[Federal Register Volume 60, Number 45 (Wednesday, March 8, 1995)]
[Notices]
[Pages 12798-12800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5584]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35427; File No. SR-MSRB-94-10]


Self-Regulatory Organization; The Municipal Securities Rulemaking 
Board; Order Approving Proposed Rule Change Establishing Three Business 
Day Settlement Time Frame

February 28, 1995.
    On August 9, 1994, the Municipal Securities Rulemaking Board 
(``MSRB'') submitted a proposed rule change to the Securities and 
Exchange Commission (``Commission'') pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
appeared in the Federal Register on August 24, 1994.\2\ The Commission 
received four comment letters.\3\ This order approves the proposal.

    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 34541 (August 17, 1994), 
59 FR 43603.
    \3\Letters from R.N. Dillingham to Commissioners, Commission 
(September 12, 1994); Sarah A. Miller, Senior Government Relations 
Counsel, Trust and Securities, American Bankers Association, to 
Jonathan G. Katz, Secretary, Commission (September 14, 1994); P. 
Howard Edelstein, President, Electronic Settlement Group, Thomson 
Trading Services, Inc. (A Thomson Financial Services Company), to 
Jonathan G. Katz, Secretary, Commission (September 16, 1994); and 
Diane M. Butler, Director--Operations & Fund Custody, Investment 
Company Institute, to Jonathan G. Katz, Secretary, Commission 
(September 22, 1994). In addition, the MSRB received six comment 
letters prior to filing the proposed rule change with the 
Commission. See infra note 7.
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I. Description of the Proposal

    The purpose of the proposed rule change is to establish three 
business days after execution of a trade (``T+3'') as the standard 
settlement time frame for transactions in municipal securities. The 
proposal conforms the standard settlement time frame for municipal 
transactions to that for most other equity and debt securities 
transactions.\4\ Currently, regular-way settlement is defined as five 
business days (``T+5'') in MSRB rules G-12 (``Uniform Practice'') and 
G-15 (``Confirmation, Clearance and Settlement Transactions with 
Customers''). The proposed rule change will be effective on June 7, 
1995, the same day as the Commission's Rule 15c6-1.\5\

    \4\On October 6, 1993, the Commission adopted Rule 15c6-1 under 
the Act which establishes T+3 as the standard settlement cycle for 
most broker-dealer transactions. Rule 15c6-1 does not apply to 
transactions in municipal securities. While municipal securities 
were specifically exempt from the scope of the rule, the Commission 
stated its expectation that the MSRB would take the lead in moving 
municipal securities to a T+3 settlement time frame. Securities 
Exchange Act Release No. 33023 (October 6, 1993), 58 FR 52891.
    \5\Rule 15c6-1, as adopted, was to become effective June 1, 
1995. In order to provide for an orderly and efficient transition 
from T+5 settlement to T+3 settlement, the Commission has changed 
the effective date of Rule 15c6-1 to June 7, 1995. Securities 
Exchange Act Release No. 34952 (November 9, 1994), 59 FR 59137.
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    The proposed rule change allows alternate settlement time frames 
for municipal securities transactions in the secondary market by 
agreement of the parties at the time of each individual transaction. 
Thus, broker-dealers may not use standing instructions or master 
agreements to retain T+5 settlement as a standard practice.
    The proposed rule change does not alter the current practice with 
respect to ``when, as and if issued'' transactions.\6\ Currently, 
``when, as and if issued'' transactions are not settled in five 
business days due to the various actions necessary to accomplish 
settlement with the issuer of municipal securities. Therefore, rule G-
12(b) will continue to provide that ``when, as and if issued'' 
transactions will settle on a date agreed to by both parties but not 
earlier than the fifth day following the date the confirmation 
indicating the final settlement date is sent or the sixth day following 
the date the confirmation indicating the final settlement date is sent 
for transactions between a manager and a syndicate member.

    \6\``When, as and if issued'' transactions are transactions in 
municipal securities which have not yet been issued.
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    The proposed rule change also will amend rule G-15(d)(i) relating 
to institutional customer delivery instructions on delivery versus 
payment or receipt versus payment (``DVP/RVP'') settlements to reflect 
a T+3 rather than T+5 settlement cycle. Pursuant to the amendment, a 
broker-dealer must obtain a representation from a customer with DVP/RVP 
privilege that the customer will deliver instructions to its agent with 
respect to the receipt or delivery of the securities involved in the 
transaction promptly and ``in a manner to assure that settlement will 
occur on settlement date.'' The MSRB has deleted references to specific 
agent instruction time frames.

II. Written Comments

    In addition to the six comment letters the MSRB received prior to 
the filing of its proposal,\7\ the Commission received 
[[Page 12799]] four comment letters, two in support,\8\ one in 
opposition,\9\ and one suggesting that additional regulatory changes 
may be necessary to implement T+3 settlement.\10\ Supporters cited 
benefits such as reduction in market risk and liquidity risk. Thomson 
Trading Services (``Thomson'') suggested an amendment to MSRB rules 
that require use of a registered clearing agency's facilities for 
automated confirmations and acknowledgments. R.N. Dillingham opposed 
the proposed rule change and asserted an inability on the part of 
retail investors to meet settlement obligations.

    \7\Letters from W. Pat Conners, Conners & Co., Inc., to Judy 
Somerville, MSRB (March 25, 1994); Steve Harris, Executive Vice 
President, Golden Harris Capital Group, Inc., to David Clapp, 
Chairman, MSRB (April 11, 1994); Ronald E. Ott, President, Davidson 
Securities, Inc., to Judy Somerville, MSRB (May 10, 1994); Roger 
Springate, Jr., Springate & Company, to MSRB (May 11, 1994); 
Frederick Stoever, President, Stoever Glass & Co., to Chris Taylor, 
Executive Director, MSRB (undated); and Gene J. d'Ercole, Executive 
Vice President, Wulff, Hansen & Co., to David Clapp, Chairman, MSRB 
(June 9, 1994).
    \8\Letters from American Bankers Association and Investment 
Company Institute, supra note 3.
    \9\Letter from R.N. Dillingham, supra note 3.
    \10\Letter from Thomson Trading Services, Inc., supra note 3.
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    Prior to filing with the Commission, the MSRB received six letters 
commenting on T+3 settlement for municipal securities.\11\ All six 
commenters are small retail broker dealers which are concerned with 
their ability to comply with the proposal, the proposal's increased 
economic costs, and its effect on their relationship with individual 
investors.

    \11\Supra note 7.
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III. Discussion

    As discussed below, the Commission believes that the MSRB's 
proposed rule change is consistent with Sections 15B and 17A of the 
Act.\12\ By adopting a T+3 settlement time frame for municipal 
securities, the settlement cycle for municipal securities will be 
consistent with the settlement cycle for most corporate and investment 
company securities. Separate settlement cycles would impose unnecessary 
cost and operational difficulties on industry participants.\13\ As more 
fully described in the T+3 adopting release, the Commission believes 
that faster trade settlement can reduce the potential for gridlock and 
foster investor confidence in securities markets during periods of high 
volume and price volatility by reducing systemic risk and liquidity 
risk in the municipal bond market.\14\ As the Investment Company 
Institute noted in its comment letter, the proposed rule change also 
addresses the problems associated with a mutual fund's obligation to 
redeem shares daily at the fund's net asset value upon request by its 
shareholders.\15\

    \12\15 U.S.C. 78o-4 and 78q-1 (1988).
    \13\In its comment letter, the American Bankers Association 
supported the rule because, among other reasons, settling municipal, 
securities on a T+5 basis while settling most other securities on a 
T+3 basis which require operating multiple settlement systems, which 
will be extremely burdensome and costly.
    \14\By reducing the settlement time frame for municipal 
securities transactions from five business days to three business 
days, there will be fewer unsettled municipal securities trades 
subject to credit and market risk at any given time, and there would 
be less time between trade execution and settlement for the value of 
those trades to deteriorate. Such risk reduction was one of the 
major reasons the Commission adopted Rule 15c6-1.
    \15\T+3 settlement for mutual funds could create problems in 
satisfying redemption requests, particularly for funds such as 
municipal bond mutual funds whose portfolios are invested largely in 
securities that are not subject to T+3. The Investment Company 
Institute states ``if a municipal bond mutual fund has to sell 
portfolio securities to meet redemptions, it might be unable to 
satisfy its obligations if redemption proceeds has to be paid to 
redeeming shareholders within three days while the fund could not be 
assured of receiving the proceeds from selling its portfolio 
securities until two days later.''
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    Thus, the Commission believes that the proposed rule is consistent 
with Section 15B. Section 15B, among other things, requires that the 
MSRB's rules be designed to foster cooperation and coordination with 
persons engaged in clearing, settling, and 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.\16\ By reducing risk in the municipal 
securities market, the proposed rule change protects investors and the 
public interest. By eliminating the burden of separate settlement 
cycles, the proposal fosters cooperation and coordination with persons 
engaged in the clearing, settling, and facilitating transactions in 
municipal securities consistent with Section 15B.

    \16\15 U.S.C 78o-4(B)(2)(C) (1988).
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    In Section 17A, Congress set forth in its findings that linking all 
clearance and settlement facilities and the development of uniform 
standards and procedures for clearance and settlement will reduce 
unnecessary costs and increase the protection of investors and persons 
facilitating transactions by and acting on behalf of investors.\17\ 
While municipal securities generally are defined as exempt securities 
under the Act,\18\ municipal securities are specifically included for 
purposes of Section 17A of the Act.\19\ By shortening the settlement 
time frame for municipal securities so that it is the same as the 
settlement time frame for corporate securities, the proposal should 
forward the goal of developing uniform standards and procedures as set 
forth in Section 17A.

    \17\15 U.S.C 78q-1(a)(1)(D) (1988).
    \18\15 U.S.C 78c(a)(12)(A)(ii) (1988).
    \19\15 U.S.C 78c(a)(12)(B)(ii) (1988).
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    Commenters opposed to the proposed rule change raised concerns 
previously considered in connection with the adoption of Rule 15c6-1. 
Four commenters expressed concern that their customers would not or 
could not pay for their securities purchases by T+3, thus forcing the 
broker-dealer to finance the customer's purchases for two days.\20\ 
Several commenters raised similar concerns during the adoption process 
for Rule 15c6-1. In the adopting release, the Commission stated that:

    \20\Letters from Golden Harris Capital Group, Inc., Davidson 
Securities, Inc., Stoever Glass & Co., and Wulff, Hansen & Co., 
supra note 7.

    The Commission is sensitive to the costs necessary for 
transition to a shorter settlement time frame but on balance 
believes that the benefits to the financial system outweigh those 
costs. Moreover, the Commission believes Rule 15c6-1 creates an 
incentive for broker-dealers, particularly retail firms, to 
encourage timely customer payments, and improve management of cash 
flows * * *. [T]he Commission expects broker-dealers will have 
adequate notice to educate customers about the need for prompt 
payment and will have adequate time and incentive to implement 
changes to reduce the need for financing.\21\

    \21\Supra note 4.

    The Commission continues to believe that the benefits in risk 
reduction outweigh the costs involved.
    Several commenters were concerned about the ability of retail 
customers to meet T+3 settlement obligations, particularly given their 
heavy reliance on the mail to receive confirms, make payments, and 
deliver physical stock certificates.\22\ The Commission believes that 
matters such as these can be handled by broker-dealers educating their 
customers on the need to send payment immediately after execution of 
trades and through employment of methods to speed delivery of 
confirmations and stock certificates. In most instances, checks mailed 
on trade date should reach the broker-dealer by T+3.

    \22\Letters from Golden Harris Capital Group, Inc., Springate & 
Company, Conners & Co., Inc., R.N. Dillingham, and Wulff, Hansen & 
Co., supra notes 3 and 7.
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    One commenter stated that its relationship with individual 
investors will be affected adversely because customers will believe 
that their broker is experiencing financial difficulties or that the 
broker believes that the customer is less credit worthy.\23\ The 
Commission believes that by educating investors about the requirements 
of T+3 settlement, broker-dealer can limit such customer 
confusion. [[Page 12800]] 

    \23\Letter from Springate & Company, supra note 7.
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    Another commenter, Thomson, supports MSRB's efforts to shorten the 
settlement cycle for municipal securities transactions. Thomson, 
however, believes that the MSRB should amend rule G-15(d)(ii), which 
requires the use of a registered clearing agency's facilities for 
automated confirmation and acknowledgement of all DVP/RVP 
transactions.\24\ Since Thomson's letter,\25\ the MSRB has issued a 
letter which denied Thomson's request and which stated the MSRB's 
believe that providers of confirmation/acknowledgment services should 
be subject to regulatory oversight and should be linked into other 
providers of such services.\26\

    \24\Thomson asserts that rule G-15(d)(ii) precludes vendors such 
as Thomson from competing with The Depository Trust Company 
(``DTC''), a registered clearing agency. Letter from Thomson, supra 
note 3. The self-regulatory organization confirmation rules limit 
confirmation and acknowledgment of institutional trades to the 
facilities of a registered securities depository.
    \25\In an earlier letter, Thomson formally requested that the 
MSRB amend rule G-15(d)(ii). Letter from P. Howard Edelstein, 
President, Electronic Settlements Group, Thomson Trading Services, 
Inc. (A Thomson Financial Services Company), to Harold L. Johnson, 
Deputy General Counsel, MSRB (June 24, 1994).
    \26\Letter from Harold L. Johnson, Deputy General Counsel, MSRB, 
to P. Howard Edelstein, President, Electronic Settlements Group, 
Thomson Financial Services (November 9, 1994).
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    The Commission believes that the issues raised by the Thomson 
letter need not be resolved prior to the approval of the proposed rule 
change. Discussions regarding Thomson's concerns are underway among the 
Commission, Thomson, and DTC. DTC has submitted a rule filing that will 
establish a linkage between DTC and vendors such as Thomson.\27\ In 
denying Thomson's request, MSRB stated that it would consider any 
proposals arising from Thomson's discussions with the Commission. The 
Commission intends to consider whether self-regulatory organization 
rules should continue to preclude use of private vendor systems for 
confirmation/affirmation services in DVP/RVP trades. However, the 
Commission believes that T+3 settlement of municipal securities should 
not be delayed while these issues are being resolved.

    \27\Securities Exchange Act Release No. 35332 (February 3, 
1995), 60 FR 8102.
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    As discussed above, Thomson's letter suggests that approval of the 
proposed rule change without amendments to MSRB rule G-15(d)(ii) raises 
competitive concerns. Under the Act, the Commission's responsibility is 
to balance the perceived anticompetitive effects of a regulatory policy 
or decision against the purpose of the Act that would be advanced by 
the policy or decisions and the costs associated therewith. The 
Commission notes that any anticompetitive effects pointed to by Thomson 
are not caused by the proposed rule change approved by this order but 
rather by an existing MSRB rule. The Commission is reviewing Thomson's 
claim but does not believe that approval of this proposal will itself 
create any burdens on competition. Moreover, as discussed above, the 
rule advances fundamental purposes under the Act, namely the efficient 
clearance and settlement of securities.

IV. Conclusion

    For the reasons stated above, the Commission finds that MSRB's 
proposal is consistent with Sections 15B and 17A of the Act.\28\

    \28\15 U.S.C. 78o-4 and 78q-1 (1988).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (File No. SR-MSRB-94-10) be, and 
hereby is, approved.\30\

    \29\15 U.S.C. 78s(b)(2) (1988).
    \30\17 CFR 200.30-3(a)(12) (1994).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-5584 Filed 3-7-95; 8:45 am]
BILLING CODE 8010-01-M