[Federal Register Volume 81, Number 193 (Wednesday, October 5, 2016)]
[Proposed Rules]
[Pages 69240-69280]
[FR Doc No: 2016-23890]

Vol. 81

Wednesday,

No. 193

October 5, 2016

Part III

Securities and Exchange Commission

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

17 CFR Part 240

Amendment to Securities Transaction Settlement Cycle; Proposed Rule

Federal Register / Vol. 81 , No. 193 / Wednesday, October 5, 2016 /
Proposed Rules

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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-78962; File No. S7-22-16]
RIN 3235-AL86

Amendment to Securities Transaction Settlement Cycle

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

SUMMARY: The Securities and Exchange Commission (``Commission'')
proposes to amend Rule 15c6-1(a) under the Securities Exchange Act of
1934 (``Exchange Act'') to shorten the standard settlement cycle for
most broker-dealer transactions from three business days after the
trade date (``T+3'') to two business days after the trade date
(``T+2''). The proposed amendment is designed to reduce a number of
risks, including credit risk, market risk, and liquidity risk and, as a
result, reduce systemic risk for U.S. market participants.

DATES: Submit comments on or before December 5, 2016.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number [-] on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090. All submissions should refer to File Number [-].
    To help us process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml).
    Comments are available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
    Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Jeffrey Mooney, Assistant Director,
Susan Petersen, Special Counsel, Andrew Shanbrom, Special Counsel,
Office of Clearance and Settlement; Justin Pica, Senior Policy Advisor,
Office of Market Supervision; Natasha Vij Greiner, Assistant Chief
Counsel, Jonathan Shapiro, Special Counsel, Office of Chief Counsel; at
202-551-5550, Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing an amendment to
Rule 15c6-1 of the Exchange Act under the Commission's rulemaking
authority set forth in Sections 15(c)(6), 17A and 23(a) of the Exchange
Act (15 U.S.C. 78o(c)(6), 78q-1, and 78w(a) respectively).

Table of Contents:

I. Introduction
II. Background
    A. Overview of the Clearance and Settlement of Securities
Transactions
    1. Statutory Framework
    2. Participating Entities
    a. FMUs--CCPs and CSDs
    (1) CCPs
    (2) CSDs
    b. Matching/ETC Providers--Exempt Clearing Agencies
    c. Market Participants--Investors, Broker-Dealers, and
Custodians
    3. Overview of Trade Settlement Processes
    a. Retail Investor Trade Settlement Process
    b. Institutional Investor Trade Settlement Process
    4. Impact of the Settlement Cycle
    5. Post-Rule 15c6-1 Adoption
    a. SIA T+1 Initiative
    b. Securities Transaction Concept Release
    c. Current Efforts To Shorten the Settlement Cycle in the U.S
    (1) BCG Study
    (2) Industry Steering Committee and Industry Planning
    (3) Investor Advisory Committee Recommendations
    B. Transition to T+2 in Non-U.S. Securities Markets
III. Discussion
    A. Proposal
    1. Current Rule 15c6-1
    2. Proposed Amendment to Rule 15c6-1 To Shorten the Standard
Settlement Cycle to T+2
    3. Reasons to Transition From T+3 to T+2
    4. Consideration of Settlement Cycle Shorter Than T+2
    B. Impact on Other Commission Rules
    1. General
    2. Regulation SHO
    3. Financial Responsibility Rules Under the Exchange Act
    4. Exchange Act Rule 10b-10
IV. Compliance Date
V. Request for Comment
VI. Economic Analysis
    A. Background
    B. Baseline
    1. Clearing Agencies
    2. Market Participants--Investors, Broker-Dealers, and
Custodians
    3. Investment Companies
    4. The Current Market for Clearance and Settlement Services
    C. Analysis of Benefits, Costs, and Impact on Efficiency,
Competition, and Capital Formation
    1. Benefits
    2. Costs
    3. Economic Implications Through Other Commission Rules
    4. Effect on Efficiency, Competition, and Capital Formation
    5. Quantification of Direct and Indirect Effects of a T+2
Settlement Cycle
    a. Industry Estimates of Costs and Benefits
    b. Commission Estimates of Costs
    (1) FMUs--CCPs and CSDs
    (2) Matching/ETC Providers--Exempt Clearing Agencies
    (3) Market Participants--Investors, Broker-Dealers, and
Custodians
    (4) Indirect Costs
    (5) Industry-Wide Costs
    D. Alternatives
    1. Shift to a T+1 Standard Settlement Cycle
    2. Straight-Through Processing Requirement
    E. Request for Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Initial Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Rule and Rule Amendment
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comment
IX. Statutory Authority and Text of the Proposed Amendment to Rule
15C6-1

I. Introduction

    The Commission originally adopted Exchange Act Rule 15c6-1 in 1993
to establish T+3 as the standard settlement cycle for broker-dealer
transactions, and in so doing, effectively shortened the settlement
cycle for most securities transactions (with certain exceptions), which
at the time was generally five business days after the trade date

(``T+5'').\1\ The Commission cited a number of reasons for
standardizing and shortening the settlement cycle, which included,
among others, reducing credit and market risk exposure related to
unsettled trades, reducing liquidity risk among derivatives and cash
markets, encouraging greater efficiency in the clearance and settlement
process, and reducing systemic risk for the U.S. markets.\2\
---------------------------------------------------------------------------

    \1\ Securities Transactions Settlement, Exchange Act Release No.
33023 (Oct. 6, 1993), 58 FR 52891, 52893 (Oct. 13, 1993) (``T+3
Adopting Release''). Rule 15c6-1 of the Exchange Act prohibits
broker-dealers from effecting or entering into a contract for the
purchase or sale of a security (other than an exempted security,
government security, municipal security, commercial paper, bankers'
acceptances, or commercial bills) that provides for payment of funds
and delivery of securities later than the third business day after
the date of the contract unless otherwise expressly agreed to by the
parties at the time of the transaction. 17 CFR 240.15c6-1.
    \2\ T+3 Adopting Release, 58 FR at 52893.
---------------------------------------------------------------------------

    The Commission now proposes to amend Exchange Act Rule 15c6-1(a) to
further shorten the standard settlement cycle from T+3 to T+2. As
discussed in greater detail below, the Commission preliminarily
believes that there are a number of reasons supporting shortening the
standard settlement cycle to T+2 at this time. As an initial matter,
the Commission believes that shortening the standard settlement cycle
will result in a further reduction of credit, market, and liquidity
risk,\3\ and as a result a reduction in systemic risk for U.S. market
participants.
---------------------------------------------------------------------------

    \3\ Credit risk refers to the risk that the credit quality of
one party to a transaction will deteriorate to the extent that it is
unable to fulfill its obligations to its counterparty on settlement
date. Market risk refers to the risk that the value of securities
bought and sold will change between trade execution and settlement
such that the completion of the trade would result in a financial
loss. Securities Transactions Settlement, Exchange Act Release No.
31904 (Feb. 23, 1993), 58 FR 11806, 11809 nn.26-27 (Mar. 1, 1993)
(``T+3 Proposing Release''). Liquidity risk describes the risk that
an entity will be unable to meet financial obligations on time due
to an inability to deliver funds or securities in the form required
though it may possess sufficient financial resources in other forms.
See Standards for Covered Clearing Agencies, Exchange Act Release
No. 71699 (Mar. 12, 2014), 79 FR 29508, 29531 (May 22, 2014) (``CCA
Proposal'').
---------------------------------------------------------------------------

    Since the Commission adopted Rule 15c6-1 in 1993, the financial
markets have expanded and evolved significantly.\4\ During this period,
the Commission has continued to focus on further mitigating and
managing risks in the clearance and settlement process, and how those
risks relate to managing systemic risk.\5\ The Commission also notes
that shortening the standard settlement cycle at this time is
consistent with the broader focus by the Commission on enhancing the
resilience and efficiency of the national clearance and settlement
system and the role that certain systemically important financial
market utilities (``FMUs''),\6\ particularly central counterparties
(``CCPs''), play in concentrating and managing risk.\7\ In light of
this ongoing focus on further mitigating and managing risks in the
clearance and settlement process, the Commission preliminarily believes
that a transition to a T+2 settlement cycle would yield important
benefits for market participants and the national clearance and
settlement system.
---------------------------------------------------------------------------

    \4\ See generally Concept Release on Equity Market Structure,
Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21,
2010).
    \5\ See generally Clearing Agency Standards, Exchange Act
Release No. 68080 (Oct. 22, 2012), 77 FR 66220, 66221-22 (Nov. 2,
2012) (``Clearing Agency Standards Adopting Release''); CCA
Proposal, 79 FR 29508.
    \6\ Section 803(6)(A) of the Payment, Clearing, and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') enacted by
Title VIII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''), 12 U.S.C. 5301, et
seq., defines ``financial market utility'' or ``FMU'' as any person
that manages or operates a multilateral system for the purpose of
transferring, clearing, or settling payments, securities, or other
financial transactions among financial institutions or between
financial institutions and the person. 12 U.S.C. 5462(6)(A). Section
803(6)(B)(i) of the Clearing Supervision Act generally excludes
certain persons from the definition of FMU including designated
contract markets, registered futures associations, swap or security-
based swap data repositories, swap execution facilities, national
securities exchanges, and alternative trading systems. 12 U.S.C.
5462(6)(B)(i). The term FMU includes not only U.S. registered
clearing agencies but also other types of entities that are not U.S.
registered clearing agencies.
    \7\ See Clearing Agency Standards Adopting Release, 77 FR at
66221-22.
---------------------------------------------------------------------------

    The Commission preliminarily has considered the costs and benefits
attendant to shortening the standard settlement cycle to T+2 and
believes that the proposed amendment to Rule 15c6-1(a) will yield
benefits that justify the associated costs. The Commission also
preliminarily believes that the case for further shortening the
standard settlement cycle at this time is supported by certain progress
and efficiencies already achieved by market participants since the
Commission's adoption of Rule 15c6-1 in 1993, including significant
technological developments. The Commission, however, is sensitive to
the effects this proposal could have on a wide range of market
participants. Accordingly, in addition to specific requests for
comment, the Commission seeks generally input on the economic effects
associated with shortening the standard settlement cycle to T+2,
including any costs, benefits or burdens, and any effects on
efficiency, competition and capital formation.

II. Background

    Rule 15c6-1(a) of the Exchange Act prohibits broker-dealers from
effecting or entering into a contract for the purchase or sale of a
security (other than certain exempted securities) \8\ that provides for
payment of funds and delivery of securities later than the third
business day after the date of the contract unless otherwise expressly
agreed to by the parties at the time of the transaction.\9\ Subject to
the exceptions enumerated in the rule, the prohibition in paragraph (a)
of Rule 15c6-1 applies to all securities. The definition of the term
``security'' in Section 3(a)(10) of the Exchange Act covers, among
others, equities, corporate bonds, unit investment trusts (``UITs''),
mutual funds, exchange-traded funds (``ETFs''), American depositary
receipts (``ADRs''), security-based swaps, and options.\10\ Many of

these securities (e.g., options, and certain mutual funds) generally
settle on a settlement cycle less than T+3 and therefore will not be
impacted by the Commission's current proposal to shorten the standard
settlement cycle to T+2. Accordingly, the discussion in this release is
primarily focused on securities that currently settle on a T+3 standard
settlement cycle.\11\ However, the Commission seeks comment on whether
and the extent to which other securities, as defined in Section
3(a)(10) of the Exchange Act, will be affected by the amendment to Rule
15c6-1(a), as proposed.
---------------------------------------------------------------------------

    \8\ Rule 15c6-1(a) does not apply to a contract for an exempted
security, government security, municipal security, commercial paper,
bankers' acceptances, or commercial bills. 17 CFR 240.15c6-1(a). The
rule also provides an additional exemption for: (i) Transactions in
limited partnership interests that are not listed on an exchange or
for which quotations are not disseminated through an automated
quotation system of a registered securities association; (ii)
contracts for the purchase and sale of securities that the
Commission may from time to time, taking into account then existing
market practices, exempt by order; and (iii) contracts for the sale
of cash securities that priced after 4:30 p.m. (Eastern Standard
Time) that are sold by an issuer to an underwriter pursuant to a
firm commitment offering registered under the Securities Act of 1933
(``Securities Act'') or the sale to an initial purchaser by a
broker-dealer participating in such offering. 17 CFR 240.15c6-1(b)
and (c).
    Additionally, as discussed further in the T+3 Adopting Release,
the Commission determined not to include transactions in municipal
securities within the scope of Rule 15c6-1, with the expectation
that the Municipal Securities Rulemaking Board (``MSRB'') would take
the lead in implementing three-day settlement of municipal
securities by the implementation date of the new rule. The
Commission requested a report from the MSRB within six months of the
Commission's adoption of Rule 15c6-1 outlining the schedule in which
the MSRB intended to implement T+3 in the municipal securities
market. T+3 Adopting Release, 58 FR at 52899. MSRB rules that
established T+3 as the standard settlement cycle for transactions in
municipal securities became operative on June 7, 1995, the same date
as Exchange Act Rule 15c6-1. See Order Approving MSRB Proposed Rule
Change Establishing Three Business Day Settlement Time Frame,
Exchange Act Release No. 35427 (Feb. 28, 1995), 60 FR 12798 (Mar. 8,
1995).
    \9\ Although current Rule 15c6-1 establishes a settlement
timeframe of no more than three business days after the trade date,
certain types of transactions routinely settle on a settlement cycle
shorter than T+3, which is permissible under the rule. See, e.g.,
note 11 infra.
    \10\ 15 U.S.C. 78c(a)(10). Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Public Law 111-203, 124
Stat. 1376 (2010), amended, among other things, the definition of
``security'' under the Exchange Act to encompass security-based
swaps. In July 2011, the Commission granted temporary exemptive
relief from compliance with certain provisions of the Exchange Act
(including Rule 15c6-1) in connection with the revision of the
Exchange Act definition of ``security'' to encompass security-based
swaps. See Order Granting Temporary Exemptions Under the Securities
Exchange Act of 1934 In Connection With the Pending Revision of the
Definition of ``Security'' To Encompass Security-Based Swaps,
Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7,
2011). Certain of the exemptions (including the exemption for Rule
15c6-1) are set to expire on February 5, 2017. See Order Extending
Temporary Exemptions Under the Securities Exchange Act of 1934 In
Connection With the Revision of the Definition of ``Security'' To
Encompass Security-Based Swaps, Exchange Act Release No. 71485 (Feb.
5, 2014), 79 FR 7731 (Feb. 10, 2014).
    \11\ In today's environment, ETFs and certain closed-end funds
clear and settle on a T+3 basis. Open-end funds (i.e., mutual funds)
generally settle on a T+1 basis, except for certain retail funds
which typically settle on T+3. Thus, the proposed amendment to Rule
15c6-1(a) would require ETFs, closed-end funds, and mutual funds
settling on a T+3 basis to revise their settlement timeframes. See
infra notes 213 and 214, regarding ETF secondary market trading,
including creation or redemption transactions for authorized
participants.
---------------------------------------------------------------------------

A. Overview of the Clearance and Settlement of Securities Transactions

    ``Clearance and settlement'' refers generally to the activities
that occur following the execution of a trade. These post-trade
processes are critical to ensuring that a buyer receives securities and
a seller receives proceeds in accordance with the agreed-upon terms by
the settlement date. The discussion that follows provides a basic
description of the clearance and settlement of securities transactions,
and is organized in the following manner: (1) An overview of the
statutory framework and goals driving the national clearance and
settlement system; (2) an introduction to securities clearing agencies
and other key market participants in the clearance and settlement
process; (3) an overview of the trade settlement process for the U.S.
securities markets; (4) a discussion of how the length of the
settlement cycle may impact the presence of credit, market, liquidity
and systemic risk in the clearance and settlement process; and (5) an
overview of ongoing efforts by market participants to shorten the
standard settlement cycle.
1. Statutory Framework
    The national clearance and settlement system in place today is
largely a product of the difficulties experienced in the U.S.
securities markets in the late 1960s and early 1970s. As trading
volumes increased during that time period, the manual process
associated with transferring certificated securities among market
participants in a relatively uncoordinated fashion created what came to
be known as the ``Paperwork Crisis.'' The Paperwork Crisis nearly
brought the securities industry to a standstill and directly or
indirectly caused the failure of a large number of broker-dealers.\12\
The breakdown in the handling of paper associated with the clearance
and settlement of securities transactions threatened to curtail the
flow of debt and equity instruments available for public investment and
jeopardized the continued operation of the securities markets.\13\
---------------------------------------------------------------------------

    \12\ See U.S. Securities and Exchange Commission, Study of
Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc. No.
92-231 (1971); see also Securities Transactions Settlement, Exchange
Act Release No. 49405 (Mar. 11, 2004), 69 FR 12922 (Mar. 18, 2004);
see also S. Rep. No. 94-75, at 4-5 (1975), reprinted in 1975
U.S.C.C.A.N. 179, 183.
    \13\ Id.
---------------------------------------------------------------------------

    In light of the experiences of the Paperwork Crisis, and with the
objectives of improving the operation of the U.S. clearance and
settlement system and protecting investors,\14\ Congress amended the
Exchange Act in 1975 to, among other things, (i) direct the Commission
to facilitate the establishment of a national system for the prompt and
accurate clearance and settlement of transactions in securities, and
(ii) provide the Commission with the authority to regulate those
entities critical to the clearance and settlement process.\15\ At the
same time, Congress empowered the Commission with direct rulemaking
authority over broker or dealer activity in making settlements,
payments, transfers, and deliveries of securities.\16\ Taken together,
these provisions provide the Commission with the authority to regulate
entities that are critical to the national clearance and settlement
system.\17\
---------------------------------------------------------------------------

    \14\ See 15 U.S.C. 78q-1(a)(1)(A)-(D), which lays out the
Congressional findings for Section 17A of the Exchange Act. In
particular, Congress found that inefficient clearance and settlement
procedures imposed unnecessary costs on investors and those acting
on their behalf and that new data processing and communications
techniques create the opportunity for more efficient, effective, and
safe procedures for clearance and settlement.
    \15\ 15 U.S.C. 78q-1(a)(2)(A); see also S. Rep. No. 94-75, supra
note 12, at 53. Congress provided the Commission with the authority
and responsibility to regulate, coordinate, and direct the
operations of all persons involved in processing securities
transactions, toward the goal of a national system for the prompt
and accurate clearance and settlement of securities transactions.
Id. at 55.
    \16\ S. Rep. No. 94-75, at 111. Specifically, Section 15(c)(6)
of the Exchange Act prohibits broker-dealers from engaging in or
inducing securities transactions in contravention of such rules and
regulations as the Commission shall prescribe as necessary or
appropriate in the public interest and for the protection of
investors or to perfect or remove impediments to a national system
for the prompt and accurate clearance and settlement of securities
transactions, with respect to the time and method of, and the form
and format of documents used in connection with, making settlements
of and payments for transactions in securities, making transfers and
deliveries of securities, and closing accounts. 15 U.S.C. 78o(c)(6).
    \17\ See 15 U.S.C. 78q-1(b)-(c); 15 U.S.C. 78o(c).
---------------------------------------------------------------------------

    Congress reaffirmed its view of the importance of a strong
clearance and settlement system in 2010 with the enactment of the
Clearing Supervision Act.\18\ Specifically, Congress found that the
``proper functioning of the financial markets is dependent upon safe
and efficient arrangements for the clearing and settlement of payments,
securities, and other financial transactions.'' \19\ Under the Clearing
Supervision Act, registered clearing agencies providing CCP and central
securities depository (``CSD'') services are FMUs.\20\ FMUs centralize
clearance and settlement activities and enable market participants to
reduce costs, increase operational efficiency, and manage risks more
effectively. While an FMU can provide many risk management benefits to
participants, the concentration of clearance and settlement activity at
an FMU has the potential to disrupt the securities markets if the FMU
does not effectively manage the risks in its clearance and settlement
activities.\21\ To address those risks, the Commission has used its
authority under the Exchange Act, as supplemented by the authority set
forth under the Clearing Supervision Act, to help ensure that the FMUs
under its supervision are subject to robust regulatory
requirements.\22\
---------------------------------------------------------------------------

    \18\ See 12 U.S.C. 5301, et seq.
    \19\ 12 U.S.C. 5461(a)(1).
    \20\ See supra note 6.
    \21\ See CCA Proposal, 79 FR at 29587; see also Risk Management
Supervision of Designated Clearing Agencies, Joint Report to Senate
Committees on Banking, Housing, and Urban Affairs and Agriculture,
Nutrition, and Forestry, and the House Committees on Financial
Services and Agriculture, from the Board of Governors of the Federal
Reserve System, Securities and Exchange Commission, and Commodity
Futures Trading Commission (July 2011), https://www.federalreserve.gov/publications/other-reports/files/risk-management-supervision-report-201107.pdf.
    \22\ See, e.g., Clearing Agency Standards Adopting Release,
supra note 5. In addition, on July 18, 2012, the Financial Stability
Oversight Council designated as systemically important the following
then-registered clearing agencies: Chicago Mercantile Exchange, Inc.
(``CME''); The Depository Trust Company (``DTC''); Fixed Income
Clearing Corporation (``FICC''); ICE Clear Credit LLC (``ICC'');
National Securities Clearing Corporation (``NSCC''); The Options
Clearing Corporation (``OCC''). See Press Release, U.S. Department
of the Treasury, Financial Stability Oversight Council Makes First
Designations in Effort to Protect Against Future Financial Crises
(July 18, 2012), https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. As such, these clearing agencies are
also subject to the Clearing Supervision Act. In addition to its
authority to regulate clearing agencies, pursuant to Section 17A of
the Exchange Act, the Commission is also the supervisory agency, as
that term is defined in Section 803(8) of the Clearing Supervision
Act, for DTC, FICC, NSCC, and OCC. The CFTC is the supervisory
agency for CME and ICE, and the Federal Reserve Bank of New York
oversees DTC's banking and trust company activities. The Commission
jointly regulates ICC and OCC with the CFTC.

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

2. Participating Entities
a. FMUs--CCPs and CSDs
    Clearance and settlement activities in securities markets are
supported by an infrastructure that is comprised of entities that
perform a variety of different functions. These functions for the U.S.
securities markets are performed in most instances by FMUs that are
registered clearing agency \23\ subsidiaries of The Depository Trust &
Clearing Corporation (``DTCC''): NSCC and DTC.
---------------------------------------------------------------------------

    \23\ Section 17A(b) of the Exchange Act requires any clearing
agency performing the functions of a clearing agency with respect to
any security (other than an exempted security) to be registered with
the Commission, unless the Commission has exempted such entity from
the registration requirements. 15 U.S.C. 78q-1(b)(1). The term
``clearing agency'' is defined broadly to include any person who:
(1) Acts as an intermediary in making payments or deliveries or both
in connection with transactions in securities; (2) provides
facilities for comparison of data respecting the terms of settlement
of securities transactions, to reduce the number of settlements of
securities transactions, or for the allocation of securities
settlement responsibilities; (3) acts as a custodian of securities
in connection with a system for the central handling of securities
whereby all securities of a particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred, loaned, or pledged by bookkeeping entry, without
physical delivery of securities certificates (such as a securities
depository); or (4) otherwise permits or facilitates the settlement
of securities transactions or the hypothecation or lending of
securities without physical delivery of securities certificates
(such as a securities depository). A clearing agency may provide,
among other things, CCP services and CSD services. See 15 U.S.C.
78c(a)(23).
---------------------------------------------------------------------------

(1) CCPs
    A CCP, following trade execution, interposes itself between the
counterparties to a trade, becoming the buyer to each seller and seller
to each buyer to ensure the performance of open contracts. One critical
function of a CCP is to eliminate bilateral credit risk between
individual buyers and sellers.
    NSCC is the CCP \24\ for trades between broker-dealers involving
equity securities, corporate and municipal debt, and UITs in the
U.S.\25\ NSCC facilitates the management of risk among broker-dealers
using a number of tools, which include: (1) Novating and guaranteeing
trades to assume the credit risk of the original counterparties; (2)
collecting clearing fund contributions from members to help ensure that
NSCC has sufficient financial resources in the event that one of the
counterparties defaults on its obligations; and (3) netting to reduce
NSCC's overall exposure to its counterparties.
---------------------------------------------------------------------------

    \24\ In addition to providing CCP services, NSCC provides a
number of other non-CCP services to market participants, including,
for example, services that support mutual funds, alternative
investments and insurance products.
    \25\ Certain SRO rules (e.g., Financial Industry Regulatory
Authority (``FINRA'') Rule 6350B(b) and FINRA Rule 6274(b))
authorize broker-dealer members to settle transactions outside of
the facilities of a registered clearing agency, or ``ex-clearing,''
if both parties agree.
---------------------------------------------------------------------------

    In novation, when a CCP member presents a contract to the CCP for
clearing, the original contract between the buyer and seller is
discharged and two new contracts are created, one between the CCP and
the buyer and the other between the CCP and the seller. The CCP thereby
assumes the original parties' contractual obligations to each other.
NSCC attaches its trade guaranty \26\ to novated transactions at
midnight on T+1.\27\ Through novation and the trade guaranty, the two
original trading counterparties to the transaction replace their
bilateral credit, market and liquidity risk exposure to each other with
risk exposure to NSCC.
---------------------------------------------------------------------------

    \26\ Pursuant to Rule 11 and Addendum K to NSCC's Rules and
Procedures, NSCC guarantees the completion of CNS settling trades
(``NSCC trade guaranty'') that have reached the later of midnight of
T+1 or midnight of the day they are reported to NSCC's members. NSCC
also guarantees the completion of shortened process trades, such as
same-day and next-day settling trades, upon comparison or trade
recording processing. See NSCC Rules and Procedures, Rule 11,
Section 1(c) and Addendum K (as of July 14, 2016) (``NSCC Rules and
Procedures''), www.dtcc.com/legal/rule-and-procedures.
    \27\ NSCC has stated that it is currently in the process of
seeking regulatory approval to move its trade guaranty forward to
the point of trade validation (for locked-in trades) and comparison
(for trades compared through NSCC). This initiative is referred to
as the ``Accelerated Trade Guaranty'' or ``ATG.'' See NSCC,
Disclosures under the Principles for Financial Market
Infrastructures, at 17 n.11 (Dec. 2015) (``NSCC PFMI Disclosure
Framework''), http://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    NSCC collects clearing fund deposits from its members to maintain
sufficient financial resources in the event a member or members default
on their obligations to NSCC.\28\ NSCC's rules also allow NSCC to
adjust and collect additional clearing fund deposits as needed to cover
the risks present while a member's trades are unsettled. Each member's
required clearing fund deposit is calculated at least once daily
pursuant to a formula set forth in NSCC's rules,\29\ and is designed to
provide sufficient funds to cover NSCC's exposure to the member.\30\
---------------------------------------------------------------------------

    \28\ NSCC's clearing fund is comprised of cash, securities, and
letters of credit posted by NSCC members to provide NSCC the
necessary resources to cover member defaults. The amount and timing
of contributions to the clearing fund are determined pursuant to
NSCC's rules. See NSCC Rules and Procedures, Rules 1 and 4.
    \29\ See NSCC Rules and Procedures, Rule 4 and Procedure XV.
    \30\ Commission Rules 17Ad-22(b)(1) through (4) require a
registered clearing agency that performs CCP services to establish,
implement, and maintain policies and procedures reasonably designed
to do the following: (1) Measure its credit exposures at least once
a day, and use margin requirements to limit its exposures to
potential losses from defaults by its participants; (2) use risk-
based models and parameters to set margin requirements and to review
such requirements at least monthly; (3) maintain sufficient
financial resources to withstand a default by the two participant
families, if clearing security-based swaps, or one participant
family otherwise, to which it has the largest exposure; and (4)
provide for an annual model validation process. 17 CFR 240.17Ad
22(b)(1)-(4).
---------------------------------------------------------------------------

    Figure 1 below shows NSCC's clearing fund deposits by quarter. As
illustrated in Figure 1, the total amount that NSCC collects to
mitigate the risks associated with member defaults has varied from
roughly $3 to $6.5 billion for the years 2010 through 2015.\31\ The
majority of these deposits are held in cash, while a much smaller
portion is held in highly liquid securities such as U.S. treasury
securities.
---------------------------------------------------------------------------

    \31\ See NSCC Quarterly Financial Statements, http://www.dtcc.com/legal/financial-statements?subsidiary=NSCC&pgs=1.

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

[GRAPHIC] [TIFF OMITTED] TP05OC16.000

    As mentioned above, NSCC also reduces its risk exposure as a CCP
through netting. Netting reduces risk in the settlement process by
reducing the overall amount of obligations that must be settled. The
reduction in the overall amount of unsettled obligations translates
into relatively fewer and smaller settlement payments, thereby reducing
the cost to trade. Netting also lessens the risk by reducing the number
of outstanding unsettled transactions linking market participants,
thereby reducing the likelihood that a settlement failure by one market
participant will trigger a chain reaction of additional defaults by
other market participants. Through the use of NSCC's netting and
accounting system, the Continuous Net Settlement System (``CNS''), NSCC
nets trades and payments among its participants, reducing the value of
securities and payments that need to be exchanged by an average of 97%
each day.\32\ NSCC accepts trades into CNS \33\ for clearing from the
nation's major exchanges and other trading venues and uses CNS to net
each NSCC member's trades in each security traded that day to a single
receive or deliver position for the securities.\34\ Throughout the day,
cash debit and credit data generated by NSCC's members' activities are
recorded, and at the end of the processing day, the debits and credits
are netted to produce one aggregate cash debit or credit for each
member.\35\
---------------------------------------------------------------------------

    \32\ See NSCC PFMI Disclosure Framework, supra note 27, at 8.
    \33\ NSCC accepts CNS-eligible securities. To be CNS-eligible, a
security must be eligible for book-entry transfer on the books of
DTC, and must be capable of being processed in the CNS system. For
example, securities may be ineligible for CNS processing due to
certain transfer restrictions (e.g., 144A securities) or due to the
pendency of certain corporate actions. See Rule 1 of NSCC's rules
for the definition of CNS-eligible securities, and Rule 3 of NSCC's
rules for a list of CNS-eligible securities. NSCC Rules and
Procedures, Rules 1 and 3.
    \34\ In CNS, compared and recorded transactions in CNS-eligible
securities that are scheduled to settle on a common settlement date
are netted by specific security issue into one net long (i.e., buy)
or net short (i.e., sell) position. CNS then nets those positions
further with positions of the same specific security issue that
remain open after their originally scheduled settlement date, which
are generally referred to as ``Fail Positions.'' The result of the
netting process is a single deliver or receive obligation for each
NSCC member for each specific security issue in which the member has
activity on a given day. See NSCC Rules and Procedures, Rule 11 and
Procedure VII and X.
    \35\ See NSCC PFMI Disclosure Framework, supra note 27, at 9.
---------------------------------------------------------------------------

    When one of the counterparties does not fulfill its settlement
obligations by delivering the required securities, a ``failure to
deliver'' occurs in CNS. Failures to deliver may be caused by the NSCC
member's failure to receive securities from a customer or counterparty
to a previous transaction.\36\ For illustration purposes, Figure 2
shows a recent seven-year period of time, in this case, October 23,
2008, through October 23, 2015, with the outstanding failures to
deliver as a percentage of the overall shares outstanding for the
securities which NSCC clears.\37\
---------------------------------------------------------------------------

    \36\ For more information on NSCC ``failures to deliver,'' see
generally Office of Investor Education and Advocacy, U.S. Securities
and Exchange Commission, Key Points About Regulation SHO (Apr. 8,
2015), https://www.sec.gov/investor/pubs/regsho.htm.
    \37\ NSCC failure-to-deliver data is publicly available on the
Commission's Web site at https://www.sec.gov/foia/docs/failsdata.htm.

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

[GRAPHIC] [TIFF OMITTED] TP05OC16.001

    While NSCC provides final settlement instructions to its members
each day, the payment for and transfer of securities ownership occurs
at DTC. At the conclusion of each trading day, CNS short positions
(i.e., obligations to deliver) at NSCC are compared against the long
positions held in the NSCC members' DTC accounts to determine security
availability.\38\ If securities are available, they are transferred
from the NSCC member's account at DTC to NSCC's account at DTC, to
cover the NSCC member's CNS short positions. CNS long positions (i.e.,
the right to receive securities owed to the participant) are
transferred from the NSCC account at DTC to the accounts of NSCC
members at DTC. On settlement date, NSCC submits instructions to DTC to
deliver (i.e., transfer) securities positions for each security netted
though CNS for each NSCC member holding a long position in such
securities. Cash obligations are settled through DTC by one net payment
for each NSCC member at the end of the settlement day.
---------------------------------------------------------------------------

    \38\ See NSCC PFMI Disclosure Framework, supra note 27, at 106.
---------------------------------------------------------------------------

(2) CSDs
    A CSD is an entity that holds securities for its participants
either in certificated or uncertificated (dematerialized) form so that
ownership can be easily transferred through a book entry (rather than
the transfer of physical certificates) and provides central safekeeping
and other asset services. Additionally, a CSD may operate a securities
settlement system, which is a set of arrangements that enables
transfers of securities, either for payment or free of payment, and
facilitates the payment process associated with such transfers. DTC
serves as the CSD and settlement system for most equity securities and
a significant number of debt securities held by U.S. market
participants.
    In its capacity as a CSD, DTC provides custody and book-entry
transfer services for the vast majority of securities transactions in
the U.S. market involving equities, corporate and municipal debt, money
market instruments, ADRs, and ETFs. In accordance with its rules, DTC
accepts deposits of securities from its participants \39\ (i.e., mostly
broker-dealers and banks), credits those securities to the depositing
participants' accounts, and effects book-entry transfer of those
securities. The securities deposited with DTC are registered in DTC's
nominee name and are held in fungible bulk for the benefit of its
participants and their customers. Each participant having an interest
in the securities of a given issuer credited to its account has a pro
rata interest in the securities of that issuer held by DTC. By
immobilizing securities (e.g., holding and transferring ownership of
securities positions in book-entry form, with DTC's nominee reflected
as the registered owner on the issuer's records) and centralizing and
automating securities settlements, DTC substantially reduces the number
of physical securities certificates transferred in the U.S. markets,
which significantly improves operational efficiencies and

reduces risk and costs associated with the processing of physical
securities certificates. These benefits not only provide efficiencies
to DTC and its participants, but to the investing public as well.
---------------------------------------------------------------------------

    \39\ NSCC's rules provide for several categories of membership
with different levels of access to NSCC's services. This release
uses the term ``member'' when referring to an NSCC member that has
full access to NSCC's CCP services. See NSCC Rules and Procedures,
Rule 1, for the definition of the various membership categories.
DTC's rules also provide for different categories of membership,
including ``participants.'' This release uses the term
``participant'' when referring to a participant of DTC. See Rules,
By-Laws, and Organizational Certificate of DTC Rule 1 for the
definition of various categories of membership.
---------------------------------------------------------------------------

    In addition to a securities account at DTC, each DTC participant
has a settlement account at a clearing bank to record any net funds
obligation for end-of-day settlement, whether payment will be due to or
from the participant. During the day, debits and credits are entered
into the participant's settlement account. The debits and credits arise
from DVP transfers and from other events or transactions involving the
transfer of funds, such as principal and interest payments distributed
to a participant or intraday settlement progress payments by a
participant to DTC.\40\ Debits and credits in the participant's
settlement account are netted intraday to calculate, at any time, a net
debit balance or net credit balance, resulting in an end-of-day
settlement obligation or right to receive payment. DTC nets debit and
credit balances for participants who are also members of NSCC to reduce
funds transfers for settlement, and acts as settlement agent for NSCC
in this process. Settlement payments between DTC and DTC's
participants' settlement banks are made through the National Settlement
System of the Federal Reserve System.\41\
---------------------------------------------------------------------------

    \40\ As noted above, a CSD operates a securities settlement
system that provides for transfers of securities either free of
payment or for payment. When a transfer occurs for payment,
typically securities settlement systems provide ``delivery versus
payment'' or ``DVP,'' whereby the delivery of the security occurs
only if payment occurs. The concept of DVP is sometimes referred to
as ``DVP/RVP.'' The term ``receive versus payment'' or ``RVP'' is
from the perspective of the seller.
    \41\ See NSCC PFMI Disclosure Framework, supra note 27, at 9-10.
---------------------------------------------------------------------------

b. Matching/ETC Providers--Exempt Clearing Agencies
    Matching/ETC Providers electronically facilitate communication
among a broker-dealer, an institutional investor, and the institutional
investor's custodian to reach agreement on the details of a securities
trade.\42\ These entities emerged as a result of efforts by market
participants to develop a more efficient and automated matching process
that continues to be viewed as a necessary step in achieving straight-
through processing (``STP'') \43\ for the settlement of institutional
trades.\44\ Currently, there are three entities that have obtained
exemptions from registration as a clearing agency from the Commission
to operate as Matching/ETC Providers.\45\ The current Matching/ETC
Providers use two methods, ``Matching'' and ``ETC,'' to facilitate
agreement on the trade details among the parties. When the parties
reach agreement, it is generally referred to as an ``affirmed
confirmation.''
---------------------------------------------------------------------------

    \42\ Electronic trade confirmation (``ETC'') was originally
developed by DTC in the early 1970s as an alternative to the use of
phone, fax or other manual processes. To facilitate greater use of
ETC by market participants to process institutional trades, the
Commission approved rule changes filed by several SROs that required
the use of ETC for trades involving institutional investors. See
Exchange Act Release No. 19227 (Nov. 9, 1982), 47 FR 51658, 51664
(Nov. 18, 1982) (order approving confirmation rules for exchanges
and securities association).
    \43\ The Securities Industry Association (which in 2006 merged
with The Bond Markets Association to form the Securities Industry
Financial Markets Association) has described STP ``as the seamless
integration of systems and processes to automate the trade process
from end-to-end--trade execution, confirmation, and settlement--
without manual intervention or the re-keying of data.'' Securities
Industry Association, Glossary of Terms, reprinted in part in Kyle L
Brandon, Prime Brokerage: Of Prime Importance to the Securities
Industry (SIA Res. Rep., Vol. VI, No. 4, New York, N.Y.), Apr. 28,
2005, at 25-26, http://www.sifma.org/WorkArea/linkit.aspx?LinkIdentifier=id&ItemID=21718&libID=5884.
    \44\ Securities Industry Association, Institutional Transaction
Processing Model, at 3 (May 2002) (``ITPC 2002 White Paper''). The
Securities Industry Association's Institutional Transaction
Processing Committee (``ITPC'') published its first white paper in
December 1999 with a subsequent version released in February 2001.
The ITPC 2002 White Paper was published in May 2002.
    \45\ The Commission issued an interpretive release in 1998
concluding that matching constitutes comparison of data respecting
the terms of settlement of securities transactions, and therefore an
entity that provides matching services as an intermediary between a
broker-dealer and an institutional customer is a clearing agency
within the meaning of Section 3(a)(23) of the Exchange Act and is,
therefore, subject to the registration requirements of Section 17A.
See Confirmation and Affirmation of Securities Trades, Exchange Act
Release No. 39829 (Apr. 6, 1998), 63 FR 17943, 17946 (Apr. 13,
1998); Clearing Agency Standards, Exchange Act Release No. 68080
(Oct. 22, 2012), 77 FR 66220, 66228 & n.94 (Nov. 2, 2012) (noting
the 1998 interpretive release); see also 15 U.S.C. 78c(a)(23)
(defining the term ``clearing agency''). The Commission has provided
exemptions from registering as a clearing agency to certain entities
that operate matching and ETC services. See Order Granting Exemption
from Registration as a Clearing Agency for Global Joint Venture
Matching Services-U.S., LLC, Exchange Act Release No. 44188 (Apr.
17, 2001), 66 FR 20494, 20501 (Apr. 23, 2001); Order Approving
Applications for an Exemption from Registration as a Clearing Agency
for Bloomberg STP LLC and SS&C Techs., Inc., Exchange Act Release
No. 76514 (Nov. 24, 2015), 80 FR 75388, 75413 (Dec. 1, 2015).
---------------------------------------------------------------------------

    ETC is a process where the Matching/ETC Provider simply provides
the communication facilities to enable a broker-dealer and its
institutional investor to send messages back and forth that ultimately
results in the agreement of the trade details or affirmed confirmation,
which is in turn sent to DTC to effect settlement of the trade.\46\
Specifically, the Matching/ETC Provider will send the affirmed
confirmations to DTC where the DTC participants who will be delivering
securities will authorize the trades for automated settlement.\47\
---------------------------------------------------------------------------

    \46\ ITPC 2002 White Paper, supra note 44.
    \47\ See Order Approving Proposed Rule Change by The Depository
Trust Company To Allow the Inventory Management System To Accept
Real-Time and Late Affirmed Trades from Omgeo, Exchange Act Release
No. 54701 (Nov. 3, 2006), 71 FR 65854 (Nov. 9, 2006).
---------------------------------------------------------------------------

    In contrast, ``Matching'' is a process by which the Matching/ETC
Provider compares and reconciles the broker-dealer's trade details with
the institutional investor's allocation instructions to determine
whether the two descriptions of the trade agree. If the trade details
and institutional investor's allocation instructions match, an affirmed
confirmation is generated, which also is used to effect settlement of
the trade. As with ETC, transmission of the affirmed confirmations by
the Matching/ETC Provider to DTC facilitates automated trade
settlement.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    ETC is considered less efficient than Matching because it is an
iterative process where each participant has to wait for a trigger
before executing the next step in the process and has to manually re-
key trade data into several systems, resulting in delay and redundant
flows of non-essential data.\49\ Moreover, during this process broker-
dealers and their institutional investors often rely on internal
systems that lack either automation, common message standards, or both,
resulting in a lack of synchronized automated data that can cause
errors and discrepancies. Matching, in contrast to ETC, is not an
iterative process. Rather, matching eliminates the separate step of
producing a confirmation for the institutional investor to review and
affirm. Currently, Matching/ETC Providers assist many, but not all,
market participants in affirming institutional trade details as soon as
possible after trade execution, thereby helping to ensure that a trade
will clear and settle by the end of the settlement cycle.\50\
---------------------------------------------------------------------------

    \49\ ITPC 2002 White Paper, supra note 44, at 3.
    \50\ See infra Part III.A.3. for affirmation rates for certain
Matching/ETC Providers.
---------------------------------------------------------------------------

c. Market Participants--Investors, Broker-Dealers, and Custodians
    A variety of market participants depend on the clearance and
settlement services facilitated by the FMUs and Matching/ETC Providers,
including but not limited to institutional and retail investors,
broker-dealers, and custodians (e.g., banks). Furthermore, the relevant
clearance and settlement

steps that need to be accomplished by the FMUs, Matching/ETC Providers,
and financial service firms within the settlement cycle vary depending
on whether an investor is an institutional investor or a retail
investor.
    Institutional investors are entities such as mutual funds, pension
funds, hedge funds, bank trust departments, and insurance companies.
Transactions involving institutional investors are often more complex
than those for and with retail investors due to the volume and size of
the transactions, the entities involved in facilitating the execution
and settlement of the trade, including Matching/ETC Providers and
custodians, and the need to manage certain regulatory or business
obligations.\51\ Trades involving retail investors are typically
smaller in size than institutional trades, and the settlement of retail
investor trades generally occurs directly with the investor's or their
intermediary's broker-dealer and does not involve a separate custodian
bank.
---------------------------------------------------------------------------

    \51\ The distinction between ``retail investor'' and
``institutional investor'' is made only for the purpose of
illustrating the manner in which these types of entities generally
clear and settle their securities transactions. For purposes of this
release, the term ``retail investor'' includes any entity that
settles their securities transactions in a manner described in Part
II.A.3.a. Similarly, the term ``institutional investor'' is used to
describe any entity that is permitted and chooses to settle their
securities transactions in the manner described in Part II.A.3.b.
---------------------------------------------------------------------------

    To clear and settle securities transactions directly through a
registered clearing agency, the rules of the clearing agencies provide
that a broker-dealer or other type of market participant must become a
direct member of that clearing agency.\52\ Generally broker-dealers
that are direct members of clearing agencies are referred to as
``clearing broker-dealers.'' Clearing broker-dealers must comply with
the rules of the clearing agency, including but not limited to rules
relating to operational and financial requirements. Broker-dealers that
submit transactions to a clearing agency through a clearing broker-
dealer are generally referred to as ``introducing broker-dealers.'' In
general, broker-dealers executing trades on a registered securities
exchange are required to clear those transactions through a registered
clearing agency.\53\ Additionally, pursuant to certain self-regulatory
organization (``SRO'') rules, broker-dealers that effect transactions
in municipal and corporate debt securities are required to clear and
settle those transactions through a registered clearing agency.\54\
Broker-dealers executing trades outside the auspices of a trading venue
(e.g., on an internalized basis) may clear through a clearing agency,
may choose to settle those trades through mechanisms internal to that
broker-dealer, or may settle the trades bilaterally.\55\ Post-trade
processing of securities transactions by broker-dealers generally
occurs in the back office and entails the following functions: (1)
Order management, which keeps track of the orders that are sent to the
various markets and of the subsequent related executions that are
received; (2) purchases and sales, which works closely with the
appropriate clearing agency to ensure the transactions have been
accurately cleared and settled and to reconcile the broker-dealer's
position; (3) cashiering, which is responsible for receiving and
delivering securities; and (4) asset servicing activities related to
the processing of dividends, stock splits, and other corporate actions.
---------------------------------------------------------------------------

    \52\ Due to the financial and operational obligations of
entities submitting trades to a clearing agency, all clearing
agencies have established specific requirements for initial
membership and ongoing participation in the clearing agency. See,
e.g., NSCC Rules and Procedures, supra note 26, Rules 2A and 2B
(discussing initial and ongoing requirements for membership).
    \53\ See, e.g., FINRA Rules 6350A(a) and 6350B(a) (requiring
that FINRA members must clear and settle transactions in
``designated securities'' (i.e., NMS stocks) through the facilities
of a registered clearing agency that uses a continuous net
settlement system). In addition, FINRA Rule 6274(a) requires that a
member must clear and settle transactions ``effected on'' the
Alternative Display Facility in ADF-eligible securities (i.e., NMS
stocks) that are eligible for net settlement through the facilities
of a registered clearing agency that uses a continuous net
settlement system. Notwithstanding the requirements in Rules
6350A(a), 6350B(a) and 6274(a), transactions in designated
securities and transactions in ADF-eligible securities may be
settled ``ex-clearing'' provided that both parties to the
transaction agree to the same. See FINRA Rules 6350A(b), 6350B(b),
6274(b).
    \54\ See MSRB Rule G-12(f); FINRA Rule 11900.
    \55\ See generally FINRA Rules 6350A, 6350B and 6274.
---------------------------------------------------------------------------

    Often, due to regulatory or business obligations, an institutional
investor will not use its executing broker-dealer to custody the
institutional investors' securities at DTC, but rather will use a
custodian bank for the safekeeping and administration of both their
securities and cash.\56\ The custodian may also provide other
administrative services, such as: (1) Acting as an agent or fiduciary;
(2) monitoring the purchase and sale of securities by the executing
broker-dealers; and (3) collecting dividends and interest.
---------------------------------------------------------------------------

    \56\ Section 17(f) of the Investment Company Act of 1940 (the
``Investment Company Act'') and the rules thereunder govern the
safekeeping of a registered investment company's assets, and
generally provide that a registered investment company must place
and maintain its securities and similar instruments only with
certain qualified custodians. Section 17(f)(1)(A) of the Investment
Company Act permits certain banks to maintain custody of registered
investment company assets subject to Commission rules. See 15 U.S.C.
80a-17(f).
---------------------------------------------------------------------------

3. Overview of Trade Settlement Processes
    As described further below, the proposed amendment to paragraph (a)
of Rule 15c6-1 would prohibit a broker or dealer from entering into a
securities contract that settles later than the second business day
after the date of the contract unless expressly agreed upon by both
parties at the time of the transaction, subject to certain exceptions
enumerated in the rule. To provide context for understanding the
proposed amendment and the related economic analysis that follows, this
section provides an overview of the current state of trade settlement
processes under current Rule 15c6-1. Given the differences in the
clearance and settlement processes for trades by retail and some
institutional investors, the proposed amendment may have differing
economic effects on different market participants involved in these
transactions. Accordingly, the current clearance and settlement
processes are discussed below separately.\57\
---------------------------------------------------------------------------

    \57\ Although trades in open-ended investment company securities
(i.e., mutual funds) are subject to Rule 15c6-1, trades in these
securities (other than ETFs and other types of exchange-traded
products) are generally not executed in the secondary market, but
rather between issuers and their broker-dealer distributors. As a
non-CCP service, NSCC administers an electronic communication
system, Fund/SERV, that centralizes and standardizes order entry,
confirmation, registration and money settlement for mutual fund
companies, broker-dealers, banks and trust companies, third party
administrators and other intermediaries involved in the purchase and
sale of mutual fund shares. Pursuant to NSCC rules, an NSCC member
may roll up their daily cash obligation from Fund/SERV transactions
into the member's daily net obligations at NSCC. NSCC Rules and
Procedures, supra note 26, Rules 7, 12 and 52.
---------------------------------------------------------------------------

a. Retail Investor Trade Settlement Process
    Trade comparison, which consists of reporting, comparing, matching,
and validating the buy and sell sides of a trade is the first step in
the clearance and settlement of retail investor transactions. At the
trading venue, such as an exchange or non-exchange trading venue (e.g.,
alternative trading system or electronic communication network), a buy
order is electronically matched against a sell order. If the details of
the trade submitted by the counterparties agree (e.g., the security
price and quantity), the trade is considered ``locked in'' and then
sent from the

trading venue to NSCC.\58\ The following is a high level description
and illustration of what generally occurs each day following execution
of a retail investor trade and submission of the trade to NSCC:
---------------------------------------------------------------------------

    \58\ Trade comparison can be completed at NSCC, through a
trading venue, or through a Qualified Special Representative
(``QSR'') (as defined in Rule 1 of NSCC's Rules and Procedures) on
behalf of NSCC members, as permitted by clearing agency rules.
Currently, over 99% of the trade data received by NSCC is received
from a trading venue or QSR on a locked-in basis (i.e., already
compared by the marketplace of execution). However, NSCC provides
comparison services for transactions in fixed income securities
(i.e., corporate and municipal bonds) and for over-the-counter
transactions that are not otherwise generally matched through other
facilities. NSCC performs its comparison process on the same
timeline as locked-in trade submissions. See NSCC PFMI Disclosure
Framework, supra note 27, at 7.
---------------------------------------------------------------------------

    Trade Date--NSCC validates trade data received from the trading
venue and confirms receipt of the transaction details by electronically
sending communication to NSCC members that are counterparties to the
trade. This communication legally commits the members to complete the
trade.\59\
---------------------------------------------------------------------------

    \59\ NSCC Rules and Procedures, supra note 26, Rule 5, Section
1.
---------------------------------------------------------------------------

    T+1--At midnight on T+1, NSCC novates the trade, becoming the buyer
to the selling broker-dealer, and the seller to the buying broker-
dealer and attaches a trade guaranty.\60\ (Step 1)
---------------------------------------------------------------------------

    \60\ NSCC accepts transactions for clearance on business days.
Pursuant to Rule 1 of NSCC's Rules and Procedures, the term
``business day'' means any day on which NSCC is open for business.
However, on any business day that banks or transfer agencies in New
York State are closed or a qualified securities depository is
closed, no deliveries of securities and no payments of money shall
be made through NSCC.
---------------------------------------------------------------------------

    T+2--NSCC issues a trade summary report to its members with a
summary of all securities transactions and cash to be settled the
following day, specifically indicating the net positions of securities
and the net cash amount owed by the member or to be received by the
member. NSCC also sends an electronic instruction to DTC detailing the
net positions and cash that need to be settled for each member/
participant. (Step 2)
    T+3--DTC transfers the securities electronically between the buying
and selling broker-dealer accounts at DTC. The participant broker-
dealers instruct their settlement banks to send money to, or receive
money from, DTC to complete the transaction.\61\ (Step 3) Investors
receive securities and cash from their respective broker-dealers. (Step
4)
---------------------------------------------------------------------------

    \61\ Both NSCC and DTC jointly provide all members/participants
and their settling banks with reports throughout the day indicating
their net debit and net credit amounts for individual members/
participants as well as a net-net amount for each settling bank.
Each NSCC member is required to select a settling bank to handle the
electronic payment or receipt of payments through the Federal
Reserve Bank's Fedwire system.
[GRAPHIC] [TIFF OMITTED] TP05OC16.002

b. Institutional Investor Trade Settlement Process
    Institutional trade processing typically starts when an
institutional customer or its agent (sometimes referred to as the ``buy
side'') places an order to buy or sell securities with its broker-
dealer. The broker-dealer will advise the institutional customer of the
trade details, who in turn may advise its broker-dealer how the trade
should be allocated among its various accounts.\62\ The process of
verifying the allocation is completed through the confirmation/
affirmation procedures described in Part II.A.2.b., which discusses the
automated post-trade pre-settlement processing of institutional
investor trades.
---------------------------------------------------------------------------

    \62\ In instances where an institutional investor submits an
order on behalf of other parties (e.g., an investment manager on
behalf of several mutual funds), the institutional investor will
instruct its broker-dealer as to how to allocate the transactions
among the underlying entities. The broker-dealer will reply by
sending details of, or confirming, each allocation and if correct,
the institutional investor will affirm.
---------------------------------------------------------------------------

    Institutional investors may choose to trade through an executing
broker-dealer that clears and settles its securities transactions
though NSCC and DTC. However, depending on the size and complexity of
the trade and the number of trading partners involved in the
transaction, institutional investors may also choose to avail
themselves of processes specifically designed to address the unique
aspects of their trades. Specifically, these transactions can be
processed on a trade-for-trade basis through a prime broker-dealer and
settled on an RVP/DVP basis through DTC \63\ and the institutional
customer's custodial bank.\64\
---------------------------------------------------------------------------

    \63\ DTC operates a DVP settlement system for settlement of
securities on a gross basis and settlement of funds on a net basis.
Deliveries of securities are subject to DTC's risk management
controls, which are designed so that DTC may complete system-wide
settlement notwithstanding the failure to settle of its largest
participant or affiliated family of participants. See DTC,
Disclosure under the PFMI Disclosure Framework, at 10 (Dec. 2015),
http://www.dtcc.com/legal/policy-and-compliance.
    \64\ Through its ID Net Service, DTC allows its participant
broker-dealers to net their institutional investor customer
transactions with the broker-dealer's other transactions (including
the broker's retail trades) to reduce the aggregate securities
movement while still retaining the trade-for-trade settlement
between the DTC participant and the custodian bank. This service
also allows the banks to maintain their responsibility to pay for
only those trades where all the shares are delivered, while at the
same time providing brokers with the benefits of netting through
NSCC's CNS system.
---------------------------------------------------------------------------

    The following is a high level description and illustration of what
generally occurs each day following execution of an institutional
investor trade and submission of the trade to DTC:
    Trade Date through T+2--The institutional investor sends to the
Matching/ETC Provider, its broker-dealer, and its custodian the
allocation information for the trade. (Step 1) The broker-dealer then
submits to the Matching/ETC Provider trade data corresponding to each
allocation, including settlement instructions and, as applicable,
commissions, taxes, and fees. (Step 2)
    If the transaction is processed through a matching service, the
Matching/ETC Provider compares the institutional investor's allocation
information with the broker-dealer's trade data to determine whether
the information contained in each field matches. If all required fields
match, the Matching/ETC Provider generates a matched confirmation and
sends it to the broker-dealer, the institutional investor, and other
entities designated by the institutional investor (e.g., the
institutional investor's custodian). (Step 3)
    If the institutional investor uses the ETC process, instead of
comparing the institutional investor's allocation information with the
broker's trade data, the Matching/ETC Provider would transmit the
information to the broker-dealer and institutional investor so that
each party could verify that the trade was executed and allocated
correctly and produce an affirmed confirmation.
    T+2--After the Matching/ETC Provider creates the matched
confirmation (whether by ETC or matching), the matching service submits
it to DTC as an ``affirmed confirmation.'' After the affirmed
confirmation has been submitted, DTC participants that are delivering
securities then authorize the trades for automated settlement. DTC
currently processes transactions in real-time from approximately 8:30
p.m. on the night before settlement day (T+2) until 3:30 p.m. on
settlement day (T+3) for DVP transactions and until 6:35 p.m. for free
of payment transactions.
    T+3--DTC transfers the securities electronically between the buying
and selling broker-dealer accounts at DTC. The participant broker-
dealers instruct their settlement banks to send money to, or receive
money from, DTC to complete the transaction.

[GRAPHIC] [TIFF OMITTED] TP05OC16.003

4. Impact of the Settlement Cycle
    The length of the settlement cycle has varying degrees of impact
across the range of market participants described above. That impact
stems, in large part, from the type of risk exposure each entity brings
to the clearance and settlement process and the nature of its processes
and systems for operating within the existing framework.
    From the perspective of a CCP, such as NSCC, the length of the
settlement cycle may affect the CCP's exposure to credit, market and
liquidity risk that arises once a transaction has been novated and the
CCP takes offsetting (and guaranteed) positions as a substituted
counterparty for each of the parties to the original transaction.\65\ A
CCP takes a number of measures to manage this credit risk to its
members, including through financial resource contributions from
members and netting down the total outstanding exposure it may have to
a particular member. However, the extent to which a CCP must apply
these risk mitigation tools depends in large part on the length of time
it is exposed to the risk that one or more of its members may default
on their settlement obligations, which in turn is driven by the length
of the settlement cycle.
---------------------------------------------------------------------------

    \65\ See CCA Proposal, 79 FR at 29524, which provides an
overview discussion of financial risks faced by clearing agencies.
---------------------------------------------------------------------------

    The settlement cycle similarly determines the period of time during
which a CCP faces market risk following novation. Market risk, as a
general matter, can arise for a CCP where a member has defaulted during
the settlement cycle, and the CCP faces the risk that the defaulted
member's positions and other resources the CCP holds (i.e., defaulted
member collateral, such as clearing fund deposits) decline in market
value as the CCP seeks to liquidate, transfer, or otherwise dispose of
those assets to minimize losses.\66\ Finally, the settlement cycle can
also impact the amount of liquidity risk a CCP may need to anticipate
for purposes of settling an open transaction (the CCP often relies on
incoming payments from some members to facilitate payments to other
members) or otherwise deploying financial resources to cover losses
that may result from a member's default.\67\ A DTCC paper published in
2011 notes that shortening the settlement cycle may result in reduced
liquidity obligations for NSCC.\68\ In addition, that study, which was
conducted from October 19, 2010, through August 31, 2011, indicated
certain procyclical benefits to a reduced settlement cycle in observing
how NSCC clearing fund requirements

would decline if the settlement cycle was shortened.\69\ The results of
the study are reflected in the tables below.
---------------------------------------------------------------------------

    \66\ See id.
    \67\ See id. Credit and liquidity risk may also be relevant to
the functioning of a CSD, given that the CSD will rely on incoming
payments or deliveries of securities from certain participants to
make payments or deliveries to other participants. Where a CSD
participant defaults, or where a CCP or a CSD participant faces
liquidity pressure, the CSD itself may need to deploy financial
resources to cover the shortfall. For example, the CSD may maintain
a participant fund (similar in function to a clearing fund) or have
available lines of credit to access in such instances.
    \68\ DTCC, Proposal to Launch a New Cost-Benefit Analysis on
Shortening the Settlement Cycle, at 7 (Dec. 2011) (``DTCC Proposal
to Launch a Cost-Benefit Analysis''), http://www.dtcc.com/en/news/2011/december/01/proposal-to-launch-a-new-cost-benefit-analysis-on-shortening-the-settlement-cycle.aspx.
    \69\ See id. at 8-9.

------------------------------------------------------------------------
                                                           Average daily
                                                           clearing fund
                    Settlement cycle                        requirement
                                                               ($MM)
------------------------------------------------------------------------
T+3.....................................................    4,012 (100%)
T+2.....................................................    3,421 (-15%)
T+1.....................................................    2,994 (-25%)
------------------------------------------------------------------------

    According to the study, clearing fund savings (for NSCC's members)
resulting from shorter settlement cycles are more pronounced during
periods of high volatility.\70\ By showing the same data for August
2011, a period of high volatility, the study shows a greater decrease
in NSCC's clearing fund requirements.\71\
---------------------------------------------------------------------------

    \70\ See id.
    \71\ See id.

------------------------------------------------------------------------
                                                           Average daily
                                                           clearing fund
                    Settlement cycle                        for August
                                                            2011 ($MM)
------------------------------------------------------------------------
T+3.....................................................    7,281 (100%)
T+2.....................................................    5,517 (-24%)
T+1.....................................................    4,619 (-37%)
------------------------------------------------------------------------

    NSCC also conducted a study from April 2011 to September 2011 that
indicated that shortening the settlement cycle would reduce NSCC's
liquidity obligations significantly. According to the study, in a T+2
settlement cycle, NSCC's average liquidity obligations would decline by
20%, thereby reducing members' required clearing fund deposits.\72\
---------------------------------------------------------------------------

    \72\ See id. at 7.
---------------------------------------------------------------------------

    For broker-dealers and investors, the impact of the length of the
settlement cycle can be understood in most cases through the
perspective of liquidity risk. Over the course of the settlement cycle,
broker-dealers and investors will generally seek to manage two forms of
liquidity risk--(i) sudden or unexpected liquidity demands that may
arise due to the CCP's ongoing management of credit, market and
liquidity risk exposure during the settlement cycle,\73\ and (ii) the
need to timely obtain and deliver cash or securities to settle
outstanding trades, as well as using cash or securities to engage in
trading activity across other markets with mismatched settlement
cycles, such as non-U.S. markets.
---------------------------------------------------------------------------

    \73\ In this respect, the liquidity risk can be linked to market
risk faced by the CCP and its member arising from the open position
between the CCP and the member, as well as any collateral posted by
the member to the CCP to cover the CCP's credit risk exposure to the
member. Where the market value of these open positions or the posted
collateral fluctuates, the CCP may seek additional margin or other
financial resources from the member. See CCA Proposal, 79 FR 29524.
---------------------------------------------------------------------------

    Broker-dealers that are CCP members (including broker-dealers that
are NSCC members) have financial resource obligations which the CCP may
collect for risk management purposes.\74\ These financial resource
obligations may be at issue where a CCP member defaults and the CCP
requires the defaulting member's resources or the other members'
mutualized resources to address any credit, market and liquidity risk
the CCP faces as it seeks to liquidate, transfer or otherwise dispose
of the defaulted positions and related collateral of the defaulting
member.\75\ These financial resource obligations may also be incurred
within a settlement cycle where a CCP seeks additional resources to
address potential risk that may increase due to changing or otherwise
volatile market conditions that can also be procyclical.\76\ In such
instances, the CCP member's obligation to make available financial
resources to the CCP keys off of the period of time during which the
CCP faces the member. Therefore, the length of the settlement cycle can
impact the amount and types (e.g., stable, highly liquid assets) of
financial resources a CCP may require of its members, which in turn
creates liquidity risk exposure and capital costs for the member in
terms of obtaining and delivering to the CCP the necessary financial
resources in a timely manner.
---------------------------------------------------------------------------

    \74\ See supra Part II.A.2.a.(1) for additional discussion
regarding the use of financial resource requirements for risk
management purposes. See also NSCC Rules and Procedures, supra note
26, Rules 4 and 4(A).
    \75\ See CCA Proposal, 79 FR at 29524.
    \76\ See DTCC, DTCC Recommends Shortening the U.S. Trade
Settlement Cycle (Apr. 2014), http://www.ust2.com/industry-action/.
---------------------------------------------------------------------------

    Further, for NSCC members/DTC participants, the length of the
settlement cycle determines the deadline by which cash or securities
must be delivered into the member/participant's DTC account for
settlement purposes. Thus, a member/participant may face liquidity risk
in obtaining (or recalling) from other markets with mismatched
settlement cycles the necessary resources to deliver in time for
settlement. Similarly, the length of the settlement cycle governs the
time when the proceeds of a securities transaction may be made
available to the member/participant. A mismatch in timing between the
settlement cycle for the securities transaction and the settlement
cycle for another market transaction, such as in the derivatives or a
non-U.S. market with a different settlement cycle, can lead in turn to
liquidity risk for the member in meeting all of its settlement
obligations across markets.\77\
---------------------------------------------------------------------------

    \77\ For example and as noted earlier, the settlement cycle
timeframe for open-end mutual funds that settle through NSCC is
generally T+1. However, the settlement cycle timeframe for many
underlying portfolio securities held by mutual funds is T+3.
Settlement timeframes for securities with non-standard settlements
held by these funds may be longer than T+3. This mismatch in timing
presents potential liquidity risks for such funds as market
participants with respect to the receipt of portfolio proceeds and
in satisfying their investor redemption obligations. See Investment
Company Act Release No. 31835 (Sept. 22, 2015), 80 FR 62273, 62282-
83 (Oct. 15, 2015); see also, e.g., PricewaterhouseCoopers LLP,
Shortening the Settlement Cycle: The Move to T+2, at 13 n.18 (2015)
(``ISC White Paper''), http://www.ust2.com/pdfs/ssc.pdf.
---------------------------------------------------------------------------

    Broker-dealers that are not members of a CCP may similarly face
certain of the liquidity risks described above because the clearing
broker-dealer may pass on related costs through margin charges, as well
as other charges and fees (which may, in some cases, be incorporated in
the clearing broker-dealer's management of its credit risk to the non-
clearing broker-dealer). These costs may also, in turn, be applied to
or passed on to both institutional and retail investors by their
executing or clearing broker-dealers.\78\ For example, an industry
study noted that some NSCC members carry the exposure of their
customers' open positions during the settlement cycle and that each
day's reduction in the settlement cycle could lessen these open
exposures by 25%.\79\ Therefore, the length of the settlement cycle can
potentially affect the size and type of financial resource demands
broker-dealers may pass on to investors.
---------------------------------------------------------------------------

    \78\ For further discussion on the downstream effects of
liquidity risk costs, see infra Part VI.C.4.
    \79\ See DTCC Proposal to Launch a Cost-Benefit Analysis, supra
note 68, at 7.
---------------------------------------------------------------------------

    The impact that the length of the settlement cycle may have on the
credit, market and liquidity risk exposure faced by market participants
can also lead to impacts on systemic risk. First, the length of the
settlement cycle will determine the number of unsettled transactions
present in the settlement system at any given point in time, and
consequently the level of exposure to credit, market and liquidity
risks faced by market participants. This attendant credit, market and
liquidity risk, in turn, can affect the potential likelihood of a
market participant defaulting. In the event of a default of a major
market participant, the default may entail losses so large as to create
widespread or systemic problems. Further, the default of one member may
lead to the default of one or more other members, exacerbating any
financial stress a CCP

or other market infrastructure may be experiencing because of the
default.\80\
---------------------------------------------------------------------------

    \80\ See T+3 Adopting Release, 58 FR at 52894; see also Clearing
Agency Standards Adopting Release, 77 FR at 66254 (discussing the
need for default procedures to allow the clearing agency to take
action resulting from one or more member defaults in order to
contain resultant losses and liquidity pressures).
---------------------------------------------------------------------------

    As a more general matter, market participants rely on CCPs for
prompt clearance and settlement of transactions and the receipt of
proceeds from those transactions. Thus, a significant disruption in the
clearance and settlement process and transmission of these proceeds
could potentially harm other market participants, particularly in
instances where market participants in centrally cleared and settled
markets are linked through intermediation chains to each other and to
participants in uncleared markets (as is the case in the U.S. clearance
and settlement system). Shortening the settlement cycle is therefore
one of the primary methods for reducing this risk.\81\
---------------------------------------------------------------------------

    \81\ See Christopher L. Culp, Risk Management by Securities
Settlement Agents, 10 J. Applied Corp. Fin. 96 (Fall 1997), http://www.rmcsinc.com/articles/JACF103.pdf.
---------------------------------------------------------------------------

5. Post-Rule 15c6-1 Adoption
    Since the adoption of Rule 15c6-1, the Commission and various
market participants have, as described in greater detail below,
explored the possibility of shortening the standard settlement cycle
further. Below is a description of these efforts.
a. SIA T+1 Initiative
    After the implementation of the T+3 settlement cycle, the
Securities Industry Association (``SIA'') led an effort to shorten the
settlement cycle to T+1 and implement STP.\82\ In 2000, the SIA
published its T+1 Business Case Final Report (``SIA Business Case
Report'') which concluded that the case for moving to a T+1 settlement
cycle in the U.S. was ``strong'' based upon several factors.\83\
According to the SIA Business Case Report: (i) The move from T+3 to T+1
would dramatically reduce the settlement risk exposure of the U.S.
securities industry; \84\ (ii) the transition to a T+1 settlement cycle
would enable the U.S. market to continue to maintain its global
competitiveness by serving as the catalyst for enhancing the current
post-trade processing and settlement process; \85\ and (iii) the move
to T+1 would serve the interests of U.S. investors by synchronizing the
clearance and settlement process across asset classes, thus enabling
more fungible, flexible trading and investing.\86\
---------------------------------------------------------------------------

    \82\ The SIA (which has since merged with other industry groups
to form the Securities Industry Financial Markets Association) was a
trade association that represented U.S. broker-dealers.
    \83\ SIA, T+1 Business Case Final Report (July 2000) (``SIA
Business Case Report''), http://www.sifma.org/issues/item.aspx?id=8589939820.
    \84\ Id. at 1, 7. The SIA Business Case Report did not
explicitly define the term ``settlement risk.'' However, the report
argued that a move to a T+1 settlement cycle would reduce credit
risk exposure and operational risk exposure. See id. at 39-41.
    \85\ Id.
    \86\ Id.; see also infra Part VI.D.1. for a discussion of the
alternative of shifting to a T+1 settlement cycle.
---------------------------------------------------------------------------

    The SIA Business Case Report also identified ten ``building
blocks'' essential to realizing the goal of improving the speed,
safety, and efficiency of the trade settlement process, and included a
cost benefit analysis for transitioning to T+1.\87\ The implementation
of these building blocks, the report noted, would ensure that the
transition to a T+1 settlement cycle would be accomplished in an
orderly and risk-effective manner.\88\
---------------------------------------------------------------------------

    \87\ See id. at 2-3. The 10 Building Blocks identified in the
report are as follows: (1) Modify internal processes at broker-
dealers, asset managers, and custodians to ensure compliance with
compressed settlement deadlines; (2) identify and comply with
accelerated deadlines for submission of trades to the clearing and
settlement systems; (3) amend NSCC's trade guaranty process so that
guaranty is provided on trade date; (4) report trades to clearing
corporations in locked-in format and revise clearing corporations'
output; (5) rewrite CNS processes at NSCC to enhance speed and
efficiency; (6) reduce reliance on checks and use alternative means
of payment, such as automatic debits allowed by the National
Automated Clearing House Association; (7) immobilize securities
shares prior to conducting transactions; (8) revise the prospectus
delivery rules and procedures for initial public offerings; (9)
develop industry matching utilities and linkages for all asset
classes; and (10) standardize reference data and move to
standardized industry protocols for broker-dealers, asset managers,
and custodians.
    \88\ Id. at 2.
---------------------------------------------------------------------------

    In July 2002, the SIA shifted the principal focus of its initiative
from shortening the settlement cycle to achieving industry-wide STP and
planned to reconsider the need to pursue a reduction in the settlement
cycle in 2004.\89\ At that time, the SIA believed more work was needed
on improving operational processing to achieve STP before a transition
to T+1 could be considered.\90\ The SIA's reasoning for this shift in
focus stemmed largely from an operational risk concern, observing that
while a shorter settlement cycle would be expected to decrease the
gross amount of unsettled trades subject to credit or market risk, it
could increase operational risk at that time by reducing the time
available to correct errors prior to settlement. The SIA therefore
argued that the industry priority should be to ensure that a higher
amount and rate of trades were affirmed/confirmed on an earlier basis
via STP, which in turn would be useful for a later consideration of
compressing the settlement cycle in an environment less prone to the
likelihood of operational risk.\91\
---------------------------------------------------------------------------

    \89\ Press Release, SIA, SIA Board Endorses Program to Modernize
Clearing and Settlement Process for Securities, STP Connections
(July 18, 2002) (statement from the SIA Board of Directors endorsing
straight-through processing); see also Letter from Jeffrey C.
Bernstein, Chairman, SIA STP Steering Committee, SIA (June 16, 2004)
(commenting on the Commission's 2004 Securities Transaction
Settlement Concept Release, Exchange Act Release No. 49405 (Mar. 11,
2004), 69 FR 12922, 12923 (Mar. 18, 2004)).
    \90\ Id. at 3.
    \91\ Id. at 7.
---------------------------------------------------------------------------

b. Securities Transaction Concept Release
    In March 2004, the Commission published a concept release
(``Concept Release'') seeking comment on methods to improve the safety
and operational efficiency of the U.S. clearance and settlement system
and to help the U.S. securities industry achieve STP.\92\ Specifically,
the Commission sought comment on, among other things, (i) the benefits
and costs of shortening the settlement cycle to a timeframe less than
T+3; (ii) whether the Commission should adopt a new rule or the SROs
should be required to amend their existing rules to require the
completion of the confirmation/affirmation process on trade date
(``T+0''); and (iii) reducing the use of physical securities.\93\ The
purpose of the Concept Release was to build upon the domestic
initiatives and continue the exploration of methods to improve the
operations of the national clearance and settlement system. The
Commission received sixty-three comment letters from a wide variety of
commenters, both domestic and international, including but not limited
to, broker-dealers, transfer agents, issuers, individual and
institutional investors, academics, service providers, and industry
associations.\94\ While the comments were informative and relevant at
the time, technological, operational and regulatory changes in the
interim have addressed many of the issues raised by the commenters.
---------------------------------------------------------------------------

    \92\ Securities Transactions Settlements, Exchange Act Release
No 49405 (Mar. 11, 2004), 69 FR 12922 (Mar. 18, 2004).
    \93\ Id.
    \94\ The comment letters submitted pursuant to the Commission's
request for comment in the Concept Release are available at https://www.sec.gov/rules/concept/s71304.shtml.
---------------------------------------------------------------------------

    The Commission received thirty-four comment letters expressing a
position
on shortening the settlement cycle,\95\ with the majority of the
commenters

either: (i) Supporting shortening the settlement cycle to a timeframe
less than T+3 (primarily T+1); (ii) supporting implementation of STP
prior to shortening the settlement cycle; (iii) supporting
implementation of STP in lieu of shortening the settlement cycle (in
part because STP would derivatively drive shorter cycles) or (iv)
expressing no opinion on either T+1 or STP, but rather discussing the
need to address other post trade processing issues (e.g., streamlining
the institutional transactional processing model, using RVP/DVP
processing for both retail and institutional trades, addressing fails
in the clearance and settlement system, and dematerializing securities
certificates in the U.S. settlement cycle) prior to a regulatory
mandate to shorten the U.S. settlement cycle.\96\ The comment letters
that supported the implementation of a T+1 settlement cycle noted the
benefits of a shortened settlement cycle, including reducing risks,
reducing costs, improving efficiencies, and making accurate information
more quickly available to investors. Several of the commenters also
noted that T+1 would remove systemic risk and enable clients to have
accurate information about their assets with finality the next trading
day.\97\ Several commenters based their general support on the view
that currently available technology (as it existed in 2004) would
support a T+1 or T+0 settlement cycle,\98\ or that the operating costs
of real time software would be dramatically lower than the staff it
would replace.\99\ One of these commenters stated that even if the
current technology facilitating ``real time settlement'' was not
currently cost effective, it would be in the future as technology
develops and advances.\100\ If real time settlement were feasible, this
commenter noted, the market architecture would make sure that the
securities and cash were available in good deliverable form for instant
settlement before the execution of the trade, thereby eliminating
failures to deliver or pay for securities, as well as totally eliminate
systemic and counterparty risk.\101\
---------------------------------------------------------------------------

    \95\ Letters from Bruce Barrett (Mar. 13, 2004); David Patch
(Mar. 13, 2004, and May 18, 2004); Robert Goldberg, President, e3m
Investments Inc. (Apr. 5, 2004); James J. Angel, Ph.D., CFA,
Associate Professor of Finance, McDonough School of Business,
Georgetown University (Apr. 9, 2004); Michael Sweeney, Vice
President, Custody Services, Sumitomo Trust & Banking, Co. (USA)
(May 20, 2004); James Nesfield (May 23, 2004); Martin Wilson (May
27, 2004); Sennett Kirk (May 27, 2004); Adam J. Bryan, President and
CEO, Omgeo LLC (June 4, 2004); David G. Tittsworth, Executive
Director, Investment Counsel Association of America (June 11, 2004);
Michael Atkin, Vice President and Director, Financial Information
Services Division, Software & Information Industry Association (June
13, 2004); Donald J. Kenney, Chairman, President, and Chief
Executive Officer, EquiServe, Inc. (June 14, 2004); Jeff Potter,
Vice President, The Northern Trust Company (June 14, 2004); John T.
W. Pace, President, Cape Securities, Inc. (June 14, 2004); Thomas
Sargant, President, Regional Municipal Operations Association (June
14, 2004); Steven G. Nelson, President and Chairman of the Board,
Continental Stock Transfer & Trust Company (June 15, 2004); Will
DuMond, Metropolitan College of New York--School of Business (June
15, 2004); Diane M. Butler, Director--Transfer Agency &
International Operations, Investment Company Institute (June 16,
2004); Fionnuala Martin, STP Program Manager, BMO Nesbitt Burns
(June 16, 2004); Frank DiMarco, Merrill Lynch & Co., Inc., Chair,
STP Steering Committee, The Bond Market Association (June 16, 2004);
Ian Gilholey, The Canadian Depository for Securities Limited (June
16, 2004); Jeffrey C. Bernstein, Chairman, SIA STP Steering
Committee, SIA (June 16, 2004); Kevin R. Smith, Chair, ISITC-IOA
(North America) (June16, 2004); Michael J. Alexander, Senior Vice
President, Charles Schwab & Co., Inc. (June 16, 2004); Michael
O'Conor, Chairman, Global Steering Committee and Peter Randall,
Executive Director, FIX Protocol Limited (June 16, 2004); Norman
Eaker, Principal, Edward Jones (June 16, 2004); W. Leo McBlain,
Chairman and Thomas J. Jordan, Executive Director, Financial
Information Forum (June 16, 2004); Jill M. Considine, Chairman and
Chief Executive Officer, The Depository Trust and Clearing
Corporation (June 23, 2004); Margaret R. Blake, Counsel to the
Association, and Dan W. Schneider, Counsel to the Association, The
Association of Global Custodians (June 28, 2004); Ed Morgan (Mar.
31, 2006); Jim Mulkey (June 10, 2006); Charles V. Rossi, President,
The Securities Transfer Association (June 15, 2006); and Gene Finn
(July 25, 2012, and Aug. 2, 2012).
    \96\ Letters from Robert Goldberg, President, e3m Investments
Inc. (Apr. 5, 2004); James J. Angel, Ph.D., CFA, Associate Professor
of Finance, McDonough School of Business, Georgetown University
(Apr. 9, 2004); James Nesfield (May 23, 2004); Adam J. Bryan,
President and CEO, Omgeo LLC (June 4, 2004); Donald J. Kenney,
Chairman, President, and Chief Executive Officer, EquiServe, Inc.
(June 14, 2004); Diane M. Butler, Director--Transfer Agency &
International Operations, Investment Company Institute (June 16,
2004); Fionnuala Martin, STP Program Manager, BMO Nesbitt Burns
(June 16, 2004); Frank DiMarco, Merrill Lynch & Co., Inc., Chair,
STP Steering Committee, The Bond Market Association (June 16, 2004);
Jeffrey C. Bernstein, Chairman, SIA STP Steering Committee, SIA
(June 16, 2004); Kevin R. Smith, Chair, ISITC-IOA (North America)
(June 16, 2004); Michael J. Alexander, Senior Vice President,
Charles Schwab & Co., Inc. (June 16, 2004); Norman Eaker, Principal,
Edward Jones (June 16, 2004); W. Leo McBlain, Chairman and Thomas J.
Jordan, Executive Director, Financial Information Forum (June 16,
2004); Jill M. Considine, Chairman and Chief Executive Officer, The
Depository Trust and Clearing Corporation (June 23, 2004); Margaret
R. Blake, Counsel to the Association, and Dan W. Schneider, Counsel
to the Association, The Association of Global Custodians (June 28,
2004); Ed Morgan (Mar. 31, 2006); Jim Mulkey (June 10, 2006);
Charles V. Rossi, President, The Securities Transfer Association
(June 15, 2006); and Gene Finn (July 25, 2012, and Aug. 2, 2012).
    \97\ Letters from Robert Goldberg, President, e3m Investments
Inc. (Apr. 5, 2004); and Fionnuala Martin, STP Program Manager, BMO
Nesbitt Burns (June 16, 2004).
    \98\ Letters from Robert Goldberg, President, e3m Investments
Inc. (Apr. 5, 2004); James J. Angel, Ph.D., CFA, Associate Professor
of Finance, McDonough School of Business, Georgetown University
(Apr. 9, 2004); James Nesfield (May 23, 2004); and Jim Mulkey (June
10, 2006).
    \99\ Letter from Robert Goldberg, President, e3m Investments
Inc. (Apr. 5, 2004).
    \100\ James J. Angel, Ph.D., CFA, Associate Professor of
Finance, McDonough School of Business, Georgetown University (Apr.
9, 2004).
    \101\ Id.
---------------------------------------------------------------------------

    Of the thirty-four comments on shortening the settlement cycle,
fourteen commenters expressed a preference to defer a decision on
changing the settlement cycle until the industry could implement STP or
other complementary processes.\102\ Reasons for deferring the decision
varied, but generally focused on the need for additional information or
additional time for the industry to implement STP successfully.\103\
Some of these commenters also raised concerns about the costs
associated with implementation of a shorter settlement cycle and
regulatory costs that may arise

from the switch to T+1.\104\ One commenter, in particular, noted that a
regulatory mandate for a shortened settlement cycle was not warranted
by the SIA's cost benefit analysis and thought a better approach would
be to encourage the development of market-driven initiatives to promote
advances in STP.\105\
---------------------------------------------------------------------------

    \102\ Letters from Adam J. Bryan, President and CEO, Omgeo LLC
(June 4, 2004); David G. Tittsworth, Executive Director, Investment
Counsel Association of America (June 11, 2004); Jeff Potter, Vice
President, The Northern Trust Company (June 14, 2004); Thomas
Sargant, President, Regional Municipal Operations Association (June
14, 2004); Charles V. Rossi, President, The Securities Transfer
Association (June 15, 2004); Frank DiMarco, Merrill Lynch & Co.,
Inc., Chair, STP Steering Committee, The Bond Market Association
(June 16, 2004); Ian Gilholey, The Canadian Depository for
Securities Limited (June 16, 2004); Jeffrey C. Bernstein, Chairman,
SIA STP Steering Committee, SIA (June 16, 2004); Michael J.
Alexander, Senior Vice President, Charles Schwab & Co., Inc. (June
16, 2004); Michael O'Conor, Chairman, Global Steering Committee and
Peter Randall, Executive Director, FIX Protocol Limited (June 16,
2004); Norman Eaker, Principal, Edward Jones (June 16, 2004); W. Leo
McBlain, Chairman and Thomas J. Jordan, Executive Director,
Financial Information Forum (June 16, 2004); Jill M. Considine,
Chairman and Chief Executive Officer, The Depository Trust and
Clearing Corporation (June 23, 2004); and Margaret R. Blake, Counsel
to the Association, and Dan W. Schneider, Counsel to the
Association, The Association of Global Custodians (June 28, 2004).
    \103\ Letters from Adam J. Bryan, President and CEO, Omgeo LLC
(June 4, 2004); David G. Tittsworth, Executive Director, Investment
Counsel Association of America (June 11, 2004); Jeff Potter, Vice
President, The Northern Trust Company (June 14, 2004); Thomas
Sargant, President, Regional Municipal Operations Association (June
14, 2004); Charles V. Rossi, President, The Securities Transfer
Association (June 15, 2004); Frank DiMarco, Merrill Lynch & Co.,
Inc., Chair, STP Steering Committee, The Bond Market Association
(June 16, 2004); Ian Gilholey, The Canadian Depository for
Securities Limited (June 16, 2004); Jeffrey C. Bernstein, Chairman,
SIA STP Steering Committee, SIA (June 16, 2004); Michael J.
Alexander, Senior Vice President, Charles Schwab & Co., Inc. (June
16, 2004); Michael O'Conor, Chairman, Global Steering Committee and
Peter Randall, Executive Director, FIX Protocol Limited (June 16,
2004); Norman Eaker, Principal, Edward Jones (June 16, 2004); W. Leo
McBlain, Chairman and Thomas J. Jordan, Executive Director,
Financial Information Forum (June 16, 2004); Jill M. Considine,
Chairman and Chief Executive Officer, The Depository Trust and
Clearing Corporation (June 23, 2004); and Margaret R. Blake, Counsel
to the Association, and Dan W. Schneider, Counsel to the
Association, The Association of Global Custodians (June 28, 2004).
    \104\ See, e.g., Letter from Michael J. Alexander, Senior Vice
President, Charles Schwab & Co., Inc. (June 16, 2004).
    \105\ Letter from David G. Tittsworth, Executive Director, the
Investment Counsel Association of America (June 11, 2004)
(commenting on the Concept Release).
---------------------------------------------------------------------------

c. Current Efforts To Shorten the Settlement Cycle in the U.S.
    Since the publication of the SIA Business Case Report in 2000 and
the publication of the Concept Release in 2004, the Commission and
market participants have continued to consider the possibility of
further shortening the settlement cycle while observing significant
changes in the securities industry with respect to post-trade processes
and technology. Below is a discussion of a number of recent significant
industry initiatives that have considered the question of whether and
when to further shorten the standard settlement cycle and that have
informed the Commission's proposal.
(1) BCG Study
    In May 2012, DTCC commissioned a study to examine and evaluate the
necessary investments and resulting benefits associated with a
shortened settlement cycle for U.S. equities and corporate and
municipal bonds.\106\ The study, which was conducted by the Boston
Consulting Group (``BCG'') and published in October 2012, analyzed the
costs, benefits, opportunities and challenges associated with
shortening the settlement cycle in the U.S. securities markets to
either T+1 or T+2, respectively.\107\
---------------------------------------------------------------------------

    \106\ See DTCC Proposal to Launch a Cost-Benefit Analysis, supra
note 68.
    \107\ The Boston Consulting Group, Cost Benefit Analysis of
Shortening the Settlement Cycle, (Oct. 2012) (``BCG Study''), http:/
/www.dtcc.com/~/media/Files/Downloads/WhitePapers/
CBA_BCG_Shortening_the_Settlement_Cycle_October2012.pdf. The BCG
Study also noted a ``T+0'' settlement cycle (i.e., settlement on
trade date) ``was ruled out as infeasible for the industry to
accomplish at this time, given the exceptional changes required to
achieve it and weak support across the industry.'' Id. at 8. The BCG
Study notes that a T+0 settlement cycle would result in major
challenges with processes such as such as trade reconciliation and
exception management, securities lending and transactions with
foreign counterparties (especially where time zones are least
aligned). Id. at 20. Moreover, the BCG Study concluded that payment
systems utilized for final settlement would also need to be
significantly altered to enable transactions late into the day. Id.
For further discussion on the BCG Study and some of the study's
limitations, see infra Part VI.C.5.a.
---------------------------------------------------------------------------

    The scope of BCG's analysis included U.S. equities, corporate
bonds, and municipal bonds settling at DTC.\108\ The study covered
clearing and settlement processes at various types of market
participants (e.g., broker-dealers, buy-side firms, and custodian
banks), in addition to processes closely related to clearance and
settlement (such as corporate action processing and securities lending)
and specific situations (such as post-trade processes for cross-border
transactions involving securities lending in the U.S.).\109\
---------------------------------------------------------------------------

    \108\ Id. at 13.
    \109\ Id.
---------------------------------------------------------------------------

    The BCG Study did not advocate any specific approach to shortening
the settlement cycle, but noted that moving to a T+2 settlement cycle
would be significantly less costly and take less time to implement than
either an immediate or gradual transition to T+1, while still
delivering significant benefits.\110\
---------------------------------------------------------------------------

    \110\ Id. at 8-11, 29-44.
---------------------------------------------------------------------------

    The BCG Study noted that market participants were aware that a T+2
settlement cycle could be accomplished through mere compression of
timeframes and corresponding rule changes but that implementing a
transition to T+2 without certain building blocks or enablers would
limit the amount of savings that would be realized across the
industry.\111\ In particular, BCG identified the following T+2
enablers: (i) Migration to trade data matching; \112\ (ii) a cross-
industry settlement instruction solution; (iii) dematerialization of
physical securities; (iv) ``access equals delivery'' \113\ for all
products,\114\ and (v) increased penalties for fails.\115\ The study
further concluded that T+1 could be built on the aforementioned T+2
enablers but would also require infrastructure for near-real-time trade
processing, and transforming securities lending and foreign buyer
processes.\116\
---------------------------------------------------------------------------

    \111\ Id. at 9.
    \112\ This migration would essentially entail a mandated ``match
to settle.'' Mandated ``match to settle'' would require
institutional trades to be matched before settlement at DTC could
occur. See BCG Study, supra note 107, at 65.
    \113\ In 2005, the Commission adopted Securities Act Rule 172,
which, with certain exclusions, provides an ``access equals
delivery'' model that permits final prospectus delivery obligations
to be satisfied by the filing of the final prospectus with the
Commission, rather than delivery of the prospectus to purchasers.
See Securities Offering Reform, Exchange Act Release No. 52056 (July
19, 2005), 70 FR 44722, 44783-85 (Aug. 3, 2005).
    \114\ BCG Study, at 9, 64-68.
    \115\ BCG Study, at 9, 69-70.
    \116\ Id. at 9, 70-72.
---------------------------------------------------------------------------

    In addition, BCG noted that acceleration of retail client funding
processes ``may'' need to take place to enable T+1 settlement.\117\
Finally, BCG identified certain changes it believed that regulators,
including the Commission, DTCC, FINRA, the MSRB, and NYSE, would need
to make to their rules to enable a shorter settlement cycle.\118\ These
changes included, among others, amending Exchange Act Rule 15c6-1.\119\
---------------------------------------------------------------------------

    \117\ Id. at 25.
    \118\ Id. at 26, 50, 68-69.
    \119\ Id. at 50, 68. See also, infra Part III.B. for a
discussion of the impact of other Commission rules.
---------------------------------------------------------------------------

    Based on the foregoing, in April 2014, DTCC recommended shortening
the U.S. trade settlement cycle for equities, municipal bonds, and unit
investment trusts to T+2 and stated it would work with the industry to
establish an implementation timeline.\120\ Once achieved, DTCC
recommended a pause and further assessment of industry readiness and
appetite for a future move to T+1.\121\ The recommendation was based
on: (1) Results from risk studies that measure exposure and NSCC's
liquidity needs; (2) the results of the BCG Study; (3) input from
industry associations; and (4) one-on-one interviews with more than 50
firms across the securities industry, which helped DTCC define
behavioral and system changes required to shorten the settlement
cycle.\122\
---------------------------------------------------------------------------

    \120\ See DTCC Recommends Shortening the U.S. Trade Settlement
Cycle, supra note 76.
    \121\ Id. at 2.
    \122\ Id.
---------------------------------------------------------------------------

(2) Industry Steering Committee and Industry Planning
    In October 2014, DTCC, in collaboration with the Investment Company
Institute (``ICI''), the Securities Industry and Financial Markets
Association (``SIFMA''), and other market participants, formed an
Industry Steering Group (``ISC'') and an industry working group to
facilitate the transition to a T+2 settlement cycle for U.S. trades in
equities, corporate and municipal bonds, and UITs.\123\ The impetus for
moving to a T+2 settlement cycle, as stated by the ISC, was to (i)
reduce credit and liquidity risks to the industry and investors, (ii)
reduce operational risk; (iii) reduce liquidity costs and free up
capital for broker-dealers by reducing the required NSCC clearing fund
contributions; (iv) enable investors to gain quicker access to funds
and securities following a trade

execution, and better protect investors from the risk of a broker-
dealer default between trade date and settlement date; (v) reduce
operational costs; and (vi) increase global harmonization.\124\
---------------------------------------------------------------------------

    \123\ Press Release, DTCC, Industry Steering Committee and
Working Group Formed to Drive Implementation of T+2 in the U.S.
(Oct. 2014), http://www.dtcc.com/news/2014/october/16/ust2.aspx.
    \124\ Id.
---------------------------------------------------------------------------

    In June 2015, PricewaterhouseCoopers LLP, in conjunction with the
ISC, published a white paper,\125\ which included certain ``industry-
level requirements'' and ``sub-requirements'' that the ISC believed
would be required for a successful migration to a T+2 settlement cycle
to occur. The ISC White Paper also included an implementation timeline
that targeted the transition to T+2 by the end of the third quarter of
2017.
---------------------------------------------------------------------------

    \125\ ISC White Paper, supra note 77.
---------------------------------------------------------------------------

    Deloitte & Touche LLP, in conjunction with the ISC, published the
T+2 Industry Implementation Playbook (``T+2 Playbook'') in December
2015, which sets forth the requested implementation timeline with
milestones and dependencies, as well as detailing ``remedial
activities'' that impacted market participants should consider to
prepare for migration to the T+2 settlement cycle.\126\ Each of the
remedial activities identified in the T+2 Playbook reference specific
industry-level requirements and sub-requirements that were identified
in the ISC White Paper.
---------------------------------------------------------------------------

    \126\ Deloitte & Touche LLP & ISC, T+2 Industry Implementation
Playbook (Dec. 2015), http://www.ust2.com/pdfs/T2-Playbook-12-21-15.pdf. For a further discussion on the T+2 Playbook, see infra Part
VI.C.5.b.
---------------------------------------------------------------------------

    Consistent with the ISC White Paper, the timeline provided in the
T+2 Playbook targeted the third quarter of 2017 for completing the
migration to a T+2 settlement cycle.\127\ In addition to providing an
implementation schedule, the T+2 Playbook was intended to serve as an
industry resource for individual firms as they make the necessary
changes to procedures and technology for transition to a T+2 settlement
cycle.\128\
---------------------------------------------------------------------------

    \127\ Id. at 8.
    \128\ Id. at 16.
---------------------------------------------------------------------------

(3) Investor Advisory Committee Recommendations
    In February 2015, the Commission's Investor Advisory Committee
(``IAC'') \129\ issued a public statement noting that shortening the
settlement cycle will mitigate operational and systemic risk, as well
as ``reduce credit, liquidity, and counterparty exposure risks,'' which
will benefit both the securities industry and individual
investors.\130\ In its recommendation, the IAC stated that it
``strongly endorsed the direction of the recommendation by DTCC'' to
shorten the settlement cycle to T+2, but recommended implementing a T+1
settlement cycle (rather than a T+2 settlement cycle), noting that
retail investors would significantly benefit from a T+1 settlement
cycle.\131\ In the event that a T+2 standard settlement cycle is
pursued, the IAC recommended that the Commission work with industry
participants to create a clear plan for moving to T+1 shortly
thereafter.\132\
---------------------------------------------------------------------------

    \129\ Section 911 of the Dodd-Frank Act established the IAC to
advise the Commission on regulatory priorities, the regulation of
securities products, trading strategies, fee structures, the
effectiveness of disclosure, and initiatives to protect investor
interests, and to promote investor confidence and the integrity of
the securities marketplace. See 15 U.S.C. 78pp. The Dodd-Frank Act
authorizes the IAC to submit findings and recommendations for review
and consideration by the Commission. Id.
    \130\ Investor Advisory Committee, U.S. Securities and Exchange
Commission, Recommendation of the Investor Advisory Committee:
Shortening the Settlement Cycle in U.S. Financial Markets (Feb. 12,
2015), http://www.sec.gov/spotlight/investor-advisory-committee-2012/settlement-cycle-recommendation-final.pdf.
    \131\ Id. According to the IAC, moving to a T+1 settlement
cycle, matching the settlement cycle that already exists for
treasuries and mutual funds, would greatly reduce systemic risk and
benefit investors. See also Committee on Payment and Settlement
Systems, Technical Committee of the International Organization of
Securities Commissions, Recommendations for Securities Settlement
Systems (Nov. 2001), at 4, 10, http://www.bis.org/cpmi/publ/d46.pdf
(recommending that the benefits and costs of a settlement cycle
shorter than T+3 should be evaluated).
    \132\ Id.
---------------------------------------------------------------------------

B. Transition to T+2 in Non-U.S. Securities Markets
    As market participants have worked to develop plans to shorten the
standard settlement cycle in the U.S. to T+2, several non-U.S.
securities markets have already shifted to a T+2 settlement cycle, and
certain other non-U.S. securities markets have announced plans to
transition to a T+2 settlement cycle.\133\ These efforts to transition
to a T+2 settlement cycle in markets outside the U.S. have been driven
in part by considerations specific to the needs of the particular
geographic region or market structure, as well as certain
considerations identified by policy makers, market participants, and
industry experts as to how shortening the settlement cycle to T+2 would
reduce risk in the relevant market and increase the operational
efficiency of post-trade processes. The Commission preliminarily
believes that many of the reasons motivating efforts in other
jurisdictions to shorten the settlement cycle to T+2 are, in principle,
similar to those identified by the Commission in this proposal.
---------------------------------------------------------------------------

    \133\ In addition to the non-U.S. markets that have moved to a
T+2 settlement cycle, certain non-U.S. markets are on a settlement
cycle shorter than T+2, including Israel, Chile, and Saudi Arabia,
which are on a T+0 cycle, and China, which is on a T+1 cycle.
---------------------------------------------------------------------------

    For example, national markets in the European Union (``EU'') moved
to a harmonized settlement cycle of T+2 \134\ to both achieve a
successful integration of settlement infrastructures across the EU as
well as realize perceived benefits a shorter settlement cycle would
bring in reducing counterparty credit risk (and associated market and
liquidity risks), greater automation of back-office processes and
reduced collateral requirements, and reduced costs for market
participants.\135\
---------------------------------------------------------------------------

    \134\ Prior to the so-called ``big bang'' migration to a T+2
settlement cycle on October 6, 2014, the standard settlement cycle
for exchange-traded shares was T+3 in all European securities
markets except Germany, Slovenia and Bulgaria, which already
operated on a T+2 settlement cycle. The 29 national markets that
moved to a T+2 settlement cycle on October 6, 2014 were: Austria,
Belgium, Croatia, Cyprus, the Czech Republic, Denmark, Estonia,
Finland, France, Greece, Hungary, Iceland, Italy, Ireland, the
Netherlands, Latvia, Lichtenstein, Lithuania, Luxembourg, Malta,
Norway, Poland, Portugal, Romania, Slovakia, Spain (certain fixed
income trades only), Sweden, Switzerland, and the United Kingdom.
See also, ``A very smooth transition to T+2'', European Central
Securities Depositories Association (Oct. 2014), http://ecsda.eu/archives/3793 (discussing the European markets transition from T+3
to T+2 settlement cycle).
    \135\ See European Commission, Commission Staff Working Document
Impact Assessment COD 2012/0029 (Mar. 7, 2012), http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52012SC0022&from=EN; see also CESAME II Harmonization of
Settlement Cycles Working Group (``CESAME II''), The Case for
Harmonizing Settlement Cycles (Oct. 5, 2010), http://ec.europa.eu/internal_market/financial-markets/docs/cesame2/subgroup/20100921_case_en.pdf; CESAME II, The Role of Settlement Cycles in
Corporate Actions Processing (Oct. 5, 2010), http://ec.europa.eu/internal_market/financial-markets/docs/cesame2/subgroup/20100921_hsc_role_en.pdf.
---------------------------------------------------------------------------

    Australia and New Zealand transitioned to a T+2 settlement cycle in
March 2016. Industry support in those markets was predicated on the
widespread agreement that shortening the settlement cycle to T+2 would
reduce counterparty, credit and operational risks, increase market
liquidity, reduce CCP margin requirements and reduce capital
requirements for broker-dealers and their clients.\136\ In addition,
the major Australian and New Zealand exchanges acknowledged the
existence of a global

move toward shortened settlement cycles and the importance of
international harmonization with respect to shortened settlement
cycles.\137\ Japanese and Canadian policy makers, regulators and market
participants are also considering a transition to a T+2 settlement
cycle,\138\ with Canadian market participants of the view that, given
the interconnectedness between the Canadian and U.S. securities
markets, a transition in Canada to a T+2 settlement cycle should occur
at the same time such a transition is achieved in the U.S.
markets.\139\
---------------------------------------------------------------------------

    \136\ See ASX Ltd., Shortening the Settlement Cycle in
Australia: Transitioning to T+2 for Cash Equities (Feb. 25, 2014),
http://www.asx.com.au/documents/public-consultations/T2_consultation_paper.PDF; see also NZX Ltd., Shortening of the
Settlement Cycle: The Move to T+2 (Nov. 12, 2014), https://nzx.com/files/static/cms-documents/FINAL%20T%202%20Consultation%20Paper%2012%20November%202014.pdf;
GBST Holding Ltd. & Stockbrokers Association of Australia,
Introducing T+2 for the Australian Equities Market (Jan. 30, 2014),
http://www.gbst.com/wp-content/uploads/2016/02/GBST-SAA-Tplus2-in-Australia-Whitepaper.pdf.
    \137\ See ASX Ltd., Shortening the Settlement Cycle in
Australia: Transitioning to T+2 for Cash Equities (Feb. 25, 2014),
http://www.asx.com.au/documents/public-consultations/T2_consultation_paper.PDF; see also NZX Ltd., Shortening of the
Settlement Cycle: The Move to T+2 (Nov. 12, 2014), https://nzx.com/files/static/cms-documents/FINAL%20T%202%20Consultation%20Paper%2012%20November%202014.pdf.
    \138\ See Japan Securities Dealers Association, Move to T+2
Settlement in Japan, http://www.jsda.or.jp/en/activities/research-studies/files/t2_en_cyukan_201603.pdf; see also Canadian Securities
Administrators, Staff Notice 24-312 (Apr. 2, 2015), http://www.osc.gov.on.ca/en/SecuritiesLaw_sn_20150402_24-312_t2-settlement.htm.
    \139\ See Canadian Securities Administrators, Staff Notice 24-
312 (Apr. 2, 2015), http://www.osc.gov.on.ca/en/SecuritiesLaw_sn_20150402_24-312_t2-settlement.htm.
---------------------------------------------------------------------------

III. Discussion

A. Proposal

1. Current Rule 15c6-1
    The Commission's adoption of Exchange Act Rule 15c6-1 created a
standard settlement cycle for broker-dealer transactions.\140\ The
Commission took this step in part because it believed that implementing
faster settlement of securities transactions and improving the
clearance and settlement process would better protect investors.\141\
Rule 15c6-1(a) provides that, unless otherwise expressly agreed by the
parties at the time of the transaction, a broker-dealer is prohibited
from entering into a contract for the purchase or sale of a security
(other than an exempted security, government security, municipal