# 81 FR 69240: Amendment to Securities Transaction Settlement Cycle

> Federal · Regulations · In force

URL: https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2016-23890

## Section

- **Citation:** 81 FR 69240
- **Heading:** Amendment to Securities Transaction Settlement Cycle
- **Jurisdiction:** Federal
- **Kind:** Regulations
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** Federal Register / Vol. 81 / 81 FR 69240

## Text

SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34-78962; File No. S7-22-16] RIN 3235-AL86 Amendment to Securities Transaction Settlement Cycle AGENCY:
Securities and Exchange Commission.

ACTION:
Proposed rule.

SUMMARY:
The Securities and Exchange Commission (“Commission”) proposes to amend Rule 15c6-1(a) under the Securities Exchange Act of 1934 (“Exchange Act”) to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”). The proposed amendment is designed to reduce a number of risks, including credit risk, market risk, and liquidity risk and, as a result, reduce systemic risk for U.S. market participants.

DATES:
Submit comments on or before December 5, 2016.

ADDRESSES:
Comments may be submitted by any of the following methods:
Electronic Comments
• Use the Commission's Internet comment form ( http://www.sec.gov/rules/proposed.shtml ); or
• Send an email to rule-comments@sec.gov. Please include File Number [-] on the subject line; or
• Use the Federal eRulemaking Portal ( http://www.regulations.gov ). Follow the instructions for submitting comments.
Paper Comments
• Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number [-].
To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/proposed.shtml ).
Comments are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions
t Web site ( http://www.sec.gov/rules/proposed.shtml ).
Comments are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.
Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT:
Jeffrey Mooney, Assistant Director, Susan Petersen, Special Counsel, Andrew Shanbrom, Special Counsel, Office of Clearance and Settlement; Justin Pica, Senior Policy Advisor, Office of Market Supervision; Natasha Vij Greiner, Assistant Chief Counsel, Jonathan Shapiro, Special Counsel, Office of Chief Counsel; at 202-551-5550, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:
The Commission is proposing an amendment to Rule 15c6-1 of the Exchange Act under the Commission's rulemaking authority set forth in Sections 15(c)(6), 17A and 23(a) of the Exchange Act (15 U.S.C. 78o(c)(6), 78q-1, and 78w(a) respectively).
Table of Contents:
I. Introduction II. Background A. Overview of the Clearance and Settlement of Securities Transactions 1. Statutory Framework 2. Participating Entities a. FMUs—CCPs and CSDs (1) CCPs (2) CSDs b. Matching/ETC Providers—Exempt Clearing Agencies c. Market Participants—Investors, Broker-Dealers, and Custodians 3. Overview of Trade Settlement Processes a
and 78w(a) respectively).
Table of Contents:
I. Introduction II. Background A. Overview of the Clearance and Settlement of Securities Transactions 1. Statutory Framework 2. Participating Entities a. FMUs—CCPs and CSDs (1) CCPs (2) CSDs b. Matching/ETC Providers—Exempt Clearing Agencies c. Market Participants—Investors, Broker-Dealers, and Custodians 3. Overview of Trade Settlement Processes a. Retail Investor Trade Settlement Process b. Institutional Investor Trade Settlement Process 4. Impact of the Settlement Cycle 5. Post-Rule 15c6-1 Adoption a. SIA T+1 Initiative b. Securities Transaction Concept Release c. Current Efforts To Shorten the Settlement Cycle in the U.S (1) BCG Study (2) Industry Steering Committee and Industry Planning (3) Investor Advisory Committee Recommendations B. Transition to T+2 in Non-U.S. Securities Markets III. Discussion A. Proposal 1. Current Rule 15c6-1 2. Proposed Amendment to Rule 15c6-1 To Shorten the Standard Settlement Cycle to T+2 3. Reasons to Transition From T+3 to T+2 4. Consideration of Settlement Cycle Shorter Than T+2 B. Impact on Other Commission Rules 1. General 2. Regulation SHO 3. Financial Responsibility Rules Under the Exchange Act 4. Exchange Act Rule 10b-10 IV. Compliance Date V. Request for Comment VI. Economic Analysis A. Background B. Baseline 1. Clearing Agencies 2. Market Participants—Investors, Broker-Dealers, and Custodians 3. Investment Companies 4. The Current Market for Clearance and Settlement Services C. Analysis of Benefits, Costs, and Impact on Efficiency, Competition, and Capital Formation 1. Benefits 2. Costs 3. Economic Implications Through Other Commission Rules 4. Effect on Efficiency, Competition, and Capital Formation 5. Quantification of Direct and Indirect Effects of a T+2 Settlement Cycle a. Industry Estimates of Costs and Benefits b
rent Market for Clearance and Settlement Services C. Analysis of Benefits, Costs, and Impact on Efficiency, Competition, and Capital Formation 1. Benefits 2. Costs 3. Economic Implications Through Other Commission Rules 4. Effect on Efficiency, Competition, and Capital Formation 5. Quantification of Direct and Indirect Effects of a T+2 Settlement Cycle a. Industry Estimates of Costs and Benefits b. Commission Estimates of Costs (1) FMUs—CCPs and CSDs (2) Matching/ETC Providers—Exempt Clearing Agencies (3) Market Participants—Investors, Broker-Dealers, and Custodians (4) Indirect Costs (5) Industry-Wide Costs D. Alternatives 1. Shift to a T+1 Standard Settlement Cycle 2. Straight-Through Processing Requirement E. Request for Comment VII. Small Business Regulatory Enforcement Fairness Act VIII. Initial Regulatory Flexibility Analysis A. Reasons for, and Objectives of, the Proposed Action B. Legal Basis C. Small Entities Subject to the Rule and Rule Amendment D. Projected Reporting, Recordkeeping and Other Compliance Requirements E. Duplicative, Overlapping or Conflicting Federal Rules F. Significant Alternatives G. Request for Comment IX. Statutory Authority and Text of the Proposed Amendment to Rule 15C6-1 I. Introduction
The Commission originally adopted Exchange Act Rule 15c6-1 in 1993 to establish T+3 as the standard settlement cycle for broker-dealer transactions, and in so doing, effectively shortened the settlement cycle for most securities transactions (with certain exceptions), which at the time was generally five business days after the trade date 1 The Commission cited a number of reasons for standardizing and shortening the settlement cycle, which included, among others, reducing credit and market risk exposure related to unsettled trades, reducing liquidity risk among derivatives and cash markets, encouraging greater efficiency in the clearance and settlement process, and reducing systemic risk for the U.S. markets. 2
1 Securities Transactions Settlement, Exchange Act Release No. 33023 (Oct
zing and shortening the settlement cycle, which included, among others, reducing credit and market risk exposure related to unsettled trades, reducing liquidity risk among derivatives and cash markets, encouraging greater efficiency in the clearance and settlement process, and reducing systemic risk for the U.S. markets. 2
1 Securities Transactions Settlement, Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891, 52893 (Oct. 13, 1993) (“T+3 Adopting Release”). Rule 15c6-1 of the Exchange Act prohibits broker-dealers from effecting or entering into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers' acceptances, or commercial bills) that provides for payment of funds and delivery of securities later than the third business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction. 17 CFR 240.15c6-1.
2 T+3 Adopting Release, 58 FR at 52893.
The Commission now proposes to amend Exchange Act Rule 15c6-1(a) to further shorten the standard settlement cycle from T+3 to T+2. As discussed in greater detail below, the Commission preliminarily believes that there are a number of reasons supporting shortening the standard settlement cycle to T+2 at this time. As an initial matter, the Commission believes that shortening the standard settlement cycle will result in a further reduction of credit, market, and liquidity risk, 3 and as a result a reduction in systemic risk for U.S. market participants.
3 Credit risk refers to the risk that the credit quality of one party to a transaction will deteriorate to the extent that it is unable to fulfill its obligations to its counterparty on settlement date. Market risk refers to the risk that the value of securities bought and sold will change between trade execution and settlement such that the completion of the trade would result in a financial loss. Securities Transactions Settlement, Exchange Act Release No
ne party to a transaction will deteriorate to the extent that it is unable to fulfill its obligations to its counterparty on settlement date. Market risk refers to the risk that the value of securities bought and sold will change between trade execution and settlement such that the completion of the trade would result in a financial loss. Securities Transactions Settlement, Exchange Act Release No. 31904 (Feb. 23, 1993), 58 FR 11806, 11809 nn.26-27 (Mar. 1, 1993) (“T+3 Proposing Release”). Liquidity risk describes the risk that an entity will be unable to meet financial obligations on time due to an inability to deliver funds or securities in the form required though it may possess sufficient financial resources in other forms. See Standards for Covered Clearing Agencies, Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR 29508, 29531 (May 22, 2014) (“CCA Proposal”).
Since the Commission adopted Rule 15c6-1 in 1993, the financial markets have expanded and evolved significantly. 4 During this period, the Commission has continued to focus on further mitigating and managing risks in the clearance and settlement process, and how those risks relate to managing systemic risk. 5 The Commission also notes that shortening the standard settlement cycle at this time is consistent with the broader focus by the Commission on enhancing the resilience and efficiency of the national clearance and settlement system and the role that certain systemically important financial market utilities (“FMUs”), 6 particularly central counterparties (“CCPs”), play in concentrating and managing risk. 7 In light of this ongoing focus on further mitigating and managing risks in the clearance and settlement process, the Commission preliminarily believes that a transition to a T+2 settlement cycle would yield important benefits for market participants and the national clearance and settlement system.
4 See generally Concept Release on Equity Market Structure, Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010)
rther mitigating and managing risks in the clearance and settlement process, the Commission preliminarily believes that a transition to a T+2 settlement cycle would yield important benefits for market participants and the national clearance and settlement system.
4 See generally Concept Release on Equity Market Structure, Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010).
5 See generally Clearing Agency Standards, Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220, 66221-22 (Nov. 2, 2012) (“Clearing Agency Standards Adopting Release”); CCA Proposal, 79 FR 29508.
6 Section 803(6)(A) of the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”) enacted by Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), 12 U.S.C. 5301, et seq., defines “financial market utility” or “FMU” as any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person. 12 U.S.C. 5462(6)(A). Section 803(6)(B)(i) of the Clearing Supervision Act generally excludes certain persons from the definition of FMU including designated contract markets, registered futures associations, swap or security-based swap data repositories, swap execution facilities, national securities exchanges, and alternative trading systems. 12 U.S.C. 5462(6)(B)(i). The term FMU includes not only U.S. registered clearing agencies but also other types of entities that are not U.S. registered clearing agencies.
7 See Clearing Agency Standards Adopting Release, 77 FR at 66221-22.
The Commission preliminarily has considered the costs and benefits attendant to shortening the standard settlement cycle to T+2 and believes that the proposed amendment to Rule 15c6-1(a) will yield benefits that justify the associated costs
ncies but also other types of entities that are not U.S. registered clearing agencies.
7 See Clearing Agency Standards Adopting Release, 77 FR at 66221-22.
The Commission preliminarily has considered the costs and benefits attendant to shortening the standard settlement cycle to T+2 and believes that the proposed amendment to Rule 15c6-1(a) will yield benefits that justify the associated costs. The Commission also preliminarily believes that the case for further shortening the standard settlement cycle at this time is supported by certain progress and efficiencies already achieved by market participants since the Commission's adoption of Rule 15c6-1 in 1993, including significant technological developments. The Commission, however, is sensitive to the effects this proposal could have on a wide range of market participants. Accordingly, in addition to specific requests for comment, the Commission seeks generally input on the economic effects associated with shortening the standard settlement cycle to T+2, including any costs, benefits or burdens, and any effects on efficiency, competition and capital formation.
II. Background
Rule 15c6-1(a) of the Exchange Act prohibits broker-dealers from effecting or entering into a contract for the purchase or sale of a security (other than certain exempted securities) 8 that provides for payment of funds and delivery of securities later than the third business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction. 9 Subject to the exceptions enumerated in the rule, the prohibition in paragraph (a) of Rule 15c6-1 applies to all securities. The definition of the term “security” in Section 3(a)(10) of the Exchange Act covers, among others, equities, corporate bonds, unit investment trusts (“UITs”), mutual funds, exchange-traded funds (“ETFs”), American depositary receipts (“ADRs”), security-based swaps, and options
ject to the exceptions enumerated in the rule, the prohibition in paragraph (a) of Rule 15c6-1 applies to all securities. The definition of the term “security” in Section 3(a)(10) of the Exchange Act covers, among others, equities, corporate bonds, unit investment trusts (“UITs”), mutual funds, exchange-traded funds (“ETFs”), American depositary receipts (“ADRs”), security-based swaps, and options. 10 Many of e.g., options, and certain mutual funds) generally settle on a settlement cycle less than T+3 and therefore will not be impacted by the Commission's current proposal to shorten the standard settlement cycle to T+2. Accordingly, the discussion in this release is primarily focused on securities that currently settle on a T+3 standard settlement cycle. 11 However, the Commission seeks comment on whether and the extent to which other securities, as defined in Section 3(a)(10) of the Exchange Act, will be affected by the amendment to Rule 15c6-1(a), as proposed.
8 Rule 15c6-1(a) does not apply to a contract for an exempted security, government security, municipal security, commercial paper, bankers' acceptances, or commercial bills. 17 CFR 240.15c6-1(a). The rule also provides an additional exemption for: (i) Transactions in 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; (ii) contracts for the purchase and sale of securities that the Commission may from time to time, taking into account then existing market practices, exempt by order; and (iii) contracts for the sale of cash securities that priced after 4:30 p.m. (Eastern Standard Time) that are sold by an issuer to an underwriter pursuant to a firm commitment offering registered under the Securities Act of 1933 (“Securities Act”) or the sale to an initial purchaser by a broker-dealer participating in such offering. 17 CFR 240.15c6-1(b) and (c)
arket practices, exempt by order; and (iii) contracts for the sale of cash securities that priced after 4:30 p.m. (Eastern Standard Time) that are sold by an issuer to an underwriter pursuant to a firm commitment offering registered under the Securities Act of 1933 (“Securities Act”) or the sale to an initial purchaser by a broker-dealer participating in such offering. 17 CFR 240.15c6-1(b) and (c).
Additionally, as discussed further in the T+3 Adopting Release, the Commission determined not to include transactions in municipal securities within the scope of Rule 15c6-1, with the expectation that the Municipal Securities Rulemaking Board (“MSRB”) would take the lead in implementing three-day settlement of municipal securities by the implementation date of the new rule. The Commission requested a report from the MSRB within six months of the Commission's adoption of Rule 15c6-1 outlining the schedule in which the MSRB intended to implement T+3 in the municipal securities market. T+3 Adopting Release, 58 FR at 52899. MSRB rules that established T+3 as the standard settlement cycle for transactions in municipal securities became operative on June 7, 1995, the same date as Exchange Act Rule 15c6-1. See Order Approving MSRB Proposed Rule Change Establishing Three Business Day Settlement Time Frame, Exchange Act Release No. 35427 (Feb. 28, 1995), 60 FR 12798 (Mar. 8, 1995).
9 Although current Rule 15c6-1 establishes a settlement timeframe of no more than three business days after the trade date, certain types of transactions routinely settle on a settlement cycle shorter than T+3, which is permissible under the rule. See, e.g., note 11 infra.
10 15 U.S.C. 78c(a)(10). Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010), amended, among other things, the definition of “security” under the Exchange Act to encompass security-based swaps
pes of transactions routinely settle on a settlement cycle shorter than T+3, which is permissible under the rule. See, e.g., note 11 infra.
10 15 U.S.C. 78c(a)(10). Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010), amended, among other things, the definition of “security” under the Exchange Act to encompass security-based swaps. In July 2011, the Commission granted temporary exemptive relief from compliance with certain provisions of the Exchange Act (including Rule 15c6-1) in connection with the revision of the Exchange Act definition of See Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 In Connection With the Pending Revision of the Definition of “Security” To Encompass Security-Based Swaps, Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7, 2011). Certain of the exemptions (including the exemption for Rule 15c6-1) are set to expire on February 5, 2017. See Order Extending Temporary Exemptions Under the Securities Exchange Act of 1934 In Connection With the Revision of the Definition of “Security” To Encompass Security-Based Swaps, Exchange Act Release No. 71485 (Feb. 5, 2014), 79 FR 7731 (Feb. 10, 2014).
11 In today's environment, ETFs and certain closed-end funds clear and settle on a T+3 basis. Open-end funds ( i.e., mutual funds) generally settle on a T+1 basis, except for certain retail funds which typically settle on T+3. Thus, the proposed amendment to Rule 15c6-1(a) would require ETFs, closed-end funds, and mutual funds settling on a T+3 basis to revise their settlement timeframes. See infra notes 213 and 214, regarding ETF secondary market trading, including creation or redemption transactions for authorized participants.
A. Overview of the Clearance and Settlement of Securities Transactions
“Clearance and settlement” refers generally to the activities that occur following the execution of a trade
tual funds settling on a T+3 basis to revise their settlement timeframes. See infra notes 213 and 214, regarding ETF secondary market trading, including creation or redemption transactions for authorized participants.
A. Overview of the Clearance and Settlement of Securities Transactions
“Clearance and settlement” refers generally to the activities that occur following the execution of a trade. These post-trade processes are critical to ensuring that a buyer receives securities and a seller receives proceeds in accordance with the agreed-upon terms by the settlement date. The discussion that follows provides a basic description of the clearance and settlement of securities transactions, and is organized in the following manner: (1) An overview of the statutory framework and goals driving the national clearance and settlement system; (2) an introduction to securities clearing agencies and other key market participants in the clearance and settlement process; (3) an overview of the trade settlement process for the U.S. securities markets; (4) a discussion of how the length of the settlement cycle may impact the presence of credit, market, liquidity and systemic risk in the clearance and settlement process; and (5) an overview of ongoing efforts by market participants to shorten the standard settlement cycle.
1. Statutory Framework
The national clearance and settlement system in place today is largely a product of the difficulties experienced in the U.S. securities markets in the late 1960s and early 1970s. As trading volumes increased during that time period, the manual process associated with transferring certificated securities among market participants in a relatively uncoordinated fashion created what came to be known as the “Paperwork Crisis.” The Paperwork Crisis nearly brought the securities industry to a standstill and directly or indirectly caused the failure of a large number of broker-dealers
rading volumes increased during that time period, the manual process associated with transferring certificated securities among market participants in a relatively uncoordinated fashion created what came to be known as the “Paperwork Crisis.” The Paperwork Crisis nearly brought the securities industry to a standstill and directly or indirectly caused the failure of a large number of broker-dealers. 12 The breakdown in the handling of paper associated with the clearance and settlement of securities transactions threatened to curtail the flow of debt and equity instruments available for public investment and jeopardized the continued operation of the securities markets. 13
12 See U.S. Securities and Exchange Commission, Study of Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc. No. 92-231 (1971); see also Securities Transactions Settlement, Exchange Act Release No. 49405 (Mar. 11, 2004), 69 FR 12922 (Mar. 18, 2004); see also S. Rep. No. 94-75, at 4-5 (1975), reprinted in 1975 U.S.C.C.A.N. 179, 183.
13 Id.
In light of the experiences of the Paperwork Crisis, and with the objectives of improving the operation of the U.S. clearance and settlement system and protecting investors, 14 Congress amended the Exchange Act in 1975 to, among other things, (i) direct the Commission to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities, and (ii) provide the Commission with the authority to regulate those entities critical to the clearance and settlement process. 15 At the same time, Congress empowered the Commission with direct rulemaking authority over broker or dealer activity in making settlements, payments, transfers, and deliveries of securities. 16 Taken together, these provisions provide the Commission with the authority to regulate entities that are critical to the national clearance and settlement system. 17
14 See 15 U.S.C
settlement process. 15 At the same time, Congress empowered the Commission with direct rulemaking authority over broker or dealer activity in making settlements, payments, transfers, and deliveries of securities. 16 Taken together, these provisions provide the Commission with the authority to regulate entities that are critical to the national clearance and settlement system. 17
14 See 15 U.S.C. 78q-1(a)(1)(A)-(D), which lays out the Congressional findings for Section 17A of the Exchange Act. In particular, Congress found that inefficient clearance and settlement procedures imposed unnecessary costs on investors and those acting on their behalf and that new data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.
15 15 U.S.C. 78q-1(a)(2)(A); see also S. Rep. No. 94-75, supra note 12, at 53. Congress provided the Commission with the authority and responsibility to regulate, coordinate, and direct the operations of all persons involved in processing securities transactions, toward the goal of a national system for the prompt and accurate clearance and settlement of securities transactions. Id. at 55.
16 S. Rep. No. 94-75, at 111. Specifically, Section 15(c)(6) of the Exchange Act prohibits broker-dealers from engaging in or inducing securities transactions in contravention of such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest and for the protection of investors or to perfect or remove impediments to a national system for the prompt and accurate clearance and settlement of securities transactions, with respect to the time and method of, and the form and format of documents used in connection with, making settlements of and payments for transactions in securities, making transfers and deliveries of securities, and closing accounts. 15 U.S.C. 78o(c)(6).
17 See 15 U.S.C. 78q-1(b)-(c); 15 U.S.C. 78o(c)
nal system for the prompt and accurate clearance and settlement of securities transactions, with respect to the time and method of, and the form and format of documents used in connection with, making settlements of and payments for transactions in securities, making transfers and deliveries of securities, and closing accounts. 15 U.S.C. 78o(c)(6).
17 See 15 U.S.C. 78q-1(b)-(c); 15 U.S.C. 78o(c).
Congress reaffirmed its view of the importance of a strong clearance and settlement system in 2010 with the enactment of the Clearing Supervision Act. 18 Specifically, Congress found that the “proper functioning of the financial markets is dependent upon safe and efficient arrangements for the clearing and settlement of payments, securities, and other financial transactions.” 19 Under the Clearing Supervision Act, registered clearing agencies providing CCP and central securities depository (“CSD”) services are FMUs. 20 FMUs centralize clearance and settlement activities and enable market participants to reduce costs, increase operational efficiency, and manage risks more effectively. While an FMU can provide many risk management benefits to participants, the concentration of clearance and settlement activity at an FMU has the potential to disrupt the securities markets if the FMU does not effectively manage the risks in its clearance and settlement activities. 21 To address those risks, the Commission has used its authority under the Exchange Act, as supplemented by the authority set forth under the Clearing Supervision Act, to help ensure that the FMUs under its supervision are subject to robust regulatory requirements. 22
18 See 12 U.S.C. 5301, et seq.
19 12 U.S.C. 5461(a)(1).
20 See supra note 6
risks in its clearance and settlement activities. 21 To address those risks, the Commission has used its authority under the Exchange Act, as supplemented by the authority set forth under the Clearing Supervision Act, to help ensure that the FMUs under its supervision are subject to robust regulatory requirements. 22
18 See 12 U.S.C. 5301, et seq.
19 12 U.S.C. 5461(a)(1).
20 See supra note 6.
21 See CCA Proposal, 79 FR at 29587; see also Risk Management Supervision of Designated Clearing Agencies, Joint Report to Senate Committees on Banking, Housing, and Urban Affairs and Agriculture, Nutrition, and Forestry, and the House Committees on Financial Services and Agriculture, from the Board of Governors of the Federal Reserve System, Securities and Exchange Commission, and Commodity Futures Trading Commission (July 2011), https://www.federalreserve.gov/publications/other-reports/files/risk-management-supervision-report-201107.pdf.
22 See, e.g., Clearing Agency Standards Adopting Release, supra note 5. In addition, on July 18, 2012, the Financial Stability Oversight Council designated as systemically important the following then-registered clearing agencies: Chicago Mercantile Exchange, Inc. (“CME”); The Depository Trust Company (“DTC”); Fixed Income Clearing Corporation (“FICC”); ICE Clear Credit LLC (“ICC”); See Press Release, U.S. Department of the Treasury, Financial Stability Oversight Council Makes First Designations in Effort to Protect Against Future Financial Crises (July 18, 2012), https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. As such, these clearing agencies are also subject to the Clearing Supervision Act. In addition to its authority to regulate clearing agencies, pursuant to Section 17A of the Exchange Act, the Commission is also the supervisory agency, as that term is defined in Section 803(8) of the Clearing Supervision Act, for DTC, FICC, NSCC, and OCC
w.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. As such, these clearing agencies are also subject to the Clearing Supervision Act. In addition to its authority to regulate clearing agencies, pursuant to Section 17A of the Exchange Act, the Commission is also the supervisory agency, as that term is defined in Section 803(8) of the Clearing Supervision Act, for DTC, FICC, NSCC, and OCC. The CFTC is the supervisory agency for CME and ICE, and the Federal Reserve Bank of New York oversees DTC's banking and trust company activities. The Commission jointly regulates ICC and OCC with the CFTC.
2. Participating Entities
a. FMUs—CCPs and CSDs
Clearance and settlement activities in securities markets are supported by an infrastructure that is comprised of entities that perform a variety of different functions. These functions for the U.S. securities markets are performed in most instances by FMUs that are registered clearing agency 23 subsidiaries of The Depository Trust & Clearing Corporation (“DTCC”): NSCC and DTC.
23 Section 17A(b) of the Exchange Act requires any clearing agency performing the functions of a clearing agency with respect to any security (other than an exempted security) to be registered with the Commission, unless the Commission has exempted such entity from the registration requirements. 15 U.S.C. 78q-1(b)(1). The term “clearing agency” is defined broadly to include any person who: (1) Acts as an intermediary in making payments or deliveries or both in connection with transactions in securities; (2) provides facilities for comparison of data respecting the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities; (3) acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loane
s transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities; (3) acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry, without physical delivery of securities certificates (such as a securities depository); or (4) otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates (such as a securities depository). A clearing agency may provide, among other things, CCP services and CSD services. See 15 U.S.C. 78c(a)(23).
(1) CCPs
A CCP, following trade execution, interposes itself between the counterparties to a trade, becoming the buyer to each seller and seller to each buyer to ensure the performance of open contracts. One critical function of a CCP is to eliminate bilateral credit risk between individual buyers and sellers.
NSCC is the CCP 24 for trades between broker-dealers involving equity securities, corporate and municipal debt, and UITs in the U.S. 25 NSCC facilitates the management of risk among broker-dealers using a number of tools, which include: (1) Novating and guaranteeing trades to assume the credit risk of the original counterparties; (2) collecting clearing fund contributions from members to help ensure that NSCC has sufficient financial resources in the event that one of the counterparties defaults on its obligations; and (3) netting to reduce NSCC's overall exposure to its counterparties.
24 In addition to providing CCP services, NSCC provides a number of other non-CCP services to market participants, including, for example, services that support mutual funds, alternative investments and insurance products
sufficient financial resources in the event that one of the counterparties defaults on its obligations; and (3) netting to reduce NSCC's overall exposure to its counterparties.
24 In addition to providing CCP services, NSCC provides a number of other non-CCP services to market participants, including, for example, services that support mutual funds, alternative investments and insurance products.
25 Certain SRO rules ( e.g., Financial Industry Regulatory Authority (“FINRA”) Rule 6350B(b) and FINRA Rule 6274(b)) authorize broker-dealer members to settle transactions outside of the facilities of a registered clearing agency, or “ex-clearing,” if both parties agree.
In novation, when a CCP member presents a contract to the CCP for clearing, the original contract between the buyer and seller is discharged and two new contracts are created, one between the CCP and the buyer and the other between the CCP and the seller. The CCP thereby assumes the original parties' contractual obligations to each other. NSCC attaches its trade guaranty 26 to novated transactions at midnight on T+1. 27 Through novation and the trade guaranty, the two original trading counterparties to the transaction replace their bilateral credit, market and liquidity risk exposure to each other with risk exposure to NSCC.
26 Pursuant to Rule 11 and Addendum K to NSCC's Rules and Procedures, NSCC guarantees the completion of CNS settling trades (“NSCC trade guaranty”) that have reached the later of midnight of T+1 or midnight of the day they are reported to NSCC's members. NSCC also guarantees the completion of shortened process trades, such as same-day and next-day settling trades, upon comparison or trade recording processing. See NSCC Rules and Procedures, Rule 11, Section 1(c) and Addendum K (as of July 14, 2016) (“NSCC Rules and Procedures”), www.dtcc.com/legal/rule-and-procedures
er of midnight of T+1 or midnight of the day they are reported to NSCC's members. NSCC also guarantees the completion of shortened process trades, such as same-day and next-day settling trades, upon comparison or trade recording processing. See NSCC Rules and Procedures, Rule 11, Section 1(c) and Addendum K (as of July 14, 2016) (“NSCC Rules and Procedures”), www.dtcc.com/legal/rule-and-procedures.
27 NSCC has stated that it is currently in the process of seeking regulatory approval to move its trade guaranty forward to the point of trade validation (for locked-in trades) and comparison (for trades compared through NSCC). This initiative is referred to as the “Accelerated Trade Guaranty” or “ATG.” See NSCC, Disclosures under the Principles for Financial Market Infrastructures, at 17 n.11 (Dec. 2015) (“NSCC PFMI Disclosure Framework”), http://www.dtcc.com/legal/policy-and-compliance.
NSCC collects clearing fund deposits from its members to maintain sufficient financial resources in the event a member or members default on their obligations to NSCC. 28 NSCC's rules also allow NSCC to adjust and collect additional clearing fund deposits as needed to cover the risks present while a member's trades are unsettled. Each member's required clearing fund deposit is calculated at least once daily pursuant to a formula set forth in NSCC's rules, 29 and is designed to provide sufficient funds to cover NSCC's exposure to the member. 30
28 NSCC's clearing fund is comprised of cash, securities, and letters of credit posted by NSCC members to provide NSCC the necessary resources to cover member defaults. The amount and timing of contributions to the clearing fund are determined pursuant to NSCC's rules. See NSCC Rules and Procedures, Rules 1 and 4.
29 See NSCC Rules and Procedures, Rule 4 and Procedure XV
sure to the member. 30
28 NSCC's clearing fund is comprised of cash, securities, and letters of credit posted by NSCC members to provide NSCC the necessary resources to cover member defaults. The amount and timing of contributions to the clearing fund are determined pursuant to NSCC's rules. See NSCC Rules and Procedures, Rules 1 and 4.
29 See NSCC Rules and Procedures, Rule 4 and Procedure XV.
30 Commission Rules 17Ad-22(b)(1) through (4) require a registered clearing agency that performs CCP services to establish, implement, and maintain policies and procedures reasonably designed to do the following: (1) Measure its credit exposures at least once a day, and use margin requirements to limit its exposures to potential losses from defaults by its participants; (2) use risk-based models and parameters to set margin requirements and to review such requirements at least monthly; (3) maintain sufficient financial resources to withstand a default by the two participant families, if clearing security-based swaps, or one participant family otherwise, to which it has the largest exposure; and (4) provide for an annual model validation process. 17 CFR 240.17Ad 22(b)(1)-(4).
Figure 1 below shows NSCC's clearing fund deposits by quarter. As illustrated in Figure 1, the total amount that NSCC collects to mitigate the risks associated with member defaults has varied from roughly $3 to $6.5 billion for the years 2010 through 2015. 31 The majority of these deposits are held in cash, while a much smaller portion is held in highly liquid securities such as U.S. treasury securities.
31 See NSCC Quarterly Financial Statements, http://www.dtcc.com/legal/financial-statements?subsidiary=NSCC&pgs=1.
EP05OC16.000
As mentioned above, NSCC also reduces its risk exposure as a CCP through netting. Netting reduces risk in the settlement process by reducing the overall amount of obligations that must be settled
n is held in highly liquid securities such as U.S. treasury securities.
31 See NSCC Quarterly Financial Statements, http://www.dtcc.com/legal/financial-statements?subsidiary=NSCC&pgs=1.
EP05OC16.000
As mentioned above, NSCC also reduces its risk exposure as a CCP through netting. Netting reduces risk in the settlement process by reducing the overall amount of obligations that must be settled. The reduction in the overall amount of unsettled obligations translates into relatively fewer and smaller settlement payments, thereby reducing the cost to trade. Netting also lessens the risk by reducing the number of outstanding unsettled transactions linking market participants, thereby reducing the likelihood that a settlement failure by one market participant will trigger a chain reaction of additional defaults by other market participants. Through the use of NSCC's netting and accounting system, the Continuous Net Settlement System (“CNS”), NSCC nets trades and payments among its participants, reducing the value of securities and payments that need to be exchanged by an average of 97% each day. 32 NSCC accepts trades into CNS 33 for clearing from the nation's major exchanges and other trading venues and uses CNS to net each NSCC member's trades in each security traded that day to a single receive or deliver position for the securities. 34 Throughout the day, cash debit and credit data generated by NSCC's members' activities are recorded, and at the end of the processing day, the debits and credits are netted to produce one aggregate cash debit or credit for each member. 35
32 See NSCC PFMI Disclosure Framework, supra note 27, at 8.
33 NSCC accepts CNS-eligible securities. To be CNS-eligible, a security must be eligible for book-entry transfer on the books of DTC, and must be capable of being processed in the CNS system. For example, securities may be ineligible for CNS processing due to certain transfer restrictions ( e.g., 144A securities) or due to the pendency of certain corporate actions
Framework, supra note 27, at 8.
33 NSCC accepts CNS-eligible securities. To be CNS-eligible, a security must be eligible for book-entry transfer on the books of DTC, and must be capable of being processed in the CNS system. For example, securities may be ineligible for CNS processing due to certain transfer restrictions ( e.g., 144A securities) or due to the pendency of certain corporate actions. See Rule 1 of NSCC's rules for the definition of CNS-eligible securities, and Rule 3 of NSCC's rules for a list of CNS-eligible securities. NSCC Rules and Procedures, Rules 1 and 3.
34 In CNS, compared and recorded transactions in CNS-eligible securities that are scheduled to settle on a common settlement date are netted by specific security issue into one net long ( i.e., buy) or net short ( i.e., sell) position. CNS then nets those positions further with positions of the same specific security issue that remain open after their originally scheduled settlement date, which are generally referred to as “Fail Positions.” The result of the netting process is a single deliver or receive obligation for each NSCC member for each specific security issue in which the member has activity on a given day. See NSCC Rules and Procedures, Rule 11 and Procedure VII and X.
35 See NSCC PFMI Disclosure Framework, supra note 27, at 9.
When one of the counterparties does not fulfill its settlement obligations by delivering the required securities, a “failure to deliver” occurs in CNS. Failures to deliver may be caused by the NSCC member's failure to receive securities from a customer or counterparty to a previous transaction. 36 For illustration purposes, Figure 2 shows a recent seven-year period of time, in this case, October 23, 2008, through October 23, 2015, with the outstanding failures to deliver as a percentage of the overall shares outstanding for the securities which NSCC clears. 37
36 For more information on NSCC “failures to deliver,” see generally Office of Investor Education and Advocacy, U.S
ransaction. 36 For illustration purposes, Figure 2 shows a recent seven-year period of time, in this case, October 23, 2008, through October 23, 2015, with the outstanding failures to deliver as a percentage of the overall shares outstanding for the securities which NSCC clears. 37
36 For more information on NSCC “failures to deliver,” see generally Office of Investor Education and Advocacy, U.S. Securities and Exchange Commission, Key Points About Regulation SHO (Apr. 8, 2015), https://www.sec.gov/investor/pubs/regsho.htm.
37 NSCC failure-to-deliver data is publicly available on the Commission's Web site at https://www.sec.gov/foia/docs/failsdata.htm.
EP05OC16.001
While NSCC provides final settlement instructions to its members each day, the payment for and transfer of securities ownership occurs at DTC. At the conclusion of each trading day, CNS short positions ( i.e., obligations to deliver) at NSCC are compared against the long positions held in the NSCC members' DTC accounts to determine security availability. 38 If securities are available, they are transferred from the NSCC member's account at DTC to NSCC's account at DTC, to cover the NSCC member's CNS short positions. CNS long positions ( i.e., the right to receive securities owed to the participant) are transferred from the NSCC account at DTC to the accounts of NSCC members at DTC. On settlement date, NSCC submits instructions to DTC to deliver ( i.e., transfer) securities positions for each security netted though CNS for each NSCC member holding a long position in such securities. Cash obligations are settled through DTC by one net payment for each NSCC member at the end of the settlement day.
38 See NSCC PFMI Disclosure Framework, supra note 27, at 106.
members at DTC. On settlement date, NSCC submits instructions to DTC to deliver ( i.e., transfer) securities positions for each security netted though CNS for each NSCC member holding a long position in such securities. Cash obligations are settled through DTC by one net payment for each NSCC member at the end of the settlement day.
38 See NSCC PFMI Disclosure Framework, supra note 27, at 106.
(2) CSDs
A CSD is an entity that holds securities for its participants either in certificated or uncertificated (dematerialized) form so that ownership can be easily transferred through a book entry (rather than the transfer of physical certificates) and provides central safekeeping and other asset services. Additionally, a CSD may operate a securities settlement system, which is a set of arrangements that enables transfers of securities, either for payment or free of payment, and facilitates the payment process associated with such transfers. DTC serves as the CSD and settlement system for most equity securities and a significant number of debt securities held by U.S. market participants.
In its capacity as a CSD, DTC provides custody and book-entry transfer services for the vast majority of securities transactions in the U.S. market involving equities, corporate and municipal debt, money market instruments, ADRs, and ETFs. In accordance with its rules, DTC accepts deposits of securities from its participants 39 ( i.e., mostly broker-dealers and banks), credits those securities to the depositing participants' accounts, and effects book-entry transfer of those securities. The securities deposited with DTC are registered in DTC's nominee name and are held in fungible bulk for the benefit of its participants and their customers. Each participant having an interest in the securities of a given issuer credited to its account has a pro rata interest in the securities of that issuer held by DTC
participants' accounts, and effects book-entry transfer of those securities. The securities deposited with DTC are registered in DTC's nominee name and are held in fungible bulk for the benefit of its participants and their customers. Each participant having an interest in the securities of a given issuer credited to its account has a pro rata interest in the securities of that issuer held by DTC. By immobilizing securities ( e.g., holding and transferring ownership of securities positions in book-entry form, with DTC's nominee reflected as the registered owner on the issuer's records) and centralizing and automating securities settlements, DTC substantially reduces the number of physical securities certificates transferred in the U.S. markets, which significantly improves operational efficiencies and
39 NSCC's rules provide for several categories of membership with different levels of access to NSCC's services. This release uses the term “member” when referring to an NSCC member that has full access to NSCC's CCP services. See NSCC Rules and Procedures, Rule 1, for the definition of the various membership categories. DTC's rules also provide for different categories of membership, including “participants.” This release uses the term “participant” when referring to a participant of DTC. See Rules, By-Laws, and Organizational Certificate of DTC Rule 1 for the definition of various categories of membership.
In addition to a securities account at DTC, each DTC participant has a settlement account at a clearing bank to record any net funds obligation for end-of-day settlement, whether payment will be due to or from the participant. During the day, debits and credits are entered into the participant's settlement account. The debits and credits arise from DVP transfers and from other events or transactions involving the transfer of funds, such as principal and interest payments distributed to a participant or intraday settlement progress payments by a participant to DTC
, whether payment will be due to or from the participant. During the day, debits and credits are entered into the participant's settlement account. The debits and credits arise from DVP transfers and from other events or transactions involving the transfer of funds, such as principal and interest payments distributed to a participant or intraday settlement progress payments by a participant to DTC. 40 Debits and credits in the participant's settlement account are netted intraday to calculate, at any time, a net debit balance or net credit balance, resulting in an end-of-day settlement obligation or right to receive payment. DTC nets debit and credit balances for participants who are also members of NSCC to reduce funds transfers for settlement, and acts as settlement agent for NSCC in this process. Settlement payments between DTC and DTC's participants' settlement banks are made through the National Settlement System of the Federal Reserve System. 41
40 As noted above, a CSD operates a securities settlement system that provides for transfers of securities either free of payment or for payment. When a transfer occurs for payment, typically securities settlement systems provide “delivery versus payment” or “DVP,” whereby the delivery of the security occurs only if payment occurs. The concept of DVP is sometimes referred to as “DVP/RVP.” The term “receive versus payment” or “RVP” is from the perspective of the seller.
41 See NSCC PFMI Disclosure Framework, supra note 27, at 9-10.
b. Matching/ETC Providers—Exempt Clearing Agencies
Matching/ETC Providers electronically facilitate communication among a broker-dealer, an institutional investor, and the institutional investor's custodian to reach agreement on the details of a securities trade
eive versus payment” or “RVP” is from the perspective of the seller.
41 See NSCC PFMI Disclosure Framework, supra note 27, at 9-10.
b. Matching/ETC Providers—Exempt Clearing Agencies
Matching/ETC Providers electronically facilitate communication among a broker-dealer, an institutional investor, and the institutional investor's custodian to reach agreement on the details of a securities trade. 42 These entities emerged as a result of efforts by market participants to develop a more efficient and automated matching process that continues to be viewed as a necessary step in achieving straight-through processing (“STP”) 43 for the settlement of institutional trades. 44 Currently, there are three entities that have obtained exemptions from registration as a clearing agency from the Commission to operate as Matching/ETC Providers. 45 The current Matching/ETC Providers use two methods, “Matching” and “ETC,” to facilitate agreement on the trade details among the parties. When the parties reach agreement, it is generally referred to as an “affirmed confirmation.”
42 Electronic trade confirmation (“ETC”) was originally developed by DTC in the early 1970s as an alternative to the use of phone, fax or other manual processes. To facilitate greater use of ETC by market participants to process institutional trades, the Commission approved rule changes filed by several SROs that required the use of ETC for trades involving institutional investors. See Exchange Act Release No. 19227 (Nov. 9, 1982), 47 FR 51658, 51664 (Nov. 18, 1982) (order approving confirmation rules for exchanges and securities association)
al processes. To facilitate greater use of ETC by market participants to process institutional trades, the Commission approved rule changes filed by several SROs that required the use of ETC for trades involving institutional investors. See Exchange Act Release No. 19227 (Nov. 9, 1982), 47 FR 51658, 51664 (Nov. 18, 1982) (order approving confirmation rules for exchanges and securities association).
43 The Securities Industry Association (which in 2006 merged with The Bond Markets Association to form the Securities Industry Financial Markets Association) has described STP “as the seamless integration of systems and processes to automate the trade process from end-to-end—trade execution, confirmation, and settlement—without manual intervention or the re-keying of data.” Securities Industry Association, Glossary of Terms, reprinted in part in Kyle L Brandon, Prime Brokerage: Of Prime Importance to the Securities Industry (SIA Res. Rep., Vol. VI, No. 4, New York, N.Y.), Apr. 28, 2005, at 25-26, http://www.sifma.org/WorkArea/linkit.aspx?LinkIdentifier=id&ItemID=21718&libID=5884.
44 Securities Industry Association, Institutional Transaction Processing Model, at 3 (May 2002) (“ITPC 2002 White Paper”). The Securities Industry Association's Institutional Transaction Processing Committee (“ITPC”) published its first white paper in December 1999 with a subsequent version released in February 2001. The ITPC 2002 White Paper was published in May 2002.
45 The Commission issued an interpretive release in 1998 concluding that matching constitutes comparison of data respecting the terms of settlement of securities transactions, and therefore an entity that provides matching services as an intermediary between a broker-dealer and an institutional customer is a clearing agency within the meaning of Section 3(a)(23) of the Exchange Act and is, therefore, subject to the registration requirements of Section 17A. See Confirmation and Affirmation of Securities Trades, Exchange Act Release No. 39829 (Apr
securities transactions, and therefore an entity that provides matching services as an intermediary between a broker-dealer and an institutional customer is a clearing agency within the meaning of Section 3(a)(23) of the Exchange Act and is, therefore, subject to the registration requirements of Section 17A. See Confirmation and Affirmation of Securities Trades, Exchange Act Release No. 39829 (Apr. 6, 1998), 63 FR 17943, 17946 (Apr. 13, 1998); Clearing Agency Standards, Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220, 66228 & n.94 (Nov. 2, 2012) (noting the 1998 interpretive release); see also 15 U.S.C. 78c(a)(23) (defining the term “clearing agency”). The Commission has provided exemptions from registering as a clearing agency to certain entities that operate matching and ETC services. See Order Granting Exemption from Registration as a Clearing Agency for Global Joint Venture Matching Services-U.S., LLC, Exchange Act Release No. 44188 (Apr. 17, 2001), 66 FR 20494, 20501 (Apr. 23, 2001); Order Approving Applications for an Exemption from Registration as a Clearing Agency for Bloomberg STP LLC and SS&C Techs., Inc., Exchange Act Release No. 76514 (Nov. 24, 2015), 80 FR 75388, 75413 (Dec. 1, 2015).
ETC is a process where the Matching/ETC Provider simply provides the communication facilities to enable a broker-dealer and its institutional investor to send messages back and forth that ultimately results in the agreement of the trade details or affirmed confirmation, which is in turn sent to DTC to effect settlement of the trade. 46 Specifically, the Matching/ETC Provider will send the affirmed confirmations to DTC where the DTC participants who will be delivering securities will authorize the trades for automated settlement. 47
46 ITPC 2002 White Paper, supra note 44.
47 See Order Approving Proposed Rule Change by The Depository Trust Company To Allow the Inventory Management System To Accept Real-Time and Late Affirmed Trades from Omgeo, Exchange Act Release No. 54701 (Nov
affirmed confirmations to DTC where the DTC participants who will be delivering securities will authorize the trades for automated settlement. 47
46 ITPC 2002 White Paper, supra note 44.
47 See Order Approving Proposed Rule Change by The Depository Trust Company To Allow the Inventory Management System To Accept Real-Time and Late Affirmed Trades from Omgeo, Exchange Act Release No. 54701 (Nov. 3, 2006), 71 FR 65854 (Nov. 9, 2006).
In contrast, “Matching” is a process by which the Matching/ETC Provider compares and reconciles the broker-dealer's trade details with the institutional investor's allocation instructions to determine whether the two descriptions of the trade agree. If the trade details and institutional investor's allocation instructions match, an affirmed confirmation is generated, which also is used to effect settlement of the trade. As with ETC, transmission of the affirmed confirmations by the Matching/ETC Provider to DTC facilitates automated trade settlement. 48
48 Id.
ETC is considered less efficient than Matching because it is an iterative process where each participant has to wait for a trigger before executing the next step in the process and has to manually re-key trade data into several systems, resulting in delay and redundant flows of non-essential data. 49 Moreover, during this process broker-dealers and their institutional investors often rely on internal systems that lack either automation, common message standards, or both, resulting in a lack of synchronized automated data that can cause errors and discrepancies. Matching, in contrast to ETC, is not an iterative process. Rather, matching eliminates the separate step of producing a confirmation for the institutional investor to review and affirm. Currently, Matching/ETC Providers assist many, but not all, market participants in affirming institutional trade details as soon as possible after trade execution, thereby helping to ensure that a trade will clear and settle by the end of the settlement cycle
tive process. Rather, matching eliminates the separate step of producing a confirmation for the institutional investor to review and affirm. Currently, Matching/ETC Providers assist many, but not all, market participants in affirming institutional trade details as soon as possible after trade execution, thereby helping to ensure that a trade will clear and settle by the end of the settlement cycle. 50
49 ITPC 2002 White Paper, supra note 44, at 3.
50 See infra Part III.A.3. for affirmation rates for certain Matching/ETC Providers.
c. Market Participants—Investors, Broker-Dealers, and Custodians
A variety of market participants depend on the clearance and settlement services facilitated by the FMUs and Matching/ETC Providers, including but not limited to institutional and retail investors, broker-dealers, and custodians ( e.g., banks). Furthermore, the relevant clearance and settlement
Institutional investors are entities such as mutual funds, pension funds, hedge funds, bank trust departments, and insurance companies. Transactions involving institutional investors are often more complex than those for and with retail investors due to the volume and size of the transactions, the entities involved in facilitating the execution and settlement of the trade, including Matching/ETC Providers and custodians, and the need to manage certain regulatory or business obligations. 51 Trades involving retail investors are typically smaller in size than institutional trades, and the settlement of retail investor trades generally occurs directly with the investor's or their intermediary's broker-dealer and does not involve a separate custodian bank.
51 The distinction between “retail investor” and “institutional investor” is made only for the purpose of illustrating the manner in which these types of entities generally clear and settle their securities transactions
, and the settlement of retail investor trades generally occurs directly with the investor's or their intermediary's broker-dealer and does not involve a separate custodian bank.
51 The distinction between “retail investor” and “institutional investor” is made only for the purpose of illustrating the manner in which these types of entities generally clear and settle their securities transactions. For purposes of this release, the term “retail investor” includes any entity that settles their securities transactions in a manner described in Part II.A.3.a. Similarly, the term “institutional investor” is used to describe any entity that is permitted and chooses to settle their securities transactions in the manner described in Part II.A.3.b.
To clear and settle securities transactions directly through a registered clearing agency, the rules of the clearing agencies provide that a broker-dealer or other type of market participant must become a direct member of that clearing agency. 52 Generally broker-dealers that are direct members of clearing agencies are referred to as “clearing broker-dealers.” Clearing broker-dealers must comply with the rules of the clearing agency, including but not limited to rules relating to operational and financial requirements. Broker-dealers that submit transactions to a clearing agency through a clearing broker-dealer are generally referred to as “introducing broker-dealers.” In general, broker-dealers executing trades on a registered securities exchange are required to clear those transactions through a registered clearing agency. 53 Additionally, pursuant to certain self-regulatory organization (“SRO”) rules, broker-dealers that effect transactions in municipal and corporate debt securities are required to clear and settle those transactions through a registered clearing agency
broker-dealers executing trades on a registered securities exchange are required to clear those transactions through a registered clearing agency. 53 Additionally, pursuant to certain self-regulatory organization (“SRO”) rules, broker-dealers that effect transactions in municipal and corporate debt securities are required to clear and settle those transactions through a registered clearing agency. 54 Broker-dealers executing trades outside the auspices of a trading venue ( e.g., on an internalized basis) may clear through a clearing agency, may choose to settle those trades through mechanisms internal to that broker-dealer, or may settle the trades bilaterally. 55 Post-trade processing of securities transactions by broker-dealers generally occurs in the back office and entails the following functions: (1) Order management, which keeps track of the orders that are sent to the various markets and of the subsequent related executions that are received; (2) purchases and sales, which works closely with the appropriate clearing agency to ensure the transactions have been accurately cleared and settled and to reconcile the broker-dealer's position; (3) cashiering, which is responsible for receiving and delivering securities; and (4) asset servicing activities related to the processing of dividends, stock splits, and other corporate actions.
52 Due to the financial and operational obligations of entities submitting trades to a clearing agency, all clearing agencies have established specific requirements for initial membership and ongoing participation in the clearing agency. See, e.g., NSCC Rules and Procedures, supra note 26, Rules 2A and 2B (discussing initial and ongoing requirements for membership).
53 See, e.g., FINRA Rules 6350A(a) and 6350B(a) (requiring that FINRA members must clear and settle transactions in “designated securities” ( i.e., NMS stocks) through the facilities of a registered clearing agency that uses a continuous net settlement system)
gency. See, e.g., NSCC Rules and Procedures, supra note 26, Rules 2A and 2B (discussing initial and ongoing requirements for membership).
53 See, e.g., FINRA Rules 6350A(a) and 6350B(a) (requiring that FINRA members must clear and settle transactions in “designated securities” ( i.e., NMS stocks) through the facilities of a registered clearing agency that uses a continuous net settlement system). In addition, FINRA Rule 6274(a) requires that a member must clear and settle transactions “effected on” the Alternative Display Facility in ADF-eligible securities ( i.e., NMS stocks) that are eligible for net settlement through the facilities of a registered clearing agency that uses a continuous net settlement system. Notwithstanding the requirements in Rules 6350A(a), 6350B(a) and 6274(a), transactions in designated securities and transactions in ADF-eligible securities may be settled “ex-clearing” provided that both parties to the transaction agree to the same. See FINRA Rules 6350A(b), 6350B(b), 6274(b).
54 See MSRB Rule G-12(f); FINRA Rule 11900.
55 See generally FINRA Rules 6350A, 6350B and 6274.
Often, due to regulatory or business obligations, an institutional investor will not use its executing broker-dealer to custody the institutional investors' securities at DTC, but rather will use a custodian bank for the safekeeping and administration of both their securities and cash. 56 The custodian may also provide other administrative services, such as: (1) Acting as an agent or fiduciary; (2) monitoring the purchase and sale of securities by the executing broker-dealers; and (3) collecting dividends and interest.
56 Section 17(f) of the Investment Company Act of 1940 (the “Investment Company Act”) and the rules thereunder govern the safekeeping of a registered investment company's assets, and generally provide that a registered investment company must place and maintain its securities and similar instruments only with certain qualified custodians
broker-dealers; and (3) collecting dividends and interest.
56 Section 17(f) of the Investment Company Act of 1940 (the “Investment Company Act”) and the rules thereunder govern the safekeeping of a registered investment company's assets, and generally provide that a registered investment company must place and maintain its securities and similar instruments only with certain qualified custodians. Section 17(f)(1)(A) of the Investment Company Act permits certain banks to maintain custody of registered investment company assets subject to Commission rules. See 15 U.S.C. 80a-17(f).
3. Overview of Trade Settlement Processes
As described further below, the proposed amendment to paragraph (a) of Rule 15c6-1 would prohibit a broker or dealer from entering into a securities contract that settles later than the second business day after the date of the contract unless expressly agreed upon by both parties at the time of the transaction, subject to certain exceptions enumerated in the rule. To provide context for understanding the proposed amendment and the related economic analysis that follows, this section provides an overview of the current state of trade settlement processes under current Rule 15c6-1. Given the differences in the clearance and settlement processes for trades by retail and some institutional investors, the proposed amendment may have differing economic effects on different market participants involved in these transactions. Accordingly, the current clearance and settlement processes are discussed below separately. 57
57 Although trades in open-ended investment company securities ( i.e., mutual funds) are subject to Rule 15c6-1, trades in these securities (other than ETFs and other types of exchange-traded products) are generally not executed in the secondary market, but rather between issuers and their broker-dealer distributors
he current clearance and settlement processes are discussed below separately. 57
57 Although trades in open-ended investment company securities ( i.e., mutual funds) are subject to Rule 15c6-1, trades in these securities (other than ETFs and other types of exchange-traded products) are generally not executed in the secondary market, but rather between issuers and their broker-dealer distributors. As a non-CCP service, NSCC administers an electronic communication system, Fund/SERV, that centralizes and standardizes order entry, confirmation, registration and money settlement for mutual fund companies, broker-dealers, banks and trust companies, third party administrators and other intermediaries involved in the purchase and sale of mutual fund shares. Pursuant to NSCC rules, an NSCC member may roll up their daily cash obligation from Fund/SERV transactions into the member's daily net obligations at NSCC. NSCC Rules and Procedures, supra note 26, Rules 7, 12 and 52.
a. Retail Investor Trade Settlement Process
Trade comparison, which consists of reporting, comparing, matching, and validating the buy and sell sides of a trade is the first step in the clearance and settlement of retail investor transactions. At the trading venue, such as an exchange or non-exchange trading venue ( e.g., alternative trading system or electronic communication network), a buy order is electronically matched against a sell order. If the details of the trade submitted by the counterparties agree ( e.g., the security price and quantity), the trade is considered “locked in” and then sent from the 58 The following is a high level description and illustration of what generally occurs each day following execution of a retail investor trade and submission of the trade to NSCC:
58 Trade comparison can be completed at NSCC, through a trading venue, or through a Qualified Special Representative (“QSR”) (as defined in Rule 1 of NSCC's Rules and Procedures) on behalf of NSCC members, as permitted by clearing agency rules
h level description and illustration of what generally occurs each day following execution of a retail investor trade and submission of the trade to NSCC:
58 Trade comparison can be completed at NSCC, through a trading venue, or through a Qualified Special Representative (“QSR”) (as defined in Rule 1 of NSCC's Rules and Procedures) on behalf of NSCC members, as permitted by clearing agency rules. Currently, over 99% of the trade data received by NSCC is received from a trading venue or QSR on a locked-in basis ( i.e., already compared by the marketplace of execution). However, NSCC provides comparison services for transactions in fixed income securities ( i.e., corporate and municipal bonds) and for over-the-counter transactions that are not otherwise generally matched through other facilities. NSCC performs its comparison process on the same timeline as locked-in trade submissions. See NSCC PFMI Disclosure Framework, supra note 27, at 7.
Trade Date —NSCC validates trade data received from the trading venue and confirms receipt of the transaction details by electronically sending communication to NSCC members that are counterparties to the trade. This communication legally commits the members to complete the trade. 59
59 NSCC Rules and Procedures, supra note 26, Rule 5, Section 1.
T+1 —At midnight on T+1, NSCC novates the trade, becoming the buyer to the selling broker-dealer, and the seller to the buying broker-dealer and attaches a trade guaranty. 60 (Step 1)
60 NSCC accepts transactions for clearance on business days. Pursuant to Rule 1 of NSCC's Rules and Procedures, the term “business day” means any day on which NSCC is open for business. However, on any business day that banks or transfer agencies in New York State are closed or a qualified securities depository is closed, no deliveries of securities and no payments of money shall be made through NSCC
NSCC accepts transactions for clearance on business days. Pursuant to Rule 1 of NSCC's Rules and Procedures, the term “business day” means any day on which NSCC is open for business. However, on any business day that banks or transfer agencies in New York State are closed or a qualified securities depository is closed, no deliveries of securities and no payments of money shall be made through NSCC.
T+2 —NSCC issues a trade summary report to its members with a summary of all securities transactions and cash to be settled the following day, specifically indicating the net positions of securities and the net cash amount owed by the member or to be received by the member. NSCC also sends an electronic instruction to DTC detailing the net positions and cash that need to be settled for each member/participant. (Step 2)
T+3 —DTC transfers the securities electronically between the buying and selling broker-dealer accounts at DTC. The participant broker-dealers instruct their settlement banks to send money to, or receive money from, DTC to complete the transaction. 61 (Step 3) Investors receive securities and cash from their respective broker-dealers. (Step 4)
61 Both NSCC and DTC jointly provide all members/participants and their settling banks with reports throughout the day indicating their net debit and net credit amounts for individual members/participants as well as a net-net amount for each settling bank. Each NSCC member is required to select a settling bank to handle the electronic payment or receipt of payments through the Federal Reserve Bank's Fedwire system.
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b. Institutional Investor Trade Settlement Process
Institutional trade processing typically starts when an institutional customer or its agent (sometimes referred to as the “buy side”) places an order to buy or sell securities with its broker-dealer. The broker-dealer will advise the institutional customer of the trade details, who in turn may advise its broker-dealer how the trade should be allocated among its various accounts
ettlement Process
Institutional trade processing typically starts when an institutional customer or its agent (sometimes referred to as the “buy side”) places an order to buy or sell securities with its broker-dealer. The broker-dealer will advise the institutional customer of the trade details, who in turn may advise its broker-dealer how the trade should be allocated among its various accounts. 62 The process of verifying the allocation is completed through the confirmation/affirmation procedures described in Part II.A.2.b., which discusses the automated post-trade pre-settlement processing of institutional investor trades.
62 In instances where an institutional investor submits an order on behalf of other parties ( e.g., an investment manager on behalf of several mutual funds), the institutional investor will instruct its broker-dealer as to how to allocate the transactions among the underlying entities. The broker-dealer will reply by sending details of, or confirming, each allocation and if correct, the institutional investor will affirm.
Institutional investors may choose to trade through an executing broker-dealer that clears and settles its securities transactions though NSCC and DTC. However, depending on the size and complexity of the trade and the number of trading partners involved in the transaction, institutional investors may also choose to avail themselves of processes specifically designed to address the unique aspects of their trades. Specifically, these transactions can be processed on a trade-for-trade basis through a prime broker-dealer and settled on an RVP/DVP basis through DTC 63 and the institutional customer's custodial bank. 64
63 DTC operates a DVP settlement system for settlement of securities on a gross basis and settlement of funds on a net basis
pecifically designed to address the unique aspects of their trades. Specifically, these transactions can be processed on a trade-for-trade basis through a prime broker-dealer and settled on an RVP/DVP basis through DTC 63 and the institutional customer's custodial bank. 64
63 DTC operates a DVP settlement system for settlement of securities on a gross basis and settlement of funds on a net basis. Deliveries of securities are subject to DTC's risk management controls, which are designed so that DTC may complete system-wide settlement notwithstanding the failure to settle of its largest participant or affiliated family of participants. See DTC, Disclosure under the PFMI Disclosure Framework, at 10 (Dec. 2015), http://www.dtcc.com/legal/policy-and-compliance.
64 Through its ID Net Service, DTC allows its participant broker-dealers to net their institutional investor customer transactions with the broker-dealer's other transactions (including the broker's retail trades) to reduce the aggregate securities movement while still retaining the trade-for-trade settlement between the DTC participant and the custodian bank. This service also allows the banks to maintain their responsibility to pay for only those trades where all the shares are delivered, while at the same time providing brokers with the benefits of netting through NSCC's CNS system.
The following is a high level description and illustration of what generally occurs each day following execution of an institutional investor trade and submission of the trade to DTC:
Trade Date through T+2 —The institutional investor sends to the Matching/ETC Provider, its broker-dealer, and its custodian the allocation information for the trade. (Step 1) The broker-dealer then submits to the Matching/ETC Provider trade data corresponding to each allocation, including settlement instructions and, as applicable, commissions, taxes, and fees
and submission of the trade to DTC:
Trade Date through T+2 —The institutional investor sends to the Matching/ETC Provider, its broker-dealer, and its custodian the allocation information for the trade. (Step 1) The broker-dealer then submits to the Matching/ETC Provider trade data corresponding to each allocation, including settlement instructions and, as applicable, commissions, taxes, and fees. (Step 2)
If the transaction is processed through a matching service, the Matching/ETC Provider compares the institutional investor's allocation information with the broker-dealer's trade data to determine whether the information contained in each field matches. If all required fields match, the Matching/ETC Provider generates a matched confirmation and sends it to the broker-dealer, the institutional investor, and other entities designated by the institutional investor ( e.g., the institutional investor's custodian). (Step 3)
If the institutional investor uses the ETC process, instead of comparing the institutional investor's allocation information with the broker's trade data, the Matching/ETC Provider would transmit the information to the broker-dealer and institutional investor so that each party could verify that the trade was executed and allocated correctly and produce an affirmed confirmation.
T+2 —After the Matching/ETC Provider creates the matched confirmation (whether by ETC or matching), the matching service submits it to DTC as an “affirmed confirmation.” After the affirmed confirmation has been submitted, DTC participants that are delivering securities then authorize the trades for automated settlement. DTC currently processes transactions in real-time from approximately 8:30 p.m. on the night before settlement day (T+2) until 3:30 p.m. on settlement day (T+3) for DVP transactions and until 6:35 p.m. for free of payment transactions.
T+3 —DTC transfers the securities electronically between the buying and selling broker-dealer accounts at DTC
s then authorize the trades for automated settlement. DTC currently processes transactions in real-time from approximately 8:30 p.m. on the night before settlement day (T+2) until 3:30 p.m. on settlement day (T+3) for DVP transactions and until 6:35 p.m. for free of payment transactions.
T+3 —DTC transfers the securities electronically between the buying and selling broker-dealer accounts at DTC. The participant broker-dealers instruct their settlement banks to send money to, or receive money from, DTC to complete the transaction.
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4. Impact of the Settlement Cycle
The length of the settlement cycle has varying degrees of impact across the range of market participants described above. That impact stems, in large part, from the type of risk exposure each entity brings to the clearance and settlement process and the nature of its processes and systems for operating within the existing framework.
From the perspective of a CCP, such as NSCC, the length of the settlement cycle may affect the CCP's exposure to credit, market and liquidity risk that arises once a transaction has been novated and the CCP takes offsetting (and guaranteed) positions as a substituted counterparty for each of the parties to the original transaction. 65 A CCP takes a number of measures to manage this credit risk to its members, including through financial resource contributions from members and netting down the total outstanding exposure it may have to a particular member. However, the extent to which a CCP must apply these risk mitigation tools depends in large part on the length of time it is exposed to the risk that one or more of its members may default on their settlement obligations, which in turn is driven by the length of the settlement cycle.
65 See CCA Proposal, 79 FR at 29524, which provides an overview discussion of financial risks faced by clearing agencies.
The settlement cycle similarly determines the period of time during which a CCP faces market risk following novation
posed to the risk that one or more of its members may default on their settlement obligations, which in turn is driven by the length of the settlement cycle.
65 See CCA Proposal, 79 FR at 29524, which provides an overview discussion of financial risks faced by clearing agencies.
The settlement cycle similarly determines the period of time during which a CCP faces market risk following novation. Market risk, as a general matter, can arise for a CCP where a member has defaulted during the settlement cycle, and the CCP faces the risk that the defaulted member's positions and other resources the CCP holds ( i.e., defaulted member collateral, such as clearing fund deposits) decline in market value as the CCP seeks to liquidate, transfer, or otherwise dispose of those assets to minimize losses. 66 Finally, the settlement cycle can also impact the amount of liquidity risk a CCP may need to anticipate for purposes of settling an open transaction (the CCP often relies on incoming payments from some members to facilitate payments to other members) or otherwise deploying financial resources to cover losses that may result from a member's default. 67 A DTCC paper published in 2011 notes that shortening the settlement cycle may result in reduced liquidity obligations for NSCC. 68 In addition, that study, which was conducted from October 19, 2010, through August 31, 2011, indicated certain procyclical benefits to a reduced settlement cycle in observing how NSCC clearing fund requirements 69 The results of the study are reflected in the tables below.
66 See id.
67 See id. Credit and liquidity risk may also be relevant to the functioning of a CSD, given that the CSD will rely on incoming payments or deliveries of securities from certain participants to make payments or deliveries to other participants. Where a CSD participant defaults, or where a CCP or a CSD participant faces liquidity pressure, the CSD itself may need to deploy financial resources to cover the shortfall
and liquidity risk may also be relevant to the functioning of a CSD, given that the CSD will rely on incoming payments or deliveries of securities from certain participants to make payments or deliveries to other participants. Where a CSD participant defaults, or where a CCP or a CSD participant faces liquidity pressure, the CSD itself may need to deploy financial resources to cover the shortfall. For example, the CSD may maintain a participant fund (similar in function to a clearing fund) or have available lines of credit to access in such instances.
68 DTCC, Proposal to Launch a New Cost-Benefit Analysis on Shortening the Settlement Cycle, at 7 (Dec. 2011) (“DTCC Proposal to Launch a Cost-Benefit Analysis”), http://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-cost-benefit-analysis-on-shortening-the-settlement-cycle.aspx.
69 See id. at 8-9.
Settlement cycle Average daily clearing fund requirement ($MM) T+3 4,012 (100%) T+2 3,421 (−15%) T+1 2,994 (−25%) According to the study, clearing fund savings (for NSCC's members) resulting from shorter settlement cycles are more pronounced during periods of high volatility. 70 By showing the same data for August 2011, a period of high volatility, the study shows a greater decrease in NSCC's clearing fund requirements. 71
70 See id.
71 See id.
Settlement cycle Average daily clearing fund for August 2011 ($MM) T+3 7,281 (100%) T+2 5,517 (−24%) T+1 4,619 (−37%) NSCC also conducted a study from April 2011 to September 2011 that indicated that shortening the settlement cycle would reduce NSCC's liquidity obligations significantly. According to the study, in a T+2 settlement cycle, NSCC's average liquidity obligations would decline by 20%, thereby reducing members' required clearing fund deposits. 72
72 See id. at 7.
For broker-dealers and investors, the impact of the length of the settlement cycle can be understood in most cases through the perspective of liquidity risk
reduce NSCC's liquidity obligations significantly. According to the study, in a T+2 settlement cycle, NSCC's average liquidity obligations would decline by 20%, thereby reducing members' required clearing fund deposits. 72
72 See id. at 7.
For broker-dealers and investors, the impact of the length of the settlement cycle can be understood in most cases through the perspective of liquidity risk. Over the course of the settlement cycle, broker-dealers and investors will generally seek to manage two forms of liquidity risk—(i) sudden or unexpected liquidity demands that may arise due to the CCP's ongoing management of credit, market and liquidity risk exposure during the settlement cycle, 73 and (ii) the need to timely obtain and deliver cash or securities to settle outstanding trades, as well as using cash or securities to engage in trading activity across other markets with mismatched settlement cycles, such as non-U.S. markets.
73 In this respect, the liquidity risk can be linked to market risk faced by the CCP and its member arising from the open position between the CCP and the member, as well as any collateral posted by the member to the CCP to cover the CCP's credit risk exposure to the member. Where the market value of these open positions or the posted collateral fluctuates, the CCP may seek additional margin or other financial resources from the member. See CCA Proposal, 79 FR 29524.
Broker-dealers that are CCP members (including broker-dealers that are NSCC members) have financial resource obligations which the CCP may collect for risk management purposes. 74 These financial resource obligations may be at issue where a CCP member defaults and the CCP requires the defaulting member's resources or the other members' mutualized resources to address any credit, market and liquidity risk the CCP faces as it seeks to liquidate, transfer or otherwise dispose of the defaulted positions and related collateral of the defaulting member
isk management purposes. 74 These financial resource obligations may be at issue where a CCP member defaults and the CCP requires the defaulting member's resources or the other members' mutualized resources to address any credit, market and liquidity risk the CCP faces as it seeks to liquidate, transfer or otherwise dispose of the defaulted positions and related collateral of the defaulting member. 75 These financial resource obligations may also be incurred within a settlement cycle where a CCP seeks additional resources to address potential risk that may increase due to changing or otherwise volatile market conditions that can also be procyclical. 76 In such instances, the CCP member's obligation to make available financial resources to the CCP keys off of the period of time during which the CCP faces the member. Therefore, the length of the settlement cycle can impact the amount and types ( e.g., stable, highly liquid assets) of financial resources a CCP may require of its members, which in turn creates liquidity risk exposure and capital costs for the member in terms of obtaining and delivering to the CCP the necessary financial resources in a timely manner.
74 See supra Part II.A.2.a.(1) for additional discussion regarding the use of financial resource requirements for risk management purposes. See also NSCC Rules and Procedures, supra note 26, Rules 4 and 4(A).
75 See CCA Proposal, 79 FR at 29524.
76 See DTCC, DTCC Recommends Shortening the U.S. Trade Settlement Cycle (Apr. 2014), http://www.ust2.com/industry-action/.
Further, for NSCC members/DTC participants, the length of the settlement cycle determines the deadline by which cash or securities must be delivered into the member/participant's DTC account for settlement purposes. Thus, a member/participant may face liquidity risk in obtaining (or recalling) from other markets with mismatched settlement cycles the necessary resources to deliver in time for settlement
er, for NSCC members/DTC participants, the length of the settlement cycle determines the deadline by which cash or securities must be delivered into the member/participant's DTC account for settlement purposes. Thus, a member/participant may face liquidity risk in obtaining (or recalling) from other markets with mismatched settlement cycles the necessary resources to deliver in time for settlement. Similarly, the length of the settlement cycle governs the time when the proceeds of a securities transaction may be made available to the member/participant. A mismatch in timing between the settlement cycle for the securities transaction and the settlement cycle for another market transaction, such as in the derivatives or a non-U.S. market with a different settlement cycle, can lead in turn to liquidity risk for the member in meeting all of its settlement obligations across markets. 77
77 For example and as noted earlier, the settlement cycle timeframe for open-end mutual funds that settle through NSCC is generally T+1. However, the settlement cycle timeframe for many underlying portfolio securities held by mutual funds is T+3. Settlement timeframes for securities with non-standard settlements held by these funds may be longer than T+3. This mismatch in timing presents potential liquidity risks for such funds as market participants with respect to the receipt of portfolio proceeds and in satisfying their investor redemption obligations. See Investment Company Act Release No. 31835 (Sept. 22, 2015), 80 FR 62273, 62282-83 (Oct. 15, 2015); see also, e.g., PricewaterhouseCoopers LLP, Shortening the Settlement Cycle: The Move to T+2, at 13 n.18 (2015) (“ISC White Paper”), http://www.ust2.com/pdfs/ssc.pdf
ds as market participants with respect to the receipt of portfolio proceeds and in satisfying their investor redemption obligations. See Investment Company Act Release No. 31835 (Sept. 22, 2015), 80 FR 62273, 62282-83 (Oct. 15, 2015); see also, e.g., PricewaterhouseCoopers LLP, Shortening the Settlement Cycle: The Move to T+2, at 13 n.18 (2015) (“ISC White Paper”), http://www.ust2.com/pdfs/ssc.pdf.
Broker-dealers that are not members of a CCP may similarly face certain of the liquidity risks described above because the clearing broker-dealer may pass on related costs through margin charges, as well as other charges and fees (which may, in some cases, be incorporated in the clearing broker-dealer's management of its credit risk to the non-clearing broker-dealer). These costs may also, in turn, be applied to or passed on to both institutional and retail investors by their executing or clearing broker-dealers. 78 For example, an industry study noted that some NSCC members carry the exposure of their customers' open positions during the settlement cycle and that each day's reduction in the settlement cycle could lessen these open exposures by 25%. 79 Therefore, the length of the settlement cycle can potentially affect the size and type of financial resource demands broker-dealers may pass on to investors.
78 For further discussion on the downstream effects of liquidity risk costs, see infra Part VI.C.4.
79 See DTCC Proposal to Launch a Cost-Benefit Analysis, supra note 68, at 7.
The impact that the length of the settlement cycle may have on the credit, market and liquidity risk exposure faced by market participants can also lead to impacts on systemic risk. First, the length of the settlement cycle will determine the number of unsettled transactions present in the settlement system at any given point in time, and consequently the level of exposure to credit, market and liquidity risks faced by market participants
nt cycle may have on the credit, market and liquidity risk exposure faced by market participants can also lead to impacts on systemic risk. First, the length of the settlement cycle will determine the number of unsettled transactions present in the settlement system at any given point in time, and consequently the level of exposure to credit, market and liquidity risks faced by market participants. This attendant credit, market and liquidity risk, in turn, can affect the potential likelihood of a market participant defaulting. In the event of a default of a major market participant, the default may entail losses so large as to create widespread or systemic problems. Further, the default of one member may lead to the default of one or more other members, exacerbating any financial stress a CCP 80
80 See T+3 Adopting Release, 58 FR at 52894; see also Clearing Agency Standards Adopting Release, 77 FR at 66254 (discussing the need for default procedures to allow the clearing agency to take action resulting from one or more member defaults in order to contain resultant losses and liquidity pressures).
As a more general matter, market participants rely on CCPs for prompt clearance and settlement of transactions and the receipt of proceeds from those transactions. Thus, a significant disruption in the clearance and settlement process and transmission of these proceeds could potentially harm other market participants, particularly in instances where market participants in centrally cleared and settled markets are linked through intermediation chains to each other and to participants in uncleared markets (as is the case in the U.S. clearance and settlement system). Shortening the settlement cycle is therefore one of the primary methods for reducing this risk. 81
81 See Christopher L. Culp, Risk Management by Securities Settlement Agents, 10 J. Applied Corp. Fin. 96 (Fall 1997), http://www.rmcsinc.com/articles/JACF103.pdf.
5
ediation chains to each other and to participants in uncleared markets (as is the case in the U.S. clearance and settlement system). Shortening the settlement cycle is therefore one of the primary methods for reducing this risk. 81
81 See Christopher L. Culp, Risk Management by Securities Settlement Agents, 10 J. Applied Corp. Fin. 96 (Fall 1997), http://www.rmcsinc.com/articles/JACF103.pdf.
5. Post-Rule 15c6-1 Adoption
Since the adoption of Rule 15c6-1, the Commission and various market participants have, as described in greater detail below, explored the possibility of shortening the standard settlement cycle further. Below is a description of these efforts.
a. SIA T+1 Initiative
After the implementation of the T+3 settlement cycle, the Securities Industry Association (“SIA”) led an effort to shorten the settlement cycle to T+1 and implement STP. 82 In 2000, the SIA published its T+1 Business Case Final Report (“SIA Business Case Report”) which concluded that the case for moving to a T+1 settlement cycle in the U.S. was “strong” based upon several factors. 83 According to the SIA Business Case Report: (i) The move from T+3 to T+1 would dramatically reduce the settlement risk exposure of the U.S. securities industry; 84 (ii) the transition to a T+1 settlement cycle would enable the U.S. market to continue to maintain its global competitiveness by serving as the catalyst for enhancing the current post-trade processing and settlement process; 85 and (iii) the move to T+1 would serve the interests of U.S. investors by synchronizing the clearance and settlement process across asset classes, thus enabling more fungible, flexible trading and investing. 86
82 The SIA (which has since merged with other industry groups to form the Securities Industry Financial Markets Association) was a trade association that represented U.S. broker-dealers.
83 SIA, T+1 Business Case Final Report (July 2000) (“SIA Business Case Report”), http://www.sifma.org/issues/item.aspx?id=8589939820.
84 Id. at 1, 7
enabling more fungible, flexible trading and investing. 86
82 The SIA (which has since merged with other industry groups to form the Securities Industry Financial Markets Association) was a trade association that represented U.S. broker-dealers.
83 SIA, T+1 Business Case Final Report (July 2000) (“SIA Business Case Report”), http://www.sifma.org/issues/item.aspx?id=8589939820.
84 Id. at 1, 7. The SIA Business Case Report did not explicitly define the term “settlement risk.” However, the report argued that a move to a T+1 settlement cycle would reduce credit risk exposure and operational risk exposure. See id. at 39-41.
85 Id.
86 Id.; see also infra Part VI.D.1. for a discussion of the alternative of shifting to a T+1 settlement cycle.
The SIA Business Case Report also identified ten “building blocks” essential to realizing the goal of improving the speed, safety, and efficiency of the trade settlement process, and included a cost benefit analysis for transitioning to T+1. 87 The implementation of these building blocks, the report noted, would ensure that the transition to a T+1 settlement cycle would be accomplished in an orderly and risk-effective manner. 88
87 See id. at 2-3. The 10 Building Blocks identified in the report are as follows: (1) Modify internal processes at broker-dealers, asset managers, and custodians to ensure compliance with compressed settlement deadlines; (2) identify and comply with accelerated deadlines for submission of trades to the clearing and settlement systems; (3) amend NSCC's trade guaranty process so that guaranty is provided on trade date; (4) report trades to clearing corporations in locked-in format and revise clearing corporations' output; (5) rewrite CNS processes at NSCC to enhance speed and efficiency; (6) reduce reliance on checks and use alternative means of payment, such as automatic debits allowed by the National Automated Clearing House Association; (7) immobilize securities shares prior to conducting transactions; (8) revise the prospectus delivery rules
orations in locked-in format and revise clearing corporations' output; (5) rewrite CNS processes at NSCC to enhance speed and efficiency; (6) reduce reliance on checks and use alternative means of payment, such as automatic debits allowed by the National Automated Clearing House Association; (7) immobilize securities shares prior to conducting transactions; (8) revise the prospectus delivery rules and procedures for initial public offerings; (9) develop industry matching utilities and linkages for all asset classes; and (10) standardize reference data and move to standardized industry protocols for broker-dealers, asset managers, and custodians.
88 Id. at 2.
In July 2002, the SIA shifted the principal focus of its initiative from shortening the settlement cycle to achieving industry-wide STP and planned to reconsider the need to pursue a reduction in the settlement cycle in 2004. 89 At that time, the SIA believed more work was needed on improving operational processing to achieve STP before a transition to T+1 could be considered. 90 The SIA's reasoning for this shift in focus stemmed largely from an operational risk concern, observing that while a shorter settlement cycle would be expected to decrease the gross amount of unsettled trades subject to credit or market risk, it could increase operational risk at that time by reducing the time available to correct errors prior to settlement. The SIA therefore argued that the industry priority should be to ensure that a higher amount and rate of trades were affirmed/confirmed on an earlier basis via STP, which in turn would be useful for a later consideration of compressing the settlement cycle in an environment less prone to the likelihood of operational risk. 91
89 Press Release, SIA, SIA Board Endorses Program to Modernize Clearing and Settlement Process for Securities, STP Connections (July 18, 2002) (statement from the SIA Board of Directors endorsing straight-through processing); see also Letter from Jeffrey C
e useful for a later consideration of compressing the settlement cycle in an environment less prone to the likelihood of operational risk. 91
89 Press Release, SIA, SIA Board Endorses Program to Modernize Clearing and Settlement Process for Securities, STP Connections (July 18, 2002) (statement from the SIA Board of Directors endorsing straight-through processing); see also Letter from Jeffrey C. Bernstein, Chairman, SIA STP Steering Committee, SIA (June 16, 2004) (commenting on the Commission's 2004 Securities Transaction Settlement Concept Release, Exchange Act Release No. 49405 (Mar. 11, 2004), 69 FR 12922, 12923 (Mar. 18, 2004)).
90 Id. at 3.
91 Id. at 7.
b. Securities Transaction Concept Release
In March 2004, the Commission published a concept release (“Concept Release”) seeking comment on methods to improve the safety and operational efficiency of the U.S. clearance and settlement system and to help the U.S. securities industry achieve STP. 92 Specifically, the Commission sought comment on, among other things, (i) the benefits and costs of shortening the settlement cycle to a timeframe less than T+3; (ii) whether the Commission should adopt a new rule or the SROs should be required to amend their existing rules to require the completion of the confirmation/affirmation process on trade date (“T+0”); and (iii) reducing the use of physical securities. 93 The purpose of the Concept Release was to build upon the domestic initiatives and continue the exploration of methods to improve the operations of the national clearance and settlement system. The Commission received sixty-three comment letters from a wide variety of commenters, both domestic and international, including but not limited to, broker-dealers, transfer agents, issuers, individual and institutional investors, academics, service providers, and industry associations
d continue the exploration of methods to improve the operations of the national clearance and settlement system. The Commission received sixty-three comment letters from a wide variety of commenters, both domestic and international, including but not limited to, broker-dealers, transfer agents, issuers, individual and institutional investors, academics, service providers, and industry associations. 94 While the comments were informative and relevant at the time, technological, operational and regulatory changes in the interim have addressed many of the issues raised by the commenters.
92 Securities Transactions Settlements, Exchange Act Release No 49405 (Mar. 11, 2004), 69 FR 12922 (Mar. 18, 2004).
93 Id.
94 The comment letters submitted pursuant to the Commission's request for comment in the Concept Release are available at https://www.sec.gov/rules/concept/s71304.shtml.
The Commission received thirty-four comment letters expressing a position
on shortening the settlement cycle, 95 with the majority of the commenters e.g., streamlining the institutional transactional processing model, using RVP/DVP processing for both retail and institutional trades, addressing fails in the clearance and settlement system, and dematerializing securities certificates in the U.S. settlement cycle) prior to a regulatory mandate to shorten the U.S. settlement cycle. 96 The comment letters that supported the implementation of a T+1 settlement cycle noted the benefits of a shortened settlement cycle, including reducing risks, reducing costs, improving efficiencies, and making accurate information more quickly available to investors. Several of the commenters also noted that T+1 would remove systemic risk and enable clients to have accurate information about their assets with finality the next trading day
plementation of a T+1 settlement cycle noted the benefits of a shortened settlement cycle, including reducing risks, reducing costs, improving efficiencies, and making accurate information more quickly available to investors. Several of the commenters also noted that T+1 would remove systemic risk and enable clients to have accurate information about their assets with finality the next trading day. 97 Several commenters based their general support on the view that currently available technology (as it existed in 2004) would support a T+1 or T+0 settlement cycle, 98 or that the operating costs of real time software would be dramatically lower than the staff it would replace. 99 One of these commenters stated that even if the current technology facilitating “real time settlement” was not currently cost effective, it would be in the future as technology develops and advances. 100 If real time settlement were feasible, this commenter noted, the market architecture would make sure that the securities and cash were available in good deliverable form for instant settlement before the execution of the trade, thereby eliminating failures to deliver or pay for securities, as well as totally eliminate systemic and counterparty risk. 101 95 Letters from Bruce Barrett (Mar. 13, 2004); David Patch (Mar. 13, 2004, and May 18, 2004);
96 Letters from Robert Goldberg, President, e3m Investments Inc. (Apr. 5, 2004); James J. Angel, Ph.D., CFA, Associate Professor of Finance, McDonough School of Business, Georgetown University (Apr. 9, 2004); James Nesfield (May 23, 2004); Adam J. Bryan, President and CEO, Omgeo LLC (June 4, 2004); Donald J. Kenney, Chairman, President, and Chief Executive Officer, EquiServe, Inc. (June 14, 2004); Diane M
rs from Robert Goldberg, President, e3m Investments Inc. (Apr. 5, 2004); James J. Angel, Ph.D., CFA, Associate Professor of Finance, McDonough School of Business, Georgetown University (Apr. 9, 2004); James Nesfield (May 23, 2004); Adam J. Bryan, President and CEO, Omgeo LLC (June 4, 2004); Donald J. Kenney, Chairman, President, and Chief Executive Officer, EquiServe, Inc. (June 14, 2004); Diane M. Butler, Director—Transfer Agency & International Operations, Investment Company Institute (June 16, 2004); Fionnuala Martin, STP Program Manager, BMO Nesbitt Burns (June 16, 2004); Frank DiMarco, Merrill Lynch & Co., Inc., Chair, STP Steering Committee, The Bond Market Association (June 16, 2004); Jeffrey C. Bernstein, Chairman, SIA STP Steering Committee, SIA (June 16, 2004); Kevin R. Smith, Chair, ISITC-IOA (North America) (June 16, 2004); Michael J. Alexander, Senior Vice President, Charles Schwab & Co., Inc. (June 16, 2004); Norman Eaker, Principal, Edward Jones (June 16, 2004); W. Leo McBlain, Chairman and Thomas J. Jordan, Executive Director, Financial Information Forum (June 16, 2004); Jill M. Considine, Chairman and Chief Executive Officer, The Depository Trust and Clearing Corporation (June 23, 2004); Margaret R. Blake, Counsel to the Association, and Dan W. Schneider, Counsel to the Association, The Association of Global Custodians (June 28, 2004); Ed Morgan (Mar. 31, 2006); Jim Mulkey (June 10, 2006); Charles V. Rossi, President, The Securities Transfer Association (June 15, 2006); and Gene Finn (July 25, 2012, and Aug. 2, 2012).
97 Letters from Robert Goldberg, President, e3m Investments Inc. (Apr. 5, 2004); and Fionnuala Martin, STP Program Manager, BMO Nesbitt Burns (June 16, 2004).
98 Letters from Robert Goldberg, President, e3m Investments Inc. (Apr. 5, 2004); James J. Angel, Ph.D., CFA, Associate Professor of Finance, McDonough School of Business, Georgetown University (Apr. 9, 2004); James Nesfield (May 23, 2004); and Jim Mulkey (June 10, 2006)
, President, e3m Investments Inc. (Apr. 5, 2004); and Fionnuala Martin, STP Program Manager, BMO Nesbitt Burns (June 16, 2004).
98 Letters from Robert Goldberg, President, e3m Investments Inc. (Apr. 5, 2004); James J. Angel, Ph.D., CFA, Associate Professor of Finance, McDonough School of Business, Georgetown University (Apr. 9, 2004); James Nesfield (May 23, 2004); and Jim Mulkey (June 10, 2006).
99 Letter from Robert Goldberg, President, e3m Investments Inc. (Apr. 5, 2004).
100 James J. Angel, Ph.D., CFA, Associate Professor of Finance, McDonough School of Business, Georgetown University (Apr. 9, 2004).
101 Id.
Of the thirty-four comments on shortening the settlement cycle, fourteen commenters expressed a preference to defer a decision on changing the settlement cycle until the industry could implement STP or other complementary processes. 102 Reasons for deferring the decision varied, but generally focused on the need for additional information or additional time for the industry to implement STP successfully. 103 Some of these commenters also raised concerns about the costs associated with implementation of a shorter settlement cycle and regulatory costs that may arise 104 One commenter, in particular, noted that a regulatory mandate for a shortened settlement cycle was not warranted by the SIA's cost benefit analysis and thought a better approach would be to encourage the development of market-driven initiatives to promote advances in STP. 105
102 Letters from Adam J. Bryan, President and CEO, Omgeo LLC (June 4, 2004); David G. Tittsworth, Executive Director, Investment Counsel Association of America (June 11, 2004); Jeff Potter, Vice President, The Northern Trust Company (June 14, 2004); Thomas Sargant, President, Regional Municipal Operations Association (June 14, 2004); Charles V
t-driven initiatives to promote advances in STP. 105
102 Letters from Adam J. Bryan, President and CEO, Omgeo LLC (June 4, 2004); David G. Tittsworth, Executive Director, Investment Counsel Association of America (June 11, 2004); Jeff Potter, Vice President, The Northern Trust Company (June 14, 2004); Thomas Sargant, President, Regional Municipal Operations Association (June 14, 2004); Charles V. Rossi, President, The Securities Transfer Association (June 15, 2004); Frank DiMarco, Merrill Lynch & Co., Inc., Chair, STP Steering Committee, The Bond Market Association (June 16, 2004); Ian Gilholey, The Canadian Depository for Securities Limited (June 16, 2004); Jeffrey C. Bernstein, Chairman, SIA STP Steering Committee, SIA (June 16, 2004); Michael J. Alexander, Senior Vice President, Charles Schwab & Co., Inc. (June 16, 2004); Michael O'Conor, Chairman, Global Steering Committee and Peter Randall, Executive Director, FIX Protocol Limited (June 16, 2004); Norman Eaker, Principal, Edward Jones (June 16, 2004); W. Leo McBlain, Chairman and Thomas J. Jordan, Executive Director, Financial Information Forum (June 16, 2004); Jill M. Considine, Chairman and Chief Executive Officer, The Depository Trust and Clearing Corporation (June 23, 2004); and Margaret R. Blake, Counsel to the Association, and Dan W. Schneider, Counsel to the Association, The Association of Global Custodians (June 28, 2004).
103 Letters from Adam J. Bryan, President and CEO, Omgeo LLC (June 4, 2004); David G. Tittsworth, Executive Director, Investment Counsel Association of America (June 11, 2004); Jeff Potter, Vice President, The Northern Trust Company (June 14, 2004); Thomas Sargant, President, Regional Municipal Operations Association (June 14, 2004); Charles V. Rossi, President, The Securities Transfer Association (June 15, 2004); Frank DiMarco, Merrill Lynch & Co., Inc., Chair, STP Steering Committee, The Bond Market Association (June 16, 2004); Ian Gilholey, The Canadian Depository for Securities Limited (June 16, 2004); Jeffrey C
t Company (June 14, 2004); Thomas Sargant, President, Regional Municipal Operations Association (June 14, 2004); Charles V. Rossi, President, The Securities Transfer Association (June 15, 2004); Frank DiMarco, Merrill Lynch & Co., Inc., Chair, STP Steering Committee, The Bond Market Association (June 16, 2004); Ian Gilholey, The Canadian Depository for Securities Limited (June 16, 2004); Jeffrey C. Bernstein, Chairman, SIA STP Steering Committee, SIA (June 16, 2004); Michael J. Alexander, Senior Vice President, Charles Schwab & Co., Inc. (June 16, 2004); Michael O'Conor, Chairman, Global Steering Committee and Peter Randall, Executive Director, FIX Protocol Limited (June 16, 2004); Norman Eaker, Principal, Edward Jones (June 16, 2004); W. Leo McBlain, Chairman and Thomas J. Jordan, Executive Director, Financial Information Forum (June 16, 2004); Jill M. Considine, Chairman and Chief Executive Officer, The Depository Trust and Clearing Corporation (June 23, 2004); and Margaret R. Blake, Counsel to the Association, and Dan W. Schneider, Counsel to the Association, The Association of Global Custodians (June 28, 2004).
104 See, e.g., Letter from Michael J. Alexander, Senior Vice President, Charles Schwab & Co., Inc. (June 16, 2004).
105 Letter from David G. Tittsworth, Executive Director, the Investment Counsel Association of America (June 11, 2004) (commenting on the Concept Release).
c. Current Efforts To Shorten the Settlement Cycle in the U.S.
Since the publication of the SIA Business Case Report in 2000 and the publication of the Concept Release in 2004, the Commission and market participants have continued to consider the possibility of further shortening the settlement cycle while observing significant changes in the securities industry with respect to post-trade processes and technology
To Shorten the Settlement Cycle in the U.S.
Since the publication of the SIA Business Case Report in 2000 and the publication of the Concept Release in 2004, the Commission and market participants have continued to consider the possibility of further shortening the settlement cycle while observing significant changes in the securities industry with respect to post-trade processes and technology. Below is a discussion of a number of recent significant industry initiatives that have considered the question of whether and when to further shorten the standard settlement cycle and that have informed the Commission's proposal.
(1) BCG Study
In May 2012, DTCC commissioned a study to examine and evaluate the necessary investments and resulting benefits associated with a shortened settlement cycle for U.S. equities and corporate and municipal bonds. 106 The study, which was conducted by the Boston Consulting Group (“BCG”) and published in October 2012, analyzed the costs, benefits, opportunities and challenges associated with shortening the settlement cycle in the U.S. securities markets to either T+1 or T+2, respectively. 107
106 See DTCC Proposal to Launch a Cost-Benefit Analysis, supra note 68.
107 The Boston Consulting Group, Cost Benefit Analysis of Shortening the Settlement Cycle, (Oct. 2012) (“BCG Study”), http://www.dtcc.com/~/media/Files/Downloads/WhitePapers/CBA_BCG_Shortening_the_Settlement_Cycle_October2012.pdf. The BCG Study also noted a “T+0” settlement cycle ( i.e., settlement on trade date) “was ruled out as infeasible for the industry to accomplish at this time, given the exceptional changes required to achieve it and weak support across the industry.” Id. at 8. The BCG Study notes that a T+0 settlement cycle would result in major challenges with processes such as such as trade reconciliation and exception management, securities lending and transactions with foreign counterparties (especially where time zones are least aligned). Id. at 20
sh at this time, given the exceptional changes required to achieve it and weak support across the industry.” Id. at 8. The BCG Study notes that a T+0 settlement cycle would result in major challenges with processes such as such as trade reconciliation and exception management, securities lending and transactions with foreign counterparties (especially where time zones are least aligned). Id. at 20. Moreover, the BCG Study concluded that payment systems utilized for final settlement would also need to be significantly altered to enable transactions late into the day. Id. For further discussion on the BCG Study and some of the study's limitations, see infra Part VI.C.5.a.
The scope of BCG's analysis included U.S. equities, corporate bonds, and municipal bonds settling at DTC. 108 The study covered clearing and settlement processes at various types of market participants ( e.g., broker-dealers, buy-side firms, and custodian banks), in addition to processes closely related to clearance and settlement (such as corporate action processing and securities lending) and specific situations (such as post-trade processes for cross-border transactions involving securities lending in the U.S.). 109
108 Id. at 13.
109 Id.
The BCG Study did not advocate any specific approach to shortening the settlement cycle, but noted that moving to a T+2 settlement cycle would be significantly less costly and take less time to implement than either an immediate or gradual transition to T+1, while still delivering significant benefits. 110
110 Id. at 8-11, 29-44.
The BCG Study noted that market participants were aware that a T+2 settlement cycle could be accomplished through mere compression of timeframes and corresponding rule changes but that implementing a transition to T+2 without certain building blocks or enablers would limit the amount of savings that would be realized across the industry
ivering significant benefits. 110
110 Id. at 8-11, 29-44.
The BCG Study noted that market participants were aware that a T+2 settlement cycle could be accomplished through mere compression of timeframes and corresponding rule changes but that implementing a transition to T+2 without certain building blocks or enablers would limit the amount of savings that woul

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