Notice2023-11611
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of a Proposed Rule Change To Amend MSRB Rules G-12 and G-15 To Define Regular-Way Settlement for Municipal Securities Transactions as Occurring One Business Day After the Trade Date and To Amend Rule G-12 To Update an Outdated Cross Reference
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Published
June 1, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 105 (Thursday, June 1, 2023)</title>
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[Federal Register Volume 88, Number 105 (Thursday, June 1, 2023)]
[Notices]
[Pages 35961-35964]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-11611]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97585; File No. SR-MSRB-2023-03]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change To Amend MSRB
Rules G-12 and G-15 To Define Regular-Way Settlement for Municipal
Securities Transactions as Occurring One Business Day After the Trade
Date and To Amend Rule G-12 To Update an Outdated Cross Reference
May 25, 2023.
I. Introduction
On March 28, 2023, the Municipal Securities Rulemaking Board
(``MSRB'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend MSRB Rules G-12 (``Rule
G-12''), on uniform practice, and G-15 (``Rule G-15''), on
confirmation, clearance, settlement and other uniform practice
requirements with respect to transactions with customers, to define
regular-way settlement for municipal securities transactions as
occurring one business day after the trade date and a proposed
amendment to Rule G-12 to update an outdated cross reference
(``proposed rule change'').
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The MSRB also requested that the proposed rule change be approved
with an implementation date of May 28, 2024, to align with the
implementation date for Exchange Act Rule 15c6-1, as amended.\3\
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\3\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872, 13916 (Mar. 6, 2023) (``SEC's T+1 Adopting
Release''). If the Commission's compliance date were to change, the
MSRB stated that it would issue a regulatory notice to modify the
compliance date to remain aligned with the Commission's compliance
date. Securities Exchange Act Release No. 97257 (Apr. 6, 2023), 88
FR 22075 n.3 (Apr. 12, 2023) (File No. SR-MSRB-2023-03)
(``Notice'').
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The proposed rule change was published for comment in the Federal
Register on April 12, 2023.\4\ The Commission received three comment
letters \5\ on the proposed rule change. On May 11, 2023, the MSRB
responded to the comment letters.\6\ As described further below, the
Commission is approving the proposed rule change.
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\4\ See Notice, 88 FR at 22075.
\5\ See Letter from Leslie M. Norwood, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, dated May 3, 2023 (``SIFMA Letter''); Letter from RJ
Rondini, Director, Securities Operations, Investment Company
Institute, dated May 2, 2023 (``ICI Letter''); and Letter from
Gregory Babyak, Global Head of Regulatory Affairs, Bloomberg L.P.,
dated May 3, 2023 (``Bloomberg Letter'').
\6\ See Letter to Secretary, Commission, from Saliha Olgun,
Interim Chief Regulatory Officer, MSRB, dated May 11, 2023 (``MSRB
Letter'').
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II. Description of the Proposed Rule Change
The MSRB stated that, consistent with its strategic goal to
modernize its rulebook, the proposed rule change would amend Rule G-
12(b)(ii)(B)-(D) and Rule G-15(b)(ii)(B)-(C) to define regular-way
settlement for municipal securities transactions as occurring on one
business day after the trade date (``T+1''). The MSRB wrote that this
proposed rule change would align with regular-way settlement on T+1 for
equities and corporate bonds under Exchange Act Rule 15c6-1, as
amended.\7\ Although Exchange Act Rule 15c6-1, as amended, does not
apply to municipal securities transactions,\8\ the MSRB stated that it
believes that the regular-way settlement cycle for municipal securities
transactions in the secondary market should be consistent with that for
equity and corporate bond transactions.\9\ The MSRB explained that, to
facilitate a T+1 standard settlement cycle, the MSRB proposed to amend
Rule G-12(b)(ii)(B)-(D) and Rule G-15(b)(ii)(B)-(C) to define regular-
way settlement as occurring on the first business day following the
trade date rather than on the second business day following the trade
date.\10\
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\7\ 17 CFR 240.15c6-1.
\8\ Id.
\9\ Notice, 88 FR at 22075.
\10\ Id.
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A. Background
The SEC initially adopted Exchange Act Rule 15c6-1 \11\ in 1993 to
shorten the settlement cycle of most equity and corporate bond
transactions from the industry standard of within five business days
(``T+5'') to requiring settlement within three business days
(``T+3'').\12\ The T+3 settlement cycle remained in effect until 2017
when the SEC amended Exchange Act Rule 15c6-1 \13\ to require the
settlement of most equity and corporate bond transactions within two
business days (``T+2'').\14\ On February 15, 2023, the SEC adopted
amendments to Exchange Act Rule 15c6-1 (``Amended Exchange Act Rule
[[Page 35962]]
15c6-1'') \15\ to further shorten the settlement process, requiring the
settlement of most equity and corporate bond transactions on T+1.\16\
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\11\ 17 CFR 240.15c6-1.
\12\ Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891
(Oct. 13, 1993). In adopting Exchange Act Rule 15c6-1, the
Commission set a compliance date of June 1, 1995, 58 FR at 52891.
\13\ 17 CFR 240.15c6-1.
\14\ Securities Exchange Act Release No. 80295 (Mar. 22, 2017),
82 FR 15564 (Mar. 29, 2017).
\15\ 17 CFR 240.15c6-1.
\16\ Notice, 88 FR at 22075.
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Amended Exchange Act Rule 15c6-1(a) \17\ prohibits a broker-dealer
from effecting or entering into a contract for the purchase or sale of
a security (other than an exempted security,\18\ a government security,
a municipal security, commercial paper, bankers' acceptances, or
commercial bills) that provide for payment of funds and delivery of
securities later than T+1, unless the parties expressly agree to a
different settlement date at the time of the transaction.\19\ The MSRB
notes that the recent amendments to Exchange Act Rule 15c6-1 \20\
change only the standard settlement date for securities transactions
covered by the existing rule and do not impact the existing exclusions
enumerated in the rule.\21\
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\17\ 17 CFR 240.15c6-1(a).
\18\ 15 U.S.C. 78c(a)(12).
\19\ The MSRB wrote that Exchange Act Rule 15c6-1 was also
amended to prohibit a broker-dealer from effecting or entering into
a contract for firm commitment offerings of securities (other than
exempt securities) priced after 4:30 p.m. Eastern Time that provide
for payment of funds and delivery of securities later than T+2,
unless the parties expressly agree to a different settlement date at
the time of the transaction. Notice, 88 FR at 22075 n.13.
\20\ 17 CFR 240.15c6-1. See also SEC's T+1 Adopting Release, 88
FR at 13874.
\21\ Notice, 88 FR at 22075-76. The MSRB stated that Exchange
Act Rule 15c6-2 improved the processing of institutional trades
through new requirements for broker-dealers and registered
investment advisers related to same-day affirmations. Notice, 88 FR
at 22076 n.15. As Exchange Act Rule 15c6-2 does not apply to
municipal securities, the MSRB stated that it is evaluating whether
a like requirement should be considered under MSRB rules. Id.
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B. Summary of the Proposed Rule Change
The MSRB explained that shortening the settlement process can serve
to reduce operational risks that can be present between trade date and
settlement date, which can promote investor protection, help reduce the
risk of counterparty default and the capital required to mitigate this
risk.\22\ The MSRB stated that, in support of these objectives and to
promote regulatory consistency, it has consistently stated that the
regular-way settlement cycle for municipal securities transactions in
the secondary market should be consistent with that for equity and
corporate bond transactions.\23\ The MSRB noted that market
efficiencies could be eroded if market participants encounter different
settlement cycles when replacing equity or corporate bonds with
municipal securities.\24\ For that reason, the MSRB stated that it
adopted a T+3 settlement cycle in 1994,\25\ and a T+2 settlement cycle
in 2017.\26\ According to the MSRB, in order to continue to maintain
consistency across asset classes and harmonize with Amended Exchange
Act Rule 15c6-1,\27\ it proposed to amend Rule G-12(b)(ii)(B)-(D) and
Rule G-15(b)(ii)(B)-(C), which both currently define regular-way
settlement as occurring on T+2, to define regular-way settlement as
occurring on T+1.\28\
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\22\ Notice, 88 FR at 22076. See also SEC's T+1 Adopting
Release, 88 FR at 13919.
\23\ Notice, 88 FR at 22076. See, e.g., ``T+3 Settlement,
Amendments Filed: Rules G-12 and G-15,'' MSRB Reports, Vol. 14, No.
4 (August 1994) at 3; ``Report of the Municipal Securities
Rulemaking Board on T+3 Settlement for the Municipal Securities
Market'' (Mar.17, 1994); and Securities Exchange Act Release No.
77364 (Mar. 14, 2016), 81 FR 14906 (Mar. 18, 2016) (File No. SR-
MSRB-2016-04).
\24\ Notice, 88 FR at 22076.
\25\ See Securities Exchange Act Release No. 34541 (Aug. 17,
1994), 59 FR 43503 (Aug. 24, 1994) (File No. SR-MSRB-1994-10).
\26\ See Securities Exchange Act Release No. 77744 (Apr. 29,
2016), 81 FR 26851 (May 4, 2016) (File No. SR-MSRB-2016-04).
\27\ 17 CFR 240.15c6-1.
\28\ Notice, 88 FR at 22076.
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The MSRB stated that, as a result, with regular-way settlement
occurring on T+1, settlement for ``when, as and if issued''
transactions under Rule G-12(b)(ii)(C) would be required to be a date
agreed upon by both parties that is not earlier than one business day
after notification of the initial settlement date for the issue.\29\
Specifically, the MSRB stated that the proposed rule change would amend
G-12(b)(ii)(C)(2) for ``when, as and if issued'' transactions not
eligible for automated comparison to specify that the date agreed upon
by both parties shall not be earlier than the first business day,
rather than the second business day, following the date that the
confirmation indicating the final settlement date is sent.\30\ For all
other municipal securities transactions under Rule G-12(b)(ii)(D), the
MSRB stated that the proposed rule change would amend the current time
frame to provide that a broker, dealer or municipal securities dealer
(a ``dealer'') would be prohibited from effecting a transaction that
provides for payment of funds and delivery of securities later than the
first business day, rather than the second business day, after the
transaction unless expressly agreed to by the parties.\31\
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\29\ Id. Pursuant to MSRB Rule G-34 (``Rule G-34''), on CUSIP
numbers, new issue, and market information requirements,
subparagraph (a)(ii)(E)(2), the initial settlement is to be provided
to the registered clearing agency by the managing underwriter for
the issue. With respect to transactions not eligible for automated
comparison, the settlement date shall not be earlier than the first
business day after the date that the confirmation indicating the
final settlement date is sent. Notice, 88 FR at 22076 n.21.
\30\ Notice, 88 FR at 22076. For ``when, as and if issued''
transactions required to be compared in an automated comparison
system under Rule G-12(f)(i), the settlement date shall continue to
be not earlier than two business days after notification of initial
settlement date for the issue is provided to the registered clearing
agency by the managing underwriter for the issue as required by Rule
G-34(a)(ii)(E)(2). Notice, 88 FR at 22076 n.22.
\31\ Notice, 88 FR at 22076. The MSRB explained that variable
rate demand obligations may establish a settlement date expressly
agreed to by the parties that may occur later than regular-way
settlement to coincide with the reset date (e.g., T+5, T+3, etc.).
See Three Day Settlement: Rules G-12(b) and G-15(b), MSRB Reports,
Vol. 15, No. 12 (July 1995), available at <a href="https://www.msrb.org/sites/default/files/July1995-Volume15-Number2.PDF">https://www.msrb.org/sites/default/files/July1995-Volume15-Number2.PDF</a>. See also Notice,
88 FR at 22076 n.23.
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The MSRB also explained that the proposed rule change would correct
an outdated cross-reference within Rule G-12.\32\ Specifically, the
MSRB explained that Rule G-12(b)(ii)(C) regarding the settlement date
for ``when, as and if issued'' transactions currently cross-references
Rule G-34 subsection paragraph (a)(ii)(D)(2) in referring to the
obligation that a managing underwriter has to provide notification of
initial settlement date of an issue to the registered clearing
agency.\33\ The MSRB also wrote that this obligation remains in Rule G-
34 but was moved to subparagraph (a)(ii)(E)(2) due to previous
amendments to Rule G-34. The MSRB indicated that correcting the cross-
reference will not alter the obligation of dealers under Rule G-34 or
Rule G-12.\34\
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\32\ Notice, 88 FR at 22076.
\33\ Id.
\34\ Id.
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C. Compliance Date
The MSRB stated that the compliance date of the proposed rule
change would be announced by the MSRB in a notice published on its
website, which date would correspond with the industry's transition to
a T+1 regular-way settlement consistent with the implementation of
Amended Exchange Act Rule 15c6-1,\35\ which is currently scheduled for
May 28, 2024. The MSRB indicated that if the SEC's compliance date were
to change, the MSRB would issue a regulatory notice to modify the
compliance date to remain aligned with the SEC's compliance date.\36\
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\35\ Id. See also SEC's T+1 Adopting Release, 88 FR at 13916.
\36\ Notice, 88 FR at 22076.
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III. Summary of Comments Received to the Proposed Rule Change
The Commission received three comment letters \37\ on the proposed
rule
[[Page 35963]]
change, as well as a response \38\ from the MSRB to the comment
letters. Two of the three commenters expressed support for the proposed
rule change and no commenters objected to the proposed rule change.
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\37\ See SIFMA Letter; ICI Letter; Bloomberg Letter.
\38\ See MSRB Letter.
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Two commenters expressed support for the proposed rule change
related to the alignment of municipal securities settlement with
regular-way settlement on T+1 for equities and corporate bonds under
Exchange Act Rule 15c6-1, as amended.\39\ Additionally, one commenter
encouraged the MSRB to consider further a rule consistent with Exchange
Act Rule 15c6-2, to improve the processing of institutional trades
through new requirements for market participants related to same-day
affirmations.\40\ The MSRB responded that it continues to evaluate
whether a similar standard may be appropriate for the municipal
securities market, and that it expect to engage stakeholders to inform
this continued evaluation.\41\
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\39\ See SIFMA Letter; ICI Letter.
\40\ SIFMA Letter at 2.
\41\ MSRB Letter at 2.
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One commenter encouraged the MSRB and the SEC to consider
permitting market participants a choice among financial identifiers for
required reporting and for other regulatory use cases as specified in
the MSRB's rules.\42\ The MSRB responded that it appreciated this
feedback but believes that the comment is outside of the scope of the
proposed rule change and should be considered separately.\43\
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\42\ Bloomberg Letter at 1.
\43\ MSRB Letter at 2.
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The MSRB stated that it continues to believe the proposed rule
change is reasonable and that the proposed rule change is necessary and
appropriate to reduce operational risks, which can promote investor
protection, help reduce risk of counterparty default and the capital
required to mitigate this risk.\44\
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\44\ Id.
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IV. Discussion and Commission's Findings
The Commission has carefully considered the proposed rule change,
the comment letters received, and the MSRB's response thereto. The
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the MSRB.
In particular, the Commission believes that the proposed rule
change is consistent with the provisions of Section 15B(b)(2)(C), which
provides, in part, that the MSRB's rules shall be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in municipal
securities and municipal financial products, to remove impediments to
and perfect the mechanism of a free and open market in municipal
securities and municipal financial products, and, in general, to
protect investors, municipal entities, obligated persons, and the
public interest.\45\ The Commission believes that the proposed rule
change will: (i) foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in municipal securities and
municipal financial products; (ii) remove impediments to and perfect
the mechanism of a free and open market in municipal securities and
municipal financial products; and (iii) protect investors, municipal
entities, obligated persons, and the public interest.
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\45\ 15 U.S.C. 78o-4(b)(2)(C).
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A. Foster Cooperation and Coordination With Persons Engaged in
Regulating, Clearing, Settling, Processing Information With Respect to,
and Facilitating Transactions in Municipal Securities
The Commission believes that the proposed amendments to Rule G-
12(b)(ii)(B) and (D) and Rule G-15(b)(ii)(B)-(C) would foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in municipal securities and municipal
financial products. In particular, the Commission notes that the
proposed rule change applies the standard for regular-way settlement
established by the SEC to transactions in municipal securities. As
such, the Commission finds that the proposed rule change would continue
to ensure that the settlement cycle remains synchronous across classes
of securities (including municipal securities). By avoiding different
settlement cycles for municipal securities, the proposed rule change
would avoid regulatory confusion, simplify compliance, and reduce risk
(e.g., operational error). These positive effects would be experienced
by municipal securities market participants involved in regulating,
clearing and settling, and processing information for municipal
securities transactions.
In addition, the proposed amendment to correct an outdated cross-
reference in Rule G-12(b)(ii)(C) is consistent with Section
15B(b)(2)(C) of the Act,\46\ and correcting the cross-reference will
not alter a dealer's obligations under Rule G-34 or Rule G-12. The
Commission further believes that the proposed amendment promotes
coordination with persons engaged in facilitating transactions in
municipal securities by aiding dealers' understanding of the rule and
facilitating compliance.
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\46\ Id.
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B. Remove Impediments to and Perfect the Mechanism of a Free and Open
Market
The Commission also believes the proposed rule change would serve
to remove impediments to and perfect the mechanism of a free and open
market in municipal securities and municipal financial products. The
Commission notes that the proposed rule change yields long-term
benefits for a range of market participants including, but not limited
to, operational cost savings, reduced counterparty risk due to a
shorter settlement cycle, reduced market risk for unsettled trades,
decreasing clearing capital requirements, reduced pro-cyclical margin,
and therefore, reduced liquidity demands and risk. The Commission also
believes the proposed rule change would promote regulatory consistency
and market efficiency. In particular, the Commission notes that the
proposed rule change institutes regular-way settlement for municipal
transactions consistent with the standard settlement for other security
classes, harmonized with Amended Exchange Act Rule 15c6-1.\47\ As the
proposed rule change reduces liquidity demands and risk, as well as
promotes regulatory consistency and market efficiency, the Commission
finds that the proposed rule change removes impediments to and perfects
the mechanism of a free and open market in municipal securities and
municipal financial products.
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\47\ 17 CFR 240.15c6-1.
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C. Protect Investors, Municipal Entities, Obligated Persons, and the
Public Interest
The Commission believes that the proposed rule change would promote
investor protection and the public interest. The Commission notes that
the proposed rule change will reduce the timeframe for regular-way
settlement and avoiding misaligned settlement dates, which can serve to
reduce risks
[[Page 35964]]
that can be present between trade date and settlement date (including
the incidence of failed transactions). In addition, the Commission
believes that a shorter standard settlement cycle would reduce
liquidity risks that could arise by allowing investors to obtain the
proceeds of securities transactions sooner. Given the associated risk
reduction, the Commission finds that the proposed rule change would
promote investor protection and the public interest.
In approving the proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. Section 15B(b)(2)(C) of the Act
\48\ requires that MSRB rules not be designed to impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act. The Commission believes the proposed rule change to amend
Rule G-12(b)(ii)(B)-(D) and Rule G-15(b)(ii)(B)-(C) would not impose
any burden on competition and would not have an impact on competition,
as the proposed rule change would apply a uniform standard for regular-
way settlement for municipal securities to align with the standard
applicable to, among other securities, equity and corporate bond
transactions under Amended Exchange Act Rule 15c6-1.\49\ In addition,
the proposed rule change would apply equally to all dealers. The
proposed rule would also change to correct an outdated cross-reference
in Rule G-12(b)(ii)(C) to properly reference Rule G-34(a)(ii)(E)(2)
rather than Rule G-34(a)(ii)(D)(2), which would not impose any burden
on competition or have an impact on competition as the proposed change
is technical in nature, does not impose any new obligation and enhances
understanding of the rule. As all of these components of the proposed
rule change would be applied equally to all registered dealers
transacting in municipal securities, the Commission believes that the
proposed rule change would not impose any additional burdens on
competition that are not necessary or appropriate in furtherance of the
purposes of the Act.
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\48\ 15 U.S.C. 78o-4(b)(2)(C).
\49\ 17 CFR 240.15c6-1.
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The Commission also finds that the proposed rule change will not
hinder capital formation. As noted above, the proposed rule changes
ensures a uniform settlement cycle across all asset classes of
securities (including municipal securities), and would be applied
equally to all dealers. As such, the Commission believes that the
proposed rule change would promote clearer regulatory requirements for
the clearance and settlements of municipal securities transactions.
Furthermore, a shorter settlement cycle may reduce the volume of
unsettled transactions that could potentially pose settlement risk, and
also decrease liquidity risk by enabling market participants to access
the proceeds of their transactions sooner. Therefore, the Commission
also finds that the proposed rule change would promote efficiency of
the clearance and settlement process, would not negatively impact the
municipal securities market's operational efficiency.
As noted above, the Commission received three comment letters on
the filing. The Commission believes that the MSRB, through its
response, addressed the commenters' concerns. For the reasons noted
above, the Commission believes that the proposed rule change is
consistent with the Exchange Act.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\50\ that the proposed rule change (SR-MSRB-2023-03) be,
and hereby is, approved.
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\50\ 15 U.S.C. 78s(b)(2).
For the Commission, pursuant to delegated authority.\51\
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\51\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-11611 Filed 5-31-23; 8:45 am]
BILLING CODE 8011-01-P
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