[Federal Register Volume 59, Number 163 (Wednesday, August 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20775]


[[Page Unknown]]

[Federal Register: August 24, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34541; File No. SR-MSRB-94-10]

 

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

August 17, 1994.
    Pursuant to Section 19(b)(1) of the Securities and Exchange Act of 
1934 (``Act''),\1\ notice is hereby given that on August 9, 1994, the 
Municipal Securities Rulemaking Board (``MSRB'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared primarily by the MSRB. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\15 U.S.C. Sec. 78s(b)(1)(1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB has filed proposed amendments to rule G-12 on Uniform 
Practice and rule G-15 on Confirmation, Clearance and Settlement of 
Transactions with Customers to establish three business days as the 
standard settlement time frame for regular-way transactions in 
municipal securities.\2\ The MSRB requests that the Commission delay 
effectiveness of the proposed rule change until the effective date for 
Rule 15c6-1 to allow the municipal securities market to convert to 
three-day settlement simultaneously with the corporate securities 
market.\3\
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    \2\On October 6, 1993, the Commission adopted Rule 15c6-1 which 
establishes three business days instead of five business days as the 
standard settlement cycle for most broker-dealer transactions. The 
rule becomes effective June 1, 1995. Although municipal securities 
were not included in the scope of Rule 15c6-1, the Commission has 
called upon the MSRB to take all steps necessary to shorten the 
routine settlement cycle for municipal securities transactions by 
the effective date of SEC Rule 15c6-1. Securities Exchange Act 
Release No. 33023 (October 6, 1993), 58 FR 52891 (``Rule 15c6-1 
Adopting Release'').
    \3\At a July 25, 1994, meeting hosted by SEC staff, 
representatives of the various self-regulatory organizations and SEC 
staff discussed the possibility of a short transition period during 
June 1995. The MSRB will file additional rule changes if necessary 
to obtain consistency with the final transition plans of the SEC for 
Rule 15c6-1.
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II. Self-Regulatory Organization's Statement of the Purpose of and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The MSRB has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Rule 15c6-1, adopted under the Act, institutes a national goal of 
shortening the standard settlement time frame for most securities 
transactions to three business days (``T+3 settlement''). The 
Commission concluded that a three-day settlement cycle, compared to the 
current five-day settlement cycle, would reduce credit and liquidity 
risks and increase efficiency in broker-dealer and clearing agency 
operations.\4\ Recognizing the differences between the corporate and 
municipal securities markets and the unique role the MSRB has in 
overseeing the municipal securities market, the Commission did not 
include municipal securities within the scope of Rule 15c6-1.\5\ The 
Commission, however, did formally request that the MSRB undertake a 
commitment to T+3 settlement for municipal securities to ensure 
consistency in settlement cycles in the corporate and municipal 
markets.\6\
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    \4\Rule 15c6-1 Adopting Release at 53.
    \5\Rule 15c6-1 Adopting Release at 35.
    \6\Letter from Arthur Levitt, Chairman, SEC, to David Clapp, 
Chairman, MSRB (October 7, 1993).
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    The Commission also asked that the MSRB provide a plan for 
implementing T+3 settlement in the municipal securities market. In 
March 1994, the MSRB provided to the Commission such a plan, the Report 
of the Municipal Securities Rulemaking Board on T+3 Settlement for the 
Municipal Securities Market (March 17, 1994) (``T+3 Report''). The T+3 
Report discussed various MSRB actions and industry initiatives that the 
MSRB concluded were necessary for a successful conversion to T+3 
settlement in the municipal securities market.\7\ The Board is 
continuing to work to ensure that these preparations for T+3 settlement 
are being made in the municipal securities market.
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    \7\Specifically, the report identified the need for improvement 
in: (i) comparison rates for inter-dealer transactions; (ii) 
confirmation/acknowledgement rates for delivery vs. payment and 
receipt vs.payment transactions; and (iii) the use of book-entry 
settlement.
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    Currently, ``regular-way'' settlement is defined as five business 
days in rules G-12 on Uniform Practice and G-15 on Confirmation, 
Clearance and Settlement of Transactions with Customers. The proposed 
rule change will redefine regular-way settlement as three business days 
rather than five. Tracking the language of Rule 15c6-1(a), the proposed 
rule change will allow alternate settlement timeframes in the secondary 
market by agreement of the parties on a case by case basis. However, 
these agreements must be reached on each individual transaction at the 
time of trade; dealers will not be able to retain T+5 settlement as a 
standard practice. The proposed rule change also will amend rule G-
15(d)(i) relating to institutional customer delivery instructions on 
DVP/RVP settlements to reflect a three-day rather than five-day 
settlement cycle. The proposed rule change exempts ``when, as and if 
issued'' transactions from the requirements of T+3 settlement. 
Currently, when, as and if issued transactions are not settled in five 
business days, and given the various actions necessary to accomplish 
settlement (or ``closing'') with the issuer of municipal securities, 
the MSRB does not believe that it would be possible to institute a 
three-day settlement cycle for these transactions.\8\
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    \8\A dealer cannot settle with a customer or another dealer 
prior to the final settlement (or ``closing'') of the issue with the 
issuer. The closing date with an issuer is dependent upon many 
factors and the preparation of a number of closing documents and 
cannot necessarily be scheduled within three days after trading 
begins in an issue.
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    As set forth in Section 15B(b)(2)(C) of the Act,\9\ the MSRB has 
the authority to adopt rules to foster cooperation with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities; to remove 
impediments to and perfect the mechanism of a free and open market in 
municipal securities; and in general, to protect investors and the 
public interest.
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    \9\15 U.S.C. Sec. 78o-2(b)(2)(C)(1988).
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    The MSRB believes that the proposed rule change will facilitate 
clearance and settlement of municipal securities and, therefore, is 
consistent with the provisions of the Act. One of the MSRB's top 
priorities for the municipal securities market is the improvement of 
clearance and settlement systems consistent with national goals.\10\ 
The Commission also has indicated its belief that efficient clearance 
and settlement of municipal securities requires that municipal 
securities have the same settlement cycle as other securities. In the 
Rule 15c6-1 Adopting Release, the Commission made several observations 
relating to T+3 settlement for municipal securities. The release noted:
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    \10\``Letter to the SEC on Its Proposed Rule on T+3 
Settlement,'' MSRB Reports Vol. 13, No. 3 (June 1993) at 11 and 
``Automated Clearance and Settlement: Rules G-12 and G-15,'' MSRB 
Reports Vol. 11, No. 3 (September 1991) at 3.

    Over fifty commentators favored including municipal securities 
within the scope of the Rule. Those commentators believe that 
maintaining separate settlement cycles for corporate and municipal 
securities is unnecessary and would impose significant cost and 
operational difficulties on industry participants. * * *  Although 
commentators have raised concerns about the differences between 
municipal and other debt securities, the Commission believes that 
these differences can be overcome. * * * In summary, the Commission 
is confident that municipal securities dealers and market 
participants, under the guidance of the MSRB, can accomplish the 
goal of shortening the settlement timeframe by two business days and 
that regular-way settlement for municipal securities can be subject 
to the same timetable as other securities.\11\
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    \11\Rule 15c6-1 Adopting Release at 36-38.

    The MSRB concurs with the Commission's finding that maintaining a 
separate settlement cycle for corporate and municipal securities is 
unnecessary and would impose significant cost and operational 
difficulties on industry participants. The proposed rule change will 
ensure that corporate and municipal securities settlement cycles are 
consistent, which will help ensure efficiency in the clearance and 
settlement of municipal securities.

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

    As noted below, the MSRB has received six letters commenting on T+3 
settlement for municipal securities. Several of these letters expressed 
a concern that small, retail-oriented dealers might be adversely 
affected by a three-day settlement cycle. In the Rule 15c6-1 Adopting 
Release, the Commission discussed arguments that the three-day 
settlement cycle generally would produce a burden on competition in the 
securities market. The Commission noted:

    Several commentators, primarily small retail broker-dealers, 
raised concerns that Rule 15c6-1 would increase their costs, thereby 
making it more difficult to compete with larger broker-dealers. The 
Commission notes that Rule 15c6-1 does not distinguish between 
categories of broker-dealers, and believes that the costs created 
would be imposed evenly upon larger and smaller broker-dealer firms. 
The costs may be higher for certain firms, regardless of their size, 
that have not invested in necessary infrastructure and 
technology.\12\

    \12\Rule 15c6-1 Adopting Release at 52.
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    The MSRB believes that this same assessment would apply to brokers, 
dealers, and municipal securities dealers with respect to municipal 
securities transactions. Therefore, the MSRB does not believe that the 
proposed rule change will impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    The MSRB has not solicited comments on the proposed rule change; 
however, the Commission solicited comment with regard to establishing 
three business days instead of five business days as the standard 
settlement time frame and discussed those comments in the Rule 15c6-1 
Adopting Release. Since the date of that release, the MSRB announced 
its plan for the implementation of T+3 settlement in the T+3 Report and 
has received six letters essentially disagreeing with the 
implementation of a T+3 settlement cycle. These letters cite various 
practical difficulties in moving to T+3 settlement based primarily upon 
the desire of retail customers to hold certificates and upon the 
payment mechanisms used by retail customers. Similar comments were 
considered and addressed by the Commission in its Rule 15c6-1 Adopting 
Release, which notes that the Commission believes that with sufficient 
notice the securities industry can identify and address these concerns 
with customer education and changes in industry practices.
    The MSRB also discussed the need for changes in certain industry 
practices with respect to retail customer transactions in its T+3 
Report. While the MSRB understands that there may be difficulties 
associated with changing industry practice to accommodate T+3 
settlement, it agrees with the Commission's assessment that the 
appropriate changes can be made with the proper attention by dealers. 
The MSRB also believes that the municipal securities industry must move 
forward in compressing the settlement cycle to three business days 
quickly because of the potential negative effects that would be created 
if municipal securities remained on a different settlement cycle than 
corporate securities.

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

    With thirty-five days of the date of publication of this notice in 
the Federal Register or within such longer period (i) as the Commission 
may designate up to ninety days of such date if it finds such longer 
period to be appropriate and publishes its reasons for so finding or 
(ii) as to which the self-regulatory organization consents, the 
Commission will:
    (A) by order approve such proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The MSRB requests that the Commission delay effectiveness of the 
proposed rule change until the effectiveness of Rule 15c6-1 to allow 
the municipal securities market to convert to three-day settlement 
simultaneously with the corporate securities market.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
    Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of the filing will also be available for 
inspection and copying at the MSRB's principal offices. All submissions 
should refer to File No. SR-MSRB-94-10 and should be submitted by 
September 14, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-20775 Filed 8-23-94; 8:45 am]
BILLING CODE 8010-01-M