to comply with specified rules addressing same-day affirmation that
the Commission anticipates will not only facilitate T+1 but
encourage the development of more efficient and automated
operations, which will in turn further STP. See supra Parts III.A
and IV.A concerning proposed Rule 15c6-2 and amended Rule 204-2,
respectively. Accordingly, the Commission does not believe that the
policies and procedures requirement under the proposed rule imposes
an inflexible standard that places ``all responsibility'' for
facilitating STP on the CMSPs or is inconsistent with the
Commission's view of STP generally or its stated policy goals.
    \333\ See DTCC ITP April Letter, supra note 216, at 6.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Amend the Annual Reporting Requirement To Better Achieve
Transparency
    While generally supporting the requirement for CMSPs to file annual
reports, DTCC ITP stated that it did not understand the particular
elements it would be required to include in the annual report, or how
those elements supported the Commission's stated objectives of the
annual report, and expressed concerns about a CMSP's ability to
complete the annual report consistent with the Commission's goals.\351\
DTCC ITP also expressed concerns that a description of some types of
information in its policies and procedures may contain proprietary or
confidential information, and as such, a description of its policies
and procedures should not be required in the annual report.\352\ As an
alternative, DTCC ITP recommended that the annual report provision of
the proposed rule be amended to focus more on quantitative reporting
and less on qualitative descriptive reporting. Specifically, DTCC ITP
recommended eliminating proposed subsections (a) through (c) of
proposed Rule 17Ad-27 requiring specified descriptions, and instead
recommended including a requirement in the rule text for public
reporting of quantitative data on an anonymized and aggregated level
for rates of allocation, confirmation, affirmation and/or matching over
the twelve month period covered by the report.\353\ Further, DTCC ITP
suggested disclosure of additional data elements, such as affirmation
rates for institutional trade and prime brokerage trade flows, and
affirmation rates for institutional trade flows achieved separately
through an ETC or through a central matching facility.\354\
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    \351\ See id. at 11. For example, DTCC ITP expressed concerns
that the term ``description'' needs more clarity related to required
content and level of detail.
    \352\ See id. DTCC ITP stated that requiring a CMSP to engage in
the future cost and effort of analyzing the need for confidential
treatment of such information will impede efforts by CMSP to
innovate. See infra Part V.C.2 for the Commission's discussion of
treatment of confidential information.
    \353\ See DTCC ITP April Letter, supra note 216, at 12. As
discussed further in Part V.C.2 below, the Commission is retaining
the qualitative and quantitative aspects of the annual report, but
has modified that requirement to address the anonymization and
aggregation issues described in this comment letter.
    \354\ See id.; see also infra Part V.C.2 for the discussion of
the metric requirements under Rule 17Ad-27(b), as adopted.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

    \365\ See supra note 315 and accompanying text.
    \366\ See T+2 Proposing Release, supra note 4, at 69258. For
example, increasing the efficiency of using a CMSP can reduce the
risk that a trade will fail to settle and reduce costs associated
with correcting errors that result from the use of manual processes
and data entry, thereby improving the overall efficiency of the U.S.
clearance and settlement system.
    \367\ See, e.g., Financial Industry Regulatory Authority (FINRA)
Rule 11860 (requiring a broker-dealer to use a registered clearing
agency, a CMSP, or a qualified vendor to complete delivery-versus-
payment transactions with their customers).
    \368\ See T+1 Report, supra note 61, at 9.
---------------------------------------------------------------------------

    Over the past decade CMSPs have become increasingly connected to a
wide variety of market participants in the U.S.\369\ New Rule 17Ad-27
will require CMSPs, and by extension their users, to assess their
processes and find solutions to reduce or eliminate reliance on
services at CMSPs that involve manual or inefficient processes or
otherwise do not further facilitate STP in the institutional trade
processing environment. This in turn should better position CMSPs to
provide services that not only reduce processing risk and costs, but
also generally facilitate a more orderly transition to a T+1 standard
settlement cycle in the near term,\370\ as well as potential further
shortening of the settlement cycle in the future.
---------------------------------------------------------------------------

    \369\ See, e.g., DTCC, About DTCC Institutional Trade
Processing, https://www.dtcc.com/about/businesses-and-subsidiaries/dtccitp (noting that DTCC ITP, parent to DTCC ITP Matching, serves
6,000 financial services firms in 52 countries).
    \370\ As discussed in Part II above, the T+1 Report contemplates
moving the ``ITP Affirmation Cutoff'' from 11:30 a.m. ET on the day
after trade date to 9:00 p.m. ET on trade date. See T+1 Report,
supra note 61, at 13, 39.
---------------------------------------------------------------------------

    Accordingly, the Commission is adopting proposed Rule 17Ad-27 with
modifications. As explained further below, the Commission is adding the
language ``reasonably designed'' to the policies and procedures
requirement in

paragraph (a), adding additional requirements in paragraph (b) to
specify the data to be included in the annual report, and adding
paragraph (c) to explain the required timing of filing the annual
report. The Commission believes these changes are responsive to the
commenter's concerns and provide CMSPs flexibility to address
individualized operations, services, types of users, and business
objectives, and provide specificity to the data requirements while at
the same time retaining those provisions that facilitate achieving the
stated objectives of the new rule. In addition, and as discussed in
more detail below, the Commission is making several technical
modifications, including reorganizing the specific obligations under
the proposed rule by subdividing those obligations into paragraphs (a)
through (d), and adopting revisions to other technical aspects of and
terms used in the proposed rule text to improve clarity.
1. New Rule 17Ad-27(a)--Requirement for Policies and Procedures
    As discussed below, the Commission is retaining the proposed
requirement in Rule 17Ad-27 to establish, implement, maintain, and
enforce policies and policies, but is making several modifications. As
with the proposed rule, the final rule will require CMSPs to develop
policies and procedures focused on facilitating improvements in their
operations, systems, and user obligations to further the development of
STP \371\ in the processing of institutional trades, improve
efficiency, facilitate both cost and risk reduction in the clearance
and settlement of institutional trades generally, and better
accommodate shorter settlement cycles.\372\ The requirement to
establish, implement, maintain and enforce policies and procedures in
new Rule 17Ad-27(a) is as an important and efficient mechanism that
will require CMSPs, and by extension those market participants that
choose to rely on CMSPs to facilitate clearance and settlement, to
develop and implement specific operational procedures and systems to
facilitate STP. This, in turn, will enable, over time, STP in the post-
trade processing of institutional trades. Importantly, the rule will
also encourage the development of strategic plans on a forward-looking
basis to facilitate STP within the CMSP's operating framework and to
facilitate internal and external assessments as to the viability and
implementation of those strategic plans. By virtue of the expanded use
of CMSPs generally and the global nature of post-trade processing
today, the Commission anticipates that these efforts will require CMSPs
to coordinate their development activities with a variety of other
market participants that impact the CMSPs' ability to provide
beneficial efficiencies, which should in turn encourage the use of
CMSPs. Finally, the development of policies and procedures by CMSPs
will facilitate the Commission's ongoing development of the national
clearance and settlement system generally by enhancing the oversight of
CMSPs and ensuring a documented approach to further STP.
---------------------------------------------------------------------------

    \371\ As discussed above, the term ``straight-through
processing,'' as used by the financial services industry, generally
refers to processes that allow for the automation of the entire
trade process from trade execution through settlement without manual
intervention. See supra note 330. In the context of institutional
trade processing under this rule, STP occurs when a market
participant or its agent uses the facilities of a CMSP to enter
trade details and completes the trade allocation, confirmation,
affirmation, matching processes, or any combination thereof, without
manual intervention.
    \372\ In some cases, the use of manual or inefficient processing
introduces errors and operational risks that delay settlement and
may result in a failure to settle the transaction. The Commission
believes that, by engaging in the process of developing and
periodically assessing their policies and procedures, CMSPs will not
only foster solutions to mitigate or alleviate these inefficiencies
and risks internally but also consider these issues as they apply to
the general processing stream that may be relevant to the CMSP's
operations and its users.
---------------------------------------------------------------------------

    Specifically Rule 17Ad-27(a), as adopted, requires a clearing
agency that provides a central matching service (i.e., a CMSP) to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to facilitate straight-through
processing of securities transactions at the clearing agency.\373\
Because the policies and procedures requirement is distinct from the
annual report requirement (discussed below), this requirement is now
designated as new paragraph (a) in final Rule 17Ad-27, as adopted. The
final rule also removes the reference to ``transactions involving
broker-dealers and their customers'' because it is only explanatory
text describing the types of parties that may use a central matching
service and therefore is unnecessary to include in the rule text.\374\
Lastly, the final rule makes clear that the policies and procedures
must be ``written.''
---------------------------------------------------------------------------

    \373\ The new rule text adds the word ``written'' to the
policies and procedures requirement to require that the policies and
procedures must be established as a written document.
    \374\ See, e.g., Bloomberg STP and SS&C Techs Exemption Order,
supra note 326, at 75388-90 (generally describing the clearing
agency applicants as providers of a ``matching service'' or
``central matching service'' without reference to the types of
customers served).
---------------------------------------------------------------------------

    The provision to ``establish, implement, maintain, and enforce''
written policies and procedures requires the CMSP to establish and
implement such policies and procedures by the compliance date and to
ensure that the policies and procedures remain current on an ongoing
basis, including by implementing timely updates or revisions.\375\
Moreover, the requirement to ``enforce'' requires the CMSP to develop a
reasonable approach with sufficient specificity to ensure that its
users comply with any required user obligations and to make clear any
consequences of non-compliance within the established policies and
procedures framework and the timeframes associated with any such
consequences. The Commission encourages, but does not require, the CMSP
to provide users with access to the required CMSP policies and
procedures well in advance of any compliance obligations applicable to
users to ensure that they can thus make the necessary arrangements or
changes to comply with any user obligations contained therein.
---------------------------------------------------------------------------

    \375\ See infra Part VII for a discussion of the compliance
dates.
---------------------------------------------------------------------------

    The periodic review required by the ``establish, implement and
maintain'' component of the CMSP's policies and procedures requirement
under adopted Rule 17Ad-27(a) should also help ensure that a CMSP
considers in a holistic fashion how the obligations it requires of its
users will advance the implementation of methodologies, operational
capabilities, systems, or services that support STP. It should also
encourage the CMSP and its users to identify inefficiencies and manual
processes that impede the STP objective and, to the extent possible,
develop automated and streamlined solutions to address those issues.
    The scope of the policies and procedures required under new
paragraph (a) generally should focus on those aspects of the CMSP's
operations and services that directly or indirectly relate to
facilitating STP in the processing of institutional trades at the
CMSP.\376\ The Commission understands that the CMSP only controls its
internal functions, and not those of its users, and as such, the rule
as adopted requires the CMSP to design its policies and procedures
around its own internal functions and services. However, and to the
extent practicable, the Commission encourages CMSPs to develop a
policies

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

manual input of trade details, the manual intervention to resolve
errors and exceptions that can prevent settlement of the trade, or the
transmission of messages regarding errors, exceptions, and settlement
status information among the parties to a trade and their settlement
agents that impede the ability of the CMSP to achieve an STP
environment. In considering generally how to develop policies and
procedures that facilitate STP, a CMSP generally should consider the
full range of operations and services related to the processing of
institutional trades for settlement and establish a holistic framework
for STP on a CMSP-wide basis. CMSPs should also generally consider and
address how the services, systems, and any operational requirements a
CMSP applies to its users ensure that the CMSP's policies and
procedures advance the goal of achieving straight-through processing
for trades processed through it. Moreover, the CMSP generally should
ensure that its systems, operational requirements, and the other
choices it makes in designing its services, enable and incentivize
prompt and accurate settlement without manual intervention or without
automated processes that may result in manual intervention.
    For example, a CMSP's policies and procedures generally should
explain the criteria that the CMSP applies to determine when a
``match'' has been achieved, including any relevant tolerances that it
or its users might apply to achieve a match, and the extent to which
such criteria should be standardized or customized.\383\ With respect
to the use of ETCs that impede the development of STP, and which often
rely on legacy technologies, a CMSP's policies and procedures generally
should establish a timeline for transitioning users away from such
manual processes to service offerings that can reduce a party's
reliance on the manual, often sequential, entry and reconciliation of
trade information.\384\ Where the CMSP acts as a communication platform
for different market participants to transmit messages regarding
errors, exceptions, and settlement status information among the parties
to a trade and their settlement agents, the CMSP generally should
consider the extent to which its policies, procedures, and processes
restrict, inhibit, or delay the ability of users to transmit such
messages used in the preparation or transmission of trades for
settlement and have policies and procedures that promote the automated
transmission of messages among the relevant parties to a transaction to
ensure timely settlement and reduce the potential for errors.
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    \383\ The use of SSIs is just one of many standardization
mechanisms available to assist CMSPs in streamlining their internal
operations to reduce reliance on manual processes, which can
facilitate STP. Given that individual CMSPs may vary in the services
provided or the operations and systems used to provide those
services, the Commission does not believe requiring the use of SSI,
or any other particular standardization mechanism, in Rule 17Ad-27
would be appropriate. However, to the extent that the use of SSIs is
applicable in a particular CMSP's operations, the CMSP generally
should consider developing incentives or requirements in its
policies and procedures to encourage or compel the use of SSIs. See
supra note 362.
    \384\ In its comment letter, DTCC ITP sought more clarity around
the Commission's description of the CMSP's role in facilitating a
transition away from manual processes, particularly as it relates to
ETC services and timelines for transitioning away from manual
processes, some of which may not be under the CMSP's control. See
DTCC ITP April Letter, supra note 216, at 7. As discussed above, the
Commission is not advocating the elimination of ETC to the extent
that its use does not impede the development of STP at the CMSP. In
the event that use of the ETC is impeding STP, CMSPs generally
should use their expertise to develop an appropriate methodology and
timeframe to transition away from the use of such ETC.
---------------------------------------------------------------------------

    The Commission recognizes it may not be technologically or
operationally practicable to eliminate all manual processes
immediately. Indeed, in certain circumstances, the parties to a trade
may need to engage in manual interventions to ensure the accuracy of
trade information and minimize operational or other risks that may
prevent settlement. Rule 17Ad-27(a), as adopted, does not require CMSPs
to remove a manual process if doing so would clearly undermine the
prompt and accurate clearance and settlement of securities
transactions. However, where a CMSP continues to permit manual
reconciliation or other types of human intervention, it generally
should explain in its policies and procedures why those manual
processes remain necessary as part of its systems and processes and
initiate incremental steps to alleviate the need for any manual
process. In addition, the CMSP should consider developing processes
that ultimately would eliminate the underlying issues that drive the
use of manual processes in order to facilitate a more automated and
STP-focused approach.
2. New Rule 17Ad-27(b)--Annual Report
    The Commission is retaining the general requirement under proposed
Rule 17Ad-27 to require a CMSP to submit a report every twelve months
to the Commission that includes specified qualitative and quantitative
information used to assess the CMSP's progress in facilitating STP
during the twelve-month period covered by the annual report. However,
as explained in more detail below, the Commission is making one
substantive and several technical modifications to the final rule, as
adopted. The purpose of these modifications is to require the CMSPs to
disclose qualitative and quantitative information in the annual report.
The Commission continues to believe that the annual report component of
Rule 17Ad-27(b), as adopted, will enable the Commission to (i) assess
the qualitative and quantitative progress made by the CMSP and its
users to further STP efforts in the processing of institutional
transactions; (ii) evaluate the need for additional regulatory action;
and (iii) further its oversight of, and the development of, the
national clearance and settlement system.
    The Commission is retaining the 12-month reporting timeframe
requirement, as proposed, for the annual report under new Rule 17Ad-
27(b) for several reasons. First, a yearly review on progress with
respect to the CMSP's efforts to facilitate STP should be a sufficient
timeframe in which the CMSP is able to consider, develop, and implement
iterative improvements over time on a forward-looking basis, while also
ensuring that progress towards STP is describable, measureable and
implemented as expeditiously and prudently possible. Second, a twelve
month period would provide the CMSP with a sufficient look-back period
to complete a meaningful review on an organization-wide basis and time
to test the efficacy of any material changes to technologies and
procedures in the preceding year.
    Third, an annual reporting requirement, as opposed to a monthly or
semi-annual requirement, should help ensure that the information
provided to the Commission reflects meaningful and substantive progress
by the CMSP, as opposed to focusing attention on smaller, technical
changes in services and policies that would be less relevant or less
informative to the CMSP, its users, the Commission, or the public as to
their understanding of the overall progress towards achieving straight-
through processing by the CMSP. And fourth, the Commission believes
that the annual report requirement, as now structured in adopted Rule
17Ad-27, would enable the Commission to evaluate actions taken by the
CMSP to ensure compliance with the rule and to help fulfill the
Commission's responsibility for oversight of the national clearance and
settlement system, both as it relates to the CMSP specifically and the
national system more generally.

    New Rule 17Ad-27(b) also retains the general requirement to provide
both qualitative and quantitative information in the annual report, as
proposed. The Commission believes that both types of analysis are
necessary to better explain the current operational environment
relative to STP development and the obstacles preventing further STP
development, and to provide appropriate context to the metrics, from a
current as well as a retrospective and prospective viewpoint. Moreover,
the qualitative aspects of the requirements under paragraph (b) will
provide the Commission with the CMSP's expertise in the assessments and
analysis of its STP progress, providing additional context for the
quantitative data required in the annual report.
    The Commission also is retaining the provision making the annual
report required under adopted Rule 17Ad-27(b) publicly available on its
website to enable the public to review and analyze progress on
achieving STP.\385\ As discussed in the T+1 Proposing Release and
detailed below, to the extent that an annual report includes
confidential commercial or financial information, a CMSP can request
confidential treatment of those specific portions of the report.\386\
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    \385\ DTCC ITP indicated in its comment letter that it is
considering publishing the annual report on its website to provide
the public with ready access to the information. See DTCC ITP
September Letter, supra note 325, at 4.
    \386\ See 17 CFR 240.24b-2.
---------------------------------------------------------------------------

    To clarify that the content of the annual report requirement is
distinct from the policies and procedures requirement (discussed
above), the annual report requirement is now designated as new
paragraph (b) under the adopted Rule 17Ad-27. Specifically, new Rule
17Ad-27(b), as adopted, requires a clearing agency that provides a
central matching service for transactions involving users to submit to
the Commission every twelve months a report that includes five
component requirements, now delineated as Rule 17Ad-27(b)(1) through
(5). Paragraphs (b)(1), (2), and (5) include modified versions of the
proposed requirements under proposed Rule 17Ad-27(a), (b), and (c). In
addition, new paragraph (b) includes paragraphs (b)(3) and (4) which
detail the data elements required in the report, consistent with the
discussion in the T+1 Proposing Release but not specified in the rule
text as proposed.\387\ In particular, paragraphs (b)(3) and (4)
incorporate the substance of the recommendations made by DTCC ITP
requesting more specificity for the data required to be included in the
report under the rule.\388\ The Commission believes that these changes
are consistent with its intent as to the contents and objective of the
annual report, as proposed, and should provide beneficial clarity to
CMSPs regarding their obligations under these provisions.
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    \387\ A CMSP generally should include in its report a summary of
key settlement data relevant to its STP objective, such as data
related to the rates of allocation, confirmation, affirmation, and/
or matching achieved via straight-through processing. See T+1
Proposing Release, supra note 2, at 10459.
    \388\ See DTCC ITP September Letter, supra note 325, at 2-3.
---------------------------------------------------------------------------

    The Commission is also amending paragraph (b) to delete the phrase
``for transactions involving broker-dealers and their customers'' for
the same reason it deleted the text in paragraph (a), as discussed in
Part V.C.1.
(a) New Rule 17Ad-27(b)(1)--Summary of Policies and Procedures
    The first of the five components under adopted Rule 17Ad-27(b)
requires the CMSP to provide pursuant to new paragraph (b)(1) a summary
of its policies and procedures required under adopted Rule 17Ad-27(a),
current as of the last day of the twelve month period covered by the
report. The Commission is making a technical change to paragraph (b)(1)
to clarify that only a ``summary'' of the CMSP's policies and
procedures current as of the last day of the twelve month period
covered by the report need be included in the report, and not the
policies and procedures in their entirety or policies and procedures
current under any other timeframe.\389\ Today, CMSPs' policies and
procedures are not publicly available. By providing a summary of the
CMSPs policies and procedures, the Commission, indirect CMSP users, and
the public will be able to understand at a high level the important
aspects of the CMSP's operations and systems, which the Commission
anticipates will in turn facilitate market-wide discussions regarding
the adoption of more efficient post-trade processing generally and
within the context of using CMSPs for some or all of a market
participant's post-trade processing needs specifically. Moreover, this
information should help readers of the annual report to be better able
to analyze other aspects of the annual report, particularly those
related to the quantitative and forward-looking qualitative information
required under the rule, as adopted.
---------------------------------------------------------------------------

    \389\ Proposed Rule 17Ad-27(a) required that the annual report
must include ``[I]t's current policies and procedures for
facilitating straight-through processing.'' T+1 Proposing Release,
supra note 2, at 10459.
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    The summary description of the CMSP's policies and procedures
required by paragraph (b)(1) generally should provide a brief overview
of the policies and procedures developed pursuant to new Rule 17Ad-
27(a). To the extent applicable, the scope of the summary generally
should focus on those aspects of the CMSP's policies and procedures
that describe and explain its operations, systems, services, and user
obligations generally and those aspects of its policies and procedures
that facilitate STP-oriented operations or systems specifically,
including any material changes made to the relevant policies and
procedures during the reporting period. Because the Commission will
make the report publicly available, it would be helpful for a CMSP to
orient the information contained in the summary to market participants
that engage in the post-trade processing of securities transactions to
help ensure that the report is useful and informative to both existing
and potential users.
(b) New Rule 17Ad-27(b)(2)--Qualitative Description of STP Progress
    The second component of the annual report under adopted Rule 17Ad-
27(b) requires the CMSP to provide pursuant to new paragraph (b)(2) a
qualitative description of the CMSP's progress in facilitating STP
during the twelve-month period covered by the report required under
paragraph (b)(1). The Commission is modifying the proposed requirement,
formerly in proposed Rule 17Ad-27(b), to add the text ``qualitative
description'' in new paragraph (b)(2) to clarify the type of
information required in the CMSP's description of its progress in
facilitating STP during the period covered by the report and to assist
CMSP compliance with this provision of the rule.
    The qualitative report required under paragraph (b)(2) will provide
the Commission and the public with an understanding of the specific
actions the CMSP has taken over the twelve-month period covered by the
report to facilitate STP. To the extent practicable, the Commission
encourages CMSPs to use their expertise to include their assessment of
the impact of any actions discussed in the qualitative section of the
report on the furtherance of its STP efforts, both as it relates to the
CMSP specifically and the markets generally. The Commission and CMSP
users will use this information to better understand the CMSP's STP
initiatives, as well as encourage market participants to begin
analyzing their own internal systems and operations to develop and
incorporate more STP-oriented mechanisms themselves. In addition, the
qualitative report required under this provision should also help
inform

an analysis of the quantitative data required under new Rule 17Ad-
27(b)(3) and (4) by providing context for the metrics regarding the
efficacy of the CMSP's actions to facilitate STP.
    A qualitative description of the CMSPs progress during the twelve
month period covered by the report generally should describe the
services and systems used during the period covered by the report that
illustrate the CMSP's progress in facilitating STP, as well as any
applicable analysis or additional information that aids in
understanding or supporting the qualitative description. This
qualitative description should generally focus on the CMSP's progress
in facilitating STP with respect to the processes used in the
allocation, confirmation, affirmation, and matching of institutional
trades, the communication of messages among the parties to the
transactions, and the availability of service offerings that reduce or
eliminate the need for manual processing. However, the CMSP should
consider including any reasonable and applicable indicia of STP
progress to supplement their descriptions under paragraph (b).
    As is the case with other provisions of adopted Rule 17Ad-27(b),
the qualitative description submitted pursuant to Rule 17Ad-27(b)(2) in
the first reporting period may benefit from a more robust discussion of
the current systems used by the CMSP in order to put a discussion of
its STP progress in context.\390\ However, the qualitative description
in subsequent annual reports should generally be able to build on the
initial report by relying on any background or foundational information
provided in the initial reporting period, and instead focus primarily
on the current year's progress.
---------------------------------------------------------------------------

    \390\ For more information related to the content and filing of
the initial and subsequent annual reports pursuant to adopted Rule
17Ad-27(c), see infra Part V.C.3.
---------------------------------------------------------------------------

(c) New Rule 17Ad-27(b)(3)--Quantitative Data
    The third component of the annual report required under adopted
Rule 17Ad-27(b) requires the CMSP to include pursuant to new paragraph
(b)(3) a quantitative presentation of data that specifies five sets of
data. The Commission concurs with DTCC ITP's recommendation that any
requirements to include specific data in the annual report should be
expressly included in the rule text.\391\ While DTCC ITP recommended
specifying in the rule certain categories of data, the Commission is
opting to break down those categories into the specific data elements
described in paragraph (b)(3).\392\ Specifying the particular data and
metrics will promote the capture of specific, standardized data points
relevant to advancing the straight-through processing objective, which
should enable more effective comparison and analysis of the data year
over year and as between CMSPs. While requiring specific data elements
removes some of the CMSP's discretion under the rule to determine how
best to quantify advancements related to straight-through processing,
the Commission believes that requiring the specific data elements in
paragraph (b)(3) is necessary to understand existing market dynamics
and, as noted above, to facilitate comparisons across CMSPs and over
time.
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    \391\ See DTCC ITP April Letter, supra note 216, at 12; DTCC ITP
September Letter, supra note 325, at 2-3.
    \392\ See DTCC ITP September Letter, supra note 325, at 2-3.
---------------------------------------------------------------------------

    Accordingly, the Commission is modifying the proposed annual report
requirement to add a quantitative data requirement under paragraphs
(b)(3)(i) through (v) specifying the key metrics related to the
processing of securities transactions at CMSPs that are required in the
annual report.\393\ Specifically, Rule 17Ad-27(b)(3) requires the CMSP
to provide data that includes: (i) the total number of trades submitted
to the clearing agency for processing; (ii) the total number of
allocations submitted to the clearing agency; (iii) the total number of
confirmations submitted to the clearing agency, as well as the total
number of confirmations cancelled by users; (iv) the percentage of
confirmations submitted to the clearing agency that are affirmed on
trade date, specifying to the extent practicable the time of
affirmation on trade date; (v) the percentage of allocations and
confirmations submitted to the clearing agency that are matched and
automatically confirmed through the clearing agency's services; and
(vi) metrics concerning the use of manual and automated processes by
the CMSP's users with respect to the CMSP's services that may be used
to assess progress in facilitating STP. The data required under this
provision should provide baseline information and insight into CMSP's
progress with regard to facilitating STP, CMSP user performance, and
potential indications of specific impediments in improving efficiencies
in the post-trade processing environment.
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    \393\ In its initial comment letter, DTCC ITP recommended that
the annual report should require the quantitative data in lieu of
the policies and procedures and qualitative description
requirements. See DTCC ITP April Letter, supra note 216, at 12. DTCC
ITP also recommended that the quantitative aspects of the report
should include specified metric categories, in which DTCC ITP
suggested specific types of data that should be included in those
metric categories. See DTCC ITP September Letter, supra note 325, at
2. As discussed above, the Commission is opting to require specific
data requirements under adopted Rule 17Ad-27(b), in lieu of metric
categories. See supra notes 391-392 and accompanying text. Most of
the data elements incorporated into Rule 17Ad-27(b)(2) and (3)
reflect the recommendations made by DTCC ITP. See DTCC ITP September
Letter, supra note 325, at 2-3.
---------------------------------------------------------------------------

    Although the metrics required under paragraphs (b)(3)(i) through
(v) will provide a high-level view of certain functions at the CMSP,
the Commission believes this data will objectively demonstrate trends
with regard to automation, manual intervention and overall progress
towards STP and may provide indications of certain systemic or
operational issues impeding the CMSP's STP progress. Defining the
specific metrics required in the annual report should also have the
effect of promoting consistencies across reporting periods at a single
CMSP and across multiple CMSPs, which should in turn improve the
Commission's and the public's ability to analyze the data over time.
The Commission considers the data requirements under paragraph (b)(3)
to be the key information necessary to analyze the CMSP progress in
facilitating STP. In the event the CMSP determines that additional data
is necessary or would be helpful to support its qualitative
descriptions required under Rule 17Ad-27(b)(2) or (5), the Commission
encourages the CMSP to include such additional quantitative data under
paragraph (b)(3).
    With regard to metrics concerning the use of manual and automated
processes by the CMSP's users with respect to the CMSP's services that
are indications of progress in facilitating STP, as required under
paragraph (b)(3)(vi), the Commission has not specified the type of
metrics that should be used to comply with this provision of the new
rule. CMSPs are encouraged to design metrics specific to their services
and users that would best indicate whether users are in fact using
manual processes for allocations, confirmations or other processing
activities and whether over time these users have migrated to an
automated processing that replaced their use of manual processing. For
example, DTCC ITP cited to the use of SSI metrics as one such measure,
which could provide details on the quality of SSIs established at the
CMSP, the use of such SSIs by its users in the actual processing
stream, and automation of

SSIs as possible indicators of STP improvements.\394\
---------------------------------------------------------------------------

    \394\ See DTCC ITP September Letter, supra note 325, at 3 for
more detail on DTCC ITP's comments related to data requirements in
the annual report.
---------------------------------------------------------------------------

    Given that the data required under paragraph (b)(3)(vi) is one of
the core measurements central to the objective of Rule 17Ad-27, the
Commission encourages CMSPs to design these metrics to be as expansive
and granular as reasonably feasible, to better provide a detailed view
of the STP progress, and to adjust such metrics as necessary to
accommodate the onboarding of new services, technologies or operations.
Retaining sufficient continuity year-to-year in the CMSP's metrics
could ensure year-over-year measurability of the STP progress made
during the time period covered by any particular annual report. Any new
metrics added to an annual report covering a particular twelve month
period due to a change in the CMSP's services, operations or systems
could be discussed in the qualitative description required under new
Rule 17Ad-27(b)(5).
(d) New Rule 17Ad-27(b)(4)--Quantitative Data Organization and
Categorization
    The fourth component of the annual report requires the CMSP to
submit, pursuant to Rule 17Ad-27(b)(4), the data sets required by
paragraph (b)(3) in the following manner: (i) organized on a month-by-
month basis beginning with January of each year, for the twelve months
covered by the report required under paragraph (b) of the rule; (ii)
separated, where applicable, between the use of central matching and
electronic trade confirmation services offered by the clearing agency;
(iii) separated, as appropriate, by asset class; (iv) separated by type
of user; and (v) presented on an anonymized and aggregated basis.\395\
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    \395\ To support transparency around the role and utility of
CMSPs and objectively demonstrate trends toward more automation and
STP progress, DTCC ITP recommended in its comment letter that the
Commission amend proposed Rule 17Ad-27 to include a specific
requirement for reporting quantitative data on an anonymized and
aggregated level for rates of allocation, confirmation, affirmation,
and/or matching that a CMSP has achieved via STP and distinguishing
trade information by asset class, type of processing service (i.e.,
ETC versus matching), and ``customer segment'' (referred to as
``user type'' in Rule 17Ad-27, as adopted). See DTCC ITP September
Letter, supra note 325, at 2.
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    The Commission agrees with DTCC ITP that further distinguishing any
required data sets by asset class, type of CMSP service used, user
type, and presented on an anonymized and aggregated basis, should
better demonstrate automation trends and STP progress. The Commission
also believes that further subcategorizing the required data as now
required under adopted Rule 17Ad-27(b)(4) enables more thorough and
useful analysis of the progress toward STP and helps identify potential
hindrances in achieving full STP.\396\ Organizing each of the data sets
required under paragraph (b)(3) to further divide the data on a month-
by month basis, and to identify the submission of trades by entity type
(i.e., ETC versus matching), user type, and asset class should assist
in the Commission's and the public's analysis of the data and more
precise identification of any potential sources of issues hindering STP
progress. Moreover, the identification of certain subcategories should
apprise users and their customers of any issues raised by the data that
is specifically applicable to a particular user.
---------------------------------------------------------------------------

    \396\ See id.
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    The Commission understands that there may be circumstances when the
identification of a particular data set does not lend itself to further
subcategorization under paragraph (b)(4)(ii) requiring CMSP service
type designation or paragraph (b)(4)(iii) requiring asset class
designation. This may be particularly true as CMSPs services and
technology evolve to accommodate improvements or changing business or
market conditions. For example, a CMSP's ETC or matching service may
not perform certain functions that are subject to the data set
requirements under paragraph (b)(3). Similarly, a specific CMSP
function may involve multiple asset classes and, as a result, may be
difficult to parse out in a manner that would aid an analysis of the
information or aid in assessing STP progress. In those cases, the CMSP
generally should use reasonable efforts to organize the data sets in a
manner that best informs the Commission, CMSP users, and the public as
to the current and future status of the CMSP's progress in facilitating
STP at the CMSP.
    To the extent applicable and feasible, subcategorizing data
required under paragraph (b)(3) by user type generally should include
those entities that are directly interfacing with the CMSP to
facilitate allocation, confirmation, affirmation or matching functions
for themselves or their clients. Such entities may include investment
managers, broker-dealers (in their capacity as executing or prime
broker-dealers), and custodians. However, to the extent that other user
types, including indirect users of CMSP services, can be identified and
distinguished in the data sets required under paragraph (b)(3), the
CMSP could consider including those categorizations as well if such
information would benefit an analysis of the required data.
    The Commission is also adopting new Rule 17Ad-27(b)(4)(v) which
requires the information to be presented on an anonymized and
aggregated basis.\397\ Given that the annual report has information
that the Commission believes should be available to the public, and
that the Commission would likely sustain a confidential treatment
request under 17 CFR 240.24b-2 by the CMSP for sensitive, proprietary
and confidential data included in the annual report,\398\ the contents
of the annual report need to be anonymized and aggregated.
---------------------------------------------------------------------------

    \397\ See id.; see also DTCC ITP April Letter, supra note 216,
at 12.
    \398\ See 17 CFR 240.24b-2.
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(e) New Rule 17Ad-27(b)(5)--Qualitative Description of STP Facilitation
    The fifth component of the annual report under Rule 17Ad-27(b)
requires the CMSP to provide pursuant to new paragraph (b)(5) a
description of the actions the CMSP intends to take to further
facilitate STP of securities transactions at the clearing agency during
the twelve-month period that follows the period covered by the report.
The Commission is adopting this provision generally as proposed, but is
making one modification to the proposed rule text by replacing the text
``[T]he steps'' in proposed Rule 17Ad-27(c) with the text ``a
description of the actions'' in new paragraph (b)(5). This modification
will facilitate a more detailed description of the CMSP's actions to
facilitate STP in the upcoming twelve months.
    The purpose of paragraph (b)(5) is two-fold. First, the provision
is intended to inform the Commission, CMSP users and market
participants generally as to the CMSP's intended actions to facilitate
STP in the upcoming year. The Commission anticipates that advance
notice of a CMSP's intentions to take certain actions oriented toward
STP development may allow other market participants to make the
necessary changes to accommodate the CMSP's activities and may
facilitate innovation to improve other aspects of the post-trade
processing environment external to the CMSP, some of which may
encourage or allow for future improvements at the CMSP.
    Second, new paragraph (b)(5) is intended to encourage CMSPs to
develop a culture of focusing on enabling a fully automated STP

environment as it considers future developments of its services,
operations, and business model. The Commission believes that the CMSP
can and should be a leading force in encouraging the development of
more efficient, automated, and STP-focused systems in post-trade
processing market-wide. While the CMSP does not have control over
actions taken or services utilized by its users and their customers,
the actions it takes to provide and promote STP services and
capabilities at the CMSP level should have a direct impact on its
users' and an indirect impact on its users' customers with respect to
future developments of their individual internal operations and
systems, as well as an impact on the state of post-trade processing
within the market as a whole.
    In describing the actions it intends to take in the twelve-month
period following the period covered by the annual report as required
under new Rule 17Ad-27(b)(5), the CMSP should generally consider
including any material changes that it intends to make with respect to
its policies, procedures, operations, systems or services that relate
to the furtherance of facilitating STP. While paragraph (b)(5) requires
the CMSP to identify those actions the CMSP will in fact implement
during the required timeframe, the CMSP should also consider including
those actions that have a high degree of likelihood of being
implemented during the timeframe. To the extent practicable and related
to STP development, the CMSP should also consider including a summary
of the underlying rationale as to why the CMSP intends to take a
particular action required to be described under paragraph (b)(5) and a
description of the expected impact of any such action or actions as it
relates to the CMSP's facilitation of STP.
    The Commission anticipates that the metrics required under new Rule
17Ad-27(b)(3) should help inform the CMSP and shape future
considerations by providing data that evidences whether progress has
made in moving toward full STP during the period covered by the
preceding year and what if any obstacles remain that should be analyzed
and addressed in future iterations of its services and operations. For
example, changes in manual touch rates by user type may indicate issues
that can and should generally be addressed on a policy or systems basis
to reduce those rates. From a qualitative perspective, CMSPs should
consider reviewing their operations on a system-wide basis to design
future solutions to address the use of manual processes or automated
process that result in manual intervention, with the goal of reducing
or eliminating the use of such processes.
3. New Rule 17Ad-27(c)--Timing of Filing Annual Report
    The Commission is adopting new Rule 17Ad-27(c) to require that the
annual report required under Rule 17Ad-27(b) must be filed with the
Commission within 60 days of the end of the twelve-month period covered
by the report, and the twelve month period covered by each report must
commence on January 1 of the calendar year.\399\ The Commission
believes that requiring the filing of the annual report within 60 days
of the end of the twelve month period covered by the report is an
appropriate amount of time because it balances the competing interests
of providing the CMSPs sufficient time to compile the data and
descriptions required under new Rule 17Ad-27(b) and providing
sufficiently recent and relevant data for the Commission and public
review and analysis. Moreover, CMSPs may choose to plan and compile the
contents of the annual report throughout the reporting year as new
relevant data and information becomes available, in part because the
CMSPs already provide on a monthly basis some data contemplated in the
annual report pursuant to the terms of the exemptive orders. Based on
the Commission's experience in requiring other types of clearing
agencies to provide financial statements within sixty days of the end
of the year,\400\ the Commission believes a 60-day period would provide
the CMSP sufficient time to compile and complete the remaining portions
of the report and seek the appropriate internal approval to file the
report with the Commission.
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    \399\ DTCC ITP recommended that the Commission should provide
further clarification as to when CMSPs would be required to submit
their initial annual report to the Commission, as well as the time
period applicable to the actual content to be included in initial
annual report. DTCC ITP raised concerns that depending on when the
initial report was due, the variance in pre and post T+1
implementation data could result in unclear analysis of STP
progress. See DTCC ITP September Letter, supra note 325, at 3. The
Commission believes DTCC ITP's concern is addressed, regardless of
the time period covered by the initial or subsequent annual reports
or whether the data reflects pre or post T+1 implementation, because
the data will be presented on a month-by-month basis pursuant to new
Rule 17Ad-27(b)(4)(i), and therefore amenable to an analysis on any
timeframe.
    \400\ See, e.g., 17 CFR 240.17Ad-22(c)(2). In the post-trade
environment more generally, the Commission also requires security-
based swap data repositories to file an annual report with the
Commission within sixty days of the end of the fiscal year. See 17
CFR 240.13n-11.
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    The Commission is also requiring that the time period covered by
the annual report contain information relevant to the requirements
under new paragraph (b) of Rule 17Ad-27 from January 1 through December
31 of each calendar year. By synchronizing the submission the annual
reports to a uniform time frame across all CMSPs, the Commission, CMSP
users, and the public will be able to better analyze the data and
assess compliance with the rule and progress of the CMSPs, on an
individual CMSP level and across all CMSPs, in facilitating STP. In the
event there is a partial year on the first year a CMSP is obligated to
comply with Rule 17Ad-27(b), then the CMSP should generally file its
first annual report to cover that partial year through December 31 of
that year.\401\
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    \401\ For example, the compliance date for adopted Rule 17Ad-27
is May 28, 2024. See infra Part VII.D. The first annual report will
cover the time period from April 1, 2024, through December 31, 2024.
---------------------------------------------------------------------------

4. New Rule 17Ad-27(d)--Filing Annual Report in EDGAR and
Confidentiality Issues
    The Commission is adopting as proposed the provision under proposed
Rule 17Ad-27 that requires CMSPs to file the annual report on
EDGAR.\402\ Pursuant to new Rule 17Ad-27(d), a CMSP is required to
submit its annual report to the Commission using EDGAR, and tag the
information in the report using the structured (i.e., machine-readable)
Inline XBRL data language. Specifically, Rule 17Ad-27(d) requires that
the report required under paragraph (b) of the new rule be filed
electronically on EDGAR and must be provided as interactive data as
required by 17 CFR 232.405 (``Rule 405 of Regulation S-T'') in
accordance with the EDGAR Filer Manual.\403\
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    \402\ DTCC ITP did not comment on the use of EDGAR to file the
proposed annual report, but did mention in the context of filing on
EDGAR that it was considering publishing the annual report on its
website. See DTCC ITP September Letter, supra note 325, at 3.
    \403\ See 17 CFR 232.101 and 232.405. In a non-substantive
change from the proposal, rather than adding new 17 CFR 232.409
(``Rule 409 of Regulation S-T''), the Commission is expanding Rule
405 of Regulation S-T to effectuate the Inline XBRL requirement.
This approach will be consistent with other Commission rulemakings
that have featured Inline XBRL requirements. See, e.g., Exchange Act
Release No. 95607 (Aug. 25, 2022), 87 FR 55134, 55196 (Sept. 8,
2022).
---------------------------------------------------------------------------

    Using EDGAR will provide the Commission and the public with a
centralized, publicly accessible electronic database for the reports,
facilitating the use of the reported data on straight-through
processing. Moreover, requiring Inline XBRL tagging of the reported
disclosures, which would specifically include an Inline XBRL block text
tag for each of the required narrative disclosures as well as

detail tags for individual data points, should make the disclosures
more easily available and accessible to and reusable by market
participants and the Commission for retrieval, aggregation, and
comparison across time periods for a single CMSP or across different
CMSPs and time periods.\404\ Detail tags will also be helpful relative
to the disclosure in the annual report of individual data points,
including the rates of allocation, confirmation, affirmation, and/or
matching achieved via straight-through processing. As a general matter,
incorporating submission via EDGAR and requiring Inline XBRL tagging
under Rule 17Ad-27 will facilitate access to data included in reports
submitted pursuant to the rule in a manner that is machine-readable,
human-readable, and accessible via application programming interface
where appropriate.\405\ In the Commission's view, the Inline XBRL
tagging requirement will facilitate efficient analysis of information
that CMSPs include in their annual reports, providing CMSP users (e.g.,
institutional investors and broker-dealers acting on behalf of
institutional investors) and the general public greater insight into
policies and procedures, progress, quantitative data, and qualitative
descriptions related to straight-through processing.
---------------------------------------------------------------------------

    \404\ See Exchange Act Release No. 10514 (June 28, 2018), 83 FR
40846, 40847 (Aug. 16, 2018). Inline XBRL allows filers to embed
XBRL data directly into an HTML document, eliminating the need to
tag a copy of the information in a separate XBRL exhibit. Id. at
40851. Using Inline XBRL as compared to an unstructured PDF, HTML,
or ASCII format requirement for the reports would facilitate
analysis of the information contained therein. Id. With respect to
the metrics concerning the use of manual and automated processes by
a CMSP's users required under paragraph (b)(3)(vi)--which may vary
across CMSPs--the Commission anticipates that the tagged data will
facilitate useful comparisons over time at a particular CMSP, even
though it may facilitate only limited comparisons across CMSPs.
    \405\ These considerations are consistent with objectives of the
recently enacted Financial Data Transparency Act (``FDTA''), which
concerns the manner in which the Commission collects and
disseminates information. The FDTA was signed into law on December
23, 2022, as Title LVIII of the James M. Inhofe National Defense
Authorization Act for Fiscal Year 2023. See James M. Inhofe National
Defense Authorization Act for Fiscal Year 2023, Public Law 117-263
(Dec. 23, 2022). Public Law 117-263, 136 Stat. 2395 (2022). Section
5811 of the FDTA directs the Commission and other covered agencies
(e.g., financial regulators) to jointly issue proposed rules for
public comment that establish data standards for the collections of
information reported to each covered agency by financial entities
and for the data collected from covered agencies on behalf of the
Financial Stability Oversight Council. The data standards must meet
specified criteria relating to openness and machine-readability and
promote interoperability of financial regulatory data across members
of the Financial Stability Oversight Council. In addition, section
5822 of the Financial Data Transparency Act requires that all public
data assets published by the Commission under the securities laws
and the Dodd-Frank Act be made available in accordance with
specified criteria relating to openness and machine-readability.
Section 5811 of the FDTA directs the Commission and other covered
agencies (e.g., financial regulators) to jointly issue proposed
rules for public comment that establish data standards for the
collections of information reported to each covered agency by
financial entities and for the data collected from covered agencies
on behalf of the Financial Stability Oversight Council. The data
standards must meet specified criteria relating to openness and
machine-readability and promote interoperability of financial
regulatory data across members of the Financial Stability Oversight
Council. In addition, section 5822 of the Financial Data
Transparency Act requires that all public data assets published by
the Commission under the securities laws and the Dodd-Frank Act be
made available in accordance with specified criteria relating to
openness and machine-readability. See 44 U.S.C. 3502(20) (defining
the term ``open Government data asset'' to mean, among other things,
machine-readable and available (or could be made available) in an
open format).
---------------------------------------------------------------------------

    As discussed in the T+1 Proposing Release, the Commission will make
the annual report required under adopted Rule 17Ad-27(b) publicly
available on its website to enable the public to review and analyze
data regarding, and progress towards, straight-through processing.\406\
The public availability of the annual report would help inform the
public, particularly the direct and indirect users of CMSPs, as to the
progress being made each year to advance implementation of STP with
respect to the allocation, confirmation, affirmation, and matching of
institutional trades, the communication of messages among the parties
to the transactions, and the availability of service offerings that
reduce or eliminate the need for manual processing. In addition,
allowing for additional transparency may facilitate innovation in the
public forum as to how CMSPs may improve their systems and services to
improve STP specifically, and the institutional processing environment
generally.
---------------------------------------------------------------------------

    \406\ DTCC ITP has indicated that it is considering publishing
the report on its website, where it believes that the public will
have ready access to the information. See DTCC ITP September Letter,
supra note 325, at 3.
---------------------------------------------------------------------------

    The Commission does not believe the annual report requires the
inclusion of proprietary information, trade secrets, or personally
identifiable information. To the extent that an annual report includes
confidential commercial or financial information, a CMSP could request
confidential treatment of those specific portions of the report.\407\
---------------------------------------------------------------------------

    \407\ See 17 CFR 240.24b-2.
---------------------------------------------------------------------------

VI. Impact on Certain Commission Rules, Guidance, and SRO Rules

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

A. Regulation SHO

    In the T+1 Proposing Release, the Commission identified provisions
of Regulation SHO under the Exchange Act that may be impacted by the
adoption of a T+1 standard settlement cycle. Certain provisions of
Regulation SHO use ``trade date'' and ``settlement date'' to determine
the time frames for compliance relating to sales of equity securities
and fails to deliver on settlement date. These references are not to a
particular settlement cycle (e.g., T+2); however, the time frames for
these provisions can change in tandem with changes in the standard
settlement cycle.\409\ The Commission received the following comments
regarding Regulation SHO.
---------------------------------------------------------------------------

    \409\ See T+1 Proposing Release, supra note 2, at 10444
(discussing the potential impacts of a T+1 standard settlement cycle
on the closeout of a fail-to-deliver position under 17 CFR 242.204
(``Rule 204'') and the application of 17 CFR 242.200(g) (``Rule
200(g)'')).
---------------------------------------------------------------------------

    One commenter stated its belief that the Commission should
reevaluate the deadlines under Rule 204 in the context of a T+1
settlement cycle.\410\ The commenter expressed concern that moving to
T+1 would reduce the time available for a bona fide market maker \411\
to close out fail-to-deliver

positions and could adversely impact the liquidity role those market
makers provide.
---------------------------------------------------------------------------

    \410\ See Virtu Financial Letter, supra note 16, at 3.
    \411\ Under Regulation SHO's bona fide market making exceptions,
the broker-dealer generally should be holding itself out as standing
ready and willing to buy and sell the security by continuously
posting widely accessible quotes that are near or at the market. The
market maker must be at economic risk for such quotes. See Exchange
Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690, 61699 (Oct. 17,
2008) (``2008 Regulation SHO Amendments''); see also Exchange Act
Release No. 94524 (Mar. 28, 2022), 87 FR 23054, 23068 n.157 (Apr.
18, 2022) (``Dealer Release'') (``Broker-dealers that do not publish
continuous quotations, or publish quotations that do not subject the
broker-dealer to such risk (e.g., quotations that are not publicly
accessible, are not near or at the market, or are skewed
directionally towards one side of the market) would not be eligible
for the bona-fide market-maker exceptions under Regulation SHO. In
addition, broker-dealers that publish quotations but fill orders at
different prices than those quoted would not be engaged in bona-fide
market making for purposes of Regulation SHO.''). Thus, a market-
maker that continually executed short sales away from its posted
quotes would generally be unable to rely on the bona-fide market
making exceptions of Regulation SHO. See Exchange Act Release No.
50103 (July 28, 2004), 69 FR 48008, 48015 n.68 (Aug. 6, 2004).
Further, broker-dealers that publish quotations but fill orders at
different prices than those quoted would not be engaged in bona fide
market-making for purposes of Regulation SHO. See, e.g., Dealer
Release, supra note 411, at 23068 n.157. The market-maker must also
be engaged in bona fide market making in that security at the time
of the short sale for eligibility for the exceptions. See 2008
Regulation SHO Amendments, supra note 411, at 61699.
---------------------------------------------------------------------------

    As discussed in the T+1 Proposing Release,\412\ shortening the
standard settlement cycle to T+1 would reduce the time frames to effect
the closeout of most types of fail-to-deliver positions under Rule
204.\413\ The applicable closeout date for a fail-to-deliver position
can differ depending on its Rule 204 categorization, including whether
it results from a short sale, a long sale, or bona fide market making
activity. If a fail-to-deliver position results from bona fide market
making activity, the participant must close out the fail-to-deliver
position by no later than the beginning of regular trading hours on the
third consecutive settlement day following the settlement date. Under
the current T+2 standard settlement cycle, the closeout for long sales
or bona fide market making activity is required by the beginning of
regular trading hours on T+5. If the Commission adopts a T+1 standard
settlement cycle, this closeout requirement would be shortened from T+5
to T+4.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

``gives or sends'' a customer a written confirmation disclosing
specified information at or before ``completion of the transaction.''
\421\
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    \418\ See id. at 10463.
    \419\ 17 CFR 240.10b-10.
    \420\ Rule 10b-10 was adopted in 1977 before the Commission
adopted Rule 15c6-1, establishing the standard settlement cycle of
T+3 in 1993. See Exchange Act Release No. 13508 (May 5, 1977), 42 FR
25318 (May 17, 1977).
    \421\ Generally, 17 CFR 240.15c1-1 (``Rule 15c1-1'') defines
``completion of the transaction'' to mean the time when: (i) a
customer purchasing a security pays for any part of the purchase
price after payment is requested or notification is given that
payment is due; (ii) a security is delivered or transferred to a
customer who purchases and makes payment for it before payment is
requested or notification is given that payment is due; (iii) a
security is delivered or transferred to a broker-dealer from a
customer who sells the security and delivers it to the broker-dealer
after delivery is requested or notification is given that delivery
is due; or (iv) a broker-dealer makes payment to a customer who
sells a security and delivers it to the broker-dealer before
delivery is requested or notification is given that delivery is due.
See 17 CFR 240.15c1-1(b).
---------------------------------------------------------------------------

    The Commission has considered how and when broker-dealers typically
comply with the requirement to send out a Rule 10b-10 confirmation when
changes have been made to the standard settlement cycle. In 1993, when
Rule 15c6-1 was initially adopted, the Commission was aware that
broker-dealers typically sent out Rule 10b-10 customer confirmations on
the day after trade date.\422\ By 2017, when the Commission shortened
the standard settlement cycle from T+3 to T+2, the Commission had
established a framework for electronic delivery of required information
to investors.\423\ At that time, the Commission stated that, while
broker-dealers may continue to send physical customer confirmations on
the day after the trade date, broker-dealers may also send electronic
confirmations to customers on the trade date. The Commission also
acknowledged that, in a T+2 settlement cycle, broker-dealers would have
a shorter timeframe to send out the confirmation but did not believe
that a shortened settlement cycle would create problems with regards to
a broker-dealer's ability to comply with Rule 10b-10. When proposing
T+1, the Commission expressed a similar belief that T+1 would not
create a compliance issue for broker-dealers under Rule 10b-10,
although broker-dealers would again need to accommodate the shortened
timeframes of T+1.\424\ The Commission solicited comment on the extent
to which the T+1 rule proposals may impact compliance with Rule 10b-10.
---------------------------------------------------------------------------

    \422\ See T+1 Proposing Release, supra note 2, at 10463.
    \423\ See, e.g., Exchange Act Release No. 37182 (May 9, 1996),
61 FR 24644 (May 15, 1996) (providing Commission views on electronic
delivery of required information by broker-dealers, transfer agents,
and investment advisers); see also T+1 Proposing Release, supra note
2, at 10643 n.222.
    \424\ See T+1 Proposing Release, supra note 2, at 10463.
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    One commenter stated that broker-dealers have had challenges at
times meeting the Rule 10b-10 requirements under T+2, particularly for
postal delivery such as in March 2020 at the beginning of the Covid-19
pandemic, and that the proposed compressed timeframe of T+1 will leave
broker-dealers with even less time to correct minor delivery
issues.\425\ Another commenter responded that shortening the settlement
cycle to T+1 will make the delivery of physical confirmations no longer
practical or feasible.\426\ However, as noted above, Rule 10b-10
requires that a broker-dealer ``give or send'' the confirmation prior
to settlement; it does not require that the Rule 10b-10 confirmation be
received prior to settlement. Shortening the settlement cycle does not
affect the ability of the broker-dealer to give or send Rule 10b-10
confirmations, and therefore does not impact a broker-dealer's ability
to comply with Rule 10b-10. Accordingly, the Commission believes it is
unnecessary to modify Rule 10b-10 to facilitate an effective transition
to a T+1 standard settlement cycle. In addition, to the extent that a
broker-dealer and its customer would like to ensure that the customer
receives Rule 10b-10 confirmation documents prior to settlement, as
explained above and discussed further below, broker-dealers and their
customers have the option to establish an arrangement for electronic
delivery.
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    \425\ See letter from Kenneth E. Bentsen, Jr., President and
Chief Executive Officer, Securities Industry and Financial Markets
Association (Aug. 3, 2022), at 2 (``SIFMA August 3rd Letter'').
    \426\ See AGC April Letter, supra note 16, at 3.
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    The Commission requested comment on whether guidance regarding
``delivery'' for electronic confirmations under Rule 10b-10 needed to
be updated to facilitate a T+1 standard settlement cycle.\427\ In the
context of sending Rule 10b-10 confirmations and prospectus delivery
obligations (discussed further below in Part VI.C), several commenters
asked that the Commission consider, on a wider basis, making electronic
delivery (``e-delivery'') the default method for communicating with
investors or customers.\428\ The Commission observes that broker-
dealers already may use ``e-delivery'' to provide this information to
investors.\429\ The Commission believes that considering widespread
changes to e-delivery standards is not appropriate in the context of
shortening the settlement cycle because it is not necessary to
establish an e-delivery default to shorten the standard settlement
cycle to T+1. In a T+1 environment, no Commission rule would require
the delivery of paper documentation by mail on T+1. Moreover, the
issues associated with e-delivery are complex and multi-faceted,
affecting a wide range of disclosure documents, and imposing a range of
potential impacts on investors who currently receive physical
documents.\430\ The Commission believes considering changes to existing
guidance warrants further consideration. Accordingly, the Commission
declines to make such change to the existing guidance in this
rulemaking.
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    \427\ See T+1 Proposing Release, supra note 2, at 10463 n.222.
    \428\ See SIFMA August 3rd Letter, supra note 425, at 1 (stating
that this acceleration of the settlement cycle heightens the need
for the Commission to modernize its rules to make e-delivery the
default mechanism for transmitting investor communications and
disclosures); ICI Letter, supra note 16, at 11-12 (recommending that
e-delivery should be the default method for delivering Rule 10b-10
confirmations); ASA Letter, supra note 16, at 3 (stating that, given
the growing preferences of investors to receive such documentation
electronically, it would be cost-effective and in the best interest
of investors to allow e-delivery to be the default option for
sending prospectuses and trade confirmations, adding that investors
who wish to receive paper documents would still be afforded the
ability to opt-in to receive paper).
    \429\ See T+1 Proposing Release, supra note 2, at 10463 n.222.
    \430\ Among other things, considering a transition to e-delivery
by default would need to assess the implication of such a change
with regard to the timing, format, and delivery mechanism, and those
implications may differ among different types of documents,
depending on the nature and purpose of the document. Another issue
to consider would be how e-delivery by default would affect investor
engagement with important information.
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    One commenter sought assurance that moving to T+1 would not affect
existing no-action letters and exemptive relief under Rule 10b-10 for
dividend reinvestment programs (``DRIP'') that allow monthly account
statements for trade activity.\431\ The Commission observes that a
shorter settlement cycle would not change the relevant facts and
circumstances described in the applicable staff no-action letters or
exemptive relief regarding the application of Rule 10b-10 to DRIP
transactions.
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    \431\ SIFMA April Letter, supra note 16, at 15.
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C. Other Prospectus Delivery Matters

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

The regulations at 17 CFR 230.172 (``Securities Act Rule 172'')
implement an ``access equals delivery'' model that permits, with
certain exceptions, final prospectus delivery obligations to be
satisfied by the filing of a final prospectus with the Commission,
rather than delivery of the prospectus to purchasers.\434\ The
Commission stated its preliminarily belief that a T+1 standard
settlement cycle would not raise any significant legal or operational
concerns for issuers or broker-dealers to comply with the prospectus
delivery obligations under the Securities Act.\435\ The Commission also
requested comment on the following: (i) whether any specific legal or
operational concerns would arise for issuers or broker-dealers to
comply with the prospectus delivery obligations under the Securities
Act if the settlement cycle is shortened to T+1, and (ii) the extent to
which the T+1 rule proposals may impact compliance with the prospectus
delivery requirements under the Securities Act.
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    \432\ T+1 Proposing Release, supra note 2, at 10464.
    \433\ 15 U.S.C. 77a et seq. Section 5(b)(2) of the Securities
Act makes it unlawful to deliver (i.e., as part of settlement) a
security ``unless accompanied or preceded'' by a prospectus that
meets the requirements of section 10(a) of the Securities Act (known
as a ``final prospectus''). 15 U.S.C. 77e(b)(2).
    \434\ 15 U.S.C. 77e(b)(2). Under Securities Act Rule 172(b), an
obligation under section 5(b)(2) of the Securities Act to have a
prospectus that satisfies the requirements of section 10(a) of the
Securities Act precede or accompany the delivery of a security in a
registered offering is satisfied only if the conditions specified in
paragraph (c) of Rule 172 are met. 17 CFR 230.172(b). Pursuant to
Rule 172(d), ``access equals delivery'' generally is not available
to the offerings of most registered investment companies (e.g.,
mutual funds), business combination transactions, or offerings
registered on Form S-8. 17 CFR 230.172(d). The Commission recently
amended Rule 172 to allow registered closed-end funds and business
development companies to rely on the rule. See Securities Offering
Reform for Closed-End Investment Companies, Investment Company Act
Release No. 33836 (Apr. 8, 2020), 85 FR 33353 (June 1, 2020).
    \435\ T+1 Proposing Release, supra note 2, at 10464.
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    One commenter stated that the requirements of 17 CFR 240.15c2-8(b)
should not apply in a T+1 environment.\436\ Under Exchange Act Rule
15c2-8(b), with respect to an issue of securities where the issuer has
not been previously required to file reports pursuant to section 13(a)
or 15(d) of the Exchange Act,\437\ unless the issuer has been exempted
from the requirement to file reports thereunder pursuant to section
12(h) of the Exchange Act,\438\ a broker-dealer is required to deliver
a copy of the preliminary prospectus to any person who is expected to
receive a confirmation of sale at least 48 hours prior to the sending
of such confirmation (``48-hour preliminary prospectus delivery
requirement'').\439\ The commenter stated that in a T+1 settlement
cycle, many broker-dealers will send confirmations on trade date to
achieve settlement by T+1, and that Rule 15c2-8 does not reflect
present-day offering procedure timelines, public availability of
preliminary prospectuses on EDGAR, or electronic delivery
facilities.\440\ However, because the Commission is adopting a T+2
standard settlement cycle for firm commitment offerings priced after
4:30 p.m. ET, and not a T+1 standard settlement cycle for these
offerings, in final Rule 15c6-1(c),\441\ no inconsistency exists
between the requirements set forth in the final amendments to Rule
15c6-1 and existing Rule 15c2-8(b). Accordingly, the Commission does
not believe that Rule 15c2-8 should be modified.
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    \436\ SIFMA April Letter, supra note 16, at 13-14.
    \437\ 15 U.S.C. 78m(a); 15 U.S.C. 78o(d).
    \438\ 15 U.S.C. 78l(h).
    \439\ Exchange Act Rule 15c2-8(b).
    \440\ SIFMA April Letter, supra note 16, at 14.
    \441\ See supra Part II.C.4.
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D. Financial Responsibility Rules for Broker-Dealers

    As noted in the T+1 Proposing Release, certain provisions of the
broker-dealer financial responsibility rules under the Exchange Act
\442\ reference explicitly or implicitly the settlement date of a
securities transaction.\443\ For example, paragraph (m) of 17 CFR
240.15c3-3 references the settlement date to prescribe the timeframe in
which a broker-dealer must complete certain sell orders on behalf of
customers.\444\ Specifically, Rule 15c3-3(m) provides that if a broker-
dealer executes a sell order of a customer (other than an order to
execute a sale of securities which the seller does not own) and if for
any reason the broker-dealer has not obtained possession of the
securities from the customer within ten business days after the
settlement date, the broker-dealer must immediately close the
transaction with the customer by purchasing securities of like kind and
quantity.\445\ In addition, settlement date is incorporated into
paragraph (c)(9) of 17 CFR 240.15c3-1,\446\ defining what it means to
``promptly transmit'' funds and ``promptly deliver'' securities within
the meaning of paragraphs (a)(2)(i) and (v) of Rule 15c3-1.\447\ The
concepts of promptly transmitting funds and promptly delivering
securities are incorporated in other provisions of the financial
responsibility rules as well, including paragraphs (k)(1)(iii) and
(k)(2)(i) and (ii) of Rule 15c3-3,\448\ paragraph (e)(1)(i)(A) of 17
CFR 240.17a-5,\449\ and paragraph (a)(3) of 17 CFR 240.17a-13.\450\
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    \442\ For purposes of this release, the term ``financial
responsibility rules'' includes any rule adopted by the Commission
pursuant to section 8, 15(c)(3), 17(a), or 17(e)(1)(A) of the
Exchange Act, any rule adopted by the Commission relating to
hypothecation or lending of customer securities, or any rule adopted
by the Commission relating to the protection of funds or securities.
The Commission's broker-dealer financial responsibility rules
include 17 CFR 240.15c3-1, 240.15c3-3, 240.17a-3, 240.17a-4,
240.17a-5, 240.17a-11, and 240.17a-13.
    \443\ See T+1 Proposing Release, supra note 2, at 10462-63.
    \444\ Exchange Act Rule 15c3-3(m).
    \445\ However, paragraph (m) of Rule 15c3-3 provides that the
term ``customer'' for the purpose of paragraph (m) does not include
a broker or dealer who maintains an omnibus credit account with
another broker or dealer in compliance with 12 CFR 220.7(f) (Rule
7(f) of Regulation T).
    \446\ Exchange Act Rule 15c3-1(c)(9).
    \447\ 17 CFR 240.15c3-1(a)(2)(i) and (v).
    \448\ 17 CFR 240.15c3-3(k)(1)(iii), (k)(2)(i)-(ii).
    \449\ Rule 17a-5(e)(1)(i)(A).
    \450\ Rule 17a-13(a)(3).
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    The Commission requested comment regarding the potential impact
that shortening the standard settlement cycle from T+2 to T+1 may have
on the ability of broker-dealers to comply with the financial
responsibility rules. The Commission received one comment stating that
shortening the standard settlement cycle to T+1 would reduce the number
of days available to a broker-dealer to obtain possession or control of
customer securities before being required to close out a customer
transaction under Rule 15c3-3(m).\451\ The commenter indicated that it
did not believe T+1 would materially burden broker-dealers or their
customers and did not recommend changes to the rule.\452\
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    \451\ See Fidelity Letter, supra note 16, at 7.
    \452\ Id. at 7-8.
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    The commenter also recommended that the Commission revisit Rule
15c3-3(d).\453\ Under Rule 15c3-3(d), not later than the next business
day, a broker or dealer, as of the close of the preceding business day,
must determine from its books or records the quantity of fully paid
securities and excess margin securities in its possession or control
and the quantity of fully paid securities and excess margin securities
not in its possession or control.\454\ According to the commenter,
existing interpretative guidance allows a firm to release securities a
day prior to settlement, under certain conditions. The commenter said
that it is not clear what this guidance means in a T+1 environment. The
commenter offers an example: if segregation of customer assets is based
on an end of day market value and end of day cash settled, it is not
clear how the segregation of assets should be calculated and enforced
in a T+1 environment.\455\ The commenter

requested that the Commission work with broker-dealers to better
understand the timeframes involved in the segregation process and how
they can operate in a T+1 environment. The Commission expects that the
staff will continue to monitor the impact of a T+1 settlement cycle on
this rule.
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    \453\ Id. at 8.
    \454\ 17 CFR 240.15c3-3(d)(1).
    \455\ See Fidelity Letter, supra note 16, at 8.
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E. Changes to SRO Rules and Operations

    In the T+1 Proposing Release, the Commission stated that, as with
the T+2 transition, it anticipated that the proposed transition to T+1
would require changes to SRO rules and operations to achieve
consistency with a T+1 standard settlement cycle.\456\ Certain SRO
rules reference existing Rule 15c6-1 or currently define ``regular
way'' settlement as occurring on T+2 and, as such, may need to be
amended in connection with shortening the standard settlement cycle to
T+1.\457\ Certain timeframes or deadlines in SRO rules also may refer
to the settlement date, either expressly or indirectly. In such cases,
the SROs may need to amend these rules in connection with shortening
the settlement cycle to T+1.\458\
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    \456\ See T+1 Proposing Release, supra note 2, at 10464.
    \457\ See, e.g., Exchange Act Release No. 79734 (Jan. 4, 2017),
82 FR 3030 (Jan. 10, 2017) (File No. SR-NSCC-2016-009).
    \458\ The T+1 Report similarly indicates that SROs will likely
need to update their rules to facilitate a transition to a T+1
standard settlement cycle. See T+1 Report, supra note 61, at 35-36.
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    In addition, the Commission also stated that SRO rules and
operations may be affected to a greater extent than occurred during the
T+2 transition, in part because the Commission has proposed more rule