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

    Several commenters agreed with the Commission's preliminary views
that shortening the settlement cycle to T+2 would impact other rules,
and in particular, compliance with Regulation SHO.\148\ Three
commenters acknowledged that the close-out periods required by Rule 204
will accelerate because the Rule 204 close-out periods are measured
from settlement date,\149\ with one of the three raising the specific
concern that the shorter timeframe may impact customers who do not make
timely deliveries.\150\ Despite this compression in the compliance
timeframes under Rule 204, two of these commenters agreed with the
Commission that because the text of Rule 204 does not explicitly
reference T+3 as the standard ``settlement date,'' the rule is
therefore unaffected by the amendment to Rule 15c6-1.\151\ Three
commenters also agreed that modification of existing interpretation or
guidance concerning Regulation SHO was appropriate.\152\ Two of these
commenters specifically encouraged the Commission to revise the staff's
Frequently Asked Questions on Regulation SHO on the Commission's Web
site to clarify the implications of a move to T+2 settlement cycle and,
in particular, that the close-out periods will shorten by a single day
when measured from the trade date.\153\
---------------------------------------------------------------------------

    \148\ SIFMA at 17; Fidelity at 3-4; FSR at 4; Thomson Reuters at
2.
    \149\ SIFMA at 17; Fidelity at 3; FSR at 4.
    \150\ FSR at 4.
    \151\ SIFMA at 17; Fidelity at 3.
    \152\ SIFMA at 18; Fidelity at 3; Thomson Reuters at 2.
    \153\ SIFMA at 18; Fidelity at 3. See also Division of Market
Regulation: Responses to Frequently Asked Questions Concerning
Regulation SHO, available at https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm.
---------------------------------------------------------------------------

    Several commenters noted the potential consequences to the
securities lending markets, particularly with respect to recalling
loans to settle transactions.\154\ One of these commenters also raised
concern that there would likely be an operational impact to stock loan
departments in terms of policies and procedures and a need to train
staff to adjust to a shortened recall cycle.\155\ Two of these
commenters believed that security lenders, security borrowers, and
service providers are currently addressing the impact of a shortened
settlement cycle on their business models and trading strategies, and
in particular, that the move to T+2 will shorten the loan recall period
by one day.\156\ However, one of these two commenters stated that
industry participants recognize and support the need for the move to
T+2 settlement, despite the implication that this move will necessarily
shorten the recall period by one day, and are prepared to make the
necessary operational adjustments to accommodate this shortened period.

These changes, this commenter believed, were anticipated as part of the
move to T+2 and its clients have been preparing accordingly.\157\ Both
of these commenters recommended the Commission modify its
interpretation or guidance regarding the recall period so that it
reflects the consequences of the move to T+2.\158\
---------------------------------------------------------------------------

    \154\ SIFMA at 18; Fidelity at 3; Thomson Reuters at 2.
    \155\ Thomson Reuters at 2.
    \156\ SIFMA at 18; Fidelity at 4.
    \157\ SIFMA at 18.
    \158\ SIFMA at 18; Fidelity at 4.
---------------------------------------------------------------------------

    The Commission acknowledges that the amendment to Rule 15c6-1, as
adopted, will operate to reduce the timeframes to effect a close-out
under Rule 204. For example, the existing close-out requirement for
fail to deliver positions resulting from short sales would be reduced
from T+4 to T+3 based on the existing definition of settlement date in
Rule 204.\159\ Similarly, with regard to fails to deliver resulting
from long sales or sales from bona fide market making activity, the
existing close-out requirement would be reduced from T+6 to T+5. After
considering comments, in particular that industry participants stated
that they have either already anticipated the shortening of the
Regulation SHO close-out period or are prepared to make the necessary
operational adjustments, the Commission is not making any changes to
the rule text of Regulation SHO.\160\
---------------------------------------------------------------------------

    \159\ See 17 CFR 242.204(g)(1).
    \160\ See 17 CFR 200 et seq.
---------------------------------------------------------------------------

    The Commission believes, however, that, to the extent that
customers have not made timely deliveries and have caused a fail to
deliver by a broker-dealer, any indirect impacts on such customers are
warranted.\161\ In addition, the Commission believes that a compliance
date of September 5, 2017 will provide retail investors with time to
become informed--either directly or through their broker-dealers--of
the change to a T+2 standard settlement cycle and determine what
changes to their own processes and behaviors may be necessary to
participate in the market under a shorter settlement cycle.
---------------------------------------------------------------------------

    \161\ In the Rule 204 Adopting Release, the Commission
recognized that requiring broker-dealers to close-out fails to
deliver promptly after they occur may result in costs to certain
participants, but believed that ``such costs are limited and are
justified by the fact that the rule will continue our efforts to
achieve our goals of reducing fails to deliver by maintaining the
reductions in fails to deliver achieved by the adoption of temporary
Rule 204T, as well as other actions taken by the Commission, and
addressing potentially abusive `naked' short selling and, thereby
help restore, maintain, and enhance investor confidence in the
markets.'' Rule 204 Adopting Release, supra note 137, 74 FR at
38286.
---------------------------------------------------------------------------

    With regard to commenters' request to modify guidance regarding the
recall of loaned securities to reflect the consequences of the move to
T+2, the adoption of a T+2 settlement cycle means that bona fide
recalls initiated on T+2 as described above would likely not be
delivered before the close-out requirement for fails on sales marked
``long'' under Rule 204 (i.e., no later than the beginning of regular
trading hours on T+5 under a T+2 settlement cycle).\162\ As a result,
the Commission is now clarifying that recalls of loaned securities that
are initiated by no later than the settlement day before the settlement
date may be marked ``long,'' provided the seller is otherwise net long
in accordance with Rule 200(c) of Regulation SHO.\163\ This
clarification should help ensure that loaned but recalled securities
would be available by T+4 before the close-out period for fails on
sales marked ``long'' would otherwise be required by Rule 204 (i.e., no
later than the beginning of regular trading hours on T+5).
Specifically, in a T+2 settlement cycle, a broker-dealer seeking to
mark an order ``long'' for loaned but recalled securities would need to
initiate a bona fide recall of a security on the settlement day before
the settlement date (i.e., T+1), provided the seller is also net long
under Rule 200(c) of Regulation SHO. Otherwise, the general
requirements of Rule 200 of Regulation SHO would govern, and sales of
loaned securities could only be marked ``long'' if the seller is
``deemed to own'' the security being sold 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.\164\
---------------------------------------------------------------------------

    \162\ The Commission notes that a participant may not offset the
amount of its fail to deliver position with shares that the
participant receives or will receive during the applicable close-out
date (i.e., during T+4 or T+6, as applicable, under a T+3 settlement
cycle, or during T+3 or T+5, as applicable, under a T+2 settlement
cycle) but must take affirmative action, by borrowing or purchasing
securities of like kind and quantity, at or before the beginning of
regular trading hours on the applicable close-out date. See Rule 204
Adopting Release, supra note 137, 74 FR at 38272.
    \163\ The staff's Frequently Asked Questions regarding
Regulation SHO include some non-substantive introductory language
that references specific settlement dates. In response to
commenters' request that such language be updated following adoption
of the shortened settlement cycle, the Commission directs the staff
to review the document and make updates as necessary and
appropriate.
    \164\ See 17 CFR 242.200(g).
---------------------------------------------------------------------------

2. Financial Responsibility Rules Under the Exchange Act
    As noted in the T+2 Proposing Release, certain provisions of the
broker-dealer financial responsibility rules under the Exchange Act
\165\ reference explicitly or implicitly the settlement date of a
securities transaction. For example, 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 for 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 10 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.\166\ Settlement date is also referenced in paragraph (c)(9)
of Exchange Act Rule 15c3-1,\167\ which explains what it means to
``promptly transmit'' funds and ``promptly deliver'' securities within
the meaning of paragraphs (a)(2)(i) and (a)(2)(v) of Rule 15c3-1.\168\
---------------------------------------------------------------------------

    \165\ The term ``financial responsibility rules,'' for purposes
of this release, 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 financial responsibility rules include Exchange Act Rules 15c3-1
(17 CFR 240.15c3-1), 15c3-3 (17 CFR 240.15c3-3), 17a-3 (17 CFR
240.17a-3), 17a-4 (17 CFR 240.17a-4), 17a-5 (17 CFR 240.17a-5), 17a-
11 (17 CFR 240.17a-11), and 17a-13 (17 CFR 240.17a-13).
    \166\ 17 CFR 240.15c3-3(m). 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)).
    \167\ 17 CFR 240.15c3-1(c)(9).
    \168\ 17 CFR 240.15c3-1(a)(2)(i), (a)(2)(v). The concepts of
promptly transmitting funds and promptly delivering securities are
incorporated in other provisions of the financial responsibility
rules, including paragraphs (k)(1)(iii), (k)(2)(i), and (k)(2)(ii)
of Rule 15c3-3 (17 CFR 240.15c3-3(k)(1)(iii)), (k)(2)(i),
(k)(2)(ii)), paragraph (e)(1)(A) of Rule 17a-5 (17 CFR 240.17a-
5(e)(1)(A)), and paragraph (a)(3) of Rule 17a-13 (17 CFR 240.17a-
13(a)(3)).
---------------------------------------------------------------------------

    The Commission requested comment regarding the potential impact
that shortening the standard settlement cycle from T+3 to T+2 may have
on the ability of broker-dealers to comply with the financial
responsibility rules. One commenter described certain requirements
provided in Rule 15c3-3(m), and stated that it did not believe a change
to that rule is required in order to support migration to T+2.\169\ A
second commenter stated that shortening the settlement cycle by one day
will reduce the number of days (from 13 business days to 12 business
days) a broker-dealer will have under Rule 15c3-3(m) to obtain
possession of the securities or close out a customer's

transaction, possibly to the detriment of the customer.\170\
---------------------------------------------------------------------------

    \169\ SIFMA at 22.
    \170\ FSR at 3-4.
---------------------------------------------------------------------------

    The Commission acknowledges that shortening the standard settlement
cycle to T+2 will effectively reduce the number of days (from 13
business days to 12 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 Commission notes
that 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.\171\ 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 13 business days to 12 business days.
Accordingly, the Commission does not believe that the change from 13
business days to 12 business days will materially burden broker-dealers
or their customers, and the Commission does not believe that it is
necessary to amend Rule 15c3-3(m) at this time.
---------------------------------------------------------------------------

    \171\ See Exchange Act Release No. 9882 (November 17, 1972), 37
FR 25224 (November 29, 1972).
---------------------------------------------------------------------------

3. Exchange Act Rule 10b-10
    Exchange Act Rule 10b-10 requires a broker-dealer to give or send a
customer a written confirmation disclosing information relevant to the
transaction ``at or before completion of [the] transaction.'' \172\
Rule 10b-10 does not directly refer to the settlement cycle but instead
defines the term at or before ``completion of the transaction'' by
reference to Exchange Act Rule 15c1-1.\173\ Generally, Rule 15c1-1
defines ``completion of the transaction'' to mean the time when: (i) A
customer is required to deliver the security being sold; (ii) a
customer is required to pay for the security being purchased; or (iii)
a broker-dealer makes a bookkeeping entry showing a transfer of the
security from the customer's account or payment by the customer of the
purchase price.\174\
---------------------------------------------------------------------------

    \172\ 17 CFR 240.10b-10(a).
    \173\ See 17 CFR 240.10b-10(d)(1).
    \174\ See 17 CFR 240.15c1-1(b).
---------------------------------------------------------------------------

    As the Commission noted in the T+2 Proposing Release, while a
confirmation must be sent ``at or before completion'' of the
transaction, Commission rules do not require that the customer receive
a confirmation prior to settlement.\175\ When adopting Rule 15c6-1 in
1993 to establish a T+3 standard settlement cycle, the Commission noted
that broker-dealers typically send customer confirmations on the day
after trade date.\176\ In the T+2 Proposing Release, the Commission
stated that it understands 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 preliminary
belief that implementation of a T+2 settlement cycle will 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
will have a shorter timeframe to comply with the requirements of Rule
10b-10 in a T+2 settlement cycle.\177\
---------------------------------------------------------------------------

    \175\ T+2 Proposing Release, supra note 1, 81 FR at 69261.
    \176\ T+3 Adopting Release, supra note 15, 58 FR at 52908.
    \177\ T+2 Proposing Release, supra note 1, 81 FR at 69261.
---------------------------------------------------------------------------

    The Commission received one comment pertaining to certain no-action
letters and exemptive relief that allow a broker-dealer providing a
dividend reinvestment program (``DRIP'') to confirm automatic dividend
reinvestments on monthly account statements in lieu of the trade-by-
trade confirmations generally required by Rule 10b-10.\178\ This
commenter stated that moving to a T+2 standard settlement cycle does
not directly conflict with the flexibility afforded by the relief that
has been granted, but nonetheless questioned whether the recipients of
such relief would be able to continue to rely on it given that the
requesting letters typically include a detailed description of the
program operations, including reference to their operation within a T+3
settlement cycle.\179\
---------------------------------------------------------------------------

    \178\ SIFMA at 21.
    \179\ Id.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that a firm should not be
deemed to have departed from the procedures described in the applicable
no-action letter or exemptive relief regarding the application of Rule
10b-10 to DRIP transactions solely by reason of the firm's
transitioning to a shorter settlement cycle and operating the program
on a T+2 settlement cycle.
4. Prime-Broker No-Action Letter
    The Commission received two comment letters discussing a no-action
letter issued by Commission staff known as the ``Prime Broker No-Action
Letter.'' \180\ In particular, the commenters noted that one of the
important rights that prime brokers hold under the Prime Broker No-
Action Letter is the right to ``disaffirm'' all previously affirmed
institutional trades of a customer reported by executing brokers to the
prime broker for clearance and settlement, without which the prime
broker would be responsible for settling the transaction.\181\ One
commenter stated that, without industry-wide consensus to change common
technology platforms currently used in the industry, the move to a T+2
settlement cycle is likely to shorten the cutoff time frame for prime
brokers to disaffirm trades, with the cutoff time moving from T+2 to
the morning of T+1.\182\ The commenter further stated that moving to an
earlier cutoff time for disaffirming trades decreases prime brokers'
ability to manage their exposure to risk (vis-[agrave]-vis customers)
that arises from margin calls issued by prime brokers on T+1.\183\
---------------------------------------------------------------------------

    \180\ Prime Broker Committee, SEC No-Action Letter (Jan. 25,
1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/pbroker012594-out.pdf (discussed in SIFMA at 18-19 and
Fidelity at 4).
    \181\ SIFMA at 18-19; Fidelity at 4. One commenter further noted
that, generally, the prime broker's right to disaffirm has provided
an incentive for speedy affirmation of such trades, as evidenced in
the high prime-broker same-day affirmation rate, while still
permitting the prime broker to manage its risk vis-[agrave]-vis the
customer. SIFMA at 19.
    \182\ SIFMA at 19.
    \183\ Id.
---------------------------------------------------------------------------

    Both commenters acknowledged that changes to the Prime Broker No-
Action Letter were not necessarily a prerequisite to shortening the
standard settlement cycle to T+2. However, the commenters also noted
that it would be helpful for the Commission to revisit this guidance to
ensure that it reflects current market practices, including the
shortened settlement cycle.\184\ In addition, one commenter stated that
certain prime brokers, together with Omgeo \185\ and The Depository
Trust & Clearing Corporation (``DTCC''), are meeting to discuss the
potential impact of a move to a shorter settlement cycle on prime
broker trade processing, particularly as it relates to the ability to
effectuate a disaffirmation from a

technology perspective.\186\ Finally, the commenter stated that it
supports ongoing efforts by Commission staff to evaluate potential
updates to the Prime Broker No-Action Letter, but notes that industry
groups are continuing their work to operationalize the processes
contemplated in a T+2 environment and consider required changes to the
agreements between prime brokers and executing brokers.\187\
---------------------------------------------------------------------------

    \184\ SIFMA at 17, 19; Fidelity at 4.
    \185\ Omgeo is an exempt clearing agency that currently provides
matching and ETC services for the U.S. equity markets. See note 24
and accompanying text supra.
    \186\ SIFMA at 19.
    \187\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges the commenters' views that the move to
a T+2 standard settlement cycle may, in the absence of additional
changes to industry practices, result in an earlier cutoff time for
prime brokers to disaffirm trades of customers reported by executing
brokers. Additionally, the Commission notes that the comments also
suggest that the industry is currently considering how best to
operationalize the relevant prime brokerage processes in a T+2 standard
settlement cycle, and that the comments do not recommend specific
changes or modifications to the Prime Broker No-Action Letter. The
Commission expects that its staff will consider whether modifications
to the Prime Broker No-Action letter are appropriate in connection with
industry implementation of the T+2 standard settlement cycle.
5. Prospectus Delivery
    In the T+2 Proposing Release, the Commission requested comment on
whether the adoption of a T+2 settlement cycle would create any legal
or operational concerns for issuers or broker-dealers related to their
ability to comply with the prospectus delivery obligations under the
Securities Act.\188\ As noted in the T+2 Proposing Release, 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.\189\
---------------------------------------------------------------------------

    \188\ T+2 Proposing Release, supra note 1, 81 FR at 69263.
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).
    \189\ T+2 Proposing Release, supra note 1, 81 FR at 69254,
n.113. 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. Paragraph (d) of Rule 172 provides that Rule 172 does not apply
to any offerings of investment companies or business development
companies, or to a business combination, or any offering registered
on Form S-8 (17 CFR 239.16b).
    Under Securities Act Rule 174(h), a dealer may satisfy any
obligation to deliver a prospectus pursuant to Section 4(a)(3) of
the Securities Act (other than for blank check companies) by
complying with the provisions of Securities Act Rule 172. 17 CFR
230.174(h). (In 2012, Congress enacted the Jumpstart Our Business
Startups Act, which re-designated Section 4(3) of the Securities Act
as Section 4(a)(3). Public Law 112-106, Sec. 201(b)(1), (c)(1), Apr.
5, 2012, 126 Stat 306.)
---------------------------------------------------------------------------

    Two commenters submitted letters encouraging the Commission to
permit expanded use of electronic delivery of prospectuses and other
materials that broker-dealers are required to provide to investors at
or prior to settlement in accordance with various provisions of the
securities laws.\190\ One commenter expressed concern that, for
securities that do not benefit from access equals delivery, the move to
T+2 leaves little or no margin for operational difficulties that could
delay the delivery of a prospectus despite a good faith effort by the
broker-dealer.\191\ In light of the potential for unforeseen or
unanticipated disruption to this process, the commenter encouraged the
Commission to provide for a reasonable means to comply or otherwise
avoid non-compliance with prospectus and confirmation delivery
requirements, given the operational constraints associated with
physical delivery.\192\
---------------------------------------------------------------------------

    \190\ SIFMA at 20-21; Fidelity at 5-6; see also note 188 supra.
    \191\ SIFMA at 20. In support of that concern, the commenter
noted that the current process to effectuate delivery of such
documentation often entails a number of steps that occur late in the
day and overnight to ensure compliance.
    \192\ Id. at 21. As an example, the commenter suggested that the
Commission could provide guidance indicating that it will consider a
broker-dealer to have met the requirement to deliver both a physical
prospectus and a confirmation prior to settlement when the broker-
dealer has made a good faith effort to deliver the physical
prospectus and confirmation prior to settlement and delivers the
prospectus and confirmation as soon as practicable thereafter. The
commenter also suggested that the Commission could provide guidance
indicating that when a confirmation is sent in advance of the
prospectus as a result of an unforeseen delay, the confirmation will
not be deemed a ``nonconforming'' prospectus in violation of Section
5 of the Securities Act if the dealer has made a good faith effort
to deliver the prospectus and the prospectus is delivered as soon as
practicable thereafter. Id.
---------------------------------------------------------------------------

    The second commenter focused more generally on the use of
electronic delivery.\193\ The commenter believed that shareholder
preferences and technology regarding internet usage has changed
considerably over the years, and that the Commission should, in light
of these changes, update its existing guidance on the use of electronic
media.\194\ The commenter further asserted that electronic delivery,
particularly under a notice and access model, offers investors an
opportunity to receive up-to-date information in a format to which they
are accustomed and that is searchable. Lastly, the commenter stated
that electronic delivery offers significant cost savings benefits to
investors and to the intermediaries that support them and is
environmentally friendly.\195\
---------------------------------------------------------------------------

    \193\ Fidelity at 5-6.
    \194\ Id.
    \195\ Id. at 6.
---------------------------------------------------------------------------

    The Commission received comments, which suggested that operational
difficulties may arise if the standard settlement cycle is shortened to
T+2 in instances where a broker-dealer is required to deliver a
physical prospectus. Such commenters, however, did not identify
specific instances where such operational difficulties could occur. If,
during implementation, specific issues arise, the Commission encourages
industry participants to bring them to the attention of the staff.
Accordingly, the Commission is not at this time providing guidance on
these requirements.

D. Exemptive Orders Excluding Certain Products From the Requirements of
Rule 15c6-1(a)

    To help facilitate the establishment of a T+3 settlement cycle, the
Commission issued an exemptive order in 1995 granting a limited
exemption for securities that do not generally trade in the U.S. by
providing that all transactions in securities that do not have transfer
or delivery facilities in the U.S. are exempt from the scope of Rule
15c6-1.\196\ In the T+2 Proposing Release, the Commission requested
comment as to whether this exemptive order should be modified or
whether the conditions of that exemption were still appropriate.\197\
The Commission did not receive any comment letters pertaining to this
exemptive order and is not rescinding or modifying it.
---------------------------------------------------------------------------

    \196\ See Securities Transactions Settlement, Exchange Act
Release No. 35750 (May 22, 1995), 60 FR 27994, 27995 (May 26, 1995)
(granting exemption for certain transactions in foreign securities).
    \197\ See T+2 Proposing Release, supra note 1, 81 FR at 69262.
---------------------------------------------------------------------------

    The Commission also granted an exemption from the T+3 settlement
cycle for contracts for the purchase or sale of any security issued by
an insurance company (as defined in Section 2(a)(17) of the Investment
Company Act) \198\ that is funded by or participates in a ``separate
account'' (as defined in Section 2(a)(37) of the Investment Company
Act),\199\ including

a variable annuity contract or a variable life insurance contract, or
any other insurance contract registered as a security under the
Securities Act.\200\
---------------------------------------------------------------------------

    \198\ 15 U.S.C. 80a-2(a)(17).
    \199\ 15 U.S.C. 80a-2(a)(37).
    \200\ See Securities Transactions Settlement, Exchange Act
Release No. 35815 (June 6, 1995), 60 FR 30906, 30907 (June 12, 1995)
(granting exemption for transactions involving certain insurance
contracts). Certain insurance contracts, including variable annuity
contracts and variable life insurance contracts, have been deemed to
be securities under the Securities Act. SEC v. Variable Annuity Life
Ins. Co. of America, 359 U.S. 65 (1959) (variable annuity contracts
are ``securities'' which must be registered with the Commission
under the Securities Act); Adoption of Rule 3c-4 under the
Investment Company Act of 1940, Exchange Act Release No. 9972, 1 SEC
Docket 17 (Jan. 31, 1973) (a public offering of variable life
insurance contracts involved an offering of securities required to
be registered under the Securities Act).
---------------------------------------------------------------------------

    In the T+2 Proposing Release, the Commission requested comment as
to whether the conditions set forth in the existing exemption for
registered insurance products continued to be appropriate, or whether
the exemption should be modified.\201\ Two commenters stated that the
conditions for the Commission's existing exemption for registered
insurance products are still appropriate, and as such, the exemption
should be preserved.\202\ In support of that view, both of these
commenters argued that the conditions and considerations set forth in
the 1995 exemptive order apply as much today as in 1995 and are even
more applicable in a T+2 environment.\203\ According to one of these
commenters, insurance companies issuing registered insurance products
are still subject to specific federal and state law requirements, as
noted in the Commission's exemptive order.\204\ Further, this commenter
noted that no relevant market or regulatory conditions have changed,
and that no relevant features of insurance products have changed since
the Commission determined that the insurance exemption was justified in
light of such requirements.\205\ In addition, the commenter noted that
registered insurance products do not trade in the same manner as most
other securities, they are not listed on exchanges or sold in the OTC
market, and these products do not present the credit, market,
liquidity, and systemic risks that Rule 15c6-1 is designed to
address.\206\ The other commenter believed that it would be helpful for
the Commission to include language in the adopting release noting that
the exemptive order for insurance products remains intact and is not
affected by the proposed amendment.\207\
---------------------------------------------------------------------------

    \201\ See T+2 Proposing Release, supra note 1, 81 FR at 69262.
    \202\ CAI at 1; Fidelity at 4.
    \203\ CAI at 3; Fidelity at 4.
    \204\ Specifically, this commenter stated that the Commission's
order noted certain federal and state law requirements on insurers
to: (1) Assess the purchaser's insurability and mortality risk,
which often involves time consuming medical examinations, laboratory
tests, and review of medical records; (2) conduct a review to
determine any additional requirements imposed by the Internal
Revenue Code or ERISA; and (3) preserve and implement, as required
by state law in many jurisdictions, a purchaser's right to return or
cancel an insurance contract for any reason within a specified time
of delivery (so-called ``free look'' requirements). CAI at 3 (citing
to Release Nos. 33-7177; 34-35815 (June 6, 1995), 60 FR 30906 (June
12, 1995)).
    \205\ CAI at 3.
    \206\ Id. at 4.
    \207\ Fidelity at 4-5.
---------------------------------------------------------------------------

    The Commission has carefully considered the comments and is not
rescinding or modifying the exemptive order for registered insurance
products.

IV. Compliance Date

    In the T+2 Proposing Release, the Commission noted that in setting
a compliance date it would need to provide sufficient time to allow for
broker-dealers, clearing agencies, and other market participants to
plan for, implement, and test changes to their systems, operations,
policies, and procedures in a manner that would allow for an orderly
transition to a T+2 standard settlement cycle. The Commission also
noted that the Industry Steering Group (``ISC'') \208\ that was formed
to facilitate the transition to a T+2 settlement cycle published, in
conjunction with Deloitte & Touche LLP, the T+2 Industry Implementation
Playbook (``T+2 Playbook''), which set forth an implementation timeline
with milestones and dependencies, as well as detailed remedial
activities that impacted market participants should consider to prepare
for a migration to a T+2 settlement cycle.\209\ This implementation
timeline provides for a transition to a T+2 settlement cycle in the
third quarter of 2017. Subsequent to publication of the T+2 Playbook,
the ISC identified September 5, 2017 as the target date for the
transition to a T+2 settlement cycle.\210\
---------------------------------------------------------------------------

    \208\ DTCC, in collaboration with the Investment Company
Institute and the Securities Industry and Financial Markets
Association, and other market participants, formed the ISC in
October 2014. See Press Release, DTCC, Industry Steering Committee
and Working Group Formed to Drive Implementation of T+2 in the U.S.
(Oct. 2014), http://www.dtcc.com/news/2014/october/16/ust2.aspx.
    \209\ Deloitte & Touche LLP & ISC, T+2 Industry Implementation
Playbook (Dec. 2015), http://www.ust2.com/pdfs/T2-Playbook-12-21-15.pdf.
    \210\ The ISC announced in March 2016 that it identified
September 5, 2017 as a target implementation date. See Press
Release, ISC, US T+2 ISC Recommends Move to Shorter Settlement Cycle
On September 5, 2017 (Mar. 7, 2016), http://www.ust2.com/pdfs/T2-ISC-recommends-shorter-settlement-030716.pdf.
---------------------------------------------------------------------------

    In response to the T+2 Proposing Release, several commenters
supported September 5, 2017 as the compliance date for the proposed
changes to Rule 15c6-1(a), and no commenters suggested an alternative
compliance date for the Commission's consideration or otherwise
addressed the compliance date issue.\211\ In identifying September 5,
2017, two commenters noted that they attempted to determine the lowest
risk date on which to migrate to a shorter settlement cycle, and that
considerations included, holidays, high-volume events such as index
rebalancing, options expiration, and scheduled corporate action events,
among others.\212\ One commenter cited the advantages of September 5,
2017 being the Tuesday following Labor Day, which would provide market
participants with a three-day weekend to implement and test system and
procedural changes.\213\
---------------------------------------------------------------------------

    \211\ CCMA at 2-3; DTCC Letter at 3-4; Fidelity at 2; FIF at 1;
ICI at 6; IDC at 2; SIFMA at 2, 3-4; Thomson Reuters at 2; WFA at 3.
    \212\ DTCC Letter at 3-4; SIFMA at 5.
    \213\ DTCC Letter at 4.
---------------------------------------------------------------------------

    Several commenters noted work that already has been performed by
market participants to implement a T+2 standard settlement cycle on a
schedule consistent with the target implementation date set forth by
the ISC.\214\ As a means of ensuring that market participants continue
to work towards implementation of a T+2 standard settlement cycle on
this timeline, several commenters encouraged the Commission to adopt
the amendment to Rule 15c6-1(a) by March 2017 and set a compliance date
consistent with the target date set by the ISC, which would provide
market participants with certainty that the transition to a shorter
settlement cycle would occur as well as provide time to implement and
test changes necessary to support a transition to a shorter settlement
cycle.\215\
---------------------------------------------------------------------------

    \214\ DTCC Letter at 4; SIFMA at 14; Thomson Reuters at 1-2.
    \215\ Fidelity at 2; FIF at 1; ICI at 6; SIFMA at 2.
---------------------------------------------------------------------------

    One commenter specifically noted that the industry-wide testing
approach developed by the ISC suggested that a six-month test period
prior to the compliance date would be required to meet industry
requirements.\216\ This commenter also expressly supported Commission
action in March 2017, stating that swift, decisive leadership by the
Commission to adopt the T+2 settlement cycle by March 2017 would
guarantee industry participants continue their efforts to complete the
operational and technological changes

required to move to a shorter settlement cycle.\217\ This commenter
also noted that testing within individual firms and between firms has
already begun, with industry-wide testing scheduled to begin on
February 13, 2017.\218\ One commenter noted that formal projects to
migrate its systems to T+2 have been created across multiple product
lines, and that it is well on-track to have all required changes
completed and positioned to support industry testing scheduled to take
place in February 2017.\219\
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    \216\ SIFMA at 4-5.
    \217\ Id. at 2.
    \218\ Id. This commenter also noted that testing of changes
related to a transition to a T+2 standard settlement cycle is being
coordinated with testing associated with other industry initiatives,
including, among others, Regulation Systems Compliance and Integrity
and the implementation of the Consolidated Audit Trail. Id. at 9.
    \219\ DTCC Letter at 4.
---------------------------------------------------------------------------

    In light of the scope of industry preparation highlighted by the
commenters as necessary for a successful transition by all market
participants to a T+2 standard settlement cycle, the Commission
believes that September 5, 2017 is an appropriate compliance date, and
an earlier date could result in disruptions to the securities markets
if market participants are not able to complete the changes necessary
to support a T+2 standard settlement cycle on a shorter timeline.
Commenters supporting a September 5, 2017 compliance date indicated
that industry preparations have continued to proceed since the March
2016 announcement by the ISC of the target implementation date and are
anticipated to be completed in time for a transition to a shorter
settlement cycle by September 5, 2017.\220\
---------------------------------------------------------------------------

    \220\ SIFMA at 2, 4-5, 9; DTCC Letter at 4; Thomson Reuters at
1-2; WFA at 2-3; ICI at 6. With respect to the preparedness of SROs
for a transition to a shortened standard settlement cycle, the
Commission received one comment noting that, although several SROs
already had published changes or proposed changes to their rules to
accommodate a shortened settlement cycle, there are still certain
SRO rules requiring amendment to recognize the T+2 settlement cycle.
Such rules may specifically establish or reference a T+3 settlement
cycle, but they also may not contain specific references to T+3 and
instead establish time frames based on the settlement date of a
trade. See SIFMA at 6 (identifying three particular rules that
specifically reference a T+3 settlement cycle). The Commission
already has approved certain SRO rule changes to accommodate a T+2
settlement cycle. See, e.g., NYSE Arca, Inc.; Order Granting
Approval of a Proposed Rule Change to Conform to Proposed Amendment
to Rule 15c6-1(a) under the Securities Exchange Act of 1934 to
Shorten the Standard Settlement Cycle from T+3 to T+2, Exchange Act
Release No. 79732 (Jan. 4, 2017); MSRB; Order Granting Approval of a
Proposed Rule Change Consisting of Proposed Amendments to Rules G-12
and G-15 to Define Regular-Way Settlement for Municipal Securities
Transactions as Occurring on a Two-Day Settlement Cycle and
Technical Conforming Amendments, Exchange Act Release No. 77744
(April 29, 2016).
---------------------------------------------------------------------------

    The Commission received two comment letters referencing certain
regulations of the Federal Deposit Insurance Corporation (``FDIC'') and
the Office of the Comptroller of the Currency (``OCC'') which use
language similar to the language in Rule 15c6-1(a) being amended
today.\221\ One commenter described these as rules that should be
amended in light of the move to a T+2 settlement cycle. The commenter
noted that the industry is in contact with each of these regulatory
entities regarding these rules and stated its belief that none of these
anticipated changes should present an obstacle to the migration
currently underway.\222\ The other commenter noted that these rules are
virtually identical to Rule 15c6-1 and requested that the Commission
coordinate with both the FDIC and OCC on changes to their rules that
match the proposal.\223\ Commission staff is in contact and
coordination with staff from these agencies, and Commission staff also
understands that staff from these agencies are in contact with the
industry regarding these rules and the shift to a T+2 settlement cycle.
These commenters did not identify a specific problem or impediment
arising from the existence of these rules, and the Commission does not
see the existence of these rules as an impediment to adopting the
amendment to Rule 15c6-1(a).
---------------------------------------------------------------------------

    \221\ See SIFMA at 6 and FSR at 5 (identifying FDIC Rule
344.7(a) and OCC Rule 12.9(a) as using language mirroring that in
Rule 15c6-1).
    \222\ SIFMA at 6.
    \223\ FSR at 5. This commenter also requested that the
Commission work with the FDIC and OCC to ensure that they amend
their equivalent rules sufficiently in advance of the T+2 compliance
date. Id. at 2.
---------------------------------------------------------------------------

    Therefore, the Commission believes that September 5, 2017 is an
appropriate compliance date by which the transition to a T+2 standard
settlement cycle should be completed. The Commission believes that a
compliance date of September 5, 2017 provides sufficient time for
broker-dealers, clearing agencies, SROs and other market participants,
including retail investors,\224\ to plan for, implement, promulgate new
rules, and test changes to systems, operations, policies, and
procedures.
---------------------------------------------------------------------------

    \224\ As previously discussed, one commenter noted concerns
about the impact of a T+2 settlement cycle on investors that do not
make timely deliveries and the potential implications for Exchange
Act Rules 15c3-3(m) and 204. See notes 150 and 170 supra. The
Commission believes that a compliance date of September 5, 2017 will
provide retail investors with time to become informed--either
directly or through their broker-dealers--of the change to a T+2
standard settlement cycle and determine what changes to their own
processes and behaviors may be necessary to participate in the
market under a shorter settlement cycle.
---------------------------------------------------------------------------

V. Further Reductions in the Settlement Cycle

    In the T+2 Proposing Release, the Commission requested comment on
whether additional reductions in the settlement cycle could be
achieved.\225\ As also discussed in Parts III.A.3.c and VI.D.1 and 2, a
few commenters urged the Commission to adopt a T+1 or shorter standard
settlement cycle citing benefits similar to those of a T+2 standard
settlement cycle, but greater in magnitude.\226\ One commenter asserted
that the Commission should move without undue delay toward a T+1
standard based on STP.\227\ Another commenter noted the proposed rule
change did not go far enough to treat all investors equally and thought
the settlement cycle should be 24 hours as a maximum timeframe and one
hour at a minimum.\228\ Another commenter stated that it was time to
implement ``instantaneous'' settlement of trades, noting that the
practical impact of longer settlement cycles is that if he is
``actively trading,'' the commenter would not have access to the
proceeds of a transaction until it settled and therefore had to keep
funds ``un-invested'' at all times.\229\ As discussed in further detail
in Part VI.D.1, several commenters argued against a move to a
settlement cycle shorter than T+2, citing the industry coordination
challenges, higher investment costs, and the longer time needed to
recoup the investment.\230\
---------------------------------------------------------------------------

    \225\ See T+2 Proposing Release, 81 FR at 69262.
    \226\ CFA at 1-4; Spydell.
    \227\ CFA at 1, 3.
    \228\ Spydell.
    \229\ Parker.
    \230\ Thomson Reuters at 2, WFA at 3, MFA at 2, and DTCC Letter
at 4.
---------------------------------------------------------------------------

    The Commission believes at this time that a successful transition
to a settlement cycle shorter than T+2 would require comparatively
larger investments by market participants to adopt new systems and
processes.\231\ However, the Commission notes that a move to a T+1
standard settlement cycle could have similar qualitative benefits of
market, credit, and liquidity risk reduction for market participants as
a move to a T+2 standard settlement cycle. Accordingly, the staff of
the Commission will undertake to submit a report to the Commission no
later than three years from the compliance date of Rule 15c6-1(a) as
amended herein. This report will include, but not be limited to an
examination of:
---------------------------------------------------------------------------

    \231\ See Part VI.D.1.

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

    (i) The impact of today's amendment to Rule 15c6-1(a) to establish
a T+2 standard settlement cycle on market participants, including
investors;
    (ii) the potential impacts associated with movement to a shorter
settlement cycle beyond T+2;
    (iii) the identification of technological and operational
improvements that can be used to facilitate a movement to a shorter
settlement cycle; and
    (iv) cross-market impacts (including international developments)
related to the shortening of the settlement cycle to T+2.
    Given that the report will be based on data and information
available to Commission staff, the Commission invites academics, market
participants, fellow regulators and other interested parties to provide
data and information that will be useful in informing the staff's
study.

VI. Economic Analysis

    The Commission has prepared an economic analysis in connection with
the amendment to Rule 15c6-1(a) that it is adopting today. The economic
analysis begins with a discussion of the risks inherent in the standard
settlement cycle for securities transactions and the impact that
shortening the standard settlement cycle may have on the management and
mitigation of these risks. Next, the economic analysis summarizes and
considers comments that address the costs and benefits of a shorter
settlement cycle, as well as comments about the economic analysis
provided in the T+2 Proposing Release. Finally, the economic analysis
discusses certain market frictions that potentially impair the ability
of market participants to shorten the settlement cycle in the absence
of a Commission rule. The discussion regarding settlement cycle risks
and market frictions frames the Commission's analysis of the rule's
benefits and costs in later sections. The Commission believes that the
amendment to Rule 15c6-1(a) will ameliorate these market frictions and
thus will reduce the risks inherent in settlement.
    After discussing the aforementioned risks and market frictions, the
economic analysis then provides a baseline of current practices. The
economic analysis then discusses the likely economic effects of the
amendment, such as the costs and benefits of the adopted amendment as
well as its effects on efficiency, competition, and capital
formation.\232\ The Commission has, where possible, attempted to
quantify the economic effects expected to result from the amendment.
---------------------------------------------------------------------------

    \232\ Section 3(f) of the Exchange Act requires the Commission,
when engaging in rulemaking that requires the Commission to consider
or determine whether an action is necessary or appropriate in the
public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
    Further, Section 23(a)(2) of the Exchange Act requires the
Commission, when adopting rules under the Exchange Act, to consider
the impact that any new rule would have on competition, and provides
that the Commission shall not adopt any rule that would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. 15 U.S.C.
78w(a)(2).
---------------------------------------------------------------------------

A. Background

    The amendment to Rule 15c6-1(a) prohibits a broker-dealer from
effecting or entering into a contract for the purchase or sale of a
security (other than an exempted security, government security,
municipal security, commercial paper, bankers' acceptances, or
commercial bills) that provides for payment of funds and delivery of
securities later than the second business day after the date of the
contract unless otherwise expressly agreed to by both parties at the
time of the transaction, subject to certain exceptions provided in the
rule. Several commenters addressed the impact that the length of the
settlement cycle would have on credit, market, liquidity, and
counterparty risk in financial markets.\233\ In its analysis of the
economic impacts of the amendment to Rule 15c6-1(a), the Commission has
considered the risks that market participants, including broker-
dealers, clearing agencies, and institutional and retail investors, are
exposed to during the settlement cycle and how those risks change with
the length of the cycle.
---------------------------------------------------------------------------

    \233\ Bloomberg at 1; CFA at 3; DTCC Letter at 2; Fidelity at 1;
FIF at 2; FSI at 2; ICI at 4-5; IDC at 1; MFA at 1-2; SIFMA at 1.
---------------------------------------------------------------------------

    The settlement cycle spans the length of time between when a trade
is executed and when cash and securities are delivered to the seller
and buyer, respectively. During this period of time, each party to a
trade faces the risk that its counterparty may fail to meet its
obligations to deliver cash or securities. When a counterparty defaults
or fails to meet its obligations to deliver cash or securities, the
trade must be closed out. Regardless of whether the non-defaulting
party chooses to enter into a new transaction as a result of the failed
trade, it is likely to bear costs as a result of its counterparty's
failure to deliver the cash or securities. For example, a party that
chooses to enter into a new transaction must find a new counterparty to
contract with and must trade at a price that may not be the same as the
price of the original trade.\234\ The length of the settlement cycle
influences this risk in two ways: (i) Through its effect on
counterparty exposures to price volatility, and (ii) through its effect
on the value of outstanding obligations.
---------------------------------------------------------------------------

    \234\ As described in Part II.c.1.a above, in its role as a CCP,
NSCC becomes counterparty to both initial parties to a transaction.
In the case of cleared transactions, while each initial party is not
exposed to the risk that their original counterparty defaults, both
are exposed to the risk of CCP default. Similarly, the CCP is
exposed to the risk that either initial party defaults.
---------------------------------------------------------------------------

    First, the duration of the settlement timeframe affects whether and
how much asset prices can move further away from the price of the
original trade. For example, if daily asset returns are statistically
independent, then the variance of prices over t days is equal to t
multiplied by the daily variance of asset returns. Thus when daily
returns are independent and daily variance of returns is constant, the
variance of returns increases linearly as the length of the settlement
cycle increases.\235\ In other words, if more time passes between when
a trade is executed and when a counterparty defaults, the variance of
prices will be larger, and the more likely it will be that difference
between execution price and the price ultimately paid will be larger.
For example, if a buyer whose counterparty defaults or fails to meet
its obligations to deliver securities decides to enter into a new
transaction to buy the same security, the buyer faces the risk that the
price of the security will have deviated from the price of the original
transaction. The price could increase or decrease, but in the event of
a price increase, the buyer must pay more than the original execution
price.\236\
---------------------------------------------------------------------------

    \235\ More generally, because total variance over multiple days
is equal to the sum of daily variances and variables related to the
correlation between daily returns, total variance increases with
time so long as daily returns are not highly negatively correlated.
See e.g., Morris H. DeGroot, Probability and Statistics 216
(Addison-Wesley Publishing Co. 1986).
    \236\ Similarly, a seller whose counterparty fails faces similar
risks with respect to the security, albeit in opposite directions.
---------------------------------------------------------------------------

    Second, the length of the settlement cycle directly influences the
quantity of unsettled transactions between trade date and settlement
date. For example, assuming no change in transaction volumes, the
volume of unsettled trades under a T+2 standard settlement cycle is
two-thirds the volume of unsettled trades under a T+3 standard
settlement cycle. Thus, in the event of a counterparty default,
counterparties would have to enter into a new transaction for, or
otherwise close out, two-thirds of the number of trades in a

T+2 standard settlement cycle, as compared to the number of trades
requiring a new trade or close-out in a T+3 standard settlement cycle.
For a given adverse move in prices, the financial losses resulting from
counterparty default will be two-thirds as large under a T+2 standard
settlement cycle than under a T+3 standard settlement cycle.\237\
---------------------------------------------------------------------------

    \237\ One commenter specifically commented on how the volume of
obligations might affect the consequences of adverse price
movements, stating that reducing the total volume and value of
obligations in the settlement system at any given time would help
minimize the systemic consequences of serious market disruptions.
See SIFMA at 15.
---------------------------------------------------------------------------

    Market participants manage and mitigate the risks associated with
settlement in a number of specific ways that are discussed in Part
III.A of this release. Generally, these methods entail costs to market
participants. In some cases, these costs may be explicit. For instance,
broker-dealers may explicitly charge customers for providing them with
the implicit option to default on payment or delivery obligations.
Other costs are implicit, such as the opportunity cost of assets posted
as collateral, or limitations on the amount of credit that broker-
dealers are willing to provide their customers.
    Shortening the standard settlement cycle will shorten the amount of
time that market participants are exposed to credit and market risks.
In addition, a shorter standard settlement cycle will reduce liquidity
risks that could arise between derivative and cash markets by allowing
investors to obtain the proceeds of securities transactions sooner.
These are risks that affect all market participants, are difficult to
diversify away, and require resources to manage and mitigate. CCPs and
clearing members require participants to post financial resources in
order to secure members' obligations to deliver cash and securities to
the CCP. To the extent that collateral is posted to CCPs and clearing
members for the purposes of mitigating the risks of the clearance and
settlement process, that may represent an allocative inefficiency.
    This allocative inefficiency could take on several forms. First,
CCP financial resources that are used to mitigate the risks of the
clearance and settlement process could have been put to alternative
uses, such as investment in less liquid assets. Second, assets that are
valuable because they are particularly suited to meeting financial
resource obligations may have been better allocated to market
participants that hold these assets for their fundamental risk and
return characteristics. These allocative inefficiencies may reduce
capital formation. Reducing the financial risks associated with the
overall clearance and settlement process would thereby reduce the
amount of collateral required to mitigate these risks, which would
reduce the costs that market participants bear to manage and mitigate
these risks and the allocative inefficiencies that may stem from risk
management practices.\238\ Hence, the Commission believes that these
benefits generally provide securities market participants with
incentives to shorten the settlement cycle.
---------------------------------------------------------------------------

    \238\ See infra Part II.C.1.a for further discussion of
financial resources collected to mitigate and manage financial
risks; see also infra Part III.A for more information about risk
reduction.
---------------------------------------------------------------------------

    However, the Commission acknowledges that certain market frictions
may prevent securities markets from shortening the settlement cycle in
the absence of regulatory intervention. The Commission has considered
two key market frictions related to investments required to implement a
shorter settlement cycle. The first is a coordination problem that
arises when some of the benefits of actions taken by market
participants are only realized when other market participants take a
similar action. For example, in the absence of the amendment to Rule
15c6-1(a), if a particular institutional investor makes a technological
investment necessary to reduce the time it requires to match and
allocate trades while its clearing broker-dealers do not, the
institutional investor cannot fully realize the benefits of its
investment, as the settlement process is limited by the capabilities of
the clearing agency for trade matching and allocation. More generally,
when each market participant must bear the costs of an upgrade for the
entire market to enjoy a benefit, the result is a coordination problem,
where each market participant is reluctant to make the necessary
investments until it can be sure that others will also do so. In
general, these coordination problems may be resolved if all parties can
credibly commit to the necessary infrastructure investments. Regulatory
intervention is one possible way of coordinating market participants to
undertake the investments necessary to support a shorter settlement
cycle. Such intervention could come through Commission rulemaking and/
or through a coordinated set of SRO rule changes. Two commenters made
similar arguments, discussing the need for ``regulatory certainty''
(i.e., Commission action) to encourage market participants to make the
necessary investments for a T+2 standard settlement cycle.\239\
---------------------------------------------------------------------------

    \239\ Fidelity at 2; FIF at 1; ICI at 6; SIFMA at 2.
---------------------------------------------------------------------------

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

counterparty default if the portfolio of trades that would have to be
reestablished is diversified.\240\ As a corollary, a market participant
who trades a single security in a single direction against a given
counterparty may face more idiosyncratic risk in the event of
counterparty failure than a market participant who trades in both
directions with that counterparty.
---------------------------------------------------------------------------

    \240\ See Ananth Madhavan, Morris Mendelson & Junius W. Peake,
Risky Business: The Clearance and Settlement of Financial
Transactions (Wharton Sch. Rodney L. White Ctr. for Fin. Research,
Working Paper No. 40-88, 1988); see also John H. Cochrane, Asset
Pricing (Princeton University Press rev. ed. 2009), at 15 (defining
the idiosyncratic component of any payoff as the part that is
uncorrelated with the discount factor).
---------------------------------------------------------------------------

    Further, the extent to which a market participant experiences any
economic benefits that may stem from a shortened standard settlement
cycle likely depends on the market participant's relative bargaining
power. While large intermediaries, such as clearing broker-dealers, may
experience direct benefits from a shorter settlement cycle as a result
of being required to post less collateral with a CCP, they may not pass
on the entirety of these cost savings to their customers. In addition,
to the extent that broker-dealers do not effectively compete for
customers through fees and services as a result of market power, they
may limit the portion of these cost savings passed through to their
customers.\241\
---------------------------------------------------------------------------

    \241\ See infra Parts VI.C.1.
---------------------------------------------------------------------------

    In light of the above, the Commission believes that the amendment
to Rule 15c6-1(a), which will shorten the standard settlement cycle
from T+3 to T+2, will mitigate the market frictions of coordination and
underinvestment described above. The Commission also believes that
mitigating these market frictions and moving to a shorter standard
settlement cycle will reduce the risks inherent in the clearance and
settlement process.
    The shorter standard settlement cycle will also have an impact on
the level of operational risk that exists in the U.S. clearance and
settlement system as a result of existing clearance and settlement
processes. By shortening the settlement cycle by one day, market
participants involved in a securities transaction will have one less
day to resolve any errors that might occur in the clearance and
settlement process. As a result, tighter operational timeframes and
linkages required under a shorter standard settlement cycle might
introduce new fragility that could impact financial market
participants, specifically an increased risk that operational issues
could impact transaction processing and related securities
settlement.\242\ One commenter noted that a T+2 settlement cycle would
motivate market participants to tighten their operational
processes.\243\ While the Commission acknowledges that a shorter
standard settlement cycle may increase risks associated with the
clearance and settlement process by creating tighter operational
timeframes, the operational improvements made by market participants to
facilitate a shorter standard settlement cycle may offset these
increases in risk. In addition, even in the absence of such operational
improvements, the Commission believes that the transition to a
shortened settlement cycle is appropriate given the reduction in
credit, market, and liquidity risks associated with a shorter
settlement cycle.
---------------------------------------------------------------------------

    \242\ For example, the ability to compute an accurate net asset
value (``NAV'') within the settlement timeframe is a key component
for settlement of ETF transactions. See, e.g., Barrington Partners,
An Extraordinary Week: Shared Experiences from Inside the Fund
Accounting Systems Failure of 2015, at 10 (Nov. 2015), http://www.mfdf.org/images/uploads/blog_files/SharedExperiencefromFASystemFailure2015.pdf.
    \243\ See ICI at 5. Specifically, the commenter noted that it
expected institutional investors to improve the quality of
settlement instructions and static settlement data maintenance and
increase automation and STP rates with their broker-dealers and
custodian banks, resulting in higher on-time affirmed, confirmed,
and settled trades.
---------------------------------------------------------------------------

    One commenter noted its view more generally that shortened
settlement periods will result in an increased likelihood of
computerized trading that could destabilize the market.\244\ The
Commission notes that amending the length of the settlement cycle will
affect the speed at which post-trade processes occur, but has not
observed any evidence to suggest that a shortened standard settlement
cycle will alter the incidence of computerized trading or how such
activity influences market stability.
---------------------------------------------------------------------------

    \244\ See Gellert; Part III.A.3 supra.
---------------------------------------------------------------------------

    Market participants may incur initial costs for the investments
necessary to comply with a shorter standard settlement cycle.\245\
However, these costs may differ across market participants and these
differences may exacerbate coordination problems. First, differences in
operational costs across CCP members may be driven by member
transaction volume, and so the extent to which many of the upgrades
necessary for a T+2 standard settlement cycle are optimal for a member
to adopt unilaterally may depend on its transaction volume. For
example, certain upgrades necessary for a T+2 standard settlement cycle
may result in economies of scale, where large clearing members are able
to comply with the amendment to Rule 15c6-1(a) at a lower per
transaction cost than smaller members. As a result, larger members
might take a short time to recover their initial costs for upgrades;
smaller members with lower transaction volumes might take longer to
recover their initial cost outlays and might be more reluctant to make
the upgrades in the absence of the amendment to Rule 15c6-1(a).\246\ On
the other hand, smaller members might be more dependent on third-party
service providers, and may thus bear fewer direct costs.
---------------------------------------------------------------------------

    \245\ See infra Part VI.C.2.
    \246\ See SIFMA at 13 (observing that the largest asset managers
reported lower estimated costs than medium asset managers).
---------------------------------------------------------------------------

    In addition, the Commission acknowledges that the upgrades
necessary to implement a shorter standard settlement cycle may produce
indirect economic effects. We analyze some of these indirect effects,
such as the impact on competition and third-party service providers, in
the following section. However, other indirect effects, such as the
ancillary benefits and costs mentioned in the October 2012 Boston
Consulting Group study (``BCG Study''),\247\ of investments and changes
to market practices that enhance the speed and efficiency of the
settlement process, but which are unrelated to a shorter standard
settlement cycle, are not within the scope of this economic analysis.
---------------------------------------------------------------------------

    \247\ See The Boston Consulting Group, Cost Benefit Analysis of
Shortening the Settlement Cycle, (Oct. 2012) (``BCG Study'') at 8,
http://www.dtcc.com/~/media/Files/Downloads/WhitePapers/
CBA_BCG_Shortening_the_Settlement_Cycle_October2012.pdf.
    As noted in the T+2 Proposing Release, DTCC commissioned in May
2012 a study to examine and evaluate the necessary investments and
resulting benefits associated with a shortened settlement cycle for
U.S. equities and corporate and municipal bonds. The resulting BCG
Study analyzed the costs, benefits, opportunities and challenges
associated with shortening the settlement cycle in the U.S.
securities markets to either T+1 or T+2, respectively. See T+2
Proposing Release, supra note 1, 81 FR at 69254.
---------------------------------------------------------------------------

B. Baseline

    In order to perform its analysis of the likely economic effects of
the amendment to Rule 15c6-1(a), as well as the amendment's effects on
efficiency, competition, and capital formation, the Commission uses as
its baseline the clearance and settlement process as it exists today.
In addition to the current process that was described in the T+2
Proposing Release, the baseline includes rules adopted by the
Commission, including rules governing the clearance and settlement
system, SRO rules,\248\ as well as rules adopted

by regulators in other jurisdictions to regulate securities settlement
in those jurisdictions.\249\ The following section discusses several
additional elements of the baseline that are relevant for the economic
analysis of the amendment to Rule 15c6-1(a) because they are related to
the risks and costs faced by market participants that clear and settle
securities transactions subject to the rule and the specific means by
which market participants manage these risks.
---------------------------------------------------------------------------

    \248\ See id. at 69247.
    \249\ See id. at 69255.
---------------------------------------------------------------------------

1. Central Counterparties
    One way NSCC mitigates the credit, market, and liquidity risk it
assumes through its novation and guaranty of trades is via multilateral
netting of the delivery and payment obligations across clearing
members. By offsetting these obligations, NSCC reduces the aggregate
market value of securities and cash it must deliver to clearing members
after the trade is novated and the trade guaranty attaches. While
netting reduces NSCC's settlement obligations by an average of 97% on
each day, it does not fully eliminate the risk posed by unsettled
trades because NSCC is still responsible for payments or deliveries on
trades it cannot fully net. NSCC reported clearing an average of
approximately $805 billion each day during the third quarter of
2016,\250\ suggesting an average net settlement obligation of
approximately $24.2 billion each day.\251\ Based on these estimates,
and given that, under current practices, NSCC's trade guaranty
currently attaches at midnight on T+1, the average notional value of
unsettled trades approaches $48.4 billion.\252\ However, as mentioned
previously, the Commission recently approved a rule change proposed by
NSCC that will accelerate the NSCC trade guaranty from midnight of T+1
to the point of trade comparison and validation for bilateral
submissions or to the point of trade validation for locked-in
submissions. Under the current standard settlement cycle, this
accelerated trade guaranty effectively increases the length of time
that NSCC's trade guaranty attaches from two days to three days. For
the purposes of determining a baseline to compare the effects of this
amendment, the Commission has assumed that NSCC's accelerated trade
guaranty will already be in effect when this amendment takes
effect.\253\
---------------------------------------------------------------------------

    \250\ See NSCC CPMI-IOSCO Quantitative Disclosure Results--Q3
2016, at 14 (Jan. 2017), http://www.dtcc.com/legal/policy-and-compliance.
    \251\ Calculated as $805 billion x 3% = $24.2 billion.
    \252\ Calculated as $24.2 billion x 2 days between attachment of
the trade guaranty and settlement on T+3 = $48.4 billion.
    \253\ See supra Part II.C.1.a.
---------------------------------------------------------------------------

    The aggregate settlement risk faced by NSCC is also a function of
the probability of clearing member default. NSCC manages the risk of
clearing member default by imposing certain financial requirements on
its members. For example, as of 2016, broker-dealer members of NSCC
that are not municipal securities brokers and do not intend to clear
and settle transactions for other broker-dealers must have excess net
capital over the minimum net capital requirement imposed by the
Commission in the amount of $500,000.\254\ Further, each NSCC member is
subject to ongoing membership requirements, including a requirement to
furnish NSCC with assurances of the member's financial responsibility
and operational capability, including, but not limited to, periodic
reports of its financial and operational condition.\255\
---------------------------------------------------------------------------

    \254\ See NSCC Rules and Procedures, supra note 24, Rule 2A,
Section 1A, and Addendum B, Section 1.B.1.
    \255\ See, e.g., id., Rule 15, Section 2.
---------------------------------------------------------------------------

    In addition to managing the risk of member default, CCPs also take
steps to mitigate the risks and adverse indirect effects generated by
member default. For example, in the normal course of business, a CCP's
exposure to market or liquidity risk is hedged because it expects to
receive every security from a seller it is obligated to deliver to a
buyer and it expects to receive every payment from a buyer that it is
obligated to deliver to a seller. However, when a clearing member
defaults, the CCP can no longer expect the defaulting member to deliver
securities or make payments. CCPs mitigate this risk by requiring
clearing members to make contributions of financial resources to the
CCP. As of Q3 2016, NSCC's clearing fund deposits totaled approximately
$5.4 billion, of which $5.2 billion was cash deposits.\256\ The level
of financial resources a CCP requires clearing members to post may be
based on, among other things, the market and liquidity risk of a
member's portfolio, the correlation between the assets in the member's
portfolio and the member's own default probability, and the liquidity
of the collateral assets.
---------------------------------------------------------------------------

    \256\ See NSCC Unaudited Condensed Consolidated Financial
Statements for Q3 2016, available at http://www.dtcc.com/~/media/
Files/Downloads/legal/financials/2016/NSCC-Unaudited-Condensed-
Consolidated-Financial-Statements-3Q-2016.pdf.
---------------------------------------------------------------------------

2. Market Participants--Investors, Broker-Dealers, and Custodians
    As discussed in Part II.C.2 above, broker-dealers serve both retail
and institutional customers. Aggregate statistics from the Board of
Governors of the Federal Reserve System suggest that at the end of the
third quarter of 2016, U.S. households held approximately 40% of the
value of corporate equity outstanding, and 50% of the value of mutual
fund shares outstanding, which provide a general picture of the share
of holdings by retail investors.\257\
---------------------------------------------------------------------------

    \257\ See Board of Governors of the Federal Reserve System,
Statistical Release Z.1 Financial Accounts of the United States,
Flow of Funds, Balance Sheets, and Integrated Macroeconomic
Accounts, at tables L.223 and L.224 (Third Quarter 2016), https://www.federalreserve.gov/releases/z1/current/z1.pdf
---------------------------------------------------------------------------

    In the 2015 annual FOCUS reports, approximately 4,100 broker-
dealers filed reports \258\ with FINRA. These firms varied in size,
with median assets of approximately $700,000, average assets of nearly
$1 billion dollars and total assets for all broker-dealers
approximately $4.1 trillion. Thirty broker-dealers held approximately
80% of the assets of broker-dealers overall, with total assets of
approximately $3.4 trillion, indicating a high degree of concentration
in the industry. Of the 4,100 filers, 186 reported self-clearing public
customer accounts, while 1,497 reported acting as an introducing broker
and sending orders to another broker-dealer for clearing. Broker-
dealers that identified themselves as self-clearing broker-dealers, had
on average, higher total assets than broker-dealers that identified
themselves as introducing broker-dealers. While the decision to self-
clear may be based on many factors, this evidence is consistent with
the argument that there may currently be high barriers to entry for
providing clearing services as a broker-dealer.
---------------------------------------------------------------------------

    \258\ FOCUS Reports, or ``Financial and Operational Combined
Uniform Single'' Reports, are monthly, quarterly, and annual reports
that broker-dealers generally are required to file with the
Commission and/or SROs pursuant to Exchange Act Rule 17a-5, 17 CFR
240.17a-5.
---------------------------------------------------------------------------

    Clearing broker-dealers face liquidity risks as they are obligated
to make payments to clearing agencies on behalf of customers who
purchase securities. As discussed in more detail below, from the
perspective of clearing broker-dealers, customers have an option to
default on their payment obligations, particularly when the price of a
purchased security declines during the settlement cycle.\259\
Therefore, clearing broker-dealers take measures to reduce the risks
posed by their customers. For example, clearing broker-dealers may
require customers to contribute financial resources in the form of
margin to margin accounts, to pre-fund purchases in cash accounts, or
may restrict the use of unsettled funds. These

measures are in many ways analogous to measures taken by clearing
agencies to reduce and mitigate the risks posed by their clearing
members. In addition, clearing broker-dealers may also mitigate the
risks posed by customers by charging higher transaction fees that
reflect the value of the customer's option to default, thereby causing
customers to internalize the cost of the default options inherent in
the settlement process.\260\ While not directly reducing the risk posed
by customers to clearing members, these higher transaction fees at
least allocate to customers the direct expected costs of customer
default.
---------------------------------------------------------------------------

    \259\ See id.
    \260\ See infra Parts VI.B.4 and VI.C.5(5).
---------------------------------------------------------------------------

    Another way the settlement cycle may affect transaction prices is
related to the use of funds during the settlement cycle. To the extent
that buyers may use the cash to purchase securities during the
settlement cycle for other purposes, they may derive value from the
length of time it takes to settle a transaction. Two studies have
tested this hypothesis, and found that sellers demand compensation for
the benefit that buyers receive from deferring payment during the
settlement cycle and that this compensation is incorporated in equity
returns.\261\
---------------------------------------------------------------------------

    \261\ See Victoria Lynn Messman, Securities Processing: The
Effects of a T+3 System on Security Prices (May 2011) (Ph.D.
dissertation, University of Tennessee--Knoxville), http://trace.tennessee.edu/utk_graddiss/1002/; Josef Lakonishok & Maurice
Levi, Weekend Effects on Stock Returns: A Note, 37 J. Fin. 883
(1982), https://www.jstor.org/stable/pdf/2327716.pdf; Ramon P.
DeGennaro, The Effect of Payment Delays on Stock Prices, 13 J. Fin.
Res. 133 (1990), http://onlinelibrary.wiley.com/doi/10.1111/j.1475-6803.1990.tb00543.x/abstract.
---------------------------------------------------------------------------

    The settlement process also exposes investors to certain risks. The
length of the settlement cycle sets the minimum amount of time between
when an investor places an order to sell securities and when the
customer can expect to have access to the proceeds of that sale.
Investors take this into account when they plan transactions to meet
liquidity needs. For example, under T+3 settlement, investors who
experience liquidity shocks, such as unexpected expenses that must be
met within two business days, could not rely on obtaining funding
solely through a sale of securities because the proceeds of the sale
would be available in three business days, at the earliest, and not
two. One possible strategy to deal with such a shock under T+3
settlement would be to borrow cash on day two to meet payment
obligations on day two and repay the loan on day three with the
proceeds from a sale of securities, incurring the cost of one day of
interest on the short-term loan. Another strategy that investors may
use is to hold financial resources to insure themselves from liquidity
shocks.
3. Investment Companies
    As noted above,\262\ shares issued by investment companies settle
on different timeframes. ETFs and certain closed-end funds generally
settle on T+3. By contrast, options and mutual funds generally settle
on a T+1 basis, except for certain retail funds which settle on
T+3.\263\ Mutual funds that settle on a T+1 basis currently face
liquidity risk as a result of a mismatch between the timing of mutual
fund transaction order settlements and the timing of fund portfolio
security transaction order settlements. Mutual funds may manage these
particular liquidity needs by, among other methods, using cash
reserves, back-up lines of credit, or interfund lending facilities to
provide cash to cover the settlement mismatch.\264\ As of the end of
2015, there were 9,156 open-end funds (excluding money market funds,
but including ETFs).\265\ The assets of these funds were approximately
$14.95 trillion.\266\ Within these figures, there were 1,521 ETFs with
$2.1 trillion in assets.\267\
---------------------------------------------------------------------------

    \262\ See supra note 78.
    \263\ Retail funds that currently settle on T+3 will be required
to settle on T+2 as a result of this amendment, and are thus part of
the broader set of securities that will be required to settle on
T+2. The costs and benefits stemming from a shorter settlement cycle
for these retail funds are included in our analysis in Section VI.C.
    \264\ See Open-End Fund Liquidity Risk Management Programs;
Swing Pricing; Re-Opening of Comment Period for Investment Company
Reporting Modernization Release, Investment Company Act Release No.
31835 (Sept. 22, 2015), 80 FR 62274, 62285 n.100 (Oct. 15, 2015),
and Investment Company Liquidity Risk Management Programs Release
No. 32315 (Oct. 13, 2016), 81 FR 82142 (Nov. 18, 2016) at 82143 n.9.
    \265\ See ICI, 2015 Investment Company Fact Book (2016), at 176,
183 (``2016 ICI Fact Book''), http://www.ici.org/pdf/2016_factbook.pdf.
    \266\ See id. at 174, 182.
    \267\ See id. at 182-83.
---------------------------------------------------------------------------

    Under Section 22(e) of the Investment Company Act, an open-end fund
is required to pay shareholders who tender shares for redemption within
seven days of their tender.\268\ In addition to this requirement, as a
practical matter open-end funds that are sold through broker-dealers
meet redemptions within three days because broker-dealers are subject
to Rule 15c6-1(a). Furthermore, Rule 22c-1 under the Investment Company
Act,\269\ the ``forward pricing'' rule, requires funds, their principal
underwriters, and dealers to sell and redeem fund shares at a price
based on the current NAV next computed after receipt of an order to
purchase or redeem fund shares, even though cash proceeds from
purchases may be invested or fund assets may be sold in subsequent days
in order to satisfy purchase requests or meet redemption obligations.
---------------------------------------------------------------------------

    \268\ See 15 CFR 270.80a-22(e).
    \269\ 17 CFR 270.22c-1.
---------------------------------------------------------------------------

4. The Current Market for Clearance and Settlement Services
    As described in Part II.C.1 above, two affiliated entities, NSCC
and DTC, facilitate clearance and settlement for transactions that
currently settle on a T+3 settlement cycle. There is limited
competition in the provision of the services that these entities
provide. NSCC is the CCP for trades between broker-dealers involving
equity securities, corporate and municipal debt, and UITs for the U.S.
market. DTC is the CSD that provides custody and book-entry transfer
services for the vast majority of securities transactions in the U.S.
market that are cleared through NSCC. There is also limited competition
in the provision of Matching/ETC services--three entities that have
obtained exemptions from registration as a clearing agency from the
Commission to operate as Matching/ETC Providers.\270\
---------------------------------------------------------------------------

    \270\ See supra note 24.
---------------------------------------------------------------------------

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

through to their customers in the form of fees and margin requirements,
and what fraction of these costs to bear themselves. The level of
competition that a clearing broker-dealer faces for customers will
dictate the extent to which it is able to exercise market power in
passing through these costs to their customers; a clearing broker-
dealer with little competition for customers is likely to pass on a
majority of its costs to its customers, while one with heavy
competition is likely to choose to bear the cost internally to avoid
losing market share.
    In addition, several factors related to clearance and settlement
impact the current levels of efficiency and capital formation in the
securities market. First, at a general level, market participants
occupying various positions in the clearance and settlement system must
post or hold liquid financial resources, and the level of these
financial resources is a function of the length of the settlement
cycle. For example, NSCC collects clearing fund contributions from
members to ensure that it has sufficient financial resources in the
event that one of its members defaults on its obligations to NSCC. As
discussed above, the length of the settlement cycle is one determinant
of the size of NSCC's exposure to clearing members. As another example,
mutual funds may manage liquidity needs by, among other methods, using
cash reserves, back-up lines of credit, or interfund lending facilities
to provide cash. These liquidity needs, in turn, are related to the
mismatch between the timing of mutual fund transaction settlements and
the timing of fund portfolio security transaction settlements.
    Holding assets solely for the purpose of mitigating counterparty
risk or liquidity needs that arise as part of the settlement process
could represent an allocative inefficiency, as discussed above, both
because firms that are required to hold these assets might prefer to
put them to alternative uses and because these assets may be more
efficiently allocated to other market participants who value them for
their fundamental risk and return characteristics rather than for their
collateral value. To the extent that intermediaries bear costs as a
result of inefficient allocation of collateral assets, these may be
reflected in transaction costs.
    The settlement cycle may also have more direct impacts on
transaction costs. As noted above, clearing broker-dealers may charge
higher transaction fees to reflect the value of the customer's option
to default, and these fees may cause customers to internalize the cost
of the default options inherent in the settlement process. However,
these fees also make transactions costly and may, at the margin,
influence the willingness of market participants to efficiently share
risks or to supply liquidity to securities markets. Taken together,
inefficiencies in the allocation of resources and risks across market
participants may serve to impair capital formation.
    Finally, market participants may make processing errors in the
clearance and settlement process.\271\ Industry participants have
commented that a lack of automation and manual processing have led to
processing errors.\272\ Although some of these errors may be resolved
within the settlement cycle and not result in a failed trade, those
that are not may result in failed trades, which appear in the failure
to deliver data.\273\ Further, market participants may incorporate the
likelihood that processing errors result in delays in payments or
deliveries into securities prices.\274\ Although errors and the
correction of errors are a part of current market practices in a
clearance and settlement system, the Commission does not have, nor did
commenters provide, data available to estimate the rate of processing
errors and the time needed to correct these processing errors.
---------------------------------------------------------------------------

    \271\ See, e.g., Omgeo, Mitigating Operational Risk and
Increasing Settlement Efficiency through Same Day Affirmation (SDA),
at 12 (Oct. 2010), http://www.omgeo.com/page/sda_whitepaper.
    \272\ See DTCC Letter at 2; IDC at 1; SIFMA at 15.
    \273\ See T+2 Proposing Release, supra note 1, 81 FR at 69245;
see also Statement by The Depository Trust & Clearing Corporation,
U.S. Securities and Exchange Commission, Securities Lending and
Short Sales Roundtable, at 3 (Sept. 30, 2009), https://www.sec.gov/comments/4-590/4590-32.pdf.
    \274\ See Messman, supra note 261.
---------------------------------------------------------------------------

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

1. Benefits
    Several commenters noted that the amendment would reduce the risks
associated with the settlement cycle.\275\ One commenter stated that by
shortening the settlement cycle, the amendment would reduce both the
aggregate market value of all unsettled trades and the amount of time
that CCPs or the counterparties to a trade may be subject to market and
credit risk from an unsettled trade.\276\ Shortening the settlement
cycle by one day would reduce the time that unsettled transactions are
guaranteed by NSCC. Under our baseline assumption that NSCC's
accelerated trade guaranty would be in effect by the effective date of
this amendment, a T+2 standard settlement cycle would reduce the time
that unsettled transactions are guaranteed by NSCC from three days to
two days, by approximately one-third. Based on published statistics
from the third quarter of 2016,\277\ and holding average dollar volumes
constant, the maximum aggregate notional value of unsettled
transactions at NSCC under the accelerated trade guaranty would be
approximately $72.6 billion,\278\ and would fall to $48.4 billion under
a T+2 standard settlement cycle, a reduction of $24.2 billion.\279\ Two
commenters noted that a shorter settlement cycle would reduce the
market risks associated with price movements during the settlement
cycle.\280\ A market participant that experiences counterparty default
and enters into a new transaction under a T+3 settlement cycle is
exposed to more market risk than would be the case under a T+2
settlement cycle. As a result, market participants that are exposed to
market, credit, and liquidity risks would be exposed to less risk under
a T+2 settlement cycle. To the extent that these transactions currently
give rise to counterparty risk exposures between mutual funds and
broker dealers, these exposures may decrease as a consequence of a
shorter settlement cycle. The Commission notes that industry
participants have suggested further benefits of a T+2 standard
settlement cycle relative to a T+3 standard settlement cycle as a
result of reduced procyclicality of counterparty exposures and clearing
fund requirements, and presented an analysis consistent with such
benefits.\281\ These benefits depend on the assumptions that underlie
models of counterparty exposures and clearing fund requirements.
---------------------------------------------------------------------------

    \275\ Bloomberg at 1; CFA at 3; DTCC Letter at 2; Fidelity at 1;
FIF at 2; FSI at 2; ICI at 4-5; IDC at 1; MFA at 1-2; SIFMA at 1.
    \276\ DTCC Letter at 2.
    \277\ See CPMI-IOSCO Quantitative Disclosure Results--Q3 2016,
supra note 250, at 14.
    \278\ NSCC has not yet implemented these rule changes. See note
27 supra.
    \279\ The Commission notes that if NSCC's accelerated trade
guaranty is not in effect by the effective date of this amendment,
then the time that unsettled transactions are guaranteed by NSCC
would change from two days to one day. In this case, the aggregate
notional value of unsettled transactions at NSCC would fall from
$48.4 billion under a T+3 standard settlement cycle to $24.2 billion
under a T+2 settlement cycle. However, the overall reduction to the
aggregate notional value of unsettled transactions at NSCC would
remain the same, a reduction of $24.2 billion.
    \280\ ICI at 5; DTCC Letter at 2.
    \281\ See DTCC, DTCC Recommends Shortening the U.S. Trade
Settlement Cycle at 2-3 (Apr. 2014), http://www.ust2.com/industry-action/.
---------------------------------------------------------------------------

    A portion of the savings by intermediaries from less costly risk

management under a T+2 standard settlement cycle relative to a T+3
standard settlement cycle may flow through to investors. Intermediaries
such as broker-dealers may mitigate settlement risks through collateral
requirements on their customers in the form of securities or cash. Such
protection is likely to require less collateral to manage settlement
risks when settlement cycles are shorter. To the extent that lower
collateral needs result in lower collateral requirements, investors may
be able to profitably redeploy financial resources once used to satisfy
collateral requirements by, for example, converting them into less-
liquid assets that offer higher returns in exchange for bearing
additional liquidity risk. Several commenters identified additional
benefits that investors may experience from a shorter settlement cycle
through their intermediaries.\282\ One commenter noted in the context
of mutual funds that funds, as investors in the markets, would benefit
from a shortened settlement cycle, and those benefits would flow to
fund shareholders.\283\ Another commenter noted that investors are
exposed to their broker-dealer from the point of trade execution to
settlement, further stating that if the broker-dealer were to go out of
business during that time, the investor may be forced to re-execute the
trade at a new market price.\284\ The same commenter suggested that a
shorter settlement cycle would reduce the charges and fees imposed by
clearing broker-dealers on introducing broker-dealers.\285\
---------------------------------------------------------------------------

    \282\ IDC at 1-2; SIFMA at 15-16.
    \283\ IDC at 1-2.
    \284\ SIFMA at 16.
    \285\ SIFMA at 15.
---------------------------------------------------------------------------

    Industry participants might also individually benefit through
reduced clearing fund deposit requirements. In the T+2 Proposing
Release, the Commission cited industry estimates of cost savings
associated with reduced clearing fund contributions. In response to the
T+2 Proposing Release, one commenter cited an industry impact analysis
estimating that projected reduction in average daily clearing fund
requirements associated with two-day settlement cycle under NSCC's
accelerated trade guaranty would be $533 million, or about 9% of
average clearing fund requirements.\286\ In addition, a shorter
settlement cycle might reduce liquidity risk by allowing investors to
obtain the proceeds of their securities transactions sooner. Reduced
liquidity risk may be a benefit to individual investors, but it may
also reduce the volatility of securities markets by reducing liquidity
demands in times of adverse market conditions, potentially reducing the
correlation between market prices and the risk management practices of
market participants.\287\ Several commenters included statements
consistent with the view that shortening the settlement cycle would
benefit investors by reducing liquidity demands and clearing capital
requirements, and improving use of capital.\288\
---------------------------------------------------------------------------

    \286\ SIFMA at 10. The commenter also noted that in the absence
of the NSCC accelerated trade guaranty, the same impact analysis
estimated a projected reduction in average daily clearing fund
requirements of nearly $1.36 billion, or about 25% of average
clearing fund requirements.
    \287\ See Peter F. Christoffersen & Francis X. Diebold, How
Relevant is Volatility Forecasting for Financial Risk Management?,
82 Rev. Econ. & Stat. 12 (2000), http://www.mitpressjournals.org/doi/abs/10.1162/003465300558597#.V6xeL_nR-JA. The paper shows that
volatility can be predicted in the short run, and concludes that
short run forecastable volatility would be useful for risk
management practices.
    \288\ Fidelity at 1; FSI at 3; IDC at 1; Newill at 1.
---------------------------------------------------------------------------

    In addition, the harmonization of the standard settlement cycle in
the U.S. with settlement cycles in foreign markets that settle
transactions on a T+2 settlement cycle may reduce the need for some
market participants engaging in cross-border and cross-asset
transactions to hedge risks stemming from mismatched settlement cycles
and hence reduce related financing and borrowing costs, resulting in
additional benefits. For example, under the current T+3 settlement
cycle, a market participant selling a security in U.S. equity markets
to fund a purchase of securities in European markets would face a one
day lag between settlement in Europe and settlement in the U.S. The
participant could choose between bearing an additional day of market
risk in the European trading markets by delaying the purchase by a day,
or funding the purchase of European shares with short-term borrowing.
Additionally, because FX transactions generally settle on a T+2
settlement cycle,\289\ a market participant who expects to use the
proceeds from the sale of securities transactions that settle on the
standard settlement cycle in the U.S. to fund the purchase of
securities in Europe would also be faced with a choice between bearing
an additional day of currency risk due to the need to purchase Euros as
part of the transaction, or to incur the cost related to hedging away
this risk in the forward market. Twelve commenters agreed that a T+2
standard settlement cycle would align the U.S. securities settlement
cycle with several non-U.S. markets that have already moved to a T+2
settlement cycle, as well as markets that are planning or considering a
move to a T+2 settlement cycle.\290\
---------------------------------------------------------------------------

    \289\ See, e.g., John W. McPartland, Foreign exchange trading
and settlement: Past and present, The Federal Reserve Bank of
Chicago, Essays on Issues No. 223 (Feb. 2006), https://
www.chicagofed.org/~/media/publications/chicago-fed-letter/2006/
cflfebruary2006-223-pdf.pdf.
    \290\ DTCC Letter at 2 and 3; FIF at 3; FSI at 3; ICI at 5-6;
IDC at 1; MFA at 2; Newill at 1; SIFMA at 16; STA at 1-2; Thomson
Reuters at 3; WFA at 3; Wee at 1-2.
---------------------------------------------------------------------------

    The benefits of harmonized settlement cycles may also accrue to
mutual funds. As described above,\291\ transactions in mutual fund
shares typically settle on a T+1 basis even when transactions in the
securities purchase and sold by the fund settle on a T+3 basis. As a
result, there is a two-day mismatch between when these funds make
payments to shareholders that redeem shares and when they receive cash
proceeds for portfolio securities they sell.\292\ Two commenters noted
that the risk reduction benefits of a T+2 standard settlement cycle
would also flow to mutual fund transactions. One commenter noted that a
T+2 settlement cycle would reduce the funding gap between settlement of
a mutual fund's portfolio securities and the settlement of shares,
improving cash management for funds to meet redemptions.\293\ The other
commenter stated that a T+2 settlement cycle would harmonize the
settlement time for securities held by open-ended funds (i.e., mutual
funds) with the settlement time for shares of mutual funds, which would
enhance funds' cash management for meeting redemptions.\294\
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    \291\ See supra note 78.
    \292\ Retail funds which currently settle on T+3, however,
already have harmonized settlement cycles with their underlying
securities. As this amendment requires a T+2 settlement cycle for
both these retail funds and their underlying securities, these
retail funds would not see benefits stemming from a reduction in
settlement cycle mismatch between retail fund shares and underlying
securities.
    \293\ ICI at 4-5.
    \294\ IDC at 1-2.
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    The Commission believes that exceptions to Rule 15c6-1(a) set forth
in paragraphs (b), (c), and (d) of Rule 15c6-1 are unlikely to
substantially reduce the benefits of a shorter settlement cycle for
most securities transactions. Market participants that rely on Rule
15c6-1(b) to transact in limited partnership interests that are not
listed on an exchange or for which quotations are not disseminated
through an automated quotation system of a registered securities
association are likely to continue to make use of that exception under
the amendment to Rule 15c6-1(a). Similarly, market participants
involved in offerings that currently

settle by the fourth business day under Rule 15c6-1(c) will likely
continue to settle by T+4. There may be transactions covered by Rules
15c6-1(b) and (c) that in the past did not make use of these exceptions
because they settled within three business days, but that may require
use of these exceptions under the amendment because they require more
than two days to settle. However, these markets are opaque, and the
Commission does not have, nor did commenters provide, data on
transactions in these categories that currently settle within three
days but that might make use of this exception under the amendment.
    In addition, the Commission notes that market participants involved
in certain transactions will not experience substantial benefits
related to reducing the maximum number of days required to settle most
securities transactions. Specifically, market participants involved in
transactions which now voluntarily settle in two days or less may
experience fewer risk reduction benefits as a result of the amendment
to Rule 15c6-1(a) than market participants that currently settle in the
standard three business days.
    Finally, the extent to which different types of market participants
experience any benefits that stem from the amendment to Rule 15c6-1(a)
may depend on their market power. Market participants that have a
greater ability to negotiate with customers or service providers may be
able to retain a larger portion of the operational cost savings from a
shorter settlement cycle than others, as they may be able to use their
market power to avoid passing along the cost savings to their clients.
2. Costs
    The Commission believes that compliance with a T+2 standard
settlement cycle will involve initial fixed costs to update systems and
processes.\295\ The Commission has used input from comment letters and
industry studies to quantify these costs to the extent possible in Part
VI.C.5 below.
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    \295\ Industry estimates have suggested some updates to systems
and processes might yield operational cost savings after the initial
update. See infra Part VI.C.5.a for industry estimates of the costs
and benefits of the amendment to Rule 15c6-1(a).
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    The operational costs associated with the amendment to Rule 15c6-
1(a) for different market participants might vary depending on each
participant's degree of direct or indirect inter-connectivity to the
clearance and settlement process, regardless of size.\296\ For example,
clearing broker-dealers that internally manage more of their own post-
trade processes will directly incur more of the upfront operational
costs associated with the amendment to Rule 15c6-1(a), because they
must directly undertake more of the upgrades and testing necessary for
a T+2 standard settlement cycle. As mentioned in Part VI.C.5, other
market participants might outsource the clearance and settlement of
their transactions to third-party providers of back-office services.
One commenter noted that the use of third party service bureaus would
reduce the costs necessary to support a T+2 standard settlement
cycle.\297\ The exposures to the operational costs associated with
shortening the standard settlement cycle will be indirect to the extent
that third-party service providers pass through the costs of
infrastructure upgrades to their customers. The degree to which
customers bear operational costs depends on their bargaining position
relative to third-party providers. Large customers with market power
may be able to avoid internalizing these costs, while small customers
in a weaker negotiation position relative to service providers may bear
the bulk of these costs.
---------------------------------------------------------------------------

    \296\ See infra Part VI.C.5 for more detail of the specific
operational costs that each type of market participant may incur.
    \297\ SIFMA at 10.
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    Further, changes to initial and ongoing operational costs may make
some self-clearing market participants alter their decision to continue
internally managing the clearance and settlement of their transactions.
Entities that currently internally manage their clearance and
settlement activity may prefer to restructure their businesses to rely
instead on third-party providers of clearance and settlement services
that may be able to amortize the initial fixed cost of upgrade across a
much larger volume of transaction activity.
    The way that different market participants are likely to bear costs
as a result of the amendment to Rule 15c6-1(a) may also vary based on
their business structure. For example, a shorter standard settlement
cycle will require payment for securities that settle regular-way by
T+2 rather than T+3 (subject to the exceptions in the rule). Generally,
regardless of current funding arrangements between investors and
broker-dealers, removing a day between execution and settlement would
mean that broker-dealers could choose between requiring investors to
fund the purchase of securities one day earlier while extending the
same level of credit they do under T+3 settlement, or providing an
additional day of funding to investors. In other words, broker-dealers
could pass through some of the costs of a shorter standard settlement
cycle by imposing the same shorter cycle on investors, or they could
pass these costs on to investors by raising transactions fees to
compensate for the additional day of funding the broker-dealer may
choose to provide. The extent to which these costs get passed through
to customers may depend on, among other things, the market power of the
broker-dealer. At most, the broker-dealer might pass through the entire
initial investment cost to its customers, while if the broker-dealer
faces perfect competition for its customers, the broker-dealer may not
pass along any of these costs to its customers.\298\
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    \298\ See supra Part VI.C.1 for further discussion of the impact
of broker-dealer market power. See infra Part VI.C.5(3) for
quantitative estimates of the costs to broker-dealers.
---------------------------------------------------------------------------

    Retail investors and the broker-dealers that serve them may
experience the burden of an earlier payment requirement differently
from broker-dealers with more institutional clients or large custodian
banks because of the way retail investors fund their accounts. One
commenter stated the concern that a shortened settlement cycle would
impose hardships on retail investors who transfer funds between
financial institutions by paper check.\299\ These retail investors
might need to change the way that they fund their transactions as a
result of the operational and technological changes required for a
shorter settlement cycle. The Commission notes that after a transition
to a T+2 standard settlement cycle broker-dealers may continue to
accept paper checks from retail investors. However, retail investors
that transfer funds by paper check may need to accelerate their
payments associated with their transactions by one day.\300\ For
example, retail investors who previously mailed paper checks may
instead deliver these checks overnight or by hand. While information on
the number of paper checks currently used to fund transactions is not
readily available, the Commission notes that the cost of overnight
delivery of a single paper check using the U.S. postal service is
approximately $23.75,\301\ and believes that the difference between
this and first-class postage, $23.28, represents a reasonable estimate
of the

most inexpensive means of accelerating delivery of checks on a per-
transaction basis.\302\ In addition, broker-dealers that serve retail
investors may also experience costs unrelated to funding choices. For
instance, retail investors may require additional or different services
such as education regarding the impact of the shorter standard
settlement cycle.\303\ Although the Commission does not believe that
the amendment will directly prevent retail investors from the transfer
of funds by paper check, the Commission believes that even if retail
investors were required to fund their transactions more quickly,
requiring a transition to a T+2 standard settlement cycle is
appropriate in light of the expected benefits from reductions in
credit, market, and liquidity risk in financial markets.
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    \299\ See Gellert.
    \300\ See Part III.A.3.
    \301\ The current postage rate for a U.S. Postal Service (USPS)
Priority Mail Express 1-DayTM Flat Rate Envelope is
$23.75. Other vendors' rates may vary.
    \302\ Calculated as the difference between USPS Priority Mail
Express 1-DayTM Flat Rate Envelope and first-class
postage: $23.75-$0.47 = $23.28.
    \303\ See infra Part VI.C.5.b.3 for more on retail investors and
their broker-dealers.
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    Several commenters noted that broker-dealers engaging in securities
lending may incur additional implementation costs relative to other
broker-dealers.\304\ In particular, one commenter noted that these
firms would need to train staff to adjust to a shortened recall
cycle.\305\ Another commenter noted that industry participants
recognize and support the need for the move to T+2 settlement, despite
the implication that this move will necessarily shorten the recall
period by one day and require operational adjustments.\306\ A third
commenter stated that participants in securities lending transactions,
including security lenders, security borrowers, and service providers,
are currently addressing the impact of a shortened settlement cycle on
their business models and trading strategies, notably that the move to
T+2 will shorten the recall period by one day.\307\
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    \304\ Thomson Reuters at 2; SIFMA at 18; Fidelity at 4.
    \305\ See Thomson-Reuters at 2.
    \306\ See SIFMA at 18.
    \307\ See Fidelity at 4.
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    At the same time, some market participants may face lower
implementation costs as a result of their current business structure
and practices. As mentioned earlier, 2011 DTCC affirmation data
indicate that, on average, 45% of trades were affirmed on trade date,
while 90% were affirmed on T+1.\308\ In addition, market participants
that trade in markets that have already implemented a T+2 settlement
cycle may face lower costs in transitioning to a T+2 cycle in the U.S.,
as many of the systems and process improvements may already have been
adopted in order to support settlement in other markets.
---------------------------------------------------------------------------

    \308\ See supra Part VI.C.5(5) for discussion of foreign broker-
dealers.
---------------------------------------------------------------------------

    Finally, a shorter settlement cycle may result in higher costs
associated with liquidating a defaulting member's position, as a
shorter horizon for default management may result in larger price
impacts, particularly for less liquid assets. For example, when a
clearing member defaults, NSCC is obligated to fulfill its trade
guaranty with the defaulting member's counterparty. One way it
accomplishes this is by liquidating assets from clearing fund
contributions from clearing members. However, depending on the
composition of clearing fund deposits, the liquidation of clearing fund
assets in a short period of time may have an adverse impact on the
price of these assets. Shortening the standard settlement cycle from
T+3 to T+2 would reduce the amount of time that NSCC would have to
liquidate clearing fund deposits, which may exacerbate the price impact
of liquidation. One commenter noted a similar negative impact in a
different setting, stating that broker-dealers required by Federal
Reserve Board's Regulation T to liquidate a customer's unpaid
transaction would have one less day to do so.\309\ Broker-dealers may
increase investments in pre-transaction risk management practices to
compensate for the reduction in time available to liquidate a
customer's unpaid transaction should the broker-dealer need to
disaffirm a trade. In addition, the Commission notes that broker-
dealers already rely on many risk management practices to mitigate the
counterparty risks posed by their customers before the need to
disaffirm a trade.\310\
---------------------------------------------------------------------------

    \309\ BDA at 1-2.
    \310\ See Part II.C.2 supra for a discussion of broker-dealer
risk-management practices.
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3. Economic Implications Through Other Commission Rules
    As discussed in Part III.B, shortening the standard settlement
cycle could have an ancillary impact on how market participants comply
with existing regulatory obligations that relate to the settlement
timeframe. The Commission provided examples of specific Commission
rules that include such requirements or are otherwise are keyed-off of
settlement date, including Regulation SHO,\311\ and certain provisions
included in the Commission's financial responsibility rules.\312\
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    \311\ See supra Part III.C.1.
    \312\ See supra Part III.C.2.
---------------------------------------------------------------------------

    Financial markets and regulatory requirements have evolved
significantly since the Commission adopted Rule 15c6-1 in 1993. Market
participants have responded to these developments in diverse ways,
including implementing a variety of systems and processes, some of
which may be unique to the market participant and its business, and
some of which may be integrated throughout the market participant's
operations. Because of the broad variety of ways in which market
participants currently satisfy regulatory obligations pursuant to
Commission rules, in most circumstances it is difficult to identify
with precision those practices that market participants will need to
change in order to meet these other obligations. Under these
circumstances, and without additional information, the Commission is
unable to provide an estimate of the ancillary economic impact that the
amendment to Rule 15c6-1(a) would have on how market participants
comply with other Commission rules.
    In certain cases, based on information about current market
practices, the Commission believes that the amendment to Rule 15c6-1(a)
is unlikely to change the means by which market participants comply
with existing regulatory requirements. For example, under the
amendment, broker-dealers will have a shorter timeframe to comply with
the customer confirmation requirements of Exchange Act Rule 10b-10.
However, the Commission understands that broker-dealers typically send
physical customer confirmations on the day after trade date, and many
broker-dealers send electronic confirmations to customers on trade
date. The Commission believes that because of the lack of ancillary
consequences in these cases, market participants are unlikely to bear
additional costs to comply with these requirements under a shorter
standard settlement cycle.
    In certain cases, however, the amendment to Rule 15c6-1(a) may
incrementally increase the costs associated with complying with other
Commission rules where those rules potentially require broker-dealers
to engage in purchases of securities within a specific period of time.
Two examples of these types of rules are Regulation SHO and the
Commission's financial responsibility rules. In most instances,
Regulation SHO governs the timeframe in which a ``participant'' of a
registered clearing agency must close out a fail to

deliver position by purchasing or borrowing securities. In the event a
market participant must alter current operations, practices or systems
or develop new operations, practices or systems in order to comply with
the current provisions of Regulation SHO, there may be associated
costs. For example, if recalls of loaned securities need to be made one
day sooner in order to comply with certain requirements under
Regulation SHO, the broker-dealer will have to ensure its systems,
staff and operations are prepared to make the adjustment to accommodate
the change.\313\
---------------------------------------------------------------------------

    \313\ See Part III.C.1 for the discussion of the impact of
shortening the settlement cycle on complying with Regulation SHO.
The costs of these adjustments are incorporated into the cost
estimates in Part VI.C.5.b.3.
---------------------------------------------------------------------------

    Similarly, some of the Commission's financial responsibility rules
relate to actions or notifications that reference the settlement date
of a transaction. For example, Exchange Act Rule 15c3-3(m) \314\ uses
settlement date to prescribe the timeframe in which a broker-dealer
must complete certain sell orders on behalf of customers. The
settlement date is also incorporated into paragraph (c)(9) of Rule
15c3-1,\315\ which explains what it means to ``promptly transmit''
funds and ``promptly deliver'' securities within the meaning of
paragraphs (a)(2)(i) and (a)(2)(v) of Rule 15c3-1. As explained above,