Shortening the Securities Transaction Settlement Cycle

Federal RegisterMar 6, 2023

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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.

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.

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.

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).

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

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.

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”).

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.

In 2017, the Commission shortened the standard settlement cycle from T+3 to T+2.

Now, in part informed by episodes in 2020 and 2021 of increased market volatility that highlighted potential vulnerabilities in the U.S. securities market,

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.

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”).

See

Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891 (Oct. 13, 1993) (“T+3 Adopting Release”).

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.

See

T+2 Adopting Release,

supra

note 4.

See

T+1 Proposing Release,

supra

note 2, at 10444 n.61.

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.

As discussed in the T+1 Proposing Release,

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.

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.

See id.

at 10447.

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

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).

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.

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.

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.”

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.”

The commenter's letter references specifically “misalignment concerns” relating to FX settlement risk,

international banking and coordination issues, and collateral/liquidity risk.

See, e.g.,

letters from Jiří Król, 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.

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.

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.

Id.

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.

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.”

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.

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.

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

https://www.bis.org/publ/bcbs241.pdf

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 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.

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.

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.

AIMA Letter,

supra

note 29, at 5.

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.

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.

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).

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.”

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.”

MarketAxess Letter,

supra

note 29, at 1.

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.”

In this scenario, the commenter stated that it would need to fund the position until the next settlement cycle.

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.

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.

Lastly, the commenter argued that any decrease or cessation of cross-border trading ultimately will reduce liquidity for U.S. investors.

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.

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.

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).

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.

According to the commenter, these issues may impact both domestic and internationally based investment advisers.

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.

Letter from Suzanne Quinn, Head of North America Compliance, Ballie Gifford Overseas Limited (Nov. 17, 2022), at 1 (“Ballie Gifford Letter”).

Id.

at 1-2.

Id.

at 2.

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.

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.

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.”

Id.

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

in a T+0 environment.

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.

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.

These commenters cited several challenges associated with a prospective move to a T+0 settlement cycle,

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.

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.”

Another commenter stated that:

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.”).

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).

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”),

https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf

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.

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.

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.

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.”

FIA PTG Letter,

supra

note 16, at 1.

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.

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.

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.

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.

Finally, the commenter stated that moving to T+0 would require “complete dematerialization of securities.”

See

Virtu Financial Letter,

supra

note 16, at 3-4.

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.

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.

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).

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,

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.

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.”

AGC April Letter,

supra

note 16, at 3.

See id.

at 3-4.

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

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.

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

and both expressed the view that the rule should not apply to such transactions.

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.

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.”

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.

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.

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.

SIFMA April Letter,

supra

note 16, at 11.

Id.

The same commenter highlighted certain “key differences” between security-based swaps and other types of securities.

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.

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.

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)].”

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.”

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.

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.”

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].”

MFA Letter,

supra

note 16, at 2.

See id.

Id.

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.

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.

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.

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.”

See

SIFMA April Letter,

supra

note 16, at 9-11.

See id.

at 10.

Id.

at 10-11.

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.

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.

See id.

at 10.

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.”

According to the commenter, the parties are “by definition” unable to foresee “unanticipated issues” prior to pricing of the offering.

Id.

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.

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

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

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

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”),

https://www.dtcc.com/ust1/industry-playbook

. 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

https://www.dtcc.com/ust1/industry-playbook

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.

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

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,

https://www.securities-administrators.ca/news/canadian-securities-regulators-outline-steps-to-support-transition-to-t1/

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

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.

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

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

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

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

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

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

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

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

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-

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.

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

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

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

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

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).

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 https://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-costbenefit-analysis-on-shortening-the-settlementcycle.aspx

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 https://www.dtcc.com/events/archives

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

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,

https://www.dtcc.com/settlement-and-asset-services/settlement/id-net

. 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,

https://www.dtcc.com/-/media/Files/Downloads/legal/fee-guides/DTC-Fee-Schedule.pdf

(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

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,

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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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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).

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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.

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).

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