[Federal Register Volume 88, Number 43 (Monday, March 6, 2023)]
[Rules and Regulations]
[Pages 13872-13954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03566]



[[Page 13871]]

Vol. 88

Monday,

No. 43

March 6, 2023

Part II





Securities and Exchange Commission





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17 CFR Parts 232, 240, and 275





Shortening the Securities Transaction Settlement Cycle; Final Rule

  Federal Register / Vol. 88, No. 43 / Monday, March 6, 2023 / Rules 
and Regulations  

[[Page 13872]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, and 275

[Release Nos. 34-96930, IA-6239; File No. S7-05-22]
RIN 3235-AN02


Shortening the Securities Transaction Settlement Cycle

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting rule amendments to shorten the standard settlement cycle for 
most broker-dealer transactions from two business days after the trade 
date (``T+2'') to one business day after the trade date (``T+1''). In 
addition, the Commission is adopting new rules related to the 
processing of institutional trades by broker-dealers and certain 
clearing agencies. The Commission is also amending certain 
recordkeeping requirements applicable to registered investment 
advisers.

DATES: 
    Effective date: May 5, 2023.
    Compliance date: The applicable compliance dates are discussed in 
Part VII of this release.

FOR FURTHER INFORMATION CONTACT: Matthew Lee, Assistant Director, Susan 
Petersen, Special Counsel, Andrew Shanbrom, Special Counsel, Jesse 
Capelle, Special Counsel, and Mary Ann Callahan, Senior Policy Advisor, 
at (202) 551-5710, Office of Clearance and Settlement, Division of 
Trading and Markets; Jennifer Porter, Senior Special Counsel, Amy 
Miller, Senior Counsel, and Holly H. Miller, Senior Financial Analyst, 
at (202) 551-6787, Division of Investment Management; U.S. Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: First, the Commission is amending paragraph 
(a) of 17 CFR 240.15c6-1 (``Rule 15c6-1'') under the Securities 
Exchange Act of 1934 (``Exchange Act'') to shorten the standard 
settlement cycle for most broker-dealer transactions from T+2 to T+1, 
as discussed in Part II.C.1.\1\ The Commission is also amending 
paragraph (b) of Rule 15c6-1 to exclude security-based swaps from the 
requirements under paragraph (a) of the rule, and amending paragraph 
(c) of Rule 15c6-1 to shorten the standard settlement cycle for firm 
commitment offerings priced after 4:30 p.m. Eastern Time (``ET'') from 
four business days after the trade date (``T+4'') to T+2, as discussed 
in Parts II.C.3 and II.C.4 respectively.
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    \1\ See Part II.A (discussing the types of securities 
transactions that are currently covered by Rule 15c6-1(a)) and Part 
II.C.1 (discussing the types of securities transactions that will be 
covered by the rule following the rule changes being adopted in this 
release).
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    Second, to promote the completion of allocations, confirmations, 
and affirmations by the end of trade date for transactions between 
broker-dealers and their institutional customers, the Commission is 
adopting a new rule under the Exchange Act at 17 CFR 240.15c6-2 (``Rule 
15c6-2''). Rule 15c6-2 requires a broker-dealer to either enter into 
written agreements as specified in the rule or establish, maintain, and 
enforce written policies and procedures reasonably designed to address 
certain objectives related to completing allocations, confirmations, 
and affirmations as soon as technologically practicable and no later 
than the end of trade date. The specific requirements of the rule are 
discussed in Part III.C.
    Third, the Commission is amending 17 CFR 275.204-2 (``Rule 204-2'') 
under the Investment Advisers Act of 1940 (``Advisers Act'') to require 
registered investment advisers to make and keep records of the 
allocations, confirmations, and affirmations for securities 
transactions subject to the requirements of Rule 15c6-2(a), as 
discussed in Part IV.C.
    Fourth, the Commission is adopting a new rule under the Exchange 
Act at 17 CFR 240.17Ad-27 (``Rule 17Ad-27'') to require clearing 
agencies that provide a central matching service (``CMSPs'') to 
establish, implement, maintain, and enforce policies and procedures 
reasonably designed to facilitate straight-through processing (``STP'') 
and to file an annual report regarding progress with respect to STP. 
The specific requirements of the rule are discussed in Part V.C.
    Fifth, the Commission is amending 17 CFR part 232 (``Regulation S-
T'') to require that a CMSP submit the annual report required by Rule 
17Ad-27 using the Commission's Electronic Data Gathering, Analysis, and 
Retrieval system (``EDGAR'') and tag the information in the report 
using the structured (i.e., machine-readable) Inline eXtensible 
Business Reporting Language (``XBRL''). The Commission discusses this 
requirement in Part V.C.4.
    Finally, the Commission solicited and received comments regarding 
the effect of shortening the settlement cycle on other Commission 
requirements, including 17 CFR 242.200 (``Regulation SHO''), 17 CFR 
240.10b-10 (``Rule 10b-10''), the financial responsibility rules 
applicable to broker-dealers, requirements related to prospectus 
delivery and ``access versus delivery,'' and the impact on self-
regulatory organization (``SRO'') rules and operations. These comments 
are discussed in Part VI.

Table of Contents

I. Introduction
II. Exchange Act Rule 15c6-1--Standard Settlement Cycle
    A. Proposed Amendments to Rule 15c6-1
    B. Comments
    1. Length of Standard Settlement Cycle and Exchange Act Rule 
15c6-1(a)
    2. Securities Excluded From Requirements Under Exchange Act Rule 
15c6-1
    3. Proposed Deletion of Rule 15c6-1(c)
    4. Retention of Exchange Act Rule 15c6-1(d)
    5. Exemptive Orders Under Exchange Act Rule 15c6-1(b)
    C. Final Rule and Discussion
    1. Amendment to Exchange Act Rule 15c6-1(a)
    2. Response to Comments Relating to T+0 Settlement
    3. Amendments to Exchange Act Rule 15c6-1(b)
    4. Amendment to Exchange Act Rule 15c6-1(c)
    5. Retention of Existing Exchange Act Rule 15c6-1(d) Unchanged
    6. Exemptive Orders Under Exchange Act Rule 15c6-1(b)
III. Exchange Act Rule 15c6-2--Same-Day Affirmation
    A. Proposed Rule 15c6-2
    B. Comments
    1. Existing Commercial Incentives for Timely Trade Allocations, 
Confirmations, and Affirmations
    2. Linking Settlement Instructions to Affirmation
    3. Definitions of Certain Terms
    4. Use of Third Parties To Achieve Same-Day Affirmation
    5. Challenges Associated With Requiring Written Agreements in 
Support of Increasing Same-Day Affirmations
    6. End-of-Day Trading, Transactions Across Multiple Time Zones, 
and Variations in Local Holidays as Obstacles to Same-Day 
Affirmation
    7. Alternative Rule Recommended in SIFMA August Letter
    C. Final Rule and Discussion
    1. Modifications to Requirement for Written Agreements
    2. New Policies and Procedures Alternative to Written Agreements 
Requirement
    3. Elements of Reasonably Designed Policies and Procedures
    4. Use of Defined Terms Other Than ``Customer''
    5. No Requirement To Link Settlement Instructions to 
Affirmations
IV. Advisers Act Rule 204-2--Investment Adviser Recordkeeping
    A. Proposed Amendments to Rule 204-2
    B. Comments
    C. Final Rule and Discussion
V. Exchange Act Rule 17Ad-27--Requirement for CMSPs To Facilitate 
Straight-Through Processing

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    A. Proposed Rule 17Ad-27
    B. Comment Letters From DTCC ITP
    1. Amend Policies and Procedures Requirement To Add ``Reasonably 
Designed'' to the Current Text
    2. Use of ETCs and Manual Processes
    3. Amend the Annual Reporting Requirement to Better Achieve 
Transparency
    4. Support Further Standardization of Industry Protocols and 
Reference Data
    C. Final Rule and Discussion
    1. New Rule 17Ad-27(a)--Requirement for Policies and Procedures
    2. New Rule 17Ad-27(b)--Annual Report
    3. New Rule 17Ad-27(c)--Timing of Filing Annual Report
    4. New Rule 17Ad-27(d)--Filing Annual Report in EDGAR and 
Confidentiality Issues
VI. Impact on Certain Commission Rules, Guidance, and SRO Rules
    A. Regulation SHO
    B. Delivery of Rule 10b-10 Confirmations and Prospectuses
    C. Other Prospectus Delivery Matters
    D. Financial Responsibility Rules for Broker-Dealers
    E. Changes to SRO Rules and Operations
VII. Compliance Dates
    A. Exchange Act Rule 15c6-1
    B. Exchange Act Rule 15c6-1(b): Exclusion for Security-Based 
Swaps
    C. Exchange Act Rule 15c6-2 and Advisers Act Rule 204-2
    D. Exchange Act Rule 17Ad-27
VIII. Economic Analysis
    A. Background
    B. Baseline
    1. Central Counterparties
    2. Market Participants--Investors, Broker-Dealers, and 
Custodians
    3. Investment Companies and Investment Advisers
    4. Current Market for Clearance and Settlement Services
    C. Analysis of Benefits, Costs, and Impact on Efficiency, 
Competition, and Capital Formation 216
    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+1 
Settlement Cycle
    D. Consideration of Reasonable Alternatives
    1. Delete 15c6-1(c) to T+2
    2. Adopt 17Ad-27 To Require Certain Outcomes
    3. Adopt Rule Changes to Rule 15c6-2 as Recommended by SIFMA's 
August Comment Letter
    4. Replace the Written Agreement Requirement in Proposed Rule 
15c6-2 With a Principles-Based Approach
    5. Select a Later Implementation Date for Adoption of the Rule
IX. Paperwork Reduction Act
    A. Advisers Act Rule 204-2
    B. Exchange Act Rule 17Ad-27
    C. Exchange Act Rule 15c6-2
    1. Summary and Proposed Use of Information
    2. Respondents
    3. Total Initial and Annual Reporting Burdens
    4. Collection of Information Is Mandatory
    5. Confidentiality
    6. Retention Period
X. Regulatory Flexibility Act
    A. Exchange Act Rules 15c6-1 and 15c6-2
    1. Need for the Rules
    2. Summary of Significant Issues Raised by Public Comment
    3. Description and Estimate of Small Entities
    4. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    5. Description of Commission Actions To Minimize Effect on Small 
Entities
    B. Amendment to Advisers Act Rule 204-2
    1. Need for the Rule Amendment
    2. Summary of Significant Issues Raised by Public Comment
    3. Description and Estimate of Small Entities
    4. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    5. Description of Commission Actions To Minimize Effect on Small 
Entities
    C. Exchange Act Rule 17Ad-27
XI. Other Matters
Statutory Authority

I. Introduction

    Promoting the timely, orderly, and efficient settlement of 
securities transactions has been a longstanding Commission 
objective.\2\ To advance this objective, the Commission first took 
steps in 1993 to establish a standard requiring the settlement of most 
securities transactions within three business days of trade date 
(``T+3''), shortening the prevailing practice at the time of settling 
securities transactions within five business days of trade date 
(``T+5'').\3\ The Commission has on multiple occasions discussed how 
shortening the settlement cycle can protect investors, reduce risk in 
the financial system, and increase operational efficiency in the 
securities market.\4\ In 2017, the Commission shortened the standard 
settlement cycle from T+3 to T+2.\5\ Now, in part informed by episodes 
in 2020 and 2021 of increased market volatility that highlighted 
potential vulnerabilities in the U.S. securities market,\6\ the 
Commission believes that shortening the settlement cycle from T+2 to 
T+1 can promote investor protection, reduce risk, and increase 
operational and capital efficiency.\7\
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    \2\ See Exchange Act Release No. 94196, Investment Advisers Act 
Release No. 5957 (Feb. 9, 2022), 87 FR 10436 (Feb. 24, 2022) (``T+1 
Proposing Release'').
    \3\ See Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 
52891 (Oct. 13, 1993) (``T+3 Adopting Release'').
    \4\ See, e.g., Exchange Act Release No. 31904 (Feb. 23, 1993) 58 
FR 11806 (Mar. 1, 1993) (``T+3 Proposing Release''); T+3 Adopting 
Release, supra note 3; Exchange Act Release No. 78962 (Sept. 28, 
2016), 81 FR 69240 (Oct. 5, 2016) (``T+2 Proposing Release''); 
Exchange Act Release No. 80295 (Mar. 22, 2017), 82 FR 15564, 15601 
(Mar. 29, 2017) (``T+2 Adopting Release''); T+1 Proposing Release, 
supra note 2.
    \5\ See T+2 Adopting Release, supra note 4.
    \6\ See T+1 Proposing Release, supra note 2, at 10444 n.61.
    \7\ As stated in the T+1 Proposing Release, the Investor 
Advisory Committee recommended in 2015 that the Commission pursue 
T+1 (rather than T+2), noting that retail investors would 
significantly benefit from a T+1 standard settlement cycle. See id. 
at 10439 & nn.28-29.
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    As discussed in the T+1 Proposing Release,\8\ the Commission 
believes that substantial progress has been made toward identifying the 
technological and operational changes that are necessary to establish a 
T+1 settlement cycle, including the industry-level changes that would 
be necessary to transition from a T+2 standard to a T+1 standard 
settlement cycle. The Commission also discussed how additional 
regulatory steps were necessary to improve the processing of 
institutional transactions, advancing two other longstanding objectives 
shared by the Commission and the securities industry: the completion of 
trade allocations, confirmations, and affirmations on trade date (an 
objective often referred to as ``same-day affirmation'') and the 
straight-through processing of securities transactions.\9\ Accordingly, 
the Commission proposed a combination of rule amendments and new rules 
to shorten the standard settlement cycle to T+1, establish new 
requirements for broker-dealers and investment advisers designed to 
advance the same-day affirmation objective, and to establish 
requirements for CMSPs to promote straight-through processing.\10\
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    \8\ See id. at 10447.
    \9\ As discussed in the T+1 Proposing Release, the Commission 
uses ``straight-through processing,'' or ``STP,'' to refer generally 
to processes that allow for the automation of the entire trade 
process from trade execution through settlement without manual 
intervention. See id. at 10458; see also infra note 323 and 
accompanying text.
    \10\ See T+1 Proposing Release, supra note 2, at 10436.
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    The Commission received many comments in response to the T+1 
Proposing Release.\11\ Having considered the comments received, the 
Commission is adopting the proposed new rules and rule amendments with 
modifications, as discussed further below. Specifically, in Part II, 
the Commission discusses the comments received regarding the proposed 
amendments to Rule 15c6-1 under the Exchange Act, and

[[Page 13874]]

modifications made in response to the comments. In Part III, the 
Commission discusses the comments received regarding proposed Rule 
15c6-2 under the Exchange Act, and modifications made in response to 
the comments. In Part IV, the Commission discusses the comments 
received regarding the proposed amendment to Rule 204-2 under the 
Advisers Act, and modifications made in response to the comments. In 
Part V, the Commission discusses the comments received regarding 
proposed Rule 17Ad-27 under the Exchange Act, and modifications made in 
response to the comments. In Part VI, the Commission discusses the 
comments received regarding the effect of shortening the settlement 
cycle on other Commission requirements, including Regulation SHO, Rule 
10b-10 under the Exchange Act, the financial responsibility rules 
applicable to broker-dealers, requirements related to prospectus 
delivery and ``access versus delivery,'' and the impact on SRO rules 
and operations.
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    \11\ Copies of all comment letters received by the Commission 
are available at https://www.sec.gov/comments/s7-05-22/s70522.htm.
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II. Exchange Act Rule 15c6-1--Standard Settlement Cycle

A. Proposed Amendments to Rule 15c6-1

    In the T+1 Proposing Release, the Commission proposed to amend Rule 
15c6-1(a) to prohibit broker-dealers from effecting or entering into a 
contract for the purchase or sale of a security (other than an exempted 
security, a government security, a municipal security, commercial 
paper, bankers' acceptances, or commercial bills) that provides for 
payment of funds and delivery of securities later than the first 
business day after the date of the contract unless otherwise expressly 
agreed to by the parties at the time of the transaction.\12\ The 
proposed amendment to Rule 15c6-1(a) would shorten the length of the 
standard settlement cycle for securities transactions covered by the 
existing rule from T+2 to T+1.\13\
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    \12\ See T+1 Proposing Release, supra note 2, at 10447.
    \13\ As explained in the T+1 Proposing Release, existing Rule 
15c6-1(a) covers contracts for the purchase or sale of all types of 
securities except for the excluded securities enumerated in 
paragraph (a)(1) of the rule. See id. at 10446. 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 depository receipts (``ADRs''), security-based swaps, and 
options. See id. at 10446 n.83. Application of Rule 15c6-1(a) 
extends to the purchase and sale of securities issued by investment 
companies (including mutual funds), private-label mortgage-backed 
securities, and limited partnership interests that are listed on an 
exchange. See id. at 10446 nn.84-85.
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    In addition to the proposed amendment to paragraph (a) of Rule 
15c6-1, the Commission proposed to delete paragraph (c) of the 
rule,\14\ which would, in conjunction with the proposed amendment to 
paragraph (a), establish a T+1 standard settlement cycle for firm 
commitment offerings priced after 4:30 p.m. ET. However, the so-called 
``override'' provisions in paragraphs (a) and (d) of Rule 15c6-1 would 
continue to allow contracts currently covered by paragraph (c) to 
provide for settlement on a timeframe other than T+1 if the parties 
expressly agree to a different settlement timeframe at the time of the 
transaction.
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    \14\ See id. at 10448-49.
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    In addition to proposing to delete paragraph (c) of Rule 15c6-1, 
the Commission proposed conforming technical amendments to paragraphs 
(a), (b), and (d) of the rule. Specifically, the Commission proposed to 
delete all references to paragraph (c) of Rule 15c6-1 that currently 
appear in paragraphs (a), (b), and (d) of the rule.\15\
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    \15\ See id. at 10449.
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B. Comments

1. Length of Standard Settlement Cycle and Exchange Act Rule 15c6-1(a)
    In response to the T+1 Proposing Release, the Commission received 
numerous comment letters supporting a shorter settlement cycle for 
securities transactions.\16\ Many of these comment letters supported 
shortening the standard settlement cycle to T+1.\17\ Several comment 
letters that supported the Commission's proposal to shorten the 
settlement cycle to T+1 also supported shortening the settlement cycle 
to ``T+0'' or instantaneous settlement.\18\ Other comment letters

[[Page 13875]]

were silent as to the Commission's proposal to shorten the settlement 
cycle to T+1, but expressed the view that a T+0 settlement cycle should 
be implemented either immediately or as soon as possible.\19\
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    \16\ See, e.g., letters from Jaime N. Calaf (Feb. 9, 2022) 
(``Calaf Letter''); James Kelley (Feb. 9, 2022) (``Kelley Letter''); 
Kyle (Feb. 9, 2022) (``Kyle 1 Letter''); Curtis Robinson (Feb. 9, 
2022) (``Robinson 1 Letter''); Ryan, Business Owner (Feb. 9, 2022) 
(``Ryan 1 Letter''); L. Martin Stewart (Feb. 9, 2022) (``Stewart 
Letter''); Anthony LaBree (Feb. 10, 2022) (``LaBree Letter''); 
Nicolas Zach (Feb. 13, 2022) (``Zach Letter''); Richard Stauts (Feb. 
14, 2022) (``Stauts Letter''); PressPage Entertainment Inc. (Feb. 
15, 2022) (``PressPage Letter''); Peter Duggan, President, 
Securities Transfer Association (Apr. 1, 2022), at 2 (``STA 
Letter''); Kirsten Wegner, Chief Executive Officer, Modern Markets 
Initiative (Apr. 4, 2022), at 1 (``MMI Letter''); Hope Jarkowski, 
General Counsel, NYSE Group, Inc. (Apr. 6, 2022), at 1 (``NYSE 
Letter''); Keith Evans, Executive Director, Canadian Capital Markets 
Association (Apr. 9, 2022), at 1 (``CCMA April Letter''); Steven 
Wager, Chair, Americas Focus Committee, Association of Global 
Custodians (Apr. 11, 2022), at 3 (``AGC April Letter''); Stephen 
Hall, Legal Director and Securities Specialist, and Jason Grimes, 
Senior Counsel, Better Markets, Inc. (Apr. 11, 2022), at 1 (``Better 
Markets Letter''); Paul Conn, President, Global Capital Markets, and 
Claire Corney, Senior Managing Director, Regulatory & Market 
Initiatives, Global Capital Markets, Computershare Limited (Apr. 11, 
2022), at 1 (``Computershare Letter''); Birgitta Siegel, Esq., 
Adjunct Professor of Law, Cornell Law School Securities Law Clinic 
(Apr. 11, 2022), at 1 (``Cornell Law Letter''); Murray Pozmanter, 
Managing Director, Head of Clearing Agency Services & Global 
Business Operations, The Depository Trust and Clearing Corporation 
(Apr. 11, 2022), at 2 (``DTCC Letter''); Joanna Mallers, Secretary, 
FIA Principal Traders Group (Apr. 11, 2022), at 1 (``FIA PTG 
Letter''); Robert Adams, Chief Operations Officer, National 
Financial Services LLC (Apr. 11, 2022), at 1 (``Fidelity Letter''); 
Gail C. Bernstein, General Counsel, Investment Adviser Association 
(Apr. 11, 2022), at 1 (``IAA April Letter''); Susan Olson, General 
Counsel, and Joanne Kane, Chief Industry Operations Officer, 
Investment Company Institute (Apr. 11, 2022), at 1 (``ICI Letter''); 
Jack Rando, Managing Director, The Investment Industry Association 
of Canada (Apr. 11, 2022), at 1 (``IIAC Letter''); Jennifer Han, 
Executive Vice President, Chief Counsel & Head of Regulatory 
Affairs, Managed Funds Association (Apr. 11, 2022), at 1 (``MFA 
Letter''); Joseph Kamnik, Chief Regulatory Counsel, The Options 
Clearing Corporation (Apr. 11, 2022), at 1 (``OCC Letter''); Fran 
Garritt, Director, Securities Lending & Market Risk, and Mark 
Whipple, Chairman, Committee on Securities Lending, Securities 
Lending Council of the Risk Management Association (Apr. 11, 2022), 
at 3 (``RMA Letter''); Joseph Barry, Senior Vice President and 
Global Head of Regulatory, Industry and Government Affairs, State 
Street Corporation (Apr. 11, 2022), at 3 (``State Street Letter''); 
Robert McBey, Chief Executive Officer, Wilson-Davis & Co., Inc. 
(Apr. 14, 2022), at 1 (``Wilson-Davis Letter''); Thomas M. Merritt, 
Deputy General Counsel, Virtu Financial, Inc. (Apr. 11, 2022), at 1 
(``Virtu Financial Letter''); Christopher A. Iacovella, Chief 
Executive Officer, American Securities Association (Apr. 12, 2022), 
at 1 (``ASA Letter''); Thomas Price, Managing Director, and Lindsey 
Weber Keljo, Head--Asset Management Group, Securities Industry and 
Financial Markets Association (Apr. 13, 2022), at 1-2 (``SIFMA April 
Letter'').
    \17\ See, e.g., AGC April Letter, supra note 16, at 3; ASA 
Letter, supra note 16, at 1; letter from Jaiden Baker (Feb. 19, 
2022) (``Baker Letter''); Better Markets Letter, supra note 16, at 
1; CCMA April Letter, supra note 16, at 1; Computershare Letter, 
supra note 16, at 1; Cornell Law Letter, supra note 16, at 2; DTCC 
Letter, supra note 16, at 2; FIA PTG Letter, supra note 16, at 1; 
Fidelity Letter, supra note 16, at 2; IAA April Letter, supra note 
16, at 1; ICI Letter, supra note 16, at 1; IIAC Letter, supra 
note16, at 1; Kyle 1 Letter, supra note 16, at 1; LaBree Letter, 
supra note 16, at 1; MFA Letter, supra note 16, at 2; MMI Letter, 
supra note 16, at 1; NYSE Letter, supra note 16, at 1; OCC Letter, 
supra note 16, at 2; PressPage Letter, supra note 16, at 1; RMA 
Letter, supra note 16, at 3; Robinson 1 Letter, supra note 16, at 1; 
Ryan 1 Letter, supra note 16, at 1; SIFMA April Letter, supra note 
16, at 3; STA Letter, supra note 16, at 2; State Street Letter, 
supra note 16, at 3; Stauts Letter, supra note 16, at 1; Stewart 
Letter, supra note 16, at 1; Wilson-Davis Letter, supra note 16, at 
1; letter from Rebecca Womack (Feb. 18, 2022) (``Womack Letter''); 
Virtu Financial Letter, supra note 16, at 3; Zach Letter, supra note 
16, at 1.
    \18\ See, e.g., Calaf Letter, supra note 16; letter from Degen 
Mahdere (Feb. 17, 2022) (``Mahdere Letter''); letter from Adam 
Rathbone (Feb. 17, 2022) (``Rathbone Letter''); letter from Hunter 
Gage Seeton (Feb. 18, 2022) (``Seeton Letter''); letter from Sam 
Oakes (Feb. 19, 2022) (``Oakes Letter''); letter from Matthew Risse 
(Feb. 19, 2022) (``Risse Letter''); letter from Ryan Webster (Oct. 
31, 2022) (``Webster Letter''). Several of the comment letters 
referred to ``T+0'' without explaining that term. However, the T+1 
Proposing Release defines T+0 as settlement no later than the end of 
trade date. See T+1 Proposing Release, supra note 2, at 10436, 
10438.
    \19\ See, e.g., letter from Mark C. (Feb. 19, 2022) (``Mark C. 
Letter''); letter from Saul Nevarez (Feb. 19, 2022) (``Nevarez 
Letter''); letter from Clinton Lawler (Feb. 19, 2022) (``Lawler 
Letter''); letter from Alex McKay (Feb. 19, 2022) (``McKay 
Letter'').
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    Commenters supporting the Commission's proposal to shorten the 
standard settlement cycle to T+1 cited a number of benefits that a T+1 
settlement cycle would deliver to market participants. For example, 
comment letters supporting a move to T+1 stated that shortening the 
settlement cycle to T+1 would result in reductions to existing levels 
of risk to central counterparties (``CCPs'') and market participants 
(including credit, market and liquidity risk),\20\ lower margin 
requirements,\21\ improved capital liquidity,\22\ improvements to post-
trade processing and operational efficiency,\23\ increased financial 
stability,\24\ and reduced systemic risk in the financial system.\25\
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    \20\ See, e.g., DTCC Letter, supra note 16, at 2-3; Fidelity 
Letter, supra note 16, at 2; IAA April Letter, supra note 16, at 1; 
ICI Letter, supra note 16, at 1, 3; MFA Letter, supra note 16, at 1; 
OCC Letter, supra note 16, at 2; RMA Letter, supra note 16, at 3; 
SIFMA April Letter, supra note 16, at 2; State Street Letter, supra 
note 16, at 4.
    \21\ See, e.g., Cornell Law Letter, supra note 16, at 3; DTCC 
Letter, supra note 16, at 2-3; Fidelity Letter, supra note 16, at 2; 
MMI Letter, supra note 16, at 2; State Street Letter, supra note 16, 
at 4.
    \22\ See, e.g., DTCC Letter, supra note 16, at 2-3; MMI Letter, 
supra note 16, at 2; State Street Letter, supra note 16, at 4.
    \23\ See, e.g., Cornell Law Letter, supra note 16, at 3; DTCC 
Letter, supra note 16, at 2-3; IAA April Letter, supra note 16, at 
1; RMA Letter, supra note 16, at 3; State Street Letter, supra note 
16, at 4.
    \24\ See, e.g., ICI Letter, supra note 16, at 1; MMI Letter, 
supra note 16, at 2.
    \25\ See, e.g., Fidelity Letter, supra note 16, at 2; MFA 
Letter, supra note 16, at 1; MMI Letter, supra note 16, at 2; RMA 
Letter, supra note 16, at 3;
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    In addition, several comment letters stated that shortening the 
settlement cycle to T+1 would benefit retail investors.\26\ For 
example, one commenter stated that retail investors would benefit from 
a move to T+1 through increased certainty, safety, and security in the 
financial system; access to the proceeds, or purchases, of their 
securities transactions a day earlier; and aligning the settlement 
cycles for ETF transactions (which now settle on T+2) with the 
settlement cycle for mutual funds (which typically settle on T+1).\27\ 
Another commenter similarly stated that investors would benefit from 
earlier access to the proceeds of their securities transactions if the 
settlement cycle is shortened to T+1.\28\
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    \26\ See, e.g., Better Markets Letter, supra note 16, at 2-3; 
Fidelity Letter, supra note 16, at 2; IIAC Letter, supra note 16, at 
1; LaBree Letter, supra note 16, at 1; MMI Letter, supra note 16, at 
2; Robinson 1 Letter, supra note 16, at 1; Ryan 1 Letter, supra note 
16, at 1; Stauts Letter, supra note 16, at 1; letter from Tate 
Winter (Feb. 17, 2022) (``Winter Letter'').
    \27\ See Fidelity Letter, supra note 16, at 2; see also ICI 
Letter, supra note 16, at 3 (stating that a T+1 settlement cycle 
would enhance funds' cash and liquidity management; given that fund 
shares typically settle on a T+1 basis, a shorter settlement cycle 
would help align the settlement of a fund's portfolio securities and 
the settlement of its shares).
    \28\ See Cornell Law Letter, supra note 16, at 3 (``If [the 
Commission's T+1 proposal] were adopted, buyers and sellers would 
have access to their proceeds an entire day earlier relative to the 
T+2 settlement cycle. If the public comments submitted to date are 
any indication, this is of paramount concern to the lay 
investor.'').
---------------------------------------------------------------------------

    The Commission also received comment letters that raised concerns 
regarding the Commission's proposal to shorten the standard settlement 
cycle to T+1.\29\ These commenters, some of which were supportive of 
shortening the settlement cycle as a general matter, raised concerns 
about the prospective impact of mismatched settlement cycles across 
global markets that would result if the settlement cycle in the U.S. is 
shortened to T+1 without global coordination and harmonization of 
settlement cycles.\30\ For example, a comment letter submitted by an 
industry association representing the alternative investment industry 
stated that the T+1 Proposing Release ``raises considerable risks for 
asset managers with primary or significant exposure to markets that 
will remain at T+2.'' \31\ The comment letter further stated that 
``[i]n absence of further global coordination, the resulting market 
misalignment from the move to T+1 poses a number of harmful unintended 
consequences to these asset managers, their counterparties and overall 
market health and stability.'' \32\ The commenter's letter references 
specifically ``misalignment concerns'' relating to FX settlement 
risk,\33\ international banking and coordination issues, and 
collateral/liquidity risk.\34\
---------------------------------------------------------------------------

    \29\ See, e.g., letters from Ji[rcaron][iacute] Kr[oacute]l, 
Deputy CEO, Global Head of Government Affairs, Alternative 
Investment Management Association (Apr. 11, 2022), at 2 (``AIMA 
Letter'') (commending the Commission's intended efforts to reduce 
risk in the U.S. settlement cycle and improve efficiency in post-
trade processing); Kristin Swenton Hochstein et al., International 
Securities Association for Institutional Trade Communication (Apr. 
8, 2022), at 2-7 (``ISITC Letter'') (not advocating for or against 
shortening the U.S. settlement cycle to T+1, but identifying certain 
challenges associated with moving to T+1); Scott Pintoff, General 
Counsel, MarketAxess Holdings Inc. (Apr. 11, 2022), at 1 
(``MarketAxess Letter'') (generally favoring a shortening of the 
standard settlement cycle for most bond transactions from T+2 to 
T+1); State Street Letter, supra note 16, at 4; Virtu Financial 
Letter, supra note 16, at 2-3.
    \30\ Several of the comment letters that raised concerns 
regarding the Commission's proposal to shorten the settlement cycle 
to T+1 also raised concerns regarding proposed Rule 15c6-2. Those 
comments are discussed separately in Part III.B below.
    \31\ AIMA Letter, supra note 29, at 2. The AIMA Letter also 
cites to a letter AIMA submitted to Commission staff on October 27, 
2021, which further details the concerns raised in the AIMA Letter. 
AIMA's 2021 submission to Commission staff was resubmitted to the 
Commission as an Annex to the AIMA Letter.
    \32\ Id.
    \33\ The comment letters that use the term ``FX'' do not define 
the term, but ``FX'' is commonly used to refer to foreign currency 
exchange. Market participants often rely on FX trades executed in 
the ``spot'' markets in order to fund securities transactions in the 
U.S. markets that settle in U.S. dollars, and the settlement cycle 
for spot FX transactions is typically T+2. However, spot 
transactions in certain FX pairs (e.g., U.S. dollars vs. Canadian 
dollars) settle on T+1.
    \34\ AIMA Letter, supra note 29, at 5-6. The commenter explained 
its concerns relating to international banking and coordination 
issues by stating that ``the rigid deadlines of banking systems pose 
a significant risk, as do simple time zone or calendar differences 
that otherwise can be accommodated by a T+2 settlement cycle.'' Id. 
at 5. The commenter further stated that foreign banking deadlines 
and cutoff times for transaction processing in related markets must 
be carefully re-examined to ensure activity can be harmonized in an 
accelerated U.S. settlement framework. Id.
---------------------------------------------------------------------------

    With respect to FX settlement risk, the commenter stated that 
accelerating the U.S. settlement cycle to T+1 raises the risk that 
transaction funding dependent on FX ``may not occur on time.'' \35\ The 
commenter further stated that alternative sources of funding for U.S. 
trades on T+1 may therefore need to be in place, which may increase 
costs and create allocation inefficiencies that may dissuade 
participation in U.S. markets.\36\
---------------------------------------------------------------------------

    \35\ Id. The commenter further stated that settlement of FX 
transactions generally occurs on T+2, ``although the period of 
irrevocability--between the unilateral cancellation deadline for the 
sold currency and actual receipt of the bought currency--can extend 
well beyond T+1.'' Id.
    \36\ Id. The commenter further stated that ``unilateral 
cancelation deadlines may need to be considered'' for FX 
transactions. Id. The length of such deadlines may impact when an FX 
transaction can be settled, in turn affecting the time it may take 
to secure funding for a securities transaction. The T+1 Report also 
states that such unilateral cancelation deadlines may need to be 
considered, and discusses how these deadlines may impact asset 
managers if the settlement cycle for securities transactions is 
shortened to T+1. See T+1 Report, infra note 61, at 17. The term 
``unilateral cancelation deadline'' generally refers to the point in 
time after which a bank is no longer guaranteed that it can recall, 
rescind or cancel (with certainty) a previously submitted payment 
instruction. This deadline varies depending on the currency pair 
being settled, correspondent payment system practices, and 
operational, service and legal arrangements. See Bank for 
International Settlements, Supervisory Guidance for Managing Risks 
Associated with the Settlement of Foreign Exchange Transactions 
(Feb. 2013), available at https://www.bis.org/publ/bcbs241.pdf. See 
infra notes 617-619 and accompanying text (further discussing the 
anticipated economic effects resulting from mismatched settlement 
cycles).

---------------------------------------------------------------------------

[[Page 13876]]

    With respect to the commenter's concerns regarding collateral and 
liquidity risks, the commenter stated that the above-described FX and 
coordination issues threaten asset managers' ability to ensure funding 
is available in time to settle their U.S. trades on T+1.\37\ According 
to the commenter, uncertainty regarding collateral for settlement may 
mean that foreign asset managers would need to redeem money market 
funds to meet their financing needs, or forego transacting in U.S. 
markets in order to comply with the accelerated settlement 
requirements.\38\ Ultimately, the commenter stated, trade financing 
issues will lead to both significantly lower trading volume and lower 
overall liquidity, which pose a very real risk to overall market health 
and stability.\39\
---------------------------------------------------------------------------

    \37\ AIMA Letter, supra note 29, at 5.
    \38\ Id.
    \39\ Id.
---------------------------------------------------------------------------

    Another commenter was concerned that there may not be sufficient 
time for investment advisers to match foreign currency amounts to 
settle all trades on T+1, citing various factors that would make it 
costly and difficult for investment advisers to execute FX after the 
U.S. market close.\40\ This commenter also stated that because FX 
transactions largely settle on a T+2 basis, market participants that 
seek to fund a cross-border securities transaction with the proceeds of 
an FX transaction would be required to settle the securities 
transaction before the proceeds of the FX transaction become available 
and pre-fund these securities transactions, which would potentially 
adversely impact client performance and increase operating and 
settlement risk for advisers. The commenter said that while both 
domestic and internationally based investment advisers would be 
impacted by these issues, non-U.S.-based investment advisers would face 
additional expenses because they would need to set up an FX trading and 
settlement presence in the U.S., or add staff abroad to create, 
execute, and settle FX transactions to meet a T+1 timeline.\41\
---------------------------------------------------------------------------

    \40\ See IAA October Letter, infra note 222, at 3 (observing 
that there are circumstances in which a U.S.-based FX trading desk 
will switch over to its Asia-based FX trading desk upon the U.S. 
market close to provide ongoing liquidity, but not on Friday 
evenings, and certain asset owners and managers, including Sovereign 
Wealth Funds, only trade from their country of domicile).
    \41\ Id. at 4 (suggesting certain actions the Commission could 
take to reduce disruption in FX markets, such as by (i) working with 
other regulators and market participants to support the move to T+1 
by, among other things, modifying the FX and equity trading day(s) 
in the U.S., and (ii) ``allow[ing] for a mismatch of FX settlement 
dates as a valid reason for T+2 settlement arrangements without it 
breaching an investment adviser's best execution obligation'').
---------------------------------------------------------------------------

    Another commenter that operates a broker-dealer and an electronic 
trading platform for corporate bonds stated that it had ``serious 
reservations regarding the impact the proposed amendments to Rule 15c6-
1(a) and Rule 15c6-2 will have on cross border trading unless, and 
until, other global financial markets also shorten their settlement 
cycle.'' \42\ Specifically, the commenter stated that if the U.S. 
settlement cycle is shortened to T+1 while other major global financial 
centers remain on a T+2 settlement cycle, ``there will be increased 
operational cost and significant settlement risks associated with 
multi-leg cross border transactions.'' \43\
---------------------------------------------------------------------------

    \42\ MarketAxess Letter, supra note 29, at 1.
    \43\ Id. at 2.
---------------------------------------------------------------------------

    The commenter further stated that it expects mismatched settlement 
cycles would result in increased financing costs associated with 
transactions in which a U.S. market participant is selling to a cross-
border participant because ``we will be forced to receive (and pay for) 
a securities position on T+1 for the U.S. leg, but generally be unable 
to onward deliver the position on the foreign leg until T+2.'' \44\ In 
this scenario, the commenter stated that it would need to fund the 
position until the next settlement cycle.\45\
---------------------------------------------------------------------------

    \44\ Id.
    \45\ Id.
---------------------------------------------------------------------------

    Additionally, the commenter stated its expectation that there will 
be a significant number of settlement fails when the U.S. participant 
is buying bonds and the cross-border participant is unable to deliver 
the bonds until T+2.\46\ The commenter further argued that if the 
Commission's T+1 proposal is adopted and other financial markets do not 
move in lock-step, the increase in financing costs and settlement fails 
in connection with cross-border transactions may force broker-dealers 
to decrease or cease offering cross-border services to their 
clients.\47\ Lastly, the commenter argued that any decrease or 
cessation of cross-border trading ultimately will reduce liquidity for 
U.S. investors.\48\ For these reasons, the commenter encouraged the 
Commission to work with international regulators to coordinate a move 
to T+1 settlement on a global basis if possible.\49\
---------------------------------------------------------------------------

    \46\ Id.
    \47\ Id.
    \48\ Id.
    \49\ Id.
---------------------------------------------------------------------------

    Another commenter stated that there may not be sufficient time for 
investment advisers to match foreign currency amounts to settle all 
trades on T+1.\50\ In particular the comment highlighted the lack of 
time between the closure of the equity markets (at 4:00 p.m. ET in the 
U.S.) and the time when U.S.-based FX trading desks close for the 
evening (usually an hour or so later).\51\ The commenter also discussed 
the reasons it believed that ``Far East'' trading desks may not 
seamlessly take over after the close of U.S.-based FX trading 
desks.\52\ According to the commenter, these issues may impact both 
domestic and internationally based investment advisers.\53\ However, in 
the commenter's view, non-U.S. based investment advisers will face 
additional expenses, as they will either be forced to set up an FX 
trading and settlement presence in North America (or Asia) or add staff 
abroad to create, execute, and settle FX transactions to meet a T+1 
timeline.\54\
---------------------------------------------------------------------------

    \50\ Letter from Suzanne Quinn, Head of North America 
Compliance, Ballie Gifford Overseas Limited (Nov. 17, 2022), at 1 
(``Ballie Gifford Letter'').
    \51\ Id.
    \52\ Id. at 1-2.
    \53\ Id. at 2.
    \54\ Id.
---------------------------------------------------------------------------

    Finally, the commenter suggested certain ``options'' for actions 
that could be taken to reduce disruption in the FX markets. While 
recognizing that some of these options would be ``troublesome to 
implement,'' the commenter stated that two would be the most effective 
in alleviating the commenter's concerns.\55\ First, the commenter 
suggested that appropriate market authorities mandate a change in ``the 
official equity trading day'' for U.S. markets to close one hour 
earlier, at 3:00 p.m. rather than 4:00 p.m. ET, which would provide 
firms more time to match trades and ensure the settlement FX is in 
place for the following day, without negatively impacting liquidity and 
trading volume.\56\ Second, the commenter stated that the Commission 
could allow for a mismatch of FX settlement dates as a valid reason for 
T+2 settlement arrangements ``without [such arrangements] breaching an 
investment adviser's best execution obligation.'' \57\
---------------------------------------------------------------------------

    \55\ Id.
    \56\ Id.
    \57\ Id.; see also supra note 41 and accompanying text 
(discussing the same, including other related recommendations from 
the IAA).
---------------------------------------------------------------------------

    In the proposing release, the Commission asked commenters whether 
efforts to shorten the standard settlement cycle to T+1 is a logical 
step on the path to T+0 settlement, or would moving to a T+1 standard 
settlement cycle require investments or processes that would be 
outdated or unnecessary

[[Page 13877]]

in a T+0 environment.\58\ Although no commenters discussed whether 
moving to a T+1 standard settlement cycle would require investments or 
processes that would be outdated or unnecessary in a T+0 environment, 
as discussed below, the Commission received numerous comments relating 
to T+0 settlement.
---------------------------------------------------------------------------

    \58\ See T+1 Proposing Release, supra note 2, at 10450.
---------------------------------------------------------------------------

    Several of the commenters that supported moving to a T+1 settlement 
cycle also stated that moving to a T+0 settlement cycle, or 
instantaneous settlement, is either not achievable or not practical in 
the near term.\59\ These commenters cited several challenges associated 
with a prospective move to a T+0 settlement cycle,\60\ including in the 
case of several comment letters, many of the same challenges that were 
cited in the ``T+1 Report,'' which the Commission discussed in the T+1 
Proposing Release.\61\ For example, one commenter stated that moving to 
T+0 ``would require the redesign of many securities processing 
functions, including [i]nstitutional [t]rade [p]rocessing, ETFs 
processing, options, margin investing, securities lending, FX markets, 
and global settlements across jurisdictions to meet the regulatory, 
operational, and contractual requirements.'' \62\ Another commenter 
stated that:
---------------------------------------------------------------------------

    \59\ See, e.g., DTCC Letter, supra note 16, at 6 (``[W]e do not 
believe the industry is currently ready to move to a T+0 standard 
settlement cycle . . .''); FIA PTG Letter, supra note 16, at 1-2; 
MMI Letter, supra note 16, at 3 (expressing commenter's concern that 
a move to T+0 would be potentially infeasible in the short term); 
NYSE Group Letter, supra note 16, at 2 (expressing commenter's view 
that T+0 settlement cycle is not practical in the near term); OCC 
Letter, supra note 16, at 4 (``OCC agrees with the consensus view 
reflected in [the T+1 Report] that same-day settlement is not 
achievable in the short-term, and that moving towards shortening the 
settlement cycle to T+0 would require an overhaul of the U.S. 
clearing and settlement infrastructure.''); SIFMA April Letter, 
supra note 16, at 15-20 (expressing commenter's view that T+0 
settlement is not practical in the near term); Virtu Financial 
Letter, supra note 16, at 3-4 (``T+0 [settlement] is not feasible or 
attainable at this time.'').
    \60\ See, e.g., DTCC Letter, supra note 16, at 5; NYSE Group 
Letter, supra note 16, at 2 (``T+0 settlement cycle would pose 
significant challenges to the industry, including eliminating the 
benefits of netting for settling trades, requiring that every 
transaction be funded instantly and individually, and additional 
complexities for foreign investors, options, ETFs and futures.''); 
SIFMA April Letter, supra note 16, at 16 (describing numerous 
challenges associated with moving to T+0 settlement); Virtu 
Financial Letter, supra note 16, at 3-4 (describing various 
challenges associated with moving to T+0 settlement); see also State 
Street Letter, supra note 16, at 5-10 (providing high-level 
observations on the implications of same-day settlement for various 
operational processes and investment products which are central to 
the custody bank business model).
    \61\ See T+1 Proposing Release, supra note 2, at 10438, 10445 
(citing to Deloitte & Touche LLP, the Depository Trust and Clearing 
Corporation, the Investment Company Institute, and Securities 
Industry and Financial Markets Association, Accelerating the U.S. 
Securities Settlement Cycle to T+1 (Dec. 1, 2021) (``T+1 Report''), 
https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf).
    \62\ SIFMA April Letter, supra note 16, at 16 (quoting T+1 
Report, supra note 61).

    [I]mplementing T+0 as the required standard settlement cycle 
across the industry remains a significant undertaking that would 
require foundational changes to the way securities trade and settle 
today. Moreover, moving the entire industry to a T+0 standard 
settlement cycle would necessitate significant changes in industry 
conventions and major investments in automating processes and 
technology that will greatly exceed similar investments needed for 
T+1.\63\
---------------------------------------------------------------------------

    \63\ DTCC Letter, supra note 16, at 5.

    Another commenter argued that moving to T+0 would require a 
``rewrite'' of not only the current clearing and settlement 
infrastructure, but also the associated banking, securities custodian, 
and money market systems that are critical components of the clearing 
and settlement ecosystem.\64\ This commenter further stated that moving 
to T+0 settlement would potentially require implementation of real-time 
currency movements during hours of the day at which such processes are 
not feasible.\65\ In particular, the commenter argued, ``[n]ot only 
would this require major system upgrades, but as critical components of 
the settlement process, banks, wire systems, custodians, lenders, and 
money market funds, along with related staff, would need to be 
available well into the evening.'' \66\
---------------------------------------------------------------------------

    \64\ FIA PTG Letter, supra note 16, at 1.
    \65\ Id.
    \66\ Id. at 1-2.
---------------------------------------------------------------------------

    Another commenter stated that T+0 settlement would present 
logistical concerns around borrowing and lending and would likely 
introduce challenges for batch processing.\67\ More specifically, this 
commenter stated that while it is possible that trades could be netted 
throughout the day, it is unlikely that batch processing could capture 
all trades by the market close, and such netting could lead to multiple 
intraday margin calls by clearing agencies.\68\ The same commenter 
stated that in a T+0 settlement environment it would be very difficult 
for investment advisers to process real-time trade allocations.\69\ 
Additionally, the commenter argued that prime brokers would be required 
to overhaul their processes and technology to capture allocations, 
calculate margin requirements, ensure margin accuracy, and facilitate 
trade reporting and disaffirmations.\70\ Finally, the commenter stated 
that moving to T+0 would require ``complete dematerialization of 
securities.'' \71\
---------------------------------------------------------------------------

    \67\ See Virtu Financial Letter, supra note 16, at 3-4.
    \68\ Id.
    \69\ Id.
    \70\ Id.
    \71\ Id.
---------------------------------------------------------------------------

    Other commenters argued that any move to shorten the settlement 
cycle to T+0 should be considered only after a successful transition to 
T+1.\72\ One such commenter stated that once the industry has 
established the full scope of work required for T+1 and is actively 
progressing towards implementation, the industry should conduct a 
``full review'' to identify the scope of changes that are needed to 
effectuate a move to a T+0 standard settlement cycle.\73\
---------------------------------------------------------------------------

    \72\ See, e.g., AGC April Letter, supra note 16, at 3-4; DTCC 
Letter, supra note 16, at 5; see also letter from Isabelle S. 
Corbett, Global Head of Government Relations, R3 LLC, at 3 (``R3 
Letter'') (supporting the view that ``T+0 does not make sense 
today,'' and stating that ``further compression from T+1 should 
continue to be considered''); ASA Letter, supra note 16, at 3 
(arguing that the market is not prepared to move to T+0, and urging 
the Commission to continue to study and solicit public feedback on 
moving to T+0 rather than using the Commission's T+1 proposal as a 
vehicle to accelerate that shift).
    \73\ See, e.g., DTCC Letter, supra note 16, at 5.
---------------------------------------------------------------------------

    Another commenter stated that moving to a T+0 settlement cycle 
would require significant industry and regulatory discussion, and 
technological upgrades and change, as well as the creation and 
implementation of new operating models and processes in many 
instances,\74\ but believed that the transition to a T+1 settlement 
cycle would be a valuable step towards T+0, as the industry would learn 
lessons that can be used to evaluate if and how a T+0 settlement cycle 
can be achieved in the longer term.\75\ However, according to the 
commenter, industry discussions on implementing T+0 at this time ``may 
inadvertently divert resources from focusing on the requirements and 
issues related to delivering T+1 in the near future.'' \76\
---------------------------------------------------------------------------

    \74\ AGC April Letter, supra note 16, at 3.
    \75\ See id. at 3-4.
    \76\ Id. at 4.
---------------------------------------------------------------------------

    Those commenters supporting an immediate move to T+0 or 
instantaneous settlement neither explained how either T+0 settlement or 
instantaneous settlement could be implemented, nor addressed the 
impediments to T+0 settlement that were cited by several of the 
commenters who argued that T+0 settlement is not achievable or not 
practical in the near term. Nor did the comment letters supporting a 
T+0 settlement cycle or

[[Page 13878]]

instantaneous settlement explain how a settlement cycle shorter than 
T+1 would reduce overall levels of risk in the clearance and settlement 
system. These letters generally consisted of declaratory statements to 
the effect that either T+0 or instantaneous settlement is achievable 
now and should be implemented without delay, while offering no factual 
support for these views.\77\
---------------------------------------------------------------------------

    \77\ See, e.g., Calaf Letter, supra note 16; Clemens Letter, 
supra note 18; Mahdere Letter, supra note 18; Nevarez Letter, supra 
note 19; Oakes Letter, supra note 18; Rathbone Letter, supra note 
18; Seeton Letter, supra note 18.
---------------------------------------------------------------------------

2. Securities Excluded From Requirements Under Exchange Act Rule 15c6-1
    The Commission also received comment letters discussing certain 
types of securities that the respective commenters believed should be 
excluded from the requirements under Exchange Act Rule 15c6-1, whether 
through amendment to the text of the rule or via separate exemptive 
relief. Two of these commenters discussed whether Rule 15c6-1 should 
apply to security-based swap transactions \78\ and both expressed the 
view that the rule should not apply to such transactions.\79\ One of 
the two commenters stated that Rule 15c6-1 is ``inapt'' with respect to 
security-based swap transactions, which are ``generally bilateral and 
executory in nature,'' meaning that there are numerous terms that the 
parties typically agree to fulfill at later dates.\80\ This commenter 
further stated that ``the [Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'')] mandated numerous requirements for 
security-based swaps that address the very credit, market and liquidity 
risks that, for broker-dealer transactions in securities, are addressed 
by the shortening of the settlement cycle from T+2 to T+1.'' \81\ 
Because security-based swaps are already subject to a comprehensive 
regulatory regime, the commenter stated, these securities should not be 
subject to further regulation under the Commission's proposal.\82\
---------------------------------------------------------------------------

    \78\ See MFA Letter, supra note 16, at 2; SIFMA April Letter, 
supra note 16, at 11-12. As noted in the T+1 Proposing Release, the 
Commission previously issued an order that exempted security-based 
swaps from the requirements under Rule 15c6-1, and subsequently 
extended that exemptive relief on several occasions, but the 
exemptive relief that previously covered compliance with Rule 15c6-1 
expired in 2020. See T+1 Proposing Release, supra note 2, at 10446 
n.83.
    \79\ See MFA Letter, supra note 16, at 2; SIFMA April Letter, 
supra note 16, at 11-12. In addition to the comment letters 
discussing the prospective application of Rule 15c6-1 to security-
based swap transactions, the Commission received a small number of 
comment letters that recommended the continuation and/or expansion 
of certain regulatory relief from Rule 15c6-1 previously provided by 
the Commission in certain exemptive orders. These comments are 
discussed in Part II.B.5, which follows discussion of the comment 
letters that relate more directly to the text of Rule 15c6-1.
    \80\ SIFMA April Letter, supra note 16, at 11.
    \81\ Id.
    \82\ Id.
---------------------------------------------------------------------------

    The same commenter highlighted certain ``key differences'' between 
security-based swaps and other types of securities.\83\ In particular, 
the commenter stated that for other types of securities, such as equity 
or debt, settlement occurs when the buyer receives the security 
purchased and the seller receives cash equaling the value of the 
security sold.\84\ For security-based swaps, however, a final net 
payment is paid by one party to the other at a future point in time to 
which the parties have contractually agreed.\85\ For all of these 
reasons, the commenter argued, the Commission should provide an express 
exclusion for security-based swaps, and ``at the very least, any doubt 
caused by the reference in the [T+1 Proposing release] to security-
based swaps should be resolved by [the Commission] clarifying that 
counterparties to such instruments, who generally agree to specific 
payment and settlement terms in writing, benefit from the existing 
override provision in [Rule 15c6-1(a)].'' \86\
---------------------------------------------------------------------------

    \83\ Id.
    \84\ Id.
    \85\ Id.
    \86\ Id.
---------------------------------------------------------------------------

    The other comment letter discussing the prospective application of 
Rule 15c6-1 to security-based swaps argued that the rule ``should not 
apply to security-based swap transactions effected by a `security-based 
swap dealer,' which is dually registered as a broker-dealer.'' \87\ In 
support of this argument, the commenter stated that security-based swap 
transactions are typically bilateral transactions between sophisticated 
counterparties who deal directly with each other, and which are subject 
to unique capital, margin, and segregation requirements.\88\ Thus, 
according to the commenter, ``there is no principled basis to apply 
Rule 15c6-1 to security-based swap transactions solely for the reason 
that a security-based swap dealer is also registered as a broker-
dealer.'' \89\ Instead, the commenter argued, the Commission should 
modify the rule to exempt, or further exemptive relief should be 
provided for, security-based swaps ``as noted in the [T+1 Proposing 
Release].'' \90\
---------------------------------------------------------------------------

    \87\ MFA Letter, supra note 16, at 2.
    \88\ See id.
    \89\ Id.
    \90\ See id.; see also id. at n.11 (citing to T+1 Proposing 
Release, supra note 2, at 10446 n.83).
---------------------------------------------------------------------------

3. Proposed Deletion of Rule 15c6-1(c)
    The Commission received one comment letter responding to the 
proposed deletion of paragraph (c) of Rule 15c6-1, and the commenter 
recommended that paragraph (c) be retained in a modified form, rather 
than being deleted.\91\ Specifically, the commenter recommended that 
paragraph (c) be retained but modified to allow parties to settle on 
T+2, rather than T+1, in the case of a firm commitment 
underwriting.\92\ Under the commenter's recommended modification, Rule 
15c6-1(c) would provide a ``fallback'' to parties without an explicit 
agreement at the time of the transaction to settle on T+2 if unforeseen 
circumstances interfere with either party's ability to conform to a T+1 
settlement date.\93\ The commenter also supported the continued 
retention of paragraph (d) of Rule 15c6-1, stating that paragraph (d) 
is ``critically important for debt and preferred equity offerings.'' 
\94\
---------------------------------------------------------------------------

    \91\ See SIFMA April Letter, supra note 16, at 9-11.
    \92\ See id. at 10.
    \93\ Id. at 10-11.
    \94\ Id. at 11.
---------------------------------------------------------------------------

    In support of the view that the Commission should retain a modified 
version of Rule 15c6-1(c), the commenter stated that reliance on 
paragraphs (a) and (d) would be insufficient to prevent transactions 
for securities priced after 4:30 p.m. ET from failing to settle.\95\ 
Specifically, the commenter stated that while paragraphs (a) and (d) 
allow parties to agree to a longer settlement cycle, in order for the 
parties to avail themselves of that extended settlement date they must 
reach that agreement at the time of the transaction.\96\
---------------------------------------------------------------------------

    \95\ See id. at 10.
    \96\ See id.
---------------------------------------------------------------------------

    The commenter further stated that, ``particularly in the context of 
common stock offerings, where an extended settlement is extremely 
difficult to implement, if specific issues are identified prior to 
pricing of the offering, in practically all such instances, the pricing 
of the offering would be delayed.'' \97\ According to the commenter, 
the parties are ``by definition'' unable to foresee ``unanticipated 
issues'' prior to pricing of the offering.\98\
---------------------------------------------------------------------------

    \97\ Id.
    \98\ Id.

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[[Page 13879]]

    Thus, the commenter stated that paragraphs (a) and (d) of Rule 
15c6-1 would not allow parties to agree to a longer settlement cycle 
when circumstances unforeseen at the time of the pricing of the 
transaction arise that prevent settlement on T+1.\99\ For example, 
according to the commenter, ``it is not unusual to face unanticipated 
issues relating to transfer agents, legend removal, local law matters 
(including local court approval), medallion guarantees or non-U.S. 
parties.'' \100\ Finally, in support of the commenter's belief that 
eliminating paragraph (c), together with a move to T+1, would lead to 
increased failures to settle trades with respect to firm commitment 
underwritings, the commenter cited the limited timeframe that would be 
available ``to resolve issues'' prior to settlement on T+1.\101\
---------------------------------------------------------------------------

    \99\ See id.
    \100\ Id.
    \101\ Id.
---------------------------------------------------------------------------

4. Retention of Exchange Act Rule 15c6-1(d)
    Paragraph (d) of Rule 15c6-1 provides that for purposes of 
paragraphs (a) and (c) of the rule, parties to a contract shall be 
deemed to have expressly agreed to an alternate date for payment of 
funds and delivery of securities at the time of the transaction for a 
contract for the sale for cash of securities pursuant to a firm 
commitment offering if the managing underwriter and the issuer have 
agreed to such date for all securities sold pursuant to such offering 
and the parties to the contract have not expressly agreed to another 
date for payment of funds and delivery of securities at the time of the 
transaction.\102\ The proposed rule text did not make any changes to 
paragraph (d) of Rule 15c6-1 other than technical conforming changes 
that would have been necessary if the Commission adopted the proposed 
deletion of paragraph (c) of the rule.\103\
---------------------------------------------------------------------------

    \102\ See 17 CFR 240.15c6-1(d).
    \103\ See T+1 Proposing Release, supra note 2, at 10448-49.
---------------------------------------------------------------------------

    The Commission received one comment letter supporting the retention 
of paragraph (d) because, according to the commenter, it is 
``critically important for debt and preferred equity offerings.'' \104\ 
However the comment letter did not further explain why paragraph (d) is 
important for such offerings.
---------------------------------------------------------------------------

    \104\ See SIFMA April Letter, supra note 16, at 11.
---------------------------------------------------------------------------

5. Exemptive Orders Under Exchange Act Rule 15c6-1(b)
    The T+1 Proposing Release stated that, pursuant to Rule 15c6-1(b), 
the Commission has granted certain exemptions from the requirements 
under Rule 15c6-1, including an exemption for securities that do not 
have facilities for transfer or delivery in the U.S.\105\ The T+1 
Proposing Release requested public comment on whether the conditions 
set forth in the Commission's exemptive order for securities traded 
outside the U.S. are still appropriate, and whether the exemption 
should be modified.\106\ The Commission received several comment 
letters discussing whether the Commission should continue the exemption 
for foreign securities if the settlement cycle were shortened to T+1, 
and all of these commenters urged the Commission to retain the 
exemption, and/or recommended that the Commission make certain 
modifications to the exemption that would expand the scope of the 
exemption.\107\
---------------------------------------------------------------------------

    \105\ See T+1 Proposing Release, supra note 2, at 10446-47 
(citing to Exchange Act Release No. 35750 (May 22, 1995), 60 FR 
27994, 27995 (May 26, 1995)).
    \106\ See T+1 Proposing Release, supra note 2, at 10451.
    \107\ See Fidelity Letter, supra note 16, at 5; SIFMA April 
Letter, supra note 16, at 1, 7-9; Virtu Financial Letter, supra note 
16, at 2; see also ICI Letter, supra note 16, at 4.
---------------------------------------------------------------------------

    One commenter recommended that the Commission retain this exemption 
and explicitly state in the adopting release that the permissible 
settlement period for securities traded outside of the U.S. should be 
defined by the local market.\108\ The commenter stated that settling 
trades with different time zones is already a difficult process and 
accelerating the settlement cycle for these securities would make 
cross-border transactions even more challenging.\109\
---------------------------------------------------------------------------

    \108\ See Fidelity Letter, supra note 16, at 5.
    \109\ See id.
---------------------------------------------------------------------------

    Another commenter stated that the exemption for foreign securities 
should be retained and modified to address ``certain product 
misalignment matters.'' \110\ This commenter observed that in many non-
U.S. markets today, trades settle on a T+2 basis.\111\ Therefore, the 
commenter stated, unless those markets transition to a T+1 settlement 
timeframe when the U.S. moves to a T+1 cycle, U.S. broker-dealers will 
not be able to comply with Rule 15c6-1 for trades in foreign 
securities.\112\
---------------------------------------------------------------------------

    \110\ SIFMA April Letter, supra note 16, at 7-9.
    \111\ Id. at 7.
    \112\ See id.
---------------------------------------------------------------------------

    Additionally, according to the commenter, retaining the exemption 
for transactions in foreign securities in non-U.S. markets would not 
address the misalignment of settlement cycles between U.S. securities 
and non-U.S. securities that impacts U.S. securities that are 
exchangeable for a foreign security or a basket of foreign 
securities.\113\ The commenter highlighted in particular ADRs, and ETFs 
with an underlying basket of foreign securities, which according to the 
commenter, illustrate this misalignment.\114\
---------------------------------------------------------------------------

    \113\ See id. at 8.
    \114\ See id. As noted in the T+1 Proposing Release, under the 
Commission's existing exemption, an ADR is considered a separate 
security from the underlying security. Thus, if there are no 
transfer facilities in the U.S. for a foreign security but there are 
transfer facilities for an ADR based on such foreign security, only 
the foreign security will be exempt from Rule 15c6-1. See T+1 
Proposing Release, supra note 2, at 10446.
---------------------------------------------------------------------------

    With respect to ADRs, the commenter stated that market makers and 
other market participants may purchase foreign shares and sell related 
ADRs in the U.S. on the same trading day, and thus timely settle the 
sale of the ADRs using the newly created ADRs.\115\ According to the 
commenter, this type of trade will not be possible if the underlying 
foreign shares settle on T+2 and the related ADR is required to settle 
on T+1.\116\ The result, the commenter stated, is likely to be wider 
bid-ask spreads for the ADR because market makers must take into 
account the additional cost of borrowing securities and other financing 
costs to avoid settlement failures.\117\ Additionally, the commenter 
argued, the incidence of fails would likely increase as a result of the 
misaligned settlement cycles, particularly where it is not possible to 
borrow securities to make delivery, and a knock-on effect could be to 
increase the incidence of buy-ins as well.\118\
---------------------------------------------------------------------------

    \115\ See SIFMA April Letter, supra note 16, at 8.
    \116\ See id.
    \117\ See id.
    \118\ See id.
---------------------------------------------------------------------------

    Separately, the same commenter argued that the ETF creation/
redemption process is impacted by the misalignment of global securities 
transaction settlement cycles where the basket of securities underlying 
an ETF includes foreign securities.\119\ In explaining this view, the 
commenter observed that ETF shares are created by an authorized 
participant (``AP'') depositing the daily creation basket of shares 
(and/or cash) with the ETF and, in exchange for the deposit of the 
basket, the ETF issues to the AP a specified number of ETF shares, 
referred to as a ``creation unit.'' \120\ The commenter further stated 
that if foreign securities comprise some or all of the ETF creation 
basket, the AP will

[[Page 13880]]

typically need to purchase those securities in the local market.\121\
---------------------------------------------------------------------------

    \119\ See id.
    \120\ Id.
    \121\ See id.
---------------------------------------------------------------------------

    Another commenter urged the Commission to ``exempt from T+1 
settlement'' U.S.-listed ETFs with baskets that contain foreign 
securities and ADRs.\122\ In support of this recommendation, the 
commenter stated that the misalignment in settlement cycles between the 
U.S. and foreign jurisdictions that continue to settle on a T+2 basis, 
coupled with time zone differences, may increase certain risks, such as 
failed trades, accrual differences, net asset value miscalculations, 
and investment guideline breaches. The same commenter stated that due 
to the resulting misalignment in settlement cycles between the U.S. and 
foreign markets upon transitioning to T+1, an ADR provider may incur 
borrowing and other costs related to the underlying foreign security to 
facilitate T+1 settlement of the ADR.\123\ According to the commenter, 
these costs would likely be passed down to investors and thus make it 
more expensive to obtain investment exposure to foreign markets.\124\
---------------------------------------------------------------------------

    \122\ See ICI Letter, supra note 16, at 4; see also Virtu 
Financial Letter, supra note 16, at 2 (recommending that for primary 
creations and redemptions alternative settlement date options be 
available so the foreign security basket and the U.S. ETF settlement 
can be ``in sync'').
    \123\ See id.
    \124\ See id.
---------------------------------------------------------------------------

    As discussed in the T+1 Proposing Release, the Commission has also 
previously granted a separate exemption from Rule 15c6-1 for contracts 
for the purchase or sale of any security issued by an insurance company 
(as defined in section 2(a)(17) of the Investment Company Act) that is 
funded by or participates in a ``separate account'' (as defined in 
section 2(a)(37) of the Investment Company Act), including a variable 
annuity contract or a variable life insurance contract, or any other 
insurance contract registered as a security under the Securities Act of 
1933 (``Securities Act'').\125\ In granting this exemption, the 
Commission recognized that ``the mechanics of purchases and redemptions 
of insurance securities products are distinct from those of other 
securities and that, because of the time required to complete necessary 
preparations, such transactions typically require more protracted 
settlement periods,'' and that ``compliance with the unique 
requirements of state and Federal law, as well as of the particular 
administrative procedures, applicable to insurance securities products 
demands additional time beyond the standard settlement process.'' \126\ 
The T+1 Proposing Release requested public comment on whether the 
conditions set forth in the exemptive order for insurance products 
continued to be appropriate, or if they should be modified.
---------------------------------------------------------------------------

    \125\ See T+1 Proposing Release, supra note 2, at 10447.
    \126\ Exchange Act Release No. 35815 (June 6, 1995), 60 FR 
30906, 30907 (June 12, 1995) (``Insurance Products Exemption 
Order'').
---------------------------------------------------------------------------

    The three commenters that discussed this exemption uniformly agreed 
that the conditions and considerations set forth in the Insurance 
Products Exemption Order apply as much today, if not with greater 
force, as when the Commission adopted the exemption in 1995 (and which 
it left in place in 2017), and that the exemption should be 
preserved.\127\ In support of this view, one commenter said it was not 
aware of any material change of circumstances that would warrant a 
change.\128\ Another commenter observed that the same administrative 
processes and regulatory requirements under state and Federal law that 
warranted the insurance products exemption were even more relevant for 
T+1 since insurance products have only grown more complex since the 
industry transitioned to T+2 in 2017.\129\
---------------------------------------------------------------------------

    \127\ See letter from Eversheds Sutherland (US) LLP for the 
Committee of Annuity Insurers (Apr. 11, 2022), at 1-3; (``CAI 
Letter''); Fidelity Letter, supra note 16, at 5-6; SIFMA April 
Letter, supra note 16, at 9. These commenters also cited to comment 
letters that had been submitted in response to the T+2 Proposing 
Release in support of retaining the Insurance Products Exemption 
Order.
    \128\ See SIFMA April Letter, supra note 16, at 9 (stating that 
``in addition to retaining the exemptions, SIFMA recommends that the 
exemptions either be codified in Rule 15c6-1(b), or that the 
Commission issue a new order to replace the orders issued in 1995 to 
facilitate access to the terms of the exemptions and to facilitate 
compliance with their terms''). This statement appears to 
collectively reference the exemption for insurance products, as well 
as the exemption for securities that do not have facilities for 
transfer and delivery in the U.S., both of which were issued in 
1995.
    \129\ See Fidelity Letter, supra note 16, at 6.
---------------------------------------------------------------------------

C. Final Rule and Discussion

1. Amendment to Exchange Act Rule 15c6-1(a)
    The Commission is amending paragraph (a) of Exchange Act Rule 15c6-
1 as proposed. Rule 15c6-1(a) will prohibit broker-dealers from 
effecting or entering into a contract for the purchase or sale of a 
security (other than an exempted security, a government security, a 
municipal security, commercial paper, bankers' acceptances, or 
commercial bills) that provides for payment of funds and delivery of 
securities later than the first business day after the date of the 
contract unless otherwise expressly agreed to by the parties at the 
time of the transaction. Subject to the exceptions enumerated in 
paragraphs (a) and (b) of the rule, the prohibition in paragraph (a) of 
Rule 15c6-1 applies to all securities. However, as discussed in Part 
II.C.3 below, the Commission is amending paragraph (b) of Rule 15c6-1 
to exclude security-based swaps from the requirements under paragraphs 
(a) and (c) of the rule.
    The Commission's reasons for amending Rule 15c6-1(a) to shorten the 
standard settlement cycle to T+1 are consistent with those articulated 
in the T+1 Proposing Release,\130\ and many of the comment letters 
submitted in response to that release. First, the Commission continues 
to believe that shortening the standard settlement cycle to T+1 would 
result in a reduction in the number and total value of unsettled trades 
that exist at any point in time. Assuming that trading volume remains 
constant, shortening the standard settlement cycle to T+1 should also 
decrease the total market value of all unsettled trades in the U.S. 
clearance and settlement system. This reduction in the number and total 
value of unsettled securities transactions should result in a reduction 
in market participants' overall exposure to market risk that arises 
from such transactions.
---------------------------------------------------------------------------

    \130\ See T+1 Proposing Release, supra note 2, at 10447-49.
---------------------------------------------------------------------------

    As explained in the T+1 Proposing Release, the Commission believes 
that shortening the standard settlement cycle to T+1 should also reduce 
CCP exposure to credit, market, and liquidity risk arising from its 
obligations to its participants, promoting the stability of the CCP and 
thereby reducing the potential for systemic risk to transmit through 
the financial system.\131\ Reducing these risks to the CCP would enable 
the CCP to reduce the overall size of the financial resources that the 
CCP requires of its participants, lowering costs to the CCP's 
participants, and potentially their customers (i.e., other market 
participants and investors).
---------------------------------------------------------------------------

    \131\ See id. at 10448.
---------------------------------------------------------------------------

    As further explained in the T+1 Proposing Release, in periods of 
market stress, liquidity demands imposed by the CCP on its 
participants, such as in the form of intraday margin calls, can produce 
procyclical effects that reduce overall market liquidity.\132\ The T+1 
Proposing Release further stated that reducing the CCP's liquidity 
exposure by shortening the settlement cycle can

[[Page 13881]]

help limit this potential for procyclicality, enhancing the ability of 
the CCP to serve as a source of stability and efficiency in the 
national clearance and settlement system.\133\
---------------------------------------------------------------------------

    \132\ See id.
    \133\ See id.
---------------------------------------------------------------------------

    Shortening the standard settlement cycle to T+1 also would enable 
investors to access the proceeds of their securities transactions 
sooner than they are able to in the current T+2 environment. 
Specifically, in a T+1 environment, sellers would have access to cash 
proceeds one day sooner and buyers would see purchased securities in 
their accounts one day earlier relative to a T+2 standard settlement 
cycle.
    Finally, market participants have already taken significant steps 
toward identifying the industry requirements and timelines for moving 
to T+1, and have made substantial progress in terms of planning such a 
move.\134\ Due to these efforts, the Commission believes that a 
successful move to T+1 settlement can occur by the compliance 
date,\135\ and the Commission believes that delaying such a move would 
allow undue risk to continue to exist in the U.S. clearance and 
settlement system.
---------------------------------------------------------------------------

    \134\ See, e.g., Deloitte, DTCC, ICI, and SIFMA, T+1 Securities 
Settlement Industry Implementation Playbook (Aug. 2022, updated Dec. 
2022) (``T+1 Playbook''), https://www.dtcc.com/ust1/industry-playbook. Additional information and documentation related to the 
industry's ongoing planning related to the prospective move to a T+1 
settlement cycle is also publicly available at https://www.dtcc.com/ust1/industry-playbook.
    \135\ See infra Part VII.A (discussing the compliance date of 
May 28, 2024, for the amendments to Exchange Act Rule 15c6-1(a)).
---------------------------------------------------------------------------

    In response to the comment letters focusing on the challenges and 
costs associated with the prospective misalignment of securities 
settlement cycles that may follow a move to T+1 in the U.S.,\136\ the 
Commission agrees that such misalignment will likely present some 
challenges that may increase costs for certain market participants, 
including asset managers. For example, the Commission recognizes that 
financing U.S. market transactions that settle on T+1 with the proceeds 
of an FX transaction that settles on T+2 may become more difficult, and 
therefore more costly, than financing of T+2 transactions is today. 
However, market participants can modify their existing business 
practices in ways that allow their securities transactions in the U.S. 
to settle on T+1.\137\
---------------------------------------------------------------------------

    \136\ See MarketAxess Letter, supra note 29, at 1-2; ICI Letter, 
supra note 16, at 4; Ballie Gifford Letter, supra note 50, at 1-2.
    \137\ The Commission observes that settlement cycles vary across 
asset classes. For example, transactions in U.S. Treasury securities 
currently settle on a T+1 basis, and market participants use the 
proceeds of FX transactions to fund transactions in U.S. Treasury 
securities despite mismatched settlement cycles. See infra note 618 
(discussing the same, as well as other examples).
---------------------------------------------------------------------------

    For example, market participants may extend the closing time for 
their FX trading desks, or they may pre-fund certain T+1 transactions 
that would otherwise be funded by an FX transaction that is executed on 
the same day as the securities transaction in the U.S. In addition, as 
one commenter stated, asset managers may, in some cases, redeem money 
market positions, or rely on other financial resources, to meet their 
financing needs.\138\ While the Commission acknowledges that 
undertaking any of the three adjustments described here may increase 
certain costs for some market participants, shortening the standard 
settlement cycle to T+1 will reduce other costs (e.g., margin charges), 
increase capital efficiency, and reduce risk in the U.S. clearance and 
settlement system.\139\
---------------------------------------------------------------------------

    \138\ AIMA Letter, supra note 29, at 5-6.
    \139\ See infra Part VIII.C.1 (discussing the anticipated 
benefits of shortening the standard settlement cycle to T+1).
---------------------------------------------------------------------------

    With respect to the suggestion of one commenter that the 
``appropriate market authorities'' mandate a change in ``the official 
equity trading day'' for U.S. markets to close one hour earlier, at 
3:00 p.m. rather than 4:00 p.m. ET, to provide firms with more time to 
match trades and ensure the ``settlement FX'' is in place for the 
following day,\140\ the Commission believes that such a change is not 
necessary for a successful transition to T+1 to occur, and is otherwise 
not justified. As explained in the paragraph immediately above, the 
Commission believes that market participants will be able to adjust 
their business practices to address the challenges associated with the 
misalignment of the T+1 settlement cycle for securities in the U.S. 
markets with the T+2 settlement cycle for FX transactions. In addition, 
the Commission believes that the commenter's recommendation to shorten 
the length of the trading day in the U.S. equity markets specifically 
to address the commenter's concern about FX transactions could have a 
negative impact on the trading activity and operations of market 
participants. In particular, the Commission believes that modifying the 
length of the trading day would alter the existing operations of the 
U.S. securities markets prior to market close in a way that is 
disproportionate to the impact of the Commission's proposal on the 
ability of market participants to use FX transactions to finance 
securities transactions in the U.S markets because market participants 
will be able to adjust their business practices to address the 
challenges.\141\
---------------------------------------------------------------------------

    \140\ See Ballie Gifford Letter, supra note 50, at 2.
    \141\ See infra notes 617-619 and accompanying text (further 
discussing the anticipated economic effects resulting from 
mismatched settlement cycles).
---------------------------------------------------------------------------

    With respect to the commenter's suggestion that the Commission 
``could allow for a mismatch of FX settlement dates as a valid reason 
for T+2 settlement arrangements without [such arrangements] breaching 
an investment adviser's best execution obligation,'' \142\ as explained 
above, the Commission believes that market participants will be able to 
adjust their business practices to address the challenges associated 
with the prospective mismatch between the settlement cycles for FX 
trades and the settlement cycle for securities transactions in the U.S. 
markets. Even if a mismatch between the settlement time for FX 
transactions and a T+1 standard settlement cycle for U.S. securities 
transactions raises the cost of funding some transactions, as discussed 
previously, the Commission also believes that shortening the standard 
settlement cycle to T+1 will reduce other costs (e.g., margin charges), 
increase capital efficiency, and reduce risk in the U.S. clearance and 
settlement system.\143\ Additionally, while the commenter correctly 
states that the Commission's proposal would allow parties to extend 
settlement only if they reach agreement at the time of the transaction, 
the commenter does not explain its understanding that ``this would be 
difficult to implement in the context of trades that require the 
settlement of FX transactions to occur,'' or that ``for this reason a 
standing option to settle at T+2 would be more effective.'' \144\ To 
the extent the commenter is recommending that the Commission establish 
a separate T+2 settlement cycle for transactions that are funded using 
FX transactions, such an approach is not workable because the 
counterparties to such transactions generally would not know whether 
the transaction had been funded in this way--unless the parties agreed 
to disclose in advance of the transaction the source of funding--and 
therefore also would not know whether to expect their securities 
transaction to settle on T+1 or T+2.
---------------------------------------------------------------------------

    \142\ See Ballie Gifford Letter, supra note 50, at 2.
    \143\ See supra note 139 and accompanying text (further 
discussing the other costs that would be reduced, as well as the 
increase in capital efficiency, and the reduction in risk to the 
U.S. clearance and settlement system).
    \144\ See Ballie Gifford Letter, supra note 50, at 2.

---------------------------------------------------------------------------

[[Page 13882]]

    The Commission has also considered the arguments submitted by one 
commenter that any misalignment of settlement cycles that follows a 
move to T+1 in the U.S. would increase the number of fails in 
connection with cross-border transactions and may force broker-dealers 
to decrease or cease offering cross-border services to their clients, 
and ultimately will reduce liquidity for U.S. investors.\145\ The 
commenter also specifically stated its expectation that there will be a 
significant number of settlement fails when a U.S. market participant 
is buying bonds and a ``cross-border participant'' is unable to deliver 
the bonds until T+2.\146\ The Commission disagrees with each of the 
commenter's statements for the reasons explained below.
---------------------------------------------------------------------------

    \145\ See MarketAxess Letter, supra note 29, at 1.
    \146\ Id.
---------------------------------------------------------------------------

    The Commission does not believe that the prospective misalignment 
of settlement cycles resulting from a move to T+1 will increase the 
number settlement fails connected with cross- border transactions.\147\ 
While settlement fails can occur for many different reasons, market 
participants will have many months to continue their planning and 
preparation for the move to T+1. By the time the transition to T+1 
occurs, market participants will have had ample opportunity to analyze 
whether any given transaction presents an unacceptable risk of a 
settlement fail, and, as stated above,\148\ have options for adjusting 
their business practices to account for the challenges associated with 
settlement of certain transactions in a T+1 environment, such as FX 
transactions or other transactions with cross-border considerations.
---------------------------------------------------------------------------

    \147\ See infra notes 617-619 and accompanying text (further 
discussing the anticipated economic effects resulting from 
mismatched settlement cycles).
    \148\ See supra note 138 and accompanying text.
---------------------------------------------------------------------------

    With respect to the commenter's specific statement regarding the 
purchase of bonds by a U.S. market participant and the inability of a 
``cross-border participant'' to deliver such bonds until T+2, the 
Commission acknowledges that in some cases it may be difficult for 
market participants to deliver bonds on T+1 when they seek to purchase 
the bonds in a foreign market and sell the same bonds in the U.S. 
market on the same day. However, market participants will know the 
timing of their settlement obligations prior to entering into contracts 
to purchase bonds in a foreign market and sell them in the U.S. market. 
If a market participant knows that the standard settlement cycle for 
the U.S. market transaction is shorter than the settlement cycle for 
the foreign market transaction, it may plan to either make arrangements 
to purchase or borrow the bonds sufficiently in advance of entering 
into the U.S. market transaction, or agree to a settlement date that is 
later than T+1 for the U.S. market transaction. In cases where none of 
these options is viable, market participants may also decide not to 
enter into the U.S. market transaction rather than entering into a 
transaction that would predictably result in a settlement fail. In the 
Commission's view, these same options also may be available to market 
participants with respect to transactions in other types of securities 
and are not unique to bond market transactions.\149\
---------------------------------------------------------------------------

    \149\ See infra notes 617-619 and accompanying text (further 
discussing the anticipated economic effects resulting from 
mismatched settlement cycles).
---------------------------------------------------------------------------

    With respect to the commenter's concerns regarding liquidity, even 
if moving to a T+1 settlement cycle in the U.S. does increase the 
number of fails associated with certain securities transactions in the 
U.S. market, it does not necessarily follow that any prospective 
misalignment of settlement cycles would result in either increased 
fails in the U.S. market overall, or a reduction in the amount of 
liquidity available to U.S. investors.\150\ As explained above, the 
Commission expects that shortening the standard settlement cycle to T+1 
will reduce risk in the clearance and settlement system by reducing the 
number of unsettled transactions that exist at any given point in 
time,\151\ and will result in increased overall liquidity in the U.S. 
markets. That view is also consistent with many of the comment letters 
submitted in response to the T+1 Proposing Release.\152\
---------------------------------------------------------------------------

    \150\ See infra Part VIII.C.4 (further discussing the 
anticipated impact on settlement fails and liquidity).
    \151\ See supra note 130 and accompanying text.
    \152\ See supra notes 20, 22, and accompanying text.
---------------------------------------------------------------------------

    With respect to the comment stressing the need for the Commission 
to work with international regulators to coordinate a move to T+1 
settlement on a global basis if possible,\153\ the Commission and its 
staff intend to continue to work with regulators in other jurisdictions 
to ensure that the move to a T+1 settlement cycle in the U.S. is 
successfully implemented while minimizing any adverse impact the 
transition may have on market participants who engage in transactions 
in both the U.S. market and foreign markets. However, the Commission 
believes that delaying the transition to T+1 in the U.S. until other 
jurisdictions have also committed to implementing T+1 is not necessary 
for a successful transition to T+1 to occur in the U.S.\154\ As a 
general matter, the Commission and Commission staff continue to engage 
with authorities in other jurisdictions regarding regulatory changes in 
the U.S., including to discuss differences between U.S. requirements 
and requirements in other jurisdictions, including through the 
Commission's ongoing participation in the Financial Stability Board, 
the International Organization of Securities Commissions (``IOSCO''), 
and CPMI-IOSCO.\155\
---------------------------------------------------------------------------

    \153\ Id.
    \154\ The Canadian Securities Authorities recently issued a 
proposal to transition the securities markets in Canada to T+1 to 
align with the T+1 standard settlement cycle adopted in this 
release. See Canadian Securities Administrators, Press Release, 
Canadian securities regulators outline steps to support transition 
to T+1, Dec. 15, 2022, https://www.securities-administrators.ca/news/canadian-securities-regulators-outline-steps-to-support-transition-to-t1/.
    \155\ CPMI-IOSCO refers to the work undertaken jointly by IOSCO 
and the Committee on Payment and Market Infrastructures (``CPMI'') 
to enhance the international coordination of standard and policy 
development and implementation regarding clearing, settlement, and 
reporting arrangements, including with respect to financial market 
infrastructures such as central counterparties and central 
securities depositories.
---------------------------------------------------------------------------

2. Response to Comments Relating to T+0 Settlement
    The Commission has carefully considered the comments it received 
relating to the prospective benefits and challenges associated with 
moving to a T+0 settlement cycle. The Commission believes that 
shortening the settlement cycle further than T+1 could ultimately 
produce considerable additional benefits to investors compared with 
shortening the settlement cycle to T+1. However, the Commission 
continues to believe that shortening the settlement cycle to T+0 would 
require the industry to develop solutions to the many challenges 
identified by market participants as impediments to such a move, as 
discussed at length in the T+1 Proposing Release,\156\ in the T+1 
Report,\157\ and in several comment letters \158\ submitted in response 
to the T+1 Proposing Release. Such impediments include, for example, 
challenges related to maintaining multi-lateral netting, institutional 
trade processing, securities lending practices, money settlement 
systems, mutual fund and ETF processing, transaction funding

[[Page 13883]]

requirements, and corporate action processing. Given the operational 
and technological challenges associated with moving to a T+0 settlement 
cycle, the Commission believes that a successful move to T+0 would take 
longer to design and implement, and cost more than, a successful move 
to a T+1 settlement cycle.\159\
---------------------------------------------------------------------------

    \156\ See T+1 Proposing Release, supra note 2, at 10467-74.
    \157\ See T+1 Report, supra note 61, at 10-11.
    \158\ See supra notes 59-60, 62-71, and accompanying text.
    \159\ Because industry participants have not developed solutions 
to the technological, operational, and business challenges and 
impediments associated with a move to a T+0 settlement cycle, at 
this time the Commission cannot reasonably provide estimates 
regarding the length of time that would be necessary for a 
successful move to T+0, or the costs associated with such a move.
---------------------------------------------------------------------------

    Shortening the settlement cycle to T+1 will result in substantial 
benefits to market participants that will be attainable much sooner 
than shortening the settlement cycle to T+0. Thus, the Commission 
believes shortening the settlement cycle to T+1 to be the more prudent 
and practical approach to shortening the settlement cycle at this time.
    However, the Commission continues to believe, as it stated in the 
T+1 Proposing Release, that the transition to a T+1 settlement cycle 
can be a useful step in identifying potential paths to T+0 
settlement.\160\ As the securities industry moves forward to implement 
a T+1 standard settlement cycle, this process generally should include 
consideration of the potential paths to achieving T+0 to help ensure 
that investments in new technology and operations undertaken to achieve 
T+1 can maximize the value of such investments over the long term. 
Following the transition to T+1 in the U.S. markets, Commission staff 
will continue to work with industry leaders, public interest advocates, 
investors and other regulators to assess the future feasibility of a 
T+0 settlement standard cycle, and seek to identify ways to overcome 
the challenges associated with such a move, as articulated in the T+1 
Proposing Release.\161\
---------------------------------------------------------------------------

    \160\ See T+1 Proposing Release, supra note 2, at 10465.
    \161\ Id. at 10467-75.
---------------------------------------------------------------------------

3. Amendments to Exchange Act Rule 15c6-1(b)
    The Commission is amending paragraph (b) of Exchange Act Rule 15c6-
1 to exclude security-based swaps from the requirements under paragraph 
(a) of the rule. The T+1 Proposing Release asked whether the Commission 
should provide exemptive relief from the requirements under Rule 15c6-1 
for transactions in security-based swaps.\162\ As discussed above, the 
Commission received two comment letters that discussed whether Rule 
15c6-1 should apply to security-based swap transactions and both of 
these commenters urged the Commission to exclude security-based swaps 
from the requirements under the rule.\163\ The Commission agrees with 
the comment letter highlighting ``key differences'' between security-
based swaps and other types of securities, and agrees that such 
differences warrant excluding security-based swaps from the 
requirements under paragraph (a) of Rule 15c6-1. In the Commission's 
view, such characteristics of security-based swaps make transactions in 
security-based swaps inconsistent with the purpose, intent, and 
structure of Rule 15c6-1, as discussed further below.
---------------------------------------------------------------------------

    \162\ See id. at 10451.
    \163\ See supra note 78 and accompanying text.
---------------------------------------------------------------------------

    First, consistent with the Commission's understanding of security-
based swap transactions, the commenter explains that for security-based 
swaps ``final net payment is paid by one party to the other at a future 
point in time to which the parties have contractually agreed.'' \164\ 
The commenter also states that Rule 15c6-1 is ``inapt'' with respect to 
security-based swap transactions, which are ``generally bilateral and 
executory in nature,'' meaning that there are numerous terms that the 
parties typically agree to fulfill at later dates.\165\ The Commission 
believes that the commenter's description of security-based swaps is 
accurate.
---------------------------------------------------------------------------

    \164\ SIFMA April Letter, supra note 16, at 11.
    \165\ Id.
---------------------------------------------------------------------------

    The Commission further believes that excluding security-based swaps 
from the requirements under paragraph (a) of Rule 15c6-1 would be 
consistent with the purpose of the rule. The Commission first proposed 
Rule 15c6-1 to establish T+3 as ``the standard settlement time frame 
for broker-dealer trades,'' \166\ and explained in the T+3 Proposing 
Release that the rule ``is designed to establish T+3 as a new `default' 
contract term.'' \167\ The T+3 Proposing Release further stated that 
most broker-dealers do not specify all of the terms of a trade before 
execution, but rely on industry custom and SRO rules for those terms, 
and the Commission did not intend to change industry custom to require 
broker-dealers to specify contract terms.\168\ Unlike other securities 
transactions, however, security-based swap contracts generally do 
include contract terms that specify the timing of contractual 
obligations, and for that reason there is not a need for any rule-based 
``default'' contract term that provides for the timing of such 
obligations.
---------------------------------------------------------------------------

    \166\ T+3 Proposing Release, supra note 4, at 11806-07.
    \167\ Id. at 11809.
    \168\ See id.
---------------------------------------------------------------------------

    Because security-based swap contracts provide for the timing of 
contractual obligations, the Commission does not anticipate that it 
will become necessary for Rule 15c6-1(a) to apply to security-based 
swap transactions at any point in the future. As such, the Commission 
is amending the text of Rule 15c6-1(b) to exclude security-based swaps 
from the requirements under Rule 15c6-1(a), rather than issuing a new 
exemptive order that would accomplish the same objective.
    As discussed further in Part VII.B, the amendments to Rule 15c6-
1(b) that the Commission is adopting in this document, including both 
the new provision that exempts security-based swaps from the scope of 
paragraph (a), as well as the technical conforming changes to Rule 
15c6-1(b) described below, will become effective upon the effective 
date of the rule. The Commission has determined that these changes 
should become effective upon the effective date, rather than the 
compliance date for Rule 15c6-1 more generally, to avoid any possible 
confusion as to whether broker-dealer transactions in security-based 
swaps may or may not be subject to Rule 15c6-1(a) between the effective 
date and the compliance date.
    As explained in the T+1 Proposing Release, Rule 15c6-1(b)(1) 
currently provides an exclusion for contracts involving the purchase or 
sale of 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.\169\ 
No commenters suggested amending the exclusion under existing Rule 
15c6-1(b)(1), and the amendments to Rule 15c6-1(b) being adopted in 
this document do not include any changes to this exclusion.
---------------------------------------------------------------------------

    \169\ See T+1 Proposing Release, supra note 2, at 10446.
---------------------------------------------------------------------------

    In recognition of the fact that the Commission may not have 
identified all situations or types of trades where the application of 
Rule 15c6-1(a) would be problematic, existing Rule 15c6-1(b)(2) 
provides that the Commission may exempt by order additional types of 
trades from Rule 15c6-1(a), either unconditionally or on specified 
terms and conditions, if the Commission determines that such an 
exemption is consistent with the public interest and

[[Page 13884]]

the protection of investors.\170\ No commenters suggested any 
amendments to paragraph (b)(2) of Rule 15c6-1, and the Commission is 
not amending this provision of the rule. Accordingly, the Commission is 
making no substantive changes to the existing provision that is 
currently designated as paragraph (b)(2). However, the amendments to 
Rule 15c6-1(b) being adopted in this document will redesignate existing 
paragraph (b)(2) of the rule as paragraph (b)(3) of the rule, and a new 
provision that excepts security-based swap transactions from the 
requirements under paragraph (a) of Rule 15c6-1 will be designated as 
paragraph (b)(2) of the rule.\171\
---------------------------------------------------------------------------

    \170\ See 17 CFR 240.15c6-1(b)(1).
    \171\ See 17 CFR 240.15c6-1(b)(1)-(3).
---------------------------------------------------------------------------

    The rule amendments being adopted in this document also strike the 
term ``contracts'' from the first clause in paragraph (b) of Rule 15c6-
1, and add the words ``Contracts for'' to the beginning of paragraphs 
(b)(1) and (3) (formerly paragraph (b)(2)). These technical changes are 
intended to account for the fact that the definition of a security-
based swap under section 3(a)(68) of the Exchange Act \172\ 
incorporates the term ``contract'' and leaving the same term in the 
first clause of Rule 15c6-1(b) could create confusion as to the meaning 
of the new provision under paragraph (b)(2) of the rule, which refers 
to security-based swaps.
---------------------------------------------------------------------------

    \172\ See 15 U.S.C. 78c(a)(68).
---------------------------------------------------------------------------

4. Amendment to Exchange Act Rule 15c6-1(c)
    The Commission is amending paragraph (c) of Exchange Act Rule 15c6-
1 to shorten the settlement cycle for firm commitment offerings for 
securities that are priced after 4:30 p.m. ET, unless otherwise 
expressly agreed to by the parties at the time of the transaction. 
Specifically, the amendment to paragraph (c) of Rule 15c6-1 will 
shorten the standard settlement cycle for these offerings from T+4 to 
T+2. As amended, paragraph (c) of Rule 15c6-1 will provide that 
paragraph (a) of the rule does not apply to contracts for the sale for 
cash of securities that are priced after 4:30 p.m. ET on the date such 
securities are priced and that are sold by an issuer to an underwriter 
pursuant to a firm commitment underwritten offering registered under 
the Securities Act or sold to an initial purchaser by a broker-dealer 
participating in such offering provided that a broker or dealer shall 
not effect or enter into a contract for the purchase or sale of such 
securities that provides for payment of funds and delivery of 
securities later than the second business day after the date of the 
contract, unless otherwise expressly agreed to by the parties at the 
time of the transaction.\173\
---------------------------------------------------------------------------

    \173\ See 17 CFR 240.15c6-1(c).
---------------------------------------------------------------------------

    As explained in the T+1 Proposing Release, in 1995 the Commission 
added paragraph (c) to Rule 15c6-1 in response to public comments 
stating that new issue securities could not settle on T+3 because 
prospectuses could not be printed prior to the trade date (the date on 
which the securities are priced).\174\ The T+1 Proposing Release 
proposed to delete paragraph (c) based on the Commission's belief that 
expanded application of the ``access equals delivery'' standard for 
prospectus delivery supports removing paragraph (c) from Rule 15c6-1 
because delays in the process that previously made delivery of the 
prospectus difficult to achieve under the standard settlement cycle 
have been mitigated by the ``access equals delivery'' standard.\175\ 
However, the T+1 Proposing Release also acknowledged that the T+1 
Report had recommended the Commission retain paragraph (c), but modify 
it to shorten the standard settlement cycle for firm commitment 
offerings priced after 4:30 p.m. ET from T+4 to T+2.\176\ Additionally, 
the Commission requested public comment on the proposed deletion of 
paragraph (c) and requested that, to the extent that commenters agree 
with the T+1 Report, such commenters provide data or other detailed 
information explaining why a T+1 settlement cycle is an inappropriate 
standard for all firm commitment offerings priced after 4:30 p.m.\177\
---------------------------------------------------------------------------

    \174\ See T+1 Proposing Release, supra note 2, at 10449.
    \175\ See id.
    \176\ See id. (citing T+1 Report, supra note 61, at 33).
    \177\ See id. at 10450.
---------------------------------------------------------------------------

    After reviewing the comment letters received in response to the T+1 
Proposing Release, the Commission continues to believe that the process 
that made delivery of the prospectus difficult to achieve under the 
standard settlement cycle has been mitigated by the ``access equals 
delivery'' standard. However, the Commission also is persuaded by the 
comment letter arguing that the Commission should retain paragraph (c) 
of Rule 15c6-1, but shorten the settlement cycle to T+2 for firm 
commitment offerings for securities that are priced after 4:30 p.m. ET, 
unless otherwise expressly agreed to by the parties at the time of the 
transaction.\178\
---------------------------------------------------------------------------

    \178\ See supra Part II.B.3 (providing a detailed description of 
comment letters urging the Commission to adopt a T+2 settlement 
cycle for firm commitment offerings for securities that are priced 
after 4:30 p.m. ET, unless otherwise expressly agreed to by the 
parties at the time of the transaction).
---------------------------------------------------------------------------

    The Commission is persuaded that a T+1 settlement cycle is not long 
enough to prevent firm commitment offerings priced after 4:30 p.m. ET 
from failing to settle on time. In particular, the Commission 
acknowledges that paragraphs (a) and (d) of Rule 15c6-1 would not allow 
parties to agree to a longer settlement cycle when circumstances 
unforeseen at the time of the pricing of the transaction arise that 
prevent settlement on T+1.\179\ Specifically, while paragraphs (a) and 
(d) allow parties to agree to a longer settlement cycle, in order for 
the parties to avail themselves of that extended settlement date, they 
must reach that agreement at the time of the transaction and must take 
affirmative steps in advance of each such transaction in order to 
obtain relief under paragraph (a) or (d).
---------------------------------------------------------------------------

    \179\ In the T+1 Proposing Release the Commission acknowledged 
that the complex documentation associated with firm commitment 
offerings may in some cases require more time to complete than is 
available under a T+1 standard settlement cycle. See T+1 Proposing 
Release, supra note 2, at 10450-51.
---------------------------------------------------------------------------

    With respect to unforeseen circumstances that arise in connection 
with firm commitment offerings, for example, as stated by a commenter, 
it is not unusual for unanticipated issues relating to transfer agents, 
legend removal, local law matters (including local court approval), 
medallion guarantees or non-U.S. parties to arise.\180\ Such 
unanticipated issues could lead to increased failures to settle trades 
on a T+1 basis with respect to firm commitment offerings priced after 
4:30 p.m. ET. For these reasons, the Commission has reconsidered its 
proposed deletion of paragraph (c) of Rule 15c6-1.
---------------------------------------------------------------------------

    \180\ See SIFMA April Letter, supra note 16, at 10.
---------------------------------------------------------------------------

    As stated above, the comment letter discussing the proposed 
deletion of paragraph (c) stated that the Commission should amend 
paragraph (c) to establish a T+2 settlement cycle for firm commitment 
offerings priced after 4:30 p.m. ET.\181\ The Commission agrees with 
the commenter's recommendation, and is amending paragraph (c) to 
establish a T+2 settlement cycle for these offerings, rather than 
deleting paragraph (c) as the Commission proposed. In the T+1 Proposing 
Release, the Commission considered such a T+2 standard as an 
alternative to deleting paragraph (c), but proposed deleting paragraph 
(c) to fully

[[Page 13885]]

harmonize the settlement of primary offerings with the settlement cycle 
for secondary market trades, thereby removing all financial and 
operational risks that can arise when the same security settles on two 
different settlement cycles.\182\ In proposing this approach, the 
Commission stated its belief that paragraph (d) would provide 
sufficient flexibility to manage the need for a longer settlement cycle 
when it arises.\183\ In light of the comments received, and as 
discussed above, the Commission now believes that the flexibility 
provided by paragraph (d) is insufficient to ensure timely settlement 
for certain firm commitment offerings under a T+1 standard settlement 
cycle. Accordingly, the Commission believes that the proposed 
alternative--retaining paragraph (c) but shortening the standard 
settlement cycle under the provision to T+2--would best achieve the 
Commission's stated objective of establishing a common standard that 
effectively minimizes the financial and operational risks associated 
with the settlement of firm commitment offerings. As discussed in the 
T+1 Proposing Release, the T+1 Report indicates that, under the 
existing T+4 settlement cycle for firm commitment offerings, most 
transactions currently settle on a T+2 basis. Consistent with the 
comments received, the Commission believes that a T+2 settlement cycle 
for firm commitment offerings priced after 4:30 p.m. ET provides 
sufficient time and flexibility to complete documentation and address 
any other issues that may arise in the preparation of a firm commitment 
offering to ensure timely settlement.
---------------------------------------------------------------------------

    \181\ See id.
    \182\ T+1 Proposing Release, supra note 2, at 10450.
    \183\ Id. at 10492.
---------------------------------------------------------------------------

5. Retention of Existing Exchange Act Rule 15c6-1(d) Unchanged
    Because the Commission is not deleting paragraph (c) of Rule 15c6-
1, the Commission is not adopting the proposed technical changes to 
paragraph (d) of the rule. The Commission did not propose any other 
changes to paragraph (d) of Rule 15c6-1, and the Commission received no 
comments recommending changes to this provision of the rule.
    The Commission agrees with the commenter stating that paragraph (d) 
should be retained \184\ because paragraph (d) enables underwriters and 
the parties to a transaction to agree, in advance of the transaction, 
to a settlement cycle other than the standard settlement cycle 
specified in either paragraph (a) or (c) of the rule, when necessary to 
manage obligations associated with the firm commitment offerings. 
Market participants involved in firm commitment offerings of certain 
debt and preferred securities commonly rely on paragraph (d) of Rule 
15c6-1 to extend settlement in order to allow time for the completion 
of the extensive documentation associated with such offerings,\185\ and 
the Commission believes it is not always possible for such 
documentation to be completed within the time frames provided by under 
paragraphs (a) and (c) of Rule 15c6-1. Therefore the amendments to Rule 
15c6-1 being adopted in this document do not include any changes to 
paragraph (d) of the rule.
---------------------------------------------------------------------------

    \184\ See SIFMA April Letter, supra note 16, at 11.
    \185\ See T+1 Report, supra note 61, at 33.
---------------------------------------------------------------------------

6. Exemptive Orders Under Exchange Act Rule 15c6-1(b)
    The Commission has reviewed the comments submitted in response to 
the T+1 Proposing Release that relate to the Commission's existing 
exemptive orders issued pursuant to Exchange Act Rule 15c6-1(b),\186\ 
and, because no changes are needed to facilitate an orderly transition 
to a T+1 settlement cycle, the existing exemptive orders will remain in 
effect without modification. The Commission's view that no changes to 
the orders are needed is consistent with the comments urging that the 
Commission retain both the existing exemption for certain insurance 
products, as well as the exemption for certain foreign securities, as 
described above.\187\
---------------------------------------------------------------------------

    \186\ See supra notes 105 and 126.
    \187\ See supra Part II.B.5.
---------------------------------------------------------------------------

    With respect to the comments recommending that the Commission 
expand the scope of the existing exemptive order relating to securities 
that do not have facilities for transfer or delivery in the U.S.,\188\ 
the Commission is not persuaded that expanding the scope of the order 
is necessary at this time and is declining to do so for the reasons 
discussed below. However, the Commission will continue to monitor how 
shortening the standard settlement cycle to T+1 in the U.S. affects 
market participants.
---------------------------------------------------------------------------

    \188\ See SIFMA April Letter, supra note 16, at 8-9; ICI Letter, 
supra note 16, at 4.
---------------------------------------------------------------------------

    Notwithstanding the comments raising concerns that the existing 
exemption for certain foreign securities does not exempt ADRs from the 
T+1 standard settlement cycle,\189\ the Commission believes that ADRs 
should continue to be subject to Rule 15c6-1(a). In response to one 
commenter's statements relating to the timely sale of ADR transactions 
using newly created ADRs,\190\ the Commission understands that a large 
percentage of ADR trading activity involves purchases and sales of 
existing ADRs in the U.S. markets. Thus, the commenter's concerns would 
seem to relate to only a small percentage of ADR trading activity.\191\
---------------------------------------------------------------------------

    \189\ See SIFMA April Letter, supra note 16, at 8; ICI Letter, 
supra note 16, at 4.
    \190\ See SIFMA April Letter, supra note 16, at 8.
    \191\ See infra notes 606-616 (discussing the anticipated 
economic effect on transactions in ADRs).
---------------------------------------------------------------------------

    The commenter stated that ``[t]his type of trade'' will not be 
possible if the underlying foreign shares settle on T+2 and the related 
ADR is required to settle on T+1, and the result is likely to be wider 
bid-ask spreads for the ADR because market makers must take into 
account the additional cost of borrowing securities and other financing 
costs to avoid settlement failures.\192\ While bid-ask spreads could 
widen and costs could increase for this narrow category of ADR 
transactions, the Commission believes that ADRs should be subject to 
the requirements under Rule 15c6-1(a). Exempting ADRs from the 
requirements under Rule 15c6-1(a) would create another misalignment 
between the securities settlement cycle for ADRs and the standard 
settlement cycle for other types of securities, which the Commission 
believes would unduly dilute the benefits of a standard settlement 
cycle. As a general matter, a standard settlement cycle facilitates 
operational efficiency, reduces operational costs and transaction 
costs, and reduces risk for market participants.
---------------------------------------------------------------------------

    \192\ See id.; see also ICI Letter, supra note 16, at 4.
---------------------------------------------------------------------------

    In this particular case, the Commission believes that exempting 
ADRs from Rule 15c6-1(a) would diminish the benefits associated with 
shortening the standard settlement cycle to T+1. As previously 
discussed in detail, such benefits include risk reduction (e.g., 
credit, market, liquidity and systemic risk), as well as increased 
capital efficiency.
    The Commission also does not agree with the commenter that it will 
be impossible for market makers and other market participants to 
purchase foreign shares and sell related ADRs in the U.S. on the same 
trading day, and thus timely settle the sale of the ADRs using the 
newly created ADRs.\193\ Rather, the Commission believes that market 
participants can borrow the underlying securities necessary to settle 
the newly created ADR on T+1 if the securities are available. While the 
commenter also raises the concern that in some cases it will not be 
possible to borrow the

[[Page 13886]]

securities to make delivery,\194\ the possibility that certain 
securities may be costly or difficult to borrow at certain times is not 
limited to ADRs. As previously discussed, establishing a standard 
settlement cycle facilitates operational efficiency, reduces 
operational costs and transaction costs, and reduces risk for market 
participants. Providing exemptions for securities that can be costly or 
difficult to borrow--when the cost or difficulty to borrow will vary 
over time in response to movements in the price of the security, a 
dynamic unrelated to the length of the settlement cycle--would erode 
these benefits.
---------------------------------------------------------------------------

    \193\ See SIFMA April Letter, supra note 16, at 8.
    \194\ See id.
---------------------------------------------------------------------------

    The Commission also has reviewed the comments urging the Commission 
to ``exempt from T+1 settlement'' U.S.-listed ETFs with baskets that 
contain foreign securities and ADRs,\195\ and has determined that such 
an exemption is not warranted at this time for reasons that are similar 
to those discussed above in response to the comments raising concerns 
regarding the impact the move to T+1 will have on market participants 
trading ADRs. As a general matter, the Commission believes that 
allowing ETFs to settle on a settlement cycle that is longer than T+1 
would diminish the benefits associated with a standard settlement cycle 
and shortening the standard settlement cycle to T+1.
---------------------------------------------------------------------------

    \195\ See id.; ICI Letter, supra note 16, at 4.
---------------------------------------------------------------------------

    The Commission recognizes that settling trades in U.S.-listed ETFs 
with baskets that contain foreign securities may become more costly for 
certain APs in a T+1 environment, as result of the prospective 
misalignment between the settlement cycle for such trades and the 
settlement cycle for the underlying foreign securities. For example, 
the Commission acknowledges that during the ETF share creation process, 
APs may need to post collateral or establish credit lines to satisfy 
foreign market requirements. However, as previously discussed, the 
Commission believes that moving to a T+1 settlement cycle will reduce 
other costs (e.g., margin charges), increase capital efficiency, and 
reduce risk in the U.S. clearance and settlement system.\196\
---------------------------------------------------------------------------

    \196\ See supra note 139 and accompanying text.
---------------------------------------------------------------------------

    The Commission also disagrees with the comment stating that the 
prospective misalignment in settlement cycles may increase certain 
risks, such as failed trades, accrual differences, net asset value 
miscalculations, and investment guideline breaches. Market participants 
will have many months to implement any operational requirements they 
identify associated with the move to a T+1 settlement cycle, including 
the operational requirements associated with the settlement of U.S.-
listed ETFs with baskets that include foreign securities and/or ADRs. 
The industry has already identified many such requirements,\197\ and 
the Commission believes that market participants will have sufficient 
time to complete the operational changes necessary to minimize these 
risks. Moreover, as explained above,\198\ the Commission believes that 
shortening the settlement cycle will reduce certain risks for market 
participants overall (e.g., credit, market and liquidity risk), 
including these risks faced by APs.
---------------------------------------------------------------------------

    \197\ See T+1 Playbook, supra note 134, at 33 (providing 
recommendations to improve timing in nightly batch cycles, make use 
of lines of credit to address the potential need for more 
collateral, and establishing connections for real-time messaging 
with NSCC).
    \198\ See supra note 139 and accompanying text.
---------------------------------------------------------------------------

    The Commission also does not believe that it is necessary at this 
time to amend the text of paragraph (b) of Rule 15c6-1 to codify the 
existing exemptive order for securities that do not have facilities for 
transfer or delivery in the U.S., or the existing exemptive order for 
certain insurance products. As noted above, one commenter recommended 
that the existing exemptions ``either be codified in Rule 15c6-1(b), or 
the Commission issue a new order to replace the orders issued in 1995 
to facilitate access to the terms of the exemptions and to facilitate 
compliance with their terms.'' \199\
---------------------------------------------------------------------------

    \199\ See supra note 128 and accompanying text.
---------------------------------------------------------------------------

    Since these orders were first issued in 1995, both orders have 
provided adequate regulatory relief to market participants who engage 
in transactions that the orders were intended to cover. Codifying the 
exemptions is not necessary to facilitate the transition to a T+1 
settlement cycle, and the Commission is aware of no evidence that 
market participants lack knowledge of the terms of the exemptive orders 
or have been unable to comply with the orders because they have not 
been codified in Rule 15c6-1.

III. Exchange Act Rule 15c6-2--Same-Day Affirmation

A. Proposed Rule 15c6-2

    The Commission proposed Rule 15c6-2 to require that, where parties 
have agreed to engage in an allocation, confirmation, or affirmation 
process, a broker or dealer would be prohibited from effecting or 
entering into a contract for the purchase or sale of a security (other 
than an exempted security, a government security, a municipal security, 
commercial paper, bankers' acceptances, or commercial bills) on behalf 
of a customer unless such broker or dealer has entered into a written 
agreement with the customer that requires the allocation, confirmation, 
affirmation, or any combination thereof, be completed as soon as 
technologically practicable and no later than the end of the day on 
trade date in such form as may be necessary to achieve settlement in 
compliance with Rule 15c6-1(a).\200\
---------------------------------------------------------------------------

    \200\ See T+1 Proposing Release, supra note 2, at 10453.
---------------------------------------------------------------------------

    In proposing Rule 15c6-2, the Commission did not define the terms 
``allocation,'' ``confirmation,'' or ``affirmation,'' but explained 
that trade allocation refers to the process by which an institutional 
investor (often an investment adviser) allocates a large trade among 
various client accounts or determines how to apportion securities 
trades ordered contemporaneously on behalf of multiple funds or non-
fund clients.\201\ The T+1 Proposing Release also explained that the 
terms ``confirmation'' and ``affirmation'' in proposed Rule 15c6-2 
refer to the transmission of messages among broker-dealers, 
institutional investors, and custodian banks to confirm the terms of a 
trade executed for an institutional investor, a process necessary to 
ensure the accuracy of the trade being settled. The Commission stated 
its belief that these terms are widely used and generally understood by 
market participants who engage in institutional trade processing.\202\
---------------------------------------------------------------------------

    \201\ Id.
    \202\ See id.
---------------------------------------------------------------------------

    In addition, in proposing Rule 15c6-2, the Commission used the term 
``confirmation'' to refer to the operational message that includes 
trade details provided by the broker-dealer to the customer to verify 
trade information so that a trade can be prepared for settlement on the 
timeline established in Rule 15c6-1(a), in contrast to the 
confirmations required under Rule 10b-10, which concern a series of 
disclosures that broker-dealers are required to provide in writing to 
customers at or before completion of a transaction.\203\ The Commission 
explained that the term ``confirmation,'' as used in proposed Rule 
15c6-2, should be understood to refer to the institutional trade 
processing message or verification and not the disclosure required 
under Rule 10b-10.\204\
---------------------------------------------------------------------------

    \203\ See id. 10453-54.
    \204\ See id. 10454.
---------------------------------------------------------------------------

    The Commission also explained that the term ``customer,'' as used 
in proposed Rule 15c6-2, includes any person or agent of such person 
who opens a brokerage account at a broker-

[[Page 13887]]

dealer to effect an institutional trade or purchases or sells a 
security for which the broker-dealer receives or will receive 
compensation.\205\ The Commission stated that the term is intended to 
cover both the institutional investor and any and all agents acting on 
its behalf.\206\
---------------------------------------------------------------------------

    \205\ See id.
    \206\ See id.
---------------------------------------------------------------------------

B. Comments

1. Existing Commercial Incentives for Timely Trade Allocations, 
Confirmations, and Affirmations
    Two commenters stated that the written agreements required under 
proposed Rule 15c6-2 are unnecessary to improve same-day affirmation 
rates because commercial incentives to achieve timely trade 
allocations, confirmations, and affirmations already exist.\207\ One 
commenter identified, for example, the following incentives for firms 
to achieve on-time settlement: increased cost of settling a trade 
without netting through the CCP; increased costs associated with the 
processing of trades that are not affirmed; costs associated with buy-
ins for trades that are not settled on a timely basis; and the 
potential for customer dissatisfaction related to the failure to timely 
settle or the increased costs associated with such failure.\208\ The 
second commenter stated that it is in an institutional customer's best 
interest to timely allocate, confirm, and affirm its trades, as doing 
so is the first step and a pre-condition to settling a trade.\209\ This 
commenter also stated more generally that financial disincentives for 
institutional customers that do not meet a same-day affirmation 
timeline already exist.\210\
---------------------------------------------------------------------------

    \207\ See Fidelity Letter, supra note 16, at 3-4 (stating that 
proposed Rule 15c6-2 is not necessary because ``market incentives 
already exist to timely allocate, confirm, and affirm trades''); 
letter from Tom Price, Managing Director, SIFMA (Aug. 26, 2022), at 
2 (``SIFMA August 26th Letter'') (stating that written agreements, 
as proposed by Rule 15c6-2, are unnecessary because ``there are many 
commercial incentives in place for industry participants to meet 
market standard settlement timelines'').
    \208\ See SIFMA August 26th Letter, supra note 207, at 2.
    \209\ See Fidelity Letter, supra note 16, at 3.
    \210\ See id.
---------------------------------------------------------------------------

2. Linking Settlement Instructions to Affirmation
    In the T+1 Proposing Release, the Commission stated that broker-
dealers are best positioned to ensure the timely settlement of 
institutional trades and, as such, should be able to ensure via their 
customer agreements that institutional customers or their agents also 
adjust their operations to facilitate same-day affirmation.\211\ In 
response to this statement, one commenter stated that settlement 
requires client instruction through a client's agents, who are 
typically custodians, against a broker-dealer's trades.\212\ The 
commenter also stated that, because custodians often act as an agent 
for institutional clients, custodians are highly dependent on the 
implementation of efficient and timely operating models and processes 
across market participants at the trading level, including 
institutional clients and broker-dealers, before they can effect 
settlement on their client's behalf.\213\ In this regard, the commenter 
requested that the Commission consider requiring through Rule 15c6-2 
the linking of settlement instructions to the affirmation.\214\
---------------------------------------------------------------------------

    \211\ See T+1 Proposing Release, supra note 2, at 10453.
    \212\ See AGC April Letter, supra note 16, at 3.
    \213\ See id.
    \214\ See id. at 2.
---------------------------------------------------------------------------

3. Definitions of Certain Terms
    In the T+1 Proposing Release, the Commission requested comment as 
to whether the terms ``allocation,'' ``confirmation,'' ``affirmation,'' 
``end of the day on trade date,'' and ``customer'' should be defined 
for purposes of Rule 15c6-2.\215\ In response, one commenter agreed 
with the Commission's view, as articulated in the T+1 Proposing 
Release, and expressed support for not defining these terms in the 
rule.\216\ This commenter stated that, because operational and 
technological processes and practices continually evolve across market 
participants who engage in institutional trade processing, the above 
terms are best grounded in the prevailing market practices and uses 
understood by these market participants.\217\ A second commenter, in 
contrast, stated that it would generally be helpful for the Commission 
to provide definitions of terms within the context of the proposed 
rule, even where such terms are commonly used in the industry.\218\ The 
commenter recommended that the Commission define each of the above 
terms for purposes of Rule 15c6-2 and suggested that the Commission 
also define the term ``trade'' because there are multiple uses of this 
term by the industry.\219\ The commenter further stated that the term 
``affirmation'' is open to some interpretation and suggested that the 
Commission define this term in particular.\220\
---------------------------------------------------------------------------

    \215\ See T+1 Proposing Release, supra note 2, at 10455.
    \216\ See letter from Matthew Stauffer, Managing Director and 
Head of DTCC Institutional Trade Processing, DTCC ITP LLC (Apr. 11, 
2022), at 3 (``DTCC ITP April Letter'').
    \217\ See id. (explaining that by not prescribing definitions 
for the key terms used in proposed Rule 15c6-2, the Commission would 
allow such terms to continue to evolve).
    \218\ See letter from Jim Kaye, Americas Regional Director, FIX 
Trading Community (Apr. 11, 2022), at 2-3 (``FIX Trading Letter'').
    \219\ See id. The commenter provided suggested definitions for 
the terms ``allocation,'' ``confirmation,'' and ``affirmation'' and 
recommended that the term ``end of the day on trade date'' be 
defined as a specific time of day together with its time zone. Id. 
at 2.
    \220\ See id. at 2.
---------------------------------------------------------------------------

4. Use of Third Parties To Achieve Same-Day Affirmation
    One commenter requested that the Commission clarify whether, under 
proposed Rule 15c6-2, an investment adviser that has entered into an 
agreement with a broker-dealer pursuant to the proposed rule may rely 
on a third party--such as a third party order management system, sub-
adviser, or custodian--to allocate or affirm trades.\221\ This 
commenter, in a later letter, stated that ``upon further analysis, we 
understand that requiring advisers to enter into specific contractual 
arrangements would create significant challenges for advisers,'' and 
recommended that the Commission replace the proposed requirement of a 
written agreement with a requirement that investment advisers adopt and 
implement policies and procedures reasonably designed to ensure that 
allocations, confirmations, and affirmations are completed on a 
timeline that allows settlement on T+1.\222\ As the commenter 
explained, this approach would ``relieve investment advisers, when they 
are parties to an allocation, confirmation, and affirmation process, 
from the burden of negotiating and having to regularly update written 
agreements,'' and ``create incentives for investment advisers to work 
with broker-dealers and other third parties to complete the process in 
a timely manner while allowing them greater flexibility to comply in a 
manner best suited to their existing infrastructure, clients, and 
resource levels.'' \223\
---------------------------------------------------------------------------

    \221\ See IAA April Letter, supra note 16, at 3-4.
    \222\ See letter from Gail C. Bernstein, General Counsel, and 
William A. Nelson, Associate General Counsel, Investment Adviser 
Association (Oct. 19, 2022), at 1-2 (``IAA October Letter'').
    \223\ Id.
---------------------------------------------------------------------------

5. Challenges Associated With Requiring Written Agreements in Support 
of Increasing Same-Day Affirmations
    Although commenters generally supported the Commission's overall 
goal of increasing same-day affirmations, several commenters expressed 
a number of concerns with

[[Page 13888]]

the written agreement requirement in proposed Rule 15c6-2.\224\ First, 
commenters stated that in many scenarios written agreements do not 
currently exist between the parties to an institutional transaction and 
would be highly burdensome to establish specifically for the purpose of 
facilitating same-day affirmation. For example, two commenters 
explained that agreements do not exist because the parties engage in 
their transactions on a receive-versus-payment/deliver-versus-payment 
(``RVP/DVP'') basis without an underlying agreement.\225\ In an RVP/DVP 
transaction, securities are only delivered by the seller when payment 
has been made by the buyer.
---------------------------------------------------------------------------

    \224\ See ASA Letter, supra note 16, at 2; Fidelity Letter, 
supra note 16, at 3-4; IAA October Letter, supra note 222, at 1-3; 
ICI Letter, supra note 16, at 5-7; ISITC Letter, supra note 29, at 
2; MarketAxess Letter, supra note 29, at 2-3; SIFMA April Letter, 
supra note 16, at 5-6; State Street Letter, supra note 16, at 4; 
Virtu Financial Letter, supra note 16, at 3.
    \225\ See Fidelity Letter, supra note 16, at 4; SIFMA April 
Letter, supra note 16, at 5.
---------------------------------------------------------------------------

    Some commenters explained that where written agreements do not 
already exist, the parties would need to draft new agreements solely 
for the purpose of compliance with the rule.\226\ In this regard, 
commenters stated that, as proposed, Rule 15c6-2 would result in 
burdensome, time consuming, and costly contract negotiations, as 
broker-dealers would have to enter into a new or amended written 
agreement with each of their institutional customers.\227\ Moreover, 
another commenter stated that certain clients may not authorize their 
investment advisers to enter into the type of written agreement 
required under proposed Rule 15c6-2, while other clients may insist on 
negotiating bespoke guideline requirements, such as arbitration or 
governing law, into their written agreements.\228\ Multiple commenters 
further expressed the view that the proposed written agreement 
requirement would create unnecessary practical burdens and costs.\229\ 
Several of these commenters stated that it would be impracticable for 
institutional customers to enter into such agreements because they 
often rely on other parties to complete certain elements of the 
allocation, confirmation, and affirmation process.\230\ One of these 
commenters stated more generally that a requirement for broker-dealers 
to enter into a written agreement with each of their institutional 
customers is not practically feasible.\231\ One commenter also observed 
that it is unclear under proposed Rule 15c6-2 whether broker-dealers 
should be entering into the written agreements with the investment 
advisers or with their customers.\232\
---------------------------------------------------------------------------

    \226\ See ISITC Letter, supra note 29, at 2; Fidelity Letter, 
supra note 16, at 4.
    \227\ See ICI Letter, supra note 16, at 5-6; MarketAxess Letter, 
supra note 29, at 2-3; SIFMA April Letter, supra note 16, at 5-6.
    \228\ See SIFMA April Letter, supra note 16, at 5.
    \229\ See ASA Letter, supra note 16, at 2; ICI Letter, supra 
note 16, at 5; SIFMA April Letter, supra note 16, at 5; Virtu 
Financial Letter, supra note 16, at 3.
    \230\ See ICI Letter, supra note 16, at 5; SIFMA April Letter, 
supra note 16, at 5; Virtu Financial Letter, supra note 16, at 3.
    \231\ See ASA Letter, supra note 16, at 2.
    \232\ See SIFMA April Letter, supra note 16, at 5.
---------------------------------------------------------------------------

    Multiple commenters expressed a separate concern that proposed Rule 
15c6-2 would expose a non-breaching broker-dealer to potential 
liability if its customer, or customer's agent, breaches the written 
agreement, even if through no fault of the broker-dealer.\233\ In 
raising this concern, some commenters stated that the proposed rule 
does not specify what should happen if the broker-dealer's customer or 
its agent breaches the written agreement, which may put broker-dealers 
in the difficult position of trying to regulate the conduct of their 
customers through commercial contracts.\234\ Another commenter also 
observed that the proposed rule would place the compliance burden on 
broker-dealers, even though the customer--and not the broker-dealer--
has the necessary information to complete the allocation, confirmation, 
and affirmation process.\235\ However, under proposed Rule 15c6-2, a 
broker-dealer is only responsible for its own actions and not for the 
actions of its customers or any other relevant parties to an 
institutional transaction, as discussed further in Part III.C.
---------------------------------------------------------------------------

    \233\ See Fidelity Letter, supra note 16, at 4; MarketAxess 
Letter, supra note 29, at 3; SIFMA April Letter, supra note 16, at 
6; Virtu Financial Letter, supra note 16, at 3.
    \234\ See Fidelity Letter, supra note 16, at 4 (questioning 
whether, under proposed Rule 15c6-2, a broker-dealer would be 
subject to SEC enforcement if it failed to enforce private 
contractual provisions with its customers regarding same-day 
affirmation); MarketAxess Letter, supra note 29, at 3 (stating that 
broker-dealers are not regulators and, as such, cannot force their 
customers to upgrade their technology or processes to achieve same-
day affirmations).
    \235\ See SIFMA April Letter, supra note 16, at 6.
---------------------------------------------------------------------------

    Further, several commenters expressed the view that a written 
agreement requirement, as proposed in Rule 15c6-2, would not be an 
effective approach for achieving the Commission's overall goal of 
increasing same-day affirmations.\236\ One commenter observed, for 
example, that a written agreement requirement is unnecessary because 
the industry recognizes the importance of same-day affirmations and is 
actively working toward achieving same-day allocations, confirmations, 
and affirmations.\237\ In this regard, some commenters recommended that 
the Commission revise proposed Rule 15c6-2 to replace the written 
agreement requirement with a requirement that broker-dealers establish 
written policies and procedures reasonably designed to achieve same-day 
affirmation.\238\ Some of these commenters further stated that such a 
principles-based approach would relieve the parties to an institutional 
transaction from the burden of negotiating a written agreement; 
incentivize broker-dealers to work with their customers to complete the 
allocation, confirmation, and affirmation process in a timely manner; 
and afford broker-dealers more flexibility to comply with the rule in a 
manner best suited to their specific business models, customer bases, 
and products.\239\
---------------------------------------------------------------------------

    \236\ See ASA Letter, supra note 16, at 2; ICI Letter, supra 
note 16, at 5; ISITC Letter, supra note 29, at 2; MarketAxess 
Letter, supra note 29, at 3; SIFMA April Letter, supra note 16, at 
5; State Street Letter, supra note 16, at 4.
    \237\ See ICI Letter, supra note 16, at 7.
    \238\ See ASA Letter, supra note 16, at 2; ICI Letter, supra 
note 16, at 7; MarketAxess Letter, supra note 29, at 3; SIFMA April 
Letter, supra note 16, at 6; State Street Letter, supra note 16, at 
4; Virtu Financial Letter, supra note 16, at 3; see also IAA October 
Letter, supra note 222, at 1-2; SIFMA August 26th Letter, supra note 
207, at 2.
    \239\ See ICI Letter, supra note 16, at 7; MarketAxess Letter, 
supra note 29, at 3; SIFMA April Letter, supra note 16, at 6; see 
also IAA October Letter, supra note 222, at 2-3; SIFMA August 26th 
Letter, supra note 207, at 2.
---------------------------------------------------------------------------

    Finally, two commenters indicated that the proposed requirement for 
written agreements in Rule 15c6-2 may encourage parties to cancel their 
transactions before the end of trade date when an allocation, 
confirmation, or affirmation cannot be completed to avoid violating the 
proposed rule.\240\
---------------------------------------------------------------------------

    \240\ See ICI Letter, supra note 16, at 7; Virtu Financial 
Letter, supra note 16, at 3.
---------------------------------------------------------------------------

6. End-of-Day Trading, Transactions Across Multiple Time Zones, and 
Variations in Local Holidays as Obstacles to Same-Day Affirmation
    Several commenters raised concerns about certain obstacles--such as 
end-of-day trading, transactions across multiple time zones, and 
variations in holiday schedules--that could interfere with achieving 
same-day affirmation under proposed Rule 15c6-2.\241\ One commenter 
stated that, given time zone

[[Page 13889]]

differences, a non-U.S. investment manager might not be able to fill 
and execute its U.S. securities transactions before its local close of 
business and, therefore, would not be able to achieve same-day 
affirmation.\242\ Another commenter indicated that same-day affirmation 
may be difficult to achieve for those in the same or similar time zones 
for trades occurring at or near the U.S. market close, and that same-
day affirmation may not be feasible for those located in time zones 
several hours ahead of the U.S., as new cut-off times would occur late 
into their overnight.\243\ Some commenters stated that investment 
advisers and their clients often rely on other parties to complete 
certain aspects of the allocation, confirmation, and affirmation 
process and, in doing so, are subject to the time zones and local 
holiday schedules in the countries where these other parties operate, 
which could prevent achieving same-day affirmation.\244\ The same 
commenters requested that the Commission modify proposed Rule 15c6-2 to 
offer broker-dealers some flexibility in situations where same-day 
affirmation cannot be achieved because of circumstances that are beyond 
their control.\245\ In this regard, some commenters recommended that 
the Commission replace the written agreement requirement in proposed 
Rule 15c6-2 with a requirement that broker-dealers adopt written 
policies and procedures to facilitate same-day affirmation.\246\
---------------------------------------------------------------------------

    \241\ See AIMA Letter, supra note 29, at 2, 6-7; ISITC Letter, 
supra note 29, at 6; SIFMA April Letter, supra note 16, at 5; Virtu 
Financial Letter, supra note 16, at 3.
    \242\ See ISITC Letter, supra note 29, at 6.
    \243\ See AIMA Letter, supra note 29, at 2, 6-7.
    \244\ See ICI Letter, supra note 16, at 5-6; SIFMA April Letter, 
supra note 16, at 5; Virtu Financial Letter, supra note 16, at 3.
    \245\ See ICI Letter, supra note 16, at 7; SIFMA April Letter, 
supra note 16, at 5; Virtu Financial Letter, supra note 16, at 3.
    \246\ See ICI Letter, supra note 16, at 7; SIFMA April Letter, 
supra note 16, at 5; Virtu Financial Letter, supra note 16, at 3.
---------------------------------------------------------------------------

7. Alternative Rule Recommended in SIFMA August Letter
    The Commission received an additional comment letter from SIFMA 
addressing alternatives to proposed Rule 15c6-2.\247\ SIFMA recommended 
that the Commission revise proposed Rule 15c6-2 to replace the written 
agreement requirement with a requirement for policies and procedures to 
support faster processing, as it would allow individual firms to design 
policies and procedures tailored to their business models, products, 
and unique customer bases while advancing the Commission's interest in 
same-day affirmation.\248\ The Commission generally agrees that 
requiring broker-dealers to establish, maintain, and enforce policies 
and procedures for achieving same-day affirmation is an effective way 
to improve affirmation rates because it promotes an orderly settlement 
process, thereby helping to ensure timely settlement in a shortened 
settlement cycle. The Commission also believes that establishing, 
maintaining, and enforcing policies and procedures as an alternative 
approach to compliance aside from entering into written agreements 
enables broker-dealers to avoid the substantial burdens and challenges 
that may be associated with negotiating written agreements in some 
cases. Nonetheless, as previously discussed in Part III.B.5 above, the 
Commission also believes that it is appropriate to retain the 
requirement for written agreements as one of two options for broker-
dealers to achieve compliance with Rule 15c6-2.
---------------------------------------------------------------------------

    \247\ See SIFMA August 26th Letter, supra note 207, at 2-3.
    \248\ See id. at 2. In Part III.B.5 above, the Commission has 
previously discussed why it believes it appropriate to retain the 
written agreement requirement in the rule, while also adding an 
option to establish, maintain, and enforce written policies and 
procedures.
---------------------------------------------------------------------------

    SIFMA's recommendation included a number of elements. First, SIFMA 
requested that Rule 15c6-2 be revised to require broker-dealers to 
establish, document, and uphold policies and procedures reasonably 
designed to maintain timely settlement rates.\249\ Second, SIFMA 
recommended that such policies and procedures: (i) address the timing 
of allocations, confirmations, and affirmations to ensure timely 
settlement; (ii) include a communication plan with market participants; 
(iii) provide a description of a broker-dealer's ability to monitor 
compliance; (iv) include the development of controls and supervisory 
procedures; and (v) include the development of metrics to measure 
compliance.\250\ The Commission generally agrees with SIFMA's approach 
and, as discussed in Part III.C below, is revising final Rule 15c6-2 to 
allow broker-dealers to achieve compliance with the rule either by (1) 
entering into written agreements or (2) establishing, maintaining, and 
enforcing reasonably designed policies and procedures. Below, the 
Commission discusses each of SIFMA's recommendations in turn.
---------------------------------------------------------------------------

    \249\ See id.
    \250\ See id. at 2-3.
---------------------------------------------------------------------------

    First, SIFMA requested that Rule 15c6-2 be revised to require 
broker-dealers to establish, document, and uphold policies and 
procedures reasonably designed to maintain timely settlement 
rates.\251\ While the Commission agrees that a policies and procedures 
approach can also advance the Commission's same-day affirmation 
objective, the Commission believes that timely settlement is a 
separate, if related, objective from same-day affirmation. Commission 
rules have long established the standard for timely settlement, as 
reflected by the requirements for the standard settlement cycle set 
forth in Rule 15c6-1. In contrast, Rule 15c6-2, as proposed, seeks to 
advance the objective of same-day affirmation. As discussed further in 
Part III.C, the Commission believes that improving affirmation rates on 
trade date is an objective separate and apart from, if nonetheless 
related to, shortening the settlement cycle because it promotes an 
orderly settlement process regardless of the length of the settlement 
cycle. In the T+1 Proposing Release, the Commission stated that, while 
proposed Rule 15c6-2 does not require settlement of the transaction on 
trade date, the requirement for same-day affirmation supports orderly 
settlement by reducing the likelihood of exceptions or other processing 
errors that can lead to settlement fails.\252\ The Commission 
recognizes that Rule 15c6-1 already addresses the concept of timely 
settlement by establishing a standard settlement cycle. As a result, 
the Commission believes that, while proposed Rule 15c6-2 should be 
revised to incorporate a policies and procedures approach, the specific 
objective of same-day affirmation, and not the more general objective 
of timely settlement, remains the objective that such policies and 
procedures should be reasonably designed to achieve.
---------------------------------------------------------------------------

    \251\ Id. at 2.
    \252\ See T+1 Proposing Release, supra note 2, at 10454-55.
---------------------------------------------------------------------------

    Second, SIFMA suggested that policies and procedures be designed to 
address the timing of allocations, confirmations, and affirmations to 
ensure timely settlement.\253\ The Commission agrees that addressing 
the timing of allocations, confirmation, and affirmations on trade date 
can help advance the objective of same-day affirmation, and, as 
discussed further in Part III.C below, the Commission is including in 
the final rule a requirement for policies and procedures to include 
target time frames on trade date for achieving allocations, 
confirmations, and affirmations.\254\
---------------------------------------------------------------------------

    \253\ See SIFMA August 26th Letter, supra note 207, at 2.
    \254\ See Rule 15c6-2(b)(2).
---------------------------------------------------------------------------

    Third, SIFMA suggested that policies and procedures be designed to 
include a communication plan with market

[[Page 13890]]

participants.\255\ The Commission agrees with this suggestion, and, as 
discussed further in Part III.C below, the Commission is including in 
the final rule a requirement for reasonably designed policies and 
procedures that include the procedures the broker-dealer will follow to 
ensure the prompt communication of trade information, investigate any 
discrepancies in trade information, and adjust trade information to 
help ensure that the allocation, confirmation, and affirmation process 
can be completed by the target time frames on trade date.\256\
---------------------------------------------------------------------------

    \255\ See SIFMA August 26th Letter, supra note 207, at 2.
    \256\ See Rule 15c6-2(b)(3).
---------------------------------------------------------------------------

    Finally, SIFMA suggested that the policies and procedures be 
designed to provide a description of a broker-dealer's ability to 
monitor compliance, include the development of controls and supervisory 
procedures, and include the development of metrics to measure 
compliance.\257\ The Commission also agrees that these elements can 
ensure that policies and procedures are effective at helping to ensure 
that allocations, confirmations, and affirmations can be completed on 
trade date. Accordingly, and as discussed further in Part III.C below, 
the Commission is including in the final rule similar requirements as 
those described by SIFMA for reasonably designed policies and 
procedures that identify and describe any technology systems, 
operations, and processes used to coordinate with relevant parties to 
ensure completion of the allocation, confirmation, or affirmation 
process; \258\ describe how the broker-dealer plans to identify and 
address delays; \259\ and measure, monitor, and document the rates of 
allocations, confirmations, and affirmations completed as soon as 
technologically practicable and no later than the end of trade 
date.\260\
---------------------------------------------------------------------------

    \257\ See id. at 2-3.
    \258\ See Rule 15c6-2(b)(1).
    \259\ See Rule 15c6-2(b)(4).
    \260\ See Rule 15c6-2(b)(5).
---------------------------------------------------------------------------

C. Final Rule and Discussion

    After considering the above comments, the Commission continues to 
believe that implementing a T+1 standard settlement cycle will require 
significant improvements in the current rates of same-day affirmations 
to help ensure timely settlement in a T+1 environment.\261\ Although 
the Commission agrees that the incentives identified by commenters in 
Part III.B.1 exist and help ensure timely settlement, the Commission 
believes that these incentives alone are insufficient to significantly 
improve same-day affirmation rates, as required to facilitate 
shortening the standard settlement cycle to T+1.\262\ While data cited 
in the T+1 Proposing Release indicates that affirmation rates have 
improved over time, the improvements have been only modest.\263\ 
Currently, despite existing commercial incentives and efforts to 
establish ``same-day affirmation'' as an industry best practice, only 
about 68% of trades achieve affirmation on trade date.\264\ Because the 
above incentives and efforts, on their own, have not sufficiently 
improved the current rate of same-day affirmations, the Commission 
believes that additional regulatory steps--including establishing a 
Commission requirement designed to advance the same-day affirmation 
objective--are needed. In this way, a Commission rule effectively 
targeted to the same-day affirmation objective can increase the rate of 
same-day affirmation for several reasons.\265\
---------------------------------------------------------------------------

    \261\ See T+1 Proposing Release, supra note 2, at 10453.
    \262\ See T+1 Report, supra note 61, at 13 (highlighting the 
need for achieving affirmation on trade date and encouraging that 
affirmations be completed by 9:00 p.m. ET on trade date to 
facilitate shortening the standard settlement cycle to T+1).
    \263\ T+1 Proposing Release, supra note 2, at 10453 n.156 
(citing DTCC, Proposal to Launch a New Cost-Benefit Analysis on 
Shortening the Settlement Cycle (Dec. 2011), available at https://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-costbenefit-analysis-on-shortening-the-settlementcycle.aspx).
    \264\ See Sean McEntee, Executive Director, ITP Product 
Management, DTCC, Remarks at the DTCC ITP Forum--Americas (June 17, 
2021) (``DTCC ITP Forum Remarks''), available at https://www.dtcc.com/events/archives.
    \265\ See infra notes 578-581 and accompanying text (discussing 
the anticipated economic benefits of Rule 15c6-2 for the rate of 
same-day affirmations).
---------------------------------------------------------------------------

    First, in the absence of such a rule, the existing incentives 
identified by commenters tend only to impose substantial costs on the 
parties if a transaction fails to settle on time (i.e., pursuant to the 
standard settlement cycle set forth in Rule 15c6-1(a)). However, 
failing to affirm by the end of trade date increases the likelihood 
that errors or exceptions will not be resolved in time for settlement. 
The sooner the parties have affirmed the trade information for their 
transaction, the lower the likelihood of a settlement fail because the 
parties will have more time to identify and resolve any potential 
errors. Second, many institutional transactions are not eligible for 
netting through the CCP because the relevant securities are held by a 
custodian bank that is not a CCP participant, and so market 
participants that use such a custodian do not have the option for--or 
the accompanying incentive to complete allocations, confirmations, and 
affirmations by the submission times that would facilitate--netting at 
the CCP.\266\ While industry planning for T+1 does contemplate creating 
new incentives to specifically induce same-day affirmations by certain 
cutoff times,\267\ even when the transaction will not be submitted to 
the CCP for netting, the associated costs for failing to meet such 
cutoff times are likely to be minor in comparison to the costs 
associated with a failure to settle the transaction.\268\ As a result, 
market participants may not take steps to realize the benefits that 
accrue from achieving allocations, confirmations, and affirmations on 
trade date, even when they are subjected to costs that arise from 
failing to achieve timely settlement. Third, the costs associated with 
failing to affirm a transaction, or with failing to achieve a buy-in, 
can be shifted among the parties settling the transaction, reducing the 
likelihood that these incentives will induce the parties to identify 
potential improvements to their processes over time because they do not 
internalize the full costs of failing to complete the allocation, 
confirmation, and affirmation process on trade date. In addition, 
because of the costs associated with improving processes and 
implementing new technologies, these incentives may only induce change 
when a broker-dealer is engaged in a high volume of

[[Page 13891]]

transactions for which errors are recurring and is also internalizing 
the costs associated with correcting those errors. Otherwise, a broker-
dealer and the relevant parties may deploy ``just in time'' solutions, 
where the allocation, confirmation, and affirmation process is 
completed on settlement date or never completed, while shifting any 
higher costs associated with ensuring the timely settlement of the 
transaction to others.\269\
---------------------------------------------------------------------------

    \266\ NSCC and DTCC ITP jointly offer an optional service called 
``ID Net'' for transactions affirmed by DTCC ITP. The service 
enables broker-dealers who are members of both NSCC and DTC to 
aggregate and net for delivery purposes their institutional 
transactions, affirmed via DTCC ITP, with their transactions pending 
for settlement in NSCC's Continuous Net Settlement (``CNS'') system. 
See DTCC, ID Net, https://www.dtcc.com/settlement-and-asset-services/settlement/id-net. Nevertheless, such affirmed transactions 
are not guaranteed by NSSC and NSCC does not provide any margin 
offset to the broker-dealers' clearing fund requirements. See 
Exchange Act Release No. 93070 (Sept. 20, 2021), 86 FR 53125 (Sept. 
24, 2021) (SR-NSCC-2021-011) (approving NSCC rule change to remove 
ID Net transactions from required fund deposit calculations).
    \267\ See T+1 Report, supra note 61, at 13-14 (for a T+1 
settlement cycle, encouraging allocations be complete by 7:00 p.m. 
ET on trade date and recommending a new affirmation cutoff time of 
9:00 p.m. ET on trade date).
    \268\ Specifically, failing to submit allocation, confirmation, 
and affirmation data by the cutoff time will likely require a 
participant to submit the transaction manually to DTC, raising the 
cost of the transaction. See infra note 269 and accompanying text 
(discussing the different fees that DTC applies depending on the 
timing or method of submission for settlement). If, a market 
participant fails to settle the transaction, however, it may be 
subject to buy-in obligations, whereby the market participant may 
need to internalize not just the cost of completing the transaction 
manually but also the cost of replacing the trade to the extent that 
the market price of the transaction has moved against the market 
participant since trade execution.
    \269\ See, e.g., DTCC, Guide to the 2023 DTC Fee Schedule, 
https://www.dtcc.com/-/media/Files/Downloads/legal/fee-guides/DTC-Fee-Schedule.pdf (setting different prices for night deliver orders, 
day deliver orders, matched institutional trades, and exceptions 
processing).
---------------------------------------------------------------------------

    In proposing a requirement for written agreements, the Commission 
intended for the relevant parties, through these agreements, to 
establish more thoughtful and orderly processes--established prior to 
trade execution--so that the parties to the transaction and their 
agents would have a shared understanding as to what steps were 
necessary to ensure that allocations, confirmations, and affirmations 
could be completed across the range of transactions into which they 
enter, and what consequences would result if a party (or its agent) 
failed to provide the necessary allocation, confirmation, or 
affirmation no later than the end of trade date.\270\
---------------------------------------------------------------------------

    \270\ To promote such preparation ex ante, the Commission has 
modified the final rule to enable broker-dealers to pursue a 
policies and procedures approach as an alternative to written 
agreements. See infra Part III.C.2 (discussing the policies and 
procedures alternative).
---------------------------------------------------------------------------

    In addition, the Commission believes that it is appropriate to 
impose obligations on a broker-dealer, even though the broker-dealer is 
only responsible for its own actions and not for the actions of others 
under Rule 15c6-2, because the broker-dealer has the ability, in some 
circumstances, to modify the conduct of the other relevant parties with 
which the broker-dealer may participate in the allocation, 
confirmation, and affirmation process to ensure its own compliance with 
the rule. As a result, the Commission believes that imposing such 
obligations on broker-dealers can increase the rate of same-day 
affirmation for institutional transactions,\271\ thereby promoting the 
timely and orderly settlement of securities transactions, because many 
broker-dealers will have relationships across multiple advisers, 
custodians, and other types of agents, and therefore can introduce 
better processes and procedures across a range of different 
relationships. Although the broker-dealer ultimately may not be in a 
position to bind the behavior of others,\272\ the Commission believes 
that market participants are generally aligned in support of 
facilitating same-day allocations, confirmations, and affirmations for 
their transactions to the greatest extent possible. The Commission 
believes that same-day affirmation is an important objective that can 
facilitate an orderly and efficient transition to a T+1 and shorter 
settlement cycles, and that Rule 15c6-2 will incentivize broker-dealers 
to identify and deploy effective practices for achieving allocations, 
confirmations, and affirmations ex ante, thereby improving the rate of 
allocations, confirmations, and affirmations over time.
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    \271\ To measure progress on the same-day affirmation objective, 
the Commission is also adopting a requirement for CMSPs to submit to 
the Commission an annual report on straight-through processing that 
is required to include data on the rate of allocations, 
confirmations, and affirmations, enabling the Commission to measure 
progress on these metrics over time. See infra Part V.C.2.(c) 
(discussing the data elements required in the annual report, which 
include data concerning allocations, confirmations, and 
affirmations).
    \272\ Nonetheless, brokers do design their fees, in part, to 
address the risks that they face, including settlement risk. See 
infra notes 567-568 and accompanying text (explaining that broker-
dealers set their fees, in part, to manage settlement risks). 
Broker-dealers may determine to raise the cost of trading for 
customers that do not facilitate same-day affirmation pursuant to a 
broker-dealer's written agreements or written policies and 
procedures, as applicable.
---------------------------------------------------------------------------

    As explained in the T+1 Proposing Release, the compliance burden 
imposed on broker-dealers by Rule 15c6-2 is to have a written agreement 
in place with its customers that requires that the allocation, 
confirmation, and affirmation process be completed as soon as 
technologically practicable and no later than the end of the day on 
trade date in such form as may be necessary to achieve settlement in 
compliance with Rule 15c6-1(a).\273\ In the Commission's view, even a 
simple requirement to have an agreement in place can effectively 
promote same-day affirmation because it helps ensure that the parties 
to a transaction where allocation, confirmation, or affirmation will 
occur have agreed in advance of entering the transaction as to the 
operational arrangements necessary to ensure the allocation, 
confirmation, or affirmation of the transaction. Rule 15c6-2 would not 
expose a non-breaching broker-dealer to liability for violating the 
rule based on the actions of its customer, or customer's agent, 
provided that the written agreement describes the obligations of the 
parties to ensure the allocation, confirmation, or affirmation of the 
transaction, and the broker-dealer itself has complied with its 
obligations under the written agreement. The Commission understands 
that commercial relationships between broker-dealers and other parties, 
such as investment advisers, often describe and, when possible, 
quantify expectations between the parties as to the timing of and other 
circumstances affecting the transfer of securities and funds, 
establishing costs and other terms that may apply if one of the parties 
to the agreement fails to meet its obligations for a certain threshold 
of transactions within a certain timeframe. Adding a contractual 
requirement for the same-day allocation, confirmation, and affirmation 
of institutional transactions that would be executed and settled as 
part of such commercial relationship, in the Commission's view, is 
likely to increase the percentage of transactions for which 
allocations, confirmations, and affirmations are completed on trade 
date.
---------------------------------------------------------------------------

    \273\ See T+1 Proposing Release, supra note 2, at 10453.
---------------------------------------------------------------------------

    As a general matter, the Commission acknowledges that some of the 
incentives identified by commenters may better align with the objective 
of same-day affirmation in a T+1 environment than in a T+2 environment 
because market participants are likely to endeavor to submit trades 
that are eligible for netting to the CCP for settlement during a new 
overnight process planned for the evening of trade date,\274\ a process 
that would be unavailable unless the parties complete trade 
allocations, confirmations, and affirmations on trade date. As stated 
by some commenters, the final design of deadlines and related 
operational requirements at the CCP, and at the industry level more 
generally, will encourage market participants to improve the rate of 
allocations, confirmations, and affirmations completed on trade date, 
as will the shortening of the settlement cycle more generally.\275\ 
Nonetheless, the Commission believes that final Rule 15c6-2, modified 
as discussed further below, can help ensure that incentives with 
respect to allocations, confirmations, and affirmations are aligned 
with timely and orderly settlement, critical to ensuring that the rate 
of settlement fails remains low as the settlement cycle continues to 
shorten.\276\
---------------------------------------------------------------------------

    \274\ See T+1 Report, supra note 61, at 13.
    \275\ See supra Part III.B.1 (discussing these comments).
    \276\ See infra note 272 (discussing the ability of broker-
dealers to use their schedule of fees to impose costs on customers 
or agents thereof that prevent completion of the allocation, 
confirmation, and affirmation process on trade date).

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[[Page 13892]]

    On balance, the Commission believes that final Rule 15c6-2, with 
the modifications discussed below to address specific concerns raised 
by commenters, will increase the incentive to submit allocations, 
confirmations, and affirmations on trade date, discouraging ``just in 
time'' solutions that may jeopardize timely settlement in a T+1 
environment. In particular, the Commission believes that ``just in 
time'' solutions may increase the rate of settlement fails in a T+1 
environment because the parties to a transaction will have 
significantly less time to resolve issues that can prevent settlement, 
raising the possibility that errors associated with the allocation, 
confirmation, and affirmation process may delay timely settlement. 
Improving the rate of same-day affirmations thereby promotes an orderly 
and efficient settlement process. More generally, as discussed in the 
T+1 Proposing Release, agreeing to trade information as close in time 
as is technologically practicable to trade execution helps ensure that 
any discrepancies in trade details are identified and resolved far 
enough in advance to ensure timely and orderly settlement.\277\ In this 
way, Rule 15c6-2 can promote an orderly and efficient process in a T+1 
environment because it substantially increases incentives for market 
participants to complete the key task of agreeing to trade information, 
including the price of the transaction and quantity of shares to be 
transferred, on trade date.
---------------------------------------------------------------------------

    \277\ See T+1 Proposing Release, supra note 2, at 10454-55.
---------------------------------------------------------------------------

1. Modifications to Requirement for Written Agreements
    The Commission is adopting Rule 15c6-2 with several modifications. 
First, with respect to the requirement to enter written agreements to 
ensure the completion of the allocation, confirmation, affirmation, or 
any combination thereof, for the transaction as soon as technologically 
practicable and no later than the end of the day on trade date in such 
form as necessary to achieve settlement of the transaction, the 
Commission is revising the rule to replace references in the text to 
``customer'' with ``relevant parties'' to better align the obligations 
under Rule 15c6-2 with the market dynamics that currently exist between 
broker-dealers, their customers, and their customers' use of advisers, 
custodians, and other third party agents as they participate in post-
trade processes, including the allocation, confirmation, and 
affirmation process.
    The Commission believes that this modification helps reduce the 
likelihood that broker-dealers would need to enter into new agreements 
with their customers specifically for the purpose of ensuring the same-
day affirmation of the transaction. It also removes the need for a 
broker-dealer to enter into an agreement with its customer specific to 
same-day affirmation if a third-party, such as an adviser, custodian or 
other agent of its customer, would be the party to engage with the 
broker-dealer to ensure the allocation, confirmation, or affirmation of 
the transaction. As discussed in the T+1 Proposing Release,\278\ the 
Commission intended for ``customer'' to include the relevant parties to 
a transaction that would participate in the allocation, confirmation, 
and affirmation process and would include the customer, the customer's 
investment adviser, the customer's custodian, or any other agent acting 
(directly or indirectly) on behalf of the customer. The modification 
helps ensure that, when a broker-dealer is considering whether and with 
which entities to enter into written agreements, the broker-dealer 
needs to identify only the relevant party or parties that will have a 
role or roles in completing the allocation, confirmation and 
affirmation process. The Commission also believes that this 
modification helps ensure that Rule 15c6-2 is appropriately designed to 
impose a written agreement requirement where a written agreement is 
practical and can help ensure the same-day affirmation of a 
transaction, even if many broker-dealers may ultimately choose to 
implement the rule through the policies and procedures alternative 
discussed in Part III.C.2.
---------------------------------------------------------------------------

    \278\ See T+1 Proposing Release, supra note 2, at 10454; see 
also Part III.A.
---------------------------------------------------------------------------

    The Commission's understanding is that, even if such party is not 
the broker-dealer's own customer, some broker-dealers may choose to 
enter into commercial agreements with such other relevant parties in 
order to support their customer relationships, collect fees, and 
otherwise facilitate the operational processes necessary to complete 
and settle the transaction. Rule 15c6-2 does not require, however, that 
a broker-dealer enter into written agreements with parties that do not 
have a role in the allocation, confirmation, and affirmation process. 
For example, if a broker-dealer is acting in the capacity of an 
executing broker on behalf of a customer and another broker-dealer will 
take responsibility for completing the allocation, confirmation, and 
affirmation process with the relevant parties to settle the transaction 
(a ``clearing broker'' in this context), then the executing broker need 
only comply with the rule to the extent that it participates in the 
allocation, confirmation, and affirmation process. An executing broker 
that does not participate in such processes would face no obligations 
under the rule. If an executing broker does undertake certain 
obligations with respect to its customer, such as may be delineated in 
its commercial arrangements with the relevant clearing broker, then 
under Rule 15c6-2 such a broker-dealer generally should ensure that its 
arrangements with the clearing broker identify that the clearing broker 
will be the broker-dealer ``engaging in the allocation, confirmation, 
and affirmation process'' for compliance with Rule 15c6-2. If the 
executing broker and the clearing broker do not have written agreements 
that establish the commercial relationship between them, then the 
executing broker generally should consider whether it needs to 
establish, implement, and maintain policies and procedures to identify 
and explain its role and its relationship with the clearing broker, 
consistent with Rule 15c6-2(a)(2), discussed in Part III.C.2. In 
contrast to an executing broker--which may not participate in the 
allocation, confirmation, and affirmation process--the clearing broker 
that facilitates the settlement of the transaction, and thereby 
participates in the allocation, confirmation, and affirmation process, 
would need to comply with Rule 15c6-2.
    Second, the Commission is making other technical changes to the 
written agreements requirement to simplify the rule text and to 
accommodate the new alternative for broker-dealers to establish, 
maintain, and enforce written policies and procedures to ensure 
completion of the allocation, confirmation and affirmation as soon as 
technologically practicable and no later than the end of the day on 
trade date.\279\ The Commission is removing the prohibition language in 
the rule (i.e., ``No broker or dealer . . . shall'') and replacing it 
with an affirmative obligation (i.e., ``A broker or dealer shall'').
---------------------------------------------------------------------------

    \279\ See infra Part III.C.2 (discussing the policies and 
procedures alternative in Rule 15c6-2(a)(2)).
---------------------------------------------------------------------------

    In addition, the Commission has removed language that paralleled 
the language in Rule 15c6-1 regarding the scope of affected securities 
under the rule (``a contract for the purchase or sale

[[Page 13893]]

of a security (other than an exempted security, a government security, 
a municipal security, commercial paper, bankers' acceptances, or 
commercial bills)''). The Commission has replaced the proposed language 
with a cross reference to the rule (e.g., ``a securities transaction 
that is subject to the requirements of Sec.  240.15c6-1(a)''). The 
purpose of this change is to simplify the rule text and ensure that the 
scope of transactions relevant to compliance with Rule 15c6-2 remains 
consistent with the scope of transactions under Rule 15c6-1(a). The 
scope of transactions remains unchanged from the proposed rule, as 
discussed in the T+1 Proposing Release, and is the same scope of 
transactions as those covered by Rule 15c6-1(a) for which the broker-
dealer will engage in the allocation, confirmation, or affirmation 
process with another party.\280\
---------------------------------------------------------------------------

    \280\ See T+1 Proposing Release, supra note 2, at 10453.
---------------------------------------------------------------------------

    Finally, as discussed further in Part III.C.2, the Commission is 
modifying proposed Rule 15c6-2 to provide two options by which broker-
dealers may comply with the rule, as adopted. The two options are set 
forth in new paragraphs (a)(1) and (2). The first option, reflected in 
paragraph (a)(1), is the proposed requirement for written agreements, 
modified in the ways discussed above. The second option, reflected in 
paragraph (a)(2), provides an alternative to the written agreements 
requirement, where, in lieu of a written agreement, a broker-dealer may 
choose to establish, maintain, and enforce written policies and 
procedures reasonably designed to ensure the completion of the 
allocation, confirmation, affirmation, or any combination thereof, for 
the transaction as soon as technologically practicable and no later 
than the end of the day on trade date in such form as necessary to 
achieve settlement of the transaction.
    While the Commission believes that a policies and procedures 
approach can relieve the parties to an institutional transaction from 
the burden of negotiating a written agreement where one does not exist, 
the Commission believes that the written agreement requirement may be 
useful to those broker-dealers that have already established written 
agreements that govern the operational arrangements for certain 
commercial relationships. Specifically, such broker-dealers that 
already have written agreements in place to manage their commercial 
relationships with their customers' advisers, custodians or other 
agents may find it efficient to revise these written agreements to 
comply with Rule 15c6-2. Even where written agreements do not currently 
exist, if the relevant parties are amenable to entering into a written 
agreement to manage their responsibilities under the allocation, 
confirmation, and affirmation process, a broker-dealer may find that 
such agreement is an effective tool for identifying the circumstances 
and operational arrangements that the relevant parties ought to 
negotiate and agree to ensure the same-day allocation, confirmation and 
affirmation of the transaction, in a similar way that developing 
policies and procedures would also identify and describe the 
circumstances and operational arrangements for each relevant 
relationship that would be necessary to ensure the completion of 
allocations, confirmations and affirmations.
    Ultimately, the written agreement requirement is designed to 
achieve the same goals as the alternative policies and procedures 
requirement, and broker-dealers may elect to comply with the 
alternative that they believe is better suited to their existing 
operations, specific business model, customer base, securities offered 
for settlement, and commercial relationships. In some cases, because 
written agreements would be individually tailored to a specific 
commercial relationship, they may help broker-dealers and the other 
relevant parties to an institutional transaction develop innovations 
that improve the allocation, confirmation, and affirmation process. 
Nonetheless, as previously discussed, the Commission acknowledges that 
the costs and challenges of negotiating a written agreement with the 
relevant parties may lead broker-dealers to choose to implement the 
rule via the policies and procedures requirement.
    In addition, the Commission believes that replacing the term 
``customer'' with ``other relevant parties'' and to add an option to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to ensure the completion of allocations, 
confirmations, and affirmations addresses the comments regarding use of 
third parties discussed in Part III.B.4.\281\ First, the modifications 
ensure that the requirements apply not to the broker-dealer and its 
customer but instead to the broker-dealer and the relevant parties that 
ensure the completion of the allocation, confirmation, and affirmation 
process. Such parties may be the customer, the customer's investment 
adviser, the customer's custodian, or another agent acting directly or 
indirectly on behalf of the customer.\282\ Second, where the adviser is 
the relevant party with whom the broker-dealer will engage to complete 
the allocation, confirmation, or affirmation process, then the broker-
dealer may seek either to establish a written agreement to ensure 
compliance with the rule, or the broker-dealer may instead choose to 
establish, maintain, and enforce policies and procedures under the 
rule. In the latter case, the broker-dealer may still seek to establish 
arrangements with the relevant parties to achieve compliance with the 
rule.\283\
---------------------------------------------------------------------------

    \281\ Such policies and procedures would be required to include 
the elements described in Part III.C.3 below.
    \282\ See supra notes 205-206 and accompanying text (describing 
the same).
    \283\ For example, consistent with the requirements of Rules 
15c6-2(b)(3) and (4), as discussed further in Part III.C.3, policies 
and procedures would be required to, under paragraph (b)(3) describe 
the procedures that the broker or dealer will follow to ensure the 
prompt communication of trade information, investigate any 
discrepancies in trade information, and adjust trade information to 
help ensure that the allocation, confirmation, and affirmation can 
be completed by the target time frames on trade date, and, under 
paragraph (b)(4), describe how the broker or dealer plans to 
identify and address delays if another party (such as an investment 
adviser or a custodian) is not promptly completing the allocation or 
affirmation for the transaction, or if the broker or dealer 
experiences delays in promptly completing the confirmation. It may 
be useful for broker-dealers to engage with the relevant parties to 
the allocation, confirmation, and affirmation process regarding the 
nature of these communications.
---------------------------------------------------------------------------

2. New Policies and Procedures Alternative to Written Agreements 
Requirement
    As previously discussed, the Commission is modifying proposed Rule 
15c6-2 to enable a broker-dealer either to (1) enter into written 
agreements or (2) establish, maintain, and enforce reasonably designed 
written policies and procedures to ensure completion of the allocation, 
confirmation, affirmation, or any combination thereof, for a 
transaction as soon as technologically practicable and no later than 
the end of the day on trade date, in such form as necessary to achieve 
settlement. The Commission is providing broker-dealers with this 
discretion under the rule to allow broker-dealers to select the 
approach that best aligns with their existing business practices and 
customer relationships, and to consider the approach that best enables 
the broker-dealer to ensure the completion of allocations, 
confirmations, and affirmations as soon as technologically practicable 
and no later than the end of the trade date.
    In response to the concerns raised by commenters in Part III.B.5, 
the

[[Page 13894]]

Commission generally agrees that requiring policies and procedures as 
an alternative approach to compliance, separate from entering into 
written agreements, provides broker-dealers with more flexibility to 
achieve same-day affirmation. As a general matter, the Commission 
believes that the policies and procedures alternative in Rule 15c6-2 
can help ensure that, when the parties to a transaction encounter 
obstacles that may prevent them from completing an allocation, 
confirmation, or affirmation on trade date, they have policies and 
procedures to navigate, address, and when possible mitigate or overcome 
such obstacles.\284\ The Commission also acknowledges that, in cases 
where written agreements do not already exist, a requirement to enter 
into such agreements specifically to achieve same-day affirmations may 
create substantial burdens and challenges. Such challenges may include, 
for example, a client who chooses not to authorize its investment 
adviser to enter into such agreement or circumstances where multiple 
third parties are relied upon to complete elements of the allocation, 
confirmation, and affirmation process. Similarly, in the context of 
RVP/DVP transactions discussed in Part III.B.5, while some broker-
dealers that regularly engage in RVP/DVP transactions may choose to 
enter into commercial agreements with their counterparties or agents of 
their counterparties to help facilitate this process, not all do and 
may instead rely on a combination of best practices, relationship 
management, and the obligations imposed by Commission or SRO rules as a 
substitute for a formal written agreement among the parties necessary 
to ensure the allocation, confirmation, and affirmation of the 
transaction. For those broker-dealers who do choose to enter into such 
agreements, the requirement for written agreements can be an effective 
and efficient mechanism for advancing the same-day affirmation 
requirement because it enables them to leverage their existing 
operational arrangements already established under the written 
agreements to codify the steps that the parties will take to ensure the 
same-day affirmation of transactions executed pursuant to the 
agreement. Nonetheless, the Commission also believes that an 
alternative policies and procedures requirement will help relieve 
broker-dealers of the burdens and challenges that, in some cases, may 
arise if broker-dealers are required to enter into new written 
agreements specifically for the purpose of facilitating same-day 
affirmation.\285\ The Commission recognizes that, in response to this 
modification, and due to the costs and challenges of entering into 
written agreements identified by commenters generally, nearly all 
broker-dealers that do not already have written agreements may choose 
to implement the rule through the policies and procedures requirement 
rather than the written agreement requirement.\286\
---------------------------------------------------------------------------

    \284\ For example, reasonably designed policies and procedures 
generally could include robust compliance and monitoring systems; 
processes to escalate identified instances of noncompliance for 
remediation; procedures that designate responsibility to business 
line personnel for supervision of functions and persons; processes 
for escalating issues; processes for periodic review and testing of 
the adequacy and effectiveness of policies and procedures; and 
training on policies and procedures. The Commission discusses the 
specific elements required of reasonably designed written policies 
and procedures under Rule 15c6-2(b) in Part III.C.3.
    \285\ See supra Part III.B.1 and infra Part III.B.7.
    \286\ For purposes of estimating the Paperwork Reduction Act 
(``PRA'') burdens under Rule 15c6-2, the Commission has assumed that 
all respondent broker-dealers will implement the rule through the 
policies and procedures requirement. See infra Part IX.C.
---------------------------------------------------------------------------

    Regardless of the alternative chosen, the Commission recognizes 
that same-day affirmation still may not be achievable in all 
circumstances due to particular obstacles associated with the 
transaction, including the time of the transaction, the time zone in 
which a party to the transaction resides, and/or variations in local 
holidays.\287\ The difficulty associated with achieving a same-day 
affirmation will necessarily vary depending on the types of 
transactions entered, the locations of the parties, and the 
sophistication of their operational arrangements. The Commission also 
generally agrees with commenters that requiring policies and procedures 
as an alternative approach to compliance, separate from entering into 
written agreements, provides broker-dealers with more flexibility to 
achieve same-day affirmation while also avoiding the substantial 
burdens and challenges that, in some cases, may result from having to 
enter into written agreements specifically to address the same-day 
affirmation objective.
---------------------------------------------------------------------------

    \287\ See supra Part III.B.6 (discussing comments expressing 
concerns about these obstacles).
---------------------------------------------------------------------------

    Whatever approach the broker-dealer determines is most appropriate 
for its circumstances and set of relationships, the Commission believes 
that either written agreements or policies and procedures can be 
structured to address challenges associated with the timing 
considerations raised by the commenters. Where commercial relationships 
exist, for example, the parties retain the ability to specify in their 
written agreements what steps are appropriate to ensure that 
allocations, confirmations, and affirmations can be completed on trade 
date. They can choose to specify how to accelerate the process to 
accommodate end of day trading, as well as how to staff their 
operations to ensure that the parties are available to complete 
allocations, confirmations, and affirmations across multiple time zones 
and, when needed, to plan for and accommodate local holidays. In some 
cases, depending on the business model and scope of relationships that 
a broker-dealer employs to complete allocations, confirmations, and 
affirmations, establishing, maintaining, and enforcing written policies 
and procedures may be a more effective tool for navigating the 
challenges that may occur for some end-of-day transactions and 
transactions across multiple jurisdictions. For example, to be 
reasonably designed, policies and procedures generally should address 
the steps that would be taken in response to known obstacles to same-
day affirmation, such as when transactions are entered at the end of 
the trading day, transactions where one or both parties operate in 
other jurisdictions, and circumstances where local holidays or 
different time zones may limit the ability of the parties to 
communicate. Where the parties cannot reach agreement on these matters 
in their written agreements, reasonably designed policies and 
procedures generally should establish the steps that a broker-dealer 
would take to accommodate multiple time zones and local holidays, and 
how the broker-dealer would plan to accelerate its processes to ensure 
the completion of allocations, confirmations, and affirmations for 
transactions entered near the end of day. Written agreements and 
reasonably designed policies and procedures could also clearly define, 
for example, circumstances to avoid, or acceleration procedures to 
follow, when a same-day affirmation may otherwise be difficult to 
achieve because of potential timing constraints.
    For broker-dealers that maintain written agreements, such written 
agreements often establish thresholds or expectations regarding the 
completion of certain operational processes, and such agreements could 
incorporate thresholds or expectations with respect to end-of-day 
trading, time zones, and local holidays. When time pressures are 
especially difficult, the parties could negotiate acceleration 
procedures to complete allocations, confirmations, and affirmations on 
trade date. When this is not possible, a broker-dealer's

[[Page 13895]]

policies and procedures generally should establish target time frames 
on trade date for completing allocations, confirmations, and 
affirmations and describe how the broker-dealer plans to identify and 
address delays. The Commission is also including in the final rule a 
requirement that policies and procedures specify the procedures the 
broker-dealer will follow to ensure the prompt communication of trade 
information, investigate any discrepancies in trade information, and 
adjust trade information to help ensure completion of the allocation, 
confirmation, and affirmation by the target time frames on trade date.
    In this regard, the Commission does not believe the rule, as 
modified, incentivizes the parties to cancel trades because a broker-
dealer would not be in violation of Rule 15c6-2 by failing to achieve 
the allocation, confirmation, or affirmation on trade date for a single 
trade unless it had failed to either enter into written agreements or 
establish, maintain, and enforce reasonably designed policies and 
procedures consistent with the rule. With respect to policies and 
procedures under Rule 15c6-2, the Commission believes that maintaining 
and enforcing such policies and procedures means that a broker-dealer 
generally should ensure that it has designed its own systems and 
operations, and deployed sufficient resources to address, any potential 
systemic failures within its own process.\288\
---------------------------------------------------------------------------

    \288\ See supra note 284 (also discussing several processes that 
policies and procedures generally could include to promote the 
objectives of the Rule 15c6-2).
---------------------------------------------------------------------------

    In addition, while the Commission specifies in Part III.C.3 several 
elements that such policies and procedures must include to be 
reasonably designed under Rule 15c6-2 (e.g., identification and 
description of technology systems, operations, and processes that the 
broker-dealer uses to coordinate with other relevant parties to ensure 
completion of the allocation, confirmation, or affirmation process for 
the transaction), the Commission has not included in the rule similar 
elements to be required of written agreements, allowing a broker-dealer 
flexibility to negotiate and draft written agreements with the other 
parties and, potentially, to explore innovative methods for ensuring 
the allocation, confirmation, and affirmation of the transaction where 
unique operational arrangements specific to a given commercial 
relationship may enable new or specific approaches. Because written 
agreements are subject to negotiation with the other relevant parties, 
they are likely to consider a range of commercial interests that derive 
from the relationship between the parties.
    The Commission is not requiring investment advisers to adopt 
similar policies and procedures because investment advisers will not 
always be among the relevant parties completing the allocation, 
confirmation, and affirmation. An adviser that enters into a Rule 15c6-
2 agreement with a broker-dealer, or transacts with a broker-dealer 
that has policies and procedures reasonably designed to ensure timely 
completion of the allocation, confirmation, affirmation processes 
pursuant to the requirements of Rule 15c6-2, may, as a best practice, 
wish to evaluate whether its policies and procedures are sufficient to 
ensure compliance with such agreement or other obligations requested by 
the broker-dealer.
3. Elements of Reasonably Designed Policies and Procedures
    The Commission believes that a policies and procedures approach can 
be an effective tool for ensuring the completion of allocations, 
confirmations, and affirmations so long as they consider holistically 
the broker-dealer's available set of tools, responsibilities to the 
relevant parties, ability to communicate and resolve issues among the 
parties for a given transaction, and provide a mechanism for tracking 
progress over time. With these objectives in mind, and to ensure 
policies and procedures are effective at achieving the stated 
objective, the Commission is adding new paragraph (b) to Rule 15c6-2 to 
specify the elements that such policies and procedures should include, 
as discussed further below.
    First, the Commission is requiring under paragraph (b)(1) that 
policies and procedures be reasonably designed to identify and describe 
any technology systems, operations, and processes that the broker-
dealer uses to coordinate with other relevant parties, including 
investment advisers and custodians, to ensure completion of the 
allocation, confirmation, or affirmation process for the transaction. 
The purpose of this provision is to ensure that the broker-dealer 
considers holistically the range of systems and tools it has available 
to facilitate the same-day affirmation objective, as well as the range 
of operations and processes that a broker-dealer uses to facilitate 
same-day affirmations across different customer and commercial 
relationships. In this way, such policies and procedures can establish 
whether and when different processes are necessary to facilitate same-
day affirmations because certain transactions or customer types require 
different arrangements. For example, a broker-dealer may have a 
specific policy or operational arrangement that addresses allocations, 
confirmations, and affirmations for a customer whose securities are 
held by a prime broker versus a customer whose securities are held by a 
bank custodian. A broker-dealer generally should also seek written 
assurances from advisers or custodians to help ensure that they 
understand and internalize their respective roles in facilitating 
completion of the allocation, confirmation, and affirmation 
process.\289\ Similarly, the broker-dealer may require different 
arrangements for a customer who engages directly with the broker-dealer 
versus a customer whose investment adviser or custodian engages with 
the broker-dealer on its behalf. The broker-dealer may also require 
different systems, operations, or processes to manage customer 
relationships where the other relevant parties to the transaction 
operate in other time zones or jurisdictions. Consistent with paragraph 
(b)(1), reasonably designed policies and procedures are required to 
identify and describe any technology systems, operations, and processes 
that the broker or dealer uses to coordinate with other relevant 
parties (such as investment advisers and custodians) to ensure 
completion of the allocation, confirmation, or affirmation process for 
the transaction. To be reasonably designed, such policies and 
procedures would need to categorize and assess the range of operational 
arrangements and processes that would be used to facilitate the 
allocation, confirmation, and affirmation process across the full range 
of different customer and

[[Page 13896]]

transaction types for which it offers services.
---------------------------------------------------------------------------

    \289\ As stated in Part III.C.2, the Commission is not requiring 
investment advisers to adopt policies and procedures similar to 
those in Rule 15c6-2(b) because investment advisers will not always 
be among the relevant parties completing the allocation, 
confirmation, and affirmation. However, an adviser that transacts 
with a broker-dealer that has policies and procedures pursuant to 
Rule 15c6-2 may wish to evaluate whether its own policies and 
procedures are sufficient to ensure compliance with obligations 
requested by the broker-dealer. Where an adviser transacts with such 
a broker-dealer, the broker-dealer's policies and procedures may 
provide that it generally should seek written assurances from the 
adviser that its policies and procedures are sufficient to ensure 
compliance with obligations requested by the broker-dealer. 
Similarly, where a custodian participates in the allocation, 
confirmation, or affirmation process with such a broker-dealer, the 
broker-dealer's policies and procedures may provide that it 
generally should seek written assurances that the custodian would 
comply with obligations requested by the broker-dealer.
---------------------------------------------------------------------------

    Second, the Commission is requiring under paragraph (b)(2) that 
policies and procedures be reasonably designed to set target time 
frames on trade date for completing the allocation, confirmation, and 
affirmation for the transaction. As discussed above, the Commission 
remains mindful that a broker-dealer may not be able to complete the 
allocation, confirmation, and affirmation process on the trade date 
with respect to every transaction it executes for every customer in 
every circumstance. Thus, Rule 15c6-2 requires policies and procedures 
that set target time frames on trade date for completing the 
allocation, confirmation, and affirmation for transactions. The broker-
dealer must also enforce its policies and procedures, including those 
related to target time frames, for the range of transaction and 
customer types it serves, as well as the range of systems and 
operational processes it might employ. For example, for highly 
automated transactions with high volume customers with direct control 
over their securities located in the same time zone, reasonably 
designed policies and procedures would set target time frames for 
completing the allocation, confirmation, and affirmation of the 
transaction very close in time to trade execution (i.e., as soon as 
technologically practicable). For transactions that are more complex, 
such as those where a customer or its agent operates in other time 
zones or jurisdictions, or a separate custodian maintains securities or 
cash accounts on the customer's behalf, a broker-dealer may consider 
how to structure the time frames to accommodate the level of effort 
that will be necessary to complete the allocation, confirmation, and 
affirmation. Pursuant to Rule 15c6-2(b)(1), reasonably designed 
policies and procedures would be able to categorize the range of 
transactions and customer relationships that it has established and 
estimate the length of time it takes to complete each of the 
allocation, confirmation, and affirmation to set its target time 
frames. As discussed in Part III.B.1, a broker-dealer is required to 
enforce its policies and procedures, meaning that it is obligated to 
design its systems and commit the necessary resources to ensure that it 
can comply with its own policies and procedures under the rule.
    Third, the Commission is requiring under paragraph (b)(3) of Rule 
15c6-2 that policies and procedures be reasonably designed to describe 
the procedures that the broker-dealer will follow to ensure the prompt 
communication of trade information, investigate any discrepancies in 
trade information, and adjust trade information to help ensure that the 
allocation, confirmation, and affirmation can be completed by the 
target time frames on trade date. Although target time frames will not 
always be met, and although affirmations will not always be complete on 
trade date, a broker-dealer is required to enforce its policies and 
procedures under Rule 15c6-2, and so reasonably designed policies and 
procedures would need to ensure that an action fully within the broker-
dealer's own control is not preventing the completion of the 
allocation, confirmation, or affirmation for the transaction. Thus, 
paragraph (b)(3) of the rule requires that policies and procedures lay 
out the ex ante steps that the broker-dealer will take to promptly 
communicate trade information, as well as to investigate discrepancies 
and adjust trade information in response to information the broker-
dealer receives.
    Fourth, the Commission is requiring under paragraph (b)(4) of Rule 
15c6-2 that policies and procedures be reasonably designed to describe 
how the broker-dealer plans to identify and address delays if another 
party, including an investment adviser or a custodian, is not promptly 
completing the allocation or affirmation for the transaction, or if the 
broker-dealer experiences delays in promptly completing the 
confirmation. As with paragraph (b)(3) of the rule, the purpose of 
paragraph (b)(4) is to ensure, to the greatest extent possible, that 
the broker-dealer is not the source of delay in completing the 
allocation, confirmation, and affirmation process. As such, pursuant to 
paragraph (b)(4), the broker-dealer should establish ex ante the steps 
that it would take in attempting to obtain an allocation or affirmation 
from its customer or the other relevant parties to the transaction 
(such as investment advisers or custodians). In the Commission's view, 
broker-dealers generally should take reasonable steps to escalate 
issues with their customers, or the other relevant parties acting on 
their customers' behalf, to resolve issues and meet the target time 
frames set forth in the broker-dealer's policies and procedures. In 
addition, the broker-dealer's policies and procedures generally should 
identify the circumstances under which a broker-dealer may experience 
delays in promptly completing the confirmation and what steps it would 
take to resolve the delay. In addition, because a broker-dealer is 
required to enforce its policies and procedures, the Commission 
believes that it should consider having policies and procedures that 
explain what efforts it would take to resolve recurring problems, 
particularly if they recur with respect to one particular counterparty, 
customer, or custodian that, for example, routinely fails to meet the 
broker-dealer's targets.
    Finally, the Commission is requiring under paragraph (b)(5) of Rule 
15c6-2 that policies and procedures be reasonably designed to measure, 
monitor, and document the rates of allocations, confirmations, and 
affirmations completed within the target time frames established under 
paragraph (b)(2) of the rule, as well as the rates of allocations, 
confirmations, and affirmations completed as soon as technologically 
practicable and no later than the end of trade date. The purpose of 
this requirement is to ensure that each broker-dealer is taking steps 
to identify when allocations, confirmations, and affirmations are 
completed, whether those completed actions occurred within the target 
time frames established pursuant to paragraph (b)(2), and if not, 
whether those allocations, confirmations, and affirmations were 
completed on trade date. In designing its policies and procedures, a 
broker-dealer generally should consider defining what operational 
processes and time frames would enable a transaction to be completed as 
soon as technologically practicable, so that a broker-dealer can assess 
the rate of transactions that are allocated, confirmed, and affirmed as 
soon as technologically practicable on trade date. While Rule 15c6-2 
does not require that same-day affirmation occur for every transaction 
that a broker-dealer executes and settles, for policies and procedures 
to be effective, the broker-dealer generally should have a sense for 
how well its policies and procedures ensure the completion of the 
allocation, confirmation, and affirmation process as soon as 
technologically practicable and no later than the end of trade date. 
Metrics developed in response to paragraph (b)(5) generally should be 
used by the broker-dealer to identify and assess the circumstances 
under which allocations, confirmations, and affirmations are less 
likely to be achieved as soon as technologically practicable and no 
later than the end of trade date so that policies and procedures are 
updated and revised over time with improvements. This would help ensure 
that the broker-dealer is effectively maintaining and enforcing its 
policies and procedures, as required by the rule.

[[Page 13897]]

4. Use of Defined Terms Other Than ``Customer''
    The Commission has previously discussed modifications to Rule 15c6-
1(a) to address concerns about use of the term ``customer'' in the 
rule. After considering the comments regarding definitions of other 
terms discussed in Part III.B.3, the Commission continues to believe 
that the terms ``allocation,'' ``confirmation,'' ``affirmation,'' and 
``end of the day on trade date,'' are widely used by the industry and 
are sufficiently understood to facilitate compliance with the 
rule.\290\ The T+1 Proposing Release explained the commonly understood 
meanings of these terms.\291\ Importantly, the specific application of 
these concepts may vary in different operational arrangements, and 
ultimately the parties to a transaction must all share a common 
understanding of their meaning to effectively complete the allocation, 
confirmation, or affirmation process and the settlement of the 
transaction. Therefore, the Commission is not revising Rule 15c6-2 to 
define the terms ``allocation,'' ``confirmation,'' ``affirmation,'' 
``end of the day on trade date,'' or ``trade'' for purposes of the 
rule.
---------------------------------------------------------------------------

    \290\ See T+1 Proposing Release, supra note 2, at 10453-54.
    \291\ See id.
---------------------------------------------------------------------------

    When a broker-dealer will use written agreements under Rule 15c6-
2(a)(1), the Commission believes that the parties generally should 
retain discretion to negotiate terms and expectations that are 
consistent with their specific operational arrangements and processes, 
and such negotiations will be most effective without defining terms 
that, when they do vary in their meaning, do so because they have been 
defined in the context of the operational arrangements established to 
facilitate the affirmation and settlement of the trade. When a broker-
dealer determines to establish, maintain, and enforce policies and 
procedures consistent with Rule 15c6-2(a)(2), the broker-dealer may 
choose to define these terms, and any other terms relevant to the same-
day affirmation objective, either in coordination with the relevant 
parties to the written agreement or in its policies and procedures, to 
help ensure that all the relevant parties have a shared understanding 
of these generally understood terms.
5. No Requirement To Link Settlement Instructions to Affirmations
    Regarding the comment discussed in Part III.B.2, the Commission is 
declining to modify Rule 15c6-2 to require that the sending of 
settlement instructions be linked to completion of the affirmation. As 
first discussed in the T+1 Proposing Release, the Commission believes 
that same-day affirmation reduces the likelihood of exceptions or other 
processing errors that can prevent a transaction from achieving timely 
settlement.\292\ While completing the affirmation on trade date is an 
indicator that a trade is ready for settlement, it does not necessarily 
mean that the trade can or will settle on a timely basis. For example, 
the relevant parties to the transaction may still need to take 
additional steps to facilitate settlement, such as ensuring that 
securities and funds are available in the relevant accounts, after the 
affirmation has been received. Accordingly, the Commission believes 
that it may not be appropriate in every circumstance to link the 
sending of settlement instructions with the receipt of an affirmation 
because this would not necessarily accommodate taking of these 
additional steps necessary to ensure timely settlement. Nonetheless, 
the Commission has a strong interest in advancing the objective of 
straight-through processing,\293\ and one effect of increasing the 
adoption of straight-through processing techniques over time may be 
that, for certain transactions, the parties may determine to link the 
sending of settlement instructions with the submission of a completed 
affirmation to facilitate the efficient and timely settlement of the 
transaction without unnecessary manual intervention.\294\
---------------------------------------------------------------------------

    \292\ See T+1 Proposing Release, supra note 2, at 10454.
    \293\ See infra Part V (discussing the importance of advancing 
the objective of straight-through processing and adopting new Rule 
17Ad-27).
    \294\ See infra Part V.C.1 (discussing the relationship between 
policies and procedures for straight-through processing at CMSPs and 
the use of manual processes to complete the settlement of securities 
transactions).
---------------------------------------------------------------------------

    In addition, the Commission understands that the customer or the 
customer's custodian generally retains discretion to determine under 
what circumstances it is appropriate to link the transmission of 
settlement instructions to the receipt of an affirmation. The 
Commission is mindful that Rule 15c6-2 only applies to broker-dealers, 
and, as such, the Commission believes that the linking of settlement 
instructions with the completion of the affirmation would likely 
require the cooperation of the custodian in many cases. For this 
reason, the Commission is not modifying the rule to include a 
requirement for linking the transmission of settlement instructions to 
the receipt of an affirmation. Nonetheless, a broker-dealer could, 
either in its written agreements or in its policies and procedures, set 
parameters for engaging with its customer or its customer's custodian 
for the linking of settlement instructions to the completion of the 
affirmation.

IV. Advisers Act Rule 204-2--Investment Adviser Recordkeeping

A. Proposed Amendments to Rule 204-2

    Under the Commission's proposed Rule 15c6-2, for contracts where 
parties agreed to engage in an allocation, confirmation, or affirmation 
process, a broker-dealer would have been prohibited from effecting or 
entering into a contract for the purchase or sale of certain securities 
on behalf of a customer unless it entered into a written agreement with 
the customer that required the allocation, confirmation, affirmation, 
or any combination thereof to be completed as soon as technologically 
practicable and no later than the end of the day on trade date in such 
form as may be necessary to achieve settlement in compliance with 
proposed Rule 15c6-1(a). To the extent that investment advisers were 
party to these agreements, the Commission would have required the 
adviser to retain related records.\295\ Specifically, the Commission 
proposed to amend Rule 204-2 under the Advisers Act by adding a 
requirement that if the adviser is a party to a contract under proposed 
Rule 15c6-2, it must make and keep records of each confirmation 
received, and any allocation and each affirmation sent, with a date and 
time stamp for each allocation (if applicable) and affirmation that 
indicates when the allocation or affirmation was sent to the broker or 
dealer.\296\
---------------------------------------------------------------------------

    \295\ See T+1 Proposing Release, supra note 2, at 10456 
(discussing proposed Rule 204-2(a)(7)(iii)).
    \296\ Id.
---------------------------------------------------------------------------

B. Comments

    While commenters generally did not oppose the recordkeeping 
requirement regarding confirmations, allocations, and affirmations, a 
number of commenters suggested certain modifications or clarifications. 
One commenter opposed proposed Rule 15c6-2's contract requirement but 
nonetheless supported the recordkeeping of allocations, confirmations, 
and affirmations, stating that ``such recordkeeping, coupled with the 
amendments to the settlement cycle rule, should suffice to achieve the 
Commission's policy objectives without imposing additional burdensome

[[Page 13898]]

documentation requirements.'' \297\ Another commenter sought 
clarification regarding an adviser's ability to rely on third parties 
to meet its recordkeeping obligations for allocations, confirmations, 
and affirmations.\298\ One commenter objected to the proposed 
amendments to Rule 204-2 on the grounds that neither they, nor proposed 
Rule 15c6-2, were necessary for the transition from to T+2 to T+1 and 
should not be adopted.\299\
---------------------------------------------------------------------------

    \297\ ICI Letter, supra note 16, at 5 n.15.
    \298\ See IAA April Letter, supra note 16, at 5-6.
    \299\ See Fidelity Letter, supra note 16, at 5.
---------------------------------------------------------------------------

C. Final Rule and Discussion

    The Commission is amending the investment adviser recordkeeping 
rule to require registered investment advisers to make and keep records 
of confirmations they receive and of allocations and affirmations they 
send or receive for any transaction that is subject to the requirements 
of Rule 15c6-2(a).\300\ Specifically, the Commission is amending Rule 
204-2(a)(7)(iii) under the Advisers Act to require investment advisers 
registered or required to be registered under section 203 of the 
Advisers Act to make and keep true, accurate and current certain 
records with respect to any transaction that is subject to the 
requirements of Rule 15c6-2(a), specifically those transactions where a 
broker-dealer engages in the allocation, confirmation, or affirmation 
process with another party or parties to achieve settlement of a 
securities transaction that is subject to the requirements of Sec.  
240.15c6-1(a). The required records include each confirmation received, 
and any allocation and each affirmation sent or received, with a date 
and time stamp for each allocation and affirmation that indicates when 
the allocation and affirmation was sent or received. As with other 
records required under Rule 204-2(a)(7), advisers will be required to 
keep originals of written confirmations received, and copies of all 
allocations and affirmations sent or received, but may maintain records 
electronically if they satisfy certain conditions.\301\ The final 
amendments to Rule 204-2 largely reflect, with certain modifications, 
the approach in the Proposal.
---------------------------------------------------------------------------

    \300\ See Rule 204-2(a)(7)(iii).
    \301\ See Rule 204-2(a)(7) (requiring making and keeping 
originals of all written communications received and copies of all 
written communications sent by an investment adviser relating to the 
records listed thereunder); but see Rule 204-2(g) (permitting 
advisers to maintain records electronically if they establish and 
maintain required procedures).
---------------------------------------------------------------------------

    Requiring the retention of these records is important for the 
Commission staff's use in its regulatory and examination program and 
will be helpful to monitor the transition from T+2 to T+1. The 
Commission disagrees with a commenter that argued the proposed 
amendments to Rule 204-2 and proposed Rule 15c6-2 are not necessary for 
the transition from to T+2 to T+1. The Commission believes that the 
timing of communicating allocations to the broker or dealer is a 
critical pre-requisite to help ensure that confirmations can be issued 
in a timely manner, and affirmation is the final step necessary for an 
adviser to acknowledge agreement on the terms of the trade or alert the 
broker or dealer of a discrepancy. The Commission believes the 
recordkeeping requirements for investment advisers should help 
establish that obligations of the various parties involved in the 
settlement process related to achieving a matched trade have been met. 
Moreover, the amendments to Rule 204-2 are intended to reduce risk 
following the transition to T+1 by improving affirmation rates.
    The final amendments to Rule 204-2 apply the new recordkeeping 
requirements to all registered advisers for any transaction that is 
subject to the requirements of Rule 15c6-2(a). Although the proposed 
recordkeeping requirements would have applied to any registered adviser 
that is a party to a contract under proposed Rule 15c6-2, final Rule 
15c6-2 includes a second ``policies and procedures'' option for a 
broker-dealer engaging in a transaction subject to Rule 15c6-1(a). 
Despite this change, paragraph (a) of the final Rule 15c6-2 applies to 
the same subset of transactions to which proposed Rule 15c6-2 would 
have applied, and, accordingly, the final amendments are designed to 
keep the scope of the final recordkeeping requirements the same as 
proposed.\302\ The Commission believes that requiring registered 
advisers to make and keep records of confirmations received, and 
allocations and affirmations sent or received with respect to these 
transactions supports the Commission's policy objectives to ensure that 
the transaction process is completed and trades timely settle on T+1. 
In addition, instead of requiring advisers to make and keep copies of 
allocations or affirmations sent and date and time stamps showing when 
they were sent to the broker or dealer, as proposed, the final rule 
will include allocations and affirmations that are sent or received and 
require date and time stamps showing when they were sent or received to 
clarify the rule text from the proposal. Finally, instead of requiring 
``a date and time stamp for each allocation (if applicable)'' (emphasis 
added), the Commission removed ``if applicable'' to clarify that a date 
and time stamp should be included for each allocation sent. These 
changes are designed to cover circumstances where an adviser receives a 
copy of allocations or affirmations from a third party, such as a 
custodian or sub-adviser or other party involved in the transaction, 
and require a date and time stamp in each case.
---------------------------------------------------------------------------

    \302\ Consistent with the T+1 Proposing Release, we estimate 
that certain investment advisers registered with the Commission will 
not be required to make and keep the required records because they 
do not have any institutional advisory clients and therefore will 
not facilitate transactions subject to Rule 15c6-2(a). See T+1 
Proposing Release, supra note 2, at nn.424-425 and related text 
(estimating that certain advisers registered with the Commission 
would not be required to make and keep the proposed required records 
because they do not have any institutional advisory clients and 
therefore would not enter into a contract under proposed Rule 15c6-
2).
---------------------------------------------------------------------------

    Based on staff experience as discussed in the T+1 Proposing 
Release, as well as the comments received, the Commission believes that 
majority of advisers that place the order for execution--or sub-
advisers or other third parties acting on an adviser's behalf--make and 
keep originals and/or electronic copies of allocations, confirmations, 
and affirmations sent or received.\303\ Advisers, which have varied 
trade allocation processes, often allocate trades through the use of 
internal systems, portfolio management systems and order management 
systems.\304\ Some advisers, however, may not make and keep these 
records or may only retain them on paper. In many cases, affirmation is 
performed by the asset owner's custodian (or its prime broker) on the 
asset owner's behalf.\305\ In response to a comment received, the 
Commission is confirming that an adviser may rely on a third party to 
make and keep the required records, although using a third party to 
make and keep records does not reduce an adviser's obligations under 
Rule 204-2. As discussed above, in recognition of the role of third 
parties, the Commission is requiring advisers to keep records of 
allocations or affirmations sent or received, in the event that the 
adviser

[[Page 13899]]

receives a copy of such records from a third party.
---------------------------------------------------------------------------

    \303\ See T+1 Proposing Release, supra note 2, at 10457; see 
also IAA April Letter, supra note 16, at 4-7; ICI Letter, supra note 
16, at 5; ISITC Letter, supra note 29, at 2.
    \304\ See IAA April Letter, supra note 16, at 4.
    \305\ See DTCC ITP Forum Remarks, supra note 264 (stating that 
up to 70% of institutional trades are affirmed by custodians); IAA 
April Letter, supra note 16, at 4 (agreeing that 70% of adviser 
trades are affirmed by the custodian, consistent with information 
received from its members); see also ICI Letter, supra note 16, at 
5; ISITC Letter, supra note 29, at 2.
---------------------------------------------------------------------------

    As stated in the T+1 Proposing Release, based on staff experience, 
the Commission believes many records are already consistently date and 
time stamped to the nearest minute using either a local time zone or a 
centralized time zone, such as coordinated universal time, or ``UTC.'' 
\306\ The final amendments to Rule 204-2 require advisers to time and 
date stamp each allocation and affirmation.
---------------------------------------------------------------------------

    \306\ T+1 Proposing Release, supra note 2, at 10456-57.
---------------------------------------------------------------------------

    The three commenters that discussed the proposed time and date 
stamping requirement for allocations and affirmations did not oppose 
the proposed time and date stamping requirements, although some sought 
clarification regarding how the requirement would be applied in 
practice.\307\ One commenter observed that storing timestamps of 
processing events such as the generation or receipt of messages is a 
good practice that provides opportunities to analyze specific points of 
latency and contributes to an accurate audit trail.\308\ This commenter 
also stated that electronic communication protocols inevitably include 
storage of complete event history with timestamps. Another commenter, 
while stating that time stamps are employed today, interpreted our 
proposal to require a single, industry-approved time stamp format based 
on a common clock, indicating such an approach would be 
challenging.\309\ This commenter raised other questions, such as what 
is end of trade date in regard to time stamping, and suggested that 
timestamps for processes that occur post-midnight ET may incorrectly 
identify properly affirmed trades as non-compliant.\310\ Another 
commenter suggested that the T+1 Proposing Release significantly 
underestimated the system and process changes that will be required and 
that the proposed requirement for advisers to timestamp certain trading 
records would add further complexity and costs to managers' 
efforts.\311\
---------------------------------------------------------------------------

    \307\ See ISITC Letter, supra note 29, at 4-5; FIX Trading 
Letter, supra note 218, at 4; AIMA Letter, supra note 29, at 2.
    \308\ FIX Trading Letter, supra note 218, at 4.
    \309\ ISITC Letter, supra note 29, at 4-5.
    \310\ Id. at 4-5 (noting that such considerations include the 
agreement on the time stamp format, evidence of time stamps (for 
compliance or audit purposes), time differences due to multiple 
systems and participants resulting in time stamps that may not 
perfectly match, and new processes needed to govern resolution of 
time stamps that could delay trade processing when all pertinent 
trade details are otherwise correct and agreed).
    \311\ See AIMA Letter, supra note 29, at 2.
---------------------------------------------------------------------------

    Although the Commission previously stated in the T+1 Proposing 
Release that the adviser generally should time and date stamp records 
of allocations and affirmations to the nearest minute,\312\ the 
Commission agrees with commenters that imposing more prescriptive 
requirements such as an agreed time stamp could result in additional 
challenges. The Commission is not adopting any such requirements for 
the time and date stamp format in Rule 204-2 or requiring that the 
format used be based on a common clock. This approach is designed to 
provide flexibility to date and time stamp allocations and affirmations 
in accordance with existing processes and industry practices, while 
still providing information about when allocations or affirmations were 
sent or received. This approach also avoids the need for prescriptive 
guidance about what end of trade date means, requiring everyone to 
handle different time zones in the same way, and any related costs 
incurred to follow such guidance.
---------------------------------------------------------------------------

    \312\ See T+1 Adopting Release, supra note 2, at 10456.
---------------------------------------------------------------------------

    Requiring these records, including a time and date stamp of all 
affirmations and allocations (but not confirmations), will aid the 
Commission staff in preparing for examinations of investment advisers 
and assessing adviser compliance with Rule 204-2 and ultimately help 
ensure that trades involving such advisers will timely settle on T+1. 
In addition, this requirement will help advisers research and remediate 
issues that may cause delays in the issuance of allocations and 
affirmations and improve their timeliness overall. Requiring these 
records also will help advisers establish that they have timely met 
contractual obligations, if applicable, or any requirements broker-
dealers impose in light of their compliance obligations under final 
Rule 15c6-2.

V. Exchange Act Rule 17Ad-27--Requirement for CMSPs To Facilitate 
Straight-Through Processing

A. Proposed Rule 17Ad-27

    In the T+1 Proposing Release, the Commission proposed new Rule 
17Ad-27 to establish new requirements for certain clearing agencies 
acting as CMSPs.\313\ The Commission proposed these requirements to 
improve the efficiency of institutional trade processing, and better 
position CMSPs to provide services that would not only reduce risk 
generally, but also help facilitate an orderly transition to a T+1 
standard settlement cycle, as well as potential further shortening of 
the settlement cycle in the future.\314\ CMSPs have become increasingly 
critical to the functioning of the securities market over the past 
twenty years, due in part to the rising volume of securities 
transactions for which CMSPs provide matching and other services.\315\ 
A shortened settlement cycle may lead to expanded use of CMSPs, as well 
as an increased focus on enhancing the services and operations of the 
CMSPs themselves.\316\ While the introduction of new technologies and 
streamlined operations such as those offered by CMSPs have improved the 
efficiency of post-trade processing over time, the Commission stated in 
the T+1 Proposing Release that more could be done to facilitate further 
improvements.\317\ Specifically, the Commission explained that 
eliminating the use of tools that encourage or require manual 
processing, alongside the continued development and implementation of 
more efficient automated systems in the institutional trade processing 
environment, is essential to reducing risk and costs to ensure the 
prompt and accurate clearance and settlement of securities 
transactions, particularly in a T+1 environment.\318\
---------------------------------------------------------------------------

    \313\ See id. at 10457. CMSPs are clearing agencies as defined 
in section 3(a)(23) of the Exchange Act, and as such, are required 
to register as a clearing agency or obtain an exemption from 
registration. The Commission has currently exempted three CMSPs from 
the registration requirement. The Commission also has adopted rules 
that apply to both registered and exempt clearing agencies, 
including CMSPs operating pursuant to an exemption from 
registration. See, e.g., Regulation Systems Compliance and 
Integrity, Exchange Act Release No. 73639 (Nov. 19, 2014), 79 FR 
72252 (Dec. 5, 2014) (``Regulation SCI Adopting Release'').
    \314\ See T+1 Proposing Release, supra note 2, at 10458.
    \315\ See id.; see also Press Release, DTCC, Over 1,800 Firms 
Agree to Leverage U.S. Institutional Trade Matching Capabilities in 
DTCC's CTM (Oct. 12, 2021), https://www.dtcc.com/news/2021/october/12/over-1800-firms-agree-to-leverage-dtccs-ctm; DTCC's Trade 
Processing Suite Traffics One Billion Trades, Traders Magazine (Feb. 
13, 2017), https://www.tradersmagazine.com/departments/clearing/dtccs-trade-processing-suite-traffics-one-billion-trades/.
    \316\ See T+1 Proposing Release, supra note 2, at 10458.
    \317\ See id. at 10457.
    \318\ See id. at 10458.
---------------------------------------------------------------------------

    As proposed, Rule 17Ad-27 was comprised of two requirements. First, 
the proposed rule would require a clearing agency that provides central 
matching services for transactions involving broker-dealers and their 
customers (i.e., CMSPs) to establish, implement, maintain and enforce 
policies and procedures to facilitate STP for transactions involving 
broker-dealers

[[Page 13900]]

and their customers.\319\ Second, the proposed rule would require a 
CMSP to submit to the Commission every twelve months a report that 
describes (i) the CMSP's current policies and procedures for 
facilitating straight-through processing; (ii) the CMSP's progress in 
facilitating straight-through processing during the twelve month period 
covered by the report; and (iii) the steps the CMSP intends to take to 
facilitate and promote STP during the twelve month period following the 
period covered by the report.\320\
---------------------------------------------------------------------------

    \319\ See id. at 10458-59.
    \320\ See id. at 10459-60.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-27 would require a CMSP to submit the annual 
report to the Commission using EDGAR, and to tag the information in the 
report using structured XBRL.\321\ The Commission stated in the 
proposal that this annual report would be made publicly available on 
the Commission's website to enable the public to review and analyze 
progress on achieving straight-through processing, identify potential 
improvements to further facilitate straight-through processing, and 
provide the Commission and the public with a centralized, publicly 
accessible electronic database for the reports, facilitating the use of 
the reported data on straight-through processing.\322\ The proposing 
release also discussed the Commission's preliminary view as to its 
intended understanding of various aspects of the two main requirements 
under proposed Rule 17Ad-27, including terms used in the rule 
text.\323\
---------------------------------------------------------------------------

    \321\ See id. at 10459. This requirement would be implemented by 
including a cross-reference to Regulation S-T in proposed Rule 17Ad-
27, and by amending Regulation S-T to include the proposed straight-
through processing reports. Pursuant to 17 CFR 232.301 (``Rule 301 
of Regulation S-T''), the EDGAR Filer Manual is incorporated by 
reference into the Commission's rules. In conjunction with the EDGAR 
Filer Manual, Regulation S-T governs the electronic submission of 
documents filed with the Commission.
    \322\ See id.
    \323\ For example, the commonly used term ``straight-through 
processing'' was explained in the T+1 Proposing Release as to 
generally refer to processes that allow for the automation of the 
entire trade process from trade execution through settlement without 
manual intervention. Id. at 10458 (citing to Securities Industry 
Association (SIA), T+1 Business Case Final Report (July 2000) (``SIA 
Business Case Report''), https://www.sifma.org/wp-content/uploads/2017/05/t1-business-case-final-report.pdf).
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B. Comment Letters From DTCC ITP

    The Depository Trust & Clearing Corporation (``DTCC''), in 
conjunction with DTCC ITP LLC and DTCC ITP Matching (US) LLC, 
(collectively ``DTCC ITP'') submitted two comment letters discussing 
proposed Rule 17Ad-27,\324\ and these were the only comments received 
by the Commission that extensively discussed proposed Rule 17Ad-
27.\325\ DTCC ITP Matching (US) LLC (``ITP Matching US'') operates one 
of three entities that to date have received from the Commission an 
exemption from registration as a clearing agency to operate as a 
CMSP.\326\ ITP Matching US currently offers two services to facilitate 
post-trade processing of institutional trades: (i) TradeSuite ID, an 
electronic trade confirmation (``ETC'') service; \327\ and (ii) a 
central trade matching service (``CTM'') for securities transactions 
(in its capacity as a CMSP).\328\
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    \324\ See DTCC ITP April Letter, supra note 216; letter from 
Matthew Stauffer, Managing Director and Head of DTCC Institutional 
Processing, DTCC (Sept. 30, 2022) (``DTCC ITP September Letter''). 
DTCC ITP Matching (US) LLC is a wholly-owned subsidiary of DTCC ITP 
LLC, a Delaware limited liability company controlled by its sole 
member, DTCC. DTCC is the parent company of The Depository Trust 
Company, the National Securities Clearing Corporation, and the Fixed 
Income Clearing Corporation, all registered with the Commission as 
clearing agencies under section 17A of the Exchange Act.
    \325\ In addition, the Commission received three comment letters 
from The Options Clearing Corporation (``OCC''), State Street, and 
the FIX Trading Community that referenced proposed Rule 17Ad-27. 
Like DTCC ITP, OCC recommended including ``reasonably designed'' in 
the text of any rule requiring a ``registrant'' to maintain policies 
and procedures. See OCC Letter, supra note 15, at 3. State Street 
supported measures intended to enhance STP at CMSPs, including the 
annual publication of data on matching rates and other similar 
efficiency metrics. See State Street Letter, supra note 15, at 4. 
FIX supported efforts to retire manual mechanisms while ensuring 
that electronic bilateral and central matching mechanisms that 
support STP are permitted. See FIX Trading Letter, supra note 227, 
at 4. Given the brief and general nature of these comments, and the 
fact that they are aligned with comments also made by DTCC ITP, the 
Commission has focused its discussion for the remainder of Part V on 
the substantive points raised by DTCC ITP.
    \326\ See Order Granting Exemption from Registration as a 
Clearing Agency for Global Joint Venture Matching Services--U.S., 
LLC, Exchange Act Release No. 33188 (Apr. 17, 2001), 66 FR 20494, 
(Apr. 23, 2001) (``GJVMS Exemption Order''); Order Approving 
Application 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) 
(``Bloomberg STP and SS&C Techs Exemption Order''). DTCC ITP 
Matching US is formerly known as GJV Matching Service--US, LLC.
    \327\ An ETC allows market participants, such as broker-dealers, 
investment managers, hedge funds, banks, custodians, and agents, to 
coordinate domestic post-trade activities, generally by providing 
trade counterparties with the ability to electronically confirm and 
affirm certain details of their trades. This automated process 
eliminates manual and verbal communications in the confirmation and 
affirmation process, thereby reducing risks and facilitating shorter 
settlement timeframes. For a description of ETCs generally, see 
GJVMS Exemption Order, supra note 326, at 20496.
    \328\ See DTCC ITP April Letter, supra note 216, at 2. 
Generally, TradeSuite ID allows broker-dealers, buy-side firms, 
custodians, and agents to confirm and affirm elements of their 
trades in equity and fixed income securities through an automated 
post-trade process. CTM allows broker-dealers and buy-side firms to 
electronically match block trades, allocations, and confirmations in 
trades involving a wide variety of asset classes and provides a 
trade allocation and acceptance service that communicates trade and 
allocation details between parties. See id. at 2-3.
---------------------------------------------------------------------------

    While DTCC ITP generally supported ``the Commission's approach to 
facilitating T+1 through the promotion of same-day affirmation, STP and 
other enhancements in the processing of institutional trades at CMSPs 
as core building blocks to a successful transition to T+1,'' DTCC ITP 
raised several concerns about specific aspects of the proposed rule and 
requested specific modifications to the proposed rule text. DTCC ITP 
stated that these changes would provide additional flexibility and 
clarity, and better position CMSPs to achieve the stated goals of the 
proposed rule.\329\ Specifically, and as detailed below, DTCC ITP 
expressed in its comment letters the following concerns.
---------------------------------------------------------------------------

    \329\ For example, DTCC ITP supported the concept of requiring 
policies and procedures and submission of an annual report but 
suggested specific recommendations regarding what should be included 
in the annual report. Further, it supported not ``prescribing'' the 
meaning of key terms and concepts used in the rule text, such as 
``allocation,'' ``confirmation,'' ``affirmation,'' and ``customer,'' 
or stipulating separate requirements and deadlines for each of these 
processing functions or specifying separate requirements and 
deadlines for each processing step. See id. at 3-4.
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1. Amend Policies and Procedures Requirement To Add ``Reasonably 
Designed'' to the Current Text
    In its initial comment letter, DTCC ITP suggested that the 
requirement in proposed Rule 17Ad-27 for a CMSP to establish, 
implement, maintain, and enforce policies and procedures should be 
amended so that a CMSP's policies and procedures are ``reasonably 
designed'' to facilitate STP.\330\ The commenter provided a number of 
reasons to support the amendment.\331\ First, in the commenter's view, 
the

[[Page 13901]]

proposed rule is an inflexible standard that places ``all 
responsibility'' for facilitating STP on the CMSPs, and as such, is 
inconsistent with the Commission's view of STP generally, and with 
regard to CMSPs specifically, will undermine the stated goal of 
facilitating STP.\332\ Further, DTCC ITP expects that the proposed text 
would result in CMSPs avoiding innovation of new technologies that 
promote STP because of liability concerns.\333\ In contrast, DTCC ITP 
stated, amending the rule text to reflect a ``reasonably designed 
standard'' would make the rule consistent with the Commission's stated 
policy goals.
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    \330\ See id. at 4. The Commission described STP in the T+1 
Proposing Release as generally referring to the processes that 
allows for automation of the entire trade process from trade 
execution through settlement without manual intervention. See T+1 
Proposing Release, supra note 2, at 10458. In the context of 
institutional trade processing, STP occurs when a market participant 
or its agent uses the facilities of a CMSP to enter trade details 
and completes the trade allocation, confirmation, affirmation, and/
or matching processes without manual intervention. See DTCC ITP 
April Letter, supra note 216, at 5.
    \331\ As discussed further in Part V.C.1 below, the Commission 
concurs with DTCC ITP's general suggestion that amending the 
policies and procedures requirement to add ``reasonably designed'' 
is appropriate, but for reasons other than those cited by DTCC ITP 
in its comment letter. See DTCC ITP April Letter, supra note 216, at 
4.
    \332\ See id. at 5. Because the obligation to develop policies 
and procedures to facilitate STP, as described in proposed Rule 
17Ad-27 applies to CMSPs only, the scope of the policies and 
procedures would only include those activities that are within the 
control of the CMSP, which in turn would bind only those entities 
that are in contractual privity with the CMSP. Moreover, the 
Commission proposed a number of other rules that required other 
market participants, namely broker-dealers and investment advisers, 
to comply with specified rules addressing same-day affirmation that 
the Commission anticipates will not only facilitate T+1 but 
encourage the development of more efficient and automated 
operations, which will in turn further STP. See supra Parts III.A 
and IV.A concerning proposed Rule 15c6-2 and amended Rule 204-2, 
respectively. Accordingly, the Commission does not believe that the 
policies and procedures requirement under the proposed rule imposes 
an inflexible standard that places ``all responsibility'' for 
facilitating STP on the CMSPs or is inconsistent with the 
Commission's view of STP generally or its stated policy goals.
    \333\ See DTCC ITP April Letter, supra note 216, at 6.
---------------------------------------------------------------------------

    Second, DTCC ITP stated that the ``standard'' in proposed Rule 
17Ad-27 is inconsistent with the approach the Commission has applied to 
CMSPs in the orders exempting matching services from registration as a 
clearing agency because the approach in the exemptive orders is more 
flexible than that of the proposed rule.\334\ For example, the 
commenter stated that the exemptive orders applicable to CMSPs clarify 
that, in reports required of CMSPs and their service providers 
indicating trade processing timeframes, the CMSP is not responsible for 
identifying the specific cause of any delay in performing its matching 
service where the fault for such delay is not attributable to the 
CMSP.\335\ DTCC ITP stated that the approach laid out in the exemptive 
order is the appropriate one because it explicitly acknowledges the 
fact that the CMSP does not have ``perfect'' control over all aspects 
of trade processing, even in instances where its systems otherwise have 
been reasonably designed to facilitate STP. Accordingly, DTCC ITP 
maintains that introducing the reasonably designed policies and 
procedures standard would eliminate inconsistencies between the 
proposed rule and the exemptive orders.
---------------------------------------------------------------------------

    \334\ See id. The Commission does not agree with DTCC that the 
``standard'' in proposed Rule 17Ad-27 applicable to the policies and 
procedures requirement is inconsistent with the approach taken in 
the exemptive orders applicable to CMSPs, but the obligations of the 
proposed rule and the exemptive order are separate and distinct from 
each other. The terms of the exemptive order include certain 
obligations relating to (i) operational conditions (e.g., providing 
the Commission with certain audit reports, annual report, annual 
risk assessments, notice of significant system outages, advance 
notice of material changes, affirmation rate data, record retention, 
copies of service agreements, obligation to not perform any clearing 
agency function other than those permitted by the exemptive order); 
(ii) interoperability conditions relating to linkages and interfaces 
with other CMSPs; (iii) requirement to negotiate fair and reasonable 
prices relating to such interfaces; and (iv) obligations relating to 
customer charges for certain activities and information. See GJVMS 
Exemption Order, supra note 326, at 20498-501. These conditions were 
established to ensure that ITP Matching US will have sufficient 
operational and processing capacity to facilitate prompt and 
accurate matching services and are designed to enable the Commission 
to monitor its risk management procedures, operational capacity and 
safeguards, corporate structure and ability to operate in a manner 
to further the fundamental goals of section 17A of the Exchange Act. 
Proposed Rule 17Ad-27 would impose an additional and separate 
obligation to develop policies and procedures that facilitate STP. 
In the exemptive order, the Commission has reserved the right to 
modify by order the terms, scope, or conditions of the exemption if 
it determines that such modification is necessary or appropriate in 
the public interest for the protection of investors, or otherwise in 
furtherance of the Exchange Act. GJVMS Exemption Order, supra note 
326, at 20501. The Commission believes no such modification is 
necessary because proposed Rule 17Ad-27 is consistent with the 
conditions set forth within the exemptive order.
    \335\ See GJVMS Exemption Order, supra note 326, at 20500.
---------------------------------------------------------------------------

    Third, DTCC ITP asserts that the proposed standard is inconsistent 
with the Commission's economic analysis of proposed Rule 17Ad-27.\336\ 
Referring to the Commission's statement in the T+1 Proposing Release 
that the policies and procedures requirement should result in the same 
estimated costs as similar policies and procedures requirements and 
burden estimates under other rules for registered clearing agencies, 
DTCC ITP noted that those requirements and the attendant compliance 
burdens and costs are based on a ``reasonably designed'' standard.\337\ 
Therefore, DTCC ITP stated that it does not believe that the proposed 
economic analysis relating to burdens and costs of proposed Rule 17Ad-
27 is consistent with the underlying legal standard reflected in the 
proposed rule.\338\
---------------------------------------------------------------------------

    \336\ See DTCC ITP April Letter, supra note 216, at 7.
    \337\ See id.
    \338\ See id.; see also infra Part VIII.C for further 
information on DTCC ITP's comment regarding the Commission's 
economic analysis.
---------------------------------------------------------------------------

    Fourth, DTCC ITP stated that ``precedent shows'' that the 
Commission's stated STP goals can be achieved by using a standard that 
includes ``reasonably designed.'' As examples, DTCC ITP cited to the 
requirements for registered clearing agencies, which it noted are 
``replete with obligations for such entities to have policies and 
procedures `reasonably designed' to achieve a particular result.'' 
\339\ Such an approach, DTCC ITP stated, allows the clearing agencies 
to use their experience and understanding of the markets they serve to 
shape the rules, policies, and procedures implementing such rules and 
such an approach with other clearing agencies' rules has resulted in 
outcomes that benefit the resilience and ongoing evolution of the 
national clearance and settlement system.\340\ DTCC ITP also stated 
that CMSPs are already subject to a reasonably designed policies and 
procedures standard pursuant to their requirements under 17 CFR 
242.1000 through 242.1007 (``Regulation SCI'').\341\
---------------------------------------------------------------------------

    \339\ DTCC ITP April Letter, supra note 216, at 7. DTCC ITP 
specifically cites to Rule 17Ad-22(e), the set of Commission rule 
provisions applicable to covered clearing agencies. See 17 CFR 
240.17Ad-22(e).
    \340\ See DTCC ITP April Letter, supra note 216, at 7.
    \341\ See id.; see also 17 CFR 242.1001 through 242.1007.
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2. Use of ETCs and Manual Processes
    DTCC ITP stated that the proposed rule should not ``abruptly 
force'' or require an immediate ``disorderly elimination'' of ETC 
services and related manual processes used by market participants 
today.\342\ Instead, DTCC ITP recommended ensuring that the proposed 
rule does not force market participants to move away from ETC services 
in a sudden and disruptive manner and clarify the degree to which CMSPs 
are responsible for realizing the Commission's goal of moving away from 
manual processes as soon as technologically practicable.\343\
---------------------------------------------------------------------------

    \342\ DTCC ITP April Letter, supra note 216, at 7. See infra 
Part V.C.1 (discussing the Commission's approach to the use of 
manual operations, including those related to ETC services, under 
adopted Rule 17Ad-27).
    \343\ See id. at 8-9. The T+1 Proposing Release stated that with 
respect to the use of ETCs that impede the development of STP and 
which often rely on legacy technologies, a CMSP's policies and 
procedures generally should establish a timeline for transitioning 
users away from such manual processes to service offerings that can 
reduce a party's reliance on the manual, often sequential, entry and 
reconciliation of trade information. T+1 Proposing Release, supra 
note 2, at 10458. However, as stated in that release, proposed Rule 
17Ad-27 did not require CMSPs to remove manual processes if doing so 
would clearly undermine the prompt and accurate clearance and 
settlement of securities transactions. See id. at 10458-59. As 
discussed in Part V.C below, Rule 17Ad-27 will allow CMSPs some 
flexibility in designing policies and procedures that reduce or 
eliminate manual operations in a manner that does not undermine the 
CMSP's obligations under section 17A of the Exchange Act and are 
appropriate for the CMSP's particular operations, services, and 
business models. See infra Part V.C.1. This flexibility applies to 
CMSPs general operations as well as any associated with ETC 
services. Moreover, if the ETC is not impeding the development of 
STP, the CMSP may determine the use and operations of the ETC is 
consistent with both the obligations required of CMSPs pursuant to 
adopted Rule 17Ad-27 as well as those under section 17A of the 
Exchange Act.

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[[Page 13902]]

    DTCC ITP requested additional clarity around the practical 
applications of manual processing when its use is necessary for, or its 
elimination may undermine, prompt and accurate settlement of 
transactions.\344\ Further, DTCC ITP noted that in certain 
circumstances the parties to a trade may need to engage in manual 
interventions to ensure the accuracy of trade and settlement 
information and minimize operational or other risks that may prevent 
settlement.\345\ Therefore, according to DTCC ITP, the rule should not 
require without further study the removal of manual processes if doing 
so would undermine the prompt and accurate settlement of securities 
transactions. Similarly, DTCC ITP stated that it seeks more clarity 
around the Commission's description of the CMSP's role in facilitating 
a transition away from manual processes, particularly as it relates to 
ETC services and timelines for transitioning away from manual 
processes, some of which may not be under the CMSP's control.\346\
---------------------------------------------------------------------------

    \344\ See DTCC ITP April Letter, supra note 216, at 9. DTCC ITP 
stated that more clarity is needed to better understand what 
constitutes a manual process and if, when, and how the use of manual 
processes may be acceptable under proposed Rule 17Ad-27. For 
example, DTCC ITP cited the need for additional clarity as to how 
removing a manual process could ``clearly undermine'' settlement, 
what factors would be taken into account in applying this standard, 
and whether unmatched trades and fails or exceptions. See id.
    \345\ See id.
    \346\ See id. at 9-10.
---------------------------------------------------------------------------

    DTCC ITP also raised concerns about the requirement that the CMSP 
explain in its policies and procedures why manual processes remain 
necessary as part of its systems and processes and consider developing 
processes that would eliminate the underlying issues that drive the use 
of manual process.\347\ It is unclear, according to DTCC ITP, how this 
requirement relates to the broader aspects of the proposal concerning 
the facilitation of STP. By way of example, DTCC ITP posed a number of 
questions regarding: (i) how the requirement aligns with the 
requirement to facilitate STP; (ii) what practical efforts should the 
CMSP undertake when it considers developing processes that eliminate 
the underlying reason for the persistent use of manual processes; (iii) 
what is the relevancy of a cost benefit analysis in developing policies 
and procedures; and (iv) what particular factors a CMSP should 
consider.\348\
---------------------------------------------------------------------------

    \347\ See id. at 10.
    \348\ See id. As discussed in Part V.C of this release, the use 
of manual operations or automated operations that may result in 
manual intervention is a potential source of risk and costs both at 
the CMSPs and in the U.S. clearance and settlement system. Moving 
towards a processing environment that facilitates STP at the CMSP 
should help alleviate some of these risks and costs. As stated in 
the T+1 Proposing Release, the Commission understands that at this 
time there may be certain scenarios where human intervention is 
necessary or prudent, however, as technology and the markets evolve 
over the near term, the expectation is that CMSPs would attempt to 
reduce or eliminate instances where human intervention is required. 
T+1 Proposing Release, supra note 2, at 10458-59.
---------------------------------------------------------------------------

    To help address these concerns, DTCC ITP recommended that the 
Commission provide further guidance in the form of high-level 
principles or standards regarding what is intended by the concept ``as 
soon as technologically practicable'' to minimize or eliminate manual 
processing for either the input of trade details or to resolve errors 
and exceptions that can prevent settlement.\349\ DTCC ITP suggested 
that achieving something as soon as technologically practicable should 
entail a determination that the intended outcome is commercially 
reasonable, economically viable, and operationally scalable.\350\
---------------------------------------------------------------------------

    \349\ See DTCC ITP April Letter, supra note 216, at 10. The T+1 
Proposing Release stated that a CMSP facilitates STP when its 
policies and procedures enable its users to minimize or eliminate, 
to the greatest extent that is technologically practicable, the need 
for manual input of trade details or manual intervention to resolve 
errors and exceptions that can prevent settlement of the trade. A 
CMSP also facilitates straight-through processing when it enables, 
to the greatest extent that is technologically practicable, the 
transmission of messages regarding errors, exceptions, and 
settlement status information among the parties to a trade and their 
settlement agents. T+1 Proposing Release, supra note 2, at 10458. 
However, as discussed in Part V.C.2 below, there may be situations 
where the minimization or elimination of certain manual operations 
is not appropriate or feasible in the near term. The facts and 
circumstances determining ``as soon as technologically practicable'' 
will vary across CMSPs, depending upon their services, systems, and 
business models. Accordingly, CMSPs should generally use their 
expertise to assess the extent to which a specific policy or 
procedure is appropriately designed to facilitate STP.
    \350\ See DTCC ITP April Letter, supra note 216, at 10.
---------------------------------------------------------------------------

3. Amend the Annual Reporting Requirement To Better Achieve 
Transparency
    While generally supporting the requirement for CMSPs to file annual 
reports, DTCC ITP stated that it did not understand the particular 
elements it would be required to include in the annual report, or how 
those elements supported the Commission's stated objectives of the 
annual report, and expressed concerns about a CMSP's ability to 
complete the annual report consistent with the Commission's goals.\351\ 
DTCC ITP also expressed concerns that a description of some types of 
information in its policies and procedures may contain proprietary or 
confidential information, and as such, a description of its policies 
and procedures should not be required in the annual report.\352\ As an 
alternative, DTCC ITP recommended that the annual report provision of 
the proposed rule be amended to focus more on quantitative reporting 
and less on qualitative descriptive reporting. Specifically, DTCC ITP 
recommended eliminating proposed subsections (a) through (c) of 
proposed Rule 17Ad-27 requiring specified descriptions, and instead 
recommended including a requirement in the rule text for public 
reporting of quantitative data on an anonymized and aggregated level 
for rates of allocation, confirmation, affirmation and/or matching over 
the twelve month period covered by the report.\353\ Further, DTCC ITP 
suggested disclosure of additional data elements, such as affirmation 
rates for institutional trade and prime brokerage trade flows, and 
affirmation rates for institutional trade flows achieved separately 
through an ETC or through a central matching facility.\354\
---------------------------------------------------------------------------

    \351\ See id. at 11. For example, DTCC ITP expressed concerns 
that the term ``description'' needs more clarity related to required 
content and level of detail.
    \352\ See id. DTCC ITP stated that requiring a CMSP to engage in 
the future cost and effort of analyzing the need for confidential 
treatment of such information will impede efforts by CMSP to 
innovate. See infra Part V.C.2 for the Commission's discussion of 
treatment of confidential information.
    \353\ See DTCC ITP April Letter, supra note 216, at 12. As 
discussed further in Part V.C.2 below, the Commission is retaining 
the qualitative and quantitative aspects of the annual report, but 
has modified that requirement to address the anonymization and 
aggregation issues described in this comment letter.
    \354\ See id.; see also infra Part V.C.2 for the discussion of 
the metric requirements under Rule 17Ad-27(b), as adopted.
---------------------------------------------------------------------------

    To provide further detail regarding the content of the annual 
report as it relates to quantitative reporting requirements, DTCC ITP 
submitted its second comment letter.\355\ Based on its review of the 
data available in its systems, DTCC ITP stated its belief that certain 
high-level categories of metrics that should be included in the rule 
text for proposed Rule 17Ad-27 to help

[[Page 13903]]

objectively demonstrate trends toward more automation, less manual 
intervention, and progress towards STP.\356\ Defining specific metric 
categories, DTCC ITP stated, would promote consistency and clarity 
across reporting and leave some flexibility for CMSPs to provide 
metrics which may be most appropriate to their specific activities and 
services.\357\ Recommendations for specific data categories included: 
(i) trade volume metrics, such as the total number of allocations and 
confirms submitted to a CMSP's matching service and total number of 
confirmations and cancelled confirmations submitted to an ETC service; 
(ii) matching metrics, such as the percentage of allocations and 
confirmations submitted to the CMSP that are matched or matched/auto-
affirmed by specified timeframes on trade date; (iii) affirmation 
metrics, including the percentage of institutional and prime broker 
confirmations submitted to an ETC that are affirmed by specified 
timeframes on trade date; and (iv) STP metrics, such as data concerning 
manual processes.\358\
---------------------------------------------------------------------------

    \355\ See DTCC ITP September Letter, supra note 325.
    \356\ See id. at 2.
    \357\ See id.
    \358\ See id. at 2-3. Part V.C.2 below further discusses the 
quantitative data requirements under Rule 17Ad-27(b), as modified. 
As discussed in that section, the Commission is opting to specify 
the particular data required under the rule rather than require data 
categories to ensure the data will capture specific information that 
can enable effective analysis of the CMSPs' progress in facilitating 
STP.
---------------------------------------------------------------------------

    DTCC ITP also requested clarity as to when CMSPs would be required 
to submit their initial annual reports, as well as the time period 
applicable to the actual content to be included in the initial annual 
report.\359\ DTCC ITP recommended that the initial twelve-month 
reporting period should begin after both the T+1 compliance date and 
the same-day affirmation rules come into effect, which according to 
DTCC ITP will provide a baseline that is predicated on implementation 
of all Commission requirements designed for a T+1 settlement cycle, and 
will provide a clear review and analysis of progress in advancing STP 
on a year-by-year basis without having to adjust to interpret reporting 
periods when the rules were not entirely in effect across the whole 
post-trade market.\360\
---------------------------------------------------------------------------

    \359\ See id. at 3. Part V.C.3 below further discusses the 
required contents and timing of the initial and subsequent annual 
reports under adopted Rule 17Ad-27(c).
    \360\ See id. DTCC ITP indicated in its comment letter that it 
is considering publishing the annual report on its website to 
provide the public with ready access to the information. See id. at 
4. Part V.C.4 below further describes the filing requirements and 
provides related guidance regarding the filing of the annual report.
---------------------------------------------------------------------------

4. Support Further Standardization of Industry Protocols and Reference 
Data
    DTCC ITP recommended that the Commission prioritize the development 
of proposals requiring market participants to increase the use of 
standardized settlement instructions (``SSIs'').\361\ Promoting greater 
adoption of SSIs, DTCC ITP stated, is critical to addressing the 
potential risk of settlement errors and fails in a T+1 environment, and 
DTCC ITP further stated its belief that centrally managed SSIs become 
even more critical in terms of the secure transmission of sensitive 
account and reference data necessary for settlement.\362\ DTCC ITP 
asserted that increased focus on, and the consequences of, cyber risk 
and fraudulent activity also necessitate the need for fully automated 
and centralized management and secure communication of critical SSI 
reference data, and noted an industry survey that indicated SSI-related 
issues continue to be one of the most common reasons for settlement 
fails.\363\
---------------------------------------------------------------------------

    \361\ See DTCC ITP April Letter, supra note 216, at 8. The use 
of SSIs is just one of many standardization mechanisms available to 
assist CMSPs in streamlining their internal operations to reduce 
reliance on manual processes, which can facilitate STP. Part V.C.1 
below discusses SSIs in the context of the development of the CMSP's 
policies and procedures under Rule 17Ad-27(a). See infra note 386.
    \362\ See id.
    \363\ See id.
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C. Final Rule and Discussion

    CMSPs facilitate communications among a broker-dealer, an 
institutional investor or its investment adviser, and the institutional 
investor's custodian to reach agreement on the details of a securities 
transaction, enabling the trade allocation, confirmation, affirmation, 
and/or the matching of institutional trades.\364\ Once the trade 
details have been agreed among the parties or matched by the CMSP, the 
CMSP can then facilitate settlement of the transaction.
---------------------------------------------------------------------------

    \364\ For a general description of the role of CMSPs in the U.S. 
markets, see T+1 Proposing Release, supra note 2, at 10439.
---------------------------------------------------------------------------

    As mentioned above and detailed in the T+1 Proposing Release, the 
rising volume of transactions for which CMSPs provide matching and 
other services have caused CMSPs to become increasingly critical to the 
functioning of the securities market.\365\ The Commission anticipates 
that a shortened settlement cycle may lead to further expanded use of 
CMSPs, as well as increased focus on enhancing the services and 
operations of the CMSPs themselves.\366\ In addition, some SRO rules 
currently require the use of CMSP services for institutional trade 
processing.\367\ The Commission believes that more could and should be 
done to ensure that CMSPs, as critical utilities in the securities 
market, are operating in a manner that improves the clearance and 
settlement of securities transactions through improvements in 
efficiency, risk reduction, and costs. Reducing and, where possible, 
eliminating the use of tools and services that encourage or require 
manual processing, along with the continued development and 
implementation of more efficient automated systems that facilitate STP 
in the institutional trade processing environment at the CMSP, is 
essential to improving those efficiencies, as well as reducing risk and 
costs, to ensure the prompt and accurate clearance and settlement of 
securities transactions.\368\
---------------------------------------------------------------------------

    \365\ See supra note 315 and accompanying text.
    \366\ See T+2 Proposing Release, supra note 4, at 69258. For 
example, increasing the efficiency of using a CMSP can reduce the 
risk that a trade will fail to settle and reduce costs associated 
with correcting errors that result from the use of manual processes 
and data entry, thereby improving the overall efficiency of the U.S. 
clearance and settlement system.
    \367\ See, e.g., Financial Industry Regulatory Authority (FINRA) 
Rule 11860 (requiring a broker-dealer to use a registered clearing 
agency, a CMSP, or a qualified vendor to complete delivery-versus-
payment transactions with their customers).
    \368\ See T+1 Report, supra note 61, at 9.
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    Over the past decade CMSPs have become increasingly connected to a 
wide variety of market participants in the U.S.\369\ New Rule 17Ad-27 
will require CMSPs, and by extension their users, to assess their 
processes and find solutions to reduce or eliminate reliance on 
services at CMSPs that involve manual or inefficient processes or 
otherwise do not further facilitate STP in the institutional trade 
processing environment. This in turn should better position CMSPs to 
provide services that not only reduce processing risk and costs, but 
also generally facilitate a more orderly transition to a T+1 standard 
settlement cycle in the near term,\370\ as well as potential further 
shortening of the settlement cycle in the future.
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    \369\ See, e.g., DTCC, About DTCC Institutional Trade 
Processing, https://www.dtcc.com/about/businesses-and-subsidiaries/dtccitp (noting that DTCC ITP, parent to DTCC ITP Matching, serves 
6,000 financial services firms in 52 countries).
    \370\ As discussed in Part II above, the T+1 Report contemplates 
moving the ``ITP Affirmation Cutoff'' from 11:30 a.m. ET on the day 
after trade date to 9:00 p.m. ET on trade date. See T+1 Report, 
supra note 61, at 13, 39.
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    Accordingly, the Commission is adopting proposed Rule 17Ad-27 with 
modifications. As explained further below, the Commission is adding the 
language ``reasonably designed'' to the policies and procedures 
requirement in

[[Page 13904]]

paragraph (a), adding additional requirements in paragraph (b) to 
specify the data to be included in the annual report, and adding 
paragraph (c) to explain the required timing of filing the annual 
report. The Commission believes these changes are responsive to the 
commenter's concerns and provide CMSPs flexibility to address 
individualized operations, services, types of users, and business 
objectives, and provide specificity to the data requirements while at 
the same time retaining those provisions that facilitate achieving the 
stated objectives of the new rule. In addition, and as discussed in 
more detail below, the Commission is making several technical 
modifications, including reorganizing the specific obligations under 
the proposed rule by subdividing those obligations into paragraphs (a) 
through (d), and adopting revisions to other technical aspects of and 
terms used in the proposed rule text to improve clarity.
1. New Rule 17Ad-27(a)--Requirement for Policies and Procedures
    As discussed below, the Commission is retaining the proposed 
requirement in Rule 17Ad-27 to establish, implement, maintain, and 
enforce policies and policies, but is making several modifications. As 
with the proposed rule, the final rule will require CMSPs to develop 
policies and procedures focused on facilitating improvements in their 
operations, systems, and user obligations to further the development of 
STP \371\ in the processing of institutional trades, improve 
efficiency, facilitate both cost and risk reduction in the clearance 
and settlement of institutional trades generally, and better 
accommodate shorter settlement cycles.\372\ The requirement to 
establish, implement, maintain and enforce policies and procedures in 
new Rule 17Ad-27(a) is as an important and efficient mechanism that 
will require CMSPs, and by extension those market participants that 
choose to rely on CMSPs to facilitate clearance and settlement, to 
develop and implement specific operational procedures and systems to 
facilitate STP. This, in turn, will enable, over time, STP in the post-
trade processing of institutional trades. Importantly, the rule will 
also encourage the development of strategic plans on a forward-looking 
basis to facilitate STP within the CMSP's operating framework and to 
facilitate internal and external assessments as to the viability and 
implementation of those strategic plans. By virtue of the expanded use 
of CMSPs generally and the global nature of post-trade processing 
today, the Commission anticipates that these efforts will require CMSPs 
to coordinate their development activities with a variety of other 
market participants that impact the CMSPs' ability to provide 
beneficial efficiencies, which should in turn encourage the use of 
CMSPs. Finally, the development of policies and procedures by CMSPs 
will facilitate the Commission's ongoing development of the national 
clearance and settlement system generally by enhancing the oversight of 
CMSPs and ensuring a documented approach to further STP.
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    \371\ As discussed above, the term ``straight-through 
processing,'' as used by the financial services industry, generally 
refers to processes that allow for the automation of the entire 
trade process from trade execution through settlement without manual 
intervention. See supra note 330. In the context of institutional 
trade processing under this rule, STP occurs when a market 
participant or its agent uses the facilities of a CMSP to enter 
trade details and completes the trade allocation, confirmation, 
affirmation, matching processes, or any combination thereof, without 
manual intervention.
    \372\ In some cases, the use of manual or inefficient processing 
introduces errors and operational risks that delay settlement and 
may result in a failure to settle the transaction. The Commission 
believes that, by engaging in the process of developing and 
periodically assessing their policies and procedures, CMSPs will not 
only foster solutions to mitigate or alleviate these inefficiencies 
and risks internally but also consider these issues as they apply to 
the general processing stream that may be relevant to the CMSP's 
operations and its users.
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    Specifically Rule 17Ad-27(a), as adopted, requires a clearing 
agency that provides a central matching service (i.e., a CMSP) to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to facilitate straight-through 
processing of securities transactions at the clearing agency.\373\ 
Because the policies and procedures requirement is distinct from the 
annual report requirement (discussed below), this requirement is now 
designated as new paragraph (a) in final Rule 17Ad-27, as adopted. The 
final rule also removes the reference to ``transactions involving 
broker-dealers and their customers'' because it is only explanatory 
text describing the types of parties that may use a central matching 
service and therefore is unnecessary to include in the rule text.\374\ 
Lastly, the final rule makes clear that the policies and procedures 
must be ``written.''
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    \373\ The new rule text adds the word ``written'' to the 
policies and procedures requirement to require that the policies and 
procedures must be established as a written document.
    \374\ See, e.g., Bloomberg STP and SS&C Techs Exemption Order, 
supra note 326, at 75388-90 (generally describing the clearing 
agency applicants as providers of a ``matching service'' or 
``central matching service'' without reference to the types of 
customers served).
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    The provision to ``establish, implement, maintain, and enforce'' 
written policies and procedures requires the CMSP to establish and 
implement such policies and procedures by the compliance date and to 
ensure that the policies and procedures remain current on an ongoing 
basis, including by implementing timely updates or revisions.\375\ 
Moreover, the requirement to ``enforce'' requires the CMSP to develop a 
reasonable approach with sufficient specificity to ensure that its 
users comply with any required user obligations and to make clear any 
consequences of non-compliance within the established policies and 
procedures framework and the timeframes associated with any such 
consequences. The Commission encourages, but does not require, the CMSP 
to provide users with access to the required CMSP policies and 
procedures well in advance of any compliance obligations applicable to 
users to ensure that they can thus make the necessary arrangements or 
changes to comply with any user obligations contained therein.
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    \375\ See infra Part VII for a discussion of the compliance 
dates.
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    The periodic review required by the ``establish, implement and 
maintain'' component of the CMSP's policies and procedures requirement 
under adopted Rule 17Ad-27(a) should also help ensure that a CMSP 
considers in a holistic fashion how the obligations it requires of its 
users will advance the implementation of methodologies, operational 
capabilities, systems, or services that support STP. It should also 
encourage the CMSP and its users to identify inefficiencies and manual 
processes that impede the STP objective and, to the extent possible, 
develop automated and streamlined solutions to address those issues.
    The scope of the policies and procedures required under new 
paragraph (a) generally should focus on those aspects of the CMSP's 
operations and services that directly or indirectly relate to 
facilitating STP in the processing of institutional trades at the 
CMSP.\376\ The Commission understands that the CMSP only controls its 
internal functions, and not those of its users, and as such, the rule 
as adopted requires the CMSP to design its policies and procedures 
around its own internal functions and services. However, and to the 
extent practicable, the Commission encourages CMSPs to develop a 
policies

[[Page 13905]]

and procedures framework that incentivizes CMSP users and their 
customers to adopt and implement the necessary systems and services 
within their own firms to make full use of the CMSP's systems that 
facilitate STP.\377\ While some of this may occur organically as CMSP 
users that agree to use specific CMSP services or systems reconfigure 
their systems to accommodate the initial and updated CMSP policies and 
procedures, CMSPs generally should also endeavor to create incentives 
within the policies and procedures framework that encourage more 
widespread use of their STP-oriented systems, both among current CMSP 
and non-CMSP users. For example, creating cost-saving operational 
efficiencies within the CMSP or developing attractive price structures 
may create incentives for more widespread use of the CMSPs services.
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    \376\ Accordingly, those aspects of the CMSP's operations or 
services that are not directly or indirectly related to facilitating 
STP are not required to be included in the policies and procedures 
required under Rule 17Ad-27(a). However, the rule does not preclude 
the CMSP from adopting policies and procedures that are beyond the 
scope of Rule 17Ad-27(a).
    \377\ While the CMSPs policies and procedures will directly 
affect the systems and processes of its users by requiring the use 
of those systems and processes to be in compliance with the CMSP's 
STP friendly systems and processes, the CMSP's STP efforts also may 
indirectly affect the systems and process of other non-user market 
participants that either interact with CMSP users or by virtue of 
the CMSP role as a centralized utility in the market. The 
standardization of industry practices toward realizing increased STP 
capabilities internal and external to the CMSPs should in turn 
promote the eventual elimination of manual processing.
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    Moreover, the policies and procedures framework generally should 
also endeavor, to the extent prudent, to dis-incentivize the use of 
manual systems or automated systems that do not facilitate STP.\378\ 
The Commission views the facilitation of STP as providing the necessary 
efficiencies, both on a technological, operational, and service level, 
to remove to the extent practicable and prudent the need for manual 
intervention (or automated systems that result in the need for manual 
intervention) in the acceptance of trade information and the process by 
which the CMSP provides for allocation, confirmation, affirmation, and 
matching services. The Commission also understands that at this time 
there may be scenarios where human intervention is necessary or 
prudent. However, as technology and the markets evolve over the near 
term, CMSPs should consider reducing or eliminating instances where 
human intervention is required as soon as reasonably possible, both on 
a technological and operational basis.
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    \378\ For example, as noted by DTCC ITP in its comment letter, 
systems or operations that standardize certain operational 
functions, such as the use of SSIs, may help alleviate the need for 
manual operations. See DTCC ITP September Letter, supra note 325, at 
2-3. However, as noted above, the use of SSIs is just one of many 
mechanisms available to assist CMSPs in streamlining their internal 
operations and in turn facilitating STP. Given that individual CMSPs 
may vary in the services provided or the operations and systems used 
to provide those services, to the extent that the use of SSIs is 
applicable in a particular CMSP's operations, the Commission 
encourages the CMSPs to consider developing incentives or 
requirements in their policies and procedures to encourage or compel 
the use of SSIs. See supra note 361.
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    To provide flexibility and discretion in the development of a 
particular CMSP's policies and procedures, the Commission is adding the 
new language ``reasonably designed'' to the policies and procedures 
requirement in final Rule 17Ad-27(a), as adopted. The insertion of the 
language ``reasonably designed'' in the policies and procedures 
requirement should allow CMSPs to tailor their policies and procedures 
to accommodate their individualized internal operations, systems, 
business models and users as they determine how best to facilitate STP 
within their particular processing environment and to mitigate any 
issues particular to that CMSP that frustrate achieving STP. That 
discretion should allow the CMSP to determine whether specific policies 
and procedures designed to further STP are reasonable relative to 
certain considerations applicable to that particular CMSP and its 
users, particularly as those assessments may change over time. 
Moreover, and as explained by the commenter, given that other 
Commission rules applicable to clearing agencies incorporate a 
``reasonably designed'' component in the policies and procedures 
required under such rules, CMSPs should have familiarity and experience 
in drafting ``reasonably designed'' policies and procedures, as 
required by new Rule 17Ad-27(a).\379\
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    \379\ See, e.g., 17 CFR 232.1001(a)(1), (b)(1), and (c)(1) 
(relating to the policies and procedures requirements under 
Regulation SCI). Regulation SCI is applicable to both clearing 
agencies that are registered as well as those that are exempted from 
registration. See, e.g., 17 CFR 240.17Ad-22(d) and (e) (relating to 
the core clearing agency rules under section 17A of the Exchange 
Act, which are applicable to only those clearing agencies that are 
registered).
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    In structuring a plan to facilitate STP through reasonably designed 
policies and procedures, a CMSP generally should evaluate its 
operations and systems to determine potential sources of inefficiency 
or manual operation that exist within the current CMSP's processing 
stream, and consider addressing these frictions in a manner that does 
not disrupt the CMSP's ability to facilitate the prompt and accurate 
settlement of securities transactions.\380\ Rule 17Ad-27 does not 
require CMSPs to force market participants to move away from ETC 
services in a sudden and disruptive manner or eliminate manual 
processing completely or on any particular timeframe if doing so would 
result in creating inefficiencies or impair the prompt and accurate 
settlement of securities transactions.\381\ CMSPs generally should, 
however, review their STP plans annually to assess whether new 
disincentives to use manual processes are appropriate, particularly in 
light of any recent market changes or technological innovations.
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    \380\ The use of manual operations may arise for a number of 
reasons, including because (i) there is no automated system that 
facilitates a particular activity; (ii) a user has not availed 
itself of the automated process offered by a CMSP; or (iii) input 
into an automated system is rejected, resulting in the need to 
manually reconcile the situation. STP endeavors to eliminate manual 
processes by automating the entire trade process from trade 
execution through settlement without manual intervention. See T+1 
Proposing Release, supra note 2, at 10458; see also supra note 323 
and accompanying text.
    \381\ See supra Part V.B.2 (discussing DTCC ITP comments 
regarding manual processing).
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    As it develops its policies and procedures to facilitate STP, a 
CMSP may consider factors relevant to that CMSP in assessing whether 
any identified issues can or should be addressed and if so, how best to 
implement those changes.\382\ For example, such factors may include: 
(i) the significance of certain obstacles to STP as it relates to other 
clearance and settlement functions and objectives, including 
operational efficiency and operational risk management; (ii) the 
frequency and impact of a particular issue; or (iii) the cost of 
resolving the issue versus the benefit. The flexibility afforded by the 
insertion of the reasonably designed language in new Rule 17Ad-27(a) 
also should allow CMSPs to better account for changes over time in 
technology, markets, business, and other advancements that promote 
accurate clearance and settlement, as well as any costs associated with 
particular policies or procedures relative to the benefits. 
Accordingly, the inclusion of ``reasonably designed'' should aid in the 
development of more effective and efficient CMSP policies and 
procedures required under Rule 17Ad-27, as adopted.
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    \382\ As discussed further below, the CMSP will be required 
pursuant to Rule 17Ad-27(b)(2) to provide a qualitative description 
of its progress in facilitating STP in its annual report to the 
Commission. For example, the report may describe the CMSP's approach 
and rationale for addressing or not addressing any issues identified 
as obstacles to facilitating STP. See infra Part V.C.2.
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    Under the rule, a CMSP facilitates STP when its policies and 
procedures enable its users to minimize or eliminate, to the greatest 
extent that is technologically practicable, the need for

[[Page 13906]]

manual input of trade details, the manual intervention to resolve 
errors and exceptions that can prevent settlement of the trade, or the 
transmission of messages regarding errors, exceptions, and settlement 
status information among the parties to a trade and their settlement 
agents that impede the ability of the CMSP to achieve an STP 
environment. In considering generally how to develop policies and 
procedures that facilitate STP, a CMSP generally should consider the 
full range of operations and services related to the processing of 
institutional trades for settlement and establish a holistic framework 
for STP on a CMSP-wide basis. CMSPs should also generally consider and 
address how the services, systems, and any operational requirements a 
CMSP applies to its users ensure that the CMSP's policies and 
procedures advance the goal of achieving straight-through processing 
for trades processed through it. Moreover, the CMSP generally should 
ensure that its systems, operational requirements, and the other 
choices it makes in designing its services, enable and incentivize 
prompt and accurate settlement without manual intervention or without 
automated processes that may result in manual intervention.
    For example, a CMSP's policies and procedures generally should 
explain the criteria that the CMSP applies to determine when a 
``match'' has been achieved, including any relevant tolerances that it 
or its users might apply to achieve a match, and the extent to which 
such criteria should be standardized or customized.\383\ With respect 
to the use of ETCs that impede the development of STP, and which often 
rely on legacy technologies, a CMSP's policies and procedures generally 
should establish a timeline for transitioning users away from such 
manual processes to service offerings that can reduce a party's 
reliance on the manual, often sequential, entry and reconciliation of 
trade information.\384\ Where the CMSP acts as a communication platform 
for different market participants to transmit messages regarding 
errors, exceptions, and settlement status information among the parties 
to a trade and their settlement agents, the CMSP generally should 
consider the extent to which its policies, procedures, and processes 
restrict, inhibit, or delay the ability of users to transmit such 
messages used in the preparation or transmission of trades for 
settlement and have policies and procedures that promote the automated 
transmission of messages among the relevant parties to a transaction to 
ensure timely settlement and reduce the potential for errors.
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    \383\ The use of SSIs is just one of many standardization 
mechanisms available to assist CMSPs in streamlining their internal 
operations to reduce reliance on manual processes, which can 
facilitate STP. Given that individual CMSPs may vary in the services 
provided or the operations and systems used to provide those 
services, the Commission does not believe requiring the use of SSI, 
or any other particular standardization mechanism, in Rule 17Ad-27 
would be appropriate. However, to the extent that the use of SSIs is 
applicable in a particular CMSP's operations, the CMSP generally 
should consider developing incentives or requirements in its 
policies and procedures to encourage or compel the use of SSIs. See 
supra note 362.
    \384\ In its comment letter, DTCC ITP sought more clarity around 
the Commission's description of the CMSP's role in facilitating a 
transition away from manual processes, particularly as it relates to 
ETC services and timelines for transitioning away from manual 
processes, some of which may not be under the CMSP's control. See 
DTCC ITP April Letter, supra note 216, at 7. As discussed above, the 
Commission is not advocating the elimination of ETC to the extent 
that its use does not impede the development of STP at the CMSP. In 
the event that use of the ETC is impeding STP, CMSPs generally 
should use their expertise to develop an appropriate methodology and 
timeframe to transition away from the use of such ETC.
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    The Commission recognizes it may not be technologically or 
operationally practicable to eliminate all manual processes 
immediately. Indeed, in certain circumstances, the parties to a trade 
may need to engage in manual interventions to ensure the accuracy of 
trade information and minimize operational or other risks that may 
prevent settlement. Rule 17Ad-27(a), as adopted, does not require CMSPs 
to remove a manual process if doing so would clearly undermine the 
prompt and accurate clearance and settlement of securities 
transactions. However, where a CMSP continues to permit manual 
reconciliation or other types of human intervention, it generally 
should explain in its policies and procedures why those manual 
processes remain necessary as part of its systems and processes and 
initiate incremental steps to alleviate the need for any manual 
process. In addition, the CMSP should consider developing processes 
that ultimately would eliminate the underlying issues that drive the 
use of manual processes in order to facilitate a more automated and 
STP-focused approach.
2. New Rule 17Ad-27(b)--Annual Report
    The Commission is retaining the general requirement under proposed 
Rule 17Ad-27 to require a CMSP to submit a report every twelve months 
to the Commission that includes specified qualitative and quantitative 
information used to assess the CMSP's progress in facilitating STP 
during the twelve-month period covered by the annual report. However, 
as explained in more detail below, the Commission is making one 
substantive and several technical modifications to the final rule, as 
adopted. The purpose of these modifications is to require the CMSPs to 
disclose qualitative and quantitative information in the annual report. 
The Commission continues to believe that the annual report component of 
Rule 17Ad-27(b), as adopted, will enable the Commission to (i) assess 
the qualitative and quantitative progress made by the CMSP and its 
users to further STP efforts in the processing of institutional 
transactions; (ii) evaluate the need for additional regulatory action; 
and (iii) further its oversight of, and the development of, the 
national clearance and settlement system.
    The Commission is retaining the 12-month reporting timeframe 
requirement, as proposed, for the annual report under new Rule 17Ad-
27(b) for several reasons. First, a yearly review on progress with 
respect to the CMSP's efforts to facilitate STP should be a sufficient 
timeframe in which the CMSP is able to consider, develop, and implement 
iterative improvements over time on a forward-looking basis, while also 
ensuring that progress towards STP is describable, measureable and 
implemented as expeditiously and prudently possible. Second, a twelve 
month period would provide the CMSP with a sufficient look-back period 
to complete a meaningful review on an organization-wide basis and time 
to test the efficacy of any material changes to technologies and 
procedures in the preceding year.
    Third, an annual reporting requirement, as opposed to a monthly or 
semi-annual requirement, should help ensure that the information 
provided to the Commission reflects meaningful and substantive progress 
by the CMSP, as opposed to focusing attention on smaller, technical 
changes in services and policies that would be less relevant or less 
informative to the CMSP, its users, the Commission, or the public as to 
their understanding of the overall progress towards achieving straight-
through processing by the CMSP. And fourth, the Commission believes 
that the annual report requirement, as now structured in adopted Rule 
17Ad-27, would enable the Commission to evaluate actions taken by the 
CMSP to ensure compliance with the rule and to help fulfill the 
Commission's responsibility for oversight of the national clearance and 
settlement system, both as it relates to the CMSP specifically and the 
national system more generally.

[[Page 13907]]

    New Rule 17Ad-27(b) also retains the general requirement to provide 
both qualitative and quantitative information in the annual report, as 
proposed. The Commission believes that both types of analysis are 
necessary to better explain the current operational environment 
relative to STP development and the obstacles preventing further STP 
development, and to provide appropriate context to the metrics, from a 
current as well as a retrospective and prospective viewpoint. Moreover, 
the qualitative aspects of the requirements under paragraph (b) will 
provide the Commission with the CMSP's expertise in the assessments and 
analysis of its STP progress, providing additional context for the 
quantitative data required in the annual report.
    The Commission also is retaining the provision making the annual 
report required under adopted Rule 17Ad-27(b) publicly available on its 
website to enable the public to review and analyze progress on 
achieving STP.\385\ As discussed in the T+1 Proposing Release and 
detailed below, to the extent that an annual report includes 
confidential commercial or financial information, a CMSP can request 
confidential treatment of those specific portions of the report.\386\
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    \385\ DTCC ITP indicated in its comment letter that it is 
considering publishing the annual report on its website to provide 
the public with ready access to the information. See DTCC ITP 
September Letter, supra note 325, at 4.
    \386\ See 17 CFR 240.24b-2.
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    To clarify that the content of the annual report requirement is 
distinct from the policies and procedures requirement (discussed 
above), the annual report requirement is now designated as new 
paragraph (b) under the adopted Rule 17Ad-27. Specifically, new Rule 
17Ad-27(b), as adopted, requires a clearing agency that provides a 
central matching service for transactions involving users to submit to 
the Commission every twelve months a report that includes five 
component requirements, now delineated as Rule 17Ad-27(b)(1) through 
(5). Paragraphs (b)(1), (2), and (5) include modified versions of the 
proposed requirements under proposed Rule 17Ad-27(a), (b), and (c). In 
addition, new paragraph (b) includes paragraphs (b)(3) and (4) which 
detail the data elements required in the report, consistent with the 
discussion in the T+1 Proposing Release but not specified in the rule 
text as proposed.\387\ In particular, paragraphs (b)(3) and (4) 
incorporate the substance of the recommendations made by DTCC ITP 
requesting more specificity for the data required to be included in the 
report under the rule.\388\ The Commission believes that these changes 
are consistent with its intent as to the contents and objective of the 
annual report, as proposed, and should provide beneficial clarity to 
CMSPs regarding their obligations under these provisions.
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    \387\ A CMSP generally should include in its report a summary of 
key settlement data relevant to its STP objective, such as data 
related to the rates of allocation, confirmation, affirmation, and/
or matching achieved via straight-through processing. See T+1 
Proposing Release, supra note 2, at 10459.
    \388\ See DTCC ITP September Letter, supra note 325, at 2-3.
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    The Commission is also amending paragraph (b) to delete the phrase 
``for transactions involving broker-dealers and their customers'' for 
the same reason it deleted the text in paragraph (a), as discussed in 
Part V.C.1.
(a) New Rule 17Ad-27(b)(1)--Summary of Policies and Procedures
    The first of the five components under adopted Rule 17Ad-27(b) 
requires the CMSP to provide pursuant to new paragraph (b)(1) a summary 
of its policies and procedures required under adopted Rule 17Ad-27(a), 
current as of the last day of the twelve month period covered by the 
report. The Commission is making a technical change to paragraph (b)(1) 
to clarify that only a ``summary'' of the CMSP's policies and 
procedures current as of the last day of the twelve month period 
covered by the report need be included in the report, and not the 
policies and procedures in their entirety or policies and procedures 
current under any other timeframe.\389\ Today, CMSPs' policies and 
procedures are not publicly available. By providing a summary of the 
CMSPs policies and procedures, the Commission, indirect CMSP users, and 
the public will be able to understand at a high level the important 
aspects of the CMSP's operations and systems, which the Commission 
anticipates will in turn facilitate market-wide discussions regarding 
the adoption of more efficient post-trade processing generally and 
within the context of using CMSPs for some or all of a market 
participant's post-trade processing needs specifically. Moreover, this 
information should help readers of the annual report to be better able 
to analyze other aspects of the annual report, particularly those 
related to the quantitative and forward-looking qualitative information 
required under the rule, as adopted.
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    \389\ Proposed Rule 17Ad-27(a) required that the annual report 
must include ``[I]t's current policies and procedures for 
facilitating straight-through processing.'' T+1 Proposing Release, 
supra note 2, at 10459.
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    The summary description of the CMSP's policies and procedures 
required by paragraph (b)(1) generally should provide a brief overview 
of the policies and procedures developed pursuant to new Rule 17Ad-
27(a). To the extent applicable, the scope of the summary generally 
should focus on those aspects of the CMSP's policies and procedures 
that describe and explain its operations, systems, services, and user 
obligations generally and those aspects of its policies and procedures 
that facilitate STP-oriented operations or systems specifically, 
including any material changes made to the relevant policies and 
procedures during the reporting period. Because the Commission will 
make the report publicly available, it would be helpful for a CMSP to 
orient the information contained in the summary to market participants 
that engage in the post-trade processing of securities transactions to 
help ensure that the report is useful and informative to both existing 
and potential users.
(b) New Rule 17Ad-27(b)(2)--Qualitative Description of STP Progress
    The second component of the annual report under adopted Rule 17Ad-
27(b) requires the CMSP to provide pursuant to new paragraph (b)(2) a 
qualitative description of the CMSP's progress in facilitating STP 
during the twelve-month period covered by the report required under 
paragraph (b)(1). The Commission is modifying the proposed requirement, 
formerly in proposed Rule 17Ad-27(b), to add the text ``qualitative 
description'' in new paragraph (b)(2) to clarify the type of 
information required in the CMSP's description of its progress in 
facilitating STP during the period covered by the report and to assist 
CMSP compliance with this provision of the rule.
    The qualitative report required under paragraph (b)(2) will provide 
the Commission and the public with an understanding of the specific 
actions the CMSP has taken over the twelve-month period covered by the 
report to facilitate STP. To the extent practicable, the Commission 
encourages CMSPs to use their expertise to include their assessment of 
the impact of any actions discussed in the qualitative section of the 
report on the furtherance of its STP efforts, both as it relates to the 
CMSP specifically and the markets generally. The Commission and CMSP 
users will use this information to better understand the CMSP's STP 
initiatives, as well as encourage market participants to begin 
analyzing their own internal systems and operations to develop and 
incorporate more STP-oriented mechanisms themselves. In addition, the 
qualitative report required under this provision should also help 
inform

[[Page 13908]]

an analysis of the quantitative data required under new Rule 17Ad-
27(b)(3) and (4) by providing context for the metrics regarding the 
efficacy of the CMSP's actions to facilitate STP.
    A qualitative description of the CMSPs progress during the twelve 
month period covered by the report generally should describe the 
services and systems used during the period covered by the report that 
illustrate the CMSP's progress in facilitating STP, as well as any 
applicable analysis or additional information that aids in 
understanding or supporting the qualitative description. This 
qualitative description should generally focus on the CMSP's progress 
in facilitating STP with respect to the processes used in the 
allocation, confirmation, affirmation, and matching of institutional 
trades, the communication of messages among the parties to the 
transactions, and the availability of service offerings that reduce or 
eliminate the need for manual processing. However, the CMSP should 
consider including any reasonable and applicable indicia of STP 
progress to supplement their descriptions under paragraph (b).
    As is the case with other provisions of adopted Rule 17Ad-27(b), 
the qualitative description submitted pursuant to Rule 17Ad-27(b)(2) in 
the first reporting period may benefit from a more robust discussion of 
the current systems used by the CMSP in order to put a discussion of 
its STP progress in context.\390\ However, the qualitative description 
in subsequent annual reports should generally be able to build on the 
initial report by relying on any background or foundational information 
provided in the initial reporting period, and instead focus primarily 
on the current year's progress.
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    \390\ For more information related to the content and filing of 
the initial and subsequent annual reports pursuant to adopted Rule 
17Ad-27(c), see infra Part V.C.3.
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(c) New Rule 17Ad-27(b)(3)--Quantitative Data
    The third component of the annual report required under adopted 
Rule 17Ad-27(b) requires the CMSP to include pursuant to new paragraph 
(b)(3) a quantitative presentation of data that specifies five sets of 
data. The Commission concurs with DTCC ITP's recommendation that any 
requirements to include specific data in the annual report should be 
expressly included in the rule text.\391\ While DTCC ITP recommended 
specifying in the rule certain categories of data, the Commission is 
opting to break down those categories into the specific data elements 
described in paragraph (b)(3).\392\ Specifying the particular data and 
metrics will promote the capture of specific, standardized data points 
relevant to advancing the straight-through processing objective, which 
should enable more effective comparison and analysis of the data year 
over year and as between CMSPs. While requiring specific data elements 
removes some of the CMSP's discretion under the rule to determine how 
best to quantify advancements related to straight-through processing, 
the Commission believes that requiring the specific data elements in 
paragraph (b)(3) is necessary to understand existing market dynamics 
and, as noted above, to facilitate comparisons across CMSPs and over 
time.
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    \391\ See DTCC ITP April Letter, supra note 216, at 12; DTCC ITP 
September Letter, supra note 325, at 2-3.
    \392\ See DTCC ITP September Letter, supra note 325, at 2-3.
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    Accordingly, the Commission is modifying the proposed annual report 
requirement to add a quantitative data requirement under paragraphs 
(b)(3)(i) through (v) specifying the key metrics related to the 
processing of securities transactions at CMSPs that are required in the 
annual report.\393\ Specifically, Rule 17Ad-27(b)(3) requires the CMSP 
to provide data that includes: (i) the total number of trades submitted 
to the clearing agency for processing; (ii) the total number of 
allocations submitted to the clearing agency; (iii) the total number of 
confirmations submitted to the clearing agency, as well as the total 
number of confirmations cancelled by users; (iv) the percentage of 
confirmations submitted to the clearing agency that are affirmed on 
trade date, specifying to the extent practicable the time of 
affirmation on trade date; (v) the percentage of allocations and 
confirmations submitted to the clearing agency that are matched and 
automatically confirmed through the clearing agency's services; and 
(vi) metrics concerning the use of manual and automated processes by 
the CMSP's users with respect to the CMSP's services that may be used 
to assess progress in facilitating STP. The data required under this 
provision should provide baseline information and insight into CMSP's 
progress with regard to facilitating STP, CMSP user performance, and 
potential indications of specific impediments in improving efficiencies 
in the post-trade processing environment.
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    \393\ In its initial comment letter, DTCC ITP recommended that 
the annual report should require the quantitative data in lieu of 
the policies and procedures and qualitative description 
requirements. See DTCC ITP April Letter, supra note 216, at 12. DTCC 
ITP also recommended that the quantitative aspects of the report 
should include specified metric categories, in which DTCC ITP 
suggested specific types of data that should be included in those 
metric categories. See DTCC ITP September Letter, supra note 325, at 
2. As discussed above, the Commission is opting to require specific 
data requirements under adopted Rule 17Ad-27(b), in lieu of metric 
categories. See supra notes 391-392 and accompanying text. Most of 
the data elements incorporated into Rule 17Ad-27(b)(2) and (3) 
reflect the recommendations made by DTCC ITP. See DTCC ITP September 
Letter, supra note 325, at 2-3.
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    Although the metrics required under paragraphs (b)(3)(i) through 
(v) will provide a high-level view of certain functions at the CMSP, 
the Commission believes this data will objectively demonstrate trends 
with regard to automation, manual intervention and overall progress 
towards STP and may provide indications of certain systemic or 
operational issues impeding the CMSP's STP progress. Defining the 
specific metrics required in the annual report should also have the 
effect of promoting consistencies across reporting periods at a single 
CMSP and across multiple CMSPs, which should in turn improve the 
Commission's and the public's ability to analyze the data over time. 
The Commission considers the data requirements under paragraph (b)(3) 
to be the key information necessary to analyze the CMSP progress in 
facilitating STP. In the event the CMSP determines that additional data 
is necessary or would be helpful to support its qualitative 
descriptions required under Rule 17Ad-27(b)(2) or (5), the Commission 
encourages the CMSP to include such additional quantitative data under 
paragraph (b)(3).
    With regard to metrics concerning the use of manual and automated 
processes by the CMSP's users with respect to the CMSP's services that 
are indications of progress in facilitating STP, as required under 
paragraph (b)(3)(vi), the Commission has not specified the type of 
metrics that should be used to comply with this provision of the new 
rule. CMSPs are encouraged to design metrics specific to their services 
and users that would best indicate whether users are in fact using 
manual processes for allocations, confirmations or other processing 
activities and whether over time these users have migrated to an 
automated processing that replaced their use of manual processing. For 
example, DTCC ITP cited to the use of SSI metrics as one such measure, 
which could provide details on the quality of SSIs established at the 
CMSP, the use of such SSIs by its users in the actual processing 
stream, and automation of

[[Page 13909]]

SSIs as possible indicators of STP improvements.\394\
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    \394\ See DTCC ITP September Letter, supra note 325, at 3 for 
more detail on DTCC ITP's comments related to data requirements in 
the annual report.
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    Given that the data required under paragraph (b)(3)(vi) is one of 
the core measurements central to the objective of Rule 17Ad-27, the 
Commission encourages CMSPs to design these metrics to be as expansive 
and granular as reasonably feasible, to better provide a detailed view 
of the STP progress, and to adjust such metrics as necessary to 
accommodate the onboarding of new services, technologies or operations. 
Retaining sufficient continuity year-to-year in the CMSP's metrics 
could ensure year-over-year measurability of the STP progress made 
during the time period covered by any particular annual report. Any new 
metrics added to an annual report covering a particular twelve month 
period due to a change in the CMSP's services, operations or systems 
could be discussed in the qualitative description required under new 
Rule 17Ad-27(b)(5).
(d) New Rule 17Ad-27(b)(4)--Quantitative Data Organization and 
Categorization
    The fourth component of the annual report requires the CMSP to 
submit, pursuant to Rule 17Ad-27(b)(4), the data sets required by 
paragraph (b)(3) in the following manner: (i) organized on a month-by-
month basis beginning with January of each year, for the twelve months 
covered by the report required under paragraph (b) of the rule; (ii) 
separated, where applicable, between the use of central matching and 
electronic trade confirmation services offered by the clearing agency; 
(iii) separated, as appropriate, by asset class; (iv) separated by type 
of user; and (v) presented on an anonymized and aggregated basis.\395\
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    \395\ To support transparency around the role and utility of 
CMSPs and objectively demonstrate trends toward more automation and 
STP progress, DTCC ITP recommended in its comment letter that the 
Commission amend proposed Rule 17Ad-27 to include a specific 
requirement for reporting quantitative data on an anonymized and 
aggregated level for rates of allocation, confirmation, affirmation, 
and/or matching that a CMSP has achieved via STP and distinguishing 
trade information by asset class, type of processing service (i.e., 
ETC versus matching), and ``customer segment'' (referred to as 
``user type'' in Rule 17Ad-27, as adopted). See DTCC ITP September 
Letter, supra note 325, at 2.
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    The Commission agrees with DTCC ITP that further distinguishing any 
required data sets by asset class, type of CMSP service used, user 
type, and presented on an anonymized and aggregated basis, should 
better demonstrate automation trends and STP progress. The Commission 
also believes that further subcategorizing the required data as now 
required under adopted Rule 17Ad-27(b)(4) enables more thorough and 
useful analysis of the progress toward STP and helps identify potential 
hindrances in achieving full STP.\396\ Organizing each of the data sets 
required under paragraph (b)(3) to further divide the data on a month-
by month basis, and to identify the submission of trades by entity type 
(i.e., ETC versus matching), user type, and asset class should assist 
in the Commission's and the public's analysis of the data and more 
precise identification of any potential sources of issues hindering STP 
progress. Moreover, the identification of certain subcategories should 
apprise users and their customers of any issues raised by the data that 
is specifically applicable to a particular user.
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    \396\ See id.
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    The Commission understands that there may be circumstances when the 
identification of a particular data set does not lend itself to further 
subcategorization under paragraph (b)(4)(ii) requiring CMSP service 
type designation or paragraph (b)(4)(iii) requiring asset class 
designation. This may be particularly true as CMSPs services and 
technology evolve to accommodate improvements or changing business or 
market conditions. For example, a CMSP's ETC or matching service may 
not perform certain functions that are subject to the data set 
requirements under paragraph (b)(3). Similarly, a specific CMSP 
function may involve multiple asset classes and, as a result, may be 
difficult to parse out in a manner that would aid an analysis of the 
information or aid in assessing STP progress. In those cases, the CMSP 
generally should use reasonable efforts to organize the data sets in a 
manner that best informs the Commission, CMSP users, and the public as 
to the current and future status of the CMSP's progress in facilitating 
STP at the CMSP.
    To the extent applicable and feasible, subcategorizing data 
required under paragraph (b)(3) by user type generally should include 
those entities that are directly interfacing with the CMSP to 
facilitate allocation, confirmation, affirmation or matching functions 
for themselves or their clients. Such entities may include investment 
managers, broker-dealers (in their capacity as executing or prime 
broker-dealers), and custodians. However, to the extent that other user 
types, including indirect users of CMSP services, can be identified and 
distinguished in the data sets required under paragraph (b)(3), the 
CMSP could consider including those categorizations as well if such 
information would benefit an analysis of the required data.
    The Commission is also adopting new Rule 17Ad-27(b)(4)(v) which 
requires the information to be presented on an anonymized and 
aggregated basis.\397\ Given that the annual report has information 
that the Commission believes should be available to the public, and 
that the Commission would likely sustain a confidential treatment 
request under 17 CFR 240.24b-2 by the CMSP for sensitive, proprietary 
and confidential data included in the annual report,\398\ the contents 
of the annual report need to be anonymized and aggregated.
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    \397\ See id.; see also DTCC ITP April Letter, supra note 216, 
at 12.
    \398\ See 17 CFR 240.24b-2.
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(e) New Rule 17Ad-27(b)(5)--Qualitative Description of STP Facilitation
    The fifth component of the annual report under Rule 17Ad-27(b) 
requires the CMSP to provide pursuant to new paragraph (b)(5) a 
description of the actions the CMSP intends to take to further 
facilitate STP of securities transactions at the clearing agency during 
the twelve-month period that follows the period covered by the report. 
The Commission is adopting this provision generally as proposed, but is 
making one modification to the proposed rule text by replacing the text 
``[T]he steps'' in proposed Rule 17Ad-27(c) with the text ``a 
description of the actions'' in new paragraph (b)(5). This modification 
will facilitate a more detailed description of the CMSP's actions to 
facilitate STP in the upcoming twelve months.
    The purpose of paragraph (b)(5) is two-fold. First, the provision 
is intended to inform the Commission, CMSP users and market 
participants generally as to the CMSP's intended actions to facilitate 
STP in the upcoming year. The Commission anticipates that advance 
notice of a CMSP's intentions to take certain actions oriented toward 
STP development may allow other market participants to make the 
necessary changes to accommodate the CMSP's activities and may 
facilitate innovation to improve other aspects of the post-trade 
processing environment external to the CMSP, some of which may 
encourage or allow for future improvements at the CMSP.
    Second, new paragraph (b)(5) is intended to encourage CMSPs to 
develop a culture of focusing on enabling a fully automated STP

[[Page 13910]]

environment as it considers future developments of its services, 
operations, and business model. The Commission believes that the CMSP 
can and should be a leading force in encouraging the development of 
more efficient, automated, and STP-focused systems in post-trade 
processing market-wide. While the CMSP does not have control over 
actions taken or services utilized by its users and their customers, 
the actions it takes to provide and promote STP services and 
capabilities at the CMSP level should have a direct impact on its 
users' and an indirect impact on its users' customers with respect to 
future developments of their individual internal operations and 
systems, as well as an impact on the state of post-trade processing 
within the market as a whole.
    In describing the actions it intends to take in the twelve-month 
period following the period covered by the annual report as required 
under new Rule 17Ad-27(b)(5), the CMSP should generally consider 
including any material changes that it intends to make with respect to 
its policies, procedures, operations, systems or services that relate 
to the furtherance of facilitating STP. While paragraph (b)(5) requires 
the CMSP to identify those actions the CMSP will in fact implement 
during the required timeframe, the CMSP should also consider including 
those actions that have a high degree of likelihood of being 
implemented during the timeframe. To the extent practicable and related 
to STP development, the CMSP should also consider including a summary 
of the underlying rationale as to why the CMSP intends to take a 
particular action required to be described under paragraph (b)(5) and a 
description of the expected impact of any such action or actions as it 
relates to the CMSP's facilitation of STP.
    The Commission anticipates that the metrics required under new Rule 
17Ad-27(b)(3) should help inform the CMSP and shape future 
considerations by providing data that evidences whether progress has 
made in moving toward full STP during the period covered by the 
preceding year and what if any obstacles remain that should be analyzed 
and addressed in future iterations of its services and operations. For 
example, changes in manual touch rates by user type may indicate issues 
that can and should generally be addressed on a policy or systems basis 
to reduce those rates. From a qualitative perspective, CMSPs should 
consider reviewing their operations on a system-wide basis to design 
future solutions to address the use of manual processes or automated 
process that result in manual intervention, with the goal of reducing 
or eliminating the use of such processes.
3. New Rule 17Ad-27(c)--Timing of Filing Annual Report
    The Commission is adopting new Rule 17Ad-27(c) to require that the 
annual report required under Rule 17Ad-27(b) must be filed with the 
Commission within 60 days of the end of the twelve-month period covered 
by the report, and the twelve month period covered by each report must 
commence on January 1 of the calendar year.\399\ The Commission 
believes that requiring the filing of the annual report within 60 days 
of the end of the twelve month period covered by the report is an 
appropriate amount of time because it balances the competing interests 
of providing the CMSPs sufficient time to compile the data and 
descriptions required under new Rule 17Ad-27(b) and providing 
sufficiently recent and relevant data for the Commission and public 
review and analysis. Moreover, CMSPs may choose to plan and compile the 
contents of the annual report throughout the reporting year as new 
relevant data and information becomes available, in part because the 
CMSPs already provide on a monthly basis some data contemplated in the 
annual report pursuant to the terms of the exemptive orders. Based on 
the Commission's experience in requiring other types of clearing 
agencies to provide financial statements within sixty days of the end 
of the year,\400\ the Commission believes a 60-day period would provide 
the CMSP sufficient time to compile and complete the remaining portions 
of the report and seek the appropriate internal approval to file the 
report with the Commission.
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    \399\ DTCC ITP recommended that the Commission should provide 
further clarification as to when CMSPs would be required to submit 
their initial annual report to the Commission, as well as the time 
period applicable to the actual content to be included in initial 
annual report. DTCC ITP raised concerns that depending on when the 
initial report was due, the variance in pre and post T+1 
implementation data could result in unclear analysis of STP 
progress. See DTCC ITP September Letter, supra note 325, at 3. The 
Commission believes DTCC ITP's concern is addressed, regardless of 
the time period covered by the initial or subsequent annual reports 
or whether the data reflects pre or post T+1 implementation, because 
the data will be presented on a month-by-month basis pursuant to new 
Rule 17Ad-27(b)(4)(i), and therefore amenable to an analysis on any 
timeframe.
    \400\ See, e.g., 17 CFR 240.17Ad-22(c)(2). In the post-trade 
environment more generally, the Commission also requires security-
based swap data repositories to file an annual report with the 
Commission within sixty days of the end of the fiscal year. See 17 
CFR 240.13n-11.
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    The Commission is also requiring that the time period covered by 
the annual report contain information relevant to the requirements 
under new paragraph (b) of Rule 17Ad-27 from January 1 through December 
31 of each calendar year. By synchronizing the submission the annual 
reports to a uniform time frame across all CMSPs, the Commission, CMSP 
users, and the public will be able to better analyze the data and 
assess compliance with the rule and progress of the CMSPs, on an 
individual CMSP level and across all CMSPs, in facilitating STP. In the 
event there is a partial year on the first year a CMSP is obligated to 
comply with Rule 17Ad-27(b), then the CMSP should generally file its 
first annual report to cover that partial year through December 31 of 
that year.\401\
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    \401\ For example, the compliance date for adopted Rule 17Ad-27 
is May 28, 2024. See infra Part VII.D. The first annual report will 
cover the time period from April 1, 2024, through December 31, 2024.
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4. New Rule 17Ad-27(d)--Filing Annual Report in EDGAR and 
Confidentiality Issues
    The Commission is adopting as proposed the provision under proposed 
Rule 17Ad-27 that requires CMSPs to file the annual report on 
EDGAR.\402\ Pursuant to new Rule 17Ad-27(d), a CMSP is required to 
submit its annual report to the Commission using EDGAR, and tag the 
information in the report using the structured (i.e., machine-readable) 
Inline XBRL data language. Specifically, Rule 17Ad-27(d) requires that 
the report required under paragraph (b) of the new rule be filed 
electronically on EDGAR and must be provided as interactive data as 
required by 17 CFR 232.405 (``Rule 405 of Regulation S-T'') in 
accordance with the EDGAR Filer Manual.\403\
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    \402\ DTCC ITP did not comment on the use of EDGAR to file the 
proposed annual report, but did mention in the context of filing on 
EDGAR that it was considering publishing the annual report on its 
website. See DTCC ITP September Letter, supra note 325, at 3.
    \403\ See 17 CFR 232.101 and 232.405. In a non-substantive 
change from the proposal, rather than adding new 17 CFR 232.409 
(``Rule 409 of Regulation S-T''), the Commission is expanding Rule 
405 of Regulation S-T to effectuate the Inline XBRL requirement. 
This approach will be consistent with other Commission rulemakings 
that have featured Inline XBRL requirements. See, e.g., Exchange Act 
Release No. 95607 (Aug. 25, 2022), 87 FR 55134, 55196 (Sept. 8, 
2022).
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    Using EDGAR will provide the Commission and the public with a 
centralized, publicly accessible electronic database for the reports, 
facilitating the use of the reported data on straight-through 
processing. Moreover, requiring Inline XBRL tagging of the reported 
disclosures, which would specifically include an Inline XBRL block text 
tag for each of the required narrative disclosures as well as

[[Page 13911]]

detail tags for individual data points, should make the disclosures 
more easily available and accessible to and reusable by market 
participants and the Commission for retrieval, aggregation, and 
comparison across time periods for a single CMSP or across different 
CMSPs and time periods.\404\ Detail tags will also be helpful relative 
to the disclosure in the annual report of individual data points, 
including the rates of allocation, confirmation, affirmation, and/or 
matching achieved via straight-through processing. As a general matter, 
incorporating submission via EDGAR and requiring Inline XBRL tagging 
under Rule 17Ad-27 will facilitate access to data included in reports 
submitted pursuant to the rule in a manner that is machine-readable, 
human-readable, and accessible via application programming interface 
where appropriate.\405\ In the Commission's view, the Inline XBRL 
tagging requirement will facilitate efficient analysis of information 
that CMSPs include in their annual reports, providing CMSP users (e.g., 
institutional investors and broker-dealers acting on behalf of 
institutional investors) and the general public greater insight into 
policies and procedures, progress, quantitative data, and qualitative 
descriptions related to straight-through processing.
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    \404\ See Exchange Act Release No. 10514 (June 28, 2018), 83 FR 
40846, 40847 (Aug. 16, 2018). Inline XBRL allows filers to embed 
XBRL data directly into an HTML document, eliminating the need to 
tag a copy of the information in a separate XBRL exhibit. Id. at 
40851. Using Inline XBRL as compared to an unstructured PDF, HTML, 
or ASCII format requirement for the reports would facilitate 
analysis of the information contained therein. Id. With respect to 
the metrics concerning the use of manual and automated processes by 
a CMSP's users required under paragraph (b)(3)(vi)--which may vary 
across CMSPs--the Commission anticipates that the tagged data will 
facilitate useful comparisons over time at a particular CMSP, even 
though it may facilitate only limited comparisons across CMSPs.
    \405\ These considerations are consistent with objectives of the 
recently enacted Financial Data Transparency Act (``FDTA''), which 
concerns the manner in which the Commission collects and 
disseminates information. The FDTA was signed into law on December 
23, 2022, as Title LVIII of the James M. Inhofe National Defense 
Authorization Act for Fiscal Year 2023. See James M. Inhofe National 
Defense Authorization Act for Fiscal Year 2023, Public Law 117-263 
(Dec. 23, 2022). Public Law 117-263, 136 Stat. 2395 (2022). Section 
5811 of the FDTA directs the Commission and other covered agencies 
(e.g., financial regulators) to jointly issue proposed rules for 
public comment that establish data standards for the collections of 
information reported to each covered agency by financial entities 
and for the data collected from covered agencies on behalf of the 
Financial Stability Oversight Council. The data standards must meet 
specified criteria relating to openness and machine-readability and 
promote interoperability of financial regulatory data across members 
of the Financial Stability Oversight Council. In addition, section 
5822 of the Financial Data Transparency Act requires that all public 
data assets published by the Commission under the securities laws 
and the Dodd-Frank Act be made available in accordance with 
specified criteria relating to openness and machine-readability. 
Section 5811 of the FDTA directs the Commission and other covered 
agencies (e.g., financial regulators) to jointly issue proposed 
rules for public comment that establish data standards for the 
collections of information reported to each covered agency by 
financial entities and for the data collected from covered agencies 
on behalf of the Financial Stability Oversight Council. The data 
standards must meet specified criteria relating to openness and 
machine-readability and promote interoperability of financial 
regulatory data across members of the Financial Stability Oversight 
Council. In addition, section 5822 of the Financial Data 
Transparency Act requires that all public data assets published by 
the Commission under the securities laws and the Dodd-Frank Act be 
made available in accordance with specified criteria relating to 
openness and machine-readability. See 44 U.S.C. 3502(20) (defining 
the term ``open Government data asset'' to mean, among other things, 
machine-readable and available (or could be made available) in an 
open format).
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    As discussed in the T+1 Proposing Release, the Commission will make 
the annual report required under adopted Rule 17Ad-27(b) publicly 
available on its website to enable the public to review and analyze 
data regarding, and progress towards, straight-through processing.\406\ 
The public availability of the annual report would help inform the 
public, particularly the direct and indirect users of CMSPs, as to the 
progress being made each year to advance implementation of STP with 
respect to the allocation, confirmation, affirmation, and matching of 
institutional trades, the communication of messages among the parties 
to the transactions, and the availability of service offerings that 
reduce or eliminate the need for manual processing. In addition, 
allowing for additional transparency may facilitate innovation in the 
public forum as to how CMSPs may improve their systems and services to 
improve STP specifically, and the institutional processing environment 
generally.
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    \406\ DTCC ITP has indicated that it is considering publishing 
the report on its website, where it believes that the public will 
have ready access to the information. See DTCC ITP September Letter, 
supra note 325, at 3.
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    The Commission does not believe the annual report requires the 
inclusion of proprietary information, trade secrets, or personally 
identifiable information. To the extent that an annual report includes 
confidential commercial or financial information, a CMSP could request 
confidential treatment of those specific portions of the report.\407\
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    \407\ See 17 CFR 240.24b-2.
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VI. Impact on Certain Commission Rules, Guidance, and SRO Rules

    The Commission stated in the T+1 Proposing Release that the 
proposed rules and rule amendments may affect compliance with other 
existing Commission rules and guidance that reference the settlement 
cycle or settlement processes. The Commission identified a preliminary 
list of rules that could be affected by a move to a T+1 standard 
settlement cycle, determined that changes to those rules were not 
necessary, and solicited comment regarding the potential impact of a 
T+1 settlement cycle. In response, several commenters identified 
elements of Commission rules, as well as existing Commission guidance, 
exemptive relief related to those rules, and staff no-action 
letters,\408\ that may be impacted by shortening the standard 
settlement cycle to T+1.
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    \408\ Staff reports, Investor Bulletins, and other staff 
documents (including those cited herein) represent the views of 
Commission staff and are not a rule, regulation, or statement of the 
Commission. The Commission has neither approved nor disapproved the 
content of these staff documents and, like all staff statements, 
they have no legal force or effect, do not alter or amend applicable 
law, and create no new or additional obligations for any person.
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A. Regulation SHO

    In the T+1 Proposing Release, the Commission identified provisions 
of Regulation SHO under the Exchange Act that may be impacted by the 
adoption of a T+1 standard settlement cycle. Certain provisions of 
Regulation SHO use ``trade date'' and ``settlement date'' to determine 
the time frames for compliance relating to sales of equity securities 
and fails to deliver on settlement date. These references are not to a 
particular settlement cycle (e.g., T+2); however, the time frames for 
these provisions can change in tandem with changes in the standard 
settlement cycle.\409\ The Commission received the following comments 
regarding Regulation SHO.
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    \409\ See T+1 Proposing Release, supra note 2, at 10444 
(discussing the potential impacts of a T+1 standard settlement cycle 
on the closeout of a fail-to-deliver position under 17 CFR 242.204 
(``Rule 204'') and the application of 17 CFR 242.200(g) (``Rule 
200(g)'')).
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    One commenter stated its belief that the Commission should 
reevaluate the deadlines under Rule 204 in the context of a T+1 
settlement cycle.\410\ The commenter expressed concern that moving to 
T+1 would reduce the time available for a bona fide market maker \411\ 
to close out fail-to-deliver

[[Page 13912]]

positions and could adversely impact the liquidity role those market 
makers provide.
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    \410\ See Virtu Financial Letter, supra note 16, at 3.
    \411\ Under Regulation SHO's bona fide market making exceptions, 
the broker-dealer generally should be holding itself out as standing 
ready and willing to buy and sell the security by continuously 
posting widely accessible quotes that are near or at the market. The 
market maker must be at economic risk for such quotes. See Exchange 
Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690, 61699 (Oct. 17, 
2008) (``2008 Regulation SHO Amendments''); see also Exchange Act 
Release No. 94524 (Mar. 28, 2022), 87 FR 23054, 23068 n.157 (Apr. 
18, 2022) (``Dealer Release'') (``Broker-dealers that do not publish 
continuous quotations, or publish quotations that do not subject the 
broker-dealer to such risk (e.g., quotations that are not publicly 
accessible, are not near or at the market, or are skewed 
directionally towards one side of the market) would not be eligible 
for the bona-fide market-maker exceptions under Regulation SHO. In 
addition, broker-dealers that publish quotations but fill orders at 
different prices than those quoted would not be engaged in bona-fide 
market making for purposes of Regulation SHO.''). Thus, a market-
maker that continually executed short sales away from its posted 
quotes would generally be unable to rely on the bona-fide market 
making exceptions of Regulation SHO. See Exchange Act Release No. 
50103 (July 28, 2004), 69 FR 48008, 48015 n.68 (Aug. 6, 2004). 
Further, broker-dealers that publish quotations but fill orders at 
different prices than those quoted would not be engaged in bona fide 
market-making for purposes of Regulation SHO. See, e.g., Dealer 
Release, supra note 411, at 23068 n.157. The market-maker must also 
be engaged in bona fide market making in that security at the time 
of the short sale for eligibility for the exceptions. See 2008 
Regulation SHO Amendments, supra note 411, at 61699.
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    As discussed in the T+1 Proposing Release,\412\ shortening the 
standard settlement cycle to T+1 would reduce the time frames to effect 
the closeout of most types of fail-to-deliver positions under Rule 
204.\413\ The applicable closeout date for a fail-to-deliver position 
can differ depending on its Rule 204 categorization, including whether 
it results from a short sale, a long sale, or bona fide market making 
activity. If a fail-to-deliver position results from bona fide market 
making activity, the participant must close out the fail-to-deliver 
position by no later than the beginning of regular trading hours on the 
third consecutive settlement day following the settlement date. Under 
the current T+2 standard settlement cycle, the closeout for long sales 
or bona fide market making activity is required by the beginning of 
regular trading hours on T+5. If the Commission adopts a T+1 standard 
settlement cycle, this closeout requirement would be shortened from T+5 
to T+4.
---------------------------------------------------------------------------

    \412\ See T+1 Proposing Release, supra note 2, at 10461.
    \413\ A T+1 standard settlement cycle would reduce close out 
time frames for all Rule 204 fail-to-deliver positions except those 
that fall within Rule 204(a)(2).
---------------------------------------------------------------------------

    As explained above, most Rule 204 time frames automatically adjust 
to a new shortened settlement cycle, and the impact of such an 
alignment was considered during the rulemaking process for Rule 204 as 
well as during the proposal of the T+1 cycle. Accordingly, given the 
time available to comply under a T+1 standard settlement cycle, the 
Commission does not believe that a reevaluation of the Rule 204 time 
frames is necessary at this time.\414\
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    \414\ As discussed in the T+1 Proposing Release, the time frame 
to recall a loaned security corresponds to the then current standard 
settlement cycle. As the standard settlement cycle has been modified 
from T+3 to T+2 to T+1, the Commission has provided additional 
guidance regarding the probable time frame necessary to recall a 
loaned security so as to ensure timely delivery to close out a 
failure to deliver that may have occurred. Extending the time frame 
to recall a loaned security further could result in failures to 
deliver not being closed out as is required by Rule 204 of 
Regulation SHO. See T+1 Proposing Release, supra note 2, at 10461-62 
(stating that previous guidance ``was predicated on the Commission's 
belief that, under then current industry standards, recalls for 
loaned securities would likely be delivered within three business 
days after the initiation of a recall. In that case, a broker-dealer 
that initiated a bona fide recall by T+2 would receive delivery of 
loaned securities by T+5 and then be able to close out any failure 
to deliver on a ``long'' sale of the loaned but recalled securities 
by the beginning of regular trading hours on T+6, as then required 
by Rule 204 in a T+3 environment.''); see also T+2 Adopting Release, 
supra note 4, at 15578 (stating that ``to the extent that customers 
have not made timely deliveries and have caused a fail to deliver by 
a broker-dealer, any indirect impacts on such customers are 
warranted,'' and expressing specific concerns related to continued 
failures to deliver further: ``In the Rule 204 Adopting Release, the 
Commission recognized that requiring broker-dealers to close-out 
fails to deliver promptly after they occur may result in costs to 
certain participants, but believed that `such costs are limited and 
are justified by the fact that the rule will continue our efforts to 
achieve our goals of reducing fails to deliver by maintaining the 
reductions in fails to deliver achieved by the adoption of temporary 
Rule 204T, as well as other actions taken by the Commission, and 
addressing potentially abusive `naked' short selling and, thereby 
help restore, maintain, and enhance investor confidence in the 
markets.' '').
---------------------------------------------------------------------------

    Two commenters addressed the impact of a T+1 settlement cycle to 
the application of Rule 200(g)(1) as it pertains to loaned but recalled 
securities. One commenter stated that the move to T+1 will shorten the 
recall period by one day and recommended that the Commission modify its 
interpretation in the Regulation SHO Adopting Release regarding the 
recall period to reflect this shortened period.\415\ The other 
commenter stated that if the standard settlement cycle is shortened to 
T+1, the requirements under Rule 200(g) may result in a change in the 
timing by which a broker-dealer would need to initiate a bona fide 
recall of a loaned security to mark the sale of such loaned, but 
recalled, security ``long'' for purposes of Rule 200(g)(1).\416\ The 
commenter observed that some broker-dealers may have shortened the 
previous three business day recall period to two business days under 
the T+2 standard settlement cycle to ensure settlement on the proper 
settlement date. The commenter explained that, in a T+1 environment, 
the recall period would be even shorter, which may limit securities 
lending participants' ability to comply with these rules. The commenter 
recommended that, should the implementation of T+1 result in any 
changes to Regulation SHO, the Commission's guidance regarding 
classification of the sale of a security that is on loan as ``long'' 
remain unchanged.
---------------------------------------------------------------------------

    \415\ See Fidelity Letter, supra note 16, at 7 (further 
explaining, ``[w]hile we anticipate that in the early days of the 
transition to T+1, there may be an increase in fails to deliver, we 
believe that the Commission's already robust regulatory framework 
minimizes instances in which a market participant may fail to 
deliver a security.'').
    \416\ See RMA Letter, supra note 16, at 4-5.
---------------------------------------------------------------------------

    In the T+1 Proposing Release, the Commission discussed the close-
out scenarios under Regulation SHO in a T+1 environment and provided a 
figure to illustrate the timing.\417\ To satisfy the requirements of 
Rule 200(g), it was acknowledged that some broker-dealers may need to 
initiate a bona fide recall as early as trade date or may choose to 
modify securities lending agreements to shorten the recall period. Such 
measures would need to be taken to meet the timing obligations under a 
T+1 cycle, and the Commission believes that such measures could 
facilitate the fulfillment of timing obligations without changing the 
requirements of Regulation SHO or related guidance. The industry used 
such measures to make a similar successful adjustment in the prior 
shortening of the settlement cycle from T+3 to T+2, and the Commission 
believes that such measures could again ensure compliance in a T+1 
environment. The Commission will continue to monitor the impact of a 
T+1 settlement cycle on the ability of broker-dealers to comply with 
Rule 200(g).
---------------------------------------------------------------------------

    \417\ See T+1 Proposing Release, supra note 2, at 10462.
---------------------------------------------------------------------------

B. Delivery of Rule 10b-10 Confirmations and Prospectuses

    As discussed in the T+1 Proposing Release,\418\ Rule 10b-10 under 
the Exchange Act provides customers confirmations of transactions and 
serves a significant investor protection function.\419\ Rule 10b-10 
does not directly refer to the settlement cycle,\420\ but instead 
requires that a broker-dealer

[[Page 13913]]

``gives or sends'' a customer a written confirmation disclosing 
specified information at or before ``completion of the transaction.'' 
\421\
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    \418\ See id. at 10463.
    \419\ 17 CFR 240.10b-10.
    \420\ Rule 10b-10 was adopted in 1977 before the Commission 
adopted Rule 15c6-1, establishing the standard settlement cycle of 
T+3 in 1993. See Exchange Act Release No. 13508 (May 5, 1977), 42 FR 
25318 (May 17, 1977).
    \421\ Generally, 17 CFR 240.15c1-1 (``Rule 15c1-1'') defines 
``completion of the transaction'' to mean the time when: (i) a 
customer purchasing a security pays for any part of the purchase 
price after payment is requested or notification is given that 
payment is due; (ii) a security is delivered or transferred to a 
customer who purchases and makes payment for it before payment is 
requested or notification is given that payment is due; (iii) a 
security is delivered or transferred to a broker-dealer from a 
customer who sells the security and delivers it to the broker-dealer 
after delivery is requested or notification is given that delivery 
is due; or (iv) a broker-dealer makes payment to a customer who 
sells a security and delivers it to the broker-dealer before 
delivery is requested or notification is given that delivery is due. 
See 17 CFR 240.15c1-1(b).
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    The Commission has considered how and when broker-dealers typically 
comply with the requirement to send out a Rule 10b-10 confirmation when 
changes have been made to the standard settlement cycle. In 1993, when 
Rule 15c6-1 was initially adopted, the Commission was aware that 
broker-dealers typically sent out Rule 10b-10 customer confirmations on 
the day after trade date.\422\ By 2017, when the Commission shortened 
the standard settlement cycle from T+3 to T+2, the Commission had 
established a framework for electronic delivery of required information 
to investors.\423\ At that time, the Commission stated that, while 
broker-dealers may continue to send physical customer confirmations on 
the day after the trade date, broker-dealers may also send electronic 
confirmations to customers on the trade date. The Commission also 
acknowledged that, in a T+2 settlement cycle, broker-dealers would have 
a shorter timeframe to send out the confirmation but did not believe 
that a shortened settlement cycle would create problems with regards to 
a broker-dealer's ability to comply with Rule 10b-10. When proposing 
T+1, the Commission expressed a similar belief that T+1 would not 
create a compliance issue for broker-dealers under Rule 10b-10, 
although broker-dealers would again need to accommodate the shortened 
timeframes of T+1.\424\ The Commission solicited comment on the extent 
to which the T+1 rule proposals may impact compliance with Rule 10b-10.
---------------------------------------------------------------------------

    \422\ See T+1 Proposing Release, supra note 2, at 10463.
    \423\ See, e.g., Exchange Act Release No. 37182 (May 9, 1996), 
61 FR 24644 (May 15, 1996) (providing Commission views on electronic 
delivery of required information by broker-dealers, transfer agents, 
and investment advisers); see also T+1 Proposing Release, supra note 
2, at 10643 n.222.
    \424\ See T+1 Proposing Release, supra note 2, at 10463.
---------------------------------------------------------------------------

    One commenter stated that broker-dealers have had challenges at 
times meeting the Rule 10b-10 requirements under T+2, particularly for 
postal delivery such as in March 2020 at the beginning of the Covid-19 
pandemic, and that the proposed compressed timeframe of T+1 will leave 
broker-dealers with even less time to correct minor delivery 
issues.\425\ Another commenter responded that shortening the settlement 
cycle to T+1 will make the delivery of physical confirmations no longer 
practical or feasible.\426\ However, as noted above, Rule 10b-10 
requires that a broker-dealer ``give or send'' the confirmation prior 
to settlement; it does not require that the Rule 10b-10 confirmation be 
received prior to settlement. Shortening the settlement cycle does not 
affect the ability of the broker-dealer to give or send Rule 10b-10 
confirmations, and therefore does not impact a broker-dealer's ability 
to comply with Rule 10b-10. Accordingly, the Commission believes it is 
unnecessary to modify Rule 10b-10 to facilitate an effective transition 
to a T+1 standard settlement cycle. In addition, to the extent that a 
broker-dealer and its customer would like to ensure that the customer 
receives Rule 10b-10 confirmation documents prior to settlement, as 
explained above and discussed further below, broker-dealers and their 
customers have the option to establish an arrangement for electronic 
delivery.
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    \425\ See letter from Kenneth E. Bentsen, Jr., President and 
Chief Executive Officer, Securities Industry and Financial Markets 
Association (Aug. 3, 2022), at 2 (``SIFMA August 3rd Letter'').
    \426\ See AGC April Letter, supra note 16, at 3.
---------------------------------------------------------------------------

    The Commission requested comment on whether guidance regarding 
``delivery'' for electronic confirmations under Rule 10b-10 needed to 
be updated to facilitate a T+1 standard settlement cycle.\427\ In the 
context of sending Rule 10b-10 confirmations and prospectus delivery 
obligations (discussed further below in Part VI.C), several commenters 
asked that the Commission consider, on a wider basis, making electronic 
delivery (``e-delivery'') the default method for communicating with 
investors or customers.\428\ The Commission observes that broker-
dealers already may use ``e-delivery'' to provide this information to 
investors.\429\ The Commission believes that considering widespread 
changes to e-delivery standards is not appropriate in the context of 
shortening the settlement cycle because it is not necessary to 
establish an e-delivery default to shorten the standard settlement 
cycle to T+1. In a T+1 environment, no Commission rule would require 
the delivery of paper documentation by mail on T+1. Moreover, the 
issues associated with e-delivery are complex and multi-faceted, 
affecting a wide range of disclosure documents, and imposing a range of 
potential impacts on investors who currently receive physical 
documents.\430\ The Commission believes considering changes to existing 
guidance warrants further consideration. Accordingly, the Commission 
declines to make such change to the existing guidance in this 
rulemaking.
---------------------------------------------------------------------------

    \427\ See T+1 Proposing Release, supra note 2, at 10463 n.222.
    \428\ See SIFMA August 3rd Letter, supra note 425, at 1 (stating 
that this acceleration of the settlement cycle heightens the need 
for the Commission to modernize its rules to make e-delivery the 
default mechanism for transmitting investor communications and 
disclosures); ICI Letter, supra note 16, at 11-12 (recommending that 
e-delivery should be the default method for delivering Rule 10b-10 
confirmations); ASA Letter, supra note 16, at 3 (stating that, given 
the growing preferences of investors to receive such documentation 
electronically, it would be cost-effective and in the best interest 
of investors to allow e-delivery to be the default option for 
sending prospectuses and trade confirmations, adding that investors 
who wish to receive paper documents would still be afforded the 
ability to opt-in to receive paper).
    \429\ See T+1 Proposing Release, supra note 2, at 10463 n.222.
    \430\ Among other things, considering a transition to e-delivery 
by default would need to assess the implication of such a change 
with regard to the timing, format, and delivery mechanism, and those 
implications may differ among different types of documents, 
depending on the nature and purpose of the document. Another issue 
to consider would be how e-delivery by default would affect investor 
engagement with important information.
---------------------------------------------------------------------------

    One commenter sought assurance that moving to T+1 would not affect 
existing no-action letters and exemptive relief under Rule 10b-10 for 
dividend reinvestment programs (``DRIP'') that allow monthly account 
statements for trade activity.\431\ The Commission observes that a 
shorter settlement cycle would not change the relevant facts and 
circumstances described in the applicable staff no-action letters or 
exemptive relief regarding the application of Rule 10b-10 to DRIP 
transactions.
---------------------------------------------------------------------------

    \431\ SIFMA April Letter, supra note 16, at 15.
---------------------------------------------------------------------------

C. Other Prospectus Delivery Matters

    As stated in the T+1 Proposing Release,\432\ broker-dealers have to 
comply with prospectus delivery obligations under the Securities 
Act.\433\

[[Page 13914]]

The regulations at 17 CFR 230.172 (``Securities Act Rule 172'') 
implement an ``access equals delivery'' model that permits, with 
certain exceptions, final prospectus delivery obligations to be 
satisfied by the filing of a final prospectus with the Commission, 
rather than delivery of the prospectus to purchasers.\434\ The 
Commission stated its preliminarily belief that a T+1 standard 
settlement cycle would not raise any significant legal or operational 
concerns for issuers or broker-dealers to comply with the prospectus 
delivery obligations under the Securities Act.\435\ The Commission also 
requested comment on the following: (i) whether any specific legal or 
operational concerns would arise for issuers or broker-dealers to 
comply with the prospectus delivery obligations under the Securities 
Act if the settlement cycle is shortened to T+1, and (ii) the extent to 
which the T+1 rule proposals may impact compliance with the prospectus 
delivery requirements under the Securities Act.
---------------------------------------------------------------------------

    \432\ T+1 Proposing Release, supra note 2, at 10464.
    \433\ 15 U.S.C. 77a et seq. Section 5(b)(2) of the Securities 
Act makes it unlawful to deliver (i.e., as part of settlement) a 
security ``unless accompanied or preceded'' by a prospectus that 
meets the requirements of section 10(a) of the Securities Act (known 
as a ``final prospectus''). 15 U.S.C. 77e(b)(2).
    \434\ 15 U.S.C. 77e(b)(2). Under Securities Act Rule 172(b), an 
obligation under section 5(b)(2) of the Securities Act to have a 
prospectus that satisfies the requirements of section 10(a) of the 
Securities Act precede or accompany the delivery of a security in a 
registered offering is satisfied only if the conditions specified in 
paragraph (c) of Rule 172 are met. 17 CFR 230.172(b). Pursuant to 
Rule 172(d), ``access equals delivery'' generally is not available 
to the offerings of most registered investment companies (e.g., 
mutual funds), business combination transactions, or offerings 
registered on Form S-8. 17 CFR 230.172(d). The Commission recently 
amended Rule 172 to allow registered closed-end funds and business 
development companies to rely on the rule. See Securities Offering 
Reform for Closed-End Investment Companies, Investment Company Act 
Release No. 33836 (Apr. 8, 2020), 85 FR 33353 (June 1, 2020).
    \435\ T+1 Proposing Release, supra note 2, at 10464.
---------------------------------------------------------------------------

    One commenter stated that the requirements of 17 CFR 240.15c2-8(b) 
should not apply in a T+1 environment.\436\ Under Exchange Act Rule 
15c2-8(b), with respect to an issue of securities where the issuer has 
not been previously required to file reports pursuant to section 13(a) 
or 15(d) of the Exchange Act,\437\ unless the issuer has been exempted 
from the requirement to file reports thereunder pursuant to section 
12(h) of the Exchange Act,\438\ a broker-dealer is required to deliver 
a copy of the preliminary prospectus to any person who is expected to 
receive a confirmation of sale at least 48 hours prior to the sending 
of such confirmation (``48-hour preliminary prospectus delivery 
requirement'').\439\ The commenter stated that in a T+1 settlement 
cycle, many broker-dealers will send confirmations on trade date to 
achieve settlement by T+1, and that Rule 15c2-8 does not reflect 
present-day offering procedure timelines, public availability of 
preliminary prospectuses on EDGAR, or electronic delivery 
facilities.\440\ However, because the Commission is adopting a T+2 
standard settlement cycle for firm commitment offerings priced after 
4:30 p.m. ET, and not a T+1 standard settlement cycle for these 
offerings, in final Rule 15c6-1(c),\441\ no inconsistency exists 
between the requirements set forth in the final amendments to Rule 
15c6-1 and existing Rule 15c2-8(b). Accordingly, the Commission does 
not believe that Rule 15c2-8 should be modified.
---------------------------------------------------------------------------

    \436\ SIFMA April Letter, supra note 16, at 13-14.
    \437\ 15 U.S.C. 78m(a); 15 U.S.C. 78o(d).
    \438\ 15 U.S.C. 78l(h).
    \439\ Exchange Act Rule 15c2-8(b).
    \440\ SIFMA April Letter, supra note 16, at 14.
    \441\ See supra Part II.C.4.
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D. Financial Responsibility Rules for Broker-Dealers

    As noted in the T+1 Proposing Release, certain provisions of the 
broker-dealer financial responsibility rules under the Exchange Act 
\442\ reference explicitly or implicitly the settlement date of a 
securities transaction.\443\ For example, paragraph (m) of 17 CFR 
240.15c3-3 references the settlement date to prescribe the timeframe in 
which a broker-dealer must complete certain sell orders on behalf of 
customers.\444\ Specifically, Rule 15c3-3(m) provides that if a broker-
dealer executes a sell order of a customer (other than an order to 
execute a sale of securities which the seller does not own) and if for 
any reason the broker-dealer has not obtained possession of the 
securities from the customer within ten business days after the 
settlement date, the broker-dealer must immediately close the 
transaction with the customer by purchasing securities of like kind and 
quantity.\445\ In addition, settlement date is incorporated into 
paragraph (c)(9) of 17 CFR 240.15c3-1,\446\ defining what it means to 
``promptly transmit'' funds and ``promptly deliver'' securities within 
the meaning of paragraphs (a)(2)(i) and (v) of Rule 15c3-1.\447\ The 
concepts of promptly transmitting funds and promptly delivering 
securities are incorporated in other provisions of the financial 
responsibility rules as well, including paragraphs (k)(1)(iii) and 
(k)(2)(i) and (ii) of Rule 15c3-3,\448\ paragraph (e)(1)(i)(A) of 17 
CFR 240.17a-5,\449\ and paragraph (a)(3) of 17 CFR 240.17a-13.\450\
---------------------------------------------------------------------------

    \442\ For purposes of this release, the term ``financial 
responsibility rules'' includes any rule adopted by the Commission 
pursuant to section 8, 15(c)(3), 17(a), or 17(e)(1)(A) of the 
Exchange Act, any rule adopted by the Commission relating to 
hypothecation or lending of customer securities, or any rule adopted 
by the Commission relating to the protection of funds or securities. 
The Commission's broker-dealer financial responsibility rules 
include 17 CFR 240.15c3-1, 240.15c3-3, 240.17a-3, 240.17a-4, 
240.17a-5, 240.17a-11, and 240.17a-13.
    \443\ See T+1 Proposing Release, supra note 2, at 10462-63.
    \444\ Exchange Act Rule 15c3-3(m).
    \445\ However, paragraph (m) of Rule 15c3-3 provides that the 
term ``customer'' for the purpose of paragraph (m) does not include 
a broker or dealer who maintains an omnibus credit account with 
another broker or dealer in compliance with 12 CFR 220.7(f) (Rule 
7(f) of Regulation T).
    \446\ Exchange Act Rule 15c3-1(c)(9).
    \447\ 17 CFR 240.15c3-1(a)(2)(i) and (v).
    \448\ 17 CFR 240.15c3-3(k)(1)(iii), (k)(2)(i)-(ii).
    \449\ Rule 17a-5(e)(1)(i)(A).
    \450\ Rule 17a-13(a)(3).
---------------------------------------------------------------------------

    The Commission requested comment regarding the potential impact 
that shortening the standard settlement cycle from T+2 to T+1 may have 
on the ability of broker-dealers to comply with the financial 
responsibility rules. The Commission received one comment stating that 
shortening the standard settlement cycle to T+1 would reduce the number 
of days available to a broker-dealer to obtain possession or control of 
customer securities before being required to close out a customer 
transaction under Rule 15c3-3(m).\451\ The commenter indicated that it 
did not believe T+1 would materially burden broker-dealers or their 
customers and did not recommend changes to the rule.\452\
---------------------------------------------------------------------------

    \451\ See Fidelity Letter, supra note 16, at 7.
    \452\ Id. at 7-8.
---------------------------------------------------------------------------

    The commenter also recommended that the Commission revisit Rule 
15c3-3(d).\453\ Under Rule 15c3-3(d), not later than the next business 
day, a broker or dealer, as of the close of the preceding business day, 
must determine from its books or records the quantity of fully paid 
securities and excess margin securities in its possession or control 
and the quantity of fully paid securities and excess margin securities 
not in its possession or control.\454\ According to the commenter, 
existing interpretative guidance allows a firm to release securities a 
day prior to settlement, under certain conditions. The commenter said 
that it is not clear what this guidance means in a T+1 environment. The 
commenter offers an example: if segregation of customer assets is based 
on an end of day market value and end of day cash settled, it is not 
clear how the segregation of assets should be calculated and enforced 
in a T+1 environment.\455\ The commenter

[[Page 13915]]

requested that the Commission work with broker-dealers to better 
understand the timeframes involved in the segregation process and how 
they can operate in a T+1 environment. The Commission expects that the 
staff will continue to monitor the impact of a T+1 settlement cycle on 
this rule.
---------------------------------------------------------------------------

    \453\ Id. at 8.
    \454\ 17 CFR 240.15c3-3(d)(1).
    \455\ See Fidelity Letter, supra note 16, at 8.
---------------------------------------------------------------------------

E. Changes to SRO Rules and Operations

    In the T+1 Proposing Release, the Commission stated that, as with 
the T+2 transition, it anticipated that the proposed transition to T+1 
would require changes to SRO rules and operations to achieve 
consistency with a T+1 standard settlement cycle.\456\ Certain SRO 
rules reference existing Rule 15c6-1 or currently define ``regular 
way'' settlement as occurring on T+2 and, as such, may need to be 
amended in connection with shortening the standard settlement cycle to 
T+1.\457\ Certain timeframes or deadlines in SRO rules also may refer 
to the settlement date, either expressly or indirectly. In such cases, 
the SROs may need to amend these rules in connection with shortening 
the settlement cycle to T+1.\458\
---------------------------------------------------------------------------

    \456\ See T+1 Proposing Release, supra note 2, at 10464.
    \457\ See, e.g., Exchange Act Release No. 79734 (Jan. 4, 2017), 
82 FR 3030 (Jan. 10, 2017) (File No. SR-NSCC-2016-009).
    \458\ The T+1 Report similarly indicates that SROs will likely 
need to update their rules to facilitate a transition to a T+1 
standard settlement cycle. See T+1 Report, supra note 61, at 35-36.
---------------------------------------------------------------------------

    In addition, the Commission also stated that SRO rules and 
operations may be affected to a greater extent than occurred during the 
T+2 transition, in part because the Commission has proposed more rule 
changes in the T+1 Proposing Release than in the T+2 Proposing 
Release.\459\ For example, Financial Industry Regulatory Authority 
(``FINRA'') Rule 11860, which could be used to facilitate compliance 
with proposed Rule 15c6-2, currently requires that affirmations be 
completed no later than the day after trade date and therefore may need 
to be amended to align with the requirements in final Rule 15c6-2. The 
Commission solicited comment on the extent to which the T+1 rule 
proposals may impact existing SRO rules and operations.\460\
---------------------------------------------------------------------------

    \459\ See T+1 Proposing Release, supra note 2, at 10464 
(discussing the same); see also T+2 Adopting Release, supra note 4, 
at 15568-75 (discussing the effect of the T+2 transition on SRO 
rules and operations).
    \460\ T+1 Proposing Release, supra note 2, at 10464.
---------------------------------------------------------------------------

    While urging the Commission to implement T+1, one commenter 
requested that the Commission deny or delay implementation of a 
National Securities Clearing Corporation (``NSCC'') rule to enhance 
capital requirements, stating that the NSCC rule would undermine the 
benefits of T+1 and that the calculation method is flawed.\461\ The 
Commission has completed its review of the NSCC proposed rule change 
and consideration of the comments on the proposal,\462\ and the 
Commission issued an approval order finding that the NSCC proposed rule 
change was consistent with the requirements of the Exchange Act and the 
rules and regulations thereunder applicable to NSCC.\463\ Furthermore, 
the rule change concerned membership standards at NSCC related to 
minimum capital requirements, designed to ensure that capital 
requirements applied to NSCC members appropriately incorporate the 
risks of their clearing activity, has already been implemented, and has 
no bearing on the length of the settlement cycle.
---------------------------------------------------------------------------

    \461\ Wilson-Davis Letter, supra note 16, at 1.
    \462\ Comments responding to the NSCC rule proposal are 
available at https://www.sec.gov/comments/sr-nscc-2021-016/srnscc2021016.htm.
    \463\ See Exchange Act Release No. 95618 (Aug. 26, 2022); 87 FR 
53796 (Sept. 1, 2022) (SR-NSCC-2021-016) (approving proposed rule 
change to enhance capital requirements and make other changes); see 
also Exchange Act Release No. 93856 (Dec. 22, 2021), 86 FR 74185 
(Dec. 29, 2021) (SR-NSCC-2021-016) (publishing notice of filing and 
soliciting public comment); Exchange Act Release No. 94068 (Jan. 26, 
2022), 87 FR 5544 (Feb. 1, 2022) (SR-NSCC-2021-016) (designating a 
longer period within which to approve, disapprove, or institute 
proceedings to determine whether to approve or disapprove); Exchange 
Act Release No. 94494 (Mar. 23, 2022), 87 FR 18444 (Mar. 30, 2022) 
(SR-NSCC-2021-016) (instituting proceedings to determine whether to 
approve or disapprove); Exchange Act Release No. 94168 (June 23, 
2022), 87 FR 38792 (June 29, 2022) (SR-NSCC-2021-016) (designating a 
longer period for Commission action on the proceedings to determine 
whether to approve or disapprove).
---------------------------------------------------------------------------

    In the context of corporate action events, one commenter advocated 
for more standardized practices, urging the Commission to consider more 
automation and transparency in issuer declarations of events to improve 
timeliness as well as support various SROs in adjusting certain rules 
related to the processing of events (e.g., FINRA Rules 11140 and 
11810).\464\ The commenter did not make any specific suggestion for 
policy action regarding corporate action events that should be taken in 
connection with the current rulemaking or the transition to a shorter 
settlement cycle, and the Commission is not taking additional action at 
this time.
---------------------------------------------------------------------------

    \464\ SIFMA April Letter, supra note 16, at 14-15.
---------------------------------------------------------------------------

    In the T+1 Proposing Release, the Commission asked whether the 
DTC's ``cover/protect'' process for certain voluntary reorganizations 
including tenders, exchanges, or rights offerings would be affected 
operationally or need to be changed in under a T+1 settlement 
cycle.\465\ One commenter claimed that the cover/protect period is 
inconsistently applied currently for many offers and recommended that, 
to the extent cover/protect periods will remain in effect, they should 
be aligned to the new T+1 settlement cycle.\466\ The commenter, 
however, did not identify any specific instances where the T+1 
settlement cycle would give rise to issues with the ``cover/protect'' 
process. In 2022, DTCC issued two reports identifying the functional 
changes at NSCC, DTC, and DTCC ITP that will be implemented for T+1, 
including the planned approach to the cover/protect process.\467\ Such 
planning documents can help market participants understand and prepare 
for potential changes to processes like the cover/protect process. If 
during implementation specific issues arise, the Commission encourages 
industry participants to bring them to the attention of Commission 
staff. Accordingly, the Commission is not at this time providing 
additional guidance.
---------------------------------------------------------------------------

    \465\ See T+1 Proposing Release, supra note 2, at 10452. This 
procedure enables DTC participants to allow their investors to make 
or change their final elections until the end of an offer's 
expiration date; where an offer allows, participants provide DTC 
with a notice of guaranteed delivery, allowing later delivery of the 
shares or rights. See id.; see also T+1 Report, supra note 61, at 
20.
    \466\ See SIFMA April Letter, supra note 16, at 14.
    \467\ See DTCC, Accelerated Settlement (T+1)--DTC, NSCC and ITP 
Functional Changes 14-15 (Aug. 2022), https://www.dtcc.com/-/media/Files/PDFs/T2/T1-Functional-Changes.pdf; DTCC, T+1 Test Approach 15-
16 (Aug. 2022), https://www.dtcc.com/-/media/Files/PDFs/T2/T1-Test-Approach.pdf (each discussing changes to the cover/protect process).
---------------------------------------------------------------------------

    One commenter stated that it appreciates the support of the 
Commission in the dematerialization of physical certificates, and the 
commenter requested continuing support for the electronic movement of 
securities, stating its support for the use of electronic medallion 
signature guarantees and a central hub to move documents between 
financial institutions that is secure and contains an audit trail of 
the receipt of documentation. As stated in the T+1 Proposing Release, 
the Commission has long advocated a reduction in the use of 
certificates in the trading environment by immobilizing or 
dematerializing securities and has acknowledged that the use of 
certificates increases the costs and risks of clearing and settling 
securities for all parties processing the securities, including those 
involved in the U.S. system for clearance and settlement.\468\
---------------------------------------------------------------------------

    \468\ T+1 Proposing Release, supra note 2, at 10474.

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[[Page 13916]]

VII. Compliance Dates

A. Exchange Act Rule 15c6-1

    In the T+1 Proposing Release, the Commission proposed March 31, 
2024 as the compliance date for each of the proposed rules.\469\ The 
Commission received numerous comments regarding the compliance dates 
for Rules 15c6-1, 15c6-2, and 204-2, generally focused on the impact 
the proposed compliance date would have on the timing of an industry-
wide effort to transition to a T+1 standard settlement cycle. The 
commenters offered a range of potential alternatives. For example, many 
individual investors recommended that the Commission accelerate the 
compliance date so that they and other retail investors could obtain 
the benefits of a shorter settlement cycle sooner than 2024.\470\ One 
commenter supported the proposed compliance date of March 31, 2024, 
stating that such a date was generally aligned with the industry-led 
effort regarding the T+1 transition.\471\ Given the extent of planning, 
operational changes, and testing necessary to achieve a successful and 
orderly transition to a T+1 standard settlement cycle, as discussed 
further below, the Commission is moving the compliance date to Tuesday, 
May 28, 2024, which follows a Federal holiday for which both markets 
and banks will be closed, providing market participants with a three-
day weekend to facilitate the transition to a T+1 standard settlement 
cycle.
---------------------------------------------------------------------------

    \469\ Id. at 10436.
    \470\ See, e.g., letter from Chris Barnard (Feb. 22, 2022); Mark 
C. Letter, supra note 19; letter from Jacy Carroll (Feb. 19, 2022); 
letter from Scott Clarke (Feb. 17, 2022); letter from Isaac Crawford 
(Feb. 20, 2022); letter from Nathan D. (Mar. 8, 2022); letter from 
Austin Englebert (Feb. 22, 2022); letter from Justina Fullwood (Feb. 
17, 2022); letter from Brayan Hernandez (Feb. 17, 2022); Kelley 
Letter, supra note 16; Kyle 1 Letter, supra note 16; letter from 
Jason Layne (Feb. 19, 2022); letter from Jordan Liske (Mar. 3, 
2022); letter from Trevor Longmire (Feb. 17, 2022); letter from 
Joshua Lory (Feb. 20, 2022); Mahdere Letter, supra note 18; letter 
from Cain Maynard (Feb. 17, 2022); letter from Brian Padrick (Feb. 
18, 2022); letter from Jimmy Pham (Feb. 18, 2022); letter from 
Anthony R. (Feb. 18, 2022); Rathbone Letter, supra note 18; letter 
from Brian Renner (Feb. 9, 2022); letter from Daniel Richardson 
(Feb. 17, 2022); letter from Andrew Robison (Apr. 8, 2022); letter 
from Michael Ruiz (Feb. 17, 2022); Ryan 1 Letter, supra note 16; 
letter from Adrian Santos (Feb. 17, 2022); letter from Christopher 
Sneed (Feb. 18, 2022); Stauts Letter, supra note 16; Stewart Letter, 
supra note 16; letter from Casey C. Vallett (Feb. 17, 2022); Zach 
Letter, supra note 16.
    \471\ See Better Markets Letter, supra note 16, at 5-6.
---------------------------------------------------------------------------

    Multiple comments, including those submitted by members of the 
Industry Working Group (``IWG'') leading at the industry level the 
effort to facilitate an orderly transition to T+1,\472\ recommended 
specifically that the Commission postpone the compliance date from 
March 31, 2024, to September 3, 2024.\473\ Some commenters recommended 
that the Commission postpone the compliance date further, to no sooner 
than two years from the adoption of the proposed rules.\474\ In 
general, a commenter representing the IWG indicated that approximately 
16 to 24 months from adoption of a final rule would be necessary to 
implement a T+1 settlement cycle.\475\
---------------------------------------------------------------------------

    \472\ As discussed in the T+1 Proposing Release, supra note 2, 
at 10445, the IWG is comprised of representatives from SIFMA, ICI, 
and DTCC, and is being coordinated in part by Deloitte. The IWG 
published the T+1 Report, supra note 61, in September 2021 and the 
T+1 Playbook, supra note 134, in August 2022.
    \473\ See, e.g., CCMA April Letter, supra note 16, at 2; 
Fidelity Letter, supra note 16, at 12; IAA October Letter, supra 
note 222, at 1-2; ICI Letter, supra note 16, at 2, 8; MFA Letter, 
supra note 16, at 2; SIFMA April Letter, supra note 16, at 2; SIFMA 
August 26th Letter, supra note 207, at 1; letter from Tom Price, 
Managing Director, SIFMA, et al (Oct. 10, 2022), at 1 (``The 
Associations and DTCC Letter''); letter from Ken Bentsen, Jr., 
President and CEO, SIFMA (Dec. 20, 2022), at 1 (``SIFMA December 
Letter''); letter from Ken Bentsen, Jr., President and CEO, SIFMA 
(Feb. 8, 2023), at 1 (``SIFMA February Letter'').
    \474\ See, e.g., SIFMA April Letter, supra note 16, at 2; State 
Street Letter, supra note 16, at 5 (citing the planning, operational 
changes, and testing necessary for a successful transition).
    \475\ See SIFMA December Letter, supra note 473, at 3.
---------------------------------------------------------------------------

    The above commenters provided several reasons for postponing from 
March to September. First, they prefer to align the transition with the 
Labor Day holiday weekend so that market participants can implement 
technology and other changes with the benefit of an extra day when 
markets would be closed. Some commenters believe that the absence of a 
three-day weekend would create financial risk for market participants 
because they would lack sufficient time to validate production changes 
and validate a ``fall back'' plan to a T+2 standard if necessary in 
response to any issues that arise.\476\ Second, they prefer to enable 
the U.S. and Canadian markets to complete the transition over a 
commonly shared holiday weekend, and explain that Labor Day weekend is 
the only such weekend in 2024.\477\ In the commenters' view, the 
absence of a unified transition in the U.S. and Canada would result in 
duplicative testing, as well as introduce issues with respect to dual-
listed products, depository receipt conversions, ETF creations and 
redemptions, ADR conversions, buy-ins, and other activities associated 
with cross-border transactions.\478\ Third, they prefer to take more 
time to complete the transition process, including to budget, design 
and implement technology and operational changes, to conduct both 
individual-level and industry-wide testing in advance of the 
transition, and to educate their customers and market participants 
generally regarding the operational and other changes necessary to 
ensure an orderly transition to a T+1 standard settlement cycle.\479\ 
Fourth, they believe that third-party vendors that support the U.S. 
securities market, including transfer agents and custodians, will not 
begin to plan for and implement operational changes until the 
Commission adopts a final rule.\480\ The current version of the T+1 
Playbook, published by the IWG, and which market participants are using 
to identify, design, and plan for the individual-level and industry-
level implementation of a T+1 standard settlement cycle, contemplates 
activities, including industry-wide testing, that would continue into 
third

[[Page 13917]]

quarter (Q3) 2024.\481\ DTCC has also published an industry-wide 
testing plan that contemplates testing until September 2024,\482\ 
though DTCC has also publicly acknowledged that the ultimate T+1 
transition date would depend on the compliance date set by the 
Commission in this release.\483\
---------------------------------------------------------------------------

    \476\ See id. at 3; see also DTCC Letter, supra note 16, at 3 
(supporting a three-day weekend to manage operational risks 
associated with the transition process); IAA April Letter, supra 
note 16, at 8 (supporting a three-day weekend to complete and test 
changes to systems outside of an active trading day); STA Letter, 
supra note 16, at 2.
    \477\ See SIFMA December Letter, supra note 473, at 2; SIFMA 
February Letter, supra note 473, at 1; letter from Christopher 
Climo, Chief Operating Officer, Investment Industry Association of 
Canada (Feb. 9, 2023), at 2 (also stating a preference for a long 
weekend because of the extra day to validate that the transition 
went as planned, and for avoiding transitions at quarter-ends, such 
as March 31, because they are significant trading days, as well as 
corporate action dates).
    \478\ See SIFMA December Letter, supra note 473, at 4.
    \479\ See, e.g., CCMA April Letter, supra note 16, at 2; 
Fidelity Letter, supra note 16, at 12; IAA October Letter, supra 
note 222, at 1-2; ICI Letter, supra note 16, at 2, 8; MFA Letter, 
supra note 16, at 2; SIFMA April Letter, supra note 16, at 2; SIFMA 
August 26th Letter, supra note 207, at 1; see also OCC Letter, supra 
note 16, at 3 (stating that firms may already be engaged in other 
large technology projects that could impact T+1 readiness); SIFMA 
December Letter, supra note 473, at 2 (stating that firms have 
planned to complete technology projects related to the LIBOR 
transition in Q2 2023); SIFMA February Letter, supra note 473, at 1 
(explaining that the March date ``will pose substantial and 
unnecessary risk to the marketplace and potentially create an 
immense amount of fails in the system'' and that ``[w]ithout proper 
testing, socialization, and notification, U.S. and international 
markets would be negatively impacted''); letter from Keith Evans, 
Executive Director, Canadian Capital Markets Association (Feb. 9, 
2023), at 1 (explaining that a compliance date in the first quarter 
would introduce significant risks such as a material increase in 
failed trades, increased buy-ins, and higher collateral costs for 
Canadian and American market participants) (``CCMA February 
Letter''); letter from Deborah Mercer-Miller, Chair, Association of 
Global Custodians (Feb. 11, 2023) (also stating that a March 31, 
2024 compliance date ``could pose significant and unnecessary risk 
to the market and potentially create a high number of failed 
trades,'' and expressing concern ``about the ability of smaller 
market participants, vendors, and other service providers to enable 
T+1 settlement on a 13-month implementation timetable'').
    \480\ See SIFMA December Letter, supra note 473, at 4.
    \481\ See T+1 Playbook, supra note 134, at 10-14. The T+1 
Playbook was most recently updated in December 2022.
    \482\ See DTCC, DTCC T+1 Test Approach: Detailed Testing 
Framework (Jan. 2023), https://www.dtcc.com/ust1/-/media/Files/PDFs/T2/UST1-Detailed-Test-Document (explaining that the T+1 transition 
date has yet to be determined, and so for planning purposes the 
document references a Sept. 3, 2024 transition date).
    \483\ See Richard Schwartz, `We're halfway through a marathon' 
says DTCC as it releases document to help preparations for T+1, The 
Trade, Jan. 24, 2023, https://www.thetradenews.com/were-halfway-through-a-marathon-says-dtcc-as-it-releases-document-to-help-preparations-for-t1/ (quoting Robert Cavallo, director, clearance 
and settlement, product management at DTCC as follows: ``We are 
halfway through a marathon and still have a long way to go, but now 
that 2024 is in sight--whether that ultimate date is determined to 
be March or September--we must move from planning and development to 
testing.'').
---------------------------------------------------------------------------

    The Commission acknowledges that a three-day weekend that includes 
a bank holiday will assist market participants in completing the 
transition to a T+1 standard settlement cycle in an orderly manner. 
Although March 31, 2024 falls at the end of a three-day weekend 
commenters noted that this weekend is not a Federal holiday and does 
not provide a bank holiday, and so the banking industry and U.S. 
securities markets would not be synchronized in terms of implementing 
final testing and systems changes.\484\ As discussed throughout this 
section, the Commission is adopting a compliance date of May 28, 2024, 
which follows a Federal holiday for which both markets and banks will 
be closed.
---------------------------------------------------------------------------

    \484\ See, e.g., SIFMA December Letter, supra note 473, at 3.
---------------------------------------------------------------------------

    The Commission also acknowledges that aligning the U.S. and 
Canadian transitions would be beneficial to market participants in both 
markets, reducing complexity with respect to cross-border transactions 
between the two jurisdictions. The Canadian Securities Authorities 
proposed in December to implement a T+1 settlement cycle in Canada, 
explaining that ``the close ties between the Canadian and American 
markets, in particular the large number of inter-listed securities'' 
make it ``critical'' for Canadian markets to move in concert with the 
U.S.\485\ The Commission intends to work closely with the relevant 
Canadian authorities to ensure an orderly transition to T+1 for the 
securities markets in the U.S. and Canada that minimizes the potential 
for risk, such as the risks associated with settlement fails.
---------------------------------------------------------------------------

    \485\ CSA, Notice and Request for Comment--Proposed Amendments 
to National Instrument 24-101 Institutional Trade Matching and 
Settlement and Proposed Changes to Companion Policy 24-101 
Institutional Trade Matching and Settlement, Dec. 15, 2022, https://www.osc.ca/sites/default/files/2022-12/ni_20221215_24-101_rfc_trade-matching-settlement.pdf.
---------------------------------------------------------------------------

    Some commenters explained that market participants tend to 
implement technology freezes in the November to February timeframe to 
minimize the impact of staff on leave during the holidays and to 
facilitate various year-end accounting activities, including tax 
preparation.\486\ In the view of these commenters, a March 2024 
compliance date would require that a substantial portion of technology 
changes and testing not occur in the November to February window, 
meaning they may need to occur primarily in March 2024, close in time 
to the compliance date. The Commission believes that a May 28, 2024, 
transition date will provide sufficient time beyond the typical 
November to February technology freeze to ensure an orderly transition. 
In total, market participants will have more than fifteen months 
following the adoption of the final rules to take the appropriate steps 
to implement any technology or other changes to support a T+1 standard 
settlement cycle, providing a substantial amount of time to plan for 
and structure any technology freezes and to address personnel shortages 
while developing, building, testing and implementing technology changes 
to support a T+1 standard settlement cycle. Market participants should 
take appropriate steps, mindful of the May 28, 2024 compliance date, to 
ensure that technology implementation can occur consistent with the 
compliance date. While a May 28, 2024 compliance date may require 
market participants to reallocate some resources and reprioritize some 
technology projects as compared to a September 3, 2024 compliance date, 
the Commission believes that a May 28, 2024 compliance date would also 
allow the substantial benefits of shortening the settlement cycle to be 
achieved sooner.\487\
---------------------------------------------------------------------------

    \486\ See, e.g., ICI Letter, supra note 16, at 9; see also AGC 
April Letter, supra note 16, at 4; SIFMA April Letter, supra note 
16, at 3-4.
    \487\ See infra Part VIII.C.1 (discussing the anticipated 
benefits of shortening the settlement cycle).
---------------------------------------------------------------------------

    With respect to the preference for a September 2024 compliance date 
more generally to ensure appropriate time for sufficient planning, 
testing, and coordination with third-party vendors,\488\ the Commission 
appreciates that providing a longer implementation period until the 
compliance date for any rule necessarily provides more time to prepare, 
test, and educate than a shorter implementation period would. As 
discussed in the T+1 Proposing Release, however, the Commission's 
objective is to ensure an orderly transition to a T+1 standard 
settlement cycle that realizes the substantial benefits of shortening 
the settlement cycle as soon as possible. In light of its objective of 
ensuring an orderly transition, the Commission is not accelerating the 
proposed compliance date, even though many commenters recommended that 
the Commission pursue a more expeditious timetable for the transition 
than even March 2024.\489\ Given that some market participants 
expressed interest for a faster transition to a T+1 settlement 
cycle,\490\ the Commission believes that May 28, 2024, provides an 
effective balance of ensuring that the compliance date provides 
sufficient time for planning and executing an orderly transition while 
also promoting an expeditious process that will allow market 
participants to realize the substantial benefits of shortening the 
settlement cycle sooner than later. In addition, the Commission 
believes that the May 28, 2024, compliance date will help ensure that 
market participants have sufficient time to implement the changes 
necessary to reduce risk, such as risks associated with the potential 
for increases in settlement fails. The Commission also believes that 
the additional time will help ensure that market participants complete 
appropriate levels of testing, provide timely notice to potentially 
affected parties and vendors, and, more generally, engage in the 
education and outreach necessary to ensure an orderly transition.\491\
---------------------------------------------------------------------------

    \488\ See supra notes 479-480 and accompanying text.
    \489\ See supra note 470 and accompanying text.
    \490\ See id.
    \491\ See supra note 479 and accompanying text.
---------------------------------------------------------------------------

    Some commenters indicated that the Commission should set the 
compliance date no sooner than two years from the adoption of final 
rules. As discussed above, while an additional seven months of 
preparation (i.e., two years from adoption of the final rules) likely 
would facilitate a higher level of preparation, testing, and education, 
the Commission believes that providing more than fifteen months until 
the compliance date for a T+1 standard settlement cycle is sufficient 
to ensure an orderly transition. Also as discussed above, while fifteen 
months of

[[Page 13918]]

preparation rather than two years may require some broker-dealers to 
reallocate some resources or reprioritize some technology projects to 
meet the May 28, 2024, transition, the Commission believes that the 
substantial benefits of shortening the settlement cycle would also be 
achieved sooner with a May 28, 2024, transition.\492\
---------------------------------------------------------------------------

    \492\ See infra Part VIII.D.5 (discussing the potential economic 
effects of a May 28, 2024, compliance date versus a later compliance 
date).
---------------------------------------------------------------------------

    Accordingly, the compliance date for the amendments to Rule 15c6-
1--other than the amendment discussed in Part VII.B below--will be May 
28, 2024.

B. Exchange Act Rule 15c6-1(b): Exclusion for Security-Based Swaps

    In response to comments received, and as discussed in Parts II.B.2 
and II.C.3, the Commission has modified Rule 15c6-1(b) to exclude 
security-based swaps from the requirements under Rule 15c6-1(a). For 
the reasons discussed in Part II.C.3, and because Rule 15c6-1(b) 
concerns the scope of transactions excluded from the requirements of 
the Rule 15c6-1(a), the amendment will become effective upon the 
effective date.

C. Exchange Act Rule 15c6-2 and Advisers Act Rule 204-2

    With respect to proposed Exchange Act Rule 15c6-2 and the proposed 
amendments to Advisers Act Rule 204-2, some commenters requested that 
the Commission set a compliance date later than the compliance date for 
Rule 15c6-1 to allow market participants time to focus their efforts on 
the T+1 transition, including the related technology and operational 
changes that they would need to design, build, test, and implement, 
without also having to take steps to ensure compliance with respect to 
same-day allocations, confirmations, and affirmations.\493\ The 
Commission disagrees. Any technology changes, operational changes, or 
other efforts necessary to advance the same-day affirmation objective 
should occur in tandem with efforts focused on the T+1 transition, and 
so the Commission is adopting a May 28, 2024, compliance date for these 
rules, for the same reasons discussed in Part VII.A. In the 
Commission's view, market participants are more likely to take steps 
that materially advance the same-day affirmation objective if they 
consider such steps alongside a more holistic review and, where 
necessary, modification of systems and operations to support the 
standard settlement cycle because, for institutional transactions, 
allocations, confirmations, and affirmations are integral to the 
settlement process. The Commission believes that, because the systems 
and operational changes necessary to facilitate a transition to T+1 
standard settlement cycle generally would overlap with the systems that 
facilitate same-day affirmation, market participants would benefit from 
considering at the same time changes that can accommodate both sets of 
requirements.
---------------------------------------------------------------------------

    \493\ See, e.g., Fidelity Letter, supra note 16, at 12 (stating 
that ``the proposed Compliance Date should apply only to the 
proposed move to T+1''); ICI Letter, supra note 16, at 5-7 
(indicating that efforts to ensure compliance with Rule 15c6-2 would 
likely divert the time and resources that industry participants need 
to focus on the transition to T+1 settlement).
---------------------------------------------------------------------------

    Accordingly, the compliance date for Rule 15c6-2 and the amendments 
to Rule 204 will be May 28, 2024.

D. Exchange Act Rule 17Ad-27

    The Commission received one comment regarding the compliance date 
for Rule 17Ad-27, in which the commenter requested that, with respect 
to Rule 17Ad-27(b) requiring an annual report on straight-through 
processing, the Commission require submission of the first annual 
report only after the T+1 transition has been completed because it will 
help ensure a consistent baseline over time in the data provided by the 
CMSP as part of its annual report.\494\ Because the Commission is 
adopting a compliance date of May 28, 2024, for Rule 15c6-2 and the 
amendments to Rules 15c6-1 and 204-2, and the Commission proposed the 
same compliance date for Rule 17Ad-27 as the other rules and rule 
amendments, a CMSP would not be required to submit its first annual 
report until after the T+1 transition has been completed. Accordingly, 
the Commission believes that a May 28, 2024, compliance date is also 
appropriate for Rule 17Ad-27 and consistent with the comment received. 
Consistent with the requirement in Rule 17Ad-27(d) that the report must 
be filed within 60 days of the end of the twelve-month period covered 
by the report, the first report must be filed no later than March 1, 
2025.
---------------------------------------------------------------------------

    \494\ See DTCC ITP September Letter, supra note 325, at 3.
---------------------------------------------------------------------------

VIII. Economic Analysis

    The Commission has prepared an economic analysis in connection with 
the amendments to Rules 15c6-1 and 204-2 and new Rules 15c6-2 and 17Ad-
27. The economic analysis begins with a discussion of the risks 
inherent in the standard settlement cycle for securities transactions 
and the impact that shortening the standard settlement cycle may have 
on the management and mitigation of these risks. Next, the economic 
analysis summarizes and addresses comments relating to the costs and 
benefits of a shorter settlement cycle, as well as comments about the 
economic analysis provided in the T+1 Proposing Release. Finally, the 
economic analysis discusses certain market frictions that potentially 
impair the ability of market participants to shorten the settlement 
cycle in the absence of a Commission rule.
    The discussion regarding settlement cycle risks and market 
frictions frames the Commission's analysis of the rule's benefits and 
costs in later sections. The Commission believes that the amendment to 
Rule 15c6-1(a) will ameliorate these market frictions and thus will 
reduce the risks inherent in settlement. The Commission further 
believes that the combination of amendments and new rules that it is 
adopting will advance two longstanding objectives shared by the 
Commission and the securities industry: the completion of trade 
allocations, confirmations, and affirmations on trade date (an 
objective often referred to as ``same-day affirmation'') and the 
straight-through processing of securities transactions.\495\
---------------------------------------------------------------------------

    \495\ See T+1 Proposing Release, supra note 2, at 10452-53.
---------------------------------------------------------------------------

    After discussing the aforementioned risks and market frictions, the 
economic analysis provides a baseline of current practices. The 
economic analysis then discusses the likely economic effects of the 
amendments and new rules, such as the costs and benefits of the adopted 
amendments and new rules, as well as its effects on efficiency, 
competition, and capital formation.\496\ The Commission has, where 
possible, attempted to quantify the economic effects expected to result 
from the amendments and new rules. However, the Commission is unable to 
quantify some economic effects because it lacks the information 
necessary to provide a reasonable estimate. In those instances, the 
discussion of the economic effects of

[[Page 13919]]

the amendments and new rules is qualitative in nature.
---------------------------------------------------------------------------

    \496\ Exchange Act section 3(f) requires the Commission, when it 
is engaged in rulemaking pursuant to the Exchange Act and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). In 
addition, Exchange Act section 23(a)(2) requires the Commission, 
when making rules pursuant to the Exchange Act, to consider among 
other matters, the impact that any such rule would have on 
competition and not to adopt any rule that would impose a burden on 
competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

A. Background

    As previously discussed, the amendment to Rule 15c6-1(a) prohibits, 
unless otherwise expressly agreed to by both parties at the time of the 
transaction, a broker-dealer from effecting or entering into a contract 
for the purchase or sale of certain securities that provides for 
payment of funds and delivery of securities later than the first 
business day after the date of the contract subject to certain 
exceptions provided in the rule. Several commenters addressed the 
impact that the length of the settlement cycle would have on risk to 
central counterparties (``CCPs'') and market participants (including 
credit, market and liquidity risk),\497\ margin requirements,\498\ 
capital liquidity,\499\ post-trade processing and operational 
efficiency,\500\ financial stability,\501\ and systemic risk in the 
financial system.\502\ In its analysis of the economic effects of the 
new rules and amendments to existing rules, the Commission has 
considered the risks that market participants, including broker-
dealers, clearing agencies, investment advisers, and institutional and 
retail investors are exposed to during the settlement cycle and how 
those risks change with the length of the cycle.
---------------------------------------------------------------------------

    \497\ See, e.g., DTCC Letter, supra note 16, at 2-3; Fidelity 
Letter, supra note 16, at 2; IAA April Letter, supra note 16, at 1; 
ICI Letter, supra note 16, at 1, 3; MFA Letter, supra note 16, at 1; 
OCC Letter, supra note 16, at 2; RMA Letter, supra note 16, at 3; 
SIFMA April Letter, supra note 16, at 2; State Street Letter, supra 
note 16, at 4.
    \498\ See, e.g., Cornell Law Letter, supra note 16, at 3; DTCC 
Letter, supra note 16, at 2-3; Fidelity Letter, supra note 16, at 2; 
MMI Letter, supra note 16, at 2; State Street Letter, supra note 16, 
at 4.
    \499\ See, e.g., DTCC Letter, supra note 16, at 2-3; MMI Letter, 
supra note 16, at 2; State Street Letter, supra note 16, at 4.
    \500\ See, e.g., Cornell Law Letter, supra note 16, at 3; DTCC 
Letter, supra note 16, at 2-3; IAA April Letter, supra note 16, at 
1; RMA Letter, supra note 16, at 3; State Street Letter, supra note 
16, at 4.
    \501\ See, e.g., ICI Letter, supra note 16, at 1; MMI Letter, 
supra note 16, at 2.
    \502\ See, e.g., Fidelity Letter, supra note 16, at 2; MFA 
Letter, supra note 16, at 1; MMI Letter, supra note 16, at 2; RMA 
Letter, supra note 16, at 3.
---------------------------------------------------------------------------

    The settlement cycle spans the time between when a trade is 
executed and when cash and securities are delivered to the seller and 
buyer, respectively. During this time, each party to a trade faces the 
risk that its counterparty may fail to meet its obligations to deliver 
cash or securities. When a counterparty fails to meet its obligations 
to deliver cash or securities, the non-defaulting party may bear costs 
as a result. For example, if the non-defaulting party chooses to enter 
into a new transaction, it will be with a new counterparty and will 
occur at a potentially different price.\503\ The length of the 
settlement cycle influences this risk in two ways: (i) through its 
effect on counterparty exposures to price volatility, and (ii) through 
its effect on the value of outstanding obligations.
---------------------------------------------------------------------------

    \503\ This applies to the general case of a transaction that is 
not novated to a CCP. As described above, in its role as a CCP, NSCC 
becomes counterparty to both initial parties to a centrally cleared 
transaction. In the case of such transactions, while each initial 
party is not exposed to the risk that its original counterparty 
defaults, both are exposed to the risk of CCP default. Similarly, 
the CCP is exposed to the risk that either initial party defaults.
---------------------------------------------------------------------------

    First, additional time allows asset prices to move further away 
from the price of the original trade. For example, in a simplified 
model, where daily asset returns are statistically independent, the 
variance of an asset's return over t days is equal to t multiplied by 
the daily variance of the asset's return. Thus, when the daily variance 
of returns is constant, the variance of returns increases linearly in 
the number of days.\504\ In other words, the more days that elapse 
between when a trade is executed and when a counterparty defaults, the 
larger the variance of price change will be, and the more likely that 
the asset's price will deviate from the execution price. The price 
change could be positive or negative, but in the event of a price 
increase, the buyer must pay more than the original execution price, 
and in the event of a price decrease, the buyer may buy the security 
for less than the original execution price.\505\
---------------------------------------------------------------------------

    \504\ More generally, because total variance over multiple days 
is equal to the sum of daily variances and variables related to the 
correlation between daily returns, total variance increases with 
time so long as daily returns are not highly negatively correlated. 
See, e.g., Morris H. DeGroot and Mark J. Schervish, Probability and 
Statistics 216 (Addison-Wesley Publishing Co., 4th ed. 1986).
    \505\ Similarly, a seller whose counterparty fails faces similar 
risks with respect to the security price but in the opposite 
direction.
---------------------------------------------------------------------------

    Second, the length of the settlement cycle directly influences the 
quantity of transactions awaiting settlement. For example, assuming no 
change in transaction volumes, the volume of unsettled trades under a 
T+1 settlement cycle is approximately half the volume of unsettled 
trades under a T+2 settlement cycle.\506\ Thus, in the event of a 
default, counterparties would have to enter into a new transaction, or 
otherwise close out approximately half as many trades under a T+1 
standard settlement cycle than under a T+2 standard. This means that 
for a given adverse move in prices, the financial losses resulting from 
a counterparty default will be approximately half as large under a T+1 
standard settlement cycle.
---------------------------------------------------------------------------

    \506\ The relationship is approximate because some trades may 
settle early or, if both counterparties agree at the time of the 
transaction, settle after the time limit in Rule 15c6-1(a).
---------------------------------------------------------------------------

    Market participants manage and mitigate settlement risk in a number 
of specific ways.\507\ Generally, these methods entail costs to market 
participants. In some cases, these costs may be explicit. For instance, 
clearing brokers typically explicitly charge introducing brokers to 
clear trades. Other costs are implicit, such as the opportunity cost of 
assets posted as collateral or limits placed on the trading activities 
of a broker's customers.
---------------------------------------------------------------------------

    \507\ See T+2 Proposing Release, supra note 4, at 69251 
(discussing the entities that compose the clearance and settlement 
infrastructure for U.S. securities markets).
---------------------------------------------------------------------------

    The Commission believes that, given current trading volumes and 
complexity, certain market frictions may prevent securities markets 
from shortening the settlement cycle in the absence of regulatory 
intervention. The Commission has considered two key market frictions 
related to investments required to implement a shorter settlement 
cycle. The first is a coordination problem that arises when some of the 
benefits of actions taken by one or more market participants are only 
realized when other market participants take a similar action. For 
example, under the current regulatory structure, if a particular 
institutional investor were to make a technological investment to 
reduce the time it requires to match and allocate trades without a 
corresponding action by its clearing broker-dealers, the institutional 
investor cannot fully realize the benefits of its investment, as the 
settlement process is limited by the capabilities of the clearing 
agency for trade matching and allocation. More generally, when every 
market participant must incur costs of an upgrade for the entire market 
to enjoy a benefit, the result is a coordination problem where each 
market participant may be reluctant to make the necessary investments 
until it can be reasonably certain that others will also do so. In 
general, these coordination problems may be resolved if all parties can 
credibly commit to the necessary infrastructure investments. Regulatory 
intervention is one possible way of coordinating market participants to 
undertake the investments necessary to support a shorter settlement 
cycle. Such intervention could come through Commission rulemaking or 
through a coordinated set of SRO rule changes.
    In addition to coordination problems, a second market friction 
related to the

[[Page 13920]]

settlement cycle involves situations where one market participant's 
investments result in benefits for other market participants. For 
example, if a market participant invests in a technology that reduces 
the error rate in its trade matching, not only does it benefit from 
fewer errors, but its counterparties and other market participants may 
also benefit from more robust trade matching. However, because market 
participants do not necessarily take into account the benefits that may 
accrue to other market participants (also known as ``externalities'') 
when market participants choose the level of investment in their 
systems, the level of investment in technologies that reduce errors 
might be less than efficient for the entire market. More generally, 
underinvestment may result because each participant only takes into 
account its own costs and benefits when choosing which infrastructure 
improvements or investments to make, and does not take into account the 
costs and benefits that may accrue to its counterparties, other market 
participants, or financial markets generally.
    Moreover, because market participants that incur similar costs to 
move to a shorter settlement cycle may nevertheless experience 
different levels of economic benefits, there is likely heterogeneity 
across market participants in the demand for a shorter settlement 
cycle. This heterogeneity may exacerbate coordination problems and 
underinvestment. Market participants that do not expect to receive 
direct benefits from settling transactions earlier may lack incentives 
to invest in infrastructure to support a shorter settlement cycle and 
thus could make it difficult for the market as a whole to realize the 
overall risk reduction that the Commission believes a shorter 
settlement cycle may bring.
    For example, the level and nature of settlement risk exposures vary 
across different types of market participants. A market participant's 
characteristics and trading strategies can influence the level of 
settlement risk it faces. For example, large market participants will 
generally be exposed to more settlement risk than small market 
participants because they trade in larger volume. However, large market 
participants also trade across a larger variety of assets and may face 
less idiosyncratic risk in the event of counterparty default if the 
portfolio of trades that may have to be replaced is diversified.\508\ 
As a corollary, a market participant who trades a single security, in a 
single direction, against a given counterparty, may face more 
idiosyncratic risk in the event of counterparty failure than a market 
participant who trades in both directions with that counterparty.
---------------------------------------------------------------------------

    \508\ See Ananth Madhavan et al., Risky Business: The Clearance 
and Settlement of Financial Transactions (U. Pa. Wharton Sch. Rodney 
L. White Ctr. for Fin. Res. Working Paper No. 40-88, 1988), at 4-5, 
https://rodneywhitecenter.wharton.upenn.edu/wp-content/uploads/2014/04/8840.pdf; see also John H. Cochrane, Asset Pricing 15 (Princeton 
Univ. Press rev. ed. 2009) (defining the idiosyncratic component of 
any payoff as the part that is uncorrelated with the discount 
factor).
---------------------------------------------------------------------------

    Furthermore, the extent to which a market participant experiences 
any economic benefits that may stem from a shortened standard 
settlement cycle likely depends on the market participant's relative 
bargaining power. While larger intermediaries may experience direct 
benefits from a shorter settlement cycle as a result of being required 
to post less collateral with a CCP, if they do not effectively compete 
for customers through fees and services as a result of market power, 
they may pass only a portion of these cost savings through to their 
customers.\509\
---------------------------------------------------------------------------

    \509\ See infra Parts VIII.C.1. (Benefits) and VIII.C.2. 
(Costs).
---------------------------------------------------------------------------

    The Commission believes that the amendment to Rule 15c6-1(a), which 
shortens the standard settlement cycle from T+2 to T+1 may mitigate the 
market frictions of coordination and underinvestment described above. 
The Commission believes that by mitigating these market frictions, and 
for the reasons discussed below, the transition to a shorter standard 
settlement cycle will reduce the risks inherent in the clearance and 
settlement process.
    The shorter standard settlement cycle might also affect the level 
of operational risk in the clearance and settlement system. Shortening 
the settlement cycle by one day will reduce the time that market 
participants have to resolve any errors that might occur in the 
clearance and settlement process. Tighter operational timeframes and 
linkages required under a shorter standard settlement cycle might 
introduce new fragility that could affect market participants, 
specifically an increased risk that operational issues could affect 
transaction processing and related securities settlement.\510\
---------------------------------------------------------------------------

    \510\ For example, the ability to compute an accurate net asset 
value (``NAV'') within the settlement timeframe is a key component 
for settlement of ETF transactions. See, e.g., Barrington Partners, 
An Extraordinary Week: Shared Experiences from Inside the Fund 
Accounting Systems Failure of 2015 (Nov. 2015), https://www.mfdf.org/docs/default-source/fromjoomla/uploads/blog_files/sharedexperiencefromfasystemfailure2015.pdf.
---------------------------------------------------------------------------

    In part, to lessen the likelihood that shortening the settlement 
cycle might negatively affect operational risk, the Commission and 
market participants have emphasized on multiple occasions the 
importance of accelerating the institutional trade clearance and 
settlement process by improving, among other things, the allocation, 
confirmation, and affirmation processes for the clearance and 
settlement of institutional trades, as well as improvements to the 
provision of central matching and electronic trade confirmation.\511\ A 
2010 white paper by Omgeo (now DTCC ITP), published when the standard 
settlement cycle in the U.S. was still T+3, described same-day 
affirmation as ``a prerequisite'' of shortening the settlement cycle 
because of its impact on settlement failure rates and operational 
risk.\512\ According to previously cited statistics published by DTCC 
in 2011, regarding affirmation rates achieved through industry 
utilization of a certain matching/ETC provider, on average, 45% of 
trades were affirmed on trade date, 90% were affirmed by T+1, and 92% 
were affirmed by noon on T+2.\513\ Currently, only about 68% of trades 
achieve affirmation by 12:00 midnight at the end of trade date.\514\ 
While these numbers have improved over time, the improvements have been 
incremental and fallen short of achieving an affirmed confirmation by 
the end of trade date as is considered a securities industry best 
practice.\515\ Accordingly, and as described more fully below, to 
achieve the maximum efficiency and risk reduction that may result from 
completing the allocation, confirmation, and affirmation process on 
trade date, and to facilitate shortening the settlement cycle to T+1 or 
shorter, the Commission is adopting new Rule 15c6-2 under the Exchange 
Act to facilitate trade date completion of institutional trade 
allocations, confirmations, and affirmations. Similarly, the Commission 
is also adopting new Rule 17Ad-27 under the Exchange Act to facilitate 
straight-through processing by certain clearing agencies acting as 
CMSPs.
---------------------------------------------------------------------------

    \511\ See supra Part III.A.; see also T+1 Proposing Release, 
supra note 2, at 10452 nn.146-148 and accompanying text.
    \512\ Omgeo, Mitigating Operational Risk and Increasing 
Settlement Efficiency through Same Day Affirmation (SDA), at 2, 7 
(Oct. 2010) (``Omgeo Study''), https://www.sifma.org/resources/thought-leader-resource-type/white-papers/.
    \513\ DTCC, Proposal to Launch a New Cost-Benefit Analysis on 
Shortening the Settlement Cycle, at 7 (Dec. 2011), supra note 263.
    \514\ DTCC ITP Forum Remarks, supra note 264.
    \515\ See T+1 Report, supra note 61, at 5.

---------------------------------------------------------------------------

[[Page 13921]]

B. Baseline

    The Commission uses as its economic baseline the clearance and 
settlement process as it exists today. In addition to the current 
process that was described in the T+1 Proposing Release, the baseline 
includes rules adopted by the Commission, including Commission rules 
governing the clearance and settlement system, SRO rules,\516\ as well 
as rules adopted by regulators in other jurisdictions to regulate 
securities settlement in those jurisdictions. The following section 
discusses several additional elements of the baseline that are relevant 
for the economic analysis of the amendment to Rule 15c6-1(a) because 
they are related to the financial risks faced by market participants 
that clear and settle transactions and the specific means by which 
market participants manage these risks.
---------------------------------------------------------------------------

    \516\ Certain SRO rules currently define ``regular way'' 
settlement as occurring on T+2 and, as such, would need to be 
amended in connection with shortening the standard settlement cycle 
to T+1. See, e.g., MSRB Rule G-12(b)(ii)(B); FINRA Rule 11320(b). 
Further, certain timeframes or deadlines in SRO rules key off the 
current settlement date, either expressly or indirectly. In such 
cases, the SROs may also need to amend these rules. See T+1 
Proposing Release, supra note 2, at 10464.
---------------------------------------------------------------------------

1. Central Counterparties
    NSCC, a subsidiary of DTCC, is a clearing agency registered with 
the Commission that operates the CCP for U.S. equity securities 
transactions.\517\ One way that NSCC mitigates the credit, market, and 
liquidity risk that it assumes through its novation and guarantee of 
trades as a CCP is by multilateral netting of securities trades' 
delivery and payment obligations across its members. By offsetting its 
members' obligations, NSCC reduces the aggregate market value of 
securities and cash it must deliver to clearing members. While netting 
reduces NSCC's settlement payment obligations by a daily average of 
98%,\518\ it does not fully eliminate the risk posed by unsettled 
trades because NSCC is responsible for payments or deliveries on any 
trades that it cannot fully net. NSCC reported clearing an average of 
approximately $2.191 trillion each day during the second quarter of 
2022,\519\ suggesting an average net settlement obligation of 
approximately $44 billion each day.\520\
---------------------------------------------------------------------------

    \517\ A second DTCC subsidiary, DTC, also a clearing agency 
registered with the Commission, operates a central securities 
depository (``CSD'') with respect to securities transactions in the 
U.S. in several types of eligible securities including, among 
others, equities, warrants, rights, corporate debt and notes, 
municipal bonds, government securities, asset-backed securities, 
depositary receipts, and money market instruments.
    \518\ According to the DTCC, centralized multilateral netting 
reduces the value of payments that need to be exchanged each day by 
an average of 98%, and netting is particularly important during 
times of heightened volatility and volume. DTCC, Advancing Together: 
Leading the Industry to Accelerated Settlement, at 2 (Feb. 2021) 
(``DTCC White Paper''), https://www.dtcc.com/-/media/Files/PDFs/White%20Paper/DTCC-Accelerated-Settle-WP-2021.pdf.
    \519\ See DTCC, Fixed Income Clearing Corporation and National 
Securities Clearing Corporation Public Quantitative Disclosure for 
Central Counterparties, Q2 2022, at 19 (Sept. 2022) (``DTCC 
Quantitative Disclosure Results Q2 2022''), https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/CPMI-IOSCO-Quantitative-Disclosure-Results-2022Q2-1.pdf.
    \520\ Calculated as $2.191 trillion x 2% = $43.82 billion.
---------------------------------------------------------------------------

    The aggregate settlement risk faced by NSCC is also a function of 
the probability of clearing member default. NSCC manages the risk of 
clearing member default by imposing certain financial responsibility 
requirements on its members. For example, as of 2022, broker-dealer 
members of NSCC that are not municipal securities brokers, and do not 
intend to clear and settle transactions for other broker-dealers, must 
have excess net capital of $500,000 over the minimum net capital 
requirement imposed by the Commission, and $1,000,000 over the minimum 
net capital requirement if the broker-dealer member clears for other 
broker-dealers.\521\ Furthermore, each NSCC member is subject to other 
ongoing membership requirements, including a requirement to furnish 
NSCC with assurances of the member's financial responsibility and 
operational capability, including, but not limited to, periodic reports 
of its financial and operational condition.\522\
---------------------------------------------------------------------------

    \521\ For a description of NSCC's financial responsibility 
requirements for registered broker-dealers, see NSCC Rules and 
Procedures, at 386 (effective Oct. 3, 2022) (``NSCC Rules and 
Procedures''), https://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf. Pursuant to Rule 11 and Addendum K to NSCC's 
Rules and Procedures, NSCC guarantees the completion of Continuous 
Net Settlement System (``CNS'') settling trades (``NSCC trade 
guaranty'') that have been validated. Id. at 108-113, 414.
    \522\ See, e.g., id. at 89.
---------------------------------------------------------------------------

    In addition to managing the member default risk, NSCC also takes 
steps to mitigate the impacts of a member default. For example, in the 
normal course of business, CCPs are generally not exposed to market or 
liquidity risk because they expect to receive every security from a 
seller they are obligated to deliver to a buyer, and they expect to 
receive every payment from a buyer that they are obligated to deliver 
to a seller. However, when a clearing member defaults, the CCP can no 
longer expect the defaulting member to deliver securities or make 
payments. CCPs mitigate this risk by requiring clearing members to make 
contributions of financial resources to the CCP so that it may make 
payments or deliver securities in the event of a member default. The 
level of financial resources CCPs require clearing members to commit 
may be based on, among other things, the market and liquidity risk of a 
member's portfolio, the correlation between the assets in the member's 
portfolio and the member's own default probability, and the liquidity 
of the assets posted as collateral.
2. Market Participants--Investors, Broker-Dealers, and Custodians
    As discussed in Part II.B of the proposal, broker-dealers serve 
both retail and institutional customers.\523\ Aggregate statistics from 
the Board of Governors of the Federal Reserve System suggest that at 
the end of the second quarter 2022, U.S. households held approximately 
40% of the value of corporate equity outstanding, 56% of the value of 
mutual fund shares outstanding, 2% of the value of corporate and 
foreign bonds, and 43% of the value of municipal securities, which 
provides a general picture of the share of holdings by retail 
investors.\524\
---------------------------------------------------------------------------

    \523\ See T+1 Proposing Release, supra note 2, at 10439-44.
    \524\ See Board of Governors of the Federal Reserve System, 
Federal Reserve Statistical Release, Z.1, Financial Accounts of the 
United States: Flow of Funds, Balance Sheets, and Integrated 
Macroeconomic Accounts, at 121, 122, 130 (Sept. 23, 2021), https://www.federalreserve.gov/releases/z1/20210923/z1.pdf.
---------------------------------------------------------------------------

    In the third quarter of 2022, approximately 3,500 broker-dealers 
filed FOCUS Reports \525\ with FINRA. These firms varied in size, with 
median assets of approximately $1.3 million and average assets of 
approximately $1.6 billion. The top 1% of broker-dealers held 80% of 
the assets of broker-dealers overall, indicating a high degree of 
concentration in the industry. Of the approximately 3,500 filers, as of 
the end of 2021, 92 reported self-clearing public customer accounts and 
acting as introducing broker and sending orders to another broker-
dealer for clearing, 1,114 reported acting only as an introducing 
broker and sending orders to another broker-dealer for clearing, and 68 
reported acting as both.\526\ Broker-dealers that identified themselves 
as self-clearing broker-dealers, on average, had higher total assets 
than broker-dealers that identified themselves as introducing broker-
dealers. While the decision to self-clear

[[Page 13922]]

may be based on many factors, this evidence is consistent with the 
argument that there may currently be high barriers to entry for 
providing clearing services as a broker-dealer.
---------------------------------------------------------------------------

    \525\ FOCUS Reports, or ``Financial and Operational Combined 
Uniform Single'' Reports, are monthly, quarterly, and annual reports 
that broker-dealers generally are required to file with the 
Commission and/or SROs pursuant to Exchange Act Rule 17a-5, 17 CFR 
240.17a-5.
    \526\ 68 filers reported clearing public customer accounts via 
self clearing and via introducing.
---------------------------------------------------------------------------

    Clearing broker-dealers face liquidity risks, as they are obligated 
to make payments to clearing agencies on behalf of customers who 
purchase securities. As discussed in more detail below, because 
customers of a clearing broker may default on their payment obligations 
to the broker, particularly when the price of a purchased security 
declines before settlement, clearing broker-dealers routinely seek to 
reduce the risks posed by their customers. For example, clearing 
broker-dealers may require customers to contribute financial resources 
in the form of margin to margin accounts, to pre-fund purchases in cash 
accounts, or may restrict the use of customers' unsettled funds. These 
measures are in many ways analogous to measures taken by clearing 
agencies to reduce and mitigate the risks posed by their clearing 
members. In addition, clearing broker-dealers may also mitigate the 
risks posed by customers by charging higher transaction fees that 
reflect the value of the customer's option to default, thereby causing 
customers to internalize the cost of default that is inherent in the 
settlement process.\527\ While not directly reducing the risk posed by 
customers to clearing members, these higher transaction fees indirectly 
reduce that risk by allocating to customers a portion of the expected 
direct costs of customer default.
---------------------------------------------------------------------------

    \527\ See infra Parts VIII.C.2. and VIII.C.4.
---------------------------------------------------------------------------

    Another way the settlement cycle may affect transaction prices 
involves the potential use of funds during the settlement cycle. To the 
extent that buyers may use the cash to purchase securities during the 
settlement cycle for other purposes, they may derive value from the 
length of time it takes to settle a transaction. Testing this 
hypothesis, studies have found that sellers demand compensation for the 
benefit that buyers receive from deferring payment during the 
settlement cycle and that this compensation is incorporated in equity 
returns.\528\
---------------------------------------------------------------------------

    \528\ See Victoria Lynn Messman, Securities Processing: The 
Effects of a T+3 System on Security Prices (May 2011) (Ph.D. 
dissertation, University of Tennessee--Knoxville), http://trace.tennessee.edu/utk_graddiss/1002/; Josef Lakonishok & Maurice 
Levi, Weekend Effects on Stock Returns: A Note, 37 J. Fin. 883 
(1982), https://www.jstor.org/stable/pdf/2327716.pdf; Ramon P. 
DeGennaro, The Effect of Payment Delays on Stock Prices, 13 J. Fin. 
Res. 133 (1990), http://onlinelibrary.wiley.com/doi/10.1111/j.1475-6803.1990.tb00543.x/abstract.
---------------------------------------------------------------------------

    The settlement process also exposes investors to certain risks. The 
length of the settlement cycle sets the minimum amount of time between 
when an investor places an order to sell securities and when the 
customer can expect to have access to the proceeds of that sale. 
Investors take this into account when they plan transactions to meet 
liquidity needs. For example, under T+2 settlement, investors who 
experience liquidity shocks, such as unexpected expenses that must be 
met within one day, could not rely on obtaining funding solely through 
a sale of securities because the proceeds of the sale would not 
typically be available until the end of the second day after the sale. 
One possible strategy to deal with such a shock under T+2 settlement 
would be to borrow to meet payment obligations on day T+1 and repay the 
loan on the following day with the proceeds from a sale of securities, 
incurring the cost of one day of interest. Another strategy that 
investors may use is to hold financial resources to insure themselves 
from liquidity shocks.
    Some securities transactions depend on an FX transaction to provide 
the necessary funds. When settlement times for FX transactions are 
longer than that of the securities transaction it is meant to finance, 
the purchaser may be required to find an alternative source of funds to 
settle the securities transaction. The Commission is unable to quantify 
the fraction of securities trades that depend on a corresponding FX 
transaction or the relative frequency with which market participants 
employ alternative methods when FX and securities settlement cycles 
differ, because it is unaware of a source for data on how securities 
transactions are funded that would be a necessary prerequisite to 
providing a reasonable estimate. It is the experience of Commission 
staff that, for retail investors, many brokers require their retail 
clients to prefund their transactions including those that require a 
corresponding FX transaction.
    Integral to settlement of institutional trades is achieving an 
affirmed confirmation, which can require a series of communications 
between a broker-dealer and its institutional customer. As a general 
matter, most broker-dealers maintain policies and procedures to ensure 
the timely settlement of their transactions.\529\ An affirmed 
confirmation by the end of trade date is considered a securities 
industry best practice.\530\ Currently, despite existing commercial 
incentives and continuing efforts to promote ``same-day affirmation'' 
as an industry best practice, only about 68% of trades achieve 
affirmation on trade date.\531\
---------------------------------------------------------------------------

    \529\ See, e.g., SIFMA August 26th Letter, supra note 207, at 2.
    \530\ See T+1 Report, supra note 61, at 5.
    \531\ See DTCC ITP Forum Remarks, supra note 264.
---------------------------------------------------------------------------

    In order to deliver shares that a customer has sold, it may be 
necessary for a broker-dealer to initiate a bona fide recall of a 
loaned security to be able to mark the sale of such loaned but recalled 
security ``long'' for purposes of Rule 200(g)(1).\532\ Under a T+2 
standard settlement cycle, the closeout period for sales marked 
``long'' is T+5, and so recalls of loaned securities need to be 
delivered by T+4 to be available to close out any fails on sales marked 
``long'' by the beginning of regular trading hours on T+5. To meet this 
timeframe, a number of broker-dealers have securities lending 
agreements that set the period of delivery for delivering loaned but 
recalled securities to two settlement days after initiation of a 
recall. The recall of a loaned security does not require that a reason 
be given so it is not possible to determine the volume of security loan 
recalls that are initiated in order to complete settlement before the 
closeout period.
---------------------------------------------------------------------------

    \532\ See T+1 Proposing Release, supra note 2, at 10461.
---------------------------------------------------------------------------

    Rule 15c6-1(c) establishes a T+4 settlement cycle for firm 
commitment underwritings for securities that are priced after 4:30 p.m. 
Eastern Time (``ET'').\533\ Under the rule, the broker or dealer must 
effect or enter into a contract for the purchase or sale of those 
securities that provide for payment of funds and delivery of securities 
no later than the fourth business day after the date of the contract 
unless otherwise expressly agreed to by the parties at the time of the 
transaction. Table 1 provides statistics for the number of initial 
public offerings of equity and aggregate proceeds by year from 2000-
2022. The Commission believes that most equity initial public offerings 
(``IPOs''), particularly larger offerings, are made on a firm 
commitment basis. Although the Commission is not aware of a 
comprehensive and accessible database that includes settlement time by 
offering, it understands that the current market practice for 
substantially all equity offering is to settle on the current T+2 
timeframe, notwithstanding the exceptions provided in Rule 15c6-1(c) 
for firm commitment offerings priced after 4:30 p.m. ET.\534\ The third 
and fourth columns of Table 1 contain estimates for total IPO proceeds 
from separate sources using separate

[[Page 13923]]

methodologies but show similar patterns. The Commission understands 
that debt offerings frequently make use of the exception provided by 
15c6-1(d) and that substantially all of the purchasers in debt 
securities offerings are large, sophisticated institutions.
---------------------------------------------------------------------------

    \533\ 17 CFR 240.15c6-1(c).
    \534\ See T+1 Report, supra note 61, at 31. The U.S. moved to 
the current T+2 settlement in September 2017.

                       Table 1--Number of Initial Public Offerings and Aggregate Proceeds
                                                 [2000-2022] \1\
----------------------------------------------------------------------------------------------------------------
                                                                       Aggregate proceeds    Aggregate proceeds
                        Year                          Number of IPOs      ($ billions)           SIFMA ($B)
----------------------------------------------------------------------------------------------------------------
2000................................................             380                 64.80                 106.2
2001................................................              80                 35.29                  46.0
2002................................................              66                 22.03                  27.2
2003................................................              63                  9.54                  18.1
2004................................................             173                 31.19                  50.5
2005................................................             159                 28.23                  40.7
2006................................................             157                 30.48                  46.4
2007................................................             159                 35.66                  52.3
2008................................................              21                 22.76                  26.7
2009................................................              41                 13.17                  27.0
2010................................................              91                 29.82                  43.5
2011................................................              81                 26.97                  40.1
2012................................................              93                 31.11                  46.2
2013................................................             158                 41.56                  60.0
2014................................................             206                 42.20                  93.5
2015................................................             118                 22.00                  32.2
2016................................................              75                 12.52                  20.7
2017................................................             106                 22.98                  39.2
2018................................................             134                 33.47                  49.9
2019................................................             112                 39.18                  48.8
2020................................................             165                 61.87                  85.4
2021................................................             311                119.36                 153.6
2022................................................              39                  7.01                   8.5
----------------------------------------------------------------------------------------------------------------
\1\ The second and third columns contain estimates derived from IPOs with an offer price of at least $5.00,
  excluding ADRs, unit offers, closed-end funds, real estate investment trusts (``REITs''), natural resource
  limited partnerships, small best efforts offers, banks and savings and loans (S&Ls), and stocks not listed in
  data maintained by the Center for Research in Security Prices (``CRSP'' includes Amex, NYSE, and NASDAQ
  stocks). Proceeds exclude overallotment options. Estimates from IPO Statistics, Jay Ritter, University of
  Florida, at 3, https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf. The fourth column provides an
  estimate by SIFMA of total IPO proceeds using their own methodology. The data is available at https://www.sifma.org/resources/research/us-equity-and-related-securities-statistics/, but we understand their
  reported IPO data ``includes rank eligible deals; excludes BDCs, SPACs, ETFs, CLEFs & rights offers.'' See
  SIFMA Research Quarterly--3Q22 (Oct. 2022), at 5, https://www.sifma.org/wp-content/uploads/2022/10/US-Research-Quarterly-Equity-2022-10-19-SIFMA.pdf.

    Custodians hold customers' securities for safekeeping in order to 
minimize the risk of the misappropriation, misuse, or theft.\535\ One 
of the primary responsibilities of a custodian is the tracking, 
settling, and reconciling of assets that are acquired and disposed of 
by the investor. In this role, custodians affirm up to 70% of 
institutional trades \536\ and up to 70% of investment adviser 
trades.\537\ There are 48 custodian banks that are members of The 
Depository Trust Company (``DTC'').
---------------------------------------------------------------------------

    \535\ Although many securities are held in electronic form, 
e.g., equities at DTC, the custodian performs similar functions 
whether the securities are held in physical or electronic form.
    \536\ See DTCC ITP Forum Remarks, supra note 264.
    \537\ See IAA April Letter, supra note 16, at 4; see also ICI 
Letter, supra note 16, at 5; ISITC Letter, supra note 29, at 2.
---------------------------------------------------------------------------

3. Investment Companies and Investment Advisers
    Shares issued by investment companies may settle on different 
timeframes. For example, ETFs, certain closed-end funds, and mutual 
funds that are sold by brokers generally settle on T+2.\538\ By 
contrast, mutual fund shares that are directly purchased from the fund 
generally settle on T+1. Mutual funds that settle on a different basis 
than the underlying investments currently face liquidity risk as a 
result of a mismatch between the timing of mutual fund share 
transaction settlement and the timing of fund portfolio security 
transaction order settlements. Mutual funds may manage these particular 
liquidity needs by, among other methods, using cash reserves, back-up 
lines of credit, or interfund lending facilities to provide cash to 
cover the settlement mismatch.\539\ As of the end of 2021, there were 
11,577 open-end funds (including money market funds and ETFs).\540\ The 
assets of these funds were approximately $34.2 trillion.\541\ Of the 
11,577 funds noted, 2,690 were ETFs with combined assets of $7.2 
trillion.\542\
---------------------------------------------------------------------------

    \538\ The Commission applied Rule 15c6-1 to broker-dealer 
contracts for the purchase and sale of securities issued by 
investment companies, including mutual funds, because the Commission 
recognized that these securities represented a significant and 
growing percentage of broker-dealer transactions. T+3 Adopting 
Release, supra note 3, at 52900.
    \539\ See Open-End Fund Liquidity Risk Management Programs; 
Swing Pricing; Re-Opening of Comment Period for Investment Company 
Reporting Modernization Release, Investment Company Act Release No. 
31835 (Sept. 22, 2015), 80 FR 62274, 62285 n.100 (Oct. 15, 2015).
    \540\ See ICI, 2022 Investment Company Fact Book, A Review of 
Trends and Activities in the Investment Company Industry, at 21 
(2022) (``2022 ICI Fact Book''), https://www.icifactbook.org/pdf/2022_factbook.pdf. This comprises 8,887 open-end mutual funds, 
including mutual funds that invest primarily in other mutual funds, 
and 2,690 ETFs, including ETFs that invest primarily in other ETFs.
    \541\ See id. at 22.
    \542\ See id.
---------------------------------------------------------------------------

    Under section 22(e) of the Investment Company Act, an open-end fund 
generally is required to pay shareholders who tender shares for 
redemption within seven days of their tender.\543\ Open-end fund shares 
that are sold through broker-dealers must be redeemed within two days 
of a

[[Page 13924]]

redemption request because broker-dealers are subject to Rule 15c6-
1(a).
---------------------------------------------------------------------------

    \543\ 15 U.S.C. 80a-22(e).
---------------------------------------------------------------------------

    Furthermore, 17 CFR 270.22c-1,\544\ the ``forward pricing'' rule, 
requires funds, their principal underwriters, and dealers to sell and 
redeem fund shares at a price based on the current NAV next computed 
after receipt of an order to purchase or redeem fund shares, even 
though cash proceeds from purchases may be invested or fund assets may 
be sold in subsequent days in order to satisfy purchase requests or 
meet redemption obligations.
---------------------------------------------------------------------------

    \544\ Rule 22c-1 under the Investment Company Act.
---------------------------------------------------------------------------

    Based on Form ADV filings received through August 31, 2022, the 
Commission estimates that there are approximately 15,160 advisers 
registered with the Commission are required to make and keep copies of 
books and records relating to their advisory business.\545\ For any 
transaction that is subject to the requirements of Rule 15c6-2(a), the 
final amendments to Rule 204-2 will require registered investment 
advisers to make and keep copies of confirmations received, and any 
allocation and each affirmation sent or received, with a date and time 
stamp for each allocation and affirmation that indicates when the 
allocation and affirmation was sent or received. The Commission 
understands that not all investment advisers may engage in transactions 
that are subject to the requirements of Rule 15c6-2(a).\546\ Of the 
15,160 advisers registered with the Commission, we estimate that 12,991 
manage institutional accounts and are thus likely to facilitate 
transactions that are subject to the requirements of Rule 15c6-
2(a).\547\
---------------------------------------------------------------------------

    \545\ See infra note 4 to Table 2.
    \546\ For more discussion, see infra Part IX.A.
    \547\ See infra note 4 to Table 2.
---------------------------------------------------------------------------

    One commenter stated that timestamps are already included in 
electronic communications protocols.\548\ As discussed in Part IV.C, 
the Commission believes that timestamps are generally included in many 
electronic communications and many advisers currently send allocations 
and affirmations electronically, though some advisers may not retain 
these types of records.
---------------------------------------------------------------------------

    \548\ See FIX Trading Letter, supra note 218; cf. a separate 
commenter stated ``Additional requirements for registered investment 
advisers to timestamp certain trading records adds further 
complexity and cost to those managers' efforts.'' See AIMA Letter, 
supra note 29, at 2.
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4. Current Market for Clearance and Settlement Services
    As described in Part II.B of the proposal, two affiliated entities, 
NSCC and DTC, facilitate clearance and settlement activities in U.S. 
securities markets in most instances.\549\ There is limited competition 
in the provision of the services that these entities provide. NSCC is 
the CCP for trades between broker-dealers involving equity securities, 
corporate and municipal debt, and UITs for the U.S. market. DTC is the 
CSD that 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. CMSPs electronically facilitate communication among a broker-
dealer, an institutional investor or its investment adviser, and the 
institutional investor's custodian to reach agreement on the details of 
a securities trade, thereby creating binding terms.\550\ As discussed 
further in Part III.D of the T+1 Proposing Release, FINRA currently 
requires broker-dealers to use a clearing agency, such as DTC or a 
CMSP, or a qualified vendor under the rule to complete delivery-versus-
payment transactions with their customers.\551\
---------------------------------------------------------------------------

    \549\ See T+1 Proposing Release, supra note 2, at 10439-40.
    \550\ See id.; see also T+2 Proposing Release, supra note 4, at 
69246. Although there are three CMSPs, only one is active. That CMSP 
currently submits nonpublic monthly reports that include data on 
monthly trade volume processed and affirmations completed on T, T+1, 
and settlement date.
    \551\ See T+1 Proposing Release, supra note 2, at 10458 n.181 
and accompanying text.
---------------------------------------------------------------------------

    In addition, a CMSP may offer a ``matching'' process by which it 
compares and reconciles the broker-dealer's trade details with the 
institutional investor's trade details to determine whether the two 
descriptions of the trade agree, at which point it can generate an 
affirmation to effect settlement of the trade. As part of such process, 
the CMSP may offer services that can assist with the automated 
identification of trades that do not match, allowing market 
participants to identify errors and remediate any trade information 
that does not match. Market participants also rely on a variety of 
``local'' matching tools that allow them to compare trade information 
received from another party against their own trade information.\552\ 
These local matching tools often rely on inconsistent SSI data 
independently maintained by broker-dealers, investment managers, 
custodians, sub-custodians, and agents on separate databases.\553\ As 
discussed in Part II.B., processing institutional trades requires 
managing the back and forth involved with transmitting and reconciling 
trade information among the parties, functionally matching and re-
matching with the counterparties to the trade, as well as custodians 
and agents, to facilitate settlement. It also requires market 
participants to engage in allocation processes, such as allocation-
level cancellations and corrections, some of which are still processed 
manually.\554\
---------------------------------------------------------------------------

    \552\ Local matching platforms include, for example, the trade 
reconciliation and inventory management tools that market 
participants use to reconcile trade information. See DTCC, Embracing 
Post-Trade Automation: Seven Ways the Sell-Side Will Benefit from 
No-Touch Future (Nov. 2020) (``DTCC Embracing Post-Trade 
Automation''), https://www.dtcc.com/itp-hub/dist/downloads/broker_supplement_11.11.20z.pdf. Examples of such service providers 
include Bloomberg, Corfinancial, Lightspeed, and SS&C Technologies.
    \553\ See id. for more information about the use and impact of 
``local'' matching platforms. A 2020 DTCC survey of global broker-
dealers found that certain institutional post-trade processing costs 
could be reduced by 20-25% through leveraging post-trade automation, 
which would in turn eliminate redundancies and manual processing and 
mitigate operational risks. See DTCC, DTCC Identifies Seven Areas of 
Broker Cost Savings as a Result of Greater Post-Trade Automation 
(Nov. 18, 2020), https://www.dtcc.com/news/2020/november/18/dtcc-identifies-seven-areas-of-broker-cost-savings-as-a-result-of-greater-post-trade-automation.
    \554\ See DTCC, Re-Imagining Post-Trade: No-Touch Processing 
Within Reach, at 4 (Sept. 2019), https://www.dtcc.com/-/media/Files/Downloads/Institutional-Trade-Processing/ITP-Story/DTCC-Re-Imagining-Post-Trade.pdf.
---------------------------------------------------------------------------

    Broker-dealers compete to provide services to retail and 
institutional customers. Based on the large number of broker-dealers, 
there is likely a high degree of competition among broker-dealers. 
However, the markets that broker-dealers serve may be segmented along 
lines relevant for the analysis of competitive effects of the amendment 
to Rule 15c6-1(a). As noted above, the number of broker-dealers that 
self-clear public customer accounts is smaller than the set of broker-
dealers that introduce and do not self-clear. This could mean that 
introducing broker-dealers compete more intensively for customers than 
clearing broker-dealers. Further, clearing broker-dealers must meet 
requirements set by NSCC and DTC, such as financial responsibility 
requirements and clearing fund requirements. These requirements 
represent barriers to entry for brokers that may wish to become 
clearing broker-dealers, limiting competition among such entities.
    Competition for customers affects how the costs associated with the 
clearance and settlement process are allocated among market 
participants. In managing the expected costs of risks from their 
customers and the costs of compliance with SRO and Commission rules, 
clearing broker-dealers decide what fraction of these costs to pass

[[Page 13925]]

through to their customers in the form of fees and margin requirements, 
and what fraction of these costs to bear themselves. The level of 
competition that a clearing broker-dealer faces for customers will 
dictate the extent to which it is able to pass these costs through to 
its customers.
    In addition, several factors affect the current levels of 
efficiency and capital formation in the various functions that make up 
the market for clearance and settlement services. First, at a general 
level, market participants occupying various positions in the clearance 
and settlement system must post or hold liquid financial resources, and 
the level of these resources is a function of the length of the 
settlement cycle. For example, NSCC collects clearing fund 
contributions from members to help ensure that it has sufficient 
financial resources in the event that one of its members defaults on 
its obligations to NSCC. As discussed above, the length of the 
settlement cycle is one determinant of the size of NSCC's exposure to 
clearing members. As another example, mutual funds may manage liquidity 
needs by, among other methods, using cash reserves, back-up lines of 
credit, or interfund lending facilities to provide cash. These 
liquidity needs, in turn, are related to the mismatch between the 
timing of mutual fund transaction order settlements and the timing of 
fund portfolio security transaction order settlements.
    Holding liquid assets solely for the purpose of mitigating 
counterparty risk or liquidity needs that arise as part of the 
settlement process could represent an allocative inefficiency. That is, 
because firms that are required to hold these assets might prefer to 
put them to alternative uses, and because these assets may be more 
efficiently allocated to other market participants who value them for 
their fundamental risk and return characteristics rather than for their 
value as collateral. To the extent that any intermediaries between 
buyer and seller, who facilitate clearance and settlement of the trade, 
bear costs as a result of inefficient allocation of collateral assets, 
these inefficiencies may be reflected in higher transaction costs.
    The settlement cycle may also have more direct impacts on 
transaction costs. As noted above, clearing broker-dealers may charge 
higher transaction fees to reflect the value of the customer's option 
to default and these fees may cause customers to internalize the cost 
of the default options inherent in the settlement process. However, 
these fees also make transactions more costly and may influence the 
willingness of market participants to efficiently share risks or to 
supply liquidity to securities markets. Taken together, inefficiencies 
in the allocation of resources and risks across market participants may 
serve to impair capital formation.
    Finally, market participants may make processing errors in the 
clearance and settlement process.\555\ Market participants have stated 
that manual processing and a lack of automation result in processing 
errors.\556\ Although some of these errors may be resolved within the 
settlement cycle and not result in a failed trade, those that are not 
may result in failed trades, which appear in the failure to deliver 
data.\557\ Further, market participants may incorporate the likelihood 
that processing errors result in delays in payments or deliveries into 
securities prices.\558\ Figure 1 shows total fails to deliver in shares 
at mid-month and end-of-month from January 2016 through mid-December 
2022. The change in the U.S. settlement cycle from T+3 to T+2 became 
effective in September 2017. Although processing errors are only one 
reason a trade may result in a fail to deliver, there is no marked 
change in the fails data around the previous shortening of the 
settlement cycle.
---------------------------------------------------------------------------

    \555\ See, e.g., Omgeo Study, supra note 512, at 12; see also 
T+1 Report, supra note 61, at 26.
    \556\ Matthew Stauffer, Managing Director, Head of Institutional 
Trade Processing at DTCC, stated, ``The findings of our survey 
highlight the benefits of leveraging automated post-trade solutions 
to reduce the costs of operational functions and the risk inherent 
in manual processes.'' See DTCC Identifies Seven Areas of Broker 
Cost Savings as a Result of Greater Post-Trade Automation, supra 
note 524.
    \557\ See Statement by The Depository Trust & Clearing 
Corporation, U.S. Securities and Exchange Commission Securities 
Lending and Short Sales Roundtable, at 3 (Sept. 30, 2009), https://www.sec.gov/comments/4-590/4590-32.pdf; see also T+1 Report, supra 
note 61, at 26.
    \558\ See Messman, supra note 528.
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BILLING CODE 8011-01-P

[[Page 13926]]

[GRAPHIC] [TIFF OMITTED] TR06MR23.000

BILLING CODE 8011-01-C

C. Analysis of Benefits, Costs, and Impact on Efficiency, Competition, 
and Capital Formation

1. Benefits
    Several commenters noted that shortening the settlement cycle would 
reduce the risks associated with the settlement cycle.\559\ Shortening 
the settlement cycle should reduce both the aggregate market value of 
all unsettled trades and the amount of time that CCPs, or the 
counterparties to a trade, may be subject to market and credit risk 
from an unsettled trade.\560\ First, holding transaction volumes 
constant, the market value of transactions awaiting settlement at any 
given point in time under a T+1 settlement cycle will be approximately 
one half lower than under the current T+2 settlement cycle. Using the 
risk mitigation framework described in Part VIII.B.1, based on 
published statistics from the second quarter of 2022,\561\ and holding 
average dollar volumes constant, the aggregate notional value of 
unsettled transactions at NSCC is estimated to fall from nearly $88 
billion to approximately $44 billion.\562\
---------------------------------------------------------------------------

    \559\ See supra notes 497-502.
    \560\ See T+1 Proposing Release, supra note 2, at 10447-48.
    \561\ See DTCC Quantitative Disclosure Results Q2 2022, supra 
note 519, at 14.
    \562\ See id. at 20.
---------------------------------------------------------------------------

    Second, a market participant that experiences counterparty default 
and enters into a new transaction under a T+2 settlement cycle is 
exposed to more market risk than would be the case under a T+1 
settlement cycle. As a result, market participants that are exposed to 
market, credit, and liquidity risks would be exposed to less risk under 
a T+1 settlement cycle. This reduction in risk may also extend to 
mutual fund transactions conducted with broker-dealers that currently 
settle on a T+2 basis.\563\ To the extent that these transactions 
currently give rise to counterparty risk exposures between mutual funds 
and broker-dealers, these exposures may decrease as a consequence of a 
shorter settlement cycle. In addition, a shorter standard settlement 
cycle should reduce liquidity risks that could arise by allowing 
investors to obtain the proceeds of securities transactions sooner. 
These

[[Page 13927]]

risks affect all market participants, are difficult to diversify away, 
and require resources to manage and mitigate.
---------------------------------------------------------------------------

    \563\ In today's environment, ETFs and certain closed-end funds 
clear and settle on a T+2 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+2. Thus, the proposed amendment to Rule 
15c6-1(a) would require ETFs, closed-end funds, and mutual funds 
settling on a T+2 basis to revise their settlement timeframes.
---------------------------------------------------------------------------

    CCPs require clearing members to post financial resources in order 
to secure members' obligations to deliver cash and securities to the 
CCP. Clearing members in turn impose fees on their customers, e.g., 
introducing broker-dealers, institutional investors, and retail 
investors. The margin requirements required by the CCP are a function 
of the risk posed to the CCP by the potential default of the clearing 
member. That risk is a function of several factors including the value 
of trades submitted for clearing but not yet settled, and the 
volatility of the securities prices that make up those unsettled 
trades. As these factors are an increasing function of the time to 
settlement, by reducing settlement from T+2 to T+1, a CCP may require 
less collateral from its members, and the CCP's members may, in turn, 
reduce fees that they may pass down to other market participants, 
including introducing broker-dealers, institutional investors, and 
retail investors.
    Any reduction in clearing broker-dealers' required margin should 
provide multiple benefits. First, financial resources that are used to 
mitigate the risks of the clearance and settlement process can be put 
to alternative uses. Reducing the financial risks associated with the 
overall clearance and settlement process should reduce the amount of 
collateral required to mitigate these risks, which should reduce the 
costs that market participants bear to manage and mitigate these risks, 
and the allocative inefficiencies that may stem from risk management 
practices.\564\ Second, assets that are valuable because they are 
particularly suited to meeting financial resource obligations may be 
better allocated to market participants that hold these assets for 
their fundamental risk and return characteristics. This improvement in 
allocative efficiency may improve capital formation.
---------------------------------------------------------------------------

    \564\ See supra Part VIII.B. (further discussing financial 
resources collected to mitigate and manage financial risks).
---------------------------------------------------------------------------

    A portion of the savings from less costly risk management under a 
T+1 standard settlement cycle relative to a T+2 standard settlement 
cycle may flow through to investors. Investors may be able to 
profitably redeploy financial resources that were once needed to fund 
higher clearing fees, for example.
    Market participants might also individually benefit through reduced 
clearing fund deposit requirements. In 2012, the BCG Study estimated 
that cost reductions related to reduced clearing fund contributions 
resulting from moving from a T+3 to a T+2 settlement cycle would amount 
to $25 million per year.\565\ In addition, a shorter settlement cycle 
might reduce liquidity risk by allowing investors to obtain the 
proceeds of their securities transactions sooner. Reduced liquidity 
risk may be a benefit to individual investors, but it may also reduce 
the volatility of securities markets by reducing liquidity demands in 
times of adverse market conditions, potentially reducing the 
correlation between market prices and the risk management practices of 
market participants.\566\
---------------------------------------------------------------------------

    \565\ See The Boston Consulting Group (``BCG''), Cost Benefit 
Analysis of Shortening the Settlement Cycle, at 10 (Oct. 2012) 
(``BCG Study''), https://1library.net/document/ynm3kx1z-cost-benefit-analysis-of-shortening-the-settlement-cycle.html. According 
to SIFMA, average daily trading volume in U.S. equities grew from 
$253.1B in 2011 to $564.7B in 2021, an increase of 123%. See CBOE 
Exchange, Inc., and SIFMA, US Equities and Related Statistics (Dec. 
1, 2022), https://www.sifma.org/resources/research/us-equity-and-related-securities-statistics/us-equities-and-related-statistics-sifma/. Price volatility, as measured by the standard deviation of 
the price, is concave in time, which means that as a period of time 
increases, volatility will increase, but at a decreasing rate. This 
suggests that the reduction in price volatility from moving from T+2 
settlement to T+1 settlement is larger than the reduction in price 
volatility from moving from T+3 settlement to T+2 settlement. These 
two facts suggest that the estimated reduction in clearing fund 
contributions would be more than $25 million per year.
    \566\ See Peter F. Christoffersen & Francis X. Diebold, How 
Relevant is Volatility Forecasting for Financial Risk Management?, 
82 Rev. Econ. & Stat. 12 (2000), http://www.mitpressjournals.org/doi/abs/10.1162/003465300558597#.V6xeL_nR-JA. The paper shows that 
volatility can be predicted in the short run, and concludes that 
short run forecastable volatility would be useful for risk 
management practices.
---------------------------------------------------------------------------

    Shortening the settlement cycle may reduce incentives for investors 
to trade excessively in times of high volatility.\567\ Such incentives 
exist because investors do not always bear the full cost of settlement 
risk for their trades. Broker-dealers incur costs in managing 
settlement risk with CCPs. Broker-dealers can set their fees so that 
they recover the average cost of risk management from their customers, 
but those fees depend on a variety of factors that impact settlement 
risk. If a particular trade has above-average settlement risk, such as 
when market prices are unusually volatile, broker-dealers may not be 
able to adjust fees to reflect the higher marginal cost. In extreme 
cases, broker-dealers may prevent a customer from trading.\568\ 
Shortening the settlement cycle reduces the cost of risk management and 
should reduce any such incentives to trade more than they otherwise 
would if they bore the full cost of settlement risk for their trades.
---------------------------------------------------------------------------

    \567\ See Sam Schulhofer-Wohl, Externalities in Securities 
Clearing and Settlement: Should Securities CCPs Clear Trades for 
Everyone? (Fed. Res. Bank Chi. Working Paper No. 2021-02, 2021).
    \568\ This occurred in January 2021 following heightened 
interest in certain ``meme'' stocks. See T+1 Proposing Release, 
supra note 2, at 10438-39.; see also Staff Report on Equity and 
Options Market Structure Conditions in Early 2021, at 31-35 (Oct. 
14, 2021), https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf.
---------------------------------------------------------------------------

    The benefits of harmonized settlement cycles may also accrue to 
mutual funds. As described above,\569\ transactions in mutual fund 
shares typically settle on a T+1 basis even when transactions in their 
portfolio securities settle on a T+2 basis. As a result, there is a 
one-day mismatch between when these funds make payments to shareholders 
that redeem shares and when the funds receive cash proceeds for 
portfolio securities they sell. This mismatch represents a source of 
liquidity risk for mutual funds. Shortening the settlement cycle by one 
day will mitigate the liquidity risk due to this mismatch. As a result, 
mutual funds that settle on a T+1 basis may be able to reduce the size 
of cash reserves or the size of back up credit facilities that some 
currently use to manage liquidity risk from the mismatch in settlement 
cycles. Further, mutual funds may be able to invest incoming cash more 
quickly when funds have net subscriptions, because the settlement time 
for the purchase of fund shares will be aligned with the settlement 
time for portfolio investments, thus allowing funds to maximize their 
exposure to their defined investment strategies.
---------------------------------------------------------------------------

    \569\ See supra note 563; see also supra Part VIII.B.3.
---------------------------------------------------------------------------

    Adoption of a T+1 standard settlement cycle could also have the 
second-order, longer-term benefit to U.S. investors of incentivizing 
other jurisdictions to emulate U.S. markets in adopting a standard 
settlement time of T+1. By virtue of U.S. capital markets' prominent 
role in global finance, a transition to a shorter settlement cycle 
would act as an incentive for other jurisdictions to also compress 
their settlement times to match U.S. processing times. This would be a 
product of non-U.S. jurisdictions' desire to reduce transactions costs 
attendant to settlement mismatches.\570\ As a result,

[[Page 13928]]

U.S. investors who deploy capital abroad would enjoy the benefits of 
compressed settlement times that the Commission has already described 
for the domestic T+1 settlement framework: lower market, credit and 
liquidity risks; and additional capital efficiencies via lower margin 
and clearing fund deposit requirements. In addition, a migration to T+1 
in other jurisdictions would reduce the settlement mismatch costs 
described below in Part VIII.C.2.
---------------------------------------------------------------------------

    \570\ See, e.g., Association for Financial Markets in Europe, 
T+1 Settlement in Europe: Potential Benefits and Challenges, at 4 
(Sept. 2022), stating ``Given that some major jurisdictions will be 
adopting T+1, the end users of capital markets--companies seeking to 
issue capital and consumers seeking to invest capital--may benefit 
from Europe following the same approach. This would also avoid a 
potential gap in the perceived competitiveness of European markets 
vis-[agrave]-vis its global peers.''
---------------------------------------------------------------------------

    The Commission believes that these benefits are unlikely to be 
substantially mitigated by the exceptions to Rule 15c6-1(a) discussed 
in Part II.A. Market participants that rely on Rule 15c6-1(b) in order 
to transact 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 are 
likely to continue to rely on the exception after the Commission adopts 
the amendment to Rule 15c6-1(a). Similarly, those that rely on the 
exemption from Rule 15c6-1 for securities that do not have facilities 
for transfer or delivery in the U.S. are likely to continue to do so, 
as indicated by the public comments urging the Commission to retain 
this exemption.\571\ There may be transactions covered by Rule 15c6-
1(b) that in the past did not make use of this exception because they 
settled within two business days, but that may require use of this 
exception under the amendment to paragraph (a) of the rule because they 
require more than one business day to settle. However, the Commission 
did not receive public comments on this point, and does not have data 
on whether transactions that previously did not make use of the 
exemption might now do so.
---------------------------------------------------------------------------

    \571\ See discussion in sections II.B.5 and II.C.6.
---------------------------------------------------------------------------

    Finally, the extent to which different types of market participants 
experience any benefits that stem from the amendment to Rule 15c6-1(a) 
may depend on their market power. As discussed in the proposing 
release,\572\ the clearance and settlement system involves a number of 
intermediaries that provide a range of services between the ultimate 
buyer and seller of a security. Those market participants that have a 
greater ability to negotiate with customers or service providers may be 
able to retain a larger portion of the operational cost savings from a 
shorter settlement cycle than others, as they may be able to use their 
market power to avoid passing along the cost savings to their clients.
---------------------------------------------------------------------------

    \572\ See T+1 Proposing Release, supra note 2, at 10439-44.
---------------------------------------------------------------------------

    Although the Commission proposed deleting Rule15c6-1(c), it is 
instead, for the reasons discussed above, amending paragraph (c) of 
Exchange Act Rule 15c6-1 to shorten the settlement cycle for firm 
commitment offerings for securities that are priced after 4:30 p.m. ET, 
unless otherwise expressly agreed to by the parties at the time of the 
transaction.\573\
---------------------------------------------------------------------------

    \573\ See T+1 Proposing Release, supra note 2, at 10449-50.
---------------------------------------------------------------------------

    As discussed in the proposing release, paragraph (c) is rarely used 
in the current T+2 settlement environment, but the IWG expects a T+1 
standard settlement cycle would increase reliance on paragraph 
(c).\574\ The Commission is persuaded by comments stating that a T+1 
settlement cycle is not sufficiently long enough to prevent firm 
commitment offerings priced after 4:30 p.m. ET from failing to settle 
on time, and the Commission acknowledges that paragraphs (a) and (d) of 
Rule 15c6-1 would not allow parties to agree to a longer settlement 
cycle when circumstances, unforeseen at the time of the pricing of the 
transaction, arise that prevent settlement on T+1. The Commission 
further acknowledges that, while paragraphs (a) and (d) allow parties 
to agree to a longer settlement cycle, in order for the parties to 
avail themselves of that extended settlement date, they must reach that 
agreement at the time of the transaction.
---------------------------------------------------------------------------

    \574\ T+1 Report, supra note 61, at 33-35.
---------------------------------------------------------------------------

    The Commission believes that amending Rule 15c6-1(c) as discussed 
in Part II.C.4 above will realize the benefits of shortening the 
settlement cycle discussed above for the specific transactions covered 
by paragraph (c) while allowing an extra day to resolve issues 
unanticipated at the time of the transaction. According to one 
commenter, it is not unusual for unanticipated issues relating to 
transfer agents, legend removal, local law matters (including local 
court approval), medallion guarantees or non-U.S. parties to 
arise.\575\ Such unanticipated issues could lead to increased failures 
to settle trades on a T+1 basis with respect to firm commitment 
offerings.
---------------------------------------------------------------------------

    \575\ See supra Part II.B.3. for detailed description of comment 
letters urging the Commission to adopt a T+2 settlement cycle for 
firm commitment offerings for securities that are priced after 4:30 
p.m. ET, unless otherwise expressly agreed to by the parties at the 
time of the transaction.
---------------------------------------------------------------------------

    In addition to the amendments to Rule 15c6-1(a) and (c), the 
Commission is adopting three rules applicable, respectively, to broker-
dealers, investment advisers, and CMSPs to improve the efficiency of 
managing the processing of institutional trades under the shortened 
timeframes that will be available in a T+1 environment. First, the 
Commission had proposed new Rule 15c6-2 to require that, where parties 
have agreed to engage in an allocation, confirmation, or affirmation 
process, a broker or dealer would be prohibited from effecting or 
entering into a contract for the purchase or sale of a security (other 
than an exempted security, a government security, a municipal security, 
commercial paper, bankers' acceptances, or commercial bills) on behalf 
of a customer, unless such broker or dealer has entered into a written 
agreement with the customer that requires the allocation, confirmation, 
affirmation, or any combination thereof, be completed as soon as 
technologically practicable and no later than the end of the day on 
trade date in such form as may be necessary to achieve settlement in 
compliance with Rule 15c6-1(a).\576\ The Commission is adopting a 
modified new Rule 15c6-2 that, in addition to technical changes,\577\ 
and for the reasons discussed in Part III.C.2 above, modifies the 
proposed rule by adding a new paragraph (a), under which a broker-
dealer can determine either to enter into written agreements, or 
establish, maintain, and enforce written policies and procedures 
reasonably designed to ensure completion of the allocation, 
confirmation, affirmation, or any combination thereof, for a 
transaction as soon as technologically practicable, and no later than 
the end of the day on trade date, in such form as necessary to achieve 
settlement.
---------------------------------------------------------------------------

    \576\ See T+1 Proposing Release, supra note 2, at 10453; see 
also supra Part III.A.
    \577\ See supra Part III.C.1.
---------------------------------------------------------------------------

    The Commission believes that implementing a T+1 standard settlement 
cycle, as well as any potential further shortening beyond T+1, will 
necessitate increases in same-day affirmation rates because same-day 
affirmations will be critical to achieving timely T+1 settlement.\578\ 
In this way, the Commission also believes that new Rule 15c6-2 should 
facilitate timely settlement as a general matter because it will 
accelerate the transmission and affirmation of trade data to trade 
date, improving the accuracy and efficiency of institutional trade 
processing, and reducing the potential for settlement failures. The 
Commission further anticipates that proposed Rule 15c6-2 will likely 
stimulate further development of automated and standardized practices 
among market

[[Page 13929]]

participants more generally, particularly those that currently rely on 
manual processes to achieve settlement.
---------------------------------------------------------------------------

    \578\ See supra note 262.
---------------------------------------------------------------------------

    Although same-day affirmation is considered a best practice for 
institutional trade processing, this practice is not universal across 
market participants or even across all trades entered by a given 
participant.\579\ As discussed in Part VIII.B above, the collection of 
redundant, often manual steps and the use of uncoordinated (i.e., not 
standardized) databases can lead to delays, exceptions processing, 
settlement fails, wasted resources, and economic losses. The Commission 
believes that proposed Rule 15c6-2 should increase the percentage of 
trades that achieve an affirmed confirmation on trade date and should 
help facilitate an orderly transition to T+1. Proposed Rule 15c6-2 
would also improve the efficiency of the settlement cycle by 
incentivizing market participants to commit to operational and 
technological upgrades that facilitate same-day affirmation to 
eliminate, among other things, manual operations, while also reducing 
operational risk, discouraging the use of ``just in time'' solutions, 
and promoting readiness for shortening the settlement cycle.\580\
---------------------------------------------------------------------------

    \579\ See supra Part III.B.1. for a discussion of comments that 
argue that commercial incentives to achieve timely trade 
allocations, confirmations, and affirmations already exist. Although 
the Commission agrees that the incentives identified by commenters 
exist and help ensure timely settlement, the Commission believes 
that these incentives alone are insufficient to significantly 
improve same-day affirmation rates, as required to facilitate 
shortening the standard settlement cycle to T+1.
    \580\ See discussion in section III.B.5. and supra note 294 and 
accompanying text.
---------------------------------------------------------------------------

    Second, the Commission is amending the recordkeeping obligations of 
investment advisers to ensure that they are properly documenting their 
related allocations and affirmations, as well as the confirmations they 
receive from their broker-dealers.\581\ The amendment to Rule 204-2 
requires advisers to time and date stamp records of any allocation and 
each affirmation with respect to any securities transaction that is 
subject to the requirements of Rule 15c6-2(a). The Commission believes 
that the timing of communicating allocations to the broker or dealer is 
a critical pre-requisite to help ensure that confirmations can be 
issued in a timely manner, and affirmation is the final step necessary 
for an adviser to acknowledge agreement on the terms of the trade or 
alert the broker or dealer of a discrepancy. The Commission believes 
the recordkeeping requirements should help establish that obligations 
to achieve a matched trade have been met. Requiring the retention of 
these records also is important for the Commission staff's use in its 
regulatory and examination program and will be helpful for the 
Commission to monitor the transition from T+2 to T+1. Moreover, the 
amendments to Rule 204-2 are intended to reduce risk following the 
transition to T+1 by improving affirmation rates.
---------------------------------------------------------------------------

    \581\ See supra Part IV.C.
---------------------------------------------------------------------------

    Finally, the Commission is adopting a requirement for CMSPs to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to facilitate straight-through 
processing.\582\ Under the rule, a CMSP facilitates straight-through 
processing when its policies and procedures enable its users to 
minimize, to the greatest extent that is technologically practicable, 
the need for manual input of trade details or manual intervention to 
resolve errors and exceptions that can prevent settlement of the 
trade.\583\
---------------------------------------------------------------------------

    \582\ See supra Part V.C.; see also T+1 Proposing Release, supra 
note 2, at 10458 (further discussing the term ``straight-through 
processing'').
    \583\ See T+1 Proposing Release, supra note 2, at 10458.
---------------------------------------------------------------------------

    The Commission believes that increasing the usage of CMSPs can 
reduce costs and risks associated with processing institutional trades 
and improve the efficiency of the national clearance and settlement 
system.\584\ CMSPs have become increasingly connected to a wide variety 
of market participants in the U.S. and elsewhere,\585\ increasing the 
need to reduce risks and inefficiencies that may result from use of a 
CMSPs' systems. The Commission believes the new rule will better 
position CMSPs to provide services that not only reduce the risk 
inherent in manual processing, but also help facilitate an orderly 
transition to a T+1 standard settlement cycle, as well as potential 
further shortening of the settlement cycle in the future.\586\ The new 
requirement supports some of the benefits derived from a shortening of 
the settlement cycle, and mitigates any subsequent potential increase 
in fails that may be caused by the reduced time to remediate any errors 
in trades.
---------------------------------------------------------------------------

    \584\ See supra note 539 and accompanying discussion of 
processing errors.
    \585\ See DTCC, About DTCC Institutional Trade Processing, 
https://www.dtcc.com/about/businesses-and-subsidiaries/dtccitp 
(noting that DTCC ITP, parent to DTCC ITP Matching, serves 6,000 
financial services firms in 52 countries).
    \586\ See supra Part V.C. for related discussion.
---------------------------------------------------------------------------

    New Rule 17Ad-27 also requires a CMSP to submit every twelve months 
to the Commission a report that describes the following: (i) a summary 
of the CMSP's current policies and procedures for facilitating 
straight-through processing; \587\ (ii) a qualitative description of 
its progress in facilitating straight-through processing during the 
twelve month period covered by the report; \588\ (iii) a quantitative 
presentation of data that includes six specified sets of data; \589\ 
(iv) requirements concerning quantitative data organization and 
categorization; \590\ and (v) the steps the CMSP intends to take to 
facilitate and promote straight-through processing during the twelve 
month period that follows the period covered by the report.\591\ The 
new requirement also informs the Commission and the public, 
particularly the direct and indirect users of the CMSP, as to the 
progress being made each year to advance implementation of straight-
through processing with respect to the allocation, confirmation, 
affirmation, and matching of institutional trades, the communication of 
messages among the parties to the transactions, and the availability of 
service offerings that reduce or eliminate the need for manual 
processing.
---------------------------------------------------------------------------

    \587\ See supra Part V.C.2.(a).
    \588\ See supra Part V.C.2.(b).
    \589\ See supra Part V.C.2.(c). Specifically, Rule 17Ad-27(b)(3) 
requires the CMSP to provide data that includes (i) the total number 
of trades submitted to the clearing agency for processing; (ii) the 
total number of allocations submitted to the clearing agency; (iii) 
the total number of confirmations submitted to the clearing agency, 
as well as the total number of confirmations cancelled by a user; 
(iv) the percentage of confirmations submitted to the clearing 
agency that are affirmed on trade date, specifying to the extent 
practicable the time of affirmation on trade date; (v) the 
percentage of allocations and confirmations submitted to the 
clearing agency that are matched and automatically confirmed through 
the clearing agency's services; and (vi) metrics concerning the use 
of manual and automated processes by the CMSP's users with respect 
to the CMSP's services that may be used to assess progress in 
facilitating STP.
    \590\ See supra Part V.C.2.(d). Specifically, Rule 17Ad-27(b)(4) 
requires the CMSP to submit, pursuant to paragraph (b)(4), the data 
sets required under paragraph (b)(3) of the new rule and which must 
be: (i) organized on a month-by-month basis beginning with January 
of each year, for the twelve months covered by the report required 
under paragraph (b) of the rule; (ii) separated, where applicable, 
between the use of central matching and electronic trade 
confirmation services offered by the clearing agency; (iii) 
separated, as appropriate, by asset class; (iv) separated by type of 
user; and (v) presented on an anonymized and aggregated basis.
    \591\ See supra Part V.C.2.(e).
---------------------------------------------------------------------------

    New Rule 17Ad-27 requires the CMSP to file the report on EDGAR 
using Inline XBRL, a structured (machine-readable) data language.\592\ 
The Commission does not currently require CMSPs to provide the specific 
disclosures set forth in Rule 17Ad-27, but CMSPs may provide 
disclosures

[[Page 13930]]

related to straight-through processing as part of Exhibit J or Exhibit 
S to their exemption applications (or updates thereto) on Form CA-
1.\593\ These disclosures are not centrally filed on an electronic 
database, nor are they machine-readable; instead, clearing agencies are 
required to mail four completed copies of Form CA-1 to the Commission's 
headquarters.\594\
---------------------------------------------------------------------------

    \592\ See supra Part V.C.4.
    \593\ In the past, applicants have discussed on the Form CA-1 
application how their services might relate to the overall objective 
of straight-through processing. See, e.g., Bloomberg STP LLC Form 
CA-1 (Jan. 21, 2015), https://www.sec.gov/rules/other/2015/34-74394-form-ca-1.pdf. Exhibit J to Form CA-1 requires clearing agencies to 
provide narrative descriptions of each service or function performed 
by the registrant. Exhibit S to Form CA-1 requires a statement 
demonstrating why the granting of an exemption from registration as 
a clearing agency would be consistent with the public interest, the 
protection of investors and the purposes of section 17A of the Act, 
including the prompt and accurate clearance and settlement of 
securities transactions and the safeguarding of securities and 
funds.
    \594\ See Instruction I.2. to Form CA-1.
---------------------------------------------------------------------------

    Requiring a centralized filing in EDGAR using location and a 
machine-readable data language for the reports facilitates access, 
retrieval, analysis, and comparison of the disclosed straight-through 
processing information across different CMSPs and time periods by the 
Commission and the public, thus potentially augmenting the 
informational benefits of the report requirement.
2. Costs
    The Commission believes that compliance with a T+1 standard 
settlement cycle will involve initial fixed costs to update systems and 
processes.\595\ The Commission does not have all of the data necessary 
to form its own firm-level estimates of the costs of updates to systems 
and processes, as the types of data needed to form these estimates are 
difficult or impossible for the Commission to collect. However, the 
Commission has used inputs provided by industry studies discussed in 
this release to quantify these costs to the extent possible in Part 
VIII.C.5. In the proposing release, the Commission encouraged 
commenters to provide any additional or more current information or 
data on the costs to market participants of the proposed rule. 
Information received in public comments has informed this analysis.
---------------------------------------------------------------------------

    \595\ Industry sources have suggested some updates to systems 
and processes might yield operational cost savings after the initial 
update. For example, the T+1 Report stated that ``[w]hile there may 
be . . . up-front implementation costs to transition the industry to 
T+1, the industry foresees long-term cost reduction for market 
participants, and by extension, costs borne by end investors, given 
the benefits of moving to T+1 settlement.'' T+1 Report, supra note 
61, at 9; see infra Part VIII.C.5.(a). for industry estimates of the 
costs and benefits of the proposed amendment to Rule 15c6-1(a).
---------------------------------------------------------------------------

    The operational cost burdens associated with the amendment to Rule 
15c6-1(a) for different market participants may vary depending on each 
market participant's degree of direct or indirect inter-connectivity to 
the clearance and settlement process, regardless of size. For example, 
market participants that internally manage more of their own post-trade 
processes directly incur more of the upfront operational costs 
associated with the amendment to Rule 15c6-1(a), because they are 
required to directly undertake more of the upgrades and testing 
necessary for a T+1 standard settlement cycle. As mentioned in Part 
II.B of the proposing release, other market participants might 
outsource the clearance and settlement of their transactions to third-
party providers of back-office services. The exposures to the 
operational costs associated with shortening the standard settlement 
cycle should be indirect to the extent that third-party service 
providers pass through the costs of infrastructure upgrades to their 
customers. The degree to which customers bear operational costs depends 
on their bargaining position relative to third-party providers. Large 
customers with market power may be able to avoid internalizing these 
costs, while small customers in a weaker negotiation position relative 
to service providers may bear the bulk of these costs. In either case, 
to the extent that the costs of infrastructure upgrades are fixed, the 
distribution of the cost burden across many customers of the third-
party service provider implies that the costs to each individual 
customer is likely to be less than if they did not outsource the 
clearance and settlement of their transactions.
    Further, changes to initial and ongoing operational costs may make 
some self-clearing market participants alter their decision to continue 
internally managing the clearance and settlement of their transactions. 
Entities that currently internally manage their clearance and 
settlement activity may prefer to restructure their businesses to rely 
instead on third-party providers of clearance and settlement services 
that may be able to amortize the initial fixed cost of upgrade across a 
much larger volume of transaction activity.
    In addition, the shortening of the settlement cycle may increase 
the need for some market participants engaging in cross-border and 
cross-asset transactions to hedge risks stemming from mismatched 
settlement cycles and differences in time zones, resulting in 
additional costs. For example, as discussed in Part II.B.1 above, a 
comment letter submitted by an industry association representing the 
alternative investment industry stated that the T+1 Proposing Release 
``raises considerable risks for asset managers with primary or 
significant exposure to markets that will remain at T+2.'' \596\ The 
commenter's letter references specifically ``misalignment concerns'' 
relating to FX settlement risk, international banking and coordination 
issues, and collateral/liquidity risk.\597\
---------------------------------------------------------------------------

    \596\ See supra note 31.
    \597\ See supra note 34.
---------------------------------------------------------------------------

    One commenter stated that because FX transactions largely settle on 
a T+2 basis, market participants that seek to fund a cross-border 
securities transaction with the proceeds of an FX transaction would be 
required to settle the securities transaction before the proceeds of 
the FX transaction become available and pre-fund these securities 
transactions, which would potentially adversely impact client 
performance and increase operating and settlement risk for 
advisers.\598\ The commenter said that, while both domestic and 
internationally based investment advisers would be impacted by these 
issues, non-U.S.-based investment advisers would face additional 
expenses because they would need to set up an FX trading and settlement 
presence in the U.S., or add staff abroad to create, execute, and 
settle FX transactions to meet a T+1 timeline.\599\ Although there 
currently exists misalignment of settlement cycles across asset classes 
and as a result of time zone differences, the Commission agrees that 
misalignment introduced by the rule amendment being adopted will likely 
present some challenges for, and increase costs for, certain market 
participants, including asset managers.\600\ For example, as discussed 
in the proposing release, under the T+1 settlement cycle, a market 
participant selling a security in European equity markets to fund a 
purchase of securities

[[Page 13931]]

in U.S. markets would face a one day lag between settlement in Europe 
and settlement in the U.S. The market participant could choose between 
bearing an additional day of market risk in the U.S. trading markets by 
delaying the purchase by a day, or funding the purchase of U.S. shares 
with short-term borrowing. Additionally, because the FX market has a 
T+2 settlement cycle,\601\ the market participant will also be faced 
with a choice between bearing an additional day of currency risk due to 
the need to sell foreign currency as part of the transaction, or 
incurring the cost related to hedging away this risk in the forward or 
futures market.
---------------------------------------------------------------------------

    \598\ IAA October Letter, supra note 222, at 4. The commenter 
also suggested certain actions the Commission could take to reduce 
disruption in FX markets. See supra note 41.
    \599\ IAA October Letter, supra note 222, at 4 (suggesting 
certain actions the Commission could take to reduce disruption in FX 
markets, such as by (i) working with other regulators and market 
participants to support the move to T+1 by, among other things, 
modifying the FX and equity trading day(s) in the U.S., and (ii) 
``allow[ing] for a mismatch of FX settlement dates as a valid reason 
for T+2 settlement arrangements without it breaching an investment 
adviser's best execution obligation'').
    \600\ See Part II.C.1. (discussing challenges and costs 
associated with the misalignment of securities and FX settlement 
cycles).
    \601\ See, e.g., CME, CME Rulebook Chapter 13, at 3, https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/I/13.pdf (``Spot 
FX Transaction means a currency purchase and sale that is 
bilaterally settled by the counterparties via an actual delivery of 
the relevant currencies within two Business Days.''). U.S. and 
Canadian dollar spot FX transactions settle on the next business 
day. Id. at 5-6.
---------------------------------------------------------------------------

    Another commenter stated that if the U.S. settlement cycle is 
shortened to T+1 while other major global financial centers remain on a 
T+2 settlement cycle, ``there will be increased operational cost and 
significant settlement risks associated with multi-leg cross border 
transactions.'' \602\ This commenter further stated that it expects 
mismatched settlement cycles would result in increased financing costs 
associated with transactions in which a U.S. market participant is 
selling to a cross-border participant because ``we will be forced to 
receive (and pay for) a securities position on T+1 for the U.S. leg, 
but generally be unable to onward deliver the position on the foreign 
leg until T+2.'' \603\ This commenter also stated its expectation that 
mismatched settlement cycles will result in a significant number of 
settlement fails, that the increase in financing costs and settlement 
fails in connection with cross-border transactions may force broker-
dealers to decrease or cease offering cross-border services to their 
clients, that any decrease or cessation of cross-border trading 
ultimately will reduce liquidity for U.S. investors.\604\
---------------------------------------------------------------------------

    \602\ See supra note 43.
    \603\ Id.
    \604\ Id.
---------------------------------------------------------------------------

    Another commenter stated that the shortened settlement cycle in 
conjunction with time zone differences between markets may not allow 
sufficient time for investment advisers to match foreign currency 
amount to settle all trades on T+1.\605\ In the context of discussing 
potential exemptions to 15c6-1, another commenter stated that settling 
trades with different time zones is already a difficult process and 
accelerating the settlement cycle for these securities would make 
cross-border transactions even more challenging.\606\
---------------------------------------------------------------------------

    \605\ See supra note 50. This commenter also suggested certain 
``options'' for actions that could be taken to reduce disruption in 
the FX markets. See supra Part II for a discussion of these options.
    \606\ See supra note 107.
---------------------------------------------------------------------------

    Commenters also stated that the misalignment of settlement cycles 
between U.S. securities and non-U.S. securities will impact U.S. 
securities that are exchangeable for a foreign security or a basket 
including foreign securities.\607\ The commenter highlighted in 
particular ADRs, and ETFs with an underlying basket that includes 
foreign securities, which according to the commenter, illustrate this 
misalignment.\608\ The commenter stated that market makers and other 
market participants may purchase foreign shares and sell related ADRs 
in the U.S. on the same trading day, and thus timely settle the sale of 
the ADRs using the newly created ADRs.\609\ According to the commenter, 
this type of trade will not be possible if the underlying foreign 
shares settle on T+2 and the related ADR is required to settle on 
T+1.\610\ The result, the commenter stated, is likely to be wider bid-
ask spreads for the ADR because market makers must take into account 
the additional cost of borrowing securities and other financing costs 
to avoid settlement failures.\611\ Additionally, the commenter argued, 
the incidence of fails would likely increase as a result of the 
misaligned settlement cycles, particularly where it is not possible to 
borrow securities to make delivery, and a knock-on effect could be to 
increase the incidence of buy-ins as well.\612\
---------------------------------------------------------------------------

    \607\ See SIFMA April Letter, supra note 15, at 8.
    \608\ See id.
    \609\ See SIFMA April Letter, supra note 16, at 8.
    \610\ See id.
    \611\ See id.
    \612\ See id.
---------------------------------------------------------------------------

    Separately, the same commenter argued that the ETF creation/
redemption process is impacted by the misalignment of global securities 
transaction settlement cycles where the basket of securities underlying 
an ETF includes foreign securities.\613\ A second commenter stated that 
the misalignment in settlement cycles between the U.S. and foreign 
jurisdictions that continue to settle on a T+2 basis, coupled with time 
zone differences, may increase certain risks, such as failed trades, 
accrual differences, net asset value miscalculations, and investment 
guideline breaches.\614\ The same commenter stated that due to the 
resulting misalignment in settlement cycles between the U.S. and 
foreign markets upon transitioning to T+1, an ADR provider may incur 
borrowing and other costs related to the underlying foreign security to 
facilitate T+1 settlement of the ADR.\615\ According to the commenter, 
these costs would likely be passed down to investors and thus make it 
more expensive to obtain investment exposure to foreign markets.\616\
---------------------------------------------------------------------------

    \613\ See id. and referencing text for a discussion of 
settlement cycle misalignment on the create and redeem process for 
ETFs that include securities not traded in the U.S.
    \614\ See supra note 122.
    \615\ See id.
    \616\ See id.
---------------------------------------------------------------------------

    The Commission understands that variation in the length of the 
settlement cycle across asset classes and jurisdictions and variation 
in time zone introduce certain risks and costs on investors, broker-
dealers, custodians, and other market participants,\617\ but the 
Commission notes that currently and in the recent past settlement 
cycles have varied across asset classes and jurisdictions. The 
Commission further understands that the financial services industry has 
managed the challenges provided by these settlement cycle mismatches 
and time zone differences between markets albeit at some cost.\618\ Our 
information on these costs is limited regarding how firms will overcome 
the specific challenges identified by certain commenters. If other 
jurisdictions subsequently follow the U.S. in shortening the settlement 
cycle, however, many of the additional costs will only be incurred 
during that interval.\619\ In addition, the Commission understands that 
solutions to specific challenges may still need to be worked out by the 
affected industry participants and that those solutions may require 
additional costs to overcome.
---------------------------------------------------------------------------

    \617\ See supra Part II.C.1. for a discussion of the 
Commission's recognition of the challenges and costs associated with 
the prospective misalignment of settlement cycles, the Commission 
actions suggested by commenters, and examples of actions market 
participants may take in order to mitigate those challenges and 
costs.
    \618\ For example, during periods of heightened uncertainty it 
is common for some investors to sell equities, including foreign 
equities, and invest in U.S. Treasury securities (which generally 
settle on T+1). Such a trade would include many of the issues cited 
by commenters including differences in time zones, currency, and 
settlement cycle.
    \619\ See supra Part VIII.C.1.
---------------------------------------------------------------------------

    The way that different market participants will likely bear costs 
as a result of the amendment to Rule 15c6-1(a) may also vary based on 
their business structure. For example, a shorter standard settlement 
cycle will require payment for securities that settle regular-way by 
T+1 rather than T+2.

[[Page 13932]]

Generally, regardless of current funding arrangements between investors 
and broker-dealers, removing one business day between execution and 
settlement will mean that broker-dealers could choose between requiring 
investors to fund the purchase of securities one business day earlier, 
while extending the same level of credit they do under T+2 settlement, 
or providing an additional business day of funding to investors.\620\ 
In other words, broker-dealers could pass through some of the costs of 
a shorter standard settlement cycle by imposing the same shorter cycle 
on investors, or they could pass these costs on to investors by raising 
transactions fees to compensate for the additional business day of 
funding the broker-dealer may choose to provide. The extent to which 
these costs get passed through to customers may depend on, among other 
things, the market power of the broker-dealer. Generally, if a broker-
dealer does not face significant competition, it will have an incentive 
to absorb part of the cost increase. On the other hand, in the extreme 
case of a perfectly competitive market, there are no economic profits 
and price equals marginal costs so an increase in cost could be fully 
passed through to the customer.\621\
---------------------------------------------------------------------------

    \620\ The direct cost of such a delay would be the one-day 
borrowing cost of the market intermediary providing the extra day of 
financing or the opportunity cost of funds to the investor times the 
value of the transaction. Such funding and opportunity costs will 
vary across investors, intermediaries, and time.
    \621\ More specifically, the market clearing quantity of the 
good or service supplied will adjust and the extent of industry-wide 
cost pass-through in a perfectly competitive market depends on the 
elasticity of demand relative to supply. The more elastic is demand, 
and the less elastic is supply, the smaller the extent of pass-
through, all else being equal. See RBB Economics, Cost Pass-through: 
Theory, Measurement and Potential Policy Implications, A Report 
Prepared for the Office of Fair Trading, at 4 (Feb. 2014) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/320912/Cost_Pass-Through_Report.pdf.
---------------------------------------------------------------------------

    However, broker-dealers that predominantly serve retail investors 
may experience the costs of an earlier payment requirement differently 
from broker-dealers with more institutional clients or large custodian 
banks because of the way retail investors fund their accounts. Retail 
investors may find it difficult to accelerate payments associated with 
their transactions, which may cause broker-dealers, who are unwilling 
to extend additional credit to retail investors, to instead require 
that these investors pre-fund their transactions.\622\ These broker-
dealers may also experience costs unrelated to funding choices. For 
instance, retail investors may require additional or different services 
such as education regarding the impact of the shorter standard 
settlement cycle.
---------------------------------------------------------------------------

    \622\ See infra Part VIII.C.5.(b)(3) for additional discussion 
regarding retail investors and their broker-dealers.
---------------------------------------------------------------------------

    Finally, a shorter settlement cycle may result in higher costs 
associated with liquidating a defaulting member's position, as a 
shorter horizon may result in larger price impacts, particularly for 
less liquid assets. For example, when a clearing member defaults, NSCC 
is obligated to fulfill its trade guarantee with the defaulting 
member's counterparty. One way it accomplishes this is by liquidating 
assets from clearing fund contributions from clearing members. However, 
liquidating assets in shorter periods of time can have larger adverse 
impacts on the prices of the assets. Shortening the standard settlement 
cycle from two business days to one business day could reduce the 
amount of time that NSCC has to liquidate its assets, which may 
exacerbate the price impact of liquidation.
    As discussed above, the Commission is amending the recordkeeping 
obligations of investment advisers with respect to any securities 
transaction that is subject to the requirements of Rule 15c6-2(a) to 
require advisers to make and keep records of their related allocations 
and affirmations sent or received, as well as the confirmations they 
receive.\623\ The amendment to Rule 204-2 requires advisers to time and 
date stamp records of any such allocation and affirmation. The 
Commission recognizes, however, that requiring these records, and 
adding time and date stamps to records, will add additional costs and 
burdens for those advisers that do not currently make and keep these 
records, or do not use electronic systems to send allocations and 
affirmations to brokers or dealers, or retain confirmations.\624\ For 
example, some advisers may incur costs to update their processes to 
accommodate these records.
---------------------------------------------------------------------------

    \623\ See supra Part IV.C.
    \624\ A commenter sought clarification regarding an adviser's 
ability to rely on third parties to meet its recordkeeping 
obligations for allocations, confirmations, and affirmations. See 
supra note 304 and accompanying text. As discussed above in Part 
IV.C., the Commission is confirming that an adviser may rely on a 
third party to make and keep the required records, although using a 
third party to make and keep records does not reduce an adviser's 
obligations under Rule 204-2.
---------------------------------------------------------------------------

3. Economic Implications Through Other Commission Rules
    As noted in Part III.E of the T+1 proposing release, the amendment 
to Rule 15c6-1(a), by shortening the standard settlement cycle, could 
have an ancillary impact on the means by which market participants 
comply with existing regulatory obligations that relate to the 
settlement timeframe. The Commission also provided illustrative 
examples of specific Commission rules that include such requirements or 
are otherwise reference the settlement date, including Regulation 
SHO,\625\ and certain provisions included in the Commission's financial 
responsibility rules.\626\ The Commission invited and received public 
comment on these effects, and these comments are discussed in detail in 
Part VI. Those public comments inform this analysis, but did not 
provide information the Commission could use to quantify the ancillary 
economic impact the amendments and new rules might have on how market 
participants comply with other Commission rules.
---------------------------------------------------------------------------

    \625\ 17 CFR 242.200 through 242.204.
    \626\ See T+1 Proposing Release, supra note 2, at 10462-63; see 
also supra Parts VI.A. and VI.C. (discussing comments received). The 
Commission also solicited comment on the impact of shortening the 
settlement cycle on compliance with Rule 10b-10 under the Exchange 
Act and broker-dealer obligations with regard to prospectus 
delivery. See T+1 Proposing Release, supra note 2, at 10463-64; see 
also supra Parts VI.B. and VI.C. (discussing comments received).
---------------------------------------------------------------------------

    Financial markets and regulatory requirements have evolved 
significantly since the Commission adopted Rule 15c6-1 in 1993. Market 
participants have responded to these developments in diverse ways, 
including implementing a variety of systems and processes, some of 
which may be unique to specific market participants and their 
businesses, and some of which may be integrated throughout business 
operations of certain market participants. Because of the broad variety 
of ways in which, depending on their particular circumstances, market 
participants currently satisfy regulatory obligations pursuant to 
Commission rules, it is difficult to identify particular practices that 
may be specific to a single or group of market participants will need 
to change in order to meet these other obligations. In this case, the 
Commission is unable to quantify the ancillary economic impact that the 
amendment to Rule 15c6-1(a) will have on how market participants comply 
with other Commission rules. As above, the Commission invited 
commenters to provide quantitative and qualitative information about 
these potential economic effects. These comments are discussed in in 
detail in Part VI above and inform this analysis.
    In certain cases, based on information about current market 
practices, the Commission believes that the

[[Page 13933]]

amendment to Rule 15c6-1(a) will be unlikely to change the means by 
which market participants comply with existing regulatory requirements. 
In these cases, the Commission believes that market participants will 
not incur significant increased costs of compliance from such 
regulatory requirements from shortening the settlement cycle to T+1.
    In other cases, however, the amendment may incrementally increase 
the costs associated with complying with other Commission rules, where 
such rules potentially require broker-dealers to engage in purchases of 
securities. Two examples of these types of rules are Regulation SHO and 
the Commission's financial responsibility rules. In most instances, 
Regulation SHO governs the timeframe in which a ``participant'' of a 
registered clearing agency must close out a fail to deliver position by 
purchasing or borrowing securities.\627\ Similarly, some of the 
Commission's financial responsibility rules relate to actions or 
notifications that reference the settlement date of a transaction. For 
example, Exchange Act Rule 15c3-3(m) \628\ uses the settlement date to 
prescribe the timeframe in which a broker-dealer must complete certain 
sell orders on behalf of customers. As noted above, the term 
``settlement date'' is also incorporated into paragraph (c)(9) of Rule 
15c3-1,\629\ which explains what it means to ``promptly transmit'' 
funds and ``promptly deliver'' securities within the meaning of 
paragraphs (a)(2)(i) and (a)(2)(v) of Rule 15c3-1. As explained above, 
the concepts of promptly transmitting funds and promptly delivering 
securities are incorporated in other provisions of the financial 
responsibility rules.\630\ Under the amendment to Rule 15c6-1(a), the 
timeframes included in these rules will be one business day closer to 
the trade date.
---------------------------------------------------------------------------

    \627\ See T+1 Proposing Release, supra note 2, at 10461-62.
    \628\ 17 CFR 240.15c3-3(m).
    \629\ 17 CFR 240.15c3-1(c)(9).
    \630\ See, e.g., 17 CFR 240.15c3-1(a)(2)(i) and (v); 17 CFR 
240.15c3-3(k)(1)(iii) and (k)(2)(i) and (ii); 17 CFR 240.17a-
5(e)(1)(i)(A); 17 CFR 240.17a-13(a)(3).
---------------------------------------------------------------------------

    The Commission believes that shortening these timeframes should not 
materially affect the costs that broker-dealers incur to meet their 
Regulation SHO obligations and obligations under the Commission's 
financial responsibility rules.\631\ Nevertheless, the Commission 
acknowledges that a shorter settlement cycle could affect the processes 
by which broker-dealers manage the likelihood of incurring these 
obligations. For example, broker-dealers may currently have in place 
inventory management systems that help them avoid failing to deliver 
securities by T+2. Broker-dealers will likely incur costs in order to 
update these systems to support a shorter settlement cycle.
---------------------------------------------------------------------------

    \631\ See supra Parts VI.A. (Regulation SHO) and VI.C. 
(Financial Responsibility Rules for Broker-Dealers) for a discussion 
of commenters concerns and the reasons why the Commission believes 
that costs should not be materially affected.
---------------------------------------------------------------------------

    In cases where market participants will need to adjust the way in 
which they comply with other Commission rules, the magnitude of the 
costs associated with these adjustments is difficult to quantify. As 
noted above, market participants employ a wide variety of strategies to 
meet regulatory obligations. For example, broker-dealers may ensure 
that they have securities available to meet their obligations by using 
inventory management systems, or they may choose instead to borrow 
securities. An estimate of costs is further complicated by the 
possibility that market participants could change their compliance 
strategies in response to a shorter standard settlement cycle.
    As with the T+2 transition, the Commission anticipates that the 
transition to T+1 will again require changes to SRO rules and changes 
to the operations or market participants subject to those rules to 
achieve consistency with a T+1 standard settlement cycle. Certain SRO 
rules reference existing Rule 15c6-1 or currently define ``regular 
way'' settlement as occurring on T+2 and, as such, may need to be 
amended in connection with shortening the standard settlement cycle to 
T+1. Certain timeframes or deadlines in SRO rules also may refer to the 
settlement date, either expressly or indirectly. In such cases, the 
SROs may need to amend these rules in connection with shortening the 
settlement cycle to T+1.\632\
---------------------------------------------------------------------------

    \632\ The T+1 Report similarly indicates that SROs will likely 
need to update their rules to facilitate a transition to a T+1 
standard settlement cycle. T+1 Report, supra note 61, at 35.
---------------------------------------------------------------------------

    The Commission invited commenters to provide quantitative and 
qualitative information about the impact of the amendment to Rule 15c6-
1(a) on the costs associated with compliance with other Commission 
rules. Although several commenters raised issues related to SRO rules 
and operations,\633\ no commenters provided quantitative information 
about the impact of the rules and rule amendments being adopted on the 
costs associated with compliance with other Commission rules or SRO 
rules.
---------------------------------------------------------------------------

    \633\ See supra Part VI.E.
---------------------------------------------------------------------------

    4. Effect on Efficiency, Competition, and Capital Formation
    In response to the T+1 Proposing Release, the Commission received 
numerous comment letters supporting a shorter settlement cycle for 
securities transactions citing positive effects of the proposed rule on 
efficiency, competition, and capital formation. One commenter stated 
that the Commission's proposal to shorten the settlement cycle is an 
example of an initiative aimed at introducing more efficiency to the 
marketplace while reducing risks for investors and other market 
participants.\634\ Another commenter noted that shortening the current 
settlement cycle would improve capital and operational 
efficiencies.\635\ Another commenter cited benefits of the proposed 
rule including enhanced efficiency of the equity markets and better use 
of capital.\636\ Another commenters stated that the proposed rule may 
improve capital efficiency and may increase competition.\637\ A 
commenter also noted that the ``reasonably designed'' standard for 
policies and procedures fosters innovation and encourages competition 
by enabling each registrant to adopt compliance methodologies aligned 
to its role and capabilities.\638\ While discussing changes necessary 
to implement a shorter settlement cycle, a commenter noted that the 
settlement process would be modernized to remove dependencies on manual 
processes and facilitate straight-through processing utilizing 
technology to achieve a more robust process which would reduce risks 
and remove impediments to an efficient settlement process.\639\
---------------------------------------------------------------------------

    \634\ See Virtu Financial Letter, supra note 16, at 5.
    \635\ See Cornell Law Letter, supra note 16, at 3; see also RMA 
Letter, supra note 16, at 3, stating that ``We further agree that 
acceleration of the standard settlement cycle to T+1 could increase 
the efficiency of capital market transactions and reduce systemic 
risk.'' See also NYSE Group Letter, supra note 16, at 1, stating 
that ``A T+1 settlement cycle will significantly increase market 
efficiency, mitigate risk (particularly during times of extreme 
volatility and stressed markets) and free up liquidity--cash or 
shares--held to ensure the completion of trades. This will allow 
industry participants to take advantage of capital and operational 
efficiencies, and benefit from significant risk reduction and a 
potential lowering of margin requirements.''
    \636\ See MMI Letter, supra note 16, at 2.
    \637\ See Wilson-Davis Letter, supra note 16, at 5-6.
    \638\ See OCC Letter, supra note 16, at 3.
    \639\ See Jeffrey S. Davis, Senior Vice President, Senior Deputy 
General Counsel, Nasdaq (April 11, 2022) (``Nasdaq Letter''), at 2.
---------------------------------------------------------------------------

    Market participants may incur initial costs for the investments 
necessary to comply with a shorter standard settlement cycle.\640\ 
However, these

[[Page 13934]]

costs are likely to differ across market participants, and these 
differences may exacerbate coordination problems. First, per-
transaction operational costs clearing members incur in connection with 
the clearing services they provide may be higher for members that clear 
fewer transactions than such costs are for members that clear a higher 
volume of transactions. Thus, the extent to which many of the upgrades 
necessary for a T+1 standard settlement cycle are optimal for a member 
to adopt unilaterally may depend, in part, on the transaction volume 
cleared by such member. For example, certain upgrades necessary for a 
T+1 standard settlement cycle may result in economies of scale, where 
large clearing members are able to comply with the amendment to Rule 
15c6-1(a) at a lower per-transaction cost than smaller members. As a 
result, larger members might take a short time to recover their initial 
costs for upgrades; smaller members with lower transaction volumes 
might take longer to recover their initial cost outlays and might be 
more reluctant to make the upgrades in the absence of the amendment. 
These differences in cost per transaction may be mitigated through the 
use of third-party service providers.
---------------------------------------------------------------------------

    \640\ See supra Part VIII.C.2.
---------------------------------------------------------------------------

    In addition, the Commission acknowledges that the upgrades 
necessary to implement a shorter standard settlement cycle may produce 
indirect economic effects. We analyze some of these indirect effects, 
such as the impact on competition and third-party service providers, in 
the following section.
    A shorter settlement cycle might improve the efficiency of the 
clearance and settlement process through several channels. First, the 
Commission believes that the primary effect that a shorter settlement 
cycle will have on the efficiency of the settlement process will be a 
reduction in the credit, market, and liquidity risks that broker-
dealers, CCPs, and other market participants are subject to during the 
standard settlement cycle.\641\ A shorter standard settlement cycle 
will generally reduce the volume of unsettled transactions that could 
potentially pose settlement risk to counterparties. Shortening the 
period between trade execution and settlement should enable trades to 
be settled with less aggregate risk to counterparties or the CCP. A 
shorter standard settlement cycle may also decrease liquidity risk by 
enabling market participants to access the proceeds of their 
transactions sooner, which may reduce the cost market participants 
incur to handle idiosyncratic liquidity shocks (i.e., liquidity shocks 
that are uncorrelated with the market). That is, because the time 
interval between a purchase/sale of securities and payment is reduced 
by one business day, market participants with immediate payment 
obligations that they could cover by selling securities will be 
required to obtain short-term funding for one less day.\642\ As a 
result of reduced cost associated with covering their liquidity needs, 
market participants may, under particular circumstances, be able to 
shift assets that would otherwise be held as liquid collateral towards 
more productive uses, improving allocative efficiency.\643\
---------------------------------------------------------------------------

    \641\ Reduction of these risks should result in the reduction of 
margin requirements and other risk management activity that requires 
resources that could be put to another use.
    \642\ See supra Part VIII.B.2.
    \643\ See supra Part VIII.A.
---------------------------------------------------------------------------

    Second, a shorter standard settlement cycle may increase price 
efficiency through its effect on credit risk exposures between 
financial intermediaries and their customers. In particular, a prior 
study noted that certain intermediaries that transact on behalf of 
investors, such as broker-dealers, may be exposed to the risk that 
their customers default on payment obligations when the price of 
purchased securities declines during the settlement cycle.\644\ As a 
result of the option to default on payment obligations, customers' 
payoffs from securities purchases resemble European call options and, 
from a theoretical standpoint, can be valued as such. Notably, the 
value of European call options increases in the time to expiration 
\645\ suggesting that the value of call options held by customers who 
purchase securities is increasing in the length of the settlement 
cycle. In order to compensate itself for the call option that it 
writes, an intermediary may include the cost of these call options as 
part of its transaction fee and this cost may become a component of 
bid-ask spreads for securities transactions. By reducing the value of 
customers' option to default by reducing the option's time to maturity, 
a shorter standard settlement cycle may reduce transaction costs in 
U.S. securities markets. In addition, to the extent that any benefit 
buyers receive from deferring payment during the settlement cycle is 
incorporated in securities returns,\646\ the amendment to Rule 15c6-
1(a) may reduce the extent to which such returns deviate from returns 
consistent with changes in fundamentals.
---------------------------------------------------------------------------

    \644\ See Madhavan et al., supra note 508.
    \645\ All other things equal, an option with a longer time to 
maturity is more likely to be in the money given that the variance 
of the underlying security's price at the exercise date is higher.
    \646\ See supra Part VIII.B.2.
---------------------------------------------------------------------------

    As discussed in more detail in Part VIII.C.2 above, the Commission 
believes that the amendment to Rule 15c6-1(a) will likely require 
market participants to incur costs related to infrastructure upgrades, 
and will likely yield benefits to market participants, largely in the 
form of reduced operational and financial risks related to settlement. 
As a result, the Commission believes that the amendment to Rule 15c6-
1(a) could affect competition in a number of different, and potentially 
offsetting, ways.
    The prospective reduction in financial risks related to shortening 
the standard settlement cycle may represent a reduction in barriers to 
entry for certain market participants.\647\ Reductions in the financial 
resources required to cover an NSCC member's clearing fund requirements 
that result from a shorter standard settlement cycle could encourage 
financial firms that currently clear transactions through NSCC clearing 
members to become clearing members themselves.
---------------------------------------------------------------------------

    \647\ See supra Part VIII.C.1. for a discussion of the reduction 
in credit, market, and liquidity risks to which NSCC would be 
subject as a result of a shortening of the settlement cycle and the 
subsequent reduction financial resources dedicated to mitigating 
those risks.
---------------------------------------------------------------------------

    Their entry into the market could promote competition among NSCC 
clearing members. Furthermore, if a reduction in settlement risks 
results in lower transaction costs for the reasons discussed above, 
market participants that were, on the margin, discouraged from 
supplying liquidity to securities markets due to these costs, could 
choose to enter the market for liquidity suppliers, increasing 
competition.
    At the same time, the Commission acknowledges that the process 
improvements required to enable a shorter standard settlement cycle 
could adversely affect competition. Among clearing members, where such 
process improvements might be necessary to comply with the shorter 
standard settlement cycle required under the amendment to Rule 15c6-
1(a), the cost associated with compliance might increase barriers to 
entry, because new firms will incur higher fixed costs associated with 
a shorter standard settlement cycle if they wish to enter the market. 
Clearing members might choose to comply by upgrading their systems and 
processes or may choose instead to exit the market for clearing 
services. The exit of clearing members could have negative consequences 
for competition

[[Page 13935]]

among clearing members. Clearing activity tends to be concentrated 
among larger broker-dealers.\648\ Clearing member exit could result in 
further concentration and additional market power for those clearing 
members that remain.
---------------------------------------------------------------------------

    \648\ See supra Part VIII.B.2.
---------------------------------------------------------------------------

    Alternatively, some current clearing members may choose to comply 
in part by outsourcing their operational needs to third-party service 
providers. Use of third-party service providers may represent a 
reasonable response to the operational costs associated with the 
amendment to Rule 15c6-1(a). To the extent that third-party service 
providers are able to spread the fixed costs of compliance across a 
larger volume of transactions than their clients, the Commission 
believes that the use of third-party service providers might impose a 
smaller compliance cost on clearing members than if these firms 
directly bore the costs of compliance. The Commission believes that 
this impact may stretch beyond just clearing members. The use of third-
party service providers may mitigate the extent to which the amendment 
to Rule 15c6-1(a) raises barriers to entry for broker-dealers. Because 
these barriers to entry may have adverse effects on competition between 
clearing members, the Commission believes that the use of third-party 
service providers may mitigate the adverse effects of the amendment to 
Rule 15c6-1(a) on competition between broker-dealers.
    Existing market power may also affect the distribution of 
competitive impacts stemming from the amendment to Rule 15c6-1(a) 
across different types of market participants. While, as noted above, 
reductions in the credit, market, and liquidity risks that broker-
dealers, CCPs, and other market participants are subject to during the 
standard settlement cycle could promote competition among clearing 
members and liquidity suppliers, these groups may benefit to differing 
degrees, depending on the extent to which they are able to capture the 
benefits of a shortened standard settlement cycle.
    Finally, a shorter standard settlement cycle might also improve the 
capital efficiency of the clearance and settlement process, which will 
promote capital formation in U.S. securities markets and in the 
financial system generally.\649\ A shorter standard settlement cycle 
will reduce the amount of time that collateral must be held for a given 
trade, thus freeing the collateral to be used elsewhere earlier. For a 
given quantity of trading activity, collateral will also be committed 
to clearing fund deposits for a shorter period of time. The greater 
collateral efficiency promoted by a shorter settlement cycle might also 
indirectly promote capital formation for market participants in the 
financial system in general. Specifically, the improved capital 
efficiency that results from a shorter standard settlement cycle will 
enable a given amount of collateral to support a larger amount of 
financial activity.
---------------------------------------------------------------------------

    \649\ See supra Part VIII.A. for more discussion regarding 
capital formation and efficiency.
---------------------------------------------------------------------------

5. Quantification of Direct and Indirect Effects of a T+1 Settlement 
Cycle
    In previous years, several industry groups have released estimates 
for compliance costs associated with a shorter standard settlement 
cycle, including the SIA, the Industry Steering Committee (``ISC''), 
and BCG.\650\ Although all of these studies examined prior shortenings 
of the settlement cycle including from T+5 to T+3 and from T+3 to T+2, 
in the absence of a current study examining shortening from the current 
T+2 to T+1, they serve as a useful rough initial estimate of the costs 
involved in a settlement cycle shortening. The most recent of these, 
the BCG Study, performed a cost-benefit analysis of a T+2 standard 
settlement cycle. Below is a summary of the cost estimates in the BCG 
Study, and in the following subsections, an evaluation of these 
estimates as part of the discussion of the potential direct and 
indirect compliance costs related to the amendment to Rule 15c6-1(a). 
In addition, the Commission encouraged commenters to provide additional 
information to help quantify the economic effects that we are currently 
unable to quantify due to data limitations.
---------------------------------------------------------------------------

    \650\ See SIA Business Case Report, supra note 323; see also BCG 
Study, supra note 565; PricewaterhouseCoopers LLP & ISG, Shortening 
the Settlement Cycle: The Move to T+2 (June 2015) (``ISG White 
Paper''), http://www.ust2.com/pdfs/ssc.pdf. This release uses 
``ISG'' rather than ``ISC'' (``Industry Steering Committee,'' the 
term used in the ISG White Paper) when referring to the T+2 effort 
so that this release clearly distinguishes between the ISC's current 
work on T+1. The SIA has since merged with other groups to form 
SIFMA.
---------------------------------------------------------------------------

(a) Industry Estimates of Costs and Benefits
    The BCG Study concluded that the transition to a T+2 settlement 
cycle would cost approximately $550 million in incremental initial 
investments across industry constituent groups,\651\ which would result 
in annual operating savings of $170 million and $25 million in annual 
return on reinvested capital from clearing fund reductions.\652\
---------------------------------------------------------------------------

    \651\ The BCG Study generally refers to ``institutional broker-
dealers,'' ``retail broker-dealers,'' ``buy side'' firms, and 
``custodian banks,'' without defining these particular groups. The 
Commission uses these terms when referring to estimates provided by 
the BCG Study but notes that its own definitions of various affected 
parties may differ from those in the BCG Study.
    \652\ See BCG Study, supra note 565, at 9-10.
---------------------------------------------------------------------------

    The BCG Study also estimated that the average level of required 
investments per firm could range from $1 to 5 million, with large 
institutional broker-dealers incurring the largest amount of 
investments on a per-firm basis, and buy side firms at the lower end of 
the spectrum.\653\ The investment costs for ``other'' entities, 
including DTCC, DTCC ITP Matching (US) LLC (f/k/a Omgeo Matching (US) 
LLC), service bureaus, registered investment companies (``RICs''), and 
non-self-clearing broker-dealers totaled $70 million for the entire 
group. Within this $70 million, DTCC and Omgeo were estimated to have a 
compliance investment cost of $10 million each. The study's authors 
estimated that institutional broker-dealers would have operational cost 
savings of approximately 5%, retail broker-dealers of 2% to 4%, buy-
side firms of 2%, and custodial banks of 10% to 15% for an industry 
total operational cost savings of approximately $170MM per year.\654\
---------------------------------------------------------------------------

    \653\ Id. at 30-31.
    \654\ Id. at 41.
---------------------------------------------------------------------------

    The BCG Study also estimated the annual clearing fund reductions 
resulting from reductions in clearing firms' clearing funds 
requirements to be $25 million per year.\655\ The study estimated this 
by multiplying the reduction in clearing fund requirements and the 
average Federal Funds target rate for the 10-year period up until 2008 
(3.5%). The BCG Study also estimated the value of the risk reduction in 
buy side exposure to the sell side. The implied savings were estimated 
to be $200 million per year, but these values were not included in the 
overall cost-benefit calculations.
---------------------------------------------------------------------------

    \655\ See supra note 565 for a discussion of the impact on this 
estimate of increases in daily trading volume since the time of the 
BCG study.
---------------------------------------------------------------------------

    Several factors limit the usefulness of the BCG Study's estimates 
of potential costs and benefits of the amendment to Rule 15c6-1(a). 
First, a further shortening of the settlement cycle to T+1 may require 
investments in new technology and processes that were not necessary 
under the previous shortening to T+2. Second, technological 
improvements since 2012 when the report was first published, such as 
the increased use of computers and automation in post-trade processes, 
may have reduced the cost of the upgrades necessary to comply with a 
shorter

[[Page 13936]]

settlement cycle. This may, in turn, reduce the costs associated with 
the amendment,\656\ as a larger portion of market participants may have 
already adopted many processes that would reduce the cost of a 
transition to a shorter settlement cycle. In addition, the BCG Study 
considered as a part of its cost estimates operational cost savings as 
a result of improvements to operational efficiency.
---------------------------------------------------------------------------

    \656\ See supra Part VIII.A. While market participants may have 
already made investments consistent with implementing a shorter 
settlement cycle, the fact that these investments have not resulted 
in a shorter settlement cycle is consistent with the existence of 
coordination problems among market participants.
---------------------------------------------------------------------------

    Lastly, the BCG Study was premised on survey responses by a subset 
of market participants that may be affected by the rule. Surveys were 
sent to 270 market participants and 70 responses were received, 
including 20 institutional broker-dealers, prime brokers, and 
correspondent clearers; 12 retail broker-dealers; 17 buy side firms; 14 
registered investment advisers; and seven custodian banks. Given the 
low response rate, as well as the uncertainty regarding the sample of 
market participants that was asked to complete the survey, the 
Commission cannot conclude that the cost estimates in the BCG Study are 
representative of the costs of all market participants.\657\
---------------------------------------------------------------------------

    \657\ See BCG Study, supra note 565, at 15.
---------------------------------------------------------------------------

(b) Estimates of Costs
    The amendment to Rule 15c6-1(a) will generate direct and indirect 
costs for market participants, who may need to modify and/or replace 
multiple systems and processes to comply with a T+1 standard settlement 
cycle. The T+1 Playbook included a timeline with milestones and 
dependencies necessary for a transition to a T+1 standard settlement 
cycle, as well as activities that market participants should consider 
in preparation for the transition, and the Commission believes that 
this provides an initial guide to the activities that will be necessary 
for a transition to a T+1 standard settlement cycle.\658\ The 
Commission estimates that many of the activities for migration to a T+1 
standard settlement cycle will stem from behavior modification of 
market participants and systems testing.\659\ These modifications will 
include a compression of the settlement timeline, as well as an 
increase in the fees that brokers may impose on their customers for 
trade failures. Although the T+1 Playbook does not include any direct 
estimates of the compliance costs for a T+1 standard settlement cycle, 
the Commission utilizes the timeline in the T+1 Playbook for specific 
actions necessary to migrate to a T+1 settlement cycle to directly 
estimate the inputs needed for migration, and form preliminary 
compliance cost estimates for the shortening to T+1 standard settlement 
cycle.
---------------------------------------------------------------------------

    \658\ See T+1 Playbook, supra note 134.
    \659\ See id. at 67-68 (discussing customer and staff 
education); see also id. at 103-107 (discussing testing and 
migration).
---------------------------------------------------------------------------

    In addition, the T+1 Playbook, the ISG White Paper, and the BCG 
Study identified several categories of actions that market participants 
might need to take to comply with a T+2 settlement cycle and likely 
also with a T+1 settlement cycle--processing, asset servicing, and 
documentation.\660\ While the following cost estimates for these 
remedial activities span industry-wide requirements for a migration to 
a T+1 settlement cycle, the Commission does not anticipate each market 
participant directly undertaking all of these activities for several 
reasons. First, some market participants work with third-party service 
providers to facilitate certain functions that may be impacted by a 
shorter standard settlement cycle, such as trade processing and asset 
servicing, and thus may only bear the costs of the requirements through 
updates to systems and processes that interface with and fees paid to 
those service providers. Second, certain costs might only fall on 
specific categories of entities. For example, the costs of updating the 
Continuous Net Settlement (``CNS'') and ID Net systems should only 
directly fall on NSCC, DTC, and members/participants of those clearing 
agencies. Finally, some market participants may already have the 
processes and systems in place to accommodate a T+1 standard settlement 
cycle or will be able to adjust to a T+1 settlement cycle without 
incurring significant costs. For example, some market participants may 
already have the systems and processes in place to meet the 
requirements for same-day trade affirmation and matching consistent 
with the requirements in new Rule 15c6-2.\661\ These market 
participants may thus bear a significantly lower cost to update their 
trade affirmation systems/processes to settle on a T+1 standard 
settlement cycle.\662\
---------------------------------------------------------------------------

    \660\ See id. at 14.
    \661\ See BCG Study, supra note 565, at 23.
    \662\ The BCG Study, as it is based on survey responses from 
market participants, does reflect the heterogeneity of compliance 
costs for market participants.
---------------------------------------------------------------------------

    The following section examines several categories of market 
participants and includes estimates the compliance costs for each 
category. The Commission's estimate of the number and type of personnel 
that may be required is based on the scope of activities for a given 
category of market participant necessary for the market participant to 
migrate to a T+1 settlement cycle, the market participant's role within 
the clearance and settlement process, and the amount of testing 
required to minimize undue disruptions.\663\ Hourly salaries for 
personnel are from SIFMA's Management and Professional Earnings in the 
Securities Industry 2013.\664\ These estimates use the timeline from 
the T+1 Playbook to determine the length of time personnel will work on 
the activities necessary to support a T+1 settlement cycle. The 
timeline provides an indirect method to estimate the inputs necessary 
to migrate to a T+1 settlement cycle, rather than relying directly on 
survey response estimates. The Commission acknowledges many entities 
are already undertaking activities to support a migration to a T+1 
settlement cycle in anticipation of the amendment. However, to the 
extent that the costs of these activities have already been incurred, 
the Commission considers these costs sunk, and they are not included in 
the analysis below.
---------------------------------------------------------------------------

    \663\ For example, FMUs that play a critical role in the 
clearance and settlement infrastructure would require more testing 
associated with a T+1 standard settlement cycle than institutional 
investors.
    \664\ To monetize the internal costs, the Commission staff used 
data from SIFMA publications, modified by Commission staff to 
account for an 1800 hour work-year, and multiplied by 5.35 
(professionals) or 2.93 (office) to account for bonuses, firm size, 
employee benefits and overhead. See SIFMA, Management and 
Professional Earnings in the Security Industry--2013 (Oct. 7, 2013); 
SIFMA, Office Salaries in the Securities Industry--2013 (Oct. 7, 
2013). These figures have been adjusted for inflation using the 
Bureau of Labor Statistics' Consumer Price Index inflation 
calculator, https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------

(1) FMUs--CCPs and CSDs
    CNS, NSCC/DTC's ID Net service, and other systems will require 
adjustment to support a T+1 standard settlement cycle. The T+1 Playbook 
includes an estimate that regulation-dependent planning, 
implementation, testing, and migration activities associated with the 
transition to a T+1 settlement cycle could last up to six 
quarters.\665\ The Commission estimates that these activities will 
impose a one-time compliance cost of $16.1 million \666\ for

[[Page 13937]]

DTC and NSCC each. After this initial compliance cost, the Commission 
expects that both DTC and NSCC will incur minimal ongoing costs from 
the transition to a T+1 standard settlement cycle, because the 
Commission estimates that the majority of costs will stem from pre-
migration activities, such as implementation, updates to systems and 
processes, and testing.
---------------------------------------------------------------------------

    \665\ See T+1 Playbook, supra note 134, at 14. The T+1 Playbook 
assumes an implementation date during the third quarter of 2024. We 
assume that the necessary tasks and the total time required to 
complete them would be similar for an earlier implementation date.
    \666\ The estimate is based on the T+1 Playbook timeline, which 
estimates regulation-dependent implementation activity, industry 
testing, and migration lasting six quarters. The Commission assumes 
10 operations specialists (at $159 per hour), 10 programmers (at 
$316 per hour), and 1 senior operations manager (at $426/hour), 
working 40 hours per week. (10 x $159 + 10 x $316 + 1 x $426) x 6 x 
13 x 40 = $16,149,120.
---------------------------------------------------------------------------

(2) Matching/ETC Providers--Exempt Clearing Agencies
    Matching/ETC Providers may need to adapt their trade processing 
systems to comply with a T+1 standard settlement cycle. This may 
include actions such as updating reference data, configuring trade 
match systems, and configuring trade affirmation systems to affirm 
trades on T+0. Matching/ETC Providers will also need to conduct testing 
and assess post-migration activities. The Commission estimates that 
these activities will impose a one-time compliance cost of up to $16.1 
million \667\ for each Matching/ETC Provider. However, the Commission 
acknowledges that some ETC providers may have a higher cost burden than 
others based on the volume of transactions that they process. The 
Commission expects that ETC providers will incur minimal ongoing costs 
after the initial transition to a T+1 standard settlement cycle because 
the Commission estimates that the majority of the costs of migration to 
a T+1 settlement cycle entail behavioral changes of market participants 
and pre-migration testing.
---------------------------------------------------------------------------

    \667\ The estimate is based on the T+1 Playbook timeline, which 
estimates regulation- dependent implementation activity for trade 
systems, matching, affirmation, testing, and post- migration testing 
lasting six quarters. The Commission assumes 10 operations 
specialists (at $159 per hour), 10 programmers (at $316 per hour), 
and 1 senior operations manager (at $426/hour), working 40 hours per 
week. (10 x $159 + 10 x $316 + 1 x $426) x 6 x 13 x 40 = 
$16,149,120.
---------------------------------------------------------------------------

    New Rule 17Ad-27 requires a CMSP to establish, implement, maintain, 
and enforce reasonably designed, written policies and procedures. Based 
on the similar policies and procedures requirements, and the 
corresponding burden estimates previously made by the Commission for 
Rule 17Ad-22(d)(8) and (e)(2),\668\ the Commission estimates that 
respondent CMSPs will incur an aggregate one-time cost of approximately 
$27,600.\669\
---------------------------------------------------------------------------

    \668\ See Clearing Agency Standards, Exchange Act Release No. 
68080 (Oct. 22, 2012), 77 FR 66219, 66260 (Nov. 2, 2012) (``Clearing 
Agency Standards Adopting Release''); Standards for Covered Clearing 
Agencies, Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR 
70786, 70891-92 (Oct. 13, 2016) (``CCA Standards Adopting 
Release'').
    \669\ There are currently three CMSPs and the Commission 
anticipates that one additional entity may seek to become a CMSP in 
the next three years. The aggregate cost was estimated as follows: 
(Assistant General Counsel at $543/hour x 8 hours = $4,344) + 
(Compliance Attorney at $426/hour x 6 hours = $2,556) = $6,900 x 4 
CMSPs equals $27,600.
---------------------------------------------------------------------------

    The rule also imposes ongoing burdens on a respondent CMSP as 
follows: (i) ongoing monitoring and compliance activities with respect 
to the written policies and procedures required by the proposed rule; 
and (ii) ongoing documentation activities with respect to the required 
annual report. As discussed in Part V.C.2, the Commission has modified 
the final rule to identify specific data elements to be included in the 
annual report. Based on the similar reporting requirements, and the 
corresponding burden estimates previously made by the Commission for 
Rule 17Ad-22(e)(23),\670\ the Commission estimates that the ongoing 
activities required by new Rule 17Ad-27 will impose an aggregate annual 
cost of this ongoing burden of approximately $71,400.\671\
---------------------------------------------------------------------------

    \670\ See CCA Standards Adopting Release, supra note 668, at 
70899.
    \671\ This figure was calculated as follows: [(Compliance 
Attorney at $426/hour x 24 hours = $10,224) + (Computer Operations 
Manager at $514/hour x 10 hours = $5,140) = $15,364 x 4 CMSPs = 
$61,456]. In addition, we estimate that the Inline XBRL requirement 
would require respondent CMSPs to spend $1,200 each year to license 
and renew Inline XBRL compliance software and/or services, and incur 
3 internal burden hours to apply and review Inline XBRL tags for the 
disclosure requirements on the report, resulting in a total annual 
aggregate cost of $9,912 [(Compliance Attorney at $426/hour x 3 
hours = $1,278) + $1,200 in external costs = $2,478 x 4 CMSPs = 
$9,912]. The total costs are the non-XBRL related costs ($61,546) + 
XBRL related costs ($9,912) = $71,368. We have increased these 
estimates because, compared to the proposal, the reports required by 
Rule 17Ad-27 will contain significantly more disclosures, and each 
of those additional disclosures will need to be tagged. In addition, 
respondent CMSPs that do not already have access to EDGAR would be 
required to file a Form ID so as to obtain the access codes that are 
required to file or submit a document on EDGAR. We anticipate that 
each respondent would require 0.30 hours to complete the Form ID, 
and for purposes of the PRA, that 100% of the burden of preparation 
for Form ID will be carried by each respondent internally. Because 
two respondent CMSPs already have access to EDGAR, we anticipate 
that proposed amendments would result in a one-time nominal increase 
of 0.60 burden hours for Form ID, which would not meaningfully add 
to, and would effectively be encompassed by, the existing burden 
estimates associated with these reports.
---------------------------------------------------------------------------

(3) Market Participants--Investors, Broker-Dealers, Investment 
Advisers, and Bank Custodians
    The overall compliance costs that a market participant incurs will 
depend on the extent to which it is directly involved in functions 
related to clearance and settlement including trade confirmation/
affirmation, asset servicing, and other activities. For example, retail 
investors may bear few (if any) direct costs in a transition to a T+1 
standard settlement cycle, because their respective broker-dealer 
handles the back-office functions of each transaction. However, as is 
discussed below, this does not imply that retail investors will not 
face indirect costs from the transition, such as those passed through 
from broker-dealers or banks.
    Institutional investors may need to configure systems and update 
reference data, which may also include updates to trade funding and 
processing mechanisms, to operate in a T+1 environment. The Commission 
estimates that this will require an initial expenditure of $4.29 
million per entity.\672\ However, these costs may vary depending on the 
extent to which a particular institutional investor has already 
automated its processes. The Commission expects institutional investors 
will incur minimal ongoing direct compliance costs after the initial 
transition to a T+1 standard settlement cycle.
---------------------------------------------------------------------------

    \672\ The estimate is based on the T+1 Playbook timeline, which 
estimates regulation-dependent implementation activity for trade 
systems, reference data, and testing activity to last six quarters. 
We assume 2 operations specialists (at $159 per hour), 2 programmers 
(at $316 per hour), and 1 senior operations manager (at $426 per 
hour), working 40 hours per week. (2 x $159 + 2 x $316 + 1 x $426) x 
6 x 13 x 40 = $4,293,120.
---------------------------------------------------------------------------

    Broker-dealers that serve institutional investors will not only 
need to configure their trading systems and update reference data, but 
may also need to update trade confirmation/affirmation systems, 
documentation, cashiering and asset servicing functions, depending on 
the roles they assume with respect to their clients. The Commission 
estimates that, on average, each of these broker-dealers will incur an 
initial compliance cost of $8.74 million.\673\ The Commission expects 
that these broker-dealers will incur minimal ongoing direct compliance 
costs after the initial

[[Page 13938]]

transition to a T+1 standard settlement cycle.
---------------------------------------------------------------------------

    \673\ The estimate is based on the T+1 Playbook timeline, which 
estimates regulation-dependent implementation activity for trade 
systems, reference data, documentation, asset servicing, and testing 
to last six quarters. We assume 5 operations specialists (at $159 
per hour), 5 programmers (at $316 per hour), and 1 senior operations 
manager (at $426 per hour), working 40 hours per week. (5 x $159 + 5 
x $256 + 1 x $345) x 6 x 13 x 40 = $8,739,120.
---------------------------------------------------------------------------

    Broker-dealers that also serve retail customers may need to spend 
significant resources during the implementation period to educate their 
clients about the shorter settlement cycle. The Commission estimates 
that these broker-dealers will incur an initial compliance cost of 
$12.73 million each.\674\ However, unlike previously mentioned market 
participants, the Commission expects that broker-dealers that serve 
retail investors may face significant one-time compliance costs after 
the initial transition to T+1. Retail investors may require additional 
education and customer service, which may impose costs on their broker-
dealers. The Commission estimates that a reasonable upper bound for the 
costs associated with this requirement is $30,000 per broker-
dealer.\675\ Assuming all clearing and introducing broker-dealers must 
educate retail customers, the upper bound for the aggregate costs of 
post implementation retail investor education will be approximately 
$38.2 million.\676\
---------------------------------------------------------------------------

    \674\ The estimate is based on the T+1 Playbook timeline, which 
estimates regulation-dependent implementation activity for trade 
systems, reference data, documentation, asset servicing, customer 
education and testing to last five quarters. We assume 5 operations 
specialists (at $159 per hour), 5 programmers (at $316 per hour), 5 
trainers (at $256 per hour) and 1 senior operations manager (at $426 
per hour), working 40 hours per week. (5 x $159 + 5 x $316 + 5 x 
$256 + 1 x $426) x 6 x 13 x 40 = $12,732,720.
    \675\ This estimate is based on the assumption that a broker-
dealer chooses to educate customers using a 10-minute video that 
takes at most $3,000 per minute to produce. See Exchange Act Release 
No. 76324 (Oct. 30, 2015), 80 FR 71388, 71529 n.1683 (Nov. 16, 
2015).
    \676\ Calculated as $30,000 per broker-dealer x (92 broker-
dealers reporting as self-clearing but not introducing + 1,114 
broker-dealers reporting as introducing but not self-clearing + 68 
broker-dealers reporting as introducing and self-clearing) = 
$38,220,000.
---------------------------------------------------------------------------

    As discussed above in Part III.C, the Commission is modifying 
proposed Rule 15c6-2 to provide two options by which broker-dealers may 
comply with the rule, as adopted. The two options are set forth in new 
paragraphs (a)(1) and (2). The first option, reflected in paragraph 
(a)(1), is the proposed requirement for written agreements, modified in 
the ways discussed above. The second option, reflected in paragraph 
(a)(2), is an alternative to the written agreements requirement, in 
lieu of which a broker-dealer may choose to establish, maintain, and 
enforce written policies and procedures reasonably designed to ensure 
the completion of the allocation, confirmation, affirmation, or any 
combination thereof, for the transaction as soon as technologically 
practicable and no later than the end of the day on trade date in such 
form as necessary to achieve settlement of the transaction.
    The first option, reflected in paragraph (a)(1), will require 
broker-dealers to either enter into or modify existing written 
agreements with the relevant parties that ensure the completion of the 
allocation, confirmation, and affirmation process. Such parties may be 
the customer, the customer's investment adviser, the customer's 
custodian, or another agent acting directly or indirectly on behalf of 
the customer. The number of such agreements will vary depending on the 
number of relevant parties which will vary by the size of the broker-
dealer, the number of customers, and the particular business 
relationship that the broker-dealer has with each of them. As discussed 
in Part III.B.5 above, several commenters expressed a number of 
concerns with the written agreement requirement as proposed. First, 
commenters stated that in many scenarios written agreements do not 
currently exist between the parties to an institutional transaction and 
would be highly burdensome to establish specifically for the purpose of 
facilitating same day affirmation. In addition, commenters expressed 
the view that the proposed written agreement requirement would create 
unnecessary practical burdens and costs.\677\
---------------------------------------------------------------------------

    \677\ See supra note 222.
---------------------------------------------------------------------------

    The Commission acknowledges that in cases such as the ones 
described by commenters above--where these written agreements do not 
already exist, a client may not authorize its investment adviser to 
enter into this type of written agreement, or various third parties are 
relied upon to complete certain elements of the allocation, 
confirmation, and affirmation process--a requirement to enter into 
written agreements specifically to address the same-day affirmation 
objective may create substantial burdens and challenges for the parties 
to an institutional transaction. Accordingly, as discussed in Part 
III.C above, the Commission is including in the final rule a second 
option, reflected in paragraph (a)(2), that specifies as an alternative 
to the written agreement requirement a policies and procedures 
requirement.
    The Commission believes that establishing policies and procedures 
as an alternative approach to compliance aside from entering into 
written agreements enables broker-dealers to avoid the substantial 
burdens and challenges that may be associated with negotiating written 
agreements in some cases. However, the Commission also believes that it 
may be less costly for broker-dealers that already use written 
agreements to manage their commercial relationships with their 
customers' advisers, custodians or other agents using such agreements 
and that broker-dealers will generally chose to comply with the rule 
using the option that is less costly for that broker-dealer's 
particular circumstances.
    The second option, reflected in paragraph (a)(2) of new Rule 15c6-
2, requires a broker-dealer to establish, maintain, and enforce 
policies and procedures to ensure completion of the allocation, 
confirmation, affirmation, or any combination thereof, for a 
transaction as soon as technologically practicable and no later than 
the end of the day on trade date, in such form as necessary to achieve 
settlement. As a general matter, most broker-dealers maintain policies 
and procedures to ensure the timely settlement of their 
transactions,\678\ and the securities industry considers achieving 
``same-day affirmation'' an industry best practice.\679\ Nonetheless, 
the Commission believes that respondent broker-dealers will need to 
evaluate existing policies and procedures, identify any gaps, and then 
develop modifications to address those gaps.\680\ Accordingly, the 
Commission estimates that respondent broker-dealers would incur an 
aggregate one-time burden of approximately 240 hours to create policies 
and procedures required under the rule,\681\ and that the cost of this 
one

[[Page 13939]]

time burden per broker-dealer would be $88,880.\682\ The Commission 
estimates that approximately 411 broker-dealers would be subject to the 
requirements of Rule 15c6-2.\683\ The total industry cost is estimated 
to be approximately $36.5M.\684\
---------------------------------------------------------------------------

    \678\ See, e.g., SIFMA August 26th Letter, supra note 207, at 2.
    \679\ See supra note 515.
    \680\ Rule 15c6-2(b)(1) requires that the written policies and 
procedures that any broker or dealer may establish, maintain, and 
enforce as required by Rule 15c6-2 should, among other requirements: 
(1) Identify and describe any technology systems, operations, and 
processes that the broker or dealer uses to coordinate with other 
relevant parties, including investment advisers and custodians, to 
ensure completion of the allocation, confirmation, or affirmation 
process for the transaction, and (2) Describe how the broker or 
dealer plans to identify and address delays if another party, 
including an investment adviser or a custodian, is not promptly 
completing the allocation or affirmation for the transaction, or if 
the broker or dealer experiences delays in promptly completing the 
confirmation. In cooperation with the broker or dealer, the relevant 
parties (including investment advisers and custodians) may incur 
some costs; however, those costs will vary depending on current 
systems at the relevant party and broker or dealer, the nature of 
the business relationship between the relevant party and the broker 
or dealer, and how the business of the relevant party is organized.
    \681\ This figure was calculated as follows: (Assistant General 
Counsel for 20 hours + Compliance Attorney for 120 hours + Senior 
Risk Management Specialist for 20 hours + Risk Management Specialist 
for 80 hours) = 240 hours x 411 respondents = 98,640 hours.
    \682\ This figure was calculated as follows: (Assistant General 
Counsel at $543/hour x 20 hours = $10,860) + (Compliance Attorney at 
$426/hour x 120 hours = $51,120) + (Senior Risk Management 
Specialist at $417/hour x 20 hours = $8,340) + (Risk Management 
Specialist at $232/hour x 80 hours = $18,560) = $88,880 x 411 
respondents = $36,529,680.
    \683\ See infra Part IX.C.2.
    \684\ See supra note 682.
---------------------------------------------------------------------------

    Rule 15c6-2 also imposes ongoing burdens on a respondent broker-
dealer as follows: (i) ongoing monitoring and compliance activities 
with respect to the written policies and procedures required by the 
rule; and (ii) ongoing documentation activities with respect to its 
obligations to measure, monitor, and document the rates of allocations, 
confirmations, and affirmations completed as soon as technologically 
practicable and no later than the end of the day on trade date. The 
Commission estimates that the ongoing activities required by Rule 15c6-
2 would impose an aggregate annual burden on respondent broker-dealers 
of 480 hours,\685\ and a cost per broker-dealer of $172,416.\686\ The 
total industry cost is estimated to be approximately $107M.\687\
---------------------------------------------------------------------------

    \685\ This figure was calculated as follows: (Assistant General 
Counsel for 48 hours + Compliance Attorney for 192 hours + Senior 
Risk Management Specialist for 48 hours + Risk Management Specialist 
for 192 hours) = 480 hours x 411 respondents = 197,280 hours.
    \686\ This figure was calculated as follows: (Assistant General 
Counsel at $543/hour x 48 hours = $26,064) + (Compliance Attorney at 
$426/hour x 192 hours = $81,792) + (Senior Risk Management 
Specialist at $417/hour x 48 hours = $20,016) + (Risk Management 
Specialist at $232/hour x 192 hours = $44,544) = $172,416 x 411 
respondents = $70,862,976.
    \687\ This figure was calculated as follows: $36,529,680 
(industry one-time burden) + $70,862,976 (industry ongoing burden) = 
$107,392,656.
---------------------------------------------------------------------------

    The Commission believes this estimate is an upper bound on the 
compliance costs associated with the second option, reflected in 
paragraph (a)(2) of new Rule 15c6-2 for at least two reasons. First, 
broker-dealers may choose the first option, reflected in paragraph 
(a)(1), if it is less burdensome for them to do so. Second, if a large 
number of broker-dealers chose the second option it may be more 
efficient for a third party to develop a set of best practices that 
could form the basis of the policies and procedures required for each 
broker-dealer that choses the second option.
    Custodian banks will need to update their asset servicing functions 
to comply with a shorter settlement cycle. The Commission estimates 
that custodian banks will incur an initial compliance cost of $4.29 
million,\688\ and expects custodian banks to incur minimal ongoing 
compliance costs after the initial transition because the Commission 
believes that most of the costs will stem from pre-migration updates 
and testing.
---------------------------------------------------------------------------

    \688\ The estimate is based on the T+1 Playbook timeline, which 
estimates regulation-dependent implementation activity for asset 
servicing and testing to last six quarters. We assume 2 operations 
specialists (at $159 per hour), 2 programmers (at $316 per hour), 
and 1 senior operations manager (at $426 per hour), working 40 hours 
per week. (2 x $159 + 2 x $316 + 1 x $426) x 6 x 13 x 40 = 
$4,293,120.
---------------------------------------------------------------------------

    The amendment to Rule 204-2 will require registered investment 
advisers to make and keep records of confirmations they receive and of 
allocations and affirmations they send or receive for securities 
transactions that are subject to the requirements of Rule 15c6-2(a). 
Based on Form ADV filings, approximately 15,160 advisers registered 
with the Commission are required to make and keep copies of certain 
books and records relating to their advisory business.\689\ The 
Commission further estimates that of these advisers, 2,169 registered 
advisers will not retain the required records under the final rule 
because they do not have any institutional advisory clients. Therefore, 
the Commission estimates that 12,991 advisers will be subject to the 
final amendment to Rule 204-2 under the Advisers Act because they will 
facilitate transactions with a broker or dealer that is subject to the 
requirements of Rule 15c6-2(a) and therefore will be subject to the 
related recordkeeping requirement.\690\ As discussed above, based on 
staff experience, the Commission believes that many advisers already 
have recordkeeping processes in place to make and keep records of 
confirmations received, and allocations and affirmations sent or 
received. The Commission believes these are customary and usual 
business practices for many advisers, but that some small and mid-size 
advisers may not currently retain these records. Further, the 
Commission believes that the vast majority of these books and records 
are kept in electronic fashion with an ability to capture a date and 
time stamp, such as in a trade order management or other recordkeeping 
system, through system logs of file transfers, email archiving, or as 
part of DTC's Institutional Trade Processing services, but that some 
advisers maintain paper records (e.g., confirmations) and/or 
communicate allocations by telephone. In addition, as noted in Part 
III.C above, we believe that up to 70% of institutional trades are 
affirmed by custodians, and therefore advisers may not retain or have 
access to the affirmations these custodians sent to brokers or 
dealers.\691\
---------------------------------------------------------------------------

    \689\ See infra note 4 to Table 2.
    \690\ See id.
    \691\ See DTCC ITP Forum Remarks, supra note 264.
---------------------------------------------------------------------------

    In a change from the proposal, we estimate three-hour information 
collection burden annually per impacted adviser associated with the new 
recordkeeping requirements.\692\ We estimate that the amendments to 
Rule 204-2 will result in an additional internal cost of approximately 
$3.02 million per year.\693\ This estimate takes into account potential 
additional burdens associated with the new recordkeeping requirement 
for advisers that do not currently retain these records, but will be 
required to do so under the final rule. These estimates are also 
designed to address any burdens for advisers that may retain such 
documents, but do not do so electronically and/or do not time and date 
stamp such documents or otherwise retain the documents in a way that 
complies with the final rule.\694\ In addition, the revised estimates 
factor in any costs associated with receiving copies of, or having 
access to, required records that are retained by a custodian or other 
third-party, including cost-savings associated with the adviser's 
ability to rely on third parties to meet its recordkeeping obligations 
under the rule.\695\
---------------------------------------------------------------------------

    \692\ The Commission believes that most of the necessary records 
are already being retained as advisers generally retain their 
communications and trade instructions to comply with other 
recordkeeping obligations. If these records are not being kept, the 
Commission believes the burden will be small to start retaining them 
because the requirement pertains to records that are sent or 
received and does not require new records to be created.
    \693\ The estimate assumes that the amendments to Rule 204-2 
will result in an incremental increase in the collection of 
information burden estimate by 3 hours for 12,991 investment 
advisers. For each such adviser, we assume 1.5 hour for a compliance 
clerk (at $82 per hour) and 1.5 hour for a general clerk (at $73 per 
hour) = $233 per investment adviser * 12,991 investment advisers = 
an incremental increase of $3,020,408 in internal costs.
    \694\ For more discussion, see infra Part IX.A.
    \695\ One commenter recommended that the Commission update these 
estimates. See infra Part IX.A for a discussion of the commenter's 
recommendation and the Commission's justification for the burden 
estimates.
---------------------------------------------------------------------------

(4) Indirect Costs
    In estimating these implementation costs, the Commission notes that 
market

[[Page 13940]]

participants who bear the direct costs of the actions they undertake to 
comply with the amendment to Rule 15c6-1 may pass these costs on to 
their customers. For example, retail and institutional investors might 
not directly bear the cost of all of the necessary upgrades for a T+1 
standard settlement cycle, but might indirectly bear these costs as 
their broker-dealers might increase their fees to amortize the costs of 
updates among their customers. The Commission is unable to quantify the 
overall magnitude of the indirect costs that retail and institutional 
investors may bear, because such costs will depend on the market power 
of each broker-dealer, and each broker-dealer's willingness to pass on 
the costs of migration to a T+1 standard settlement cycle to its 
customers. However, the Commission believes that in situations where 
broker-dealers have little or no competition, broker-dealers will have 
an incentive to absorb part of the cost increase. As discussed in Part 
VIII.C.5.b)(3) above, this could be as high as the full amount of the 
estimated $8.74 million for each broker-dealer that serves 
institutional investors, and $12.73 million for each broker-dealer that 
serves institutional and retail investors. However, in situations where 
broker-dealers face heavy competition for customers, there may be 
little or no economic profits and price may equal marginal cost so an 
increase in costs could be fully passed through to the customer.\696\
---------------------------------------------------------------------------

    \696\ See supra note 621.
---------------------------------------------------------------------------

    As noted in Part VIII.B.4, the ability of market participants to 
pass implementation costs on to customers likely depends on their 
relative bargaining power. For example, CCPs, like many other 
utilities, exhibit many of the characteristics of natural monopolies 
and, as a result, may have market power, particularly relative to 
broker-dealers who submit trades for clearing. This means that CCPs may 
be able to share implementation costs they directly face related to 
shortening the settlement cycle with broker-dealers through higher 
clearing fees. Conversely, to the extent that institutional investors 
have market power relative to broker-dealers, broker-dealers may not be 
in a position to impose indirect costs on them.
(5) Industry-Wide Costs
    To estimate the aggregate, industry-wide cost of a transition to a 
T+1 standard settlement cycle, the Commission takes its own per-entity 
estimates and multiplies them by our estimate of the respective number 
of entities. The Commission estimates that there are 1,229 buy-side 
firms, 160 self-clearing broker-dealers, and 48 custodian banks.\697\ 
Additionally, while there are three Matching/ETC Providers, the 
Commission believes that only one of these is currently providing 
services in the U.S. We estimate there are 1,274 broker-dealers that 
will incur investor education costs. One way to establish a total 
industry initial compliance cost estimate is to multiply each estimated 
per-entity cost by the respective number of entities and sum these 
values, which results in an estimate of $7.76 billion.\698\ The 
Commission, however, believes that this estimate is likely to overstate 
the true initial cost of transition to a T+1 standard settlement cycle 
for a number of reasons. First, our per-entity estimates do not account 
for the heterogeneity in market participant size, which may have a 
significant impact on the costs that market participants face. While 
the BCG Study included both estimates of the number of entities in 
different size categories as well as estimates of costs that an entity 
in each size category is likely to incur, it did not provide sufficient 
underlying information to allow the Commission to estimate the 
relationship between participant size and compliance cost and, thus, we 
cannot produce comparable estimates. The Commission solicited comment 
on the extent to which market participants believe that the compliance 
costs for Rule 15c6-1(a) would scale with market participant size and 
did not receive data that could be used to improve these estimates.
---------------------------------------------------------------------------

    \697\ The estimate for the number of buy-side firms is based on 
the Commission's 13(f) holdings information filers with over $1 
billion in assets under management, as of December 31, 2020. The 
estimate for the number of broker-dealers is based on FINRA FOCUS 
Reports of firms reporting as self-clearing. See supra note 525 and 
accompanying text. The estimate for the number of custodian banks is 
based on the number of ``settling banks'' listed in DTC's Member 
Directories, http://www.dtcc.com/client-center/dtc-directories.
    \698\ Calculated from estimates derived above in this section 
(Part VIII.C.5) as 160 broker-dealers (self-clearing) x $12,733,000 
+ + 48 custodian banks x $4,293,000 + 1,229 buy-side firms x 
$4,293,000 + 4 Matching/ETC Providers x ($16,149,000 + $6,900) + 2 
FMUs x $16,149,000 + 12,991 IAs x $233 + 411 broker-dealers with 
institutional customers x $88,880$ 7,763M.
---------------------------------------------------------------------------

    Second, investments by third-party service providers may mean that 
many of the estimated compliance costs for market participants are 
duplicated. The BCG Study suggests that ``leverage'' from service 
providers may yield a savings of $194 million, reducing aggregate costs 
by approximately 29%.\699\ In the T+1 Proposing Release, the Commission 
sought further comment on the extent to which the efficiencies 
generated by the investments of service providers might reduce the 
compliance costs of market participants. Taking into account potential 
cost reductions due to repurposing existing systems and using service 
providers as described above, the Commission believes that $5.51 
billion represents a reasonable range for the total industry initial 
compliance costs.\700\
---------------------------------------------------------------------------

    \699\ See BCG Study, supra note 565, at 79.
    \700\ The lower bound of this range is calculated as ($7.76 
billion x (1-0.29)) = $5.51 billion.
---------------------------------------------------------------------------

    In addition to these initial costs, a transition to a shorter 
settlement cycle may also result in certain ongoing industry-wide 
costs. Though the Commission believes that a move to a shorter 
settlement cycle will generally bring with it a reduced reliance on 
manual processing, a shorter settlement cycle may also exacerbate 
remaining operational risk. This is because a shorter settlement cycle 
will provide market participants with less time to resolve errors. For 
example, if there is an entry error in the trade match details sent by 
either counterparty for a trade, both counterparties will have one 
extra day to resolve the error under the baseline than in a T+1 
environment. For these errors, a shorter settlement cycle may increase 
the probability that the error ultimately results in a settlement fail. 
However, the Commission believes that a large variety of operational 
errors are possible in the clearance and settlement process, and some 
of these errors are likely to be infrequent, the Commission is unable 
to quantify the impact that a shorter settlement cycle may have on the 
ongoing industry-wide costs stemming from a potential increase in 
operational risk.

D. Consideration of Reasonable Alternatives

1. Delete 15c6-1(c) to T+2
    In the T+1 Proposing Release the Commission proposed to delete 
paragraph (c) of the rule,\701\ which would, in conjunction with the 
proposed amendment to paragraph (a), establish a T+1 standard 
settlement cycle for firm commitment offerings priced after 4:30 p.m. 
ET. The Commission requested comment on whether, as an alternative to 
deleting paragraph (c), it be amended in order to shorten the 
settlement cycle for firm commitment offerings to T+2. In response to 
comments received and as discussed in Part II.B.3 and Part II.C.4

[[Page 13941]]

above, the Commission is adopting this alternative.
---------------------------------------------------------------------------

    \701\ See T+1 Proposing Release, supra note 2, at 10448-49.
---------------------------------------------------------------------------

2. Adopt 17Ad-27 To Require Certain Outcomes
    The Commission proposed Rule 17Ad-27 to require a CMSP establish, 
implement, maintain, and enforce policies and procedures to facilitate 
straight-through processing for transactions involving broker-dealers 
and their customers.\702\ As proposed, Rule 17Ad-27 would require a 
CMSP to submit every twelve months to the Commission a report that 
describes the following: (i) the CMSP's current policies and procedures 
for facilitating straight-through processing; (ii) its progress in 
facilitating straight-through processing during the twelve month period 
covered by the report; and (iii) the steps the CMSP intends to take to 
facilitate and promote straight-through processing during the twelve 
month period that follows the period covered by the report.\703\
---------------------------------------------------------------------------

    \702\ See id. at 10457-61.
    \703\ As adopted, the Rule 17Ad-27 reporting requirement has 
been revised. See supra Part V.C.
---------------------------------------------------------------------------

    The Commission proposed a ``policies and procedures'' approach in 
developing the rule because it believes such an approach will remain 
effective over time as CMSPs consider and offer new technologies and 
operations to improve the settlement of institutional trades. The 
Commission also believes that improving the CMSPs' systems to 
facilitate straight-through processing can help market participants 
consider additional ways to make their own systems more efficient. In 
addition, a ``policies and procedures'' approach can help ensure that a 
CMSP considers, in a holistic fashion, how the obligations it applies 
to its users will advance the implementation of methodologies, 
operational capabilities, systems, or services that support straight-
through processing.
    The Commission has considered as an alternative to the policies and 
procedures approach in proposed Rule 17Ad-27, proposing a rule to 
require CMSPs to achieve certain outcomes that would facilitate 
straight-through processing. For example, the Commission considered a 
requirement that a CMSP do the following: (i) enable the users of its 
service to complete the matching, confirmation, or affirmation of the 
securities transaction as soon as technologically and operationally 
practicable and no later than the end of the day on which the 
transaction was effected by the parties to the transaction; or (ii) 
forward or otherwise submit the transaction for settlement as soon as 
technologically and operationally practicable, as if using fully 
automated systems.
    However, as discussed in Part V.C.1. above, the Commission believes 
that a policies and procedures approach will better meet the objectives 
of promoting STP by requiring policies and procedures that include a 
holistic review and framework for considering how systems and processes 
facilitate straight-through processing, and that can adapt over time to 
changes in technology and operations, both among and beyond the CMSP's 
systems. Therefore the Commission is adopting new Rule 17Ad-27 as 
proposed but with the two modifications discussed above.
3. Adopt Rule Changes to Rule 15c6-2 as Recommended by SIFMA's August 
Comment Letter
    As previously mentioned in Part III.B.7., the Commission received 
an additional comment letter from SIFMA addressing alternatives to 
proposed Rule 15c6-2.\704\ SIFMA recommended that the Commission revise 
proposed Rule 15c6-2 to replace the written agreement requirement with 
a requirement for policies and procedures that can support faster 
processing, which would allow individual firms to advance the 
Commission's interest in same-day affirmation while ensuring that 
broker-dealers can design policies and procedures tailored to their 
business models, products, and unique customer bases.\705\
---------------------------------------------------------------------------

    \704\ See SIFMA August 26th Letter, supra note 194, at 2-3.
    \705\ See id. at 2. In Part III.B.5., above, the Commission has 
previously discussed why it believes it appropriate to retain the 
written agreement requirement in the rule, while also adding an 
option to establish, maintain, and enforce written policies and 
procedures.
---------------------------------------------------------------------------

    SIFMA's recommendation included a number of elements. First, SIFMA 
requested that Rule 15c6-2 be revised to require policies and 
procedures reasonably designed to maintain timely settlement 
rates.\706\ Second, SIFMA recommended that such policies and 
procedures: (i) address the timing of allocations, confirmations, and 
affirmations to ensure timely settlement; (ii) include a communication 
plan with market participants; (iii) provide a description of a broker-
dealers' ability to monitor compliance; (iv) include the development of 
controls and supervisory procedures; and (v) include the development of 
metrics to measure compliance.\707\
---------------------------------------------------------------------------

    \706\ See id.
    \707\ See id. at 2-3.
---------------------------------------------------------------------------

    The Commission agrees that the policies and procedures approach is 
beneficial, and thus is revising final Rule 15c6-2 to allow broker-
dealers to achieve compliance with the rule either by entering into 
written agreements or by establishing, implementing, and maintaining 
policies and procedures. Economically, options always have a positive 
value when they allow the holder to choose amongst a menu of choices; 
in this case, the ability to choose amongst approaches should present a 
benefit to broker-dealers, who can better assess which one of these two 
alternatives provides the most efficient path to compliance with the 
rule. Discussion of the costs for each of these alternatives can be 
found in section C.5.(b)(3).
    In terms of what the policies and procedures dictate, the 
Commission believes, as mentioned in Part III.B.7, that timely 
settlement is a separate, if related, objective from same-day 
affirmation. As discussed in Part III.B.1 above, the Commission 
continues to believe that improving affirmation rates on trade date is 
an objective separate and apart from, though related to, shortening the 
settlement cycle, because it promotes an orderly settlement process 
regardless of the length of the settlement cycle.
    Other than the different specifications of the policies and 
procedures just mentioned, the Commission believes that it is generally 
adopting SIFMA's recommendations with respect to: addressing the timing 
of allocations, confirmations, and affirmations to ensure timely 
settlement; including a communication plan with market participants; 
providing a description of a broker-dealers' ability to monitor 
compliance; including the development of controls and supervisory 
procedures; and including the development of metrics to measure 
compliance.
4. Replace the Written Agreement Requirement in Proposed Rule 15c6-2 
With a Principles-Based Approach
    The Commission received comment letters from the Investment Company 
Institute (ICI) and from the American Securities Association (ASA) that 
advocate for a principles-based approach that allows broker-dealers to 
adopt their own internal policies that promote the allocation, 
confirmation and affirmation of trades for relevant customers. That 
would include, according to ICI, a requirement that broker-dealers 
adopt policies and procedures ``reasonably designed'' to ensure that 
allocations, confirmations, and affirmations are completed on a 
timeline that allows settlement on T+1.
    The Commission is mindful that each broker-dealer is best suited to 
assess the

[[Page 13942]]

challenges that it faces in accelerating the settlement process. 
Therefore, as already discussed, the Commission is providing broker-
dealers with the additional choice of a policies and procedures 
alternative besides the written agreements requirement. The Commission 
believes that the policies and procedures alternative affords broker-
dealers sufficient flexibility without sacrificing the main objective 
of the rule, which is solving the collective action problem of 
improving the overall current affirmation rates of 68%. A principles-
based approach relies almost exclusively on the existing commercial 
incentives discussed on Part III.B.1, which the Commission already 
considered insufficient to overcome the incremental gains in same-day 
affirmation rates to date.
5. Select a Later Implementation Date for Adoption of the Rule
    The Commission received a number of comment letters \708\ that 
recommend a later date than the proposed implementation date of March 
31, 2024. Reasons given by the industry for more time include the 
additional convenience attendant to a transition to T+1 settlement over 
a three-day weekend (e.g., Memorial Day, Labor Day); the possibility of 
coordinating the T+1 settlement transition with a closely aligned 
market (i.e., Canada on Labor Day 2024); and the ability to have more 
thorough preparation and testing protocols, among others.
---------------------------------------------------------------------------

    \708\ See, e.g., DTCC Letter, supra note 16, at 4; SIFMA April 
Letter, supra note 16, at 4; State Street Letter, supra note 16, at 
5; MFA Letter, supra note 16, at 2; ICI Letter, supra note 16, at 2; 
AGC April Letter, supra note 16, at 4; CCMA April Letter, supra note 
16, at 1; RMA Letter, supra note 16, at 8; IAA April Letter, supra 
note 16, at 2; IIAC Letter, supra note 16, at 2; ASA Letter, supra 
note 16, at 1-2; OCC Letter, supra note 16, at 3; STA Letter, supra 
note 16, at 2.
---------------------------------------------------------------------------

    The Commission acknowledges that there are additional costs to an 
earlier transition date, as a more compressed timeline to 
implementation will have an opportunity cost over scarce operational 
resources. Additional time also allows for more robust preparation and 
testing.\709\ Nevertheless, postponing the implementation of T+1 
settlement delays the realization of the market-wide benefits of the 
rule. While there may be increases in up-front costs from an earlier 
date, there are also benefits attendant to general reductions in 
liquidity, credit and market risk. Periods of high volatility could 
materialize on any date between the implementation date and any of the 
suggested dates, and such occurrence would reduce the benefits of the 
rule precisely at the moment when it is most useful. Given the extent 
of planning, operational changes, and testing necessary to achieve a 
successful and orderly transition to a T+1 standard settlement 
cycle,\710\ the Commission is moving the compliance date to Tuesday, 
May 28, 2024, which follows a Federal holiday for which both markets 
and banks will be closed, providing market participants with a three-
day weekend to facilitate the transition to a T+1 standard settlement 
cycle, and providing market participants an additional two months. The 
Commission believes that a May 28, 2024, compliance date will ensure an 
orderly transition to a T+1 standard settlement cycle that realizes the 
substantial benefits of shortening the settlement cycle as soon as 
possible.
---------------------------------------------------------------------------

    \709\ See supra Part VII.A.
    \710\ Id.
---------------------------------------------------------------------------

IX. Paperwork Reduction Act

    As discussed in the proposing release, Rule 17Ad-27 and the 
amendments to Rule 204-2(a) contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\711\ The Commission submitted the proposed collections of 
information to the Office of Management and Budget (``OMB'') for review 
in accordance with the PRA. For the amendments to Rule 204-2(a), the 
title of the information collection is ``Rule 204-2 under the 
Investment Advisers Act of 1940'' (OMB Control No. 3235-0278). For Rule 
17Ad-27, the title of the information collection is ``Shortening the 
Securities Transaction Settlement Cycle'' (OMB Control No. 3235-
0799).\712\ In addition, the modifications to Rule 15c6-2 contain 
``collection of information'' requirements, which will be submitted to 
OMB for review in accordance with the PRA. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \711\ See 44 U.S.C. 3501 et seq.
    \712\ The T+1 Proposing Release stated that the Commission 
intended to include Rule 17Ad-27 in an existing information 
collection, ``Clearing Agency Standards for Operation and 
Governance'' (OMB Control No. 3235-0695). The Commission has 
subsequently determined to request a new OMB Control Number for the 
collection of information in Rule 17Ad-27.
---------------------------------------------------------------------------

    The Commission received several comments concerning its PRA 
estimates for the proposed amendment to Rule 204-2, which are discussed 
below. In response to these comments, and in view of the changes 
between the proposed and adopted recordkeeping requirements, the 
Commission is modifying its PRA estimates, as reflected in Part IX.A. 
The Commission is also modifying its PRA estimates for Rule 17Ad-27 in 
view of the changes between the proposed and adopted rule requirements, 
as explained in Part IX.B. In addition, the Commission corrects a 
tabulation error for Rule 17Ad-27 that was included in the T+1 
Proposing Release.
    Finally, because the modifications to Rule 15c6-2 discussed in Part 
III.C would impose PRA burdens, the Commission below provides PRA 
estimates for Rule 15c6-2. The Commission will submit these burdens to 
OMB for review in accordance with the PRA.\713\
---------------------------------------------------------------------------

    \713\ See supra note 712 and accompanying text (providing the 
title of the information collection and the OMB control number for 
these rulemakings, ``Shortening the Securities Transaction 
Settlement Cycle'' (OMB Control No. 3235-0799)).
---------------------------------------------------------------------------

A. Advisers Act Rule 204-2

    Under section 204 of the Advisers Act, investment advisers 
registered or required to register with the Commission under section 
203 of the Advisers Act must make and keep for prescribed periods such 
records (as defined in section 3(a)(37) of the Exchange Act), furnish 
copies thereof, and make and disseminate such reports as the 
Commission, by rule, may prescribe as necessary or appropriate in the 
public interest or for the protection of investors. Advisers Act Rule 
204-2 sets forth the requirements for maintaining and preserving 
specified books and records. This collection of information is found at 
17 CFR 275.204-2 and is mandatory. The Commission staff uses the 
collection of information in its regulatory and examination program. 
Responses to the requirements of the proposed amendments to Rule 204-2 
that are provided to the Commission in the context of its regulatory 
and examination program are kept confidential subject to the provisions 
of applicable law.\714\
---------------------------------------------------------------------------

    \714\ See section 210(b) of the Advisers Act, 15 U.S.C. 80b-
10(b).
---------------------------------------------------------------------------

    The final amendments to Rule 204-2 will require all registered 
investment advisers to make and keep certain records with respect to 
any securities transaction that is subject to the requirements of Rule 
15c6-2(a). Those records include each confirmation received, and any 
allocation and each affirmation sent or received, with a date and time 
stamp for each allocation and affirmation that indicates when the 
allocation and affirmation were sent or received.
    The proposed amendments to Rule 204-2 would have required 
recordkeeping by any registered adviser

[[Page 13943]]

that is a party to a contract under proposed Rule 15c6-2 while the 
final rule references more specifically transactions subject to Rule 
15c6-2(a), although both concern the same subset of transactions. We 
estimate that 12,991 advisers, or 86% of the total registered advisers 
subject to amended Rule 204-2, will facilitate transactions subject to 
Rule 15c6-2(a) and thus be subject to the amendments.\715\ As discussed 
in the T+1 Proposing Release, the Commission stated that based on staff 
experience, it believed that many advisers already have processes in 
place to make and keep records of confirmations received, and 
allocations and affirmations sent as part of their customary and usual 
business practices, though recognizing that some small and mid-sized 
advisers do not currently retain these records, and some advisers still 
maintain certain records in paper and/or communicate by telephone.\716\ 
Paper records are less likely to be date and time stamped, and those 
communicated by telephone are not date or time-stamped at all, unless a 
memorial of the communication is retained). The Commission also stated 
that it believed many such records are electronically maintained, and 
are sent or received electronically, in which case such documents were 
already date and time stamped in many instances.\717\
---------------------------------------------------------------------------

    \715\ Based on Form ADV data as of June 2022. See also infra 
note 4 to Table 2.
    \716\ See T+1 Proposing Release, supra note 2, at 10494.
    \717\ See T+1 Proposing Release, supra note 2, at 10456-57, 
10490, 10494.
---------------------------------------------------------------------------

    Some commenters discussed aspects of the burden estimates for the 
proposed amendments to Rule 204-2. One commenter stated that the 
Commission has underestimated the time and cost burdens for 
implementing the proposed recordkeeping requirements but did not 
provide specific estimates.\718\ As one basis for that statement, the 
commenter explained that most investment advisers use third parties to 
perform or communicate allocations or affirmations, and do not 
necessarily currently retain the records themselves.\719\ This 
commenter stated that if such advisers were required to retain those 
records on an ongoing basis, they would likely incur costs associated 
with directing the third parties to electronically copy the investment 
adviser on any allocations or affirmations and ensuring that their own 
systems and infrastructure could adequately accommodate these 
additional records. The commenter suggested that if advisers could not 
rely on third parties to meet their recordkeeping obligations, the 
Commission should update its estimates, while also asking the 
Commission to review the potential cost savings associated with 
allowing advisers to use third parties to retain the required 
records.\720\ In this regard, we note that investment advisers may 
continue to rely on third parties to meet their recordkeeping 
obligations, including those required by the final amendments to Rule 
204-2.\721\
---------------------------------------------------------------------------

    \718\ See IAA April Letter, supra note 16, at 7.
    \719\ Id. (noting the Commission's estimate in the T+1 Proposing 
Release that 70 percent of investment adviser trades are affirmed by 
their custodian is consistent with information received from IAA 
members, and also noting that advisers may utilize separately 
managed accounts where trading and allocations are conducted by a 
third-party investment manager under an agreement with the 
investment adviser).
    \720\ Id.
    \721\ See supra Part IV.C. As previously noted, we estimate that 
70% of trades are affirmed by custodians, which may retain the 
affirmations on the adviser's behalf.
---------------------------------------------------------------------------

    Several comments also addressed timestamping. One suggested that 
the costs could be higher than we estimated in the proposal,\722\ while 
another stated that timestamps are already included in electronic 
communications protocols.\723\ We agree, consistent with the latter 
comment, that timestamps are generally included in many electronic 
communications and many advisers currently send allocations and 
affirmations electronically.
---------------------------------------------------------------------------

    \722\ AIMA Letter, supra note 29.
    \723\ FIX Trading Letter, supra note 218.
---------------------------------------------------------------------------

    In a change from the proposal, we estimate that each adviser that 
will be subject to the new recordkeeping requirements will incur an 
additional three-hour burden each year, increased from two hours as 
proposed. We are not amortizing any of the burdens as proposed, because 
we believe investment advisers that will be subject to the new 
requirements will incur the same hour burden initially and then 
annually thereafter.\724\
---------------------------------------------------------------------------

    \724\ The T+1 Proposing Release amortized the annual two-hour 
burden over three years, resulting in an annual internal burden of 
0.667 hours per adviser per year.
---------------------------------------------------------------------------

    The Commission estimates that 12,991 registered advisers will be 
subject to the new recordkeeping requirements because they manage 
institutional accounts and are thus likely to facilitate transactions 
that are subject to the requirements of Rule 15c6-2(a).\725\ This 
estimate takes into account potential additional burdens associated 
with the new recordkeeping requirement for advisers that do not 
currently make and retain these records, but will be required to do so 
under the final rule. The revised estimates are also designed to 
address any burdens for advisers that may make and retain such 
documents, but do not do so electronically and/or do not time and date 
stamp such documents or otherwise retain the documents in a way that 
complies with the final rule. In addition, the revised estimates factor 
in any costs associated with receiving copies of, or having access to, 
required records that are retained by a custodian or other third-party, 
offset by cost-savings associated with the adviser's ability to rely on 
third parties to meet its recordkeeping obligations under the rule. As 
discussed above, we believe that many advisers already have 
recordkeeping processes in place to retain the new required records, 
and may only incur minimal additional burdens to comply with the final 
recordkeeping requirements. However, some advisers may need to spend 
more time to modify their recordkeeping systems. Accordingly, the 
three-hour burden estimate reflects an average across all advisers 
likely to be subject to the new requirements. Finally, in response to 
the comment that our staffing cost estimates were too low, we have 
increased the hours burden to three and the time we estimate the 
compliance clerk and general clerk will spend on the collection of 
information, and we updated the wage rates to account for 
inflation.\726\
---------------------------------------------------------------------------

    \725\ The Commission is using a different methodology than the 
proposal in order to simplify the calculation and include more 
advisers that we estimate will be subject to the new recordkeeping 
requirement. The final estimate includes one category of 12,991 
advisers that will be subject to the new recordkeeping requirements 
because they manage institutional accounts and are thus likely to 
facilitate transactions that are subject to the requirements of Rule 
15c6-2(a). The estimate excludes advisers that only have individuals 
or high-net-worth individuals as clients in Item 5.D. and do not 
report participation in any wrap fee program in Item 5.I., and 
advisers that do not report any regulatory assets under management 
in Item 5.F. In contrast, the T+1 Proposing Release estimated 11,283 
of advisers that are subject to Rule 204-2, would enter a contract 
with a broker or dealer under proposed Rule 15c6-2 and therefore be 
subject to the related proposed recordkeeping amendment. The 
estimate included three categories of advisers that would have had 
the same burden hours: (1) 220 small and mid-size advisers that have 
institutional clients that we believed do not maintain the proposed 
records; (2) 113 advisers that have institutional clients that staff 
estimated do not send allocations or affirmations; and (3) 7,898 
advisers with institutional clients that the staff estimated make 
institutional trades that are affirmed by custodians and therefore 
do not maintain the proposed affirmations.
    \726\ The wage rate estimate takes into account an updated 
inflation adjustment since the proposal and estimates that the 
higher paid compliance clerk will spend approximately 50% of the 
time performing the function instead of 17% as estimated in the T+1 
Proposing Release.
---------------------------------------------------------------------------

    In our most recently approved Paperwork Reduction Act submission 
for Rule 204-2, we estimated for Rule

[[Page 13944]]

204-2 a total annual aggregate hour burden of 2,764,563 hours, and a 
total annual aggregate internal cost burden of $175,980,426.\727\ The 
estimated additional burdens associated with the final amendments to 
Rule 204-2, which take into account an increase in annual hour burdens 
and internal cost burdens due to the comments received and an increase 
in the internal wage rates due to an updated inflation adjustment 
reflecting inflation through the end of 2022, are reflected in the 
table below.
---------------------------------------------------------------------------

    \727\ Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Revisions to Rule 204-2, OMB 
Report, OMB 3235-0278 (Aug. 2021).

                   Table 2--Summary of Burden Estimates for the Final Amendments to Rule 204-2
----------------------------------------------------------------------------------------------------------------
                                         Annual internal hour                             Internal time cost per
               Advisers                       burden \1\         Internal wage rate \2\          year \3\
----------------------------------------------------------------------------------------------------------------
12,991 advisers \4\..................  3 hours per adviser \5\  $77.50 per hour........  Incremental aggregate
                                       Incremental aggregate                              internal cost =
                                        burden = 38,973 hours                             $3,020,408 ($77.5 x
                                        (12,991 advisers x 3                              38,973 hours =
                                        hours = 38,973 hours).                            $3,020,408).
----------------------------------------------------------------------------------------------------------------
Currently approved aggregate burden    2,764,563 aggregate                        $175,980,426
 \6\.                                   hours per year.
----------------------------------------------------------------------------------------------------------------
Estimated revised aggregate burden     2,803,536 aggregate                      $179,000,834 \8\
 \7\.                                   hours per year.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ In a change from the Proposing Release, we are not amortizing the initial internal hour burden over a three-
  year period. Instead, we believe that the estimated internal hour burdens associated with the final amendments
  will be annual burdens.
\2\ As with our estimates relating to the previous amendments to Advisers Act Rule 204-2, the Commission expects
  that performance of these functions will most likely be allocated between compliance clerks and general
  clerks. Data from SIFMA's Office Salaries in the Securities Industry 2013, modified by Commission staff to
  account for an 1800-hour work-year and inflation through the end of 2022, and multiplied by 2.93 to account
  for bonuses, firm size, employee benefits and overhead, suggest that costs for these position are $82 and $73,
  respectively. A blended hourly rate is therefore: ($82 + $73) / 2 = $77.5 per hour.
\3\ Under the currently-approved PRA for Rule 204-2, there is no cost burden other than the internal cost of the
  hour burden described herein, and we believe that the amendments will not result in any external cost burden.
\4\ We estimate there were 15,160 total registered advisers as of June 2022 based on Form ADV filings received
  through the Investment Adviser Registration Depository (IARD) through August 31, 2022. Of these 15,160
  advisers, we estimate that 12,991 will be subject to the new recordkeeping requirements because they manage
  institutional accounts and are thus likely to facilitate transactions that are subject to the requirements of
  Rule 15c6-2(a). We have excluded advisers that only have individuals or high-net-worth individuals as clients
  in Item 5.D. and do not report participation in any wrap fee program in Item 5.I. We also excluded advisers
  that do not report any regulatory assets under management in Item 5.F.
\5\ We estimate an average of three hours per adviser to update procedures and instruct personnel to make and
  retain the required records in the advisers' recordkeeping systems, including any such documents it may
  receive in paper format and does not currently retain, and to actually retain those records for the required
  retention periods. Because we believe that many advisers already have recordkeeping systems to accommodate
  these records, which include, at a minimum, spreadsheet formats and email retention systems that have an
  ability to capture a date and time stamp, such advisers are likely to incur minimal incremental costs
  associated with the new recordkeeping requirement.
\6\ See supra note 727.
\7\ The new recordkeeping burden will add 38,973 aggregate annual hours, resulting in a revised estimate of
  2,803,536 aggregate hours for all registered advisers subject to these amendments to Rule 204-2 (2,764,563
  current hours + 38,973 additional hours = 2,803,536 aggregate hours per year). The new recordkeeping burden
  would also add $3,020,408 in aggregate internal costs, resulting in a revised estimate of $179,000,834 in
  aggregate internal costs ($175,980,426 current internal costs + $3,020,408 additional internal costs =
  $179,000,834).
\8\ This reflects a reduction in the internal time cost per year that appeared in the T+1 Proposing Release, to
  account for corrections to the internal time costs calculations as they appeared in the T+1 Proposing Release.

B. Exchange Act Rule 17Ad-27

    As discussed in the T+1 Proposing Release, the purpose of the 
collections under Exchange Act Rule 17Ad-27 is to ensure that CMSPs 
facilitate the ongoing development of operational and technological 
improvements associated with the straight-through processing of 
institutional trades. The collections are mandatory. To the extent that 
the Commission receives confidential information pursuant to this 
collection of information, such information would be kept confidential 
subject to the provisions of applicable law.\728\
---------------------------------------------------------------------------

    \728\ See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of the Freedom 
of Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    Respondents under this rule are the three CMSPs to which the 
Commission has granted an exemption from registration as a clearing 
agency, as previously discussed in the T+1 Proposing Release. The 
Commission also continues to anticipate that one additional entity may 
seek to become a CMSP in the next three years, and so for purposes of 
this PRA collection the Commission has assumed four respondents.
    As discussed in Part V.C.1, Rule 17Ad-27(a) requires a CMSP to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to facilitate straight-through 
processing. Although the Commission has modified the text of Rule 17Ad-
27(a) to provide that such policies and procedures be ``reasonably 
designed,'' the Commission believes that the initial burden under this 
portion of the rule is unchanged. As discussed in the T+1 Proposing 
Release, the Commission continues to estimate that respondent CMSPs 
would incur an aggregate one-time burden of approximately 56 hours to 
create such new policies and procedures,\729\ and that the aggregate 
cost of this one time burden would be $27,600.\730\
---------------------------------------------------------------------------

    \729\ This figure was calculated as follows: (Assistant General 
Counsel for 8 hours + Compliance Attorney for 6 hours) = 14 hours x 
4 respondent CMSPs = 56 hours.
    \730\ This figure was calculated as follows: (Assistant General 
Counsel at $543/hour x 8 hours = $4,344) + (Compliance Attorney at 
$426/hour x 6 hours = $2,556) = $6,900 x 4 CMSPs equals $27,600.
---------------------------------------------------------------------------

    Rule 17Ad-27 also imposes ongoing burdens on a respondent CMSP as 
follows: (i) ongoing monitoring and compliance activities with respect 
to the

[[Page 13945]]

written policies and procedures required by the proposed rule; and (ii) 
ongoing documentation activities with respect to the required annual 
report. As discussed in Part V.C.2, the Commission has modified the 
final rule to identify specific data elements to be included in the 
annual report. To accommodate the documentation and reporting of such 
data as contemplated in final Rule 17Ad-27(b), the Commission has 
revised its estimates such that the ongoing activities required by Rule 
17Ad-27 would now impose an aggregate annual burden on respondent CMSPs 
of 148 hours,\731\ with an internal aggregate cost (or monetized value 
of the hour burden) of $65,208.\732\ The total industry internal cost 
is estimated to be $92,808.\733\
---------------------------------------------------------------------------

    \731\ This figure was calculated as follows: (Compliance 
Attorney for 24 hours + Computer Operations Manager for 10 hours) = 
34 hours x 4 respondent CMSPs = 136 hours. In the T+1 Proposing 
Release, the number of hours for a Compliance Attorney was 
incorrectly stated as ``25 hours'' as opposed to ``24 hours.'' See 
T+1 Proposing Release, supra note 2, at 10495 n.433. As discussed 
previously, supra note 671, the Commission estimates that the Inline 
XBRL requirement will require respondent CMSPs to incur three 
additional ongoing burden hours to apply and review Inline XBRL 
tags, as follows: (Compliance Attorney for 3 hours) x 4 CMSPs = 12 
hours. Taken together, the total ongoing burden is 148 hours (136 
hours + 12 hours = 148 hours).
    \732\ This figure was calculated as follows: (Compliance 
Attorney at $426/hour x 24 hours = $10,224) + (Computer Operations 
Manager at $514/hour x 10 hours = $5,140) = $15,364 x 4 CMSPs = 
$61,456. The Commission also estimates the costs associated with the 
three burden hours associated with applying and reviewing Inline 
XBRL tags are as follows: (Compliance Attorney at $426/hour x 3 
hours = $1,278) x 4 CMSPs = $5,112. Taken together, the total amount 
is $65,208 ($60,096 + $5,112 = $65,208).
    \733\ This figure was calculated as follows: $27,600 (industry 
one-time burden) + $65,208 (industry ongoing burden) = $92,808.
    \734\ The T+1 Proposing Release incorrectly stated the amount 
for the total annual burden per respondent (91 hours) and the total 
annual industry burden (364 hours) because the initial burden used 
to calculate those amounts should have been annualized to 18.67 
hours. The estimates have been corrected in Table 3 for this 
adopting release and reflect the PRA estimates that the Commission 
provided to OMB for this rulemaking.
    \735\ In the T+1 Proposing Release, Table 2: Summary of burden 
estimates for Rule 17Ad-27 erroneously stated the total industry 
initial burden of 56 hours instead of the initial burden per entity 
of 14 hours. See T+1 Proposing Release, supra note 2, at 10496. The 
remaining entries in the table in this release have been updated 
accordingly.

                                               Table 3--Summary of Burden Estimates for Rule 17Ad-27 \734\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                Total
                                                                            Number of      Initial     Annualized    Ongoing       Total        annual
  Name of information collection        Type of burden       Number of       annual       burden per    initial     burden per     annual      industry
                                                            respondents   responses per   respondent   burden per   respondent   burden per     burden
                                                                           respondent                  respondent                respondent    (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
17Ad-27...........................  Recordkeeping.........            4               1     \735\ 14         4.67           37        41.67       166.67
                                                           ---------------------------------------------------------------------------------------------
    Total Aggregate Burden for All  ......................  ...........  ..............  ...........  ...........  ...........  ...........       166.67
     Respondents.
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Exchange Act Rule 15c6-2

    As proposed, Exchange Act Rule 15c6-2 did not create any PRA 
burdens, so the T+1 Proposing Release did not estimate PRA burdens for 
the proposed rule. As discussed in Part III.C, the Commission is 
modifying the proposed rule at adoption to incorporate affirmative 
recordkeeping obligations, as explained below.
1. Summary and Proposed Use of Information
    Rule 15c6-2(a) requires any broker or dealer engaging in the 
allocation, confirmation, or affirmation process with another party or 
parties to achieve settlement of a securities transaction that is 
subject to the requirements of Rule 15c6-1(a) to either: (1) enter into 
a written agreement with the relevant parties to ensure completion of 
the allocation, confirmation, affirmation, or any combination thereof, 
for the transaction as soon as technologically practicable and no later 
than the end of the day on trade date in such form as necessary to 
achieve settlement of the transaction; or (2) establish, maintain, and 
enforce written policies and procedures reasonably designed to ensure 
completion of the allocation, confirmation, affirmation, or any 
combination thereof, for the transaction as soon as technologically 
practicable and no later than the end of the day on trade date in such 
form as necessary to achieve settlement of the transaction.\736\
---------------------------------------------------------------------------

    \736\ 17 CFR 240.15c6-2(a).
---------------------------------------------------------------------------

    Pursuant to Rule 15c6-2(b), to ensure completion of the allocation, 
confirmation, affirmation, or any combination thereof for the 
transaction as soon as technologically practicable and no later than 
the end of the day on trade date, written policies and procedures 
required by paragraph (a)(2) of this section shall: (1) identify and 
describe any technology systems, operations, and processes that the 
broker or dealer uses to coordinate with other relevant parties, 
including investment advisers and custodians, to ensure completion of 
the allocation, confirmation, or affirmation process for the 
transaction; (2) set target time frames on trade date for completing 
the allocation, confirmation, and affirmation for the transaction; (3) 
describe the procedures that the broker or dealer will follow to ensure 
the prompt communication of trade information, investigate any 
discrepancies in trade information, and adjust trade information to 
help ensure that the allocation, confirmation, and affirmation can be 
completed by the target time frames on trade date; (4) describe how the 
broker or dealer plans to identify and address delays if another party, 
including an investment adviser or a custodian, is not promptly 
completing the allocation or affirmation for the transaction, or if the 
broker or dealer experiences delays in promptly completing the 
confirmation; and (5) measure, monitor, document the rates of 
allocations, confirmations, and affirmations completed as soon as 
technologically practicable and no later than the end of the day on 
trade date.\737\
---------------------------------------------------------------------------

    \737\ 17 CFR 240.15c6-2(b).
---------------------------------------------------------------------------

    The purpose of this information collection is to ensure that the 
parties to institutional transactions--that is, transactions where a 
broker-dealer or its customer must engage with agents of the customer, 
including the customer's investment adviser or its securities 
custodian, to prepare a transaction for settlement--can ensure the 
completion of the allocation, confirmation, and affirmation process as 
soon as technologically practicable and no later than the end of the 
day on trade date.\738\ This objective, commonly referred to as ``same-
day affirmation,'' has been a longstanding goal of the securities 
industry and one that can help ensure the timely and orderly settlement 
of securities transactions.\739\
---------------------------------------------------------------------------

    \738\ See supra Part III.
    \739\ See id.; see also T+1 Proposing Release, supra note 2, at 
10452-53.
---------------------------------------------------------------------------

    Rule 15c6-2 provides broker-dealers with two compliance 
alternatives that would create a recordkeeping burden: (i)

[[Page 13946]]

entering into written agreements pursuant to Rule 15c6-2(a)(1) or (ii) 
establishing, maintaining, and enforcing written policies and 
procedures pursuant to Rule 15c6-2(a)(2). Based on the comments 
received regarding the costs and challenges associated with entering 
into such written agreements under the rule, the Commission believes 
that broker-dealers are unlikely to enter into new written agreements 
specifically for the purpose of achieving compliance with Rule 15c6-
2(a)(1) if they do not already have written agreements to manage their 
commercial relationships. Moreover, as discussed in Part III.B.5, a 
broker-dealer may choose to update existing agreements and commercial 
arrangements to achieve compliance with Rule 15c6-2(a)(1); \740\ 
however, the Commission believes that broker-dealers are likely to 
choose to comply with the policies and procedures requirement under 
Rule 15c6-2(a)(2) if the costs and challenges (i.e., for PRA purposes, 
the associated hour burdens) associated with updating existing 
agreement or arrangements would be higher than those associated with 
the policies and procedures requirement. For purposes of preparing this 
PRA analysis, the Commission assumes that all respondent broker-dealers 
will seek to achieve compliance with Rule 15c6-2 by establishing, 
maintaining, and enforcing policies and procedures consistent with Rule 
15c6-2(a)(2).\741\
---------------------------------------------------------------------------

    \740\ The existing requirements of 17 CFR 240.17a-4(b)(7) 
(``Rule 17a-4(b)(7)'') under the Exchange Act already require a 
broker or dealer to preserve all written agreements (or copies 
thereof) entered into by a member, broker or dealer relating to its 
business as such, including agreements with respect to any account. 
See 17 CFR 240.17a-4(b)(7).
    \741\ To the extent some broker-dealers choose to update their 
existing agreements and arrangements to achieve compliance with Rule 
15c6-2(a)(1) because the associated costs and challenges (i.e., for 
PRA purposes, the hour burdens) would be lower than those associated 
with the policies and procedures requirement, then the actual hour 
burden for this collection of information requirement in Rule 15c6-2 
may be less than the estimated hour burden.
---------------------------------------------------------------------------

2. Respondents
    As of December 31, 2021, 3,508 broker-dealers were registered with 
the Commission.\742\ Of those, approximately 143 broker-dealers are 
participants of the DTC,\743\ a clearing agency registered with the 
Commission that provides central securities depository services for 
transactions in U.S. equity securities. Participants in DTC can 
facilitate the settlement of securities transactions on behalf of their 
customers. For example, broker-dealers that participate in DTC are 
often referred to as ``clearing brokers'' within the securities 
industry. In addition to broker-dealers, DTC participants include bank 
custodians that may also hold securities on behalf of institutional 
customers. Among other things, DTC facilitates the settlement of 
securities transactions using the delivery-versus-payment (``DVP'') and 
receipt-versus-payment (``RVP'') methods, both of which are commonly 
used by buyers and sellers to settle an institutional transaction once 
the parties have completed the allocation, confirmation, and 
affirmation process. Because DTC is the only clearing agency that 
provides central securities depository services for U.S. equities, the 
Commission believes that the set of participants at DTC that are 
broker-dealers are a useful, if partial, estimate of broker-dealers 
that participate in the allocation, confirmation, and affirmation 
process and therefore of broker-dealers that would be subject to the 
requirements of Rule 15c6-2.
---------------------------------------------------------------------------

    \742\ This estimate is derived from FOCUS Report data as of 
December 31, 2021.
    \743\ See DTCC, DTC Member Directories, https://www.dtcc.com/client-center/dtc-directories (last updated Dec. 30, 2022).
---------------------------------------------------------------------------

    In addition, other broker-dealers may participate in the 
allocation, confirmation, and affirmation process but, because they do 
not maintain status as a participant in DTC, rely on commercial 
relationships with DTC participants (i.e., clearing brokers) to 
facilitate final settlement of their institutional transactions. Using 
annual statistics compiled by the Financial Industry Regulatory 
Authority (``FINRA''), the Commission estimates that approximately 268 
additional broker-dealers may serve institutional customers.\744\ 
Accordingly, the Commission estimates that approximately 411 broker-
dealers would be subject to the requirements of Rule 15c6-2.
---------------------------------------------------------------------------

    \744\ Specifically, statistics compiled by FINRA suggest that 
approximately 256 small firms and 12 medium-sized firms in the 
``Trading and Execution'' category perform ``Institutional 
Brokerage.'' FINRA, 2022 FINRA Industry Snapshot 33, 34 (2022), 
https://www.finra.org/sites/default/files/2022-03/2022-industry-snapshot.pdf.
---------------------------------------------------------------------------

3. Total Initial and Annual Reporting Burdens
    The extent to which a respondent will be burdened by the proposed 
collection of information under Rule 15c6-2 will depend on two factors: 
(1) the extent to which the broker-dealer determines that its policies 
and procedures, as opposed to its written agreements, will be required 
to demonstrate compliance with the rule; and (2) the extent to which 
existing policies and procedures for ensuring timely settlement would 
need to be modified to address same-day affirmation. As a general 
matter, most broker-dealers maintain policies and procedures to ensure 
the timely settlement of their transactions,\745\ and the securities 
industry considers achieving ``same-day affirmation'' an industry best 
practice.\746\ Nonetheless, the Commission believes that respondent 
broker-dealers will need to evaluate existing policies and procedures, 
identify any gaps, and then update their policies and procedures to 
address any gaps identified. Accordingly, the Commission estimates that 
respondent broker-dealers would incur an aggregate one-time burden of 
approximately 240 hours to create policies and procedures required 
under the rule,\747\ and that the internal cost (or monetized value of 
the hour burden) of this one-time burden per broker-dealer would be 
$88,880.\748\
---------------------------------------------------------------------------

    \745\ See, e.g., SIFMA August 26th Letter, supra note 207, at 2.
    \746\ See supra Part III.B.1.
    \747\ This figure was calculated as follows: (Assistant General 
Counsel for 20 hours + Compliance Attorney for 120 hours + Senior 
Risk Management Specialist for 20 hours + Risk Management Specialist 
for 80 hours) = 240 hours x 411 respondents = 98,640 hours.
    \748\ This figure was calculated as follows: (Assistant General 
Counsel at $543/hour x 20 hours = $10,860) + (Compliance Attorney at 
$426/hour x 120 hours = $51,120) + (Senior Risk Management 
Specialist at $417/hour x 20 hours = $8,340) + (Risk Management 
Specialist at $232/hour x 80 hours = $18,560) = $88,880 x 411 
respondents = $36,529,680.
---------------------------------------------------------------------------

    Rule 15c6-2 also imposes ongoing burdens on a respondent broker-
dealer as follows: (i) ongoing monitoring and compliance activities 
with respect to the written policies and procedures required by the 
rule; and (ii) ongoing documentation activities with respect to its 
obligations to measure, monitor, and document the rates of allocations, 
confirmations, and affirmations completed as soon as technologically 
practicable and no later than the end of the day on trade date. The 
Commission estimates that the ongoing activities required by Rule 15c6-
2 would impose an aggregate annual burden on respondent broker-dealers 
of 480 hours,\749\ and an internal cost (or monetized value of the hour 
burden) per broker-dealer of $172,416.\750\ The total

[[Page 13947]]

industry internal cost is estimated to be approximately $107M.\751\
---------------------------------------------------------------------------

    \749\ This figure was calculated as follows: (Assistant General 
Counsel for 48 hours + Compliance Attorney for 192 hours + Senior 
Risk Management Specialist for 48 hours + Risk Management Specialist 
for 192 hours) = 480 hours x 411 respondents = 197,280 hours.
    \750\ This figure was calculated as follows: (Assistant General 
Counsel at $543/hour x 48 hours = $26,064) + (Compliance Attorney at 
$426/hour x 192 hours = $81,792) + (Senior Risk Management 
Specialist at $417/hour x 48 hours = $20,016) + (Risk Management 
Specialist at $232/hour x 192 hours = $44,544) = $172,416 x 411 
respondents = $70,862,976.
    \751\ This figure was calculated as follows: $36,529,680 
(industry one-time burden) + $70,862,976 (industry ongoing burden) = 
$107,392,656.

                                                  Table 4--Summary of Burden Estimates for Rule 15c6-2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   Total        Total
                                                                            Number of      Initial     Annualized    Ongoing       annual       annual
  Name of information collection        Type of burden       Number of       annual       burden per    initial     burden per   burden per    industry
                                                            respondents   responses per   respondent   burden per   respondent   respondent     burden
                                                                           respondent      (hours)     respondent    (hours)      (hours)      (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
15c6-2............................  Recordkeeping.........          411               1          240           80          480          560      230,160
                                                           ---------------------------------------------------------------------------------------------
    Total Aggregate Burden for All  ......................  ...........  ..............  ...........  ...........  ...........  ...........      230,160
     Respondents.
--------------------------------------------------------------------------------------------------------------------------------------------------------

4. Collection of Information Is Mandatory
    Where applicable, the collection of information pursuant to Rule 
15c6-2 is mandatory.
5. Confidentiality
    Where the Commission requests that a broker-dealer produce records 
retained pursuant to the requirements of Rule 15c6-2, a broker-dealer 
can request confidential treatment of the information.\752\ If such 
confidential treatment request is made, the Commission anticipates that 
it will keep the information confidential subject to applicable 
law.\753\
---------------------------------------------------------------------------

    \752\ See 17 CFR 200.83. Information regarding requests for 
confidential treatment of information submitted to the Commission is 
available on the Commission's website at http://www.sec.gov/foia/howfo2.htm#privacy.
    \753\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing 
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------

6. Retention Period
    Pursuant to Exchange Act Rule 17a-4(b)(7), a broker or dealer 
registered pursuant to section 15 of the Exchange Act must preserve for 
a period of not less than three years, the first two years in an easily 
accessible place, all written agreements (or copies thereof) entered 
into by such member, broker or dealer relating to its business as such, 
including agreements with respect to any account.\754\
---------------------------------------------------------------------------

    \754\ 17 CFR 240.17a-4(b)(7).
---------------------------------------------------------------------------

    Pursuant to 17 CFR 240.17a-4(e)(7), a broker or dealer registered 
pursuant to section 15 of the Exchange Act must maintain and preserve 
in an easily accessible place each compliance, supervisory, and 
procedures manual, including any updates, modifications, and revisions 
to the manual, describing the policies and practices of the member, 
broker or dealer with respect to compliance with applicable laws and 
rules, and supervision of the activities of each natural person 
associated with the member, broker or dealer until three years after 
the termination of the use of the manual.\755\
---------------------------------------------------------------------------

    \755\ 17 CFR 240.17a-4(e)(7).
---------------------------------------------------------------------------

X. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\756\ Section 603(a) of the Administrative Procedure Act,\757\ 
as amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules to determine the 
impact of such rulemaking on ``small entities.'' \758\ Section 605(b) 
of the RFA states that this requirement shall not apply to any proposed 
rule which, if adopted, would not have a significant economic impact on 
a substantial number of small entities.\759\ An Initial Regulatory 
Flexibility Analysis (``IRFA'') was prepared in conjunction with the 
T+1 Proposing Release, published in February 2022. The T+1 Proposing 
Release included, and solicited comment on, the IRFA.
---------------------------------------------------------------------------

    \756\ See 5 U.S.C. 601 et seq.
    \757\ 5 U.S.C. 603(a).
    \758\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this rulemaking, are set forth in 17 CFR 
240.0-10.
    \759\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Exchange Act Rules 15c6-1 and 15c6-2

    Below is the Final Regulatory Flexibility Analysis for the 
amendments to Rule 15c6-1 and new Rule 15c6-2, prepared in accordance 
with the RFA.
1. Need for the Rules
    The Commission is adopting the amendments to Rule 15c6-1 to shorten 
the standard settlement cycle from two days to one day, offering market 
participants benefits that include reduced exposure to credit, market, 
and liquidity risk, as well as related reductions to overall systemic 
risk. These benefits have been previously discussed in detail in Parts 
II and VIII above.
    The Commission is adopting Rule 15c6-2 to establish requirements 
that facilitate the completion of allocations, confirmations, and 
affirmations by the end of the trade date, helping to facilitate the 
settlement of institutional transactions in a T+1 or shorter standard 
settlement cycle by promoting the timely and orderly transmission of 
trade data necessary to achieve settlement. In addition, Rule 15c6-2 
can foster continued improvements in institutional trade processing, 
which should in turn also further promote accuracy and efficiency, 
reduce the potential for settlement fails, and more generally, reduce 
the potential for operational risk. These benefits have been previously 
discussed in detail in Parts III and VIII above.
    The amendments to Rule 15c6-1 and new Rule 15c6-2 each advance the 
objectives of section 15(c)(6), 17A, and 23(a) of the Exchange 
Act.\760\
---------------------------------------------------------------------------

    \760\ See 15 U.S.C. 78o(c)(6); 15 U.S.C. 78q-1; 15 U.S.C. 
78w(a).
---------------------------------------------------------------------------

2. Summary of Significant Issues Raised by Public Comment
    As noted above in Part X.A, the T+1 Proposing Release solicited 
comment on the IRFA. Although the Commission received no comments 
specifically concerning the IRFA, multiple commenters discussed the 
costs and burdens for broker-dealers associated with Rules 15c6-1 and 
15c6-2. These comments have been discussed in detail in Parts II and 
III, and the Commission has modified the proposed rules at adoption to 
address these comments and, in part, to minimize the effect on small 
entities, as discussed further in Part X.A.5 below.

[[Page 13948]]

3. Description and Estimate of Small Entities
    Paragraph (c) of Rule 0-10 under the Exchange Act provides that, 
for purposes of Commission rulemaking in accordance with the provisions 
of the RFA, when used with reference to a broker or dealer, the 
Commission has defined the term ``small entity'' to mean a broker or 
dealer: (1) with total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the prior fiscal year 
as of which its audited financial statements were prepared pursuant to 
Rule 17a-5(d) under the Exchange Act,\761\ or if not required to file 
such statements, a broker-dealer with total capital (net worth plus 
subordinated liabilities) of less than $500,000 on the last business 
day of the preceding fiscal year (or in the time that it has been in 
business, if shorter); and (2) is not affiliated with any person (other 
than a natural person) that is not a small business or small 
organization.\762\
---------------------------------------------------------------------------

    \761\ 17 CFR 240.17a-5(c).
    \762\ 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    The amendments to Rule 15c6-1 and new Rule 15c6-2 each establish 
requirements that apply to broker-dealers, including those that are 
small entities. Based on FOCUS Report data, the Commission estimates 
that, as of June 30, 2022, approximately 1,393 broker-dealers might be 
deemed small entities for purposes of this analysis.
4. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    The amendments to Rule 15c6-1 do not impose any new reporting or 
recordkeeping requirements on broker-dealers that are small entities. 
However, the amendments to Rule 15c6-1 may impact certain broker-
dealers, including those that are small entities, to the extent that 
broker-dealers may need to make changes to their business operations 
and incur certain costs in order to operate in a T+1 environment.
    For example, implementing a T+1 standard settlement cycle may 
require broker-dealers, including those that are small entities, to 
make changes to their business practices, as well as to their computer 
systems, and/or to deploy new technology solutions. Implementation of 
these changes may require broker-dealers to incur new or increased 
costs, which may vary based on the business model of individual broker-
dealers as well as other factors.\763\
---------------------------------------------------------------------------

    \763\ See supra Part VIII.C.2 (further discussing how large 
customers of third-party providers have market power that may enable 
them to avoid internalizing costs, while small customers in a weaker 
negotiating position relative to their service providers may bear 
the bulk of these costs).
---------------------------------------------------------------------------

    Additionally, implementing a T+1 standard settlement cycle may 
result in an increase in costs to certain broker-dealers who finance 
the purchase of customer securities until the broker-dealer receives 
payment from its customers. To pay for securities purchases, many 
customers liquidate other securities or money fund balances held for 
them by their broker-dealers in consolidated accounts such as cash 
management accounts. However, some broker-dealers may elect to finance 
the purchase of customer securities until the broker-dealer receives 
payment from its customers for those customers that do not choose to 
liquidate other securities or have a sufficient money fund balance 
prior to trade execution to pay for securities purchases. Broker-
dealers that elect to finance the purchase of customer securities may 
incur an increase in costs in a T+1 environment resulting from 
settlement occurring one day earlier unless the broker-dealer can 
expedite customer payments.
    Comments directed to the burdens and costs associated with Rule 
15c6-1 have been discussed in Part II.
    As modified at adoption and as previously discussed in detail in 
Part III, Rule 15c6-2 imposes recordkeeping requirements on broker-
dealers that are small entities because it includes a requirement to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to ensure the completion on trade of trade 
allocations, confirmations, and affirmations for their institutional 
trades. In addition, the rule may impact certain broker-dealers, 
including those that are small entities, to the extent that broker-
dealers may need to make changes to their business operations and incur 
certain costs in order to implement such policies and procedures. These 
efforts may require broker-dealers, including those that are small 
entities, to make changes to their business practices, as well as to 
their computer systems, and/or to deploy new technology solutions. 
Implementation of these changes may require broker-dealers to incur new 
or increased costs, which may vary based on the business model of 
individual broker-dealers as well as other factors.
    Comments directed to the burdens and costs associated with Rule 
15c6-2 have been discussed in Part III.
5. Description of Commission Actions To Minimize Effect on Small 
Entities
    As discussed in the IRFA, the Commission considered alternatives to 
the amendments to Rule 15c6-1 that would accomplish the stated 
objectives of the amendment without disproportionately burdening 
broker-dealers that are small entities, including: differing compliance 
requirements or timetables; clarifying, consolidating, or simplifying 
the compliance requirements; using performance rather than design 
standards; or providing an exemption for certain or all broker-dealers 
that are small entities. The purpose of Rule 15c6-1 is to establish a 
standard settlement cycle for broker-dealer transactions. Alternatives, 
such as different compliance requirements or timetables, or exemptions, 
for Rule 15c6-1, or any part thereof, for small entities would 
undermine the purpose of establishing a standard settlement cycle. For 
example, allowing small entities to settle at a time later than T+1 
could create a two-tiered market that could work to the detriment of 
small entities whose order flow would not coincide with that of other 
firms operating on a T+1 settlement cycle. Additionally, the Commission 
believes that establishing a single timetable (i.e., compliance date) 
for all broker-dealers, including small entities, to comply with the 
amendment is necessary to ensure that the transition to a T+1 standard 
settlement cycle takes place in an orderly manner that minimizes undue 
disruptions in the securities markets.\764\ With respect to using 
performance rather than design standards, the Commission used 
performance standards to the extent appropriate under the statute.\765\ 
In addition, under the amendment, broker-dealers have the flexibility 
to tailor their systems and processes, and generally to choose how, to 
comply with the rule.
---------------------------------------------------------------------------

    \764\ For example, because broker-dealers do not always know the 
identity of their counterparty when they enter a transaction, 
providing broker-dealers that are small entities with an exemption 
from the standard settlement cycle would likely create substantial 
confusion over when a transaction will settle.
    \765\ For example, for firm commitment offerings, the Commission 
modified the proposed rule at adoption to incorporate a T+2 rather 
than a T+1 standard, as discussed above in Part II.C.4. More 
generally, small entities retain the option under paragraph (d) to 
agree with their counterparty in advance of a transaction subject to 
Rule 15c6-1(a) to use a settlement cycle other than T+1. See supra 
Part II.C.5.
---------------------------------------------------------------------------

    The Commission also considered alternatives to Rule 15c6-2 and, in 
response to the comments received, has modified the rule at adoption to 
provide a policies and procedures alternative, as requested by the 
commenters, to reduce the burden and cost of the rule and to provide 
greater flexibility to broker-dealers to tailor their systems and

[[Page 13949]]

processes, and generally to choose how, to comply with the rule. The 
modifications to the rule made in response to the comments received 
have been discussed in detail in Part III.C.

B. Amendment to Advisers Act Rule 204-2

    The Commission has prepared the following Final Regulatory 
Flexibility Analysis (``FRFA'') in accordance with section 4(a) of the 
RFA relating to the final amendments to Rule 204-2 under the Advisers 
Act.
1. Need for the Rule Amendment
    As discussed above, we are adopting amendments to 17 CFR 
275.206(4)-2 (``Rule 206(4)-2'') to require all registered investment 
advisers to make and keep certain records for any transaction that is 
subject to the requirements of Rule 15c6-2(a). Those records include 
each confirmation received, and any allocation and each affirmation 
sent or received, with a date and time stamp for each allocation and 
affirmation that indicates when the allocation and affirmation was sent 
or received. The reasons for, and objectives of, the final amendments 
are discussed in more detail in Parts I and IV above. The burdens of 
these requirements on small advisers are discussed in Parts VIII and 
IX, which discuss the burdens on all advisers. The professional skills 
required to meet these specific burdens are also discussed in Part IX.
2. Summary of Significant Issues Raised by Public Comment
    In developing our approach to Rule 204-2, we considered the 
potential impact on small entities that would be subject to the final 
amendments. In the 2022 Proposing Release, we requested comment on the 
matters discussed in the IRFA, including the proposed amendments to 
Rule 204-2, as well as the potential impacts discussed in this 
analysis, and whether the proposal could have an effect on small 
entities that has not been considered. One commenter, concerned that 
the Commission had underestimated the time and cost burdens for 
implementing the proposed recordkeeping requirements, observed that if 
investment advisers that currently rely on third parties to meet their 
recordkeeping obligations were no longer be able to do so, and would 
instead have to obtain and maintain such records on an ongoing basis, 
advisers, ``especially smaller and mid-sized investment advisers,'' 
would incur costs to update their infrastructure to obtain and maintain 
the proposed trading records.\766\ This commenter recommended that the 
Commission update its estimates, and specifically requested ``that the 
Commission review the potential cost savings from allowing investment 
advisers to utilize third parties to maintain required records under 
the Proposal.'' \767\
---------------------------------------------------------------------------

    \766\ IAA April Letter, supra note 16, at 7.
    \767\ Id.
---------------------------------------------------------------------------

    As discussed above, advisers may continue to rely on third parties 
to comply with their recordkeeping obligations, consistent with current 
practice, and we do not believe that the final amendments to Rule 204-2 
will require most advisers to make significant changes to their current 
recordkeeping practices. We recognize that the amendments to final Rule 
204-2 will require registered investment advisers to make and keep 
records of confirmations received, and any allocations and each 
affirmation sent or received for securities transactions that are 
subject to the requirements of Rule 15c6-2(a). Some advisers--including 
small advisers--may need to update their processes to retain and date 
stamp the specified records. After consideration of the comments 
received, we are revising our estimates to increase the number of small 
entities affected by the new rule and amendments, update the estimated 
wage rates, and increase the hourly burdens associated with the 
amendments to Rule 204-2.
3. Description and Estimate of Small Entities
    The final amendments will affect certain investment advisers 
registered with the Commission, including some small entities. Under 
Commission rules, for the purposes of the Advisers Act and the RFA, an 
investment adviser generally is a small entity if it: (1) has assets 
under management having a total value of less than $25 million; (2) did 
not have total assets of $5 million or more on the last day of the most 
recent fiscal year; and (3) does not control, is not controlled by, and 
is not under common control with another investment adviser that has 
assets under management of $25 million or more, or any person (other 
than a natural person) that had total assets of $5 million or more on 
the last day of its most recent fiscal year.\768\
---------------------------------------------------------------------------

    \768\ Advisers Act Rule 0-7(a).
---------------------------------------------------------------------------

    As discussed in Part IX.A, the Commission estimates that as of June 
2022, 12,991 registered investment advisers will be subject to the 
final amendments to Rule 204-2 under the Advisers Act. Based on IARD 
data, we estimate that, as of June 2022, approximately 522 SEC-
registered advisers are small entities (``small advisers'').\769\ Of 
these, the Commission anticipates that 33, or 6% of small advisers 
registered with the Commission, would be subject to the final amendment 
under the Advisers Act.\770\
---------------------------------------------------------------------------

    \769\ Based on SEC-registered investment adviser responses to 
Items 5.F. and 12 of Form ADV as of June 2022, incorporating Form 
ADV filings received through IARD through August 31, 2022. Only SEC-
registered investment advisers with regulatory assets under 
management (``RAUM'') of less than $25 million, as indicated in Form 
ADV Item 5.F.(2)(c) are required to respond to Form ADV Item 12. For 
purposes of this analysis, a registered investment adviser is 
classified as a ``small business'' or ``small organization'' if they 
respond ``No'' to Form ADV Item 12.A., 12.B.(1), 12.B.(2), 12.C.(1), 
and 12.C.(2). These responses indicate that the registered 
investment adviser had RAUM of less than $25 million, did not have 
total assets of $5 million or more on the last day of the most 
recent fiscal year; and does not control, is not controlled by, and 
is not under common control with another investment adviser that has 
RAUM of $25 million or more, or any person (other than a natural 
person) that had total assets of $5 million or more on the last day 
of the most recent fiscal year, consistent with the definition of a 
small entity under the Advisers Act for purposes of the RFA.
    \770\ Based on data from Form ADV as of June 2022. This figure 
represents small registered investment advisers that: (i) report 
clients that are only individuals or high net worth individuals in 
response to Item 5.D, and (ii) do not report participating in wrap 
fee programs in response to Item 5.I, and (iii) have regulatory 
assets under management greater than zero in response to Item 5.D.
---------------------------------------------------------------------------

4. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    The final amendments to Rule 204-2 will require all registered 
investment advisers to maintain make and keep certain records with 
respect to any securities transaction that is subject to the 
requirements of Rule 15c6-2(a). These records include each confirmation 
received, and any allocation and each affirmation sent or received, 
with a date and time stamp for each allocation and affirmation that 
indicates when the allocation and affirmation were sent or received. 
Each of these records will be required to be kept in the same manner, 
and for the same period of time, as other books and records required to 
be kept under Rule 204-2(a).\771\ The PRA for Rule 204-2 discusses the 
type of professional skills necessary to conduct such activities. The 
Commission believes that no Federal rules duplicate, overlap or 
conflict with the final amendments to Rule 204-2. As discussed above, 
there are approximately 33 small advisers currently registered with us 
that we believe will impacted by the rule. As discussed in our 
Paperwork Reduction Act Analysis, the amendments to Rule

[[Page 13950]]

204-2 under the Advisers Act will increase the annual burden by 
approximately three hours per adviser, or 99 incremental aggregate 
hours for small advisers. We therefore believe the annual monetized 
aggregate cost to small advisers associated with our amendments will be 
7,673.\772\
---------------------------------------------------------------------------

    \771\ See, e.g., Advisers Act Rule 204-2(e)-(g).
    \772\ Calculated as follows: (3 hours x 33 small advisers) x 
$77.5 per burden hour = $7,673.
---------------------------------------------------------------------------

5. Description of Commission Actions To Minimize Effect on Small 
Entities
    The RFA directs the Commission to consider significant alternatives 
that would accomplish our stated objective, while minimizing any 
significant economic impact on small entities. The Commission 
considered alternatives to the final amendments to Rule 204-2 that 
would accomplish the stated objectives without disproportionately 
burdening investment advisers that are small entities, including: (1) 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities; (2) clarifying, 
consolidating or simplifying the compliance and reporting requirements; 
(3) using performance rather than design standards; or (4) providing an 
exemption from coverage of all or part of the final rule amendments for 
investment advisers that are small entities.
    Regarding the first and fourth alternatives, the Commission 
believes that establishing different compliance, recordkeeping, or 
reporting requirements or timetables for small advisers, or exempting 
small advisers from the amended rule, or any part thereof, would be 
inappropriate under these circumstances. The protections of the 
Advisers Act are intended to apply equally to clients of both large and 
small firms and small entities currently follow the same requirements 
that large entities do when making and keeping books and records; 
therefore, it would be inconsistent with the purposes of the Advisers 
Act to specify differences for small entities under the final 
amendments to Rule 204-2. While the Commission estimates that 33 small 
advisers will incur costs to comply with the amendments, the Commission 
believes that the initial burden on small advisers of retaining the 
required records will not be large. As discussed above, the Commission 
believes that many advisers, including small advisers, already have 
processes in place to retain records of confirmations received, and 
allocations and affirmations sent and received as part of their 
customary and usual business practices, though some advisers do not 
currently retain these records and some still maintain certain records 
in paper and/or communicate by telephone. The Commission also believes 
many such records are electronically maintained, and are sent or 
received electronically, in which case such documents are already date 
and time stamped in many instances. As a result, the Commission does 
not believe the two hour additional burden of complying with the final 
amendments would warrant establishing a different timetable for 
compliance for small advisers. In addition, as discussed above, our 
staff would use the information that advisers would maintain to help 
prepare for examinations of investment advisers and verify that an 
adviser has completed the steps necessary to complete settlement in a 
timely manner in accordance with final Rule 15c6-1(a). Establishing 
different conditions for large and small advisers would negate these 
benefits.
    Similarly, we do not believe it would be appropriate to exempt 
small advisers from the final amendments. We believe that 33 small 
advisers will be subject to amended Rule 204-2 and thus make and keep 
records of each confirmation received, and any allocation and each 
affirmation sent or received, with a date and time stamp for each 
allocation and affirmation that indicates when the allocation and 
affirmation were sent or received. This approach is designed to support 
the Commission's policy objectives in achieving same-day affirmation by 
helping to ensure that trades with advisers timely settle on T+1. In 
addition, this requirement will help advisers research and remediate 
issues that may cause delays in the issuance of allocations and 
affirmations and improve their timeliness overall. Requiring these 
records also will help advisers establish that they have timely met 
contractual obligations, if applicable, or any requirements broker-
dealers impose in light of their compliance obligations under final 
Rule 15c6-2(a).
    Regarding the second alternative, the Commission believes the final 
amendments are clear and that further clarification, consolidation, or 
simplification of the compliance requirements is not necessary. Amended 
Rule 204-2 states the types of communications--confirmations, any 
allocations, and affirmations--that advisers must retain in their 
records, and that each allocation and affirmation must be date and time 
stamped. We believe that by clearly listing these types of 
communications as required records, advisers will not need to parse 
whether, and if so which, current requirement under Rule 204-2 captures 
these post-trade communications. Further, the requirement to date and 
time stamp each allocation and affirmation sent to a broker or dealer 
is clear and consistent with many advisers' current practices of date 
and time stamping these records.
    Regarding the third alternative, the final amendments to Rule 204-2 
use a combination of performance and design standards. The final Rule 
204-2 amendments are narrowly tailored to correspond to the final rules 
and rule amendments under the Exchange Act. Although the amendments 
provide some flexibility to advisers in such practices as date- and 
time-stamping, we generally find that it is more useful to our 
regulatory and examination program, and therefore for our ability to 
protect investors, for advisers to retain books and records in a 
uniform and quantifiable manner.

C. Exchange Act Rule 17Ad-27

    Exchange Act Rule 17Ad-27 applies to clearing agencies that are 
CMSPs. For the purposes of Commission rulemaking, a small entity 
includes, when used with reference to a clearing agency, a clearing 
agency that (i) compared, cleared, and settled less than $500 million 
in securities transactions during the preceding fiscal year, (ii) had 
less than $200 million of funds and securities in its custody or 
control at all times during the preceding fiscal year (or at any time 
that it has been in business, if shorter), and (iii) is not affiliated 
with any person (other than a natural person) that is not a small 
business or small organization.\773\
---------------------------------------------------------------------------

    \773\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    As discussed in the T+1 Proposing Release, and based on the 
Commission's existing information about the CMSPs that would be subject 
to Rule 17Ad-27, the Commission continues to believe that all such 
CMSPs would not fall within the definition of a small entity described 
above.\774\ While other CMSPs may emerge and seek to register as 
clearing agencies or obtain exemptions from registration as a clearing 
agency with the Commission, the Commission does not believe that any 
such entities would be ``small entities'' as defined in 17 CFR 240.0-
10(d). Accordingly, the Commission believes that any such CMSP would 
exceed the thresholds for

[[Page 13951]]

``small entities'' set forth in in 17 CFR 240.0-10.
---------------------------------------------------------------------------

    \774\ DTCC ITP Matching is a subsidiary of DTCC, and in 2020, 
DTCC processed $2.329 quadrillion in financial transactions. DTCC, 
2020 Annual Report. As of December 1, 2021, SS&C Technologies 
Holdings, Inc. (NASDAQ: SSNC) had a market capitalization of $19.35 
billion. Bloomberg STP LLC is a wholly-owned by Bloomberg L.P., a 
global business and financial information and news company.
---------------------------------------------------------------------------

    The Commission received no comments regarding its analysis for Rule 
17Ad-27 in the T+1 Proposing Release. For the reasons described above, 
the Commission certifies that Rule 17Ad-27 will not have a significant 
economic impact on a substantial number of small entities.

XI. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\775\ the Office of 
Information and Regulatory Affairs has designated these rules as a 
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \775\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

Statutory Authority

    The Commission is adopting amendments to Regulation S-T and Rule 
15c6-1 and adopting new Rules 15c6-2 and 17Ad-27 under the Commission's 
rulemaking authority set forth in sections 15(c)(6), 17A, 23(a), and 
35A of the Exchange Act [15 U.S.C. 78o(c)(6), 78q-1, 78w(a), and 78ll, 
respectively]. The Commission is adopting amendments to Rule 204-2 
under the Advisers Act under the authority set forth in sections 204 
and 211 of the Advisers Act [15 U.S.C. 80b-4 and 80b-11].

List of Subjects in 17 CFR Parts 232, 240, and 275

    Reporting and recordkeeping requirements, Securities.

Text of Amendment

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
1. The general authority citation for part 232 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-6a, 80b-10, 80b-11, 7201 
et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *

0
2. Amend Sec.  232.101 by:
0
a. Removing the word ``and'' at the end of paragraph (a)(1)(xxix);
0
b. Removing the period at the end of paragraph (a)(1)(xxx) and adding 
``; and'' in its place; and
0
c. Adding paragraph (a)(1)(xxxi).
    The addition reads as follows:


Sec.  232.101  Mandated electronic submissions and exceptions.

    (a) * * *
    (1) * * *
    (xxxi) Reports filed pursuant to Sec.  240.17Ad-27 of this chapter 
(Rule 17Ad-27 under the Exchange Act).
* * * * *

0
3. Amend Sec.  232.405 by:
0
a. Revising the introductory text and paragraphs (a)(2), (a)(3)(i) 
introductory text, (a)(3)(ii), (a)(4), and (b)(1) introductory text;
0
b. Adding paragraph (b)(5); and
0
c. Revising Note 1 to Sec.  232.405.
    The addition and revisions read as follows:


Sec.  232.405  Interactive Data File submissions.

    This section applies to electronic filers that submit Interactive 
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101) 
of Regulation S-K), General Instruction F of Form 11-K (Sec.  249.311), 
paragraph (101) of Part II--Information Not Required to be Delivered to 
Offerees or Purchasers of Form F-10 (Sec.  239.40 of this chapter), 
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.  
249.220f of this chapter), paragraph B.(15) of the General Instructions 
to Form 40-F (Sec.  249.240f of this chapter), paragraph C.(6) of the 
General Instructions to Form 6-K (Sec.  249.306 of this chapter), Sec.  
240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under the Exchange 
Act), Note D.5 of Sec.  240.14a-101 of this chapter (Rule 14a-101 under 
the Exchange Act), Item 1 of Sec.  240.14c-101 of this chapter (Rule 
14c-101 under the Exchange Act), General Instruction C.3.(g) of Form N-
1A (Sec. Sec.  239.15A and 274.11A of this chapter), General 
Instruction I of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this 
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a 
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4 
(Sec. Sec.  239.17b and 274.11c of this chapter), General Instruction 
C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d of this chapter), 
and General Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 and 
274.128 of this chapter) specify when electronic filers are required or 
permitted to submit an Interactive Data File (Sec.  232.11), as further 
described in note 1 to this section. This section imposes content, 
format and submission requirements for an Interactive Data File, but 
does not change the substantive content requirements for the financial 
and other disclosures in the Related Official Filing (Sec.  232.11).
    (a) * * *
    (2) Be submitted only by an electronic filer either required or 
permitted to submit an Interactive Data File as specified by Item 
601(b)(101) of Regulation S-K, General Instruction F of Form 11-K 
(Sec.  249.311), paragraph (101) of Part II--Information Not Required 
to be Delivered to Offerees or Purchasers of Form F-10 (Sec.  239.40 of 
this chapter), paragraph 101 of the Instructions as to Exhibits of Form 
20-F (Sec.  249.220f of this chapter), paragraph B.(15) of the General 
Instructions to Form 40-F (Sec.  249.240f of this chapter), paragraph 
C.(6) of the General Instructions to Form 6-K (Sec.  249.306 of this 
chapter), Rule 17Ad-27(d) under the Exchange Act, Note D.5 of Rule 14a-
101 under the Exchange Act, Item 1 of Rule 14c-101 under the Exchange 
Act, General Instruction C.3.(g) of Form N1A (Sec. Sec.  239.15A and 
274.11A of this chapter), General Instruction I of Form N-2 (Sec. Sec.  
239.14 and 274.11a-1 of this chapter), General Instruction C.3.(h) of 
Form N-3 (Sec. Sec.  239.17a and 274.11b of this chapter), General 
Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b and 274.11c of this 
chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.  239.17c 
and 274.11d of this chapter), or General Instruction C.4 of Form N-CSR 
(Sec. Sec.  249.331 and 274.128 of this chapter), as applicable;
    (3) * * *
    (i) If the electronic filer is not a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), or a separate account as defined in section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, or a business development company as defined in 
section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), or a clearing agency that provides a central matching 
service, and is not within one of the categories specified in paragraph 
(f)(1)(i) of this section, as partly embedded into a filing with the 
remainder simultaneously submitted as an exhibit to:
* * * * *
    (ii) If the electronic filer is a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), or a separate account (as defined in section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, or a business development company as

[[Page 13952]]

defined in section 2(a)(48) of the Investment Company Act of 1940 (15 
U.S.C. 80a-2(a)(48)), or a clearing agency that provides a central 
matching service, and is not within one of the categories specified in 
paragraph (f)(1)(ii) of this section, as partly embedded into a filing 
with the remainder simultaneously submitted as an exhibit to a filing 
that contains the disclosure this section requires to be tagged; and
    (4) Be submitted in accordance with the EDGAR Filer Manual and, as 
applicable, Item 601(b)(101) of Regulation S-K, General Instruction F 
of Form 11-K (Sec.  249.311 of this chapter), paragraph (101) of Part 
II--Information Not Required to be Delivered to Offerees or Purchasers 
of Form F-10 (Sec.  239.40 of this chapter), paragraph 101 of the 
Instructions as to Exhibits of Form 20-F (Sec.  249.220f of this 
chapter), paragraph B.(15) of the General Instructions to Form 40-F 
(Sec.  249.240f of this chapter), paragraph C.(6) of the General 
Instructions to Form 6-K (Sec.  249.306 of this chapter), Rule 17Ad-
27(d) under the Exchange Act, Note D.5 of Rule 14a-101 under the 
Exchange Act, Item 1 of Rule 14c-101 under the Exchange Act, General 
Instruction C.3.(g) of Form N-1A (Sec. Sec.  239.15A and 274.11A of 
this chapter), General Instruction I of Form N-2 (Sec. Sec.  239.14 and 
274.11a-1 of this chapter), General Instruction C.3.(h) of Form N-3 
(Sec. Sec.  239.17a and 274.11b of this chapter), General Instruction 
C.3.(h) of Form N-4 (Sec. Sec.  239.17b and 274.11c of this chapter), 
General Instruction C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d 
of this chapter); or General Instruction C.4 of Form N-CSR (Sec. Sec.  
249.331 and 274.128 of this chapter).
    (b) * * *
    (1) If the electronic filer is not a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), or a separate account (as defined in section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, or a business development company as defined in 
section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), or a clearing agency that provides a central matching 
service, an Interactive Data File must consist of only a complete set 
of information for all periods required to be presented in the 
corresponding data in the Related Official Filing, no more and no less, 
from all of the following categories:
* * * * *
    (5) If the electronic filer is a clearing agency that provides a 
central matching service, an Interactive Data File must consist only of 
a complete set of information for all corresponding data in the Related 
Official Filing, no more and no less, as follows:
    (i) The information provided pursuant to Rule 17Ad-27 under the 
Exchange Act.
    (ii) [Reserved]
* * * * *

    Note 1 to Sec.  232.405: Item 601(b)(101) of Regulation S-K 
specifies the circumstances under which an Interactive Data File 
must be submitted and the circumstances under which it is permitted 
to be submitted, with respect to Sec. Sec.  239.11 (Form S-1), 
239.13 (Form S-3), 239.25 (Form S-4),239.18 (Form S-11), 239.31 
(Form F-1), 239.33 (Form F-3), 239.34 (Form F-4), 249.310 (Form 10-
K), 249.308a (Form 10-Q), and 249.308 of this chapter (Form 8-K). 
General Instruction F of Form 11-K (Sec.  249.311 of this chapter) 
specifies the circumstances under which an Interactive Data File 
must be submitted, and the circumstances under which it is permitted 
to be submitted, with respect to Form 11-K. Paragraph (101) of Part 
II--Information not Required to be Delivered to Offerees or 
Purchasers of Form F-10 (Sec.  239.40 of this chapter) specifies the 
circumstances under which an Interactive Data File must be submitted 
and the circumstances under which it is permitted to be submitted, 
with respect to Form F-10. Paragraph 101 of the Instructions as to 
Exhibits of Form 20-F (Sec.  249.220f of this chapter) specifies the 
circumstances under which an Interactive Data File must be submitted 
and the circumstances under which it is permitted to be submitted, 
with respect to Form 20-F. Paragraph B.(15) of the General 
Instructions to Form 40-F (Sec.  249.240f of this chapter) and 
Paragraph C.(6) of the General Instructions to Form 6-K (Sec.  
249.306 of this chapter) specify the circumstances under which an 
Interactive Data File must be submitted and the circumstances under 
which it is permitted to be submitted, with respect to Sec. Sec.  
249.240f (Form 40-F) and 249.306 of this chapter (Form 6-K). Rule 
17Ad-27(d) under the Exchange Act specifies the circumstances under 
which an Interactive Data File must be submitted with respect the 
reports required under Rule 17Ad-27. Note D.5 of Schedule 14A (Sec.  
240.14a-101 of this chapter) and Item 1 of Schedule 14C (Sec.  
240.14c-101 of this chapter) specify the circumstances under which 
an Interactive Data File must be submitted with respect to Schedules 
14A and 14C. Item 601(b)(101) of Regulation S-K, paragraph (101) of 
Part II--Information not Required to be Delivered to Offerees or 
Purchasers of Form F-10, Instructions to Form 40-F, and paragraph 
C.(6) of the General Instructions to Form 6-K all prohibit 
submission of an Interactive Data File by an issuer that prepares 
its financial statements in accordance with 17 CFR 210.6-01 through 
210.6-10 (Article 6 of Regulation S-X). For an issuer that is a 
management investment company or separate account registered under 
the Investment Company Act of 1940 (15 U.S.C. 80a et seq.) or a 
business development company as defined in section 2(a)(48) of the 
Investment Company Act of 1940 (15 U.S.C. 80a2(a)(48)), General 
Instruction C.3.(g) of Form N-1A (Sec. Sec.  239.15A and 274.11A of 
this chapter), General Instruction I of Form N-2 (Sec. Sec.  239.14 
and 274.11a-1 of this chapter), General Instruction C.3.(h) of Form 
N-3 (Sec. Sec.  239.17a and 274.11b of this chapter), General 
Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b and 274.11c of 
this chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.  
239.17c and 274.11d of this chapter), and General Instruction C.4 of 
Form N-CSR (Sec. Sec.  249.331 and 274.128 of this chapter), as 
applicable, specifies the circumstances under which an Interactive 
Data File must be submitted.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
4. The general authority citation for part 240 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5,78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise 
noted.
* * * * *

0
5. Revise Sec.  240.15c6-1 to read as follows:


Sec.  240.15c6-1  Settlement cycle.

    (a) Except as provided in paragraphs (b), (c), and (d) of this 
section, a broker or dealer shall not effect or enter into a contract 
for the purchase or sale of a security (other than an exempted 
security, a government security, a municipal security, commercial 
paper, bankers' acceptances, or commercial bills) that provides for 
payment of funds and delivery of securities later than the first 
business day after the date of the contract unless otherwise expressly 
agreed to by the parties at the time of the transaction.
    (b) Paragraph (a) of this section shall not apply to:
    (1) Contracts for the purchase or sale of 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;
    (2) Security-based swaps; or
    (3) Contracts for the purchase or sale of securities that the 
Commission may from time to time, taking into account then existing 
market practices, exempt by order from the requirements of paragraph 
(a) of this section, either

[[Page 13953]]

unconditionally or on specified terms and conditions, if the Commission 
determines that such exemption is consistent with the public interest 
and the protection of investors.
    (c) Paragraph (a) of this section shall not apply to contracts for 
the sale for cash of securities that are priced after 4:30 p.m. Eastern 
Time (ET) on the date such securities are priced and that are sold by 
an issuer to an underwriter pursuant to a firm commitment underwritten 
offering registered under the Securities Act of 1933 or sold to an 
initial purchaser by a broker-dealer participating in such offering 
provided that a broker or dealer shall not effect or enter into a 
contract for the purchase or sale of such securities that provides for 
payment of funds and delivery of securities later than the second 
business day after the date of the contract unless otherwise expressly 
agreed to by the parties at the time of the transaction.
    (d) For purposes of paragraphs (a) and (c) of this section, the 
parties to a contract shall be deemed to have expressly agreed to an 
alternate date for payment of funds and delivery of securities at the 
time of the transaction for a contract for the sale for cash of 
securities pursuant to a firm commitment offering if the managing 
underwriter and the issuer have agreed to such date for all securities 
sold pursuant to such offering and the parties to the contract have not 
expressly agreed to another date for payment of funds and delivery of 
securities at the time of the transaction.

0
6. Add Sec.  240.15c6-2 to read as follows:


Sec.  240.15c6-2  Same-day allocation, confirmation, and affirmation.

    (a) Any broker or dealer engaging in the allocation, confirmation, 
or affirmation process with another party or parties to achieve 
settlement of a securities transaction that is subject to the 
requirements of Sec.  240.15c6-1(a) shall:
    (1) Enter into a written agreement with the relevant parties to 
ensure completion of the allocation, confirmation, affirmation, or any 
combination thereof, for the transaction as soon as technologically 
practicable and no later than the end of the day on trade date in such 
form as necessary to achieve settlement of the transaction; or
    (2) Establish, maintain, and enforce written policies and 
procedures reasonably designed to ensure completion of the allocation, 
confirmation, affirmation, or any combination thereof, for the 
transaction as soon as technologically practicable and no later than 
the end of the day on trade date in such form as necessary to achieve 
settlement of the transaction.
    (b) To ensure completion of the allocation, confirmation, 
affirmation, or any combination thereof for the transaction as soon as 
technologically practicable and no later than the end of the day on 
trade date, the reasonably designed written policies and procedures 
required by paragraph (a)(2) of this section shall:
    (1) Identify and describe any technology systems, operations, and 
processes that the broker or dealer uses to coordinate with other 
relevant parties, including investment advisers and custodians, to 
ensure completion of the allocation, confirmation, or affirmation 
process for the transaction;
    (2) Set target time frames on trade date for completing the 
allocation, confirmation, and affirmation for the transaction;
    (3) Describe the procedures that the broker or dealer will follow 
to ensure the prompt communication of trade information, investigate 
any discrepancies in trade information, and adjust trade information to 
help ensure that the allocation, confirmation, and affirmation can be 
completed by the target time frames on trade date;
    (4) Describe how the broker or dealer plans to identify and address 
delays if another party, including an investment adviser or a 
custodian, is not promptly completing the allocation or affirmation for 
the transaction, or if the broker or dealer experiences delays in 
promptly completing the confirmation; and
    (5) Measure, monitor, and document the rates of allocations, 
confirmations, and affirmations completed as soon as technologically 
practicable and no later than the end of the day on trade date.

0
7. Add Sec.  240.17Ad-27 to read as follows:


Sec.  240.17Ad-27  Straight-through processing by clearing agencies 
that provide a central matching service.

    (a) A clearing agency that provides a central matching service must 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to facilitate straight-through 
processing of securities transactions at the clearing agency.
    (b) A clearing agency that provides a central matching service must 
submit to the Commission every twelve months a report that includes the 
following:
    (1) A summary of the clearing agency's policies and procedures 
required under paragraph (a) of this section, current as of the last 
day of the twelve-month period covered by the report required under 
paragraph (b) of this section;
    (2) A qualitative description of the clearing agency's progress in 
facilitating straight-through processing during the twelve-month period 
covered by the report required under paragraph (b) of this section;
    (3) A quantitative presentation of data that includes:
    (i) The total number of trades submitted to the clearing agency for 
processing;
    (ii) The total number of allocations submitted to the clearing 
agency;
    (iii) The total number of confirmations submitted to the clearing 
agency, as well as the total number of confirmations cancelled by a 
user;
    (iv) The percentage of confirmations submitted to the clearing 
agency that are affirmed on trade date, specifying to the extent 
practicable the relevant timeframe in which the affirmation is 
processed on trade date;
    (v) The percentage of allocations and confirmations submitted to 
the clearing agency that are matched and automatically confirmed 
through the clearing agency's services; and
    (vi) Metrics concerning the use of manual and automated processes 
by the clearing agency's users with respect to its services that may be 
used to assess progress in facilitating straight-through processing.
    (4) Each of the data sets required under paragraph (b)(3) of this 
section shall be:
    (i) Organized on a month-by-month basis, beginning with January of 
each year, for the twelve months covered by the report required under 
paragraph (b) of this section;
    (ii) Separated, where applicable, between the use of central 
matching and electronic trade confirmation services offered by the 
clearing agency;
    (iii) Separated, as appropriate, by asset class;
    (iv) Separated by type of user; and
    (v) Presented on an anonymized and aggregated basis.
    (5) A qualitative description of the actions the clearing agency 
intends to take to further facilitate straight-through processing of 
securities transactions at the clearing agency during the twelve-month 
period that follows the period covered by the report required under 
paragraph (b) of this section.
    (c) Each report required under paragraph (b) of this section must 
be filed within 60 days of the end of the twelve-month period covered 
by the report required under paragraph (b) of this section, and the 
twelve-month period covered by each report shall commence on January 1 
of the calendar year.
    (d) The report required under paragraph (b) of this section must be

[[Page 13954]]

filed electronically on EDGAR and must be provided in an Interactive 
Data File in accordance with Sec.  232.405 of this chapter (Rule 405 of 
Regulation S-T) and the EDGAR Filer Manual.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
8. The authority citation for part 275 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless 
otherwise noted.
* * * * *
    Section 275.204-2 is also issued under 15 U.S.C. 80b-6.
* * * * *

0
9. Amend Sec.  275.204-2 by revising paragraph (a)(7)(iii) to read as 
follows:


Sec.  275.204-2  Books and records to be maintained by investment 
advisers.

    (a) * * *
    (7) * * *
    (iii) The placing or execution of any order to purchase or sell any 
security; and, for any transaction that is subject to the requirements 
of Sec.  240.15c6-2(a) of this chapter, each confirmation received, and 
any allocation and each affirmation sent or received, with a date and 
time stamp for each allocation and affirmation that indicates when the 
allocation and affirmation was sent or received;
* * * * *

    By the Commission.

    Dated: February 15, 2023.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2023-03566 Filed 3-3-23; 8:45 am]
 BILLING CODE 8011-01-P