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. Retail
investors may find it difficult to accelerate payments associated with
their transactions, which may cause broker-dealers who are unwilling to
extend additional credit to retail investors to instead require that
these investors pre-fund their transactions.\263\ These broker-dealers
may also experience costs unrelated to funding choices. For instance,
retail investors may require additional or different services such as
education regarding the impact of the shorter standard settlement
cycle.
---------------------------------------------------------------------------

    \263\ See infra Part VI.C.5.b.(3) for more on retail investors
and their broker-dealers.
---------------------------------------------------------------------------

    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 show
that, on average, 45% of trades were affirmed on trade date, while 90%
were affirmed on T+1.\264\ 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.
---------------------------------------------------------------------------

    \264\ 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 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, the liquidation of assets
in a short period of time may have an adverse impact on the price of an
asset. Shortening the standard settlement cycle from three days to two
days would reduce the amount of time that NSCC would have to liquidate
its assets, which may exacerbate the price impact of liquidation.
3. Economic Implications Through Other Commission Rules
    In Part 0., the Commission noted that the proposed amendment to
Rule 15c6-1(a), by shortening the standard settlement cycle, could have
ancillary consequences for how market participants comply with existing
regulatory obligations that relate to the settlement timeframe. The
Commission also provided illustrative examples of specific Commission
rules that include such requirements or are otherwise are keyed-off of
settlement date, including Regulation SHO,\265\ and certain provisions
included in the Commission's financial responsibility rules.\266\
---------------------------------------------------------------------------

    \265\ 17 CFR 242.200 et seq.
    \266\ See supra Part III.B.3.
---------------------------------------------------------------------------

    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 these ancillary economic consequences.
The Commission invites commenters to provide quantitative and
qualitative information about these potential economic consequences.
    In certain cases, based on information about current market
practices, the Commission preliminarily believes that the proposed
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 proposed amendment, broker-dealers will have a
shorter timeframe to comply with the customer confirmation requirements
of Rule 10b-10. However, it is the Commission's understanding 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 preliminarily
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 proposed amendment 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. 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. Similarly,
some of the Commission's financial responsibility rules relate to
actions or notifications that reference the settlement date of a
transaction. For example, Rule 15c3-3(m) \267\ uses settlement date to
prescribe the timeframe in which a broker-dealer must complete certain
sell orders on behalf of customers. As noted above, settlement date is
also incorporated into paragraph (c)(9) of Rule 15c3-1,\268\ which
explains what it means to ``promptly transmit'' funds and ``promptly
deliver'' securities within the meaning of paragraphs (a)(2)(i) and
(a)(2)(v) of Rule 15c3-1. As explained above, the concepts of promptly
transmitting funds and promptly delivering securities are incorporated
in other provisions of the financial responsibility rules.\269\ Under
the proposed amendment to Rule 15c6-1(a), the timeframes included in
these rules will be one day closer to the trade date.
---------------------------------------------------------------------------

    \267\ 17 CFR 240.15c3-3(m).
    \268\ 17 CFR 240.15c3-1(c)(9).
    \269\ See, e.g., 17 CFR 240.15c3-1(a)(2)(i), (a)(2)(v); 17 CFR
240.15c3-3(k)(1)(iii), (k)(2)(i), (k)(2)(ii); 17 CFR 240.17a-
5(e)(1)(A); 17 CFR 240.17a-13(a)(3).
---------------------------------------------------------------------------

    The Commission preliminarily believes that shortening these
timeframes will not materially affect the costs that broker-dealers are
likely to incur to meet their Regulation SHO obligations and
obligations under the Commission's financial responsibility rules after
the settlement date. Nevertheless, the Commission acknowledges that a
shorter settlement cycle could affect the processes by which broker-
dealers manage the likelihood of incurring these obligations. For
example, broker-dealers may currently have in place inventory
management systems that help them avoid failing to deliver securities
by T+3. Broker-dealers may incur incremental costs in order to update
these systems to support a shorter settlement cycle.
    In cases where market participants will need to adjust the way in
which they comply with other Commission rules, the magnitude of the
costs associated with these adjustments is difficult to quantify. As
noted above, market participants employ a wide variety of strategies to
meet regulatory obligations. For example, broker-dealers may ensure
that they have securities available to meet their obligations by using
inventory management systems or they may choose instead to borrow
securities. An estimate of costs is further complicated by the
possibility that market participants could change their compliance
strategies as a result of shortening the standard settlement cycle.
    The Commission invites commenters to provide quantitative and
qualitative information about the impact of the proposed amendment to
Rule 15c6-1(a) on the costs associated with compliance with other
Commission rules.
4. Effect on Efficiency, Competition, and Capital Formation
    A shorter settlement cycle might improve the efficiency of the
clearance and settlement process through several channels. The
Commission preliminarily believes that the primary effect that a
shorter settlement cycle would have on the efficiency of the settlement
process would be a reduction in the credit, market, and liquidity risks
that broker-dealers, CCPs, and other market participants are subject to
during the standard settlement cycle. A shorter standard settlement
cycle will generally reduce the volume of unsettled transactions that
could potentially pose settlement risk to counterparties. By shortening
the period between trade execution and settlement, trades can be

settled with less aggregate risk to counterparties or the CCP. A
shorter standard settlement cycle may also decrease liquidity risk by
enabling market participants to access the proceeds of their
transactions sooner, which may reduce the cost market participants
incur to handle idiosyncratic liquidity shocks (i.e., liquidity shocks
that are uncorrelated with the market). That is, because the time
interval between a purchase/sale of securities and payment is reduced
by one day, market participants with immediate payment obligations that
they could cover by selling securities would be required to obtain
short-term funding for one less day.\270\ As a result of reduced cost
associated with covering their liquidity needs, market participants
may, under particular circumstances, be able to shift assets that would
otherwise be held as liquid collateral towards more productive uses,
improving allocative efficiency.\271\
---------------------------------------------------------------------------

    \270\ See supra Part VI.B.2.
    \271\ See supra Part VI.A. for more on collateral and allocative
efficiency.
---------------------------------------------------------------------------

    In addition, a shorter standard settlement cycle may increase price
efficiency through its effect on credit risk exposures between
financial intermediaries and their customers. In particular, a prior
study noted that certain intermediaries that transact on behalf of
investors, such as broker-dealers, may be exposed to the risk that
their customers default on payment obligations when the price of
purchased securities declines during the settlement cycle.\272\ As a
result of the option to default on payment obligations, customers'
payoffs from securities purchases resemble European call options and,
from a theoretical standpoint, can be valued as such. Notably, the
value of European call options are increasing in the time to maturity
\273\ suggesting that the value of call options held by customers who
purchase securities is increasing in the length of the settlement
cycle. In order to compensate itself for the call option that it
writes, an intermediary may include the cost of these call options as
part of its transaction fee and this cost may become a component of
bid-ask spreads for securities transactions. By reducing the value of
customers' option to default by reducing the option's time to maturity,
a shorter standard settlement cycle may reduce transaction costs in
U.S. securities markets. In addition, to the extent that any benefit
buyers receive from deferring payment during the settlement cycle is
incorporated in securities returns,\274\ the proposed amendment may
reduce the extent to which these returns deviate from returns
consistent with changes to fundamentals.
---------------------------------------------------------------------------

    \272\ See Madhavan et al., supra note 222.
    \273\ All other things equal, an option with a longer time to
maturity is more likely to be in the money given that the variance
of the underlying security's price at the exercise date is higher.
    \274\ See supra Part Part VI.B.2.
---------------------------------------------------------------------------

    As discussed in more detail above, the Commission preliminarily
believes that the proposed amendment to Rule 15c6-1(a) will likely
require market participants to incur costs related to infrastructure
upgrades and will likely yield benefits to market participants, largely
in the form of reduced financial risks related to settlement. As a
result, the Commission preliminarily believes that the proposed
amendment to Rule 15c6-1(a) could affect competition in a number of
different, and potentially offsetting, ways.
    The prospective reduction in financial risks related to shortening
the standard settlement cycle may represent a reduction in barriers to
entry for certain market participants. Reductions in the financial
resources required to cover an NSCC member's clearing fund requirements
that result from a shorter standard settlement cycle could encourage
financial firms that currently clear transactions through NSCC clearing
members to become clearing members themselves. Their entry into the
market could promote competition among clearing members at NSCC.
Furthermore, if a reduction in settlement risks results in lower
transaction costs for the reasons discussed above, market participants
that were, on the margin, discouraged from supplying liquidity to
securities markets due to these costs could choose to enter the market
for liquidity suppliers, increasing competition.
    At the same time, the Commission acknowledges that the process
improvements required to enable a shorter standard settlement cycle
could adversely affect competition. Among clearing members, where such
process improvements might be necessary to comply with the shorter
standard settlement cycle required under the proposed amendment to Rule
15c6-1(a), the cost associated with compliance might create barriers to
entry, because new firms will incur higher fixed costs associated with
a shorter standard settlement cycle if they wish to enter the market.
Clearing members might choose to comply by upgrading their systems and
processes or may choose instead to exit the market for clearing
services. The exit of clearing members could have negative consequences
for competition between clearing members. Clearing activity tends to be
concentrated among larger broker-dealers.\275\ Clearing member exit
could result in further concentration and additional market power for
those clearing members that remain.
---------------------------------------------------------------------------

    \275\ See id.
---------------------------------------------------------------------------

    Alternatively, some current clearing members may choose to comply
by ceasing to be clearing members and instead outsourcing their
operational needs to third-party service providers. Use of third-party
service providers may represent a reasonable response to the
operational costs associated with the proposed amendment to Rule 15c6-
1(a). To the extent that third-party service providers are able to
spread the fixed costs of compliance across a larger volume of
transactions than their clients, the Commission preliminarily believes
that the use of third-party service providers might impose a smaller
compliance cost on clearing members, including smaller broker-dealers,
than if these firms directly bore the costs of compliance. The
Commission preliminarily believes that this impact may stretch beyond
just clearing members. The use of third-party service providers may
mitigate the extent to which the proposed amendment to Rule 15c6-1(a)
raises barriers to entry for broker-dealers. Because these barriers to
entry may have adverse effects on competition between clearing members,
we preliminarily believe that the use of third-party service providers
may mitigate the adverse effects of the proposed amendment to Rule
15c6-1(a) on competition between broker-dealers.
    Existing market power may also affect the distribution of
competitive impacts stemming from the proposed amendment to Rule 15c6-
1(a) across different types of market participants. While, as noted
above, reductions in settlement risk could promote competition among
clearing members and liquidity suppliers, these groups may benefit to
differing degrees, depending on the extent to which they are able to
capture the benefits of a shortened standard settlement cycle. For
example, clearing brokers tend to be larger than other broker-
dealers,\276\ and may generally be able to appropriate more of the
savings from clearing fund deposit reductions for themselves if they
have market power relative to their customers by passing only a small
portion of savings through to their customers through fees or
transactions costs. However, those that predominantly serve retail
investors may be in a better bargaining position

relative to those that predominantly serve institutional investors, and
therefore may capture more of the benefits stemming from the proposed
amendment to Rule 15c6-1(a). Broker-dealers that serve retail investors
may similarly be able to use their market power relative to their
customers to retain more of the clearing fund deposit reduction as
profits by maintaining their transaction costs and fees instead of
passing these through to their customers. Institutional investors may
be in a relatively better bargaining position by virtue of their large
size and may be more likely to successfully negotiate lower fees or
transaction costs and share in the savings associated with lower
clearing fund deposits.
---------------------------------------------------------------------------

    \276\ Id.
---------------------------------------------------------------------------

    Finally, a shorter standard settlement cycle might also improve the
capital efficiency of the clearance and settlement process, which would
promote capital formation in U.S. securities markets and in the
financial system generally.\277\ A shorter standard settlement cycle
would reduce the amount of time that collateral must be held for a
given trade, thus freeing the collateral to be used elsewhere earlier.
For a given quantity of trading activity, collateral would be committed
to clearing fund deposits for a shorter amount of time. The greater
collateral efficiency promoted by a shorter settlement cycle might also
indirectly promote capital formation for market participants in the
financial system in general, because the improved capital efficiency of
a shorter settlement cycle means that a given amount of collateral can
support a larger amount of economic activity.
---------------------------------------------------------------------------

    \277\ See supra Part VI.A. and Part VI.C.4. for more discussion
about capital formation and efficiency.
---------------------------------------------------------------------------

5. Quantification of Direct and Indirect Effects of a T+2 Settlement
Cycle
    As mentioned previously, several industry groups have released cost
estimates for compliance with a shorter standard settlement cycle,
including the SIA, the ISC, and BCG. However, only the BCG Study
performed a cost-benefit analysis of a T+2 standard settlement cycle.
We first summarize the cost estimates in the BCG Study in the
subsection immediately below and then, in the following subsections, we
provide our own evaluation of these estimates as part of our discussion
of the potential direct and indirect compliance costs related to the
proposed amendment to Rule 15c6-1(a). In addition, the Commission
encourages commenters to provide additional information to help
quantify the economic effects that we are currently unable to quantify
due to data limitations.
a. Industry Estimates of Costs and Benefits
    The BCG Study concluded that the transition to a T+2 settlement
cycle would cost approximately $550 million in incremental initial
investments across industry constituent groups,\278\ which would result
in annual operating savings of $170 million and $25 million in annual
return on reinvested capital from clearing fund reductions.\279\
---------------------------------------------------------------------------

    \278\ The BCG Study generally refers to ``institutional broker-
dealers,'' ``retail broker-dealers,'' ``buy side'' firms, and
``custodian banks,'' without defining these particular groups. The
Commission uses these terms when referring to estimates provided by
the BCG Study but notes that its own definitions of various affected
parties may differ from those in the BCG Study.
    \279\ See BCG Study, at 9-10.
---------------------------------------------------------------------------

    The BCG Study also estimated that the average level of required
investments per firm could range from $1 to 5 million, with large
institutional broker-dealers incurring the largest amount of
investments on a per-firm basis, and buy side firms at the lower end of
the spectrum.\280\ The investment costs for ``other'' entities,
including DTCC, Omgeo, service bureaus, RIAs and non-self-clearing
broker-dealers totaled $70 million for the entire group. Within this
$70 million, DTCC and Omgeo were estimated to have a compliance cost of
$10 million each. The operational cost savings per entity ranged from
$30-55 million per year, with broker-dealers serving retail investors
saving the largest absolute amount, and buy side firms saving the
least. Custodian banks were estimated to save approximately $40 million
per year.\281\
---------------------------------------------------------------------------

    \280\ Id. at 30-31.
    \281\ See id. at 41.
---------------------------------------------------------------------------

    The BCG Study also estimated the annual clearing fund reductions
resulting from reductions in clearing firms' clearing funds
requirements to be $25 million per year. The study estimated this by
considering the reduction in clearing fund requirements and multiplied
it by the average Federal Funds target rate for the 10-year period up
until 2008 (3.5%). The BCG Study also estimated the value of the risk
reduction in buy side exposure to the sell side. The implied savings
were estimated to be $200 million per year, but these values were not
included in the overall cost-benefit calculations.
    Several factors limit the usefulness of the BCG Study's estimates
of potential costs and benefits of the proposed amendment to Rule 15c6-
1(a). First, technological improvements, such as the increased use of
computers and automation in post-trade processes, that have been made
since 2012, when the report was first published, may have reduced the
cost of the upgrades necessary to comply with a shorter settlement
cycle. While this may, in turn, reduce the costs associated with the
proposed amendment, it may also reduce the scope of investments
required by the proposed amendment,\282\ as a larger portion of market
participants may have already adopted many processes that would reduce
the cost of a transition to a T+2 settlement cycle. In addition, the
BCG Study considered as a part of its cost estimates operational cost
savings as a result of improvements to operational efficiency, which
the Commission preliminarily considers an ancillary benefit of a
shorter settlement cycle.
---------------------------------------------------------------------------

    \282\ See supra Part VI.A. While market participants may have
already made investments consistent with implementing a shorter
settlement cycle, the fact that these investments have not resulted
in a shorter settlement cycle is consistent with the existence of
coordination problems among market participants.
---------------------------------------------------------------------------

    Lastly, the BCG Study was premised on survey responses by a subset
of market participants that may be affected by the rule--surveys were
sent to 270 market participants and 70 responses were received,
including 20 institutional broker-dealers, prime brokers and
correspondent clearers; 12 retail broker-dealers; 17 buy side firms; 14
registered investment advisors (RIAs); and seven custodian banks. Given
the low response rate, as well as the uncertainty regarding the sample
of market participants that was asked to complete the survey, we cannot
conclude that the cost estimates in the BCG Study are representative of
the costs of all market participants.\283\
---------------------------------------------------------------------------

    \283\ See BCG Study, supra note 103, at 15.
---------------------------------------------------------------------------

b. Commission Estimates of Costs
    The proposed amendment might generate direct and indirect costs for
market participants, who may need to change multiple systems and
processes to comply with a T+2 standard settlement cycle. As noted in
Part II.A.5.c.(2), the T+2 Playbook included a timeline with milestones
and dependencies necessary for a transition to a T+2 settlement cycle,
as well as activities that market participants should consider in
preparation for the transition. The Commission preliminarily believes
that the majority of activities for migration to a T+2 settlement cycle
will stem from behavior modification of market participants and systems
testing, and thus the majority of the costs of

migration will be from labor.\284\ These modifications may include a
compression of the settlement timeline, as well as an increase in the
fees that brokers may impose on their customers for trade failures.
Although the T+2 Playbook does not include any direct estimates of the
compliance costs for a T+2 settlement cycle, we utilize the timeline in
the T+2 Playbook for specific actions necessary to migrate to a T+2
settlement cycle to directly estimate the inputs needed for migration,
and form preliminary compliance cost estimates in the next section.
---------------------------------------------------------------------------

    \284\ See id. at 15.
---------------------------------------------------------------------------

    In addition, the T+2 Playbook, the ISC White Paper, and the BCG
Study identify several categories of actions that market participants
might need to take to comply with a T+2 settlement cycle--processing,
asset servicing, and documentation.\285\ While the following cost
estimates for these remedial activities span industry-wide requirements
for a migration to a T+2 settlement cycle, we do not anticipate each
market participant directly undertaking all of these activities for
several reasons. First, as noted in Part II.A.2.c., some market
participants work with third-party service providers for activities
such as trade processing and asset servicing, and thus may only
indirectly bear the costs of the requirements. Second, certain costs
might only fall on specific categories of entities--for example, the
costs of updating the CNS and ID Net system would only directly fall on
NSCC, DTC, and members/participants of those clearing agencies.
Finally, some market participants may already have the processes and
systems in place to accommodate a T+2 settlement cycle or would be able
to adjust to a T+2 settlement cycle with minimal cost. For example,
some market participants may already have the systems and processes to
reduce the amount of time needed for trade affirmation and
matching.\286\ These market participants may thus bear a significantly
lower cost to update their trade affirmation to comply with a T+2
standard settlement cycle.\287\
---------------------------------------------------------------------------

    \285\ See T+2 Playbook, supra note 126, at 11.
    \286\ See BCG Study, supra note 107, at 23.
    \287\ The BCG Study, as it is based on survey responses from
market participants, does reflect the heterogeneity of compliance
costs for market participants. However, for reasons mentioned in
Part VI.C.5.a., we are not able to fully accept the BCG Study's cost
estimates.
---------------------------------------------------------------------------

    In the following section, we examine several categories of market
participants and estimate the compliance costs for each category. Our
estimate of the number and type of personnel is based on the scope of
activities necessary for the participant to migrate to a T+2 settlement
cycle, the participant's role within the clearance and settlement
process, and the amount of testing required to ensure an error-free
migration.\288\ Hourly salaries for personnel are from SIFMA's
Management and Professional Earnings in the Securities Industry
2013.\289\ Our estimates use the timeline from the T+2 Playbook to
determine the length of time personnel would work on the activities
necessary to support a T+2 settlement cycle. The timeline provides an
indirect method to estimate the inputs necessary to migrate to a T+2
settlement cycle, rather than relying directly on survey response
estimates. We acknowledge many entities are already undertaking
activities to support a migration to a T+2 settlement cycle in
anticipation of the proposed amendment. However, to the extent that the
costs of these activities have already been incurred, we consider these
costs sunk, and do not include them in our analysis.
---------------------------------------------------------------------------

    \288\ For example, FMUs that play a critical role in the
clearance and settlement infrastructure will require more testing
associated with a T+2 settlement cycle than institutional investors.
    \289\ To monetize the internal costs, the Commission staff used
data from SIFMA publications, modified by Commission staff to
account for an 1800 hour work-year and multiplied by 5.35
(professionals) or 2.93 (office) to account for bonuses, firm size,
employee benefits and overhead. See SIFMA, Management and
Professional Earnings in the Security Industry--2013 (Oct. 7, 2013),
http://www.sifma.org/research/item.aspx?id=8589940603; SIFMA, Office
Salaries in the Securities Industry--2013 (Oct. 7, 2013), http://www.sifma.org/research/item.aspx?id=8589940608. These figures have
been adjusted for inflation using data published by the Bureau of
Labor Statistics.
---------------------------------------------------------------------------

(1) FMUs--CCPs and CSDs
    CNS, NSCC/DTC's ID Net service, and other systems will require
adjustment to support a T+2 standard settlement cycle. According to the
T+2 Playbook and the ISC White Paper, regulation-dependent planning,
implementation, testing, and migration activities associated with the
transition to a T+2 settlement cycle could last up to five
quarters.\290\ We preliminarily believe that these activities will
impose a one-time compliance cost of $10.9 million \291\ for DTC and
NSCC each. After this initial compliance cost, we preliminarily expect
that both DTCC and NSCC will incur minimal ongoing costs from the
transition to a T+2 settlement cycle, because we believe that the
majority of costs will stem from pre-migration activities, such as
implementation, updates, and testing.
---------------------------------------------------------------------------

    \290\ See T+2 Playbook, supra note 126, at 11. To monetize the
internal costs, Commission staff used data from the SIFMA
publications. Our time estimates account for the fact that a portion
of the timeline has already elapsed in anticipation of a transition
to a T+2 standard settlement cycle, and those costs are already
sunk.
    \291\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity, industry
testing, and migration lasting five quarters. We assume 10
operations specialists (at $129 per hour), 10 programmers (at $256
per hour), and 1 senior operations manager (at $345/hour), working
40 hours per week. (10 x $129 + 10 x $256 + 1 x $345) x 5 x 13 x 40
= $10,907,000.
---------------------------------------------------------------------------

(2) Matching/ETC Providers--Exempt Clearing Agencies
    Matching/ETC Providers may need to adapt their trade processing
systems to comply with a T+2 settlement cycle. This may include actions
such as updating reference data, configuring trade match systems, and
configuring trade affirmation systems to affirm trades by 12:00 p.m. on
T+1. Matching/ETC Providers will also need to conduct testing and
assess post-migration activities. We preliminarily estimate that these
activities will impose a one-time compliance cost of up to $10.9
million \292\ for each Matching/ETC Provider. However, we acknowledge
that some ETC providers may have a higher cost burden than others based
on the volume of transactions that they process. We expect that ETC
providers will incur minimal ongoing costs after the initial transition
to a T+2 settlement cycle because we preliminarily believe that the
majority of the costs of migration to a T+2 settlement cycle entail
behavioral changes of market participants and pre-migration testing.
---------------------------------------------------------------------------

    \292\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, matching, affirmation, testing, and post-migration testing
lasting five quarters. We assume 10 operations specialists (at $129
per hour), 10 programmers (at $256 per hour), and 1 senior
operations manager (at $345/hour), working 40 hours per week. (10 x
$129 + 10 x $256 + 1 x $345) x 5 x 13 x 40 = $10,907,000.
---------------------------------------------------------------------------

(3) Market Participants--Investors, Broker-Dealers, and Custodians
    The overall compliance costs that a market participant incurs will
depend on the extent to which it is directly involved in functions
related to trade confirmation/affirmation, clearance and settlement,
asset servicing, and other activities. For example, retail investors
may bear few (if any) direct costs in a transition to a T+2 standard
settlement cycle, because their respective broker-dealer handles the
back-office functions of each transaction. However, as is discussed
below, this does not imply that retail investors will not face indirect
costs from the transition, such

as those passed through from broker-dealers or banks.
    Institutional investors may need to configure systems and update
reference data, which may also include updates to trade funding and
processing mechanisms, to operate in a T+2 environment. The Commission
preliminarily estimates that this will require an initial expenditure
of $2.32 million per entity.\293\ However, these costs may vary
depending on the extent to which a particular institutional investor
has already automated their trade processes. We preliminarily expect
institutional investors will incur minimal ongoing direct compliance
costs after the initial transition to a T+2 standard settlement cycle.
---------------------------------------------------------------------------

    \293\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, and testing activity to last four quarters.
We assume 2 operations specialists (at $129 per hour), 2 programmers
(at $256 per hour), and 1 senior operations manager (at $345 per
hour), working 40 hours per week. (2 x $129 + 2 x $256 + 1 x $345) x
4 x 13 x 40 = $2,319,200.
---------------------------------------------------------------------------

    Broker-dealers that serve institutional investors will not only
need to configure their trading systems and update reference data, but
may also need to update trade confirmation/affirmation systems,
documentation, cashiering and asset servicing functions, depending on
the roles they assume with respect to their clients. We preliminarily
estimate that, on average, each of these broker-dealers will incur an
initial compliance cost of $4.72 million.\294\ We preliminarily expect
that these broker-dealers will incur minimal ongoing direct compliance
costs after the initial transition to a T+2 standard settlement cycle.
---------------------------------------------------------------------------

    \294\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, documentation, asset servicing, and testing
to last four quarters. We assume 5 operations specialists (at $129
per hour), 5 programmers (at $256 per hour), and 1 senior operations
manager (at $345 per hour), working 40 hours per week. (5 x $129 + 5
x $256 + 1 x $345) x 4 x 13 x 40 = $4,721,600.
---------------------------------------------------------------------------

    Broker-dealers that serve retail investors may also need to spend
significant resources to educate their clients about the shorter
settlement cycle. We preliminarily estimate that these broker-dealers
will incur an initial compliance cost of $8.6 million each.\295\
However, unlike previously mentioned market participants, we expect
that broker-dealers that serve retail investors may face significant
one-time compliance costs after the initial transition to T+2. Retail
investors may require additional education and customer service, which
may impose costs on their broker-dealers. The Commission preliminarily
believes that a reasonable upper bound for the costs associated with
this requirement is $30,000 per broker-dealer.\296\ Assuming all
clearing and introducing broker-dealers must educate retail customers,
the upper bound for the costs of retail investor education would be
approximately $50.5 million.\297\
---------------------------------------------------------------------------

    \295\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, documentation, asset servicing, customer
education and testing to last five quarters. We assume 5 operations
specialists (at $129 per hour), 5 programmers (at $256 per hour), 5
trainers (at $208 per hour) and 1 senior operations manager (at $345
per hour), working 40 hours per week. (5 x $129 + 5 x $256 + 5 x
$208 + 1 x $345) x 5 x 13 x 40 = $8,606,000.
    \296\ This estimate is based on the assumption that a broker-
dealer chooses to educate customers using a 10-minute view that
takes at most $3,000 per minute to produce. See Crowdfunding,
Exchange Act Release No. 76324 (Oct. 30, 2015), 80 FR 71388, 71529 &
n.1683 (Nov. 16, 2015).
    \297\ Calculated as $30,000 per broker-dealer x (186 broker-
dealers reporting as self-clearing + 1,497 broker-dealers reporting
as introducing but not self-clearing) = $50,490,000.
---------------------------------------------------------------------------

    Custodian banks will need to update their asset servicing functions
to comply with a shorter settlement cycle. We preliminarily estimate
that custodian banks will incur an initial compliance cost of $1.16
million,\298\ and expect them to incur minimal ongoing compliance costs
after the initial transition because we preliminarily believe most of
the costs will stem from pre-migration updates and testing.
---------------------------------------------------------------------------

    \298\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for asset
servicing and testing to last two quarters. We assume 2 operations
specialists (at $129 per hour), 2 programmers (at $256 per hour),
and 1 senior operations manager (at $345 per hour), working 40 hours
per week. (2 x $129 + 2 x $256 + 1 x $345) x 2 x 13 x 40 =
$1,159,600.
---------------------------------------------------------------------------

(4) Indirect Costs
    In estimating these implementation costs, we note that market
participants who bear the direct costs of the actions they undertake to
comply with Rule 15c6-1 may pass these costs on to their customers. For
example, retail and institutional investors might not directly bear the
cost of all of the necessary upgrades for a T+2 settlement cycle, but
might indirectly bear these costs as their broker-dealers might
increase their fees to amortize the costs of updates among their
customers. We are unable to quantify the overall magnitude of the
indirect costs that retail and institutional investors may bear,
because it will depend on the market power of each broker-dealer, and
its willingness to pass on the costs of migration to a T+2 standard
settlement cycle to their customers. However, we preliminarily believe
that in situations where broker-dealers have little or no competition,
broker-dealers may at most pass on the entire cost of the initial
investment to their customers. As discussed above, this could be as
high as $4.72 million for broker-dealers that serve institutional
investors, and $8.6 million for broker-dealers that serve retail
investors. However, in situations where broker-dealers face heavy
competition for customers, broker-dealers may bear the costs of the
initial investment entirely, and avoid passing on these costs to their
customers.
    As noted in Part VI.B.4., the ability of market participants to
pass implementation costs on to customers likely depends on their
relative bargaining power. For example, CCPs, like many other
utilities, exhibit many of the characteristics of natural monopolies
and, as a result, may have market power, particularly relative to
broker-dealers who submit trades for clearing. This means that they may
be able to share implementation costs they directly face related to
shortening the settlement cycle with broker-dealers through higher
clearing fees. Conversely, if institutional investors have market power
relative to broker-dealers, broker-dealers may not be in a position to
impose indirect costs on them.
(5) Industry-Wide Costs
    To estimate the aggregate, industry-wide cost of a transition to a
T+2 standard settlement cycle, we take our per-entity estimates and
multiply them by our estimate of the respective number of entities. The
Commission preliminarily estimates that there are 965 buy-side firms,
186 broker-dealers, and 53 custodian banks.\299\ Additionally, as noted
in Part II.A.2.b., there are three Matching/ETC Providers, and 1,683
broker-dealers that will incur investor education costs. One way to
establish a total industry initial compliance cost estimate would be to
multiply each estimated per-entity cost by the respective number of
entities and sum these values, which would result in an estimate of
$4.0 billion.\300\ The

Commission, however, preliminarily believes that this estimate is
likely to overstate the true initial cost of transition to a T+2
settlement cycle for a number of reasons. First, our per-entity
estimates do not account for the heterogeneity in market participant
size, which may have a significant impact on the costs that market
participants face. While the BCG Study included both estimates of the
number of entities in different size categories as well as estimates of
costs that an entity in each size category is likely to incur, it did
not provide sufficient underlying information to allow the Commission
to estimate the relationship between participant size and compliance
cost and thus we cannot produce comparable estimates. The Commission
seeks comment on the extent to which market participants believe that
the compliance costs for the proposed rule will scale with market
participant size.
---------------------------------------------------------------------------

    \299\ The estimate for the number of buy-side firms is based on
the Commission's 13(f) holdings information filers with over $1
billion in assets under management, as of December 31, 2015. The
estimate for the number of broker-dealers is based on FINRA FOCUS
Reports of firms reporting as self-clearing. See supra note 235 and
accompanying text. The estimate for the number of custodian banks is
based on the number of ``settling banks'' listed in DTC's Member
Directories, available at http://www.dtcc.com/client-center/dtc-directories.
    \300\ Calculated as 186 broker-dealers (self-clearing) x
$8,606,000 + 1683 broker-dealers (self-clearing and introducing) x
$30,000 + 53 custodian banks x $1,159,000 + 965 buy-side firms x
$2,319,000 + 3 Matching/ETC Providers x $10,900,000 + 2 FMUs x
$10,900,000 = $ 4,005,034,800.
---------------------------------------------------------------------------

    Second, the Commission's estimate assumes that broker-dealers will
not repurpose existing systems that allow them to participate in
foreign markets that require settlement by T+2. For example,
approximately 99 of the broker-dealers that reported self-clearing also
reported that they were affiliates or subsidiaries of foreign broker-
dealers or banks. To the extent that a broker-dealer has a foreign
affiliate or parent that already has systems in place to support T+2
settlement in foreign markets, it may bear lower costs under the
proposed amendment to Rule 15c6-1(a) than the estimate above. Removing
all 99 of these broker-dealers from the computation of total industry
initial compliance cost estimate presented above results in a reduction
of this estimate to approximately $3.2 billion.\301\ The Commission
seeks comment on the extent to which participants believe that the
compliance costs for the proposed rule may be less for those broker-
dealers that can repurpose existing systems that they currently use for
their activities in foreign markets.
---------------------------------------------------------------------------

    \301\ Calculated as 87 broker-dealers (self-clearing) x
$8,606,000 + 1683 broker-dealers (self-clearing and introducing) x
$30,000 + 53 custodian banks x $1,159,000 + 965 buy-side firms x
$2,319,000 + 3 Matching/ETC Providers x $10,900,000 + 2 FMUs x
$10,900,000 = $ 3,153,040,800.
---------------------------------------------------------------------------

    Third, investments by third-party service providers may mean that
many of the estimated compliance costs for market participants are
duplicated. The BCG Study suggests that ``leverage'' from service
providers may yield a savings of $194 million, reducing aggregate costs
by approximately 29%.\302\ Based on information gathered from the
recent available financial reports of service providers, the Commission
preliminarily believes that a reasonable range of estimates for the
average cost reduction associated with service providers across all
entities could be between 16% and 32%.\303\ However, the Commission
seeks further comment on the extent to which the efficiencies generated
by the investments of service providers might reduce the compliance
costs of market participants. Applying this range to the total industry
initial compliance cost estimate presented above yields a range of
total industry initial compliance cost estimates between $2.7 billion
and $3.4 billion.
---------------------------------------------------------------------------

    \302\ See BCG Study supra note 107, at 79.
    \303\ Commission Staff hand collected information on operating
margins for business segments related to settlement services of
three large service providers for fiscal years 2013, 2014, and 2015.
The median estimate was 16.4%. To arrive at the lower bound of 16%,
the Commission assumes service providers capture all of the cost
reduction they provide; to arrive at the upper bound, the Commission
assumes that service providers share half of the overall cost
reduction with their customers. Generally, the extent to which
service providers share the efficiencies they provide with their
customers may depend on service providers' bargaining power. See,
e.g., Binmore, Ken, Ariel Rubinstein, and Asher Wolinsky, The Nash
Bargaining Solution In Economic Modelling, The RAND Journal of
Economics, 17, no. 2, Summer, 1986, at 176-188.
---------------------------------------------------------------------------

    Taking into account potential cost reductions due to repurposing
existing systems and using service providers as described above, the
Commission preliminarily believes that $2.1 billion to $4.2 billion
represents a reasonable range for the total industry initial compliance
costs.\304\
---------------------------------------------------------------------------

    \304\ The lower bound of this range is calculated as ($4.0
billion-$0.9 billion cost reduction related to broker-dealers with
foreign parents or affiliates) - (1-0.32) = $2.1 billion.
---------------------------------------------------------------------------

    In addition to these initial costs, a transition to a shorter
settlement cycle may also result in certain ongoing industry-wide
costs. Though we preliminarily believe that a move to a shorter
settlement cycle will generally bring with it a reduced reliance on
manual processing, a shorter settlement cycle may also exacerbate
remaining operational risk. This is because a shorter settlement cycle
would provide market participants with less time to resolve errors. For
example, if there is an entry error in the trade match details sent by
either counterparty for a trade, both counterparties would have one
extra day to resolve the error under the baseline than in a T+2
environment. For these errors, a shorter settlement cycle may increase
the probability that the error ultimately results in a settlement fail.
However, given the variety of operational errors that are possible in
the clearance and settlement process and the low probability of some of
these errors, we are unable to quantify the impact that a shorter
settlement cycle may have on the ongoing industry-wide costs stemming
from a potential increase in operational risk.
    Another industry-wide potential cost of shortening the settlement
cycle is related to CCP member default. A shorter settlement cycle may
provide CCPs with a shorter horizon in which to manage a defaulting
member's outstanding settlement obligations. Besides potentially
increasing the operational risks associated with default management, a
shorter settlement cycle may also have implications for CCPs that must
liquidate a defaulting member's securities and, if circumstances
require, the securities of non-defaulting members, in order to meet
payment obligations for unsettled trades. A shorter settlement cycle
leaves a CCP with less time in which to liquidate the securities and
may increase the price impact associated with liquidation.
    Current margin models at CCPs may account for the price impact
associated with liquidating collateral. Although a CCP's margining
algorithm may account for the additional impact generated by a shorter
liquidation horizon for the defaulting member's clearing fund deposits,
margin requirements may not reflect the costs that a liquidation over a
shorter horizon may impose on other market participants. For example, a
CCP may impose haircuts on collateral to account for the costs of
liquidating collateral in the event of a clearing member default,
causing clearing members to internalize a portion of the cost of
liquidating illiquid assets. While the haircut may mitigate the risk
that the price impact associated with liquidation of collateral assets
over a shorter period of time causes the CCP to fail to meet its
settlement obligations, the reduction in the price of collateral assets
may affect other market participants who may be sensitive to the value
of these assets.

D. Alternatives

1. Shift to a T+1 Standard Settlement Cycle
    The Commission has considered the consequences of a shift to a T+1
standard settlement cycle.\305\ The Commission preliminarily believes
that

although a move to a T+1 standard settlement cycle could have similar
qualitative benefits of market, credit, and liquidity risk reduction as
a move to a T+2 standard settlement cycle, the types of necessary
investments and changes necessary to move to a T+1 standard settlement
cycle also introduce greater costs for market participants.
---------------------------------------------------------------------------

    \305\ See supra Part III.A.4. for a discussion on the
consideration of a settlement cycle shorter than T+2.
---------------------------------------------------------------------------

    As stated earlier, a T+1 standard settlement cycle might result in
a larger reduction in certain settlement risks than would result from a
T+2 standard settlement cycle because, as explained above, the risks
associated with counterparty default tend to increase with time. Price
volatility, as measured by the standard deviation of the price, is
concave in time, which means that as a period of time increases,
volatility will increase, but at a decreasing rate. This suggests that
the reduction in price volatility from moving from T+2 settlement to
T+1 settlement is larger than the reduction in price volatility from
moving from T+3 settlement to T+2 settlement. Similarly, assuming
constant trading volume, the volume of unsettled trades for a T+1
settlement cycle would be reduced again by one-third, and, as a result,
for any given adverse movement in prices, the financial losses
resulting from counterparty default will be two-thirds less than those
under a T+3 settlement cycle.
    At the same time, the Commission preliminarily believes that the
initial costs of complying with a T+1 settlement cycle will be greater
than with a T+2 settlement cycle. Successful transition to a settlement
cycle that is shorter than T+2 could require significantly larger
investments by market participants to adopt new systems and processes.
The upgrades necessary for a T+1 settlement cycle might include changes
such as a transformation of lending and foreign buyer processes, real-
time or near real-time trade processing capabilities, as well as a
further acceleration of the retail funding timeline, which would
require larger structural changes to the settlement process and more
cross-industry coordination than the upgrades for a T+2 settlement
cycle would. Because these upgrades could require more changes across
multiple markets and settlement systems, they may be more expensive to
implement than the upgrades necessary for T+2 settlement. Additionally,
the lead time and level of coordination by market participants required
to implement such changes to transition to a T+1 standard settlement
cycle would be longer and greater than the time and coordination
required to move to a T+2 standard settlement cycle, which could delay
the realization of the risk-reducing benefits of shortening the
settlement cycle and increase the risk that market participants would
not be able to transition to T+1 in a coordinated fashion.
    Further, and as noted above, a move to a T+1 standard settlement
cycle could introduce additional financial risks and costs as a result
of its impact on transactions in certain foreign markets. Because
settlement of spot FX transactions occurs on T+2, market participants
who transact in an environment with a shorter settlement cycle would be
required to pre-fund securities transactions in foreign currencies.
Under these circumstances, a market participant would either incur
opportunity costs and currency risk associated with holding FX reserves
or be exposed to price volatility by delaying securities transactions
by one day to coordinate settlement of the securities and FX legs. In
addition, shortening the settlement cycle to T+1 may make it more
difficult for market participants to timely settle cross-border
transactions because the U.S. settlement cycle would not be harmonized
with non-U.S. markets that have already transitioned to a T+2
settlement cycle.\306\ The disparity between the settlement cycles
would most likely increase the costs associated with such cross-border
transactions.
---------------------------------------------------------------------------

    \306\ For further discussion regarding the potential benefits of
harmonization of settlement cycles for market participants engaging
in cross-border transactions, see infra Part III.A.4.
---------------------------------------------------------------------------

    The BCG Study estimated that the transition to a T+1 settlement
cycle would cost the industry $1.77 billion in incremental investments
(compared to $550 million for a T+2 settlement cycle), with an annual
operational cost savings of $175 million per year and $35 million from
clearing fund reductions (compared to $170 million and $25 million per
year in a T+2 settlement cycle, respectively). Risk reduction benefits
were estimated to be $410 million for a T+1 settlement cycle (compared
to $200 million per year in a T+2 settlement cycle).\307\ Although the
Commission preliminarily believes that these numbers cannot be fully
accepted as cost estimates for the proposed amendment,\308\ the
magnitude of the difference between the BCG Study's T+2 and T+1 cost
and benefit estimates likely indicate additional larger structural
changes necessary to transition to a T+1 settlement cycle.
---------------------------------------------------------------------------

    \307\ See BCG Study, supra note 107, at 41.
    \308\ See supra Part VI.C.5.a.
---------------------------------------------------------------------------

    In addition, the SIA T+1 Report estimated the initial investment
costs of a shortened standard settlement cycle of T+1 to be $8 billion,
with net annual benefits of $2.7 billion per year. The report estimated
that broker-dealers would have an initial investment of $5.4 billion,
with net annual benefits of $2.1 billion per year; asset managers would
have an initial investment of $1.7 billion, with net annual benefits of
$403 million per year; custodians would have an initial investment of
$600 million, with net annual benefits of $307 million per year; and
infrastructure service providers would have an initial investment of
$237 million, with net annual loss of $81 million per year. Although
these estimates have higher costs and benefits than the estimates in
the BCG Study, the SIA estimates were made in 2000, and are much older
than the BCG Study estimates, which were made in 2012. In the sixteen
years since the publication of the SIA T+1 Report, significant
technological and industry changes may have affected the costs and
benefits of a T+1 standard settlement cycle, which may limit the
usefulness of the report's estimates for assessing the costs and
benefits of a T+1 standard settlement cycle today.\309\
---------------------------------------------------------------------------

    \309\ See SIA Business Case Report at 3.
---------------------------------------------------------------------------

2. Straight-Through Processing Requirement
    The Commission has also considered the consequences of mandating
specific clearance and settlement practices, such as straight-through
processing, in lieu of the proposed rules. STP involves the electronic
entry of trade details during the settlement process, which avoids the
manual entry and re-entry of trade details. By avoiding the manual
entry of trade details, STP can speed up the settlement process as well
as reduce error rates. However, the Commission preliminarily believes
that although many of the costs and benefits of a T+2 standard
settlement cycle could be achieved by mandating specific clearance and
settlement practices, there are several reasons why mandating a shorter
settlement cycle may substantively differ from a specific practice
requirement.
    First, the Commission preliminarily believes that many of the
proposed rule's benefits stem directly from the fact that the length of
the settlement cycle has been shortened, and not from the particular
practices used to comply with the proposed rule. As discussed above in
Part VI.C., the Commission preliminarily believes that shortening the
settlement cycle is likely to reduce a number of risks associated with
securities settlement, including credit and market risks that stem from

counterparty exposures. Moreover, the Commission preliminarily believes
that intermediaries that manage these types of risk as a result of
their role in the clearance and settlement system may share a portion
of potential cost savings associated with reduced risks with financial
market participants. While the Commission acknowledges that an
alternative approach that primarily focuses on mandating STP may
achieve some of the operational benefits associated with a shortened
settlement cycles, such an approach may not reduce counterparty
exposures and attendant risks.
    Furthermore, the Commission recognizes that STP may be a natural
enabler for a shorter settlement cycle, but it may not be the most
efficient enabler. The Commission preliminarily believes that market
participants may have a variety of methods to comply with the proposed
rule, and may prefer the least costly method of shortening the
settlement cycle. By allowing market participants to choose how to
comply with a shorter settlement cycle, rather than mandating a
specific practice, the proposed rules may allow the market to realize
the benefits of a shorter settlement cycle at the lowest cost to market
participants.
    Additionally, mandating specific clearance and settlement practices
instead of mandating a shortened settlement cycle may have adverse
effects on competition in the market for back-office services. Back-
office service providers may have a variety of methods to help their
clients comply with a shorter settlement cycle, and mandating specific
clearance and settlement practices may adversely affect the number of
providers that market participants might use, and a reduction in
competition among back-office service providers that can comply with
required practices may result in higher compliance costs for market
participants.

E. Request for Comment

    The Commission seeks comment on the potential economic impact of
the proposed amendment to Rule 15c6-1(a). In addition, the Commission
seeks comment on related issues that may inform the Commission's views
regarding the economic impact of the proposed amendment to Rule 15c6-
1(a), as well as alternatives to the proposed amendment. The Commission
in particular seeks comment on the following:
    1. The Commission invites commenters to provide additional data on
the time it takes to complete each step within the current clearance
and settlement process. What are current constraints or impediments for
each step within the clearance and settlement process that would limit
the ability to shorten the settlement cycle from T+3 to T+2? Are there
similar or additional limitations for shortening the settlement cycle
beyond T+2? Do these constraints or impediments vary by market
participant type?
    2. The Commission invites commenters to provide additional data on
the current timing of trade matching. What portion of trades is
affirmed on trade date? What portion of trades is currently matched
such that they could already be settled on a T+2 settlement cycle? How
does the timing of trade matching vary by the type of market
participant?
    3. The Commission invites commenters to discuss the costs and
benefits of the industry changes (e.g., technology changes and business
practices) necessary to comply with a T+2 standard settlement cycle
related to trade matching. What are the costs of implementing such
changes? What cost-savings would these changes yield? What operational
risks might these changes create?
    4. The Commission invites commenters to provide additional data on
the expected collateral efficiency gains from a T+2 standard settlement
cycle. How would clearing fund deposits change as a result of the
proposed amendment? To what extent does this change fully represent the
change to the level of risk associated with the settlement cycle for
securities transactions?
    5. The Commission invites commenters to discuss the impact of a T+2
settlement cycle on broker-dealers and their customers. What types of
adaptations will be necessary to comply with a T+2 settlement cycle,
and what are their relative costs and benefits?
    6. The Commission invites commenters to discuss the potential
impact of a T+2 standard settlement cycle with respect to cross-border
and cross-asset class transactions. What are the costs and benefits of
harmonizing with certain markets' settlement cycles? Would a T+2
standard settlement cycle make any cross-border or cross-asset
transactions more or less difficult?
    7. The Commission invites commenters to discuss the anticipated
market changes, if any, if the proposed amendment to Rule 15c6-1(a)
were not adopted. Which activities necessary for compliance with a T+2
standard settlement cycle would occur in the absence of the proposed
rule amendment? Which market participants, if any, would move to a T+2
settlement cycle in the absence of the proposed rule amendment?
    8. The Commission seeks comment on the alternative of shifting to a
T+1 standard settlement cycle. Would such an alternative be appropriate
and preferable to a T+2 standard settlement cycle? Why or why not? What
are the costs and benefits of such an alternative relative to the
baseline and the proposal?
    9. The Commission seeks comment on the alternative of mandating
specific clearance and settlement practices, such as STP. Would such an
alternative be appropriate and preferable to a T+2 standard settlement
cycle? Why or why not? What are the costs and benefits of such an
alternative relative to the baseline and the proposal?
    10. The Commission seeks comment on several topics related to the
response of market participants to the shift to a T+2 settlement cycle
in certain foreign markets. The Commission seeks comment on the
following:
     Commenters are invited to discuss the impact that the
shift to a T+2 settlement cycle in certain foreign markets (e.g., E.U.
markets) has had on their clearance and settlement operations. Are
there any responses to changes in the settlement cycle of these markets
that may alter the costs or benefits of adopting a T+2 standard
settlement cycle in the U.S.?
     Commenters are invited to discuss their preparations for
upcoming migrations to a T+2 settlement cycle in foreign markets. Do
these preparations alter the costs and benefits of adapting to a T+2
standard settlement cycle in the U.S.?
     Has the experience of migrating to a T+2 settlement cycle
in certain foreign markets allowed commenters to make any other
observations relevant to the proposal to adopt a T+2 standard
settlement cycle in the United States?

VII. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of
1996,\310\ a rule is ``major'' if it has resulted, or is likely to
result in:
---------------------------------------------------------------------------

    \310\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment, or
innovation.
    The Commission requests comment on whether the proposed amendment
to Rule 15c6-1(a) would be a ``major'' rule

for purposes of the Small Business Regulatory Enforcement Fairness Act.
In addition, the Commission solicits comment and empirical data on:
     The potential effect on the U.S. economy on annual basis;
     Any potential increase in costs or prices for consumer or
individual industries; and
     Any potential effect on competition, investment, or
innovation.

VIII. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\311\ Section 603(a) of the Administrative Procedure Act,\312\
as amended by the RFA, generally requires the Commission to prepare and
make available for public comment an initial regulatory flexibility
analysis of all proposed rules to determine the impact of such
rulemaking on ``small entities.'' \313\ Section 605(b) of the RFA
states that this requirement shall not apply to any proposed rule
which, if adopted, would not have a significant economic impact on a
substantial number of small entities.\314\
---------------------------------------------------------------------------

    \311\ See 5 U.S.C. 601 et seq.
    \312\ 5 U.S.C. 603(a).
    \313\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted certain definitions for the terms ``small
business'' and ``small organization'' for the purposes of rulemaking
in accordance with the RFA. These definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10.
    \314\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The Commission has prepared the following initial regulatory
flexibility analysis in accordance with Section 603(a) of the RFA in
relation to the proposed amendment to Exchange Act Rule 15c6-1(a).

A. Reasons for, and Objectives of, the Proposed Action

    The Commission is proposing to amend Exchange Act Rule 15c6-1(a) to
shorten the standard settlement cycle for securities transactions
(other than those excluded by the rule) from T+3 to T+2. The Commission
believes that proposing the amendment to Rule 15c6-1(a) to shorten the
standard settlement cycle from three days to two days could potentially
offer market participants significant benefits through the reduction of
exposure to credit, market, and liquidity risk, as well as related
reductions to systemic risk.

B. Legal Basis

    The Commission is proposing an amendment to Rule 15c6-1(a) under
the authority set forth in the Exchange Act, particularly under
Sections 15(c)(6),\315\ 17A,\316\ and 23(a) \317\ of the Exchange Act.
---------------------------------------------------------------------------

    \315\ 15 U.S.C. 78o(c)(6).
    \316\ 15 U.S.C. 78q-1.
    \317\ 15 U.S.C. 78w(a).
---------------------------------------------------------------------------

C. Small Entities Subject to the Rule and Rule Amendment

    Paragraph (c) of Exchange Act Rule 0-10 provides that, for purposes
of Commission rulemaking in accordance with the provisions of the RFA,
when used with reference to a broker or dealer, the Commission has
defined the term ``small entity'' to mean a broker or dealer: (1) With
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\318\ or if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last business day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and (2) is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\319\
---------------------------------------------------------------------------

    \318\ 17 CFR 240.17a-5(c).
    \319\ 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    The proposed amendment to Rule 15c6-1(a) would prohibit broker-
dealers, including those that are small entities, 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 no later than
the second business day after the date of the contract unless otherwise
expressly agreed to by the parties at the time of the transaction.
Currently, based on FOCUS Report \320\ data, as of December 31, 2015,
we estimate that there are 1,235 broker-dealers that may be considered
small entities.
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    \320\ See supra note 235.
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D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The proposed amendment to Rule 15c6-1(a) would not impose any new
reporting or recordkeeping requirements on broker-dealers that are
small entities. However, the proposed amendment to Rule 15c6-1(a) may
impact certain broker-dealers, including those that are small entities,
to the extent that broker-dealers may need to make changes to their
business operations and incur certain costs in order to operate in a
T+2 environment.
    For example, conversion to a T+2 standard settlement cycle may
require broker-dealers, including those that are small entities, to
make changes to their business practices, as well as to their computer
systems, and/or to deploy new technology solutions. Implementation of
these changes may require broker-dealers to incur new or increased
costs, which may vary based on the business model of individual broker-
dealers as well as other factors.
    Additionally, conversion to a T+2 standard settlement cycle may
also result in an increase in costs to certain broker-dealers who
finance the purchase of customer securities until the broker-dealer
receives payment from its customers. To pay for securities purchases,
many customers liquidate other securities or money fund balances held
for them by their broker-dealers in consolidated accounts such as cash
management accounts. However, some broker-dealers may elect to finance
the purchase of customer securities until the broker-dealer receives
payment from its customers for those customers that do not choose to
liquidate other securities or have a sufficient money fund balance
prior to trade execution to pay for securities purchases. Broker-
dealers that elect to finance the purchase of customer securities may
incur an increase in costs in a T+2 environment resulting from
settlement occurring one day earlier unless the broker-dealer can
expedite customer payments.

E. Duplicative, Overlapping or Conflicting Federal Rules

    The Commission believes that there are no federal rules that
duplicate, overlap or conflict with the proposed amendment to Rule
15c6-1(a).

F. Significant Alternatives

    The RFA requires that the Commission include in its regulatory
flexibility analysis a description of any significant alternatives to
the proposed rule which would accomplish the stated objectives of
applicable statutes and which would minimize any significant economic
impact of the proposed rule on small entities.\321\ Pursuant to Section
3(a) of the RFA, the Commission's initial regulatory flexibility
analysis must consider certain types of alternatives, including: (a)
The establishment of differing compliance or reporting requirements or
timetables that take into account the resources

available to small entities; (b) the clarification, consolidation, or
simplification of the compliance and reporting requirements under the
rule for small entities; (c) the use of performance rather than design
standards; and (d) an exemption from coverage of the rule, or any part
of thereof, for such small entities.\322\
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    \321\ 5 U.S.C. 603(c).
    \322\ Id.
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    The Commission considered alternatives to the proposed rule
amendment that would accomplish the stated objectives of the amendment
without disproportionately burdening broker-dealers that are small
entities, including: differing compliance requirements or timetables;
clarifying, consolidating or simplifying the compliance requirements;
using performance rather than design standards; or providing an
exemption for certain or all broker-dealers that are small entities.
The purpose of Rule 15c6-1(a) is to establish a standard settlement
cycle for broker-dealer transactions. Alternatives, such as different
compliance requirements or timetables, or exemptions, for Rule 15c6-
1(a), or any part thereof, for small entities would undermine the
purpose of establishing a standard settlement cycle. For example,
allowing small entities to settle at a time later than T+2 could create
a two-tiered market that could work to the detriment of small entities
whose order flow would not coincide with that of other firms operating
on a T+2 settlement cycle. Additionally, the Commission believes that
establishing a single timetable (i.e., compliance date) for all broker-
dealers, including small entities, to comply with the amendment is
necessary to ensure that the transition to a T+2 standard settlement
cycle takes place in an orderly manner that minimizes undue disruptions
in the securities markets. With respect to using performance rather
than design standards, the Commission used performance standards to the
extent appropriate under the statute. For example, broker-dealers have
the flexibility to settle transactions under a standard settlement
cycle shorter than T+2. In addition, under the proposed rule amendment,
broker-dealers have the flexibility to tailor their systems and
processes, and generally to choose how, to comply with the rule.

G. Request for Comment

    The Commission encourages written comments on matters discussed in
the initial RFA. In particular, the Commission seeks comment on the
number of small entities that would be affected by the proposed
amendment to Rule 15c6-1(a) and whether the effect(s) on small entities
would be economically significant. Commenters are asked to describe the
nature of any effect(s) the proposed amendment to Rule 15c6-1(a) may
have on small entities, and to provide empirical data to support their
views.

IX. Statutory Authority and Text of the Proposed Amendment to Rule
15c6-1

    The Commission is proposing an amendment to Rule 15c6-1 under the
Commission's rulemaking authority set forth in Sections 15(c)(6), 17A
and 23(a) of the Exchange Act [15 U.S.C. 78o(c)(6), 78q-1, and 78w(a)
respectively]. For the reasons stated in the preamble, Title 17,
Chapter II of the Code of Federal Regulations is proposed to be amended
as follows:

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

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

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106,
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Amend Sec.  240.15c6-1 by revising paragraph (a) to read as follows:
    The proposed amendment reads as follows:

Sec.  240.15c6-1  Settlement Cycle.

    (a) Except as provided in paragraphs (b), (c), and (d) of this
section, a broker or dealer shall not effect or enter into a contract
for the purchase or sale of a security (other than an exempted
security, 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
the parties at the time of the transaction.
* * * * *

    By the Commission.

     Dated: September 28, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-23890 Filed 10-4-16; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 80, Number 228 (Friday, November 27, 2015)]
[Notices]
[Pages 74185-74186]
[FR Doc No: 2015-30084]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76495; File No. SR-BX-2014-048]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order
Granting an Extension To Limited Exemption From Rule 612(c) of
Regulation NMS in Connection With the Exchange's Retail Price
Improvement Program Until December 1, 2016

November 20, 2015.
    On November 28, 2014, the Commission issued an order pursuant to
its authority under Rule 612(c) of Regulation NMS \1\ (``Sub-Penny
Rule'') that granted the NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'') a
limited exemption from the Sub-Penny Rule in connection with the
operation of the Exchange's Retail Price Improvement Program (``RPI
Program'').\2\ The limited exemption was granted concurrently with the
Commission's approval of the Exchange's proposal to adopt the RPI
Program on a one-year pilot term. The Commission granted the exemption
coterminous with the effectiveness of the RPI Program--both the RPI
Program and the exemption are scheduled to expire on December 1, 2015.
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    \1\ 17 CFR 242.612(c).
    \2\ See Securities Exchange Act Release No. 73702, 79 FR 72049
(December 4, 2014) (SR-BX-2014-048) (``RPI Approval Order'').
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    The Exchange now seeks to extend the exemption until December 1,
2016.\3\ The Exchange's request was made in conjunction with an
immediately effectively filing that extends the operation of the RPI
Program until December 1, 2016.\4\ In its request to extend the
exemption, the Exchange notes that given the gradual implementation of
the RPI Program and the preliminary participation and results,
extending the exemption would provide additional opportunities for
greater participation and assessment of the results. Accordingly, the
Exchange has asked additional time to allow it and the Commission to
analyze data concerning the RPI Program, which the Exchange committed
to provide to the Commission.\5\ For this reason and the reasons stated
in the RPI Approval Order originally granting the limited exemption,
the Commission, pursuant to its authority under Rule 612(c) of
Regulation NMS, finds that pursuant to its authority under Rule 612(c)
of

Regulation NMS, extending the exemption is appropriate in the public
interest and consistent with the protection of investors.
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    \3\ See Letter from Jeffrey S. Davis, Vice President & Deputy
General Counsel, Exchange, to Brent J. Fields, Secretary,
Commission, dated November 12, 2015.
    \4\ See SR-BX-2015-073.
    \5\ See RPI Approval Order, supra note 2.
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    Therefore, it is hereby ordered that, pursuant to Rule 612(c) of
Regulation NMS, the Exchange is granted an extension of the limited
exemption from Rule 612 of Regulation NMS that allows the Exchange to
accept and rank orders priced equal to or greater than $1.00 per share
in increments of $0.001, in connection with the operation of its RPI
Program, until December 1, 2016.
    The limited and temporary exemption extended by this Order is
subject to modification or revocation if at any time the Commission
determines that such action is necessary or appropriate in furtherance
of the purposes of the Act. Responsibility for compliance with any
applicable provisions of the Federal securities laws must rest with the
persons relying on the exemption that are the subject of this Order.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(83).
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Robert W. Errett,
Deputy Secretary.
 [FR Doc. 2015-30084 Filed 11-25-15; 8:45 am]
 BILLING CODE 8011-01-P