\64\ This commenter further stated that moving
to T+0 settlement would potentially require implementation of real-time
currency movements during hours of the day at which such processes are
not feasible.\65\ In particular, the commenter argued, ``[n]ot only
would this require major system upgrades, but as critical components of
the settlement process, banks, wire systems, custodians, lenders, and
money market funds, along with related staff, would need to be
available well into the evening.'' \66\
---------------------------------------------------------------------------
\64\ FIA PTG Letter, supra note 16, at 1.
\65\ Id.
\66\ Id. at 1-2.
---------------------------------------------------------------------------
Another commenter stated that T+0 settlement would present
logistical concerns around borrowing and lending and would likely
introduce challenges for batch processing.\67\ More specifically, this
commenter stated that while it is possible that trades could be netted
throughout the day, it is unlikely that batch processing could capture
all trades by the market close, and such netting could lead to multiple
intraday margin calls by clearing agencies.\68\ The same commenter
stated that in a T+0 settlement environment it would be very difficult
for investment advisers to process real-time trade allocations.\69\
Additionally, the commenter argued that prime brokers would be required
to overhaul their processes and technology to capture allocations,
calculate margin requirements, ensure margin accuracy, and facilitate
trade reporting and disaffirmations.\70\ Finally, the commenter stated
that moving to T+0 would require ``complete dematerialization of
securities.'' \71\
---------------------------------------------------------------------------
\67\ See Virtu Financial Letter, supra note 16, at 3-4.
\68\ Id.
\69\ Id.
\70\ Id.
\71\ Id.
---------------------------------------------------------------------------
Other commenters argued that any move to shorten the settlement
cycle to T+0 should be considered only after a successful transition to
T+1.\72\ One such commenter stated that once the industry has
established the full scope of work required for T+1 and is actively
progressing towards implementation, the industry should conduct a
``full review'' to identify the scope of changes that are needed to
effectuate a move to a T+0 standard settlement cycle.\73\
---------------------------------------------------------------------------
\72\ See, e.g., AGC April Letter, supra note 16, at 3-4; DTCC
Letter, supra note 16, at 5; see also letter from Isabelle S.
Corbett, Global Head of Government Relations, R3 LLC, at 3 (``R3
Letter'') (supporting the view that ``T+0 does not make sense
today,'' and stating that ``further compression from T+1 should
continue to be considered''); ASA Letter, supra note 16, at 3
(arguing that the market is not prepared to move to T+0, and urging
the Commission to continue to study and solicit public feedback on
moving to T+0 rather than using the Commission's T+1 proposal as a
vehicle to accelerate that shift).
\73\ See, e.g., DTCC Letter, supra note 16, at 5.
---------------------------------------------------------------------------
Another commenter stated that moving to a T+0 settlement cycle
would require significant industry and regulatory discussion, and
technological upgrades and change, as well as the creation and
implementation of new operating models and processes in many
instances,\74\ but believed that the transition to a T+1 settlement
cycle would be a valuable step towards T+0, as the industry would learn
lessons that can be used to evaluate if and how a T+0 settlement cycle
can be achieved in the longer term.\75\ However, according to the
commenter, industry discussions on implementing T+0 at this time ``may
inadvertently divert resources from focusing on the requirements and
issues related to delivering T+1 in the near future.'' \76\
---------------------------------------------------------------------------
\74\ AGC April Letter, supra note 16, at 3.
\75\ See id. at 3-4.
\76\ Id. at 4.
---------------------------------------------------------------------------
Those commenters supporting an immediate move to T+0 or
instantaneous settlement neither explained how either T+0 settlement or
instantaneous settlement could be implemented, nor addressed the
impediments to T+0 settlement that were cited by several of the
commenters who argued that T+0 settlement is not achievable or not
practical in the near term. Nor did the comment letters supporting a
T+0 settlement cycle or
[[Page 13878]]
instantaneous settlement explain how a settlement cycle shorter than
T+1 would reduce overall levels of risk in the clearance and settlement
system. These letters generally consisted of declaratory statements to
the effect that either T+0 or instantaneous settlement is achievable
now and should be implemented without delay, while offering no factual
support for these views.\77\
---------------------------------------------------------------------------
\77\ See, e.g., Calaf Letter, supra note 16; Clemens Letter,
supra note 18; Mahdere Letter, supra note 18; Nevarez Letter, supra
note 19; Oakes Letter, supra note 18; Rathbone Letter, supra note
18; Seeton Letter, supra note 18.
---------------------------------------------------------------------------
2. Securities Excluded From Requirements Under Exchange Act Rule 15c6-1
The Commission also received comment letters discussing certain
types of securities that the respective commenters believed should be
excluded from the requirements under Exchange Act Rule 15c6-1, whether
through amendment to the text of the rule or via separate exemptive
relief. Two of these commenters discussed whether Rule 15c6-1 should
apply to security-based swap transactions \78\ and both expressed the
view that the rule should not apply to such transactions.\79\ One of
the two commenters stated that Rule 15c6-1 is ``inapt'' with respect to
security-based swap transactions, which are ``generally bilateral and
executory in nature,'' meaning that there are numerous terms that the
parties typically agree to fulfill at later dates.\80\ This commenter
further stated that ``the [Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'')] mandated numerous requirements for
security-based swaps that address the very credit, market and liquidity
risks that, for broker-dealer transactions in securities, are addressed
by the shortening of the settlement cycle from T+2 to T+1.'' \81\
Because security-based swaps are already subject to a comprehensive
regulatory regime, the commenter stated, these securities should not be
subject to further regulation under the Commission's proposal.\82\
---------------------------------------------------------------------------
\78\ See MFA Letter, supra note 16, at 2; SIFMA April Letter,
supra note 16, at 11-12. As noted in the T+1 Proposing Release, the
Commission previously issued an order that exempted security-based
swaps from the requirements under Rule 15c6-1, and subsequently
extended that exemptive relief on several occasions, but the
exemptive relief that previously covered compliance with Rule 15c6-1
expired in 2020. See T+1 Proposing Release, supra note 2, at 10446
n.83.
\79\ See MFA Letter, supra note 16, at 2; SIFMA April Letter,
supra note 16, at 11-12. In addition to the comment letters
discussing the prospective application of Rule 15c6-1 to security-
based swap transactions, the Commission received a small number of
comment letters that recommended the continuation and/or expansion
of certain regulatory relief from Rule 15c6-1 previously provided by
the Commission in certain exemptive orders. These comments are
discussed in Part II.B.5, which follows discussion of the comment
letters that relate more directly to the text of Rule 15c6-1.
\80\ SIFMA April Letter, supra note 16, at 11.
\81\ Id.
\82\ Id.
---------------------------------------------------------------------------
The same commenter highlighted certain ``key differences'' between
security-based swaps and other types of securities.\83\ In particular,
the commenter stated that for other types of securities, such as equity
or debt, settlement occurs when the buyer receives the security
purchased and the seller receives cash equaling the value of the
security sold.\84\ For security-based swaps, however, a final net
payment is paid by one party to the other at a future point in time to
which the parties have contractually agreed.\85\ For all of these
reasons, the commenter argued, the Commission should provide an express
exclusion for security-based swaps, and ``at the very least, any doubt
caused by the reference in the [T+1 Proposing release] to security-
based swaps should be resolved by [the Commission] clarifying that
counterparties to such instruments, who generally agree to specific
payment and settlement terms in writing, benefit from the existing
override provision in [Rule 15c6-1(a)].'' \86\
---------------------------------------------------------------------------
\83\ Id.
\84\ Id.
\85\ Id.
\86\ Id.
---------------------------------------------------------------------------
The other comment letter discussing the prospective application of
Rule 15c6-1 to security-based swaps argued that the rule ``should not
apply to security-based swap transactions effected by a `security-based
swap dealer,' which is dually registered as a broker-dealer.'' \87\ In
support of this argument, the commenter stated that security-based swap
transactions are typically bilateral transactions between sophisticated
counterparties who deal directly with each other, and which are subject
to unique capital, margin, and segregation requirements.\88\ Thus,
according to the commenter, ``there is no principled basis to apply
Rule 15c6-1 to security-based swap transactions solely for the reason
that a security-based swap dealer is also registered as a broker-
dealer.'' \89\ Instead, the commenter argued, the Commission should
modify the rule to exempt, or further exemptive relief should be
provided for, security-based swaps ``as noted in the [T+1 Proposing
Release].'' \90\
---------------------------------------------------------------------------
\87\ MFA Letter, supra note 16, at 2.
\88\ See id.
\89\ Id.
\90\ See id.; see also id. at n.11 (citing to T+1 Proposing
Release, supra note 2, at 10446 n.83).
---------------------------------------------------------------------------
3. Proposed Deletion of Rule 15c6-1(c)
The Commission received one comment letter responding to the
proposed deletion of paragraph (c) of Rule 15c6-1, and the commenter
recommended that paragraph (c) be retained in a modified form, rather
than being deleted.\91\ Specifically, the commenter recommended that
paragraph (c) be retained but modified to allow parties to settle on
T+2, rather than T+1, in the case of a firm commitment
underwriting.\92\ Under the commenter's recommended modification, Rule
15c6-1(c) would provide a ``fallback'' to parties without an explicit
agreement at the time of the transaction to settle on T+2 if unforeseen
circumstances interfere with either party's ability to conform to a T+1
settlement date.\93\ The commenter also supported the continued
retention of paragraph (d) of Rule 15c6-1, stating that paragraph (d)
is ``critically important for debt and preferred equity offerings.''
\94\
---------------------------------------------------------------------------
\91\ See SIFMA April Letter, supra note 16, at 9-11.
\92\ See id. at 10.
\93\ Id. at 10-11.
\94\ Id. at 11.
---------------------------------------------------------------------------
In support of the view that the Commission should retain a modified
version of Rule 15c6-1(c), the commenter stated that reliance on
paragraphs (a) and (d) would be insufficient to prevent transactions
for securities priced after 4:30 p.m. ET from failing to settle.\95\
Specifically, the commenter stated that while paragraphs (a) and (d)
allow parties to agree to a longer settlement cycle, in order for the
parties to avail themselves of that extended settlement date they must
reach that agreement at the time of the transaction.\96\
---------------------------------------------------------------------------
\95\ See id. at 10.
\96\ See id.
---------------------------------------------------------------------------
The commenter further stated that, ``particularly in the context of
common stock offerings, where an extended settlement is extremely
difficult to implement, if specific issues are identified prior to
pricing of the offering, in practically all such instances, the pricing
of the offering would be delayed.'' \97\ According to the commenter,
the parties are ``by definition'' unable to foresee ``unanticipated
issues'' prior to pricing of the offering.\98\
---------------------------------------------------------------------------
\97\ Id.
\98\ Id.
---------------------------------------------------------------------------
[[Page 13879]]
Thus, the commenter stated that paragraphs (a) and (d) of Rule
15c6-1 would not allow parties to agree to a longer settlement cycle
when circumstances unforeseen at the time of the pricing of the
transaction arise that prevent settlement on T+1.\99\ For example,
according to the commenter, ``it is not unusual to face unanticipated
issues relating to transfer agents, legend removal, local law matters
(including local court approval), medallion guarantees or non-U.S.
parties.'' \100\ Finally, in support of the commenter's belief that
eliminating paragraph (c), together with a move to T+1, would lead to
increased failures to settle trades with respect to firm commitment
underwritings, the commenter cited the limited timeframe that would be
available ``to resolve issues'' prior to settlement on T+1.\101\
---------------------------------------------------------------------------
\99\ See id.
\100\ Id.
\101\ Id.
---------------------------------------------------------------------------
4. Retention of Exchange Act Rule 15c6-1(d)
Paragraph (d) of Rule 15c6-1 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.\102\ The proposed rule text did not make any changes to
paragraph (d) of Rule 15c6-1 other than technical conforming changes
that would have been necessary if the Commission adopted the proposed
deletion of paragraph (c) of the rule.\103\
---------------------------------------------------------------------------
\102\ See 17 CFR 240.15c6-1(d).
\103\ See T+1 Proposing Release, supra note 2, at 10448-49.
---------------------------------------------------------------------------
The Commission received one comment letter supporting the retention
of paragraph (d) because, according to the commenter, it is
``critically important for debt and preferred equity offerings.'' \104\
However the comment letter did not further explain why paragraph (d) is
important for such offerings.
---------------------------------------------------------------------------
\104\ See SIFMA April Letter, supra note 16, at 11.
---------------------------------------------------------------------------
5. Exemptive Orders Under Exchange Act Rule 15c6-1(b)
The T+1 Proposing Release stated that, pursuant to Rule 15c6-1(b),
the Commission has granted certain exemptions from the requirements
under Rule 15c6-1, including an exemption for securities that do not
have facilities for transfer or delivery in the U.S.\105\ The T+1
Proposing Release requested public comment on whether the conditions
set forth in the Commission's exemptive order for securities traded
outside the U.S. are still appropriate, and whether the exemption
should be modified.\106\ The Commission received several comment
letters discussing whether the Commission should continue the exemption
for foreign securities if the settlement cycle were shortened to T+1,
and all of these commenters urged the Commission to retain the
exemption, and/or recommended that the Commission make certain
modifications to the exemption that would expand the scope of the
exemption.\107\
---------------------------------------------------------------------------
\105\ See T+1 Proposing Release, supra note 2, at 10446-47
(citing to Exchange Act Release No. 35750 (May 22, 1995), 60 FR
27994, 27995 (May 26, 1995)).
\106\ See T+1 Proposing Release, supra note 2, at 10451.
\107\ See Fidelity Letter, supra note 16, at 5; SIFMA April
Letter, supra note 16, at 1, 7-9; Virtu Financial Letter, supra note
16, at 2; see also ICI Letter, supra note 16, at 4.
---------------------------------------------------------------------------
One commenter recommended that the Commission retain this exemption
and explicitly state in the adopting release that the permissible
settlement period for securities traded outside of the U.S. should be
defined by the local market.\108\ The commenter stated that settling
trades with different time zones is already a difficult process and
accelerating the settlement cycle for these securities would make
cross-border transactions even more challenging.\109\
---------------------------------------------------------------------------
\108\ See Fidelity Letter, supra note 16, at 5.
\109\ See id.
---------------------------------------------------------------------------
Another commenter stated that the exemption for foreign securities
should be retained and modified to address ``certain product
misalignment matters.'' \110\ This commenter observed that in many non-
U.S. markets today, trades settle on a T+2 basis.\111\ Therefore, the
commenter stated, unless those markets transition to a T+1 settlement
timeframe when the U.S. moves to a T+1 cycle, U.S. broker-dealers will
not be able to comply with Rule 15c6-1 for trades in foreign
securities.\112\
---------------------------------------------------------------------------
\110\ SIFMA April Letter, supra note 16, at 7-9.
\111\ Id. at 7.
\112\ See id.
---------------------------------------------------------------------------
Additionally, according to the commenter, retaining the exemption
for transactions in foreign securities in non-U.S. markets would not
address the misalignment of settlement cycles between U.S. securities
and non-U.S. securities that impacts U.S. securities that are
exchangeable for a foreign security or a basket of foreign
securities.\113\ The commenter highlighted in particular ADRs, and ETFs
with an underlying basket of foreign securities, which according to the
commenter, illustrate this misalignment.\114\
---------------------------------------------------------------------------
\113\ See id. at 8.
\114\ See id. As noted in the T+1 Proposing Release, under the
Commission's existing exemption, an ADR is considered a separate
security from the underlying security. 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 foreign security, only
the foreign security will be exempt from Rule 15c6-1. See T+1
Proposing Release, supra note 2, at 10446.
---------------------------------------------------------------------------
With respect to ADRs, the commenter stated that market makers and
other market participants may purchase foreign shares and sell related
ADRs in the U.S. on the same trading day, and thus timely settle the
sale of the ADRs using the newly created ADRs.\115\ According to the
commenter, this type of trade will not be possible if the underlying
foreign shares settle on T+2 and the related ADR is required to settle
on T+1.\116\ The result, the commenter stated, is likely to be wider
bid-ask spreads for the ADR because market makers must take into
account the additional cost of borrowing securities and other financing
costs to avoid settlement failures.\117\ Additionally, the commenter
argued, the incidence of fails would likely increase as a result of the
misaligned settlement cycles, particularly where it is not possible to
borrow securities to make delivery, and a knock-on effect could be to
increase the incidence of buy-ins as well.\118\
---------------------------------------------------------------------------
\115\ See SIFMA April Letter, supra note 16, at 8.
\116\ See id.
\117\ See id.
\118\ See id.
---------------------------------------------------------------------------
Separately, the same commenter argued that the ETF creation/
redemption process is impacted by the misalignment of global securities
transaction settlement cycles where the basket of securities underlying
an ETF includes foreign securities.\119\ In explaining this view, the
commenter observed that ETF shares are created by an authorized
participant (``AP'') depositing the daily creation basket of shares
(and/or cash) with the ETF and, in exchange for the deposit of the
basket, the ETF issues to the AP a specified number of ETF shares,
referred to as a ``creation unit.'' \120\ The commenter further stated
that if foreign securities comprise some or all of the ETF creation
basket, the AP will
[[Page 13880]]
typically need to purchase those securities in the local market.\121\
---------------------------------------------------------------------------
\119\ See id.
\120\ Id.
\121\ See id.
---------------------------------------------------------------------------
Another commenter urged the Commission to ``exempt from T+1
settlement'' U.S.-listed ETFs with baskets that contain foreign
securities and ADRs.\122\ In support of this recommendation, the
commenter stated that the misalignment in settlement cycles between the
U.S. and foreign jurisdictions that continue to settle on a T+2 basis,
coupled with time zone differences, may increase certain risks, such as
failed trades, accrual differences, net asset value miscalculations,
and investment guideline breaches. The same commenter stated that due
to the resulting misalignment in settlement cycles between the U.S. and
foreign markets upon transitioning to T+1, an ADR provider may incur
borrowing and other costs related to the underlying foreign security to
facilitate T+1 settlement of the ADR.\123\ According to the commenter,
these costs would likely be passed down to investors and thus make it
more expensive to obtain investment exposure to foreign markets.\124\
---------------------------------------------------------------------------
\122\ See ICI Letter, supra note 16, at 4; see also Virtu
Financial Letter, supra note 16, at 2 (recommending that for primary
creations and redemptions alternative settlement date options be
available so the foreign security basket and the U.S. ETF settlement
can be ``in sync'').
\123\ See id.
\124\ See id.
---------------------------------------------------------------------------
As discussed in the T+1 Proposing Release, the Commission has also
previously granted a separate exemption from Rule 15c6-1 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) that is
funded by or participates in a ``separate account'' (as defined in
section 2(a)(37) of the Investment Company Act), 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'').\125\ In granting this exemption, the
Commission recognized that ``the mechanics of purchases and redemptions
of insurance securities products are distinct from those of other
securities and that, because of the time required to complete necessary
preparations, such transactions typically require more protracted
settlement periods,'' and that ``compliance with the unique
requirements of state and Federal law, as well as of the particular
administrative procedures, applicable to insurance securities products
demands additional time beyond the standard settlement process.'' \126\
The T+1 Proposing Release requested public comment on whether the
conditions set forth in the exemptive order for insurance products
continued to be appropriate, or if they should be modified.
---------------------------------------------------------------------------
\125\ See T+1 Proposing Release, supra note 2, at 10447.
\126\ Exchange Act Release No. 35815 (June 6, 1995), 60 FR
30906, 30907 (June 12, 1995) (``Insurance Products Exemption
Order'').
---------------------------------------------------------------------------
The three commenters that discussed this exemption uniformly agreed
that the conditions and considerations set forth in the Insurance
Products Exemption Order apply as much today, if not with greater
force, as when the Commission adopted the exemption in 1995 (and which
it left in place in 2017), and that the exemption should be
preserved.\127\ In support of this view, one commenter said it was not
aware of any material change of circumstances that would warrant a
change.\128\ Another commenter observed that the same administrative
processes and regulatory requirements under state and Federal law that
warranted the insurance products exemption were even more relevant for
T+1 since insurance products have only grown more complex since the
industry transitioned to T+2 in 2017.\129\
---------------------------------------------------------------------------
\127\ See letter from Eversheds Sutherland (US) LLP for the
Committee of Annuity Insurers (Apr. 11, 2022), at 1-3; (``CAI
Letter''); Fidelity Letter, supra note 16, at 5-6; SIFMA April
Letter, supra note 16, at 9. These commenters also cited to comment
letters that had been submitted in response to the T+2 Proposing
Release in support of retaining the Insurance Products Exemption
Order.
\128\ See SIFMA April Letter, supra note 16, at 9 (stating that
``in addition to retaining the exemptions, SIFMA recommends that the
exemptions either be codified in Rule 15c6-1(b), or that the
Commission issue a new order to replace the orders issued in 1995 to
facilitate access to the terms of the exemptions and to facilitate
compliance with their terms''). This statement appears to
collectively reference the exemption for insurance products, as well
as the exemption for securities that do not have facilities for
transfer and delivery in the U.S., both of which were issued in
1995.
\129\ See Fidelity Letter, supra note 16, at 6.
---------------------------------------------------------------------------
C. Final Rule and Discussion
1. Amendment to Exchange Act Rule 15c6-1(a)
The Commission is amending paragraph (a) of Exchange Act Rule 15c6-
1 as proposed. Rule 15c6-1(a) will prohibit broker-dealers 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. Subject to the exceptions enumerated in
paragraphs (a) and (b) of the rule, the prohibition in paragraph (a) of
Rule 15c6-1 applies to all securities. However, as discussed in Part
II.C.3 below, the Commission is amending paragraph (b) of Rule 15c6-1
to exclude security-based swaps from the requirements under paragraphs
(a) and (c) of the rule.
The Commission's reasons for amending Rule 15c6-1(a) to shorten the
standard settlement cycle to T+1 are consistent with those articulated
in the T+1 Proposing Release,\130\ and many of the comment letters
submitted in response to that release. First, the Commission continues
to believe that shortening the standard settlement cycle to T+1 would
result in a reduction in the number and total value of unsettled trades
that exist at any point in time. Assuming that trading volume remains
constant, shortening the standard settlement cycle to T+1 should also
decrease the total market value of all unsettled trades in the U.S.
clearance and settlement system. This reduction in the number and total
value of unsettled securities transactions should result in a reduction
in market participants' overall exposure to market risk that arises
from such transactions.
---------------------------------------------------------------------------
\130\ See T+1 Proposing Release, supra note 2, at 10447-49.
---------------------------------------------------------------------------
As explained in the T+1 Proposing Release, the Commission believes
that shortening the standard settlement cycle to T+1 should also reduce
CCP 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.\131\ Reducing these risks to the CCP would enable
the CCP to reduce the overall size of the financial resources that the
CCP requires of its participants, lowering costs to the CCP's
participants, and potentially their customers (i.e., other market
participants and investors).
---------------------------------------------------------------------------
\131\ See id. at 10448.
---------------------------------------------------------------------------
As further explained in the T+1 Proposing Release, in periods of
market stress, liquidity demands imposed by the CCP on its
participants, such as in the form of intraday margin calls, can produce
procyclical effects that reduce overall market liquidity.\132\ The T+1
Proposing Release further stated that reducing the CCP's liquidity
exposure by shortening the settlement cycle can
[[Page 13881]]
help limit this potential for procyclicality, enhancing the ability of
the CCP to serve as a source of stability and efficiency in the
national clearance and settlement system.\133\
---------------------------------------------------------------------------
\132\ See id.
\133\ See id.
---------------------------------------------------------------------------
Shortening the standard settlement cycle to T+1 also would enable
investors to access the proceeds of their securities transactions
sooner than they are able to in the current T+2 environment.
Specifically, 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.
Finally, market participants have already taken significant steps
toward identifying the industry requirements and timelines for moving
to T+1, and have made substantial progress in terms of planning such a
move.\134\ Due to these efforts, the Commission believes that a
successful move to T+1 settlement can occur by the compliance
date,\135\ and the Commission believes that delaying such a move would
allow undue risk to continue to exist in the U.S. clearance and
settlement system.
---------------------------------------------------------------------------
\134\ See, e.g., Deloitte, DTCC, ICI, and SIFMA, T+1 Securities
Settlement Industry Implementation Playbook (Aug. 2022, updated Dec.
2022) (``T+1 Playbook''), <a href="https://www.dtcc.com/ust1/industry-playbook">https://www.dtcc.com/ust1/industry-playbook</a>. Additional information and documentation related to the
industry's ongoing planning related to the prospective move to a T+1
settlement cycle is also publicly available at <a href="https://www.dtcc.com/ust1/industry-playbook">https://www.dtcc.com/ust1/industry-playbook</a>.
\135\ See infra Part VII.A (discussing the compliance date of
May 28, 2024, for the amendments to Exchange Act Rule 15c6-1(a)).
---------------------------------------------------------------------------
In response to the comment letters focusing on the challenges and
costs associated with the prospective misalignment of securities
settlement cycles that may follow a move to T+1 in the U.S.,\136\ the
Commission agrees that such misalignment will likely present some
challenges that may increase costs for certain market participants,
including asset managers. For example, the Commission recognizes that
financing U.S. market transactions that settle on T+1 with the proceeds
of an FX transaction that settles on T+2 may become more difficult, and
therefore more costly, than financing of T+2 transactions is today.
However, market participants can modify their existing business
practices in ways that allow their securities transactions in the U.S.
to settle on T+1.\137\
---------------------------------------------------------------------------
\136\ See MarketAxess Letter, supra note 29, at 1-2; ICI Letter,
supra note 16, at 4; Ballie Gifford Letter, supra note 50, at 1-2.
\137\ The Commission observes that settlement cycles vary across
asset classes. For example, transactions in U.S. Treasury securities
currently settle on a T+1 basis, and market participants use the
proceeds of FX transactions to fund transactions in U.S. Treasury
securities despite mismatched settlement cycles. See infra note 618
(discussing the same, as well as other examples).
---------------------------------------------------------------------------
For example, market participants may extend the closing time for
their FX trading desks, or they may pre-fund certain T+1 transactions
that would otherwise be funded by an FX transaction that is executed on
the same day as the securities transaction in the U.S. In addition, as
one commenter stated, asset managers may, in some cases, redeem money
market positions, or rely on other financial resources, to meet their
financing needs.\138\ While the Commission acknowledges that
undertaking any of the three adjustments described here may increase
certain costs for some market participants, shortening the standard
settlement cycle to T+1 will reduce other costs (e.g., margin charges),
increase capital efficiency, and reduce risk in the U.S. clearance and
settlement system.\139\
---------------------------------------------------------------------------
\138\ AIMA Letter, supra note 29, at 5-6.
\139\ See infra Part VIII.C.1 (discussing the anticipated
benefits of shortening the standard settlement cycle to T+1).
---------------------------------------------------------------------------
With respect to the suggestion of one commenter that the
``appropriate market authorities'' mandate a change in ``the official
equity trading day'' for U.S. markets to close one hour earlier, at
3:00 p.m. rather than 4:00 p.m. ET, to provide firms with more time to
match trades and ensure the ``settlement FX'' is in place for the
following day,\140\ the Commission believes that such a change is not
necessary for a successful transition to T+1 to occur, and is otherwise
not justified. As explained in the paragraph immediately above, the
Commission believes that market participants will be able to adjust
their business practices to address the challenges associated with the
misalignment of the T+1 settlement cycle for securities in the U.S.
markets with the T+2 settlement cycle for FX transactions. In addition,
the Commission believes that the commenter's recommendation to shorten
the length of the trading day in the U.S. equity markets specifically
to address the commenter's concern about FX transactions could have a
negative impact on the trading activity and operations of market
participants. In particular, the Commission believes that modifying the
length of the trading day would alter the existing operations of the
U.S. securities markets prior to market close in a way that is
disproportionate to the impact of the Commission's proposal on the
ability of market participants to use FX transactions to finance
securities transactions in the U.S markets because market participants
will be able to adjust their business practices to address the
challenges.\141\
---------------------------------------------------------------------------
\140\ See Ballie Gifford Letter, supra note 50, at 2.
\141\ See infra notes 617-619 and accompanying text (further
discussing the anticipated economic effects resulting from
mismatched settlement cycles).
---------------------------------------------------------------------------
With respect to the commenter's suggestion that the Commission
``could allow for a mismatch of FX settlement dates as a valid reason
for T+2 settlement arrangements without [such arrangements] breaching
an investment adviser's best execution obligation,'' \142\ as explained
above, the Commission believes that market participants will be able to
adjust their business practices to address the challenges associated
with the prospective mismatch between the settlement cycles for FX
trades and the settlement cycle for securities transactions in the U.S.
markets. Even if a mismatch between the settlement time for FX
transactions and a T+1 standard settlement cycle for U.S. securities
transactions raises the cost of funding some transactions, as discussed
previously, the Commission also believes that shortening the standard
settlement cycle to T+1 will reduce other costs (e.g., margin charges),
increase capital efficiency, and reduce risk in the U.S. clearance and
settlement system.\143\ Additionally, while the commenter correctly
states that the Commission's proposal would allow parties to extend
settlement only if they reach agreement at the time of the transaction,
the commenter does not explain its understanding that ``this would be
difficult to implement in the context of trades that require the
settlement of FX transactions to occur,'' or that ``for this reason a
standing option to settle at T+2 would be more effective.'' \144\ To
the extent the commenter is recommending that the Commission establish
a separate T+2 settlement cycle for transactions that are funded using
FX transactions, such an approach is not workable because the
counterparties to such transactions generally would not know whether
the transaction had been funded in this way--unless the parties agreed
to disclose in advance of the transaction the source of funding--and
therefore also would not know whether to expect their securities
transaction to settle on T+1 or T+2.
---------------------------------------------------------------------------
\142\ See Ballie Gifford Letter, supra note 50, at 2.
\143\ See supra note 139 and accompanying text (further
discussing the other costs that would be reduced, as well as the
increase in capital efficiency, and the reduction in risk to the
U.S. clearance and settlement system).
\144\ See Ballie Gifford Letter, supra note 50, at 2.
---------------------------------------------------------------------------
[[Page 13882]]
The Commission has also considered the arguments submitted by one
commenter that any misalignment of settlement cycles that follows a
move to T+1 in the U.S. would increase the number of fails in
connection with cross-border transactions and may force broker-dealers
to decrease or cease offering cross-border services to their clients,
and ultimately will reduce liquidity for U.S. investors.\145\ The
commenter also specifically stated its expectation that there will be a
significant number of settlement fails when a U.S. market participant
is buying bonds and a ``cross-border participant'' is unable to deliver
the bonds until T+2.\146\ The Commission disagrees with each of the
commenter's statements for the reasons explained below.
---------------------------------------------------------------------------
\145\ See MarketAxess Letter, supra note 29, at 1.
\146\ Id.
---------------------------------------------------------------------------
The Commission does not believe that the prospective misalignment
of settlement cycles resulting from a move to T+1 will increase the
number settlement fails connected with cross- border transactions.\147\
While settlement fails can occur for many different reasons, market
participants will have many months to continue their planning and
preparation for the move to T+1. By the time the transition to T+1
occurs, market participants will have had ample opportunity to analyze
whether any given transaction presents an unacceptable risk of a
settlement fail, and, as stated above,\148\ have options for adjusting
their business practices to account for the challenges associated with
settlement of certain transactions in a T+1 environment, such as FX
transactions or other transactions with cross-border considerations.
---------------------------------------------------------------------------
\147\ See infra notes 617-619 and accompanying text (further
discussing the anticipated economic effects resulting from
mismatched settlement cycles).
\148\ See supra note 138 and accompanying text.
---------------------------------------------------------------------------
With respect to the commenter's specific statement regarding the
purchase of bonds by a U.S. market participant and the inability of a
``cross-border participant'' to deliver such bonds until T+2, the
Commission acknowledges that in some cases it may be difficult for
market participants to deliver bonds on T+1 when they seek to purchase
the bonds in a foreign market and sell the same bonds in the U.S.
market on the same day. However, market participants will know the
timing of their settlement obligations prior to entering into contracts
to purchase bonds in a foreign market and sell them in the U.S. market.
If a market participant knows that the standard settlement cycle for
the U.S. market transaction is shorter than the settlement cycle for
the foreign market transaction, it may plan to either make arrangements
to purchase or borrow the bonds sufficiently in advance of entering
into the U.S. market transaction, or agree to a settlement date that is
later than T+1 for the U.S. market transaction. In cases where none of
these options is viable, market participants may also decide not to
enter into the U.S. market transaction rather than entering into a
transaction that would predictably result in a settlement fail. In the
Commission's view, these same options also may be available to market
participants with respect to transactions in other types of securities
and are not unique to bond market transactions.\149\
---------------------------------------------------------------------------
\149\ See infra notes 617-619 and accompanying text (further
discussing the anticipated economic effects resulting from
mismatched settlement cycles).
---------------------------------------------------------------------------
With respect to the commenter's concerns regarding liquidity, even
if moving to a T+1 settlement cycle in the U.S. does increase the
number of fails associated with certain securities transactions in the
U.S. market, it does not necessarily follow that any prospective
misalignment of settlement cycles would result in either increased
fails in the U.S. market overall, or a reduction in the amount of
liquidity available to U.S. investors.\150\ As explained above, the
Commission expects that shortening the standard settlement cycle to T+1
will reduce risk in the clearance and settlement system by reducing the
number of unsettled transactions that exist at any given point in
time,\151\ and will result in increased overall liquidity in the U.S.
markets. That view is also consistent with many of the comment letters
submitted in response to the T+1 Proposing Release.\152\
---------------------------------------------------------------------------
\150\ See infra Part VIII.C.4 (further discussing the
anticipated impact on settlement fails and liquidity).
\151\ See supra note 130 and accompanying text.
\152\ See supra notes 20, 22, and accompanying text.
---------------------------------------------------------------------------
With respect to the comment stressing the need for the Commission
to work with international regulators to coordinate a move to T+1
settlement on a global basis if possible,\153\ the Commission and its
staff intend to continue to work with regulators in other jurisdictions
to ensure that the move to a T+1 settlement cycle in the U.S. is
successfully implemented while minimizing any adverse impact the
transition may have on market participants who engage in transactions
in both the U.S. market and foreign markets. However, the Commission
believes that delaying the transition to T+1 in the U.S. until other
jurisdictions have also committed to implementing T+1 is not necessary
for a successful transition to T+1 to occur in the U.S.\154\ As a
general matter, the Commission and Commission staff continue to engage
with authorities in other jurisdictions regarding regulatory changes in
the U.S., including to discuss differences between U.S. requirements
and requirements in other jurisdictions, including through the
Commission's ongoing participation in the Financial Stability Board,
the International Organization of Securities Commissions (``IOSCO''),
and CPMI-IOSCO.\155\
---------------------------------------------------------------------------
\153\ Id.
\154\ The Canadian Securities Authorities recently issued a
proposal to transition the securities markets in Canada to T+1 to
align with the T+1 standard settlement cycle adopted in this
release. See Canadian Securities Administrators, Press Release,
Canadian securities regulators outline steps to support transition
to T+1, Dec. 15, 2022, <a href="https://www.securities-administrators.ca/news/canadian-securities-regulators-outline-steps-to-support-transition-to-t1/">https://www.securities-administrators.ca/news/canadian-securities-regulators-outline-steps-to-support-transition-to-t1/</a>.
\155\ CPMI-IOSCO refers to the work undertaken jointly by IOSCO
and the Committee on Payment and Market Infrastructures (``CPMI'')
to enhance the international coordination of standard and policy
development and implementation regarding clearing, settlement, and
reporting arrangements, including with respect to financial market
infrastructures such as central counterparties and central
securities depositories.
---------------------------------------------------------------------------
2. Response to Comments Relating to T+0 Settlement
The Commission has carefully considered the comments it received
relating to the prospective benefits and challenges associated with
moving to a T+0 settlement cycle. The Commission believes that
shortening the settlement cycle further than T+1 could ultimately
produce considerable additional benefits to investors compared with
shortening the settlement cycle to T+1. However, the Commission
continues to believe that shortening the settlement cycle to T+0 would
require the industry to develop solutions to the many challenges
identified by market participants as impediments to such a move, as
discussed at length in the T+1 Proposing Release,\156\ in the T+1
Report,\157\ and in several comment letters \158\ submitted in response
to the T+1 Proposing Release. Such impediments include, for example,
challenges related to maintaining multi-lateral netting, institutional
trade processing, securities lending practices, money settlement
systems, mutual fund and ETF processing, transaction funding
[[Page 13883]]
requirements, and corporate action processing. Given the operational
and technological challenges associated with moving to a T+0 settlement
cycle, the Commission believes that a successful move to T+0 would take
longer to design and implement, and cost more than, a successful move
to a T+1 settlement cycle.\159\
---------------------------------------------------------------------------
\156\ See T+1 Proposing Release, supra note 2, at 10467-74.
\157\ See T+1 Report, supra note 61, at 10-11.
\158\ See supra notes 59-60, 62-71, and accompanying text.
\159\ Because industry participants have not developed solutions
to the technological, operational, and business challenges and
impediments associated with a move to a T+0 settlement cycle, at
this time the Commission cannot reasonably provide estimates
regarding the length of time that would be necessary for a
successful move to T+0, or the costs associated with such a move.
---------------------------------------------------------------------------
Shortening the settlement cycle to T+1 will result in substantial
benefits to market participants that will be attainable much sooner
than shortening the settlement cycle to T+0. Thus, the Commission
believes shortening the settlement cycle to T+1 to be the more prudent
and practical approach to shortening the settlement cycle at this time.
However, the Commission continues to believe, as it stated in the
T+1 Proposing Release, that the transition to a T+1 settlement cycle
can be a useful step in identifying potential paths to T+0
settlement.\160\ As the securities industry moves forward to implement
a T+1 standard settlement cycle, this process generally should include
consideration of the potential paths to achieving T+0 to help ensure
that investments in new technology and operations undertaken to achieve
T+1 can maximize the value of such investments over the long term.
Following the transition to T+1 in the U.S. markets, Commission staff
will continue to work with industry leaders, public interest advocates,
investors and other regulators to assess the future feasibility of a
T+0 settlement standard cycle, and seek to identify ways to overcome
the challenges associated with such a move, as articulated in the T+1
Proposing Release.\161\
---------------------------------------------------------------------------
\160\ See T+1 Proposing Release, supra note 2, at 10465.
\161\ Id. at 10467-75.
---------------------------------------------------------------------------
3. Amendments to Exchange Act Rule 15c6-1(b)
The Commission is amending paragraph (b) of Exchange Act Rule 15c6-
1 to exclude security-based swaps from the requirements under paragraph
(a) of the rule. The T+1 Proposing Release asked whether the Commission
should provide exemptive relief from the requirements under Rule 15c6-1
for transactions in security-based swaps.\162\ As discussed above, the
Commission received two comment letters that discussed whether Rule
15c6-1 should apply to security-based swap transactions and both of
these commenters urged the Commission to exclude security-based swaps
from the requirements under the rule.\163\ The Commission agrees with
the comment letter highlighting ``key differences'' between security-
based swaps and other types of securities, and agrees that such
differences warrant excluding security-based swaps from the
requirements under paragraph (a) of Rule 15c6-1. In the Commission's
view, such characteristics of security-based swaps make transactions in
security-based swaps inconsistent with the purpose, intent, and
structure of Rule 15c6-1, as discussed further below.
---------------------------------------------------------------------------
\162\ See id. at 10451.
\163\ See supra note 78 and accompanying text.
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First, consistent with the Commission's understanding of security-
based swap transactions, the commenter explains that for security-based
swaps ``final net payment is paid by one party to the other at a future
point in time to which the parties have contractually agreed.'' \164\
The commenter also states that Rule 15c6-1 is ``inapt'' with respect to
security-based swap transactions, which are ``generally bilateral and
executory in nature,'' meaning that there are numerous terms that the
parties typically agree to fulfill at later dates.\165\ The Commission
believes that the commenter's description of security-based swaps is
accurate.
---------------------------------------------------------------------------
\164\ SIFMA April Letter, supra note 16, at 11.
\165\ Id.
---------------------------------------------------------------------------
The Commission further believes that excluding security-based swaps
from the requirements under paragraph (a) of Rule 15c6-1 would be
consistent with the purpose of the rule. The Commission first proposed
Rule 15c6-1 to establish T+3 as ``the standard settlement time frame
for broker-dealer trades,'' \166\ and explained in the T+3 Proposing
Release that the rule ``is designed to establish T+3 as a new `default'
contract term.'' \167\ The T+3 Proposing Release further stated that
most broker-dealers do not specify all of the terms of a trade before
execution, but rely on industry custom and SRO rules for those terms,
and the Commission did not intend to change industry custom to require
broker-dealers to specify contract terms.\168\ Unlike other securities
transactions, however, security-based swap contracts generally do
include contract terms that specify the timing of contractual
obligations, and for that reason there is not a need for any rule-based
``default'' contract term that provides for the timing of such
obligations.
---------------------------------------------------------------------------
\166\ T+3 Proposing Release, supra note 4, at 11806-07.
\167\ Id. at 11809.
\168\ See id.
---------------------------------------------------------------------------
Because security-based swap contracts provide for the timing of
contractual obligations, the Commission does not anticipate that it
will become necessary for Rule 15c6-1(a) to apply to security-based
swap transactions at any point in the future. As such, the Commission
is amending the text of Rule 15c6-1(b) to exclude security-based swaps
from the requirements under Rule 15c6-1(a), rather than issuing a new
exemptive order that would accomplish the same objective.
As discussed further in Part VII.B, the amendments to Rule 15c6-
1(b) that the Commission is adopting in this document, including both
the new provision that exempts security-based swaps from the scope of
paragraph (a), as well as the technical conforming changes to Rule
15c6-1(b) described below, will become effective upon the effective
date of the rule. The Commission has determined that these changes
should become effective upon the effective date, rather than the
compliance date for Rule 15c6-1 more generally, to avoid any possible
confusion as to whether broker-dealer transactions in security-based
swaps may or may not be subject to Rule 15c6-1(a) between the effective
date and the compliance date.
As explained in the T+1 Proposing Release, Rule 15c6-1(b)(1)
currently 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.\169\
No commenters suggested amending the exclusion under existing Rule
15c6-1(b)(1), and the amendments to Rule 15c6-1(b) being adopted in
this document do not include any changes to this exclusion.
---------------------------------------------------------------------------
\169\ See T+1 Proposing Release, supra note 2, at 10446.
---------------------------------------------------------------------------
In recognition of the fact that the Commission may not have
identified all situations or types of trades where the application of
Rule 15c6-1(a) would be problematic, existing Rule 15c6-1(b)(2)
provides that the Commission may exempt by order additional types of
trades from Rule 15c6-1(a), either unconditionally or on specified
terms and conditions, if the Commission determines that such an
exemption is consistent with the public interest and
[[Page 13884]]
the protection of investors.\170\ No commenters suggested any
amendments to paragraph (b)(2) of Rule 15c6-1, and the Commission is
not amending this provision of the rule. Accordingly, the Commission is
making no substantive changes to the existing provision that is
currently designated as paragraph (b)(2). However, the amendments to
Rule 15c6-1(b) being adopted in this document will redesignate existing
paragraph (b)(2) of the rule as paragraph (b)(3) of the rule, and a new
provision that excepts security-based swap transactions from the
requirements under paragraph (a) of Rule 15c6-1 will be designated as
paragraph (b)(2) of the rule.\171\
---------------------------------------------------------------------------
\170\ See 17 CFR 240.15c6-1(b)(1).
\171\ See 17 CFR 240.15c6-1(b)(1)-(3).
---------------------------------------------------------------------------
The rule amendments being adopted in this document also strike the
term ``contracts'' from the first clause in paragraph (b) of Rule 15c6-
1, and add the words ``Contracts for'' to the beginning of paragraphs
(b)(1) and (3) (formerly paragraph (b)(2)). These technical changes are
intended to account for the fact that the definition of a security-
based swap under section 3(a)(68) of the Exchange Act \172\
incorporates the term ``contract'' and leaving the same term in the
first clause of Rule 15c6-1(b) could create confusion as to the meaning
of the new provision under paragraph (b)(2) of the rule, which refers
to security-based swaps.
---------------------------------------------------------------------------
\172\ See 15 U.S.C. 78c(a)(68).
---------------------------------------------------------------------------
4. Amendment to Exchange Act Rule 15c6-1(c)
The Commission is amending paragraph (c) of Exchange Act Rule 15c6-
1 to shorten the 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.
Specifically, the amendment to paragraph (c) of Rule 15c6-1 will
shorten the standard settlement cycle for these offerings from T+4 to
T+2. As amended, paragraph (c) of Rule 15c6-1 will provide that
paragraph (a) of the rule does not apply to contracts for the sale for
cash of securities that are priced after 4:30 p.m. ET on the date such
securities are priced and that are sold by an issuer to an underwriter
pursuant to a firm commitment underwritten offering registered under
the Securities Act or sold to an initial purchaser by a broker-dealer
participating in such offering provided that a broker or dealer shall
not effect or enter into a contract for the purchase or sale of such
securities that provides for payment of funds and delivery of
securities later than the second business day after the date of the
contract, unless otherwise expressly agreed to by the parties at the
time of the transaction.\173\
---------------------------------------------------------------------------
\173\ See 17 CFR 240.15c6-1(c).
---------------------------------------------------------------------------
As explained in the T+1 Proposing Release, in 1995 the Commission
added paragraph (c) to Rule 15c6-1 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).\174\ The T+1 Proposing Release
proposed to delete paragraph (c) based on the Commission's belief 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 previously made delivery of the
prospectus difficult to achieve under the standard settlement cycle
have been mitigated by the ``access equals delivery'' standard.\175\
However, the T+1 Proposing Release also acknowledged that the T+1
Report had recommended the Commission retain paragraph (c), but modify
it to shorten the standard settlement cycle for firm commitment
offerings priced after 4:30 p.m. ET from T+4 to T+2.\176\ Additionally,
the Commission requested public comment on the proposed deletion of
paragraph (c) and requested that, to the extent that commenters agree
with the T+1 Report, 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.\177\
---------------------------------------------------------------------------
\174\ See T+1 Proposing Release, supra note 2, at 10449.
\175\ See id.
\176\ See id. (citing T+1 Report, supra note 61, at 33).
\177\ See id. at 10450.
---------------------------------------------------------------------------
After reviewing the comment letters received in response to the T+1
Proposing Release, the Commission continues to believe that the process
that made delivery of the prospectus difficult to achieve under the
standard settlement cycle has been mitigated by the ``access equals
delivery'' standard. However, the Commission also is persuaded by the
comment letter arguing that the Commission should retain paragraph (c)
of Rule 15c6-1, but shorten the settlement cycle to T+2 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.\178\
---------------------------------------------------------------------------
\178\ See supra Part II.B.3 (providing a detailed description of
comment letters urging the Commission to adopt a T+2 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).
---------------------------------------------------------------------------
The Commission is persuaded that a T+1 settlement cycle is not long
enough to prevent firm commitment offerings priced after 4:30 p.m. ET
from failing to settle on time. In particular, the Commission
acknowledges that paragraphs (a) and (d) of Rule 15c6-1 would not allow
parties to agree to a longer settlement cycle when circumstances
unforeseen at the time of the pricing of the transaction arise that
prevent settlement on T+1.\179\ Specifically, while paragraphs (a) and
(d) allow parties to agree to a longer settlement cycle, in order for
the parties to avail themselves of that extended settlement date, they
must reach that agreement at the time of the transaction and must take
affirmative steps in advance of each such transaction in order to
obtain relief under paragraph (a) or (d).
---------------------------------------------------------------------------
\179\ In the T+1 Proposing Release the Commission acknowledged
that the complex documentation associated with firm commitment
offerings may in some cases require more time to complete than is
available under a T+1 standard settlement cycle. See T+1 Proposing
Release, supra note 2, at 10450-51.
---------------------------------------------------------------------------
With respect to unforeseen circumstances that arise in connection
with firm commitment offerings, for example, as stated by a commenter,
it is not unusual for unanticipated issues relating to transfer agents,
legend removal, local law matters (including local court approval),
medallion guarantees or non-U.S. parties to arise.\180\ Such
unanticipated issues could lead to increased failures to settle trades
on a T+1 basis with respect to firm commitment offerings priced after
4:30 p.m. ET. For these reasons, the Commission has reconsidered its
proposed deletion of paragraph (c) of Rule 15c6-1.
---------------------------------------------------------------------------
\180\ See SIFMA April Letter, supra note 16, at 10.
---------------------------------------------------------------------------
As stated above, the comment letter discussing the proposed
deletion of paragraph (c) stated that the Commission should amend
paragraph (c) to establish a T+2 settlement cycle for firm commitment
offerings priced after 4:30 p.m. ET.\181\ The Commission agrees with
the commenter's recommendation, and is amending paragraph (c) to
establish a T+2 settlement cycle for these offerings, rather than
deleting paragraph (c) as the Commission proposed. In the T+1 Proposing
Release, the Commission considered such a T+2 standard as an
alternative to deleting paragraph (c), but proposed deleting paragraph
(c) to fully
[[Page 13885]]
harmonize the settlement of primary offerings with the settlement cycle
for secondary market trades, thereby removing all financial and
operational risks that can arise when the same security settles on two
different settlement cycles.\182\ In proposing this approach, the
Commission stated its belief that paragraph (d) would provide
sufficient flexibility to manage the need for a longer settlement cycle
when it arises.\183\ In light of the comments received, and as
discussed above, the Commission now believes that the flexibility
provided by paragraph (d) is insufficient to ensure timely settlement
for certain firm commitment offerings under a T+1 standard settlement
cycle. Accordingly, the Commission believes that the proposed
alternative--retaining paragraph (c) but shortening the standard
settlement cycle under the provision to T+2--would best achieve the
Commission's stated objective of establishing a common standard that
effectively minimizes the financial and operational risks associated
with the settlement of firm commitment offerings. As discussed in the
T+1 Proposing Release, the T+1 Report indicates that, under the
existing T+4 settlement cycle for firm commitment offerings, most
transactions currently settle on a T+2 basis. Consistent with the
comments received, the Commission believes that a T+2 settlement cycle
for firm commitment offerings priced after 4:30 p.m. ET provides
sufficient time and flexibility to complete documentation and address
any other issues that may arise in the preparation of a firm commitment
offering to ensure timely settlement.
---------------------------------------------------------------------------
\181\ See id.
\182\ T+1 Proposing Release, supra note 2, at 10450.
\183\ Id. at 10492.
---------------------------------------------------------------------------
5. Retention of Existing Exchange Act Rule 15c6-1(d) Unchanged
Because the Commission is not deleting paragraph (c) of Rule 15c6-
1, the Commission is not adopting the proposed technical changes to
paragraph (d) of the rule. The Commission did not propose any other
changes to paragraph (d) of Rule 15c6-1, and the Commission received no
comments recommending changes to this provision of the rule.
The Commission agrees with the commenter stating that paragraph (d)
should be retained \184\ because paragraph (d) enables underwriters and
the parties to a transaction to agree, in advance of the transaction,
to a settlement cycle other than the standard settlement cycle
specified in either paragraph (a) or (c) of the rule, when necessary to
manage obligations associated with the firm commitment offerings.
Market participants involved in firm commitment offerings of certain
debt and preferred securities commonly rely on paragraph (d) of Rule
15c6-1 to extend settlement in order to allow time for the completion
of the extensive documentation associated with such offerings,\185\ and
the Commission believes it is not always possible for such
documentation to be completed within the time frames provided by under
paragraphs (a) and (c) of Rule 15c6-1. Therefore the amendments to Rule
15c6-1 being adopted in this document do not include any changes to
paragraph (d) of the rule.
---------------------------------------------------------------------------
\184\ See SIFMA April Letter, supra note 16, at 11.
\185\ See T+1 Report, supra note 61, at 33.
---------------------------------------------------------------------------
6. Exemptive Orders Under Exchange Act Rule 15c6-1(b)
The Commission has reviewed the comments submitted in response to
the T+1 Proposing Release that relate to the Commission's existing
exemptive orders issued pursuant to Exchange Act Rule 15c6-1(b),\186\
and, because no changes are needed to facilitate an orderly transition
to a T+1 settlement cycle, the existing exemptive orders will remain in
effect without modification. The Commission's view that no changes to
the orders are needed is consistent with the comments urging that the
Commission retain both the existing exemption for certain insurance
products, as well as the exemption for certain foreign securities, as
described above.\187\
---------------------------------------------------------------------------
\186\ See supra notes 105 and 126.
\187\ See supra Part II.B.5.
---------------------------------------------------------------------------
With respect to the comments recommending that the Commission
expand the scope of the existing exemptive order relating to securities
that do not have facilities for transfer or delivery in the U.S.,\188\
the Commission is not persuaded that expanding the scope of the order
is necessary at this time and is declining to do so for the reasons
discussed below. However, the Commission will continue to monitor how
shortening the standard settlement cycle to T+1 in the U.S. affects
market participants.
---------------------------------------------------------------------------
\188\ See SIFMA April Letter, supra note 16, at 8-9; ICI Letter,
supra note 16, at 4.
---------------------------------------------------------------------------
Notwithstanding the comments raising concerns that the existing
exemption for certain foreign securities does not exempt ADRs from the
T+1 standard settlement cycle,\189\ the Commission believes that ADRs
should continue to be subject to Rule 15c6-1(a). In response to one
commenter's statements relating to the timely sale of ADR transactions
using newly created ADRs,\190\ the Commission understands that a large
percentage of ADR trading activity involves purchases and sales of
existing ADRs in the U.S. markets. Thus, the commenter's concerns would
seem to relate to only a small percentage of ADR trading activity.\191\
---------------------------------------------------------------------------
\189\ See SIFMA April Letter, supra note 16, at 8; ICI Letter,
supra note 16, at 4.
\190\ See SIFMA April Letter, supra note 16, at 8.
\191\ See infra notes 606-616 (discussing the anticipated
economic effect on transactions in ADRs).
---------------------------------------------------------------------------
The commenter stated that ``[t]his type of trade'' will not be
possible if the underlying foreign shares settle on T+2 and the related
ADR is required to settle on T+1, and the result is likely to be wider
bid-ask spreads for the ADR because market makers must take into
account the additional cost of borrowing securities and other financing
costs to avoid settlement failures.\192\ While bid-ask spreads could
widen and costs could increase for this narrow category of ADR
transactions, the Commission believes that ADRs should be subject to
the requirements under Rule 15c6-1(a). Exempting ADRs from the
requirements under Rule 15c6-1(a) would create another misalignment
between the securities settlement cycle for ADRs and the standard
settlement cycle for other types of securities, which the Commission
believes would unduly dilute the benefits of a standard settlement
cycle. As a general matter, a standard settlement cycle facilitates
operational efficiency, reduces operational costs and transaction
costs, and reduces risk for market participants.
---------------------------------------------------------------------------
\192\ See id.; see also ICI Letter, supra note 16, at 4.
---------------------------------------------------------------------------
In this particular case, the Commission believes that exempting
ADRs from Rule 15c6-1(a) would diminish the benefits associated with
shortening the standard settlement cycle to T+1. As previously
discussed in detail, such benefits include risk reduction (e.g.,
credit, market, liquidity and systemic risk), as well as increased
capital efficiency.
The Commission also does not agree with the commenter that it will
be impossible for market makers and other market participants to
purchase foreign shares and sell related ADRs in the U.S. on the same
trading day, and thus timely settle the sale of the ADRs using the
newly created ADRs.\193\ Rather, the Commission believes that market
participants can borrow the underlying securities necessary to settle
the newly created ADR on T+1 if the securities are available. While the
commenter also raises the concern that in some cases it will not be
possible to borrow the
[[Page 13886]]
securities to make delivery,\194\ the possibility that certain
securities may be costly or difficult to borrow at certain times is not
limited to ADRs. As previously discussed, establishing a standard
settlement cycle facilitates operational efficiency, reduces
operational costs and transaction costs, and reduces risk for market
participants. Providing exemptions for securities that can be costly or
difficult to borrow--when the cost or difficulty to borrow will vary
over time in response to movements in the price of the security, a
dynamic unrelated to the length of the settlement cycle--would erode
these benefits.
---------------------------------------------------------------------------
\193\ See SIFMA April Letter, supra note 16, at 8.
\194\ See id.
---------------------------------------------------------------------------
The Commission also has reviewed the comments urging the Commission
to ``exempt from T+1 settlement'' U.S.-listed ETFs with baskets that
contain foreign securities and ADRs,\195\ and has determined that such
an exemption is not warranted at this time for reasons that are similar
to those discussed above in response to the comments raising concerns
regarding the impact the move to T+1 will have on market participants
trading ADRs. As a general matter, the Commission believes that
allowing ETFs to settle on a settlement cycle that is longer than T+1
would diminish the benefits associated with a standard settlement cycle
and shortening the standard settlement cycle to T+1.
---------------------------------------------------------------------------
\195\ See id.; ICI Letter, supra note 16, at 4.
---------------------------------------------------------------------------
The Commission recognizes that settling trades in U.S.-listed ETFs
with baskets that contain foreign securities may become more costly for
certain APs in a T+1 environment, as result of the prospective
misalignment between the settlement cycle for such trades and the
settlement cycle for the underlying foreign securities. For example,
the Commission acknowledges that during the ETF share creation process,
APs may need to post collateral or establish credit lines to satisfy
foreign market requirements. However, as previously discussed, the
Commission believes that moving to a T+1 settlement cycle will reduce
other costs (e.g., margin charges), increase capital efficiency, and
reduce risk in the U.S. clearance and settlement system.\196\
---------------------------------------------------------------------------
\196\ See supra note 139 and accompanying text.
---------------------------------------------------------------------------
The Commission also disagrees with the comment stating that the
prospective misalignment in settlement cycles may increase certain
risks, such as failed trades, accrual differences, net asset value
miscalculations, and investment guideline breaches. Market participants
will have many months to implement any operational requirements they
identify associated with the move to a T+1 settlement cycle, including
the operational requirements associated with the settlement of U.S.-
listed ETFs with baskets that include foreign securities and/or ADRs.
The industry has already identified many such requirements,\197\ and
the Commission believes that market participants will have sufficient
time to complete the operational changes necessary to minimize these
risks. Moreover, as explained above,\198\ the Commission believes that
shortening the settlement cycle will reduce certain risks for market
participants overall (e.g., credit, market and liquidity risk),
including these risks faced by APs.
---------------------------------------------------------------------------
\197\ See T+1 Playbook, supra note 134, at 33 (providing
recommendations to improve timing in nightly batch cycles, make use
of lines of credit to address the potential need for more
collateral, and establishing connections for real-time messaging
with NSCC).
\198\ See supra note 139 and accompanying text.
---------------------------------------------------------------------------
The Commission also does not believe that it is necessary at this
time to amend the text of paragraph (b) of Rule 15c6-1 to codify the
existing exemptive order for securities that do not have facilities for
transfer or delivery in the U.S., or the existing exemptive order for
certain insurance products. As noted above, one commenter recommended
that the existing exemptions ``either be codified in Rule 15c6-1(b), or
the Commission issue a new order to replace the orders issued in 1995
to facilitate access to the terms of the exemptions and to facilitate
compliance with their terms.'' \199\
---------------------------------------------------------------------------
\199\ See supra note 128 and accompanying text.
---------------------------------------------------------------------------
Since these orders were first issued in 1995, both orders have
provided adequate regulatory relief to market participants who engage
in transactions that the orders were intended to cover. Codifying the
exemptions is not necessary to facilitate the transition to a T+1
settlement cycle, and the Commission is aware of no evidence that
market participants lack knowledge of the terms of the exemptive orders
or have been unable to comply with the orders because they have not
been codified in Rule 15c6-1.
III. Exchange Act Rule 15c6-2--Same-Day Affirmation
A. Proposed Rule 15c6-2
The Commission proposed 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).\200\
---------------------------------------------------------------------------
\200\ See T+1 Proposing Release, supra note 2, at 10453.
---------------------------------------------------------------------------
In proposing Rule 15c6-2, the Commission did not define the terms
``allocation,'' ``confirmation,'' or ``affirmation,'' but explained
that 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.\201\ The T+1 Proposing Release also explained that the
terms ``confirmation'' and ``affirmation'' in proposed Rule 15c6-2
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. The Commission stated
its belief that these terms are widely used and generally understood by
market participants who engage in institutional trade processing.\202\
---------------------------------------------------------------------------
\201\ Id.
\202\ See id.
---------------------------------------------------------------------------
In addition, in proposing Rule 15c6-2, the Commission used 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), in contrast to the
confirmations required under Rule 10b-10, which concern a series of
disclosures that broker-dealers are required to provide in writing to
customers at or before completion of a transaction.\203\ The Commission
explained that 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.\204\
---------------------------------------------------------------------------
\203\ See id. 10453-54.
\204\ See id. 10454.
---------------------------------------------------------------------------
The Commission also explained that the term ``customer,'' as used
in proposed Rule 15c6-2, includes any person or agent of such person
who opens a brokerage account at a broker-
[[Page 13887]]
dealer to effect an institutional trade or purchases or sells a
security for which the broker-dealer receives or will receive
compensation.\205\ The Commission stated that the term is intended to
cover both the institutional investor and any and all agents acting on
its behalf.\206\
---------------------------------------------------------------------------
\205\ See id.
\206\ See id.
---------------------------------------------------------------------------
B. Comments
1. Existing Commercial Incentives for Timely Trade Allocations,
Confirmations, and Affirmations
Two commenters stated that the written agreements required under
proposed Rule 15c6-2 are unnecessary to improve same-day affirmation
rates because commercial incentives to achieve timely trade
allocations, confirmations, and affirmations already exist.\207\ One
commenter identified, for example, the following incentives for firms
to achieve on-time settlement: increased cost of settling a trade
without netting through the CCP; increased costs associated with the
processing of trades that are not affirmed; costs associated with buy-
ins for trades that are not settled on a timely basis; and the
potential for customer dissatisfaction related to the failure to timely
settle or the increased costs associated with such failure.\208\ The
second commenter stated that it is in an institutional customer's best
interest to timely allocate, confirm, and affirm its trades, as doing
so is the first step and a pre-condition to settling a trade.\209\ This
commenter also stated more generally that financial disincentives for
institutional customers that do not meet a same-day affirmation
timeline already exist.\210\
---------------------------------------------------------------------------
\207\ See Fidelity Letter, supra note 16, at 3-4 (stating that
proposed Rule 15c6-2 is not necessary because ``market incentives
already exist to timely allocate, confirm, and affirm trades'');
letter from Tom Price, Managing Director, SIFMA (Aug. 26, 2022), at
2 (``SIFMA August 26th Letter'') (stating that written agreements,
as proposed by Rule 15c6-2, are unnecessary because ``there are many
commercial incentives in place for industry participants to meet
market standard settlement timelines'').
\208\ See SIFMA August 26th Letter, supra note 207, at 2.
\209\ See Fidelity Letter, supra note 16, at 3.
\210\ See id.
---------------------------------------------------------------------------
2. Linking Settlement Instructions to Affirmation
In the T+1 Proposing Release, the Commission stated that broker-
dealers are best positioned to ensure the timely settlement of
institutional trades and, as such, should be able to ensure via their
customer agreements that institutional customers or their agents also
adjust their operations to facilitate same-day affirmation.\211\ In
response to this statement, one commenter stated that settlement
requires client instruction through a client's agents, who are
typically custodians, against a broker-dealer's trades.\212\ The
commenter also stated that, because custodians often act as an agent
for institutional clients, custodians are highly dependent on the
implementation of efficient and timely operating models and processes
across market participants at the trading level, including
institutional clients and broker-dealers, before they can effect
settlement on their client's behalf.\213\ In this regard, the commenter
requested that the Commission consider requiring through Rule 15c6-2
the linking of settlement instructions to the affirmation.\214\
---------------------------------------------------------------------------
\211\ See T+1 Proposing Release, supra note 2, at 10453.
\212\ See AGC April Letter, supra note 16, at 3.
\213\ See id.
\214\ See id. at 2.
---------------------------------------------------------------------------
3. Definitions of Certain Terms
In the T+1 Proposing Release, the Commission requested comment as
to whether the terms ``allocation,'' ``confirmation,'' ``affirmation,''
``end of the day on trade date,'' and ``customer'' should be defined
for purposes of Rule 15c6-2.\215\ In response, one commenter agreed
with the Commission's view, as articulated in the T+1 Proposing
Release, and expressed support for not defining these terms in the
rule.\216\ This commenter stated that, because operational and
technological processes and practices continually evolve across market
participants who engage in institutional trade processing, the above
terms are best grounded in the prevailing market practices and uses
understood by these market participants.\217\ A second commenter, in
contrast, stated that it would generally be helpful for the Commission
to provide definitions of terms within the context of the proposed
rule, even where such terms are commonly used in the industry.\218\ The
commenter recommended that the Commission define each of the above
terms for purposes of Rule 15c6-2 and suggested that the Commission
also define the term ``trade'' because there are multiple uses of this
term by the industry.\219\ The commenter further stated that the term
``affirmation'' is open to some interpretation and suggested that the
Commission define this term in particular.\220\
---------------------------------------------------------------------------
\215\ See T+1 Proposing Release, supra note 2, at 10455.
\216\ See letter from Matthew Stauffer, Managing Director and
Head of DTCC Institutional Trade Processing, DTCC ITP LLC (Apr. 11,
2022), at 3 (``DTCC ITP April Letter'').
\217\ See id. (explaining that by not prescribing definitions
for the key terms used in proposed Rule 15c6-2, the Commission would
allow such terms to continue to evolve).
\218\ See letter from Jim Kaye, Americas Regional Director, FIX
Trading Community (Apr. 11, 2022), at 2-3 (``FIX Trading Letter'').
\219\ See id. The commenter provided suggested definitions for
the terms ``allocation,'' ``confirmation,'' and ``affirmation'' and
recommended that the term ``end of the day on trade date'' be
defined as a specific time of day together with its time zone. Id.
at 2.
\220\ See id. at 2.
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4. Use of Third Parties To Achieve Same-Day Affirmation
One commenter requested that the Commission clarify whether, under
proposed Rule 15c6-2, an investment adviser that has entered into an
agreement with a broker-dealer pursuant to the proposed rule may rely
on a third party--such as a third party order management system, sub-
adviser, or custodian--to allocate or affirm trades.\221\ This
commenter, in a later letter, stated that ``upon further analysis, we
understand that requiring advisers to enter into specific contractual
arrangements would create significant challenges for advisers,'' and
recommended that the Commission replace the proposed requirement of a
written agreement with a requirement that investment advisers adopt and
implement policies and procedures reasonably designed to ensure that
allocations, confirmations, and affirmations are completed on a
timeline that allows settlement on T+1.\222\ As the commenter
explained, this approach would ``relieve investment advisers, when they
are parties to an allocation, confirmation, and affirmation process,
from the burden of negotiating and having to regularly update written
agreements,'' and ``create incentives for investment advisers to work
with broker-dealers and other third parties to complete the process in
a timely manner while allowing them greater flexibility to comply in a
manner best suited to their existing infrastructure, clients, and
resource levels.'' \223\
---------------------------------------------------------------------------
\221\ See IAA April Letter, supra note 16, at 3-4.
\222\ See letter from Gail C. Bernstein, General Counsel, and
William A. Nelson, Associate General Counsel, Investment Adviser
Association (Oct. 19, 2022), at 1-2 (``IAA October Letter'').
\223\ Id.
---------------------------------------------------------------------------
5. Challenges Associated With Requiring Written Agreements in Support
of Increasing Same-Day Affirmations
Although commenters generally supported the Commission's overall
goal of increasing same-day affirmations, several commenters expressed
a number of concerns with
[[Page 13888]]
the written agreement requirement in proposed Rule 15c6-2.\224\ First,
commenters stated that in many scenarios written agreements do not
currently exist between the parties to an institutional transaction and
would be highly burdensome to establish specifically for the purpose of
facilitating same-day affirmation. For example, two commenters
explained that agreements do not exist because the parties engage in
their transactions on a receive-versus-payment/deliver-versus-payment
(``RVP/DVP'') basis without an underlying agreement.\225\ In an RVP/DVP
transaction, securities are only delivered by the seller when payment
has been made by the buyer.
---------------------------------------------------------------------------
\224\ See ASA Letter, supra note 16, at 2; Fidelity Letter,
supra note 16, at 3-4; IAA October Letter, supra note 222, at 1-3;
ICI Letter, supra note 16, at 5-7; ISITC Letter, supra note 29, at
2; MarketAxess Letter, supra note 29, at 2-3; SIFMA April Letter,
supra note 16, at 5-6; State Street Letter, supra note 16, at 4;
Virtu Financial Letter, supra note 16, at 3.
\225\ See Fidelity Letter, supra note 16, at 4; SIFMA April
Letter, supra note 16, at 5.
---------------------------------------------------------------------------
Some commenters explained that where written agreements do not
already exist, the parties would need to draft new agreements solely
for the purpose of compliance with the rule.\226\ In this regard,
commenters stated that, as proposed, Rule 15c6-2 would result in
burdensome, time consuming, and costly contract negotiations, as
broker-dealers would have to enter into a new or amended written
agreement with each of their institutional customers.\227\ Moreover,
another commenter stated that certain clients may not authorize their
investment advisers to enter into the type of written agreement
required under proposed Rule 15c6-2, while other clients may insist on
negotiating bespoke guideline requirements, such as arbitration or
governing law, into their written agreements.\228\ Multiple commenters
further expressed the view that the proposed written agreement
requirement would create unnecessary practical burdens and costs.\229\
Several of these commenters stated that it would be impracticable for
institutional customers to enter into such agreements because they
often rely on other parties to complete certain elements of the
allocation, confirmation, and affirmation process.\230\ One of these
commenters stated more generally that a requirement for broker-dealers
to enter into a written agreement with each of their institutional
customers is not practically feasible.\231\ One commenter also observed
that it is unclear under proposed Rule 15c6-2 whether broker-dealers
should be entering into the written agreements with the investment
advisers or with their customers.\232\
---------------------------------------------------------------------------
\226\ See ISITC Letter, supra note 29, at 2; Fidelity Letter,
supra note 16, at 4.
\227\ See ICI Letter, supra note 16, at 5-6; MarketAxess Letter,
supra note 29, at 2-3; SIFMA April Letter, supra note 16, at 5-6.
\228\ See SIFMA April Letter, supra note 16, at 5.
\229\ See ASA Letter, supra note 16, at 2; ICI Letter, supra
note 16, at 5; SIFMA April Letter, supra note 16, at 5; Virtu
Financial Letter, supra note 16, at 3.
\230\ See ICI Letter, supra note 16, at 5; SIFMA April Letter,
supra note 16, at 5; Virtu Financial Letter, supra note 16, at 3.
\231\ See ASA Letter, supra note 16, at 2.
\232\ See SIFMA April Letter, supra note 16, at 5.
---------------------------------------------------------------------------
Multiple commenters expressed a separate concern that proposed Rule
15c6-2 would expose a non-breaching broker-dealer to potential
liability if its customer, or customer's agent, breaches the written
agreement, even if through no fault of the broker-dealer.\233\ In
raising this concern, some commenters stated that the proposed rule
does not specify what should happen if the broker-dealer's customer or
its agent breaches the written agreement, which may put broker-dealers
in the difficult position of trying to regulate the conduct of their
customers through commercial contracts.\234\ Another commenter also
observed that the proposed rule would place the compliance burden on
broker-dealers, even though the customer--and not the broker-dealer--
has the necessary information to complete the allocation, confirmation,
and affirmation process.\235\ However, under proposed Rule 15c6-2, a
broker-dealer is only responsible for its own actions and not for the
actions of its customers or any other relevant parties to an
institutional transaction, as discussed further in Part III.C.
---------------------------------------------------------------------------
\233\ See Fidelity Letter, supra note 16, at 4; MarketAxess
Letter, supra note 29, at 3; SIFMA April Letter, supra note 16, at
6; Virtu Financial Letter, supra note 16, at 3.
\234\ See Fidelity Letter, supra note 16, at 4 (questioning
whether, under proposed Rule 15c6-2, a broker-dealer would be
subject to SEC enforcement if it failed to enforce private
contractual provisions with its customers regarding same-day
affirmation); MarketAxess Letter, supra note 29, at 3 (stating that
broker-dealers are not regulators and, as such, cannot force their
customers to upgrade their technology or processes to achieve same-
day affirmations).
\235\ See SIFMA April Letter, supra note 16, at 6.
---------------------------------------------------------------------------
Further, several commenters expressed the view that a written
agreement requirement, as proposed in Rule 15c6-2, would not be an
effective approach for achieving the Commission's overall goal of
increasing same-day affirmations.\236\ One commenter observed, for
example, that a written agreement requirement is unnecessary because
the industry recognizes the importance of same-day affirmations and is
actively working toward achieving same-day allocations, confirmations,
and affirmations.\237\ In this regard, some commenters recommended that
the Commission revise proposed Rule 15c6-2 to replace the written
agreement requirement with a requirement that broker-dealers establish
written policies and procedures reasonably designed to achieve same-day
affirmation.\238\ Some of these commenters further stated that such a
principles-based approach would relieve the parties to an institutional
transaction from the burden of negotiating a written agreement;
incentivize broker-dealers to work with their customers to complete the
allocation, confirmation, and affirmation process in a timely manner;
and afford broker-dealers more flexibility to comply with the rule in a
manner best suited to their specific business models, customer bases,
and products.\239\
---------------------------------------------------------------------------
\236\ See ASA Letter, supra note 16, at 2; ICI Letter, supra
note 16, at 5; ISITC Letter, supra note 29, at 2; MarketAxess
Letter, supra note 29, at 3; SIFMA April Letter, supra note 16, at
5; State Street Letter, supra note 16, at 4.
\237\ See ICI Letter, supra note 16, at 7.
\238\ See ASA Letter, supra note 16, at 2; ICI Letter, supra
note 16, at 7; MarketAxess Letter, supra note 29, at 3; SIFMA April
Letter, supra note 16, at 6; State Street Letter, supra note 16, at
4; Virtu Financial Letter, supra note 16, at 3; see also IAA October
Letter, supra note 222, at 1-2; SIFMA August 26th Letter, supra note
207, at 2.
\239\ See ICI Letter, supra note 16, at 7; MarketAxess Letter,
supra note 29, at 3; SIFMA April Letter, supra note 16, at 6; see
also IAA October Letter, supra note 222, at 2-3; SIFMA August 26th
Letter, supra note 207, at 2.
---------------------------------------------------------------------------
Finally, two commenters indicated that the proposed requirement for
written agreements in Rule 15c6-2 may encourage parties to cancel their
transactions before the end of trade date when an allocation,
confirmation, or affirmation cannot be completed to avoid violating the
proposed rule.\240\
---------------------------------------------------------------------------
\240\ See ICI Letter, supra note 16, at 7; Virtu Financial
Letter, supra note 16, at 3.
---------------------------------------------------------------------------
6. End-of-Day Trading, Transactions Across Multiple Time Zones, and
Variations in Local Holidays as Obstacles to Same-Day Affirmation
Several commenters raised concerns about certain obstacles--such as
end-of-day trading, transactions across multiple time zones, and
variations in holiday schedules--that could interfere with achieving
same-day affirmation under proposed Rule 15c6-2.\241\ One commenter
stated that, given time zone
[[Page 13889]]
differences, a non-U.S. investment manager might not be able to fill
and execute its U.S. securities transactions before its local close of
business and, therefore, would not be able to achieve same-day
affirmation.\242\ Another commenter indicated that same-day affirmation
may be difficult to achieve for those in the same or similar time zones
for trades occurring at or near the U.S. market close, and that same-
day affirmation may not be feasible for those located in time zones
several hours ahead of the U.S., as new cut-off times would occur late
into their overnight.\243\ Some commenters stated that investment
advisers and their clients often rely on other parties to complete
certain aspects of the allocation, confirmation, and affirmation
process and, in doing so, are subject to the time zones and local
holiday schedules in the countries where these other parties operate,
which could prevent achieving same-day affirmation.\244\ The same
commenters requested that the Commission modify proposed Rule 15c6-2 to
offer broker-dealers some flexibility in situations where same-day
affirmation cannot be achieved because of circumstances that are beyond
their control.\245\ In this regard, some commenters recommended that
the Commission replace the written agreement requirement in proposed
Rule 15c6-2 with a requirement that broker-dealers adopt written
policies and procedures to facilitate same-day affirmation.\246\
---------------------------------------------------------------------------
\241\ See AIMA Letter, supra note 29, at 2, 6-7; ISITC Letter,
supra note 29, at 6; SIFMA April Letter, supra note 16, at 5; Virtu
Financial Letter, supra note 16, at 3.
\242\ See ISITC Letter, supra note 29, at 6.
\243\ See AIMA Letter, supra note 29, at 2, 6-7.
\244\ See ICI Letter, supra note 16, at 5-6; SIFMA April Letter,
supra note 16, at 5; Virtu Financial Letter, supra note 16, at 3.
\245\ See ICI Letter, supra note 16, at 7; SIFMA April Letter,
supra note 16, at 5; Virtu Financial Letter, supra note 16, at 3.
\246\ See ICI Letter, supra note 16, at 7; SIFMA April Letter,
supra note 16, at 5; Virtu Financial Letter, supra note 16, at 3.
---------------------------------------------------------------------------
7. Alternative Rule Recommended in SIFMA August Letter
The Commission received an additional comment letter from SIFMA
addressing alternatives to proposed Rule 15c6-2.\247\ SIFMA recommended
that the Commission revise proposed Rule 15c6-2 to replace the written
agreement requirement with a requirement for policies and procedures to
support faster processing, as it would allow individual firms to design
policies and procedures tailored to their business models, products,
and unique customer bases while advancing the Commission's interest in
same-day affirmation.\248\ The Commission generally agrees that
requiring broker-dealers to establish, maintain, and enforce policies
and procedures for achieving same-day affirmation is an effective way
to improve affirmation rates because it promotes an orderly settlement
process, thereby helping to ensure timely settlement in a shortened
settlement cycle. The Commission also believes that establishing,
maintaining, and enforcing policies and procedures as an alternative
approach to compliance aside from entering into written agreements
enables broker-dealers to avoid the substantial burdens and challenges
that may be associated with negotiating written agreements in some
cases. Nonetheless, as previously discussed in Part III.B.5 above, the
Commission also believes that it is appropriate to retain the
requirement for written agreements as one of two options for broker-
dealers to achieve compliance with Rule 15c6-2.
---------------------------------------------------------------------------
\247\ See SIFMA August 26th Letter, supra note 207, at 2-3.
\248\ See id. at 2. In Part III.B.5 above, the Commission has
previously discussed why it believes it appropriate to retain the
written agreement requirement in the rule, while also adding an
option to establish, maintain, and enforce written policies and
procedures.
---------------------------------------------------------------------------
SIFMA's recommendation included a number of elements. First, SIFMA
requested that Rule 15c6-2 be revised to require broker-dealers to
establish, document, and uphold policies and procedures reasonably
designed to maintain timely settlement rates.\249\ Second, SIFMA
recommended that such policies and procedures: (i) address the timing
of allocations, confirmations, and affirmations to ensure timely
settlement; (ii) include a communication plan with market participants;
(iii) provide a description of a broker-dealer's ability to monitor
compliance; (iv) include the development of controls and supervisory
procedures; and (v) include the development of metrics to measure
compliance.\250\ The Commission generally agrees with SIFMA's approach
and, as discussed in Part III.C below, is revising final Rule 15c6-2 to
allow broker-dealers to achieve compliance with the rule either by (1)
entering into written agreements or (2) establishing, maintaining, and
enforcing reasonably designed policies and procedures. Below, the
Commission discusses each of SIFMA's recommendations in turn.
---------------------------------------------------------------------------
\249\ See id.
\250\ See id. at 2-3.
---------------------------------------------------------------------------
First, SIFMA requested that Rule 15c6-2 be revised to require
broker-dealers to establish, document, and uphold policies and
procedures reasonably designed to maintain timely settlement
rates.\251\ While the Commission agrees that a policies and procedures
approach can also advance the Commission's same-day affirmation
objective, the Commission believes that timely settlement is a
separate, if related, objective from same-day affirmation. Commission
rules have long established the standard for timely settlement, as
reflected by the requirements for the standard settlement cycle set
forth in Rule 15c6-1. In contrast, Rule 15c6-2, as proposed, seeks to
advance the objective of same-day affirmation. As discussed further in
Part III.C, the Commission believes that improving affirmation rates on
trade date is an objective separate and apart from, if nonetheless
related to, shortening the settlement cycle because it promotes an
orderly settlement process regardless of the length of the settlement
cycle. In the T+1 Proposing Release, the Commission stated that, while
proposed Rule 15c6-2 does not require settlement of the transaction on
trade date, the requirement for same-day affirmation supports orderly
settlement by reducing the likelihood of exceptions or other processing
errors that can lead to settlement fails.\252\ The Commission
recognizes that Rule 15c6-1 already addresses the concept of timely
settlement by establishing a standard settlement cycle. As a result,
the Commission believes that, while proposed Rule 15c6-2 should be
revised to incorporate a policies and procedures approach, the specific
objective of same-day affirmation, and not the more general objective
of timely settlement, remains the objective that such policies and
procedures should be reasonably designed to achieve.
---------------------------------------------------------------------------
\251\ Id. at 2.
\252\ See T+1 Proposing Release, supra note 2, at 10454-55.
---------------------------------------------------------------------------
Second, SIFMA suggested that policies and procedures be designed to
address the timing of allocations, confirmations, and affirmations to
ensure timely settlement.\253\ The Commission agrees that addressing
the timing of allocations, confirmation, and affirmations on trade date
can help advance the objective of same-day affirmation, and, as
discussed further in Part III.C below, the Commission is including in
the final rule a requirement for policies and procedures to include
target time frames on trade date for achieving allocations,
confirmations, and affirmations.\254\
---------------------------------------------------------------------------
\253\ See SIFMA August 26th Letter, supra note 207, at 2.
\254\ See Rule 15c6-2(b)(2).
---------------------------------------------------------------------------
Third, SIFMA suggested that policies and procedures be designed to
include a communication plan with market
[[Page 13890]]
participants.\255\ The Commission agrees with this suggestion, and, as
discussed further in Part III.C below, the Commission is including in
the final rule a requirement for reasonably designed policies and
procedures that include the procedures the broker-dealer will follow to
ensure the prompt communication of trade information, investigate any
discrepancies in trade information, and adjust trade information to
help ensure that the allocation, confirmation, and affirmation process
can be completed by the target time frames on trade date.\256\
---------------------------------------------------------------------------
\255\ See SIFMA August 26th Letter, supra note 207, at 2.
\256\ See Rule 15c6-2(b)(3).
---------------------------------------------------------------------------
Finally, SIFMA suggested that the policies and procedures be
designed to provide a description of a broker-dealer's ability to
monitor compliance, include the development of controls and supervisory
procedures, and include the development of metrics to measure
compliance.\257\ The Commission also agrees that these elements can
ensure that policies and procedures are effective at helping to ensure
that allocations, confirmations, and affirmations can be completed on
trade date. Accordingly, and as discussed further in Part III.C below,
the Commission is including in the final rule similar requirements as
those described by SIFMA for reasonably designed policies and
procedures that identify and describe any technology systems,
operations, and processes used to coordinate with relevant parties to
ensure completion of the allocation, confirmation, or affirmation
process; \258\ describe how the broker-dealer plans to identify and
address delays; \259\ and measure, monitor, and document the rates of
allocations, confirmations, and affirmations completed as soon as
technologically practicable and no later than the end of trade
date.\260\
---------------------------------------------------------------------------
\257\ See id. at 2-3.
\258\ See Rule 15c6-2(b)(1).
\259\ See Rule 15c6-2(b)(4).
\260\ See Rule 15c6-2(b)(5).
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C. Final Rule and Discussion
After considering the above comments, the Commission continues to
believe that implementing a T+1 standard settlement cycle will require
significant improvements in the current rates of same-day affirmations
to help ensure timely settlement in a T+1 environment.\261\ Although
the Commission agrees that the incentives identified by commenters in
Part III.B.1 exist and help ensure timely settlement, the Commission
believes that these incentives alone are insufficient to significantly
improve same-day affirmation rates, as required to facilitate
shortening the standard settlement cycle to T+1.\262\ While data cited
in the T+1 Proposing Release indicates that affirmation rates have
improved over time, the improvements have been only modest.\263\
Currently, despite existing commercial incentives and efforts to
establish ``same-day affirmation'' as an industry best practice, only
about 68% of trades achieve affirmation on trade date.\264\ Because the
above incentives and efforts, on their own, have not sufficiently
improved the current rate of same-day affirmations, the Commission
believes that additional regulatory steps--including establishing a
Commission requirement designed to advance the same-day affirmation
objective--are needed. In this way, a Commission rule effectively
targeted to the same-day affirmation objective can increase the rate of
same-day affirmation for several reasons.\265\
---------------------------------------------------------------------------
\261\ See T+1 Proposing Release, supra note 2, at 10453.
\262\ See T+1 Report, supra note 61, at 13 (highlighting the
need for achieving affirmation on trade date and encouraging that
affirmations be completed by 9:00 p.m. ET on trade date to
facilitate shortening the standard settlement cycle to T+1).
\263\ T+1 Proposing Release, supra note 2, at 10453 n.156
(citing DTCC, Proposal to Launch a New Cost-Benefit Analysis on
Shortening the Settlement Cycle (Dec. 2011), available at <a href="https://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-costbenefit-analysis-on-shortening-the-settlementcycle.aspx">https://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-costbenefit-analysis-on-shortening-the-settlementcycle.aspx</a>).
\264\ See Sean McEntee, Executive Director, ITP Product
Management, DTCC, Remarks at the DTCC ITP Forum--Americas (June 17,
2021) (``DTCC ITP Forum Remarks''), available at <a href="https://www.dtcc.com/events/archives">https://www.dtcc.com/events/archives</a>.
\265\ See infra notes 578-581 and accompanying text (discussing
the anticipated economic benefits of Rule 15c6-2 for the rate of
same-day affirmations).
---------------------------------------------------------------------------
First, in the absence of such a rule, the existing incentives
identified by commenters tend only to impose substantial costs on the
parties if a transaction fails to settle on time (i.e., pursuant to the
standard settlement cycle set forth in Rule 15c6-1(a)). However,
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. Second, many institutional transactions are not eligible for
netting through the CCP because the relevant securities are held by a
custodian bank that is not a CCP participant, and so market
participants that use such a custodian do not have the option for--or
the accompanying incentive to complete allocations, confirmations, and
affirmations by the submission times that would facilitate--netting at
the CCP.\266\ While industry planning for T+1 does contemplate creating
new incentives to specifically induce same-day affirmations by certain
cutoff times,\267\ even when the transaction will not be submitted to
the CCP for netting, the associated costs for failing to meet such
cutoff times are likely to be minor in comparison to the costs
associated with a failure to settle the transaction.\268\ As a result,
market participants may not take steps to realize the benefits that
accrue from achieving allocations, confirmations, and affirmations on
trade date, even when they are subjected to costs that arise from
failing to achieve timely settlement. Third, the costs associated with
failing to affirm a transaction, or with failing to achieve a buy-in,
can be shifted among the parties settling the transaction, reducing the
likelihood that these incentives will induce the parties to identify
potential improvements to their processes over time because they do not
internalize the full costs of failing to complete the allocation,
confirmation, and affirmation process on trade date. In addition,
because of the costs associated with improving processes and
implementing new technologies, these incentives may only induce change
when a broker-dealer is engaged in a high volume of
[[Page 13891]]
transactions for which errors are recurring and is also internalizing
the costs associated with correcting those errors. Otherwise, a broker-
dealer and the relevant parties may deploy ``just in time'' solutions,
where the allocation, confirmation, and affirmation process is
completed on settlement date or never completed, while shifting any
higher costs associated with ensuring the timely settlement of the
transaction to others.\269\
---------------------------------------------------------------------------
\266\ NSCC and DTCC ITP jointly offer an optional service called
``ID Net'' for transactions affirmed by DTCC ITP. The service
enables broker-dealers who are members of both NSCC and DTC to
aggregate and net for delivery purposes their institutional
transactions, affirmed via DTCC ITP, with their transactions pending
for settlement in NSCC's Continuous Net Settlement (``CNS'') system.
See DTCC, ID Net, <a href="https://www.dtcc.com/settlement-and-asset-services/settlement/id-net">https://www.dtcc.com/settlement-and-asset-services/settlement/id-net</a>. Nevertheless, such affirmed transactions
are not guaranteed by NSSC and NSCC does not provide any margin
offset to the broker-dealers' clearing fund requirements. See
Exchange Act Release No. 93070 (Sept. 20, 2021), 86 FR 53125 (Sept.
24, 2021) (SR-NSCC-2021-011) (approving NSCC rule change to remove
ID Net transactions from required fund deposit calculations).
\267\ See T+1 Report, supra note 61, at 13-14 (for a T+1
settlement cycle, encouraging allocations be complete by 7:00 p.m.
ET on trade date and recommending a new affirmation cutoff time of
9:00 p.m. ET on trade date).
\268\ Specifically, failing to submit allocation, confirmation,
and affirmation data by the cutoff time will likely require a
participant to submit the transaction manually to DTC, raising the
cost of the transaction. See infra note 269 and accompanying text
(discussing the different fees that DTC applies depending on the
timing or method of submission for settlement). If, a market
participant fails to settle the transaction, however, it may be
subject to buy-in obligations, whereby the market participant may
need to internalize not just the cost of completing the transaction
manually but also the cost of replacing the trade to the extent that
the market price of the transaction has moved against the market
participant since trade execution.
\269\ See, e.g., DTCC, Guide to the 2023 DTC Fee Schedule,
<a href="https://www.dtcc.com/-/media/Files/Downloads/legal/fee-guides/DTC-Fee-Schedule.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/fee-guides/DTC-Fee-Schedule.pdf</a> (setting different prices for night deliver orders,
day deliver orders, matched institutional trades, and exceptions
processing).
---------------------------------------------------------------------------
In proposing a requirement for written agreements, the Commission
intended for the relevant parties, through these agreements, to
establish more thoughtful and orderly processes--established prior to
trade execution--so that the parties to the transaction and their
agents would have a shared understanding as to what steps were
necessary to ensure that allocations, confirmations, and affirmations
could be completed across the range of transactions into which they
enter, and what consequences would result if a party (or its agent)
failed to provide the necessary allocation, confirmation, or
affirmation no later than the end of trade date.\270\
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\270\ To promote such preparation ex ante, the Commission has
modified the final rule to enable broker-dealers to pursue a
policies and procedures approach as an alternative to written
agreements. See infra Part III.C.2 (discussing the policies and
procedures alternative).
---------------------------------------------------------------------------
In addition, the Commission believes that it is appropriate to
impose obligations on a broker-dealer, even though the broker-dealer is
only responsible for its own actions and not for the actions of others
under Rule 15c6-2, because the broker-dealer has the ability, in some
circumstances, to modify the conduct of the other relevant parties with
which the broker-dealer may participate in the allocation,
confirmation, and affirmation process to ensure its own compliance with
the rule. As a result, the Commission believes that imposing such
obligations on broker-dealers can increase the rate of same-day
affirmation for institutional transactions,\271\ thereby promoting the
timely and orderly settlement of securities transactions, because many
broker-dealers will have relationships across multiple advisers,
custodians, and other types of agents, and therefore can introduce
better processes and procedures across a range of different
relationships. Although the broker-dealer ultimately may not be in a
position to bind the behavior of others,\272\ the Commission believes
that market participants are generally aligned in support of
facilitating same-day allocations, confirmations, and affirmations for
their transactions to the greatest extent possible. The Commission
believes that same-day affirmation is an important objective that can
facilitate an orderly and efficient transition to a T+1 and shorter
settlement cycles, and that Rule 15c6-2 will incentivize broker-dealers
to identify and deploy effective practices for achieving allocations,
confirmations, and affirmations ex ante, thereby improving the rate of
allocations, confirmations, and affirmations over time.
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\271\ To measure progress on the same-day affirmation objective,
the Commission is also adopting a requirement for CMSPs to submit to
the Commission an annual report on straight-through processing that
is required to include data on the rate of allocations,
confirmations, and affirmations, enabling the Commission to measure
progress on these metrics over time. See infra Part V.C.2.(c)
(discussing the data elements required in the annual report, which
include data concerning allocations, confirmations, and
affirmations).
\272\ Nonetheless, brokers do design their fees, in part, to
address the risks that they face, including settlement risk. See
infra notes 567-568 and accompanying text (explaining that broker-
dealers set their fees, in part, to manage settlement risks).
Broker-dealers may determine to raise the cost of trading for
customers that do not facilitate same-day affirmation pursuant to a
broker-dealer's written agreements or written policies and
procedures, as applicable.
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As explained in the T+1 Proposing Release, the compliance burden
imposed on broker-dealers by Rule 15c6-2 is to have a written agreement
in place with its customers that requires that the allocation,
confirmation, and affirmation process 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).\273\ In the Commission's view, even a
simple requirement to have an agreement in place can effectively
promote same-day affirmation because it helps ensure that the parties
to a transaction where allocation, confirmation, or affirmation will
occur have agreed in advance of entering the transaction as to the
operational arrangements necessary to ensure the allocation,
confirmation, or affirmation of the transaction. Rule 15c6-2 would not
expose a non-breaching broker-dealer to liability for violating the
rule based on the actions of its customer, or customer's agent,
provided that the written agreement describes the obligations of the
parties to ensure the allocation, confirmation, or affirmation of the
transaction, and the broker-dealer itself has complied with its
obligations under the written agreement. The Commission understands
that commercial relationships between broker-dealers and other parties,
such as investment advisers, often describe and, when possible,
quantify expectations between the parties as to the timing of and other
circumstances affecting the transfer of securities and funds,
establishing costs and other terms that may apply if one of the parties
to the agreement fails to meet its obligations for a certain threshold
of transactions within a certain timeframe. Adding a contractual
requirement for the same-day allocation, confirmation, and affirmation
of institutional transactions that would be executed and settled as
part of such commercial relationship, in the Commission's view, is
likely to increase the percentage of transactions for which
allocations, confirmations, and affirmations are completed on trade
date.
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\273\ See T+1 Proposing Release, supra note 2, at 10453.
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As a general matter, the Commission acknowledges that some of the
incentives identified by commenters may better align with the objective
of same-day affirmation in a T+1 environment than in a T+2 environment
because market participants are likely to endeavor to submit trades
that are eligible for netting to the CCP for settlement during a new
overnight process planned for the evening of trade date,\274\ a process
that would be unavailable unless the parties complete trade
allocations, confirmations, and affirmations on trade date. As stated
by some commenters, the final design of deadlines and related
operational requirements at the CCP, and at the industry level more
generally, will encourage market participants to improve the rate of
allocations, confirmations, and affirmations completed on trade date,
as will the shortening of the settlement cycle more generally.\275\
Nonetheless, the Commission believes that final Rule 15c6-2, modified
as discussed further below, can help ensure that incentives with
respect to allocations, confirmations, and affirmations are aligned
with timely and orderly settlement, critical to ensuring that the rate
of settlement fails remains low as the settlement cycle continues to
shorten.\276\
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\274\ See T+1 Report, supra note 61, at 13.
\275\ See supra Part III.B.1 (discussing these comments).
\276\ See infra note 272 (discussing the ability of broker-
dealers to use their schedule of fees to impose costs on customers
or agents thereof that prevent completion of the allocation,
confirmation, and affirmation process on trade date).
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[[Page 13892]]
On balance, the Commission believes that final Rule 15c6-2, with
the modifications discussed below to address specific concerns raised
by commenters, will increase the incentive to submit allocations,
confirmations, and affirmations on trade date, discouraging ``just in
time'' solutions that may jeopardize timely settlement in a T+1
environment. In particular, the Commission believes that ``just in
time'' solutions may increase the rate of settlement fails in a T+1
environment because the parties to a transaction will have
significantly less time to resolve issues that can prevent settlement,
raising the possibility that errors associated with the allocation,
confirmation, and affirmation process may delay timely settlement.
Improving the rate of same-day affirmations thereby promotes an orderly
and efficient settlement process. More generally, as discussed in the
T+1 Proposing Release, agreeing to trade information as close in time
as is technologically practicable to trade execution helps ensure that
any discrepancies in trade details are identified and resolved far
enough in advance to ensure timely and orderly settlement.\277\ In this
way, Rule 15c6-2 can promote an orderly and efficient process in a T+1
environment because it substantially increases incentives for market
participants to complete the key task of agreeing to trade information,
including the price of the transaction and quantity of shares to be
transferred, on trade date.
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\277\ See T+1 Proposing Release, supra note 2, at 10454-55.
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1. Modifications to Requirement for Written Agreements
The Commission is adopting Rule 15c6-2 with several modifications.
First, with respect to the requirement to enter written agreements to
ensure the completion of the allocation, confirmation, affirmation, or
any combination thereof, for the transaction as soon as technologically
practicable and no later than the end of the day on trade date in such
form as necessary to achieve settlement of the transaction, the
Commission is revising the rule to replace references in the text to
``customer'' with ``relevant parties'' to better align the obligations
under Rule 15c6-2 with the market dynamics that currently exist between
broker-dealers, their customers, and their customers' use of advisers,
custodians, and other third party agents as they participate in post-
trade processes, including the allocation, confirmation, and
affirmation process.
The Commission believes that this modification helps reduce the
likelihood that broker-dealers would need to enter into new agreements
with their customers specifically for the purpose of ensuring the same-
day affirmation of the transaction. It also removes the need for a
broker-dealer to enter into an agreement with its customer specific to
same-day affirmation if a third-party, such as an adviser, custodian or
other agent of its customer, would be the party to engage with the
broker-dealer to ensure the allocation, confirmation, or affirmation of
the transaction. As discussed in the T+1 Proposing Release,\278\ the
Commission intended for ``customer'' to include the relevant parties to
a transaction that would participate in the allocation, confirmation,
and affirmation process and would include the customer, the customer's
investment adviser, the customer's custodian, or any other agent acting
(directly or indirectly) on behalf of the customer. The modification
helps ensure that, when a broker-dealer is considering whether and with
which entities to enter into written agreements, the broker-dealer
needs to identify only the relevant party or parties that will have a
role or roles in completing the allocation, confirmation and
affirmation process. The Commission also believes that this
modification helps ensure that Rule 15c6-2 is appropriately designed to
impose a written agreement requirement where a written agreement is
practical and can help ensure the same-day affirmation of a
transaction, even if many broker-dealers may ultimately choose to
implement the rule through the policies and procedures alternative
discussed in Part III.C.2.
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\278\ See T+1 Proposing Release, supra note 2, at 10454; see
also Part III.A.
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The Commission's understanding is that, even if such party is not
the broker-dealer's own customer, some broker-dealers may choose to
enter into commercial agreements with such other relevant parties in
order to support their customer relationships, collect fees, and
otherwise facilitate the operational processes necessary to complete
and settle the transaction. Rule 15c6-2 does not require, however, that
a broker-dealer enter into written agreements with parties that do not
have a role in the allocation, confirmation, and affirmation process.
For example, if a broker-dealer is acting in the capacity of an
executing broker on behalf of a customer and another broker-dealer will
take responsibility for completing the allocation, confirmation, and
affirmation process with the relevant parties to settle the transaction
(a ``clearing broker'' in this context), then the executing broker need
only comply with the rule to the extent that it participates in the
allocation, confirmation, and affirmation process. An executing broker
that does not participate in such processes would face no obligations
under the rule. If an executing broker does undertake certain
obligations with respect to its customer, such as may be delineated in
its commercial arrangements with the relevant clearing broker, then
under Rule 15c6-2 such a broker-dealer generally should ensure that its
arrangements with the clearing broker identify that the clearing broker
will be the broker-dealer ``engaging in the allocation, confirmation,
and affirmation process'' for compliance with Rule 15c6-2. If the
executing broker and the clearing broker do not have written agreements
that establish the commercial relationship between them, then the
executing broker generally should consider whether it needs to
establish, implement, and maintain policies and procedures to identify
and explain its role and its relationship with the clearing broker,
consistent with Rule 15c6-2(a)(2), discussed in Part III.C.2. In
contrast to an executing broker--which may not participate in the
allocation, confirmation, and affirmation process--the clearing broker
that facilitates the settlement of the transaction, and thereby
participates in the allocation, confirmation, and affirmation process,
would need to comply with Rule 15c6-2.
Second, the Commission is making other technical changes to the
written agreements requirement to simplify the rule text and to
accommodate the new alternative for broker-dealers to establish,
maintain, and enforce written policies and procedures to ensure
completion of the allocation, confirmation and affirmation as soon as
technologically practicable and no later than the end of the day on
trade date.\279\ The Commission is removing the prohibition language in
the rule (i.e., ``No broker or dealer . . . shall'') and replacing it
with an affirmative obligation (i.e., ``A broker or dealer shall'').
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\279\ See infra Part III.C.2 (discussing the policies and
procedures alternative in Rule 15c6-2(a)(2)).
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In addition, the Commission has removed language that paralleled
the language in Rule 15c6-1 regarding the scope of affected securities
under the rule (``a contract for the purchase or sale
[[Page 13893]]
of a security (other than an exempted security, a government security,
a municipal security, commercial paper, bankers' acceptances, or
commercial bills)''). The Commission has replaced the proposed language
with a cross reference to the rule (e.g., ``a securities transaction
that is subject to the requirements of Sec. 240.15c6-1(a)''). The
purpose of this change is to simplify the rule text and ensure that the
scope of transactions relevant to compliance with Rule 15c6-2 remains
consistent with the scope of transactions under Rule 15c6-1(a). The
scope of transactions remains unchanged from the proposed rule, as
discussed in the T+1 Proposing Release, and is the same scope of
transactions as those covered by Rule 15c6-1(a) for which the broker-
dealer will engage in the allocation, confirmation, or affirmation
process with another party.\280\
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\280\ See T+1 Proposing Release, supra note 2, at 10453.
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Finally, as discussed further in Part III.C.2, the Commission is
modifying proposed Rule 15c6-2 to provide two options by which broker-
dealers may comply with the rule, as adopted. The two options are set
forth in new paragraphs (a)(1) and (2). The first option, reflected in
paragraph (a)(1), is the proposed requirement for written agreements,
modified in the ways discussed above. The second option, reflected in
paragraph (a)(2), provides an alternative to the written agreements
requirement, where, in lieu of a written agreement, a broker-dealer may
choose to establish, maintain, and enforce written policies and
procedures reasonably designed to ensure the completion of the
allocation, confirmation, affirmation, or any combination thereof, for
the transaction as soon as technologically practicable and no later
than the end of the day on trade date in such form as necessary to
achieve settlement of the transaction.
While the Commission believes that a policies and procedures
approach can relieve the parties to an institutional transaction from
the burden of negotiating a written agreement where one does not exist,
the Commission believes that the written agreement requirement may be
useful to those broker-dealers that have already established written
agreements that govern the operational arrangements for certain
commercial relationships. Specifically, such broker-dealers that
already have written agreements in place to manage their commercial
relationships with their customers' advisers, custodians or other
agents may find it efficient to revise these written agreements to
comply with Rule 15c6-2. Even where written agreements do not currently
exist, if the relevant parties are amenable to entering into a written
agreement to manage their responsibilities under the allocation,
confirmation, and affirmation process, a broker-dealer may find that
such agreement is an effective tool for identifying the circumstances
and operational arrangements that the relevant parties ought to
negotiate and agree to ensure the same-day allocation, confirmation and
affirmation of the transaction, in a similar way that developing
policies and procedures would also identify and describe the
circumstances and operational arrangements for each relevant
relationship that would be necessary to ensure the completion of
allocations, confirmations and affirmations.
Ultimately, the written agreement requirement is designed to
achieve the same goals as the alternative policies and procedures
requirement, and broker-dealers may elect to comply with the
alternative that they believe is better suited to their existing
operations, specific business model, customer base, securities offered
for settlement, and commercial relationships. In some cases, because
written agreements would be individually tailored to a specific
commercial relationship, they may help broker-dealers and the other
relevant parties to an institutional transaction develop innovations
that improve the allocation, confirmation, and affirmation process.
Nonetheless, as previously discussed, the Commission acknowledges that
the costs and challenges of negotiating a written agreement with the
relevant parties may lead broker-dealers to choose to implement the
rule via the policies and procedures requirement.
In addition, the Commission believes that replacing the term
``customer'' with ``other relevant parties'' and to add an option to
establish, maintain, and enforce written policies and procedures
reasonably designed to ensure the completion of allocations,
confirmations, and affirmations addresses the comments regarding use of
third parties discussed in Part III.B.4.\281\ First, the modifications
ensure that the requirements apply not to the broker-dealer and its
customer but instead to the broker-dealer and the relevant parties that
ensure the completion of the allocation, confirmation, and affirmation
process. Such parties may be the customer, the customer's investment
adviser, the customer's custodian, or another agent acting directly or
indirectly on behalf of the customer.\282\ Second, where the adviser is
the relevant party with whom the broker-dealer will engage to complete
the allocation, confirmation, or affirmation process, then the broker-
dealer may seek either to establish a written agreement to ensure
compliance with the rule, or the broker-dealer may instead choose to
establish, maintain, and enforce policies and procedures under the
rule. In the latter case, the broker-dealer may still seek to establish
arrangements with the relevant parties to achieve compliance with the
rule.\283\
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\281\ Such policies and procedures would be required to include
the elements described in Part III.C.3 below.
\282\ See supra notes 205-206 and accompanying text (describing
the same).
\283\ For example, consistent with the requirements of Rules
15c6-2(b)(3) and (4), as discussed further in Part III.C.3, policies
and procedures would be required to, under paragraph (b)(3) describe
the procedures that the broker or dealer will follow to ensure the
prompt communication of trade information, investigate any
discrepancies in trade information, and adjust trade information to
help ensure that the allocation, confirmation, and affirmation can
be completed by the target time frames on trade date, and, under
paragraph (b)(4), describe how the broker or dealer plans to
identify and address delays if another party (such as an investment
adviser or a custodian) is not promptly completing the allocation or
affirmation for the transaction, or if the broker or dealer
experiences delays in promptly completing the confirmation. It may
be useful for broker-dealers to engage with the relevant parties to
the allocation, confirmation, and affirmation process regarding the
nature of these communications.
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2. New Policies and Procedures Alternative to Written Agreements
Requirement
As previously discussed, the Commission is modifying proposed Rule
15c6-2 to enable a broker-dealer either to (1) enter into written
agreements or (2) establish, maintain, and enforce reasonably designed
written policies and procedures to ensure completion of the allocation,
confirmation, affirmation, or any combination thereof, for a
transaction as soon as technologically practicable and no later than
the end of the day on trade date, in such form as necessary to achieve
settlement. The Commission is providing broker-dealers with this
discretion under the rule to allow broker-dealers to select the
approach that best aligns with their existing business practices and
customer relationships, and to consider the approach that best enables
the broker-dealer to ensure the completion of allocations,
confirmations, and affirmations as soon as technologically practicable
and no later than the end of the trade date.
In response to the concerns raised by commenters in Part III.B.5,
the
[[Page 13894]]
Commission generally agrees that requiring policies and procedures as
an alternative approach to compliance, separate from entering into
written agreements, provides broker-dealers with more flexibility to
achieve same-day affirmation. As a general matter, the Commission
believes that the policies and procedures alternative in Rule 15c6-2
can help ensure that, when the parties to a transaction encounter
obstacles that may prevent them from completing an allocation,
confirmation, or affirmation on trade date, they have policies and
procedures to navigate, address, and when possible mitigate or overcome
such obstacles.\284\ The Commission also acknowledges that, in cases
where written agreements do not already exist, a requirement to enter
into such agreements specifically to achieve same-day affirmations may
create substantial burdens and challenges. Such challenges may include,
for example, a client who chooses not to authorize its investment
adviser to enter into such agreement or circumstances where multiple
third parties are relied upon to complete elements of the allocation,
confirmation, and affirmation process. Similarly, in the context of
RVP/DVP transactions discussed in Part III.B.5, while some broker-
dealers that regularly engage in RVP/DVP transactions may choose to
enter into commercial agreements with their counterparties or agents of
their counterparties to help facilitate this process, not all do and
may instead rely on a combination of best practices, relationship
management, and the obligations imposed by Commission or SRO rules as a
substitute for a formal written agreement among the parties necessary
to ensure the allocation, confirmation, and affirmation of the
transaction. For those broker-dealers who do choose to enter into such
agreements, the requirement for written agreements can be an effective
and efficient mechanism for advancing the same-day affirmation
requirement because it enables them to leverage their existing
operational arrangements already established under the written
agreements to codify the steps that the parties will take to ensure the
same-day affirmation of transactions executed pursuant to the
agreement. Nonetheless, the Commission also believes that an
alternative policies and procedures requirement will help relieve
broker-dealers of the burdens and challenges that, in some cases, may
arise if broker-dealers are required to enter into new written
agreements specifically for the purpose of facilitating same-day
affirmation.\285\ The Commission recognizes that, in response to this
modification, and due to the costs and challenges of entering into
written agreements identified by commenters generally, nearly all
broker-dealers that do not already have written agreements may choose
to implement the rule through the policies and procedures requirement
rather than the written agreement requirement.\286\
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\284\ For example, reasonably designed policies and procedures
generally could include robust compliance and monitoring systems;
processes to escalate identified instances of noncompliance for
remediation; procedures that designate responsibility to business
line personnel for supervision of functions and persons; processes
for escalating issues; processes for periodic review and testing of
the adequacy and effectiveness of policies and procedures; and
training on policies and procedures. The Commission discusses the
specific elements required of reasonably designed written policies
and procedures under Rule 15c6-2(b) in Part III.C.3.
\285\ See supra Part III.B.1 and i
[…truncated; see source link]Indexed from Federal Register on March 6, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.