and streamline the institutional trade processing environment, both
from an operational and technological perspective.\153\ 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. Further, industry coordination has
facilitated improved communication between the parties to a trade using
standardized messaging protocols, such as FIX, and the SWIFT network.
When the Commission proposed to shorten the settlement cycle to T+2,
the Commission observed that the market has improved these
confirmation, affirmation, and matching processes through the use of
CMSPs.\154\
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    \153\ For example, DTCC ITP Matching has introduced centralized
matching with its CTM platform that continues to automate the trade
confirmation process and includes connectivity via FIX and the SWIFT
network to custodian banks for the purposes of settlement
notification. See DTCC, Why Is DTCC Migrating US Trade Flows to CTM
and Terminating OASYS?, https://dtcclearning.com/content/1439-cat-institutional-trade-processing/cat-ctm/us-trade-flows/us-trades-on-ctm-faqs/us-trades-on-ctm-general-faqs/7353-why-is-dtcc-migrating-us-trade-flows-to-ctm-and-terminating-oasys.html.
    \154\ T+2 Proposing Release, supra note 30, at 69258.

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    A 2010 white paper issued by Omgeo (now DTCC ITP) also described
same-day affirmation as ``a prerequisite'' of shortening the settlement
cycle because of its impact on the rate of settlement fails and on
operational risk.\155\ According to data published in 2011 regarding
affirmation rates achieved through the use of one CMSP, on average, 45%
of trades were affirmed on trade date, 90% were affirmed by the end of
T+1, and 92% were affirmed by noon on T+2.\156\ Existing processes for
matching institutional trades rely on a number of manual elements, and
currently only about 68% of trades achieve affirmation by 12:00
midnight at the end of trade date.\157\ While these rates have improved
over time, the improvements have been incremental and, in the
Commission's view, insufficient. 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. The T+1 Report highlights
the need for achieving affirmation on trade date and encourages that on
trade date allocations be completed by 7:00 p.m. ET and affirmations by
9:00 p.m. ET to facilitate shortening of the standard settlement cycle
to T+1.\158\ As discussed below, the Commission proposes Rule 15c6-2 to
require completion of institutional trade allocations, confirmations,
and affirmations by the end of trade date.
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    \155\ Omgeo, Mitigating Operational Risk and Increasing
Settlement Efficiency through Same Day Affirmation (SDA), at 2, 7
(Oct. 2010) (``Omgeo Study'').
    \156\ DTCC, Proposal to Launch a New Cost-Benefit Analysis on
Shortening the Settlement Cycle, at 7 (Dec. 2011), https://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-cost-benefit-analysis-on-shortening-the-settlement-cycle.aspx.
    \157\ DTCC ITP Forum Remarks, supra note 58.
    \158\ See T+1 Report, supra note 18, at 13.
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1. Proposed Rule 15c6-2 Under the Exchange Act
    The Commission proposes 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). As explained in further detail below,
the Commission believes that implementing a T+1 standard settlement
cycle, as well as any potential further shortening beyond T+1, would
require a significant improvement in the current rates of same-day
affirmations to ensure timely settlement in a T+1 environment. In this
way, the Commission also believes that proposed Rule 15c6-2 should
facilitate timely settlement as a general matter, regardless of
shortening the settlement cycle, because it will accelerate the
completion of affirmations on trade date. Because broker-dealers and
their institutional customers will review and reconcile trade data
earlier in the settlement process, the Commission believes that same-
day affirmation can improve the accuracy and efficiency of
institutional trade processing. In particular, conducting these
activities earlier in the process, and as soon as technologically
practicable, will allow more time to resolve errors, an important
consideration as shorter settlement cycles compress the available time
to resolve errors.
    Proposed Rule 15c6-2 applies requirements to a broker-dealer's
contractual arrangements with its institutional customers because the
Commission preliminarily believes that broker-dealers are best
positioned to ensure (through their contractual arrangements) that
their customers, including those acting on behalf of their customers,
will perform the required allocation, confirmation, and affirmation
functions on the appropriate timeframe and as soon as technologically
practicable. Because broker-dealers are the party to a transaction most
likely to have access to a clearing agency, the broker-dealer is also
the party best positioned to ensure the timely settlement of
institutional trades, and as such, should be able to ensure via its
customer agreements that institutional customers or their agents also
comport their operations to facilitate same-day affirmation.\159\ In
addition, requiring broker-dealers to enter into written agreements
that require the allocation, confirmation, and affirmation processes be
completed as soon as technologically practicable and no later than the
end of trade date may help increase the use of standardized terms and
trade details across market participants, which may enable the parties
to reduce their reliance on manual processes in favor of more automated
methods.
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    \159\ In an effort to also encourage investment advisers to
ensure that their own operations and procedures for institutional
trade processing can accommodate T+1 or shorter settlement
timeframes, in Part III.C the Commission proposes an amendment to an
existing recordkeeping rule for registered investment advisers.
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    As proposed, Rule 15c6-2 does not define the terms ``allocation,''
``confirmation,'' or ``affirmation.'' As discussed in Part II.B.3.c),
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.\160\ The terms ``confirmation'' and ``affirmation'' 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. Broker-dealers transmit trade
confirmations to their customers to verify trade information, and
customers provide an affirmation in response to affirm the confirmation
so that the transaction can be prepared for settlement. The Commission
believes that these terms are widely used and generally understood by
market participants who engage in institutional trade processing.
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    \160\ For example, DTCC ITP's OASYS platform is a trade
allocation and acceptance service that communicates trade and
allocation details between investment managers and broker-dealers.
DTCC ITP is in the process of decommissioning OASYS and replacing it
with CTM, an enriched automated system that offers central matching
workflow (including allocation) settlement notification and ALERT
services. ALERT provides a database for the maintenance and
communication of account and SSI information so that investment
managers, broker-dealers, custodian banks and prime brokers can
share account information electronically. See DTCC, ALERT, https://www.dtcc.com/institutional-trade-processing/itp/alert.
---------------------------------------------------------------------------

    Proposed Rule 15c6-2 uses 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).\161\ In contrast,

confirmations required by Exchange Act Rule 10b-10 concern a series of
disclosures that broker-dealers are required to provide in writing to
customers at or before completion of a transaction.\162\ While some
matching or electronic trade confirmation services may use the
operational confirmation process described in proposed Rule 15c6-2 to
produce a confirmation for purposes of compliance with Rule 10b-10,
others may not. Accordingly, 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. Below the Commission solicits comment as to
whether these terms are sufficiently understood to facilitate
compliance with the proposed rule.
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    \161\ Confirmations will include the following trade
information: transaction type, security (including an identifier and
description), account ID and title, trade date, settlement date,
quantity, price, commission (if any), taxes and fees (if any),
accrued interest (if appropriate) and the net amount of money to be
paid or received at settlement. A confirmation will also include the
broker name and whether the broker-dealer was acting as principal or
agent on the trade.
    \162\ 17 CFR 240.10b-10. For more information on confirmations
required under Rule 10b-10, see Part III.E.3.
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    Proposed Rule 15c6-2 would also require broker-dealers to enter
into a written agreement with a ``customer'' that has agreed to engage
in the allocation, confirmation, or affirmation process. For purposes
of the rule, the term ``customer'' includes any person or agent of such
person who opens a brokerage account at a broker-dealer to effect an
institutional trade or purchases or sells a security for which the
broker-dealer receives or will receive compensation. In the
institutional trade processing environment, the Commission understands
that at times, a broker-dealer may accept instructions or trades from
entities acting on behalf of the institutional investor. The term, as
used in proposed Rule 15c6-2, is intended to cover both the
institutional investor and any and all agents acting on its behalf. As
stated below, the Commission is seeking further comment on whether the
obligations imposed by proposed Rule 15c6-2 should explicitly state
that contracts of such agents acting on behalf of the broker-dealer's
customer are subject to the proposed rule or whether the proposed rule
text as written is sufficiently clear.
    Finally, the written agreement executed pursuant to proposed Rule
15c6-1 requires that the allocation, confirmation, and affirmation
processes, or any combination thereof, related to these trades 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).\163\ The
Commission is proposing ``end of the day on trade date'' rather than
requiring a specific time earlier than end of day to allow firms to
maximize their internal processes to meet the appropriate cutoff times
and other deadlines, as soon as technologically practicable. The
Commission expects that different sectors of the market, different
types of asset classes or market participants, and different
operational processes (e.g., cross-border transactions) may have
varying processing deadlines, some of which may need to be earlier than
end of the day to facilitate trade processing. For example, as noted
above, the T+1 Report contemplates moving the ``ITP Affirmation
Cutoff'' from 11:30 a.m. on the day after trade date to 9:00 p.m. on
trade date to facilitate a T+1 settlement cycle.\164\ Accordingly, the
parties would be able under the rule to require earlier timeframes when
appropriate. Moreover, the SROs could consider whether and how to use
earlier than end of day deadlines, such as those recommended by the T+1
Report.
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    \163\ For purposes of this rule, ``end of the day'' has the same
meaning as it is generally understood: no later than 11:59:59 p.m.,
Eastern Standard Time or Eastern Daylight Saving Time, whichever is
currently in effect on trade date.
    \164\ See T+1 Report, supra note 18, at 39.
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2. Basis for Requiring Affirmation No Later Than the End of Trade Date
    As discussed in Part II.B, aspects of post-trade processing for
institutional transactions remain inefficient and costly for several
reasons. Although same-day affirmation is considered a best practice
for institutional trade processing, adoption is not universal across
market participants or even across all trades entered by a given
participant.\165\ Market participants continue to use hundreds of
``local'' matching platforms,\166\ and rely on inconsistent SSI data
independently maintained by broker-dealers, investment managers,
custodians, sub-custodians, and agents on separate databases.\167\ 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.\168\ This 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. While the proposed rule does not require any changes
to manual processes or existing uses of databases and exceptions
processing, the Commission preliminarily believes that market
participants may pursue improvements to these existing processes to
manage their obligations under Rule 15c6-2, if adopted.
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    \165\ While the concept of completing these functions on trade
date has often been referred to a ``same-day'' affirmation, the
Commission is proposing instead to use the term ``trade date'' in
the rule to be clear that the allocation, confirmation, and
affirmation process should be completed on the trade date.
    \166\ 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.
    \167\ For more information about the use and impact of ``local''
matching platforms, see supra note 166. 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; see also DTCC
Embracing Post-Trade Automation, supra note 166.
    \168\ 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.
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    Although proposed Rule 15c6-2 does not require settlement of the
transaction on trade date, the Commission preliminarily believes the
proposed rule helps ensure that institutional trades will timely settle
on T+1 because, by promoting the completion of these processes as soon
as technologically practicable and no later than the end of trade date,
it reduces the likelihood of exceptions or other errors with respect to
trade information that can prevent a transaction from settling. In the
Commission's view, because the rule requires that allocation,
confirmation, and affirmation be completed as soon as technologically
practicable and no later than the end of trade date, it can also
facilitate shortening the settlement cycle, both with respect to T+1
and potentially for shortening beyond T+1 in the future. By elevating
an industry best practice to a Commission

requirement, the Commission believes that proposed Rule 15c6-2 can
significantly improve the current 68% rate of affirmations on trade
date by standardizing the obligations of broker-dealers and their
institutional customers with respect to the timing of achieving
affirmations. This, in turn, could facilitate increases in operational
efficiency necessary to support an orderly transition to shorter
settlement cycles. The Commission also anticipates that SROs will
consider whether to propose rule changes to incorporate the
requirements in new Rule 15c6-2 if adopted,\169\ and proposed Rule
15c6-2 would likely encourage further development of automated and
standardized practices among market participants to facilitate
settlement of institutional trades.
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    \169\ For example, Financial Industry Regulatory Authority
(``FINRA'') Rule 11860 does not require that a broker-dealer send a
confirmation of trade details until the day after trade date, which
can delay the affirmation process until T+1 (in a T+2 environment)
and reduce the time available to manage trade exceptions. FINRA, as
well as DTC and DTCC ITP Matching may propose new rules, procedures
or services to further enhance the ability of market participants to
settle in shorter timeframes.
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3. Request for Comment
    The Commission solicits comment on the particular questions set
forth below, and encourages commenters to submit any relevant data or
analysis in connection with their answers.
    28. Would proposed Rule 15c6-2 accomplish the stated objectives?
Would the proposed rule encourage further standardization and
automation in the processing of institutional trades? What effect will
the proposed rule have on improving efficiencies and reducing errors
and fails? Please provide a basis or explanation for your position.
    29. Proposed Rule 15c6-2 uses such terms as ``allocation,''
``confirmation,'' and ``affirmation.'' As discussed above, the
Commission believes that these are well understood concepts. Should
these terms be defined for purposes of the proposed rule? If so, please
explain which terms need further definition and why? Please include the
recommended elements of such definitions.
    30. Similarly, does the term ``end of the day on trade date'' need
to be defined? If so, please provide information as to why and include
recommended elements of such a definition.
    31. Proposed Rule 15c6-2 uses the term ``customer.'' Given that
often agents of the customer are providing allocation, confirmation or
affirmation instructions or communications to the broker-dealer on
behalf of the broker-dealer's customer, does the rule as written
address this scenario? Does the use of the term ``customer''
sufficiently incorporate any and all agents of the customer? Is the
Commission's understanding of these terms consistent with the
industry's use of these terms? Why or why not? Should the term
``customer'' be defined for purposes of Rule 15c6-2? If so, please
include the recommended elements of such a definition.
    32. What effect would proposed Rule 15c6-2 have on the relationship
between a broker-dealer and its customer?
    33. Do the perceived benefits of proposed Rule 15c6-2 or the
benefits of trade date confirmation and affirmation accrue to all
participants--brokers-dealers (including prime brokers), institutional
customers, custodians, or matching utilities? If not, why? Do they
accrue differently based on size of the entity? Please explain.
    34. Does proposed Rule 15c6-2 introduce any new risks? If so,
please describe such risks and whether they can be quantified. Can
these risks be mitigated? If so, how?
    35. If proposed Rule 15c6-2 is adopted by the Commission, what
should be the necessary time frame for implementing such a rule? What
factors should the Commission consider in determining the
implementation date?
    36. Would proposed Rule 15c6-2 affect cross-border trading or
cross-border trade processing? If so, how would it do so?
    37. As proposed, Rule 15c6-2 excludes exempted securities,
government securities, municipal securities, commercial paper, bankers'
acceptances, and commercial bills. For those asset classes that do not
already settle on T+1, should the proposed rule apply to any or all of
these excluded securities? Please discuss the reasons why any or all of
these securities should or should not be excluded from Rule 15c6-2.
    38. What if anything should the Commission do to further facilitate
the use of standardized industry protocols and standardization of
reference data by broker-dealers and institutional customers, including
investment advisers and custodians? What if anything should the
Commission do to further facilitate efficiency in processing
institutional trades and reducing errors and fails?
    39. Would the adoption of further Commission rules be necessary to
require or further facilitate the objective of ensuring that
institutional trades are operationally capable of settling on a T+1 or
shorter timeframe?
    40. The T+1 Report indicates that market participants may cancel
and rebill an affirmed trade because of a monetary change to the trade
and states that these instances occur frequently in a T+2 settlement
cycle.\170\ Why are trades affirmed when monetary amounts may not
agree? Should it be permissible to cancel an affirmed trade? Why or why
not?
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    \170\ See T+1 Report, supra note 18, at 26.
---------------------------------------------------------------------------

    41. Are investment advisers matching their records about a trade
against the received confirmation prior to affirming? If not, why not?
If so, what criteria are used to determine that a `match' has occurred?
Which fields must match? Should financial values, such as unit price,
total commission, accrued interest for fixed-income trades and net
amount to be paid or received be matched? What steps does or should the
adviser take to ensure the affirming party, if not the adviser, is
matching adviser-provided trade information against the broker or
dealer confirmation before affirming trades?
    42. When matching trade information on a given transaction between
the investment adviser and the broker-dealer, the parties to the
transaction may view differences, such as differences in amounts, as
minor and therefore within a satisfactory ``tolerance'' range to match,
whereas in other cases a party may be unwilling to match if any
discrepancy in trade information exists. These differences in trade
information may be perceived to be small in absolute terms or relative
to the size of the trade. Parties also may set ``tolerance'' thresholds
in their systems to ignore some differences, such as trade information
where an element differs by ``one penny'' or less than 0.01% of the
value being compared. To what extent do advisers apply such tolerances
when matching trades? What fields are subject to such tolerance
thresholds and what size tolerances are generally used? For example, if
the net money for settlement as calculated by the adviser differs from
the net money for settlement as calculated by the broker or dealer as
part of the confirmation by a dollar, is that trade a ``match''? And if
so, which value is used for settlement, the amount on the confirmation
or the adviser's records? Does the other party then adjust its records
to the amount used for settlement? Are investors ever harmed by this
approach? Is there general consensus on tolerances? Are there industry
groups that define guidelines or best practices on the use of
tolerances and, if so, do they all agree?
    43. Should advisers be expected to affirm trades or should this
always be a

function of the broker-dealer or bank custodian holding the account
where securities will be delivered? How should the adviser proceed if
the deadline to notify a broker-dealer or bank custodian is approaching
yet a confirmation has not been received? If advisers delay
notification of the custodian until after affirming the trade in such a
scenario, will this create delays in recalling loaned securities or
securities that may have been pledged as collateral?
    44. In some cases, bank custodians may receive a copy of a
confirmation (a ``duplicate confirmation'') as an early alert of
potential trade activity. Are these duplicate confirmations relied upon
to affirm the trade information? Do custodians ever settle trades based
solely on information received in a duplicate confirmation? Should this
practice be permitted? Please explain why or why not. Do custodians use
these duplicate confirmations as an early alert to call a security back
from being on loan or to identify a security that may be pledged as
collateral?
    45. Elements of FINRA Rule 11860 could be used to help facilitate
compliance with proposed Rule 15c6-2, if adopted. Is proposed Rule
15c6-2 consistent with the approach to RVP/DVP settlement set forth in
FINRA Rule 11860 and, more generally, the Uniform Practice Code
(``UPC'') set forth in the FINRA Rule 11000 series? \171\ If not,
please explain.
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    \171\ The UPC is a series of FINRA rules, interpretations and
explanations designed to make uniform, where practicable, custom,
practice, usage, and trading technique in the investment banking and
securities business, particularly with regard to operational and
settlement issues. These can include such matters as trade terms,
deliveries, payments, dividends, rights, interest, reclamations,
exchange of confirmations, stamp taxes, claims, assignments, powers
of substitution, computation of interest and basis prices, due-
bills, transfer fees, ``when, as and if issued'' trading, ``when, as
and if distributed'' trading, marking to the market, and close-out
procedures. The UPC was created so that the transaction of day-to-
day business by members may be simplified and facilitated; that
business disputes and misunderstandings, which arise from
uncertainty and lack of uniformity in such matters, may be
eliminated; and that the mechanisms of a free and open market may be
improved and impediments thereto removed. See, e.g., Exchange Act
Release No. 91789 (May 7, 2021), 86 FR 26084, 26088 (May 12, 2021).
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    46. Should proposed Rule 15c6-2 have separate requirements and
deadlines for each step in the allocation, affirmation, and
confirmation processes? And if so, should deadlines be relative to a
prior dependent activity? For example, should allocations be
communicated within an hour of, or no later than three hours after,
receipt of the notice of execution and affirmations be communicated
within an hour of, or no later than three hours after, receipt of the
confirmation? Or is it acceptable to require end of day for all
activity? What changes would be recommended for a T+0 environment?

C. Proposed Amendment to Recordkeeping Rule for Investment Advisers

    Under proposed Rule 15c6-2, a broker-dealer would be prohibited
from entering into a contract on behalf of a customer for the purchase
or sale of certain securities \172\ unless it has entered into a
written agreement with the customer that requires the allocation,
confirmation, affirmation, or any combination thereof to be completed
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).\173\ Investment advisers, as customers of a broker or dealer, may
become a party to such an agreement. Proposed Rule 15c6-2 does not
specify which party would be obligated to provide the necessary
allocation, confirmation, and affirmation, although the Commission
understands that, generally, the customer (here, the investment
adviser) customarily provides the broker or dealer with instructions
directing how to allocate the securities to be purchased or sold, and
the broker or dealer confirms the trade details, which the adviser, in
turn, affirms.
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    \172\ As discussed in Part III.B.1, proposed Rule 15c6-2 would
not apply to an exempted security, government security, municipal
security, commercial paper, bankers' acceptances, or commercial
bills.
    \173\ See supra Part III.B (discussing the proposed new
requirement for ``same-day affirmation'').
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    Based on staff experience, the Commission believes that advisers
generally have recordkeeping processes that include keeping originals
and/or electronic copies of such allocations, confirmations, and
affirmations. However, in some instances this may not be the case. Some
activities, such as affirmation, may be performed on the adviser's
behalf by a third party, such as middle-office outsourcing provider, a
custodian or a prime broker, and advisers may not maintain these
records.\174\ In addition, based on staff experience, the Commission
also believes that some advisers do not maintain these records or
maintain them only in paper. Accordingly, the Commission is proposing
an amendment to the investment adviser recordkeeping rule designed to
ensure that registered investment advisers that are parties to
contracts under proposed Rule 15c6-2 retain records of confirmations
received, and keep records of the allocations and affirmations sent to
a broker or dealer.\175\ Specifically, the Commission proposes to amend
Rule 204-2 under the Investment Advisers Act of 1940 (the ``Advisers
Act'') by adding a requirement in paragraph (a)(7)(iii) that advisers
maintain 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 if the adviser is a party
to a contract under proposed Rule 15c6-2. As with other records
required under Rule 204-2(a)(7), advisers would be required to keep
originals of confirmations, and copies of allocations and affirmations,
described in the proposed rule, but may maintain records electronically
if they satisfy certain conditions.\176\
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    \174\ See DTCC ITP Forum Remarks, supra note 58 (stating that up
to 70% of institutional trades are affirmed by custodians).
    \175\ See proposed Rule 204-2(a)(7)(iii), infra Part 0.
    \176\ 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).
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    While the Commission believes that retaining records of all of
these documents is important, we understand that the timing of
communicating allocations to the broker or dealer is a critical pre-
requisite to 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 proposed amendment to Rule 204-2 therefore
would require advisers to time and date stamp records of any allocation
and each affirmation. The proposed time and date stamp for these
communications would occur when they were ``sent to the broker or
dealer.'' To meet this proposed requirement, an adviser generally
should time and date stamp records of each allocation (if applicable)
and affirmation to the nearest minute.
    Based on staff experience, the Commission believes many advisers
send allocations and affirmations electronically to brokers or dealers,
and 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.'' \177\ The Commission believes
that date and time stamping these records to the nearest minute would
evidence that the advisers have met their obligations to timely achieve
a matched trade.
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    \177\ See U.S. Naval Observatory, Systems of Time, https://www.cnmoc.usff.navy.mil/Organization/United-States-Naval-Observatory/Precise-Time-Department/The-USNO-Master-Clock/Definitions-of-Systems-of-Time/. The Commission understands that
some firms have systems that date and time stamp records with
greater precision. Certainly as volumes increase and the timeframes
to complete operational activities, such as settlement, shorten, the
Commission believes from a practical perspective that many firms
will find value in having increased precision in the time stamps on
trade-related activities.
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    The Commission recognizes that requiring these records and adding
time and date stamps to records would, however, add additional costs
and burdens for those advisers that do not currently maintain these
records or do not use electronic systems to send allocations and
affirmations to brokers or dealers or maintain confirmations. For
example, some advisers may incur costs to update their processes to
accommodate these records. For advisers that use third parties to
perform or communicate allocations or affirmations, they also could
incur costs associated with directing the third parties to
electronically copy the adviser on any allocations or
affirmations.\178\
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    \178\ For additional discussion on this and other initial costs
and burdens of the proposed amendment to Rule 204-2, see infra Part
V.C.5.b).
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    We believe that requiring these records and requiring a time and
date stamp of all affirmations and any applicable allocations (but not
confirmations) would help advisers establish that they have timely met
contractual obligations under proposed Rule 15c6-2 and ultimately help
ensure that trades involving such advisers would timely settle on T+1.
In addition, we believe the proposed requirement would aid the
Commission staff in preparing for examinations of investment advisers
and assessing adviser compliance.
1. Request for Comment
    We request comment on the proposed amendment to the investment
adviser recordkeeping rule:
    47. Should the Commission amend Rule 204-2 to specifically
correspond to the proposed Rule 15c6-2 and require advisers that are
parties to contracts under proposed Rule 15c6-2 to retain records of
the documents described in that rule?
    48. Should the Commission require that these records be retained
under a different provision of the recordkeeping rule? For example,
should the Commission instead amend Rule 204-2(a)(3) (requiring
advisers to retain ``memorandums'' of orders) to explicitly include
these records? If so, the determination of whether to maintain the
relevant allocations, confirmation, and affirmations would depend on if
they were part of an ``order.'' Given that certain orders may never be
executed, and that certain executed trades potentially might not have
orders associated with them, would including the requirement in the
recordkeeping requirement related to ``orders'' result in advisers not
retaining some allocations, confirmations, and affirmations?
Separately, would maintaining the proposed records under Rule 204-
2(a)(3) create confusion about whether advisers need to maintain
originals and/or duplicate copies of relevant allocations,
confirmations, and affirmations, when the specified record is the
memorandum? Or, do advisers currently maintain records of allocations,
confirmations, and affirmations under this provision to document the
orders they describe in the memoranda?
    49. Should the Commission require time and date stamping of the
allocations and affirmations to the nearest minute, as proposed? Would
advisers need to make system changes to accomplish such time and date
stamping of allocations and affirmations? Is there an approach other
than time and date stamping that would allow Commission staff to verify
that an adviser has completed the steps necessary to facilitate
settlement in a timely manner? Should the Commission require time and
date stamping of just the affirmation or just the allocation? Is the
requirement to time and date stamp the allocation or affirmation when
it is ``sent to the broker or dealer'' clear? Should we require the
time and date stamp at a different point in time? If so, when?
    50. Should we require time and date stamping of receipt of the
confirmation as well? What additional costs or burdens would such time
stamping incur?
    51. Under what circumstances do third parties, such as prime
brokers or custodians, affirm trades instead of advisers, and in those
instances do the third parties send copies of the affirmations to the
advisers? Does this happen for all accounts an adviser manages or only
some accounts and why?
    52. If advisers are matching adviser records to confirmations, some
trades will not match. In other instances, an adviser may receive a
confirmation for a trade that the adviser does not ``know,'' such as
when an adviser did not execute a trade or when the adviser's trading
desk has not notified the adviser's middle or back office. In such
cases, do advisers proactively notify the broker-dealer that the trade
does not match (often referred to as ``don't know'' or sending a
``DK'')? Should the proposed rule be more specific about recordkeeping
when an adviser does not agree with or does not ``know'' a trade for
which a confirmation was received? How often do trades not match? How
frequently do advisers receive confirmations they do not ``know?''

D. New Requirement for CMSPs To Facilitate Straight-Through Processing

    Because of the rising volume of transactions for which CMSPs
provide matching and other services,\179\ CMSPs have become
increasingly critical to the functioning of the securities market.\180\
As described in Part II.B.1, 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.
Once the trade details have been agreed among the parties or matched by
the CMSP, the CMSP can then facilitate settlement of the transaction.
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    \179\ See, e.g., 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/.
    \180\ 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'').
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    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 believes more should
be done to facilitate further improvements, particularly with respect
to the processing of institutional trades. Currently, some SRO rules
require the use of CMSP services for institutional

trade processing.\181\ The Commission has previously explained that a
shortened settlement cycle may lead to expanded use of CMSPs, as well
as increased focus on enhancing the services and operations of the
CMSPs themselves.\182\ In particular, the Commission believes 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.\183\ Below is a discussion of the elements of the
proposed rule.
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    \181\ See e.g., 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).
    \182\ T+2 Proposing Release, supra note 30, at 69258.
    \183\ See T+1 Report, supra note 18, at 9.
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1. Policies and Procedures To Facilitate Straight-Through Processing
    Proposed Rule 17Ad-27 would require a CMSP to establish, implement,
maintain and enforce policies and procedures to facilitate straight-
through processing for transactions involving broker-dealers and their
customers.
    The term ``straight-through processing'' generally refers to
processes that allow for the automation of the entire trade process
from trade execution through settlement without manual
intervention.\184\ In the context of institutional trade processing
under this rule, straight-through processing 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. Under the rule,
a CMSP facilitates straight-through processing 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.
Under the rule, policies and procedures generally should establish a
holistic framework for facilitating straight-through processing, as
just described, 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. 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. With respect to the use of electronic trade confirmation
services, which often rely on legacy technologies, a CMSP's policies
and procedures generally should establish a timeline for transitioning
users away from manual processes to matching services that reduce a
party's reliance on the manual, often sequential, entry and
reconciliation of trade information.
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    \184\ See SIA Business Case Report, supra note 21, at app. E
(defining ``straight-through processing'').
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    The Commission believes that increasing the efficiency of using a
CMSP can reduce the risk that a trade will fail to settle, as well as
the costs associated with correcting errors that result from the use of
manual processes and data entry, thereby improving the overall
efficiency of the National C&S System. CMSPs have become increasingly
connected to a wide variety of market participants in the U.S.,\185\
increasing the need to reduce risks and inefficiencies that may result
from use of a CMSP's services. Because the proposed rule would preclude
reliance on service offerings at CMSPs that rely on manual processing,
the Commission preliminarily believes the proposed rule will better
position CMSPs to provide services that not only reduce risk generally
but also help facilitate an orderly transition to a T+1 standard
settlement cycle,\186\ as well as potential further shortening of the
settlement cycle in the future.
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    \185\ 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).
    \186\ As discussed in Part III.B.2, the T+1 Report contemplates
moving the ``ITP Affirmation Cutoff'' from 11:30 a.m. on the day
after trade date to 9:00 p.m. on trade date. See supra note 164.
Proposed Rule 17Ad-27 is consistent with, and should help promote,
efforts to shorten the processing time for institutional trades in a
T+1 environment.
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    The Commission has taken a ``policies and procedures'' approach in
developing the proposed rule because it preliminarily 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
CMSP's 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.
    In considering how to develop policies and procedures that
facilitate straight-through processing, a CMSP generally should
consider the full range of operations and services related to the
processing of institutional trades for settlement. For example, as
noted above, the CMSP often 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. Under proposed Rule 17Ad-27, a CMSP
also generally should consider the extent to which its policies,
procedures, and processes restrict, inhibit, or delay the ability of
users to transmit such messages to any agent that assists said users in
preparing or submitting the trade for settlement. In the Commission's
view, the CMSP generally should consider having policies and procedures
that promote the onward transmission of messages among the relevant
parties to a transaction to ensure timely settlement and reduce the
potential for errors. Similarly, in structuring its process for
submitting transactions for settlement, the CMSP generally should
consider ensuring 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.
    As explained above, the Commission recognizes it may not be
technologically or operationally practicable to eliminate all manual
processes immediately. Indeed, the Commission believes that 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, and proposed
Rule 17Ad-27 does not require CMSPs to remove a manual processes if
doing so would clearly undermine the prompt and accurate clearance and
settlement of

securities transactions. However, pursuant to the policies and
procedures approach described above, 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.
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 approach.
2. Annual Report on Straight-Through Processing
    Proposed Rule 17Ad-27 also would require a CMSP to submit every
twelve months to the Commission a report that describes the following:
(a) The CMSP's current policies and procedures for facilitating
straight-through processing; (b) its progress in facilitating straight-
through processing during the twelve month period covered by the
report; and (c) 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. The Commission preliminarily
intends to make this annual report publicly available on its website to
enable the public to review and analyze progress on achieving straight-
through processing. A CMSP would submit this report to the Commission
using the Commission's Electronic Data Gathering, Analysis, and
Retrieval system (``EDGAR''), and would tag the information in the
report using the structured (i.e., machine-readable) Inline eXtensible
Business Reporting Language (``XBRL'').\187\
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    \187\ This requirement would be implemented by including a
cross-reference to Regulation S-T in proposed Rule 17Ad-27, and by
revising Regulation S-T to include the proposed straight-through
processing reports. Pursuant to 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.
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    The Commission believes that the proposed reporting requirement
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 C&S System, both as it
relates to the CMSP specifically and the National C&S System more
generally. The proposed requirement would also inform 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. In particular, the Commission preliminarily
believes that a CMSP generally should include in its report a summary
of key settlement data relevant to its straight-through processing
objective. Such data could include the rates of allocation,
confirmation, affirmation, and/or matching achieved via straight-
through processing. In describing its progress in facilitating
straight-through processing, the CMSP could also identify common or
best practices that facilitate straight-through processing. In
addition, after the CMSP has submitted its initial report, in
subsequent years a CMSP generally should include in its report an
assessment of how its progress in facilitating straight-through
processing during the twelve month period covered by the report under
paragraph (b) compares to the steps it intended to take to facilitate
straight-through processing under paragraph (c) from the prior year's
report.
    Because this information would be useful to the industry and the
general public in considering potential ways to increase the
availability of straight-through processing, the Commission believes
that the report should be made public. The Commission preliminarily
believes that the proposed requirement generally would not require the
disclosure 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.\188\
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    \188\ See 17 CFR 240.24b-2.
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    As the National C&S System continues to evolve, the Commission
believes that CMSPs will continue to play an increasingly critical role
in efforts to facilitate the prompt and accurate clearance and
settlement of securities transactions and to eliminate inefficient and
costly procedures that effect the settlement of securities
transactions, particularly institutional transactions. Furthermore,
because of the CMSP's role in submitting matched or confirmed and
affirmed trades for overnight positioning of settling transactions, the
Commission believes that a CMSP generally should evaluate how it
participates in that process and consider how it can support
improvements to the timing and manner of settlement obligations (e.g.,
intraday) to increase efficiency in the National C&S System.
    Requiring CMSPs to file the reports on EDGAR would 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 comprise an Inline XBRL block text tag for each of the
three required narrative disclosures as well as detail tags for
individual data points, would make the disclosures more easily
available and accessible to and reusable by market participants and the
Commission for retrieval, aggregation, and comparison across different
CMSPs and time periods, as compared to an unstructured PDF, HTML, or
ASCII format requirement for the reports.\189\ Detail tags could be
helpful to the extent the reports disclose individual data points,
including the rates of allocation, confirmation, affirmation, and/or
matching achieved via straight-through processing.
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    \189\ See Release No. 33-10514 (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.
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    The Commission is proposing a 12-month requirement in the rule
because the Commission preliminarily believes that a yearly review and
report on progress with respect to straight-through processing is the
appropriate timescale on which the CMSP should consider, develop, and
implement iterative improvements over time, while also ensuring that
progress towards straight-through processing is expeditious.
Specifically, a 12-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 and implement material changes
to technologies and procedures. 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 the
Commission's attention on smaller, technical changes in services and
policies that would be less relevant to improving the Commission's
understanding of the overall progress towards achieving straight-
through processing by the CMSP. The

Commission believes that the reporting requirement should continue
indefinitely because changes in technology will require ongoing review
and consideration of how such changes might impact policies and
procedures to facilitate straight-through processing.
3. Request for Comment
    The Commission requests comment on all aspects of proposed Rule
17Ad-27, as well as the following specific topics:
    53. Is the proposed policies and procedures approach appropriate
and sufficient to achieve the proposed rule's stated objectives? Why or
why not? Would more specific or directive requirements, such as those
discussed above be more effective at facilitating straight-through
processing than the proposed policies and procedures approach? Please
explain why or why not.
    54. Is proposed Rule 17Ad-27 consistent with the approach to RVP/
DVP settlement set forth in FINRA Rule 11860 and, more generally, the
UPC set forth in the FINRA Rule 11000 series? \190\ If not, please
explain.
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    \190\ See supra note 171 and accompanying text (describing the
UPC).
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    55. Is the proposed use of the term ``straight-through processing''
clear and understandable? Why or why not? Should the Commission define
the term for purposes of the proposed rule? If so, please describe the
elements that the Commission should consider including in the
definition to make it clear and understandable.
    56. Should the Commission require a CMSP to enable the users of its
service to complete the matching, confirmation, or affirmation of
securities transactions as soon as technologically practicable?
Alternatively, should the Commission impose a specific deadline on such
a requirement, such as requiring that these processes be completed
within a certain number of minutes or hours? Should the Commission
require specific deadlines, when using a CMSP, for completing each of
the allocation, confirmation, affirmation, or matching processes? Why
or why not? If the Commission were to impose a specific deadline, what
would be the appropriate deadline for each process--allocation,
confirmation, affirmation, and matching?
    57. Should the Commission require a CMSP to forward or otherwise
submit a transaction for settlement as soon as technologically and
operationally practicable, as if using fully automated systems? Should
the Commission specify to whom a CMSP should forward such information
to facilitate straight-through processing? To what extent do CMSPs not
forward such trade information as soon as technologically practicable?
Are certain parties excluded? What are the reasons preventing such
forwarding of trade information?
    58. Is it appropriate for proposed Rule 17Ad-27 to require a CMSP
to retire any electronic trade confirmation services, where the users
of a CMSP may transmit sequential messages back and forth to achieve
allocation, confirmation, and affirmation of a transaction? If so,
should the rule be modified to accommodate electronic trade
confirmation services offered by CMSPs? Why or why not?
    59. More generally, are electronic trade confirmation services
consistent with the concept of ``straight-through processing?'' Why or
why not? Please explain.
    60. With regard to the proposed requirement for a CMSP to provide
an annual report, does the proposed rule include the appropriate
aspects or level of detail that should be included in such a report?
Why or why not? Should the Commission require that the public report be
issued in a machine-readable data language? Why or why not?
    61. Are the time periods (i.e., every 12 months) described in the
rule concerning the submission and content of the annual report
sufficiently clear? If not, please explain.
    62. Should a CMSP be required to tag its annual report using Inline
XBRL? Why or why not? Rather than requiring block text tags for the
narrative disclosures as well as detail tags of individual data points
(including those nested within the narrative disclosures), should we
only require block text tags for the narrative disclosures? Should the
annual report be tagged in an open structured data language other than
Inline XBRL? If so, what open structured data language should be used
and why?
    63. Is EDGAR an appropriate submission mechanism for the annual
report? Why or why not? Should the Commission use an alternative
submission mechanism, such as the Electronic Form Filing System
(``EFFS'')? An EFFS submission requirement would not be compatible with
a requirement to use Inline XBRL or other open structured data language
for the annual report.
    64. Should the Commission make public the annual report required to
be submitted to the Commission under the proposed rule? Why or why not?
Would making the report public alter the type or detail of information
included by the CMSP in the report or in its policies and procedures?
If so, why? If the public availability of any information required
under the proposed rule would raise issues related to confidentiality
or the proprietary nature of the CMSP's operations, please explain.
    65. CMSPs generally allow their users to define the criteria that
will constitute a ``match,'' and the users may set different tolerances
under those criteria depending on their business strategy. Should a
CMSPs be required to disclose in the annual report its matching
criteria? Should a CMSP be required to disclose data regarding
confirmations, affirmations, and/or matches in its annual report, such
as the percentage of successful confirmations, affirmations, and/or
matches achieved on trade date, or the average time users take to
achieve confirmation, affirmation, and/or a match from trade
submission? Should a CMSP be required to disclose any other data to
help facilitate straight-through processing, such as average time to
submit a trade to a registered clearing agency for settlement, or the
average number of messages that a CMSP transmits among the parties to a
trade before the trade is submitted to a registered clearing agency for
settlement? Please explain.
    66. More generally, should CMSPs be required to make their policies
and procedures for straight-through processing public? Please explain
why or why not?
    67. The Commission has issued exemptive orders for three CMSPs,
pursuant to which each CMSP is subject to a series of operational and
interoperability conditions.\191\ Should the Commission amend the
respective exemptive orders to add conditions similar to the proposed
requirements in Rule 17Ad-27 instead of adopting this proposal? Why or
why not?
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    \191\ See supra note 32 (providing citations to the exemptive
orders for DTCC ITP Matching, BSTP, and SS&C).
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    68. In the Matching Release, the Commission stated that, even
though matching services fall within the Exchange Act definition of
``clearing agency,'' it was of the view that an entity that limits its
clearing agency functions to providing matching services need not be
subject to the full panoply of clearing agency regulation.\192\ The
Commission offered two alternative approaches for regulation: Limited
registration or conditional exemptions. Since the Matching Release, the
Commission has approved three conditional exemptions

for CMSPs, as noted in the above question, with the goal of
facilitating competition in the provision of matching services.\193\
Has the Commission's approach to the regulation of CMSPs facilitated
competition in the provision of matching services? If so, why or why
not? To what extent does competition among CMSPs help promote either a
shortened settlement cycle or straight-through processing? Please
explain.
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    \192\ Exchange Act Release No. 39829 (Apr. 6, 1998), 63 FR
17943, 17947 (Apr. 13, 1998) (``Matching Release'').
    \193\ See, e.g., BSTP and SS&C Order, supra note 32, at 75397-
400 (noting the Commission's interest in facilitating competition
among CMSPs).
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    69. Are there any other steps that the Commission should take to
enhance the ability of the CMSPs to promote straight-through processing
or increase efficiency in the settlement of securities transactions?

E. Impact on Certain Commission Rules and Guidance and SRO Rules

    The proposed rules and rule amendments may affect compliance with
other existing Commission rules and guidance that reference the
settlement cycle or settlement processes in establishing requirements
for market participants. Below is a preliminary list of rules
identified by the Commission. The Commission preliminarily believes
that no changes to these rules are necessary to adopt the proposed
rules. The Commission solicits comment on the potential impacts of
shortening the settlement cycle to T+1 on each of the below rules.
1. Regulation SHO Under the Exchange Act
    As with the adoption of a T+2 standard settlement cycle, several
provisions of Regulation SHO may be impacted by shortening the
settlement cycle to T+1 because certain provisions use ``trade date''
and ``settlement date'' to determine the timeframes for compliance
relating to sales of equity securities and fails to deliver on
settlement date. Since these references are not to a particular
settlement cycle (e.g., ``T+2''), the timeframes for these provisions
change in tandem with changes in the standard settlement cycle.
(a) Rule 204
    Shortening the standard settlement cycle to T+1 would reduce the
timeframes to effect the closeout of a fail-to-deliver position under
17 CFR 242.204 (``Rule 204'').\194\ Under Rule 204,\195\ a participant
of a registered clearing agency must deliver securities to a registered
clearing agency for clearance and settlement on a long or short sale in
any equity security by settlement date, or if a participant has a fail-
to-deliver position, the participant shall, by no later than the
beginning of regular trading hours on the applicable closeout date,
immediately close out the fail-to-deliver position by borrowing or
purchasing securities of like kind and quantity.\196\
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    \194\ 17 CFR 242.204.
    \195\ For purposes of Regulation SHO, the term ``participant''
has the same meaning as in Section 3(a)(24) of the Exchange Act, 15
U.S.C. 78c(a)(24). See Amendments to Regulation SHO, Exchange Act
Release No. 60388 (July 27, 2009), 74 FR 38266, 38268 n.34 (July 31,
2009) (``Rule 204 Adopting Release''). Section 3(a)(24) of the
Exchange Act defines ``participant'' to mean, when used with respect
to a clearing agency, any person who uses a clearing agency to clear
or settle securities transactions or to transfer, pledge, lend, or
hypothecate securities. Such term does not include a person whose
only use of a clearing agency is (A) through another person who is a
participant or (B) as a pledgee of securities.
    \196\ 17 CFR 242.204(a).
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    The applicable closeout date for a fail-to-deliver position differs
depending on whether the position results from a short sale, a long
sale, or bona fide market making activity. If a fail-to-deliver
position results from a short sale, the participant must close out the
fail-to-deliver position by no later than the beginning of regular
trading hours on the settlement day following the settlement date.\197\
Under the current T+2 standard settlement cycle, the applicable
closeout date for short sales is required by the beginning of regular
trading hours on T+3. In a T+1 settlement cycle, the existing closeout
requirement for fail-to-deliver positions resulting from short sales
would be reduced from T+3 to T+2.\198\
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    \197\ Id.
    \198\ See 17 CFR 242.204(g)(1).
---------------------------------------------------------------------------

    If a fail-to-deliver position results from a long sale or 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.\199\ 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.
---------------------------------------------------------------------------

    \199\ See 17 CFR 242.204(a)(1), (a)(3).
---------------------------------------------------------------------------

(b) Rule 200(g)
    Shortening the standard settlement cycle to T+1 may also impact the
application of 17 CFR 242.200(g) (``Rule 200(g)''). Specifically, a T+1
settlement cycle may change when a broker-dealer would need 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). Under Rule 200(g), a broker-dealer must mark all sell orders
of any equity security as ``long,'' ``short,'' or ``short exempt.''
\200\ Rule 200(g)(1) stipulates that a broker-dealer may only mark a
sale as ``long'' if the seller is ``deemed to own'' the security being
sold under 17 CFR 242.200 (a) through (f) and either (i) the security
is in the broker-dealer's physical possession or control; or (ii) it is
reasonably expected that the security will be in the broker-dealer's
possession or control by settlement of the transaction.\201\
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    \200\ See 17 CFR 242.200(g).
    \201\ See 17 CFR 242.200(g)(1).
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    The Commission has provided guidance on when a person that sells a
loaned but recalled security would be ``deemed to own'' the security
and be able to mark the sale ``long.'' \202\ The guidance was given
when the standard settlement cycle was T+3. Under those circumstances,
the Commission indicated that, if a person that has loaned a security
to another person sells the security and a bona fide recall of the
security is initiated within two business days after trade date, the
person that has loaned the security will be ``deemed to own'' the
security for purposes of Rule 200(g)(1), and such sale will not be
treated as a short sale for purposes of Rule 204. The Commission also
stated that a broker-dealer may mark such orders as ``long'' sales
provided such marking is also in compliance with Rule 200(c) of
Regulation SHO, and thus the closeout requirement of Rule 204.\203\
---------------------------------------------------------------------------

    \202\ See Rule 204 Adopting Release, supra note 195, at n.55.
    \203\ See id.; see also 17 CFR 242.200(c).
---------------------------------------------------------------------------

    This 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.
    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. Under such an agreement, a bona fide recall by no later
than T+2 would result in the delivery of such loaned securities by T+4
and in time to close out any fails on sales marked long by the
beginning of regular trading hours on T+5. For those broker-dealers
that lend securities pursuant to securities lending agreements that
have a recall period of three business days after recall, a broker-
dealer would need to initiate a bona fide recall by T+1 to receive
delivery of the loaned security by T+4 and in time to close out any
fails on sales marked long by the beginning of regular trading hours on
T+5.
    If a T+1 settlement cycle is implemented, closeout of a failure of
a sale marked ``long'' would be required by the beginning of regular
trading hours on T+4. With this further shortened timeframe, recalls of
loaned securities would need to be delivered by T+3 to be available to
close out any fails on sales marked ``long'' by the beginning of
regular trading hours on T+4. Accordingly, under a T+1 settlement
cycle, broker-dealers that lend securities pursuant to a recall period
of three business days would need to initiate a bona fide recall on
trade date (i.e., T+0), and those brokers that lend securities pursuant
to a recall period of two business days would need to initiate a bona
fide recall by T+1, in order to close out any failure to deliver on
sales marked ``long'' by the beginning of regular trading hours in T+4.
The Commission understands, however, that under a T+1 standard
settlement cycle, at least some broker-dealers would be likely to
modify their securities lending agreements to shorten the recall period
to one settlement day after the initiation of the recall.\204\ Under
such agreements, a bona fide recall would need to be initiated by T+2
in order to meet the applicable closeout period for long sales. Figure
4 provides a diagram of close-out scenarios in a T+1 environment.
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    \204\ See T+1 Report, supra note 18, at 24-25.
    [GRAPHIC] [TIFF OMITTED] TP24FE22.003

2. Financial Responsibility Rules Under the Exchange Act
    Certain provisions of the Commission's broker-dealer financial
responsibility rules \205\ reference explicitly or implicitly the
settlement date of a securities transaction. For example, paragraph (m)
of Exchange Act Rule 15c3-3 references the settlement date to prescribe
the timeframe in which a broker-dealer must complete certain sell
orders on behalf of customers.\206\ 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 whatever 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.\207\ In addition, settlement date
is incorporated into paragraph (c)(9) of Exchange Act Rule 15c3-1,\208\
which

defines 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.\209\ 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), (k)(2)(i), and (k)(2)(ii) of Rule 15c3-3,\210\
paragraph (e)(1)(A) of Rule 17a-5,\211\ and paragraph (a)(3) of Rule
17a-13.\212\
---------------------------------------------------------------------------

    \205\ For purposes of this release, the term ``financial
responsibility rules'' includes any rule adopted by the Commission
pursuant to Sections 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, 15c3-3, 17a-3, 17a-4, 17a-5, 17a-11, and
17a-13.
    \206\ 17 CFR 240.15c3-3(m).
    \207\ 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 Rule 7(f) of Regulation
T (12 CFR 220.7(f)).
    \208\ 17 CFR 240.15c3-1(c)(9).
    \209\ 17 CFR 240.15c3-1(a)(2)(i), (a)(2)(v).
    \210\ 17 CFR 240.15c3-3(k)(1)(iii), (k)(2)(i)-(ii).
    \211\ 17 CFR 240.17a-5(e)(1)(A).
    \212\ 17 CFR 240.17a-13(a)(3).
---------------------------------------------------------------------------

    The Commission acknowledges that shortening the standard settlement
cycle to T+1 will effectively reduce the number of days (from 12
business days to 11 business days) that a broker-dealer will have to
obtain possession of customer securities before being required to close
out a customer transaction under Rule 15c3-3(m). The operations
supporting the processing of customer orders by broker-dealers and the
technology supporting those operations have developed substantially
since 1972, when the Commission adopted paragraph (m) of Rule 15c3-
3.\213\ Based on staff experience, the Commission believes that these
developments have resulted in a lower frequency of broker-dealers
failing to obtain possession of the securities from their customers
within 10 business days after the settlement date. Therefore, the
Commission believes that these developments in technology and broker-
dealer operations diminish the potential for customers to be adversely
affected by the change from 12 business days to 11 business days.
Accordingly, the Commission believes that the change from 12 business
days to 11 business days would not materially burden broker-dealers or
their customers,\214\ and the Commission believes that it is
unnecessary to amend Rule 15c3-3(m), or any of the broker-dealer
financial responsibility rules, at this time.
---------------------------------------------------------------------------

    \213\ See Broker-Dealers; Maintenance of Certain Basic Reserves,
Exchange Act Release No. 9856 (Nov. 10, 1972), 37 FR 25224 (Nov. 29,
1972) (``Rule 15c3-3 Adopting Release'').
    \214\ See infra Part V.C.3 (discussing the economic implications
of shortening the settlement cycle on Rule 15c3-3).
---------------------------------------------------------------------------

    The Commission solicits comment regarding the effect that
shortening the standard settlement cycle from T+2 to T+1 could have on
the ability of broker-dealers to comply with the Commission's financial
responsibility rules.
3. Rule 10b-10 Under the Exchange Act
    Providing customers with confirmations pursuant to Rule 10b-10
serves a significant investor protection function.\215\ Confirmations
provide customers with a means of verifying the terms of their
transactions, alerting investors to potential conflicts of interest
with their broker-dealers, acting as a safeguard against fraud, and
providing investors a means to evaluate the costs of their transactions
and the quality of their broker-dealers' execution.\216\
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    \215\ 17 CFR 240.10b-10.
    \216\ See Confirmation Requirements for Transactions of Security
Futures Products Effected in Futures Accounts, Exchange Act Release
No. 46471 (Sept. 6, 2002), 67 FR 58302, 58303 (Sept. 13, 2002).
---------------------------------------------------------------------------

    Although Rule 10b-10 does not directly refer to the settlement
cycle, it requires that a broker-dealer send a customer a written
confirmation disclosing specified information ``at or before
completion'' of the transaction, which Rule 10b-10 defines to have the
meaning provided in the definition of the term in Rule 15c1-1 under the
Exchange Act.\217\ Generally, 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.\218\
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    \217\ See 17 CFR 240.10b-10(d)(2).
    \218\ See 17 CFR 240.15c1-1(b).
---------------------------------------------------------------------------

    When first adopting Rule 15c6-1 in 1993 to establish a T+3
settlement cycle, the Commission noted that broker-dealers typically
send customer confirmations on the day after the trade date.\219\ When
adopting a T+2 settlement cycle in 2017, 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.
Accordingly, the Commission noted its belief that implementation of a
T+2 settlement cycle would not create problems with regard to a broker-
dealer's ability to comply with the requirement under Rule 10b-10 to
send a confirmation ``at or before completion'' of the transaction, but
acknowledged that broker-dealers would have a shorter timeframe to
comply with the requirements of Rule 10b-10 in a T+2 settlement
cycle.\220\ With respect to a T+1 standard settlement cycle, the
Commission similarly believes that T+1 would not create a compliance
issue for broker-dealers under Rule 10b-10, although broker-dealers
would have a further shortened timeframe to do so in a T+1 settlement
cycle. In addition, as explained in Part III.D, proposed Rule 15c6-2
also would not alter the requirements of Rule 10b-10.\221\
---------------------------------------------------------------------------

    \219\ T+3 Adopting Release, supra note 9, at 52908.
    \220\ T+2 Adopting Release, supra note 10, at 15579.
    \221\ See supra Part III.B.1 (discussing the relationship
between a ``confirmation'' under proposed Rule 15c6-2 and existing
Rule 10b-10).
---------------------------------------------------------------------------

    The Commission solicits comment on the extent to which the T+1 rule
proposals may impact compliance with Rule 10b-10. In the T+1 Report,
the ISC recommends clarifying what constitutes ``delivery'' for
electronic confirmations under Rule 10b-10. The Commission has
previously provided such guidance.\222\ The Commission therefore
solicits comment on whether this guidance needs to be updated in a T+1
environment.
---------------------------------------------------------------------------

    \222\ See generally Use of Electronic Media for Delivery
Purposes, Exchange Act Release No. 36345 (Oct. 6, 1995) (``1995
Release'') (providing Commission views on the use of electronic
media to deliver information to investors, with a focus on
electronic delivery of prospectuses, annual reports to security
holders and proxy solicitation materials under the federal
securities laws); Use of Electronic Media by Broker-Dealers,
Transfer Agents, and Investment Advisers for Delivery of
Information, Exchange Act Release No. 37182 (May 9, 1996) (``1996
Release'') (providing Commission views on electronic delivery of
required information by broker-dealers, transfer agents and
investment advisers); Use of Electronic Media, Exchange Act Release
No. 42728 (Apr. 28, 2000) (``2000 Release'') (providing updated
interpretive guidance on the use of electronic media to deliver
documents on matters such as telephonic and global consent; issuer
liability for website content; and legal principles that should be
considered in conducting online offerings). Under the guidance, the
Commission's framework for electronic delivery consists of the
following elements: (1) Notice to the investor that information is
available electronically; (2) access to information comparable to
that which would have been provided in paper form and that is not so
burdensome that the intended recipients cannot effectively access
it; and (3) evidence to show delivery (i.e., reason to believe that
electronically delivered information will result in the satisfaction
of the delivery requirements under the federal securities laws). See
1996 Release at 24646-47.

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

4. Prospectus Delivery and ``Access Versus Delivery''
    Broker-dealers have to comply with prospectus delivery obligations
under the Securities Act.\223\ As discussed in Part III.A.4, Securities
Act Rule 172 implements 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.\224\
---------------------------------------------------------------------------

    \223\ 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 Act (known as a
``final prospectus''). 15 U.S.C. 77e(b)(2).
    \224\ 15 U.S.C. 77e(b)(2); 17 CFR 230.172. 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 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).
---------------------------------------------------------------------------

    The Commission preliminarily believes that, if a T+1 standard
settlement cycle is implemented, such a 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.
    The Commission requests comment on whether commenters believe 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. The
Commission asks that commenters identify specific examples of the
circumstances in which such legal or operational difficulties could
occur.
    The Commission also requests comment on the extent to which the T+1
rule proposals may impact compliance with the prospectus delivery
requirements under the Securities Act.
5. Changes to SRO Rules and Operations
    As with the T+2 transition, the Commission anticipates that the
proposed transition to T+1 would again require changes to SRO rules and
operations 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.\225\
---------------------------------------------------------------------------

    \225\ 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 18, at 35-36.
---------------------------------------------------------------------------

    Because the Commission is also proposing two other rule changes to
facilitate a T+1 standard settlement cycle, SRO rules and operations
may be affected to a greater extent than occurred during the T+2
transition. For example, while elements of FINRA Rule 11860 could be
used to facilitate compliance with proposed Rule 15c6-2, FINRA Rule
11860 currently requires that affirmations be completed no later than
the day after trade date and may need to be amended to align with the
requirements in proposed Rule 15c6-2.
    The Commission solicits comment on the extent to which the T+1 rule
proposals may impact existing SRO rules and operations.

F. Proposed Compliance Date

    Industry planning and testing was critical to ensuring an orderly
transition from a T+3 standard settlement cycle to T+2, and the
Commission anticipates that planning and testing would again be
critical to ensuring an orderly transition to a T+1 standard settlement
cycle, if adopted. Accordingly, the Commission recognizes that the
compliance date for the above rule proposals, if adopted, must allow
sufficient time for broker-dealers, investment advisers, clearing
agencies, and other market participants to plan for, implement, and
test changes to their systems, operations, policies, and procedures in
a manner that allows for an orderly transition. The Commission also
recognizes that the compliance date must provide sufficient time for
broker-dealers and other market participants to engage in outreach and
education regarding the transition to ensure that, among other things,
their customers, including individual retail investors, have time to
prepare for operational or other changes related to a T+1 standard
settlement cycle.
    The Commission is mindful that failure to appropriately implement
an orderly transition to T+1, if a T+1 standard settlement cycle is
adopted, may heighten certain operational risks for the U.S. securities
markets. However, the Commission is also mindful that delaying the
transition to a T+1 standard settlement cycle further than is necessary
would delay the realization of the risk reducing and other benefits
expected under a T+1 standard settlement cycle.\226\ The DTCC White
Paper contemplated that a transition to T+1 is achievable in the second
half of 2023,\227\ and the T+1 Report states that a T+1 transition is
achievable in the first half of 2024. The T+1 Report estimates that
planning for testing will begin in Q4 2022, that industry-wide testing
will begin in Q2 2023, and that industry-wide testing will need to
occur for one full year before implementation of a T+1 standard
settlement cycle.\228\ The T+1 Report also states that, once
``regulatory certainty and guidance is achieved, the industry
anticipates a lengthy and necessary amount of time will be required for
T+1 implementation.'' \229\
---------------------------------------------------------------------------

    \226\ See infra Part V.C (discussing the anticipated benefits of
a T+1 standard settlement cycle).
    \227\ DTCC White Paper, supra note 61, at 8.
    \228\ T+1 Report, supra note 18, at Fig. 1.
    \229\ T+1 Report, supra note 18, at 6-7.
---------------------------------------------------------------------------

    With these dates and considerations in mind, the Commission
believes that market participants should prepare expeditiously for a
T+1 transition and proposes a compliance date of March 31, 2024.\230\
If the proposed rules and rule amendments presented in this release are
adopted as proposed, the Commission believes that the systems and
operational changes necessary at the industry level can be planned,
tested, and implemented in advance of March 31, 2024. Although the T+1
Report estimates that planning for testing will not begin until Q4
2022, and that industry-wide testing will not begin until Q2 2023,\231\
the Commission believes that market participants can implement a T+1
standard settlement cycle by the earlier end of the T+1 Report's
overall time table. Specifically, planning for testing could begin
sooner than Q4 2022, so that industry-wide testing can begin in early
2023 and conclude in early 2024, in advance of the proposed compliance
date.
---------------------------------------------------------------------------

    \230\ Notwithstanding the proposed compliance date, market
participants could still coordinate to establish an earlier T+1
transition date as needed to ensure effective planning, testing, and
implementation.
    \231\ T+1 Report, supra note 18, at Fig. 1.
---------------------------------------------------------------------------

    70. The Commission solicits comment on whether the proposed March
31, 2024 compliance date is appropriate for each of the four proposed
rules (Rule 15c6-1, Rule 15c6-2, Rule 17Ad-27,

and the amendment to Rule 204-2(a)). How many months would market
participants need to plan, test, and implement a transition to T+1?
What data points would market participants use to assess the timing for
planning, testing, and implementation? Are any specific operational or
technological issues raised by the proposed compliance date? To what
extent does the proposed compliance date align or not align with
typical practices related to the planning and testing of systems or
other technology changes among affected parties, such as market
participants, broker-dealers, investment advisers, or clearing
agencies? For example, to achieve a compliance date of March 31, 2024,
to what extent, if any, would these parties (and market participants
more generally) have to consider an implementation date that is earlier
than March 31, 2024? Why? Please explain.
    71. What is the extent of planning and testing necessary to achieve
an orderly transition to a T+1 standard settlement cycle, if adopted?
In responding to this request for comment, commenters should provide
specific data and any other relevant information necessary to explain
the extent of industry-wide planning and testing that would be required
to ensure an orderly transition to the proposed T+1 settlement cycle by
March 31, 2024.
    72. The Commission has proposed a single compliance date applicable
to each of the four proposed rules. Would staggering the compliance
dates for these rules help facilitate an orderly transition to a T+1
settlement cycle, if adopted? For example, should the compliance date
for Rule 15c6-2, if adopted, fall before the compliance date for Rule
15c6-1, to ensure an orderly transition to a T+1 settlement cycle, if
adopted? If staggering would be appropriate, what would be an
appropriate schedule of compliance dates? Would staggering the
compliance dates introduce impediments to an orderly T+1 settlement
cycle transition? If so, please describe.

IV. Pathways to T+0

    The Commission uses T+0 in this release to refer to settlement that
is complete by the end of trade date.\232\ This has sometimes been
referred to as same-day settlement. In the Commission's preliminary
view, same-day settlement could occur pursuant to at least three
different models: (i) Netted settlement at the end of the day on T+0;
(ii) real-time settlement, where transactions are settled in real time
or near real time and presumably on a gross basis (i.e., without any
netting applied to reduce the overall number of open positions); and
(iii) ``rolling'' settlement, where trades are netted and settled
intraday on a recurring basis. In this release, the Commission uses T+0
to refer specifically to netted settlement at the end of the day on
T+0. The Commission believes that this model of same-day settlement is
currently the most appropriate to consider applying to the standard
settlement cycle after implementation of T+1, if adopted, because it
retains a core element of the existing settlement infrastructure--
namely, the application of multilateral netting at the end of trade
date to reduce the overall number of open positions before completing
settlement.\233\
---------------------------------------------------------------------------

    \232\ See supra note 12 and accompanying text.
    \233\ In Part IV.B, the Commission solicits comment on the
merits of this model versus the others described, as well as any
other potential settlement models.
---------------------------------------------------------------------------

    The Commission preliminarily believes that implementing a T+0
standard settlement cycle would have similar benefits of market,
credit, and liquidity risk reduction that were realized in the
shortening of the settlement cycle from T+3 to T+2 and are expected in
moving from a T+2 to a T+1 standard settlement cycle. In particular,
shortening from a T+2 standard settlement cycle to a T+0 standard might
result in a larger reduction in certain settlement risks than would
result from shortening to a T+1 standard because the risks associated
with counterparty default tend to increase with time.\234\ Similarly,
because price volatility is a concave function of time,\235\ the
shorter settlement cycle in a T+0 environment will reduce expected
price volatility to a greater extent than in a T+1 environment.\236\ In
addition, assuming constant trading volume, the volume of unsettled
trades for a T+0 settlement cycle could be roughly half that from a T+1
settlement cycle, and, as a result, for any given adverse movement in
prices, the financial losses resulting from counterparty default could
be half that expected in a T+1 settlement cycle.\237\
---------------------------------------------------------------------------

    \234\ See T+2 Adopting Release, supra note 10, at 15598.
    \235\ If price changes are uncorrelated across time periods then
the variance of price change over T periods is T times the variance
over a single period. Therefore, the standard deviation of price
changes over T periods is T1/2 times the standard
deviation over a single period.
    \236\ See id.
    \237\ See id.
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    The Commission believes that now is the time to begin identifying
potential paths to achieving T+0. Thus, the Commission is actively
assessing the benefits and costs associated with accelerating the
standard settlement cycle to T+0. As the securities industry plans how
to implement a T+1 standard settlement cycle, this process 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. In this way, the transition to a T+1 settlement cycle can be a
useful step in identifying potential paths to T+0.
    The Commission is also mindful of some perceived challenges to
implementing a T+0 standard settlement cycle in the immediate future
identified by market participants. As discussed above,\238\ the T+1
Report states that T+0 is ``not achievable in the short term given the
current state of the settlement ecosystem'' and would require an
``overall modernization'' of modern-day clearance and settlement
infrastructure, changes to business models, revisions to industry-wide
regulatory frameworks, and the potential implementation of real-time
currency movements to facilitate such a change.\239\ The T+1 Report
identified ``key areas'' that industry groups determined would be
impacted by a move to T+0 settlement, including re-engineering of
securities processing; securities netting; funding requirements for
securities transactions; securities lending practices; prime brokerage
practices; global settlement; and primary offerings, derivatives
markets and corporate actions.
---------------------------------------------------------------------------

    \238\ See supra notes 76-79 and accompanying text.
    \239\ T+1 Report, supra note 18, at 10; see also supra notes 76-
77 and accompanying text (discussing the same).
---------------------------------------------------------------------------

    To advance the discussion of developing and achieving a T+0
standard settlement cycle, the Commission solicits comment on potential
approaches to overcoming the operational and other barriers identified
by market participants for shortening the standard settlement cycle
beyond T+1. Specifically, the Commission in Part IV.A discusses three
potential approaches that could be used to implement a T+0 settlement
cycle, and solicits comment on all aspects of the approaches described.
The Commission also discusses in Part IV.B the operational and other
challenges that market participants have identified for implementing
T+0, and solicits comment on the building blocks necessary to address
or resolve those challenges to enable a T+0 settlement cycle.

A. Possible Approaches to Achieving T+0

    To facilitate discussion of T+0 settlement, the Commission has
identified three possible approaches or frameworks for considering how
to implement T+0 settlement. These are presented not as an exhaustive,
complete, or discrete list of pathways but rather as example cases that
help illustrate the range of potential approaches, or combination of
approaches, that might be useful in facilitating investments that
improve the efficiency of the National C&S System, including the
ability to implement a T+0 standard settlement cycle. The Commission
provides these examples to help facilitate comment on the implications
of a T+0 standard settlement cycle and the mechanics of implementation,
as well as their potential impact on the challenges identified in Part
IV.B. Comments received will help inform any future proposals.
1. Wide-Scale Implementation
    One possible path to shortening the settlement cycle from T+1 to
T+0 involves a wide effort, led by the Commission or an industry
working group, to develop and publish documents like the ISG White
Paper, the T+2 Playbook, and now the T+1 Report, in which industry
experts identify the full set of potential impediments to T+0, propose
solutions, and develop a timeline for education, testing, and
implementation.
    While this approach would mirror past efforts to shorten the
settlement cycle, it necessarily requires industry-wide solutions to
the impediments identified with respect to T+0, such as those that may
be related to the considerations in Part IV.B. For this reason, the
Commission believes that it may be helpful to consider two alternative
paths to T+0: (i) An approach where implementation begins first with
technology and operational changes by key infrastructure providers; and
(ii) an approach where exchanges and clearing agencies offer pilots or
similar small-scale programs to establish T+0 as an optional settlement
cycle in certain circumstances.
2. Staggered Implementation Beginning With Key Infrastructure
    An alternative approach to shortening the settlement cycle from T+1
to T+0 could begin by focusing efforts on improving key settlement
infrastructure to support wide-scale implementation of T+0 settlement
cycle. Such an approach could involve the development of industry-led
or academic research designed to identify the key improvements and to
promote engagement with respect to development and implementation.
    Under this approach, a key assumption is that achieving a T+0
standard settlement cycle, or the benefits anticipated from it, may not
be possible until existing market infrastructure has sufficient
capacity to support the full range of market participants who would
settle their transactions on T+0, and that the challenges to achieving
T+0 derive, in part, from insufficient capacity or capability to serve
those market participants. Infrastructure providers have used this
approach in the past to develop, test, and implement new technologies
and services before wide-scale release. For example, as discussed in
Part II.C, following implementation of a T+2 standard settlement cycle,
DTCC began to pursue two sets of initiatives, accelerated settlement
and settlement optimization, designed to improve its own infrastructure
to support more efficient settlement processes. A similar effort
following implementation of T+1 could identify improvements to existing
infrastructure that could address the challenges identified in Part
IV.B. For example, infrastructure providers like DTCC could explore
mechanisms that expand the availability of money settlement, as
discussed further in Part IV.B.3, or reduce the timing challenges
associated with T+0 settlement, as discussed in Part IV.B.8.
3. Tiered Implementation Beginning With Pilot Programs
    Exchanges and clearing agencies have often deployed new
technologies in targeted environments to test new functionality and
service offerings on a small scale. This approach could allow market
participants to test T+0 settlement in a targeted environment, such as
using a specific exchange or exchanges, specific securities, and/or
specific settlement services at a registered clearing agency. SROs
could consider pilot proposals that could help advance development of
the operational and technological resources necessary to enable T+0
settlement.
    For example, DTCC began exploring the use of distributed ledger in
2015, completed its Project ION case study in 2020,\240\ and recently
announced plans to deploy its ION platform through its ``minimal viable
product'' pilot program.\241\ According to DTCC, the ION MVP program is
a mechanism for NSCC and DTC participants to test the use of
distributed ledger technology alongside ``classic'' settlement
infrastructure at NSCC and DTC.\242\ Similarly, BOX Exchange LLC
recently implemented its Boston Security Token Exchange (``BSTX'')
platform to enable access to accelerated settlement for certain
securities.\243\ In India, where the Securities and Exchange Board of
India recently announced plans to implement a T+1 settlement cycle, the
securities regulator plans to allow local stock exchanges to offer T+1
settlement on certain securities, while retaining a T+2 settlement
cycle for others. Each case presents examples where new technologies
are offered on a select basis, such as on certain exchanges or for
certain securities, in ways that could allow market participants to
begin to adapt to T+0 settlement on an incremental basis in a
controlled environment.
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    \240\ See DTCC, Project ION Case Study (May 2020), https://
www.dtcc.com/~/media/Files/Downloads/settlement-asset-services/user-
documentation/Project-ION-Paper-2020.pdf.
    \241\ See Press Release, DTCC, DTCC's Project ION Platform Moves
to Development Phase Following Successful Pilot with Industry (Sept.
15, 2021), https://www.dtcc.com/news/2021/september/15/dtccs-project-ion-platform-moves-to-development-phase-following-successful-pilot-with-industry.
    \242\ See id. To the extent that elements of the ION MVP program
constitute rules, policies, or procedures of NSCC or DTC, it may be
subject to the requirements for submitting proposed rule changes
under Section 19 of the Exchange Act and Rule 19b-4. See 15 U.S.C.
78s(b); 17 CFR 240.19b-4. To the extent that this proposal would
involve changes to rules, procedures, and operations that could
materially affect the nature or level of risk presented by NSCC or
DTC, they may also be required to submit an Advance Notice under the
Dodd-Frank Act. See 12 U.S.C. 5465(e)(1)(A); 17 CFR 240.19b-4(n).
    \243\ See Exchange Act Release No. 94092 (Jan. 27, 2022), 87 FR
5881 (Feb. 2, 2022) (order approving a proposed rule change to adopt
rules governing the listing and trading of equity securities on BOX
Exchange LLC through a facility of BOX Exchange LLC to be known as
BSTX LLC).
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    Such an approach potentially allows market participants to achieve
T+0 without having to first address all of the challenges described in
Part IV.B for all market participants, instead enabling experimentation
and innovation to find solutions for certain segments over time. This
could help minimize one challenge noted in the T+1 Report: That T+0
would likely require the adoption of new technologies, implementation
costs that would disproportionately fall on small and medium-sized
firms that rely on manual processing or legacy systems and may lack the
resources to modernize their infrastructure rapidly.\244\
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    \244\ See T+1 Report, supra note 18, at 10; see also supra notes
77-78 and accompanying text (discussing the same); infra note 385
and accompanying text (noting that some benefits may accrue to those
market participants with high market power).

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B. Issues To Consider for Implementing T+0

    Below the Commission describes several challenges identified as
impediments to implementing a T+0 standard settlement cycle,
particularly in the short term. The Commission requests comment on
these challenges, as well as any comments identifying other challenges
or necessary building blocks associated with implementing T+0. More
generally, with respect to each of these topics, the Commission
solicits comment on ways to improve the efficiency of and reduce the
risks that can result from the post-trade processes implicated by each
of these challenges. The Commission is particularly interested in
commenters that identify potential methods or building blocks that can
enable T+0. In considering the below topics, the Commission also
requests that commenters assess whether the three approaches identified
in Part IV.A might affect the analysis of the below or otherwise reveal
potential methods for addressing and implementing them.
1. Maintaining Multilateral Netting at the End of Trade Date
    As discussed in Part II.B.1, multilateral netting by the CCP is an
essential feature of the National C&S System. By substantially reducing
the volume and value of transactions in equity securities that need to
be settled each day, CCP netting unlocks substantial capital
efficiencies for market participants while, at the same time, reducing
credit, market, and liquidity risk in the National C&S System. While
the Commission continues to consider how new technologies and business
practices in the industry might further reduce risk and promote capital
efficiency, the Commission preliminarily believes that the capital
efficiencies and risk reduction benefits that result from the use of
multilateral netting make it unlikely that market participants could
cost-effectively implement a T+0 standard settlement cycle without the
continued use of multilateral netting in some form.\245\
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    \245\ See infra Part V.B.1 (discussing the capital efficiencies
and risk reducing effects that result from the use of multilateral
netting).
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    In particular, at this time the Commission believes that a
transition from T+1 settlement to real-time settlement could not be
achieved without substantial and significant changes to fundamental
elements of market structure and infrastructure because real-time
settlement, to the extent it requires gross settlement would prevent
the use of, or significantly reduce the utility of, multilateral
netting before settlement. If market participants develop technologies
and business practices that can support the use of a real-time
settlement system in the U.S. at some point in the future, the
Commission is interested in understanding how such technologies might
interact with existing infrastructure that provides multilateral
netting. Indeed, retaining multilateral netting in a T+0 environment
poses challenges that include accommodating the submission of trades
for clearing during and after the close of regular trading hours while
still producing netting results with sufficient time to enable market
participants to position their cash and securities to achieve final
settlement before money settlement systems close for the day.\246\ The
Commission observes that existing processes and computational tools
used to complete the processing and settlement of trades currently rely
on significantly more time than the few hours between the close of
regular trading hours and the close of money settlement systems on a
given day.
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    \246\ Part IV.B.3 discusses existing limitations in money
settlement infrastructure that may contribute to this challenge.
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    The Commission is interested in receiving public comments on both
the utility of centralized multilateral netting as a feature of the
National C&S System and any potential impediments or challenges
associated with retaining such netting functionality while shortening
the settlement cycle to T+0. The Commission is also interested in
receiving public comments on potential benefits or costs associated
with real-time settlement. In particular the Commission requests
comment on the following:
    73. Is it possible to shorten the settlement cycle in the U.S.
markets to T+0 and retain multilateral netting? If so, what is the
earliest time on T+0 that market participants could be prepared to
settle their trades without eliminating multilateral netting, and what
changes, if any, to existing netting processes would be necessary to
move to a T+0 settlement cycle?
    74. Could a real-time settlement model be successfully deployed in
the National C&S System in a way that compliments the use of
multilateral netting? If yes, please explain. For example, most
institutional trades that use bank custodians generally are not
submitted to CNS for netting. Would it be possible to settle those
trades in a real-time settlement model while other trading activity
would continue to rely on multilateral netting? Alternatively, would it
be beneficial to find ways to move more institutional trades into
multilateral netting processes, such as by expanding access to
multilateral netting systems to custodians? Why or why not? What are
the impediments to expanding access to custodians?
    75. If real-time settlement is not possible without eliminating or
substantially curtailing multilateral netting activity, please explain.
    76. If real-time settlement is not compatible with multilateral
netting, would the potential benefits of real-time gross settlement
still justify the elimination of multilateral netting in the National
C&S System? Please explain why or why not.
    77. What impact would the elimination of multilateral netting have
on capital demands (e.g., margin requirements) imposed on market
participants in connection with their settlement obligations? To the
extent possible, please include any quantitative estimates or data that
may be relevant to the request for comment.
    78. How would the elimination of multilateral netting impact
overall levels of market, liquidity and credit risk in the clearance
and settlement system and how might such risks be distributed among
market participants?
    79. Are there disadvantages to multilateral netting and, if so,
what are they? Does multilateral netting mandate the use of agreed
timeframes to determine which trades will be included in netting (for
example, trades settling on or executed on a given day or within a
given hour)? Why or why not? Are there netting activities that
currently only happen once a day that might need to occur more often
for trades to settle at the end of trade date? If so, what are they and
are there benefits, costs or risks to performing these activities more
than once a day?
    80. Does multilateral netting foster or require the use of batch
processing? Does multilateral netting necessitate sequential processing
activities that impede the adoption of same-day settlement? Why or why
not? For example, do introducing broker-dealers that maintain omnibus
accounts at clearing broker-dealers need to net their activity prior to
submitting net trades to their clearing broker-dealers who, in turn,
have a dependency before being able to calculate their own net figures?
Are there computational or other technology upgrades that could be
employed to accelerate these processes so that they could continue to
function effectively under the shortened timeframes available in a T+0
environment? Are there other settlement

models, such as those deploying intraday or rolling settlement, that
could improve the settlement process in such a way that facilitates an
effective multilateral netting process at the end of the day in a T+0
environment?
2. Achieving Same-Day Settlement Processing
    Moving settlement to the end of trade date would significantly
compress the array of operational activities and processes required to
achieve settlement, raising questions about whether the current
arrangement of settlement processes can support T+0 settlement.
    For example, in the current T+2 settlement environment, DTC
processes certain transactions for settlement during the day on
settlement date and other transactions the night before settlement date
(``S-1'') during the so-called ``night cycle,'' which begins at 8:30
p.m. on S-1. Processing transactions during the night cycle allows for
earlier settlement of certain transactions that are included in the
night cycle, thereby reducing counterparty risk and, with respect to
transactions that are cleared through NSCC, enables such transactions
to be removed from members' marginable portfolios, which in turn
reduces such members' NSCC margin requirements.
    DTC uses a process called the ``Night Batch Process'' to control
the order of processing of transactions in the night cycle.\247\ During
the Night Batch Process, DTC evaluates each participant's available
positions, transaction priority and risk management controls, and
identifies the transaction processing order that optimizes the number
of transactions processed for settlement. The Night Batch Process
allows DTC to run multiple processing scenarios until it identifies an
optimal processing scenario. At approximately 8:30 p.m. on S-1, DTC
subjects all transactions eligible for processing to the Night Batch
Process, which is run in an ``off-line'' batch that is not visible to
participants, allowing DTC to run multiple processing scenarios until
the optimal processing scenario is identified. The results of the Night
Batch Process are incorporated back into DTC's core processing
environment on a transaction-by-transaction basis.
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    \247\ See DTC, Settlement Service Guide, at 68 (June 24, 2021),
https://www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Settlement.pdf.
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    Because trade date and settlement date would be the same day in a
T+0 environment, shortening the standard settlement cycle to T+0 would
require DTC and its participants to initiate and complete their
settlement processes much sooner relative to the time a trade is
executed and without the benefit of any overnight processes.
Compressing timeframes to achieve T+0 settlement necessarily removes
the ability to perform any settlement activities on S-1. This has
implications for how DTC conducts its existing ``night cycle'' process
but, more broadly, for all the market participants who collect trading
information that feeds into the night cycle process and any systems
that they run overnight to prepare for settlement. Moving to a T+0
settlement cycle would also impact the processing timeframes for
corporate actions.
    The Commission requests public comment regarding the prospective
impact that shortening the settlement cycle to T+0 would have on
settlement processes such as those described above. In particular, the
Commission requests comment on the following:
    81. Would shortening the standard settlement cycle to T+0 allow
sufficient time for settlement processes that are currently conducted
by DTC and its participants to be completed on a timeframe that is
compatible with timely settlement? If not, why not?
    82. When would be the optimal time to complete existing processes
that occur on S-1 in a T+0 environment? More generally, how would
existing settlement processes that occur on S-1 need to change to
accommodate a T+0 standard settlement cycle?
    83. What would be the impact on market participants (clearing
agencies, broker-dealers, buy side participants, retail investors,
etc.) of any changes in processes necessary to accommodate T+0?
    84. What risks, if any, arise by the compression of the settlement
cycle to accommodate T+0, particularly as it relates to market, credit,
liquidity, and systemic risk? What are the associated costs of these
risks? How might these risks affect the market, trading behaviors,
investors (both retail and institutional), and innovation? Is
mitigation of these risks feasible, and if so, how?
3. Enhancing Money Settlement
    To achieve final settlement on settlement date, DTCC and its
clearing agency participants rely on access to two systems operated by