[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] ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \1\15 U.S.C. Sec. 78s(b)(1)(1988). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\15 U.S.C. Sec. 78o-2(b)(2)(C)(1988). --------------------------------------------------------------------------- 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: --------------------------------------------------------------------------- \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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \13\17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-20775 Filed 8-23-94; 8:45 am] BILLING CODE 8010-01-M