Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Proposed Rule Change Relating to Establishment of Three Business Day Settlement Time Frame

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34541; File No. SR-MSRB-94-10]

Self-Regulatory Organizations; Municipal Securities Rulemaking

Board; Notice of Filing of Proposed Rule Change Relating to

Establishment of Three Business Day Settlement Time Frame

August 17, 1994.

Pursuant to Section 19(b)(1) of the Securities and Exchange Act of

1934 (``Act''),\1\ notice is hereby given that on August 9, 1994, the

Municipal Securities Rulemaking Board (``MSRB'') filed with the

Securities and Exchange Commission (``Commission'') a proposed rule

change as described in Items I, II, and III below, which Items have

been prepared primarily by the MSRB. The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

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\1\15 U.S.C. Sec. 78s(b)(1)(1988).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The MSRB has filed proposed amendments to rule G-12 on Uniform

Practice and rule G-15 on Confirmation, Clearance and Settlement of

Transactions with Customers to establish three business days as the

standard settlement time frame for regular-way transactions in

municipal securities.\2\ The MSRB requests that the Commission delay

effectiveness of the proposed rule change until the effective date for

Rule 15c6-1 to allow the municipal securities market to convert to

three-day settlement simultaneously with the corporate securities

market.\3\

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\2\On October 6, 1993, the Commission adopted Rule 15c6-1 which

establishes three business days instead of five business days as the

standard settlement cycle for most broker-dealer transactions. The

rule becomes effective June 1, 1995. Although municipal securities

were not included in the scope of Rule 15c6-1, the Commission has

called upon the MSRB to take all steps necessary to shorten the

routine settlement cycle for municipal securities transactions by

the effective date of SEC Rule 15c6-1. Securities Exchange Act

Release No. 33023 (October 6, 1993), 58 FR 52891 (``Rule 15c6-1

Adopting Release'').

\3\At a July 25, 1994, meeting hosted by SEC staff,

representatives of the various self-regulatory organizations and SEC

staff discussed the possibility of a short transition period during

June 1995. The MSRB will file additional rule changes if necessary

to obtain consistency with the final transition plans of the SEC for

Rule 15c6-1.

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II. Self-Regulatory Organization's Statement of the Purpose of and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the MSRB included statements

concerning the purpose of and basis for the proposed rule change and

discussed any comments it received on the proposed rule change. The

text of these statements may be examined at the places specified in

Item IV below. The MSRB has prepared summaries, set forth in sections

(A), (B), and (C) below, of the most significant aspects of such

statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

Rule 15c6-1, adopted under the Act, institutes a national goal of

shortening the standard settlement time frame for most securities

transactions to three business days (``T+3 settlement''). The

Commission concluded that a three-day settlement cycle, compared to the

current five-day settlement cycle, would reduce credit and liquidity

risks and increase efficiency in broker-dealer and clearing agency

operations.\4\ Recognizing the differences between the corporate and

municipal securities markets and the unique role the MSRB has in

overseeing the municipal securities market, the Commission did not

include municipal securities within the scope of Rule 15c6-1.\5\ The

Commission, however, did formally request that the MSRB undertake a

commitment to T+3 settlement for municipal securities to ensure

consistency in settlement cycles in the corporate and municipal

markets.\6\

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\4\Rule 15c6-1 Adopting Release at 53.

\5\Rule 15c6-1 Adopting Release at 35.

\6\Letter from Arthur Levitt, Chairman, SEC, to David Clapp,

Chairman, MSRB (October 7, 1993).

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The Commission also asked that the MSRB provide a plan for

implementing T+3 settlement in the municipal securities market. In

March 1994, the MSRB provided to the Commission such a plan, the Report

of the Municipal Securities Rulemaking Board on T+3 Settlement for the

Municipal Securities Market (March 17, 1994) (``T+3 Report''). The T+3

Report discussed various MSRB actions and industry initiatives that the

MSRB concluded were necessary for a successful conversion to T+3

settlement in the municipal securities market.\7\ The Board is

continuing to work to ensure that these preparations for T+3 settlement

are being made in the municipal securities market.

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\7\Specifically, the report identified the need for improvement

in: (i) comparison rates for inter-dealer transactions; (ii)

confirmation/acknowledgement rates for delivery vs. payment and

receipt vs.payment transactions; and (iii) the use of book-entry

settlement.

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Currently, ``regular-way'' settlement is defined as five business

days in rules G-12 on Uniform Practice and G-15 on Confirmation,

Clearance and Settlement of Transactions with Customers. The proposed

rule change will redefine regular-way settlement as three business days

rather than five. Tracking the language of Rule 15c6-1(a), the proposed

rule change will allow alternate settlement timeframes in the secondary

market by agreement of the parties on a case by case basis. However,

these agreements must be reached on each individual transaction at the

time of trade; dealers will not be able to retain T+5 settlement as a

standard practice. The proposed rule change also will amend rule G-

15(d)(i) relating to institutional customer delivery instructions on

DVP/RVP settlements to reflect a three-day rather than five-day

settlement cycle. The proposed rule change exempts ``when, as and if

issued'' transactions from the requirements of T+3 settlement.

Currently, when, as and if issued transactions are not settled in five

business days, and given the various actions necessary to accomplish

settlement (or ``closing'') with the issuer of municipal securities,

the MSRB does not believe that it would be possible to institute a

three-day settlement cycle for these transactions.\8\

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\8\A dealer cannot settle with a customer or another dealer

prior to the final settlement (or ``closing'') of the issue with the

issuer. The closing date with an issuer is dependent upon many

factors and the preparation of a number of closing documents and

cannot necessarily be scheduled within three days after trading

begins in an issue.

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As set forth in Section 15B(b)(2)(C) of the Act,\9\ the MSRB has

the authority to adopt rules to foster cooperation with persons engaged

in regulating, clearing, settling, processing information with respect

to, and facilitating transactions in municipal securities; to remove

impediments to and perfect the mechanism of a free and open market in

municipal securities; and in general, to protect investors and the

public interest.

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\9\15 U.S.C. Sec. 78o-2(b)(2)(C)(1988).

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The MSRB believes that the proposed rule change will facilitate

clearance and settlement of municipal securities and, therefore, is

consistent with the provisions of the Act. One of the MSRB's top

priorities for the municipal securities market is the improvement of

clearance and settlement systems consistent with national goals.\10\

The Commission also has indicated its belief that efficient clearance

and settlement of municipal securities requires that municipal

securities have the same settlement cycle as other securities. In the

Rule 15c6-1 Adopting Release, the Commission made several observations

relating to T+3 settlement for municipal securities. The release noted:

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\10\``Letter to the SEC on Its Proposed Rule on T+3

Settlement,'' MSRB Reports Vol. 13, No. 3 (June 1993) at 11 and

``Automated Clearance and Settlement: Rules G-12 and G-15,'' MSRB

Reports Vol. 11, No. 3 (September 1991) at 3.

Over fifty commentators favored including municipal securities

within the scope of the Rule. Those commentators believe that

maintaining separate settlement cycles for corporate and municipal

securities is unnecessary and would impose significant cost and

operational difficulties on industry participants. * * * Although

commentators have raised concerns about the differences between

municipal and other debt securities, the Commission believes that

these differences can be overcome. * * * In summary, the Commission

is confident that municipal securities dealers and market

participants, under the guidance of the MSRB, can accomplish the

goal of shortening the settlement timeframe by two business days and

that regular-way settlement for municipal securities can be subject

to the same timetable as other securities.\11\

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\11\Rule 15c6-1 Adopting Release at 36-38.

The MSRB concurs with the Commission's finding that maintaining a

separate settlement cycle for corporate and municipal securities is

unnecessary and would impose significant cost and operational

difficulties on industry participants. The proposed rule change will

ensure that corporate and municipal securities settlement cycles are

consistent, which will help ensure efficiency in the clearance and

settlement of municipal securities.

B. Self-Regulatory Organization's Statement on Burden on Competition

As noted below, the MSRB has received six letters commenting on T+3

settlement for municipal securities. Several of these letters expressed

a concern that small, retail-oriented dealers might be adversely

affected by a three-day settlement cycle. In the Rule 15c6-1 Adopting

Release, the Commission discussed arguments that the three-day

settlement cycle generally would produce a burden on competition in the

securities market. The Commission noted:

Several commentators, primarily small retail broker-dealers,

raised concerns that Rule 15c6-1 would increase their costs, thereby

making it more difficult to compete with larger broker-dealers. The

Commission notes that Rule 15c6-1 does not distinguish between

categories of broker-dealers, and believes that the costs created

would be imposed evenly upon larger and smaller broker-dealer firms.

The costs may be higher for certain firms, regardless of their size,

that have not invested in necessary infrastructure and

technology.\12\

\12\Rule 15c6-1 Adopting Release at 52.

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The MSRB believes that this same assessment would apply to brokers,

dealers, and municipal securities dealers with respect to municipal

securities transactions. Therefore, the MSRB does not believe that the

proposed rule change will impose any burden on competition not

necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants, or Others

The MSRB has not solicited comments on the proposed rule change;

however, the Commission solicited comment with regard to establishing

three business days instead of five business days as the standard

settlement time frame and discussed those comments in the Rule 15c6-1

Adopting Release. Since the date of that release, the MSRB announced

its plan for the implementation of T+3 settlement in the T+3 Report and

has received six letters essentially disagreeing with the

implementation of a T+3 settlement cycle. These letters cite various

practical difficulties in moving to T+3 settlement based primarily upon

the desire of retail customers to hold certificates and upon the

payment mechanisms used by retail customers. Similar comments were

considered and addressed by the Commission in its Rule 15c6-1 Adopting

Release, which notes that the Commission believes that with sufficient

notice the securities industry can identify and address these concerns

with customer education and changes in industry practices.

The MSRB also discussed the need for changes in certain industry

practices with respect to retail customer transactions in its T+3

Report. While the MSRB understands that there may be difficulties

associated with changing industry practice to accommodate T+3

settlement, it agrees with the Commission's assessment that the

appropriate changes can be made with the proper attention by dealers.

The MSRB also believes that the municipal securities industry must move

forward in compressing the settlement cycle to three business days

quickly because of the potential negative effects that would be created

if municipal securities remained on a different settlement cycle than

corporate securities.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

With thirty-five days of the date of publication of this notice in

the Federal Register or within such longer period (i) as the Commission

may designate up to ninety days of such date if it finds such longer

period to be appropriate and publishes its reasons for so finding or

(ii) as to which the self-regulatory organization consents, the

Commission will:

(A) by order approve such proposed rule change or

(B) institute proceedings to determine whether the proposed rule

change should be disapproved.

The MSRB requests that the Commission delay effectiveness of the

proposed rule change until the effectiveness of Rule 15c6-1 to allow

the municipal securities market to convert to three-day settlement

simultaneously with the corporate securities market.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of the submissions, all subsequent amendments, all written

statements with respect to the proposed rule change between the

Commission and any person, other than those that may be withheld from

the public in accordance with the provisions of 5 U.S.C. 552, will be

available for inspection and copying in the Commission's Public

Reference Room. Copies of the filing will also be available for

inspection and copying at the MSRB's principal offices. All submissions

should refer to File No. SR-MSRB-94-10 and should be submitted by

September 14, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\13\

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\13\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-20775 Filed 8-23-94; 8:45 am]

BILLING CODE 8010-01-M