the concepts of promptly transmitting funds and promptly delivering
securities are incorporated in other provisions of the financial
responsibility rules.\316\ Under the amendment to Rule 15c6-1(a), the
timeframes included in these rules will be one business day closer to
the trade date.
---------------------------------------------------------------------------

    \314\ 17 CFR 240.15c3-3(m).
    \315\ 17 CFR 240.15c3-1(c)(9).
    \316\ See, e.g., 17 CFR 240.15c3-1(a)(2)(i), (a)(2)(v); 17 CFR
240.15c3-3(k)(1)(iii), (k)(2)(i), (k)(2)(ii); 17 CFR 240.17a-
5(e)(1)(A); 17 CFR 240.17a-13(a)(3).
---------------------------------------------------------------------------

    The Commission believes that shortening these timeframes will not
materially affect the costs that broker-dealers are likely to incur to
meet their Regulation SHO obligations and obligations under the
Commission's financial responsibility rules after the settlement date.
Nevertheless, the Commission acknowledges that a shorter settlement
cycle could affect the processes by which broker-dealers manage the
likelihood of incurring these obligations. For example, broker-dealers
may currently have in place inventory management systems that help them
avoid failing to deliver securities by T+3. Broker-dealers may incur
incremental costs in order to update these systems to support a shorter
settlement cycle.
    In cases where market participants will need to adjust the way in
which they comply with other Commission rules, the magnitude of the
costs associated with these adjustments is difficult to quantify. As
noted above, market participants employ a wide variety of strategies to
meet regulatory obligations. For example, broker-dealers may ensure
that they have securities available to meet their obligations by using
inventory management systems or they may choose instead to borrow
securities. An estimate of costs is further complicated by the
possibility that market participants could change their compliance
strategies in response to the shortened standard settlement cycle.
However, the Commission notes that some of the adjustment costs for
compliance with other Commission rules, such as the stock loan recall
requirements of Regulation SHO, and the prospectus delivery
requirements of Securities Act Rule 172 are included in the cost
estimates we provide in Part VI.C.5.\317\
---------------------------------------------------------------------------

    \317\ Stock loan recall and prospectus delivery requirements
were explicitly listed in the set of process updates necessary for
T+2 in the T+2 Playbook, which was used to form our upper bound cost
estimates. For the SIFMA survey cost estimates which the Commission
uses as a lower bound for cost estimates, the Commission assumes
that survey responders have incorporated these costs into their
estimates.
---------------------------------------------------------------------------

4. Effect on Efficiency, Competition, and Capital Formation
    A shorter standard settlement cycle will improve the efficiency of
the clearance and settlement process through several channels. The
Commission believes that the primary effect that a shorter settlement
cycle would have on the efficiency of the settlement process would be a
reduction in the credit, market, and liquidity risks that broker-
dealers, CCPs, and other market participants are subject to during the
standard settlement cycle. A shorter standard settlement cycle will
generally reduce the volume of unsettled transactions that could
potentially pose settlement risk to counterparties. By shortening the
period between trade execution and settlement, trades can be settled
with less aggregate risk to counterparties or the CCP. A shorter
standard settlement cycle may also decrease liquidity risk by enabling
market participants to access the proceeds of their transactions
sooner, which may reduce the cost market participants incur to handle
idiosyncratic liquidity shocks (i.e., liquidity shocks that are
uncorrelated with the market). That is, because the time interval
between a purchase/sale of securities and payment is reduced by one
day, market participants with immediate payment obligations that they
could cover by selling securities would be required to obtain short-
term funding for one less business day.\318\ As a result of reduced
cost associated with covering their liquidity needs, market
participants may, under particular circumstances, be able to shift
assets that would otherwise be held as liquid collateral towards more
productive uses, improving allocative efficiency.\319\ Several
commenters made similar arguments, noting the benefits of reduced
liquidity risk and reduced collateral requirements.\320\
---------------------------------------------------------------------------

    \318\ See supra Part VI.B.2.
    \319\ See supra Part VI.A for more on collateral and allocative
efficiency.
    \320\ SIFMA at 15, ICI at 4-5, FIF at 2, WFA at 2. The SIFMA
comment letter stated that CCPs will be better positioned to serve
as a source of stability and efficiency within the clearance and
settlement system when there is a shorter period of time during
which they are exposed to credit, market, and liquidity risks, and
provided DTCC's estimate of a reduction of nearly $1.36 billion in
average daily clearing fund requirements for DTCC member firms (in
the absence of NSCC's accelerated trade guaranty). The ICI letter
also discussed the reduction in credit, market, and liquidity risk,
and added that this will reduce liquidity gaps and enhance cash
management for investment advisers and mutual funds as well as other
institutional investors. WFA stated that a shortened settlement
cycle would reduce systemic risks, free up capital, standardize
global transaction settlement, and better meet customers' needs.
---------------------------------------------------------------------------

    In addition, a shorter standard settlement cycle may increase price
efficiency through its effect on credit risk exposures between
financial intermediaries and their customers. In particular, a prior
study noted that certain intermediaries that transact on behalf of
investors, such as broker-dealers, may be exposed to the risk that
their customers default on payment obligations when the price of
purchased securities declines during the settlement cycle.\321\ As a
result of the option to default on payment obligations, customers'
payoffs from securities purchases resemble European call options and,
from a theoretical standpoint, can be valued as such. Notably, the
value of European call options are increasing in the time to maturity
\322\ suggesting that the value of call options held by customers who
purchase securities is increasing in the length of the settlement
cycle. In order to compensate itself for the call option that it
writes, an intermediary may include the cost of these call options as

part of its transaction fee and this cost may become a component of
bid-ask spreads for securities transactions. By reducing the value of
customers' option to default by reducing the option's time to maturity,
a shorter standard settlement cycle may reduce transaction costs in
U.S. securities markets.\323\ In addition, to the extent that any
benefit buyers receive from deferring payment during the settlement
cycle is incorporated in securities returns,\324\ the amendment to Rule
15c6-1, as adopted, may reduce the extent to which these returns
deviate from returns consistent with changes to fundamentals.
---------------------------------------------------------------------------

    \321\ See Madhavan et al., supra note 240.
    \322\ All other things equal, an option with a longer time to
maturity is more likely to be in the money given that the variance
of the underlying security's price at the exercise date is higher.
    \323\ One commenter agreed that a shorter settlement cycle could
result in lower transactions costs. See Newill.
    \324\ See supra Part VI.B.2.
---------------------------------------------------------------------------

    The Commission believes that the amendment to Rule 15c6-1(a) will
likely require market participants to incur costs related to
infrastructure upgrades and will likely yield benefits to market
participants, largely in the form of reduced financial risks related to
settlement. As a result, the Commission believes that the amendment to
Rule 15c6-1(a) could affect competition in a number of different, and
potentially offsetting, ways.
    The prospective reduction in financial risks related to shortening
the standard settlement cycle may represent a reduction in barriers to
entry for certain market participants. Reductions in the financial
resources required to cover an NSCC member's clearing fund requirements
that result from a shorter standard settlement cycle could encourage
financial firms that currently clear transactions through NSCC clearing
members to become clearing members themselves. Their entry into the
market could promote competition among clearing members at NSCC.
Furthermore, if a reduction in settlement risks results in lower
transaction costs for the reasons discussed above, market participants
that were, on the margin, discouraged from supplying liquidity to
securities markets due to these costs could choose to enter the market
for liquidity suppliers, increasing competition.
    At the same time, the Commission acknowledges that the
technological and operational changes required to enable a shorter
standard settlement cycle could adversely affect competition. Among
clearing members, where such process improvements might be necessary to
comply with the shorter standard settlement cycle required under the
amendment to Rule 15c6-1(a), the cost associated with compliance might
create barriers to entry, because new firms will incur higher fixed
costs associated with a shorter standard settlement cycle if they wish
to enter the market. Clearing members might choose to comply by
upgrading their systems and processes or may choose instead to exit the
market for clearing services. The exit of clearing members could have
negative consequences for competition between clearing members.
Clearing activity tends to be concentrated among larger broker-dealers,
and the exit of clearing members could result in further concentration
and additional market power for those clearing members that
remain.\325\
---------------------------------------------------------------------------

    \325\ See id.
---------------------------------------------------------------------------

    Alternatively, some current clearing members may choose to comply
by ceasing to be clearing members and instead outsourcing their
operational needs to third-party service providers. Use of third-party
service providers may represent a reasonable response to the
operational costs associated with the amendment to Rule 15c6-1(a).
While the costs associated with the amendment to Rule 15c6-1(a) may
have adverse effects on competition between clearing members, including
by increasing barriers to entry for broker-dealers who wish to become
clearing member, the Commission believes that the use of third-party
service providers may mitigate them. This is because, to the extent
that third-party service providers are able to spread the fixed costs
of compliance across a larger volume of transactions than their
clients, the Commission believes that the use of third-party service
providers might impose a smaller compliance cost on clearing members,
including smaller broker-dealers, than if these firms directly bore the
costs of compliance.
    Existing market power may also affect the distribution of
competitive impacts stemming from the amendment to Rule 15c6-1(a)
across different types of market participants. While, as noted above,
reductions in risk could promote competition among clearing members and
liquidity suppliers, these groups may benefit to differing degrees,
depending on the extent to which they are able to capture the benefits
of a shortened standard settlement cycle. For example, clearing brokers
tend to be larger than other broker-dealers,\326\ and may generally be
able to appropriate more of the savings from clearing fund deposit
reductions for themselves if they have market power relative to their
customers by passing only a small portion of savings through to their
customers through fees or transactions costs. However, those broker-
dealers that predominantly serve retail investors may be in a better
bargaining position relative to those that predominantly serve
institutional investors, and therefore may capture more of the benefits
stemming from the amendment to Rule 15c6-1(a). Likewise, broker-dealers
that serve retail investors may similarly be able to use their market
power relative to their customers to retain more of the clearing fund
deposit reduction as profits by maintaining their transaction costs and
fees instead of passing these through to their customers. Institutional
investors may be in a relatively better bargaining position by virtue
of their large size and may be more likely to successfully negotiate
lower fees or transaction costs and share in the savings associated
with lower clearing fund deposits.
---------------------------------------------------------------------------

    \326\ Id.
---------------------------------------------------------------------------

    Finally, a shorter standard settlement cycle could improve the
capital efficiency of the clearance and settlement process, which would
promote capital formation in U.S. securities markets and in the
financial system generally.\327\ A shorter standard settlement cycle
would reduce the amount of time that collateral must be held for a
given trade, thus freeing the collateral to be used elsewhere earlier.
Additionally, one commenter estimated that the move to a T+2 standard
settlement cycle would reduce NSCC clearing fund deposits by an average
of almost 9%, which translates into approximately $533 million of freed
capital for NSCC's members.\328\ The greater collateral efficiency
promoted by a shorter settlement cycle might also indirectly promote
capital formation for market participants in the financial system in
general, because the proceeds from purchases and sales will be
available to market participants faster, and allow those assets to be
used for other purposes sooner. This would improve capital efficiency,
as a given amount of collateral can support a larger amount of economic
activity.
---------------------------------------------------------------------------

    \327\ See supra Part VI.C.1. and Part VI.C.4. for more
discussion about capital formation and efficiency.
    \328\ SIFMA at 10. The SIFMA comment letter also noted that DTCC
estimated a reduction of nearly $1.36 billion in average daily
clearing fund requirements for DTCC member firms in the absence of
NSCC's accelerated trade guaranty.
---------------------------------------------------------------------------

5. Quantification of Direct and Indirect Effects of a T+2 Settlement
Cycle
    Prior to the T+2 Proposing Release, industry groups released cost
estimates for compliance with a shorter standard settlement cycle,
including the SIA, the ISC, and BCG. In response to the T+2 Proposing
Release, SIFMA and ICI

retained the services of Deloitte & Touche LLC to analyze the results
of the Industry Cost Survey that they conducted of asset managers,
broker-dealers, and custody banks, as well as service bureaus and
DTCC.\329\ This survey provides cost estimates for the investments
necessary for a T+2 standard settlement cycle. This economic analysis
first summarizes the most recent cost estimates provided by commenters
in the subsection immediately below and then, in the following
subsections, provides the Commission's evaluation of these estimates as
part of a discussion of the potential direct and indirect compliance
costs related to the amendment to Rule 15c6-1(a).
---------------------------------------------------------------------------

    \329\ SIFMA at 10.
---------------------------------------------------------------------------

a. Industry Estimates of Costs and Benefits
    The SIFMA survey cost estimates have several advantages over the
BCG Study cost estimates published in 2012. First, because the SIFMA
survey cost estimates are more recent, they may take into account
technological innovations that have occurred since 2012 that may have
changed the cost of upgrades that a shorter standard settlement cycle
could necessitate. In addition, the SIFMA survey cost estimates may
also incorporate information about more recent investments many market
participants have already made to support transition to a T+2
settlement cycle which may reduce the necessity of certain
upgrades.\330\ Finally, given the efforts of industry participants to
publicize the transition to a T+2 standard settlement cycle, market
participants may have a more concrete timeline upon which to base their
cost estimates.
---------------------------------------------------------------------------

    \330\ See SIFMA at 13.
---------------------------------------------------------------------------

    The Commission notes that some of the weaknesses of the BCG Study
also apply to the SIFMA survey. As both studies rely on respondents to
voluntarily provide information about their own cost estimates, the
cost estimates may not be representative of the costs of all market
participants. Given that the cost estimates in some industry categories
had significant variation, it is not clear to what extent the costs of
those industry participants who did not respond to the survey would
differ from those that did. However, the response rates in different
categories of industry participants varied significantly, which
suggests that the potential for selection bias for the cost estimates
may vary by participant category.
    The SIFMA survey concluded that the transition to a T+2 standard
settlement cycle would cost approximately $687 million in incremental
initial investments across industry constituent groups.\331\ This value
is higher than the $550 million total cost estimate from the BCG Study
in conducted in 2012.\332\ The SIFMA survey contained 87 responses
segmented by business model, including asset managers, clearing broker-
dealers, introducing broker-dealers, self-clearing broker-dealers,
custody banks, and service providers, to produce an average cost for
the category of firm. The Commission's entity estimates for each
category of firm from the T+2 Proposing Release were used to estimate
the size of each category, and to produce the total cost estimate. In
addition, the survey's estimates were grouped by the size of the firm,
with this grouping based on assets under management (``AUM'') for asset
managers and on annual revenues for sell side and clearing firms.\333\
---------------------------------------------------------------------------

    \331\ SIFMA at 24. The commenter stated its belief that these
costs, while significant, reflect that its members and other market
participants would bear the costs of the transition to a T+2
settlement cycle individually and by segment both reasonably and
proportionately. The commenter further stated that the survey
indicated that costs borne by various segments could be reduced
because investments already made in system changes for firms
operating in jurisdictions that maintain a T+2 settlement
environment and widespread use of service bureaus to provide
clearance and settlement services include the changes needed to
support the initiative. SIFMA at 10. In addition, one other
commenter stated that it does not believe the proposed amendment
will impose any burdens on the industry in addition to those
necessary to implement the industry initiative to move to T+2.
Fidelity at 6.
    \332\ SIFMA at 10.
    \333\ SIFMA at 10-11. There was a broad range of firm sizes and
business models, with asset managers with AUM ranging from $20
billion to over $200 billion and annual revenues of broker-dealers
ranging from under $250 million to over $1 billion.
---------------------------------------------------------------------------

    The investment costs for asset managers were estimated to be
$74,000 per asset manager, and the total cost for all asset managers
would be $71,410,000.\334\ The 26 asset managers that responded to the
survey represented approximately 48% of ICI fund members' assets in
open ended mutual funds. The survey estimate for broker-dealers
(clearing for others and self-clearing) is approximately $2,690,000,
with the total cost for all broker-dealers (clearing for others and
self-clearing) estimated to be $500,340,000.\335\ The commenter noted
that broker-dealer respondents provided cost estimates that varied
significantly, and that some self-clearing firms reported much lower
costs due to their use of third party service providers and the fact
that some firms have already made the investments necessary to support
a move to a T+2 settlement cycle given their presence in non-U.S.
markets that operate on a T+2 settlement cycle. At the same time, other
self-clearing firms reported much higher costs, up to $15.6 million.
---------------------------------------------------------------------------

    \334\ SIFMA at 24.
    \335\ Id.
---------------------------------------------------------------------------

    The survey noted that introducing firms reported de minimis direct
implementation costs, and estimates that each introducing broker-dealer
would incur $30,000 of client outreach and education costs. The survey
estimated that custodian banks would have an average cost of $782,000,
with a total cost for all custodian banks of $41,446,000.\336\ The
average cost estimate for service providers was $3,006,000, and the
total cost estimate for all service providers was $18,036,000. As in
the case for broker-dealers, the commenter notes that there was
significant variation in cost estimates, as some service providers
reported having already made the necessary investments. In addition,
the survey notes that survey respondents were instructed not to include
the costs of third party service party providers in their responses, to
avoid double counting. The survey estimates that the average cost for
ETC providers was $315,000 each, with the total cost for all Matching/
ETC providers at $945,000. The estimated cost for NSCC and DTC was $10
million each, which was provided by DTCC.
---------------------------------------------------------------------------

    \336\ Id.
---------------------------------------------------------------------------

b. Commission Estimates of Costs
    The amendment to Rule 15c6-1(a) will generate direct and indirect
costs for market participants, who may need to change multiple systems
and processes to comply with a T+2 standard settlement cycle. As noted
in Part IV above, the T+2 Playbook included a timeline with milestones
and dependencies necessary for a transition to a T+2 settlement cycle,
as well as activities that market participants should consider in
preparation for the transition. The Commission believes that the
majority of the activities of migration to a T+2 standard settlement
cycle will stem from behavior modification of market participants and
systems testing, and thus the majority of the costs of migration will
be from labor. These modifications may include a compression of the
settlement timeline, as well as an increase in the fees that brokers
may impose on their customers for trade failures.
    As noted by several commenters, many market participants work with

third-party service providers for activities such as trade processing
and asset servicing, and thus may only indirectly bear the costs of the
requirements. In addition, some market participants already have the
processes and systems in place to accommodate a T+2 settlement cycle or
would be able to adjust to a T+2 settlement cycle with minimal cost.
For example, some market participants may already have the systems and
processes to reduce the amount of time needed for trade affirmation and
matching.\337\ These market participants may thus bear a significantly
lower cost to update their trade affirmation to comply with a T+2
standard settlement cycle.
---------------------------------------------------------------------------

    \337\ See BCG Study, supra note 247, at 23; SIFMA at 4-5.
---------------------------------------------------------------------------

    In the following section, the Commission examines several
categories of market participants and estimates the compliance costs
for each category. The Commission acknowledges that many entities are
already undertaking activities to support a migration to a T+2
settlement cycle in anticipation of the amendment. However, to the
extent that the costs of these activities have already been incurred,
the Commission considers these as sunk costs and therefore does not
include them in the analysis below.
(1) FMUs--CCPs and CSDs
    NSCC and DTC systems and operations will require adjustment to
support a T+2 standard settlement cycle. According to the T+2 Playbook
and the ISC White Paper, regulation-dependent planning, implementation,
testing, and migration activities associated with the transition to a
T+2 settlement cycle could last up to five quarters.\338\ In the T+2
Proposing Release, the Commission initially estimated that these
activities will impose a one-time compliance cost of $10.9 million
\339\ for DTC and NSCC each. The SIFMA survey stated that DTCC reported
their estimated costs to be $10 million each, $6 million for the build
out necessary for the test environment and $4 million for T+2 system
modifications.\340\ These self-reported costs do not significantly
differ from the Commission's nor the BCG Study's preliminary estimate.
---------------------------------------------------------------------------

    \338\ See T+2 Playbook, supra note 209, at 11. To monetize the
internal costs, Commission staff used data from the SIFMA
publications. Our time estimates account for the fact that a portion
of the timeline has already elapsed in anticipation of a transition
to a T+2 standard settlement cycle, and those costs are already
sunk.
    \339\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity, industry
testing, and migration lasting five quarters. We assume 10
operations specialists (at $129 per hour), 10 programmers (at $256
per hour), and 1 senior operations manager (at $345/hour), working
40 hours per week. (10 x $129 + 10 x $256 + 1 x $345) x 5 x 13 x 40
= $10,907,000.
    \340\ SIFMA at 25; DTCC Letter at 3.
---------------------------------------------------------------------------

(2) Matching/ETC Providers--Exempt Clearing Agencies
    Matching/ETC Providers may need to adapt their trade processing
systems to comply with a T+2 settlement cycle. This may include actions
such as updating reference data, configuring trade match systems, and
configuring trade affirmation systems to affirm trades by 12:00 p.m. on
T+1. Matching/ETC Providers will also need to conduct testing and
assess post-migration activities. In response to the SIFMA survey,
Matching/ETC providers indicated an average cost of $315,000 each.
Given that two out of the three Matching/ETC providers responded to the
survey, the Commission believes that the survey responses support a
lower bound of the per-entity cost estimate to $315,000. However, the
Commission acknowledges that some Matching/ETC providers may have a
higher or lower costs than others based on the volume of transactions
that they process as well as the extent to which the ETC provider has
already made the necessary investments for a T+2 settlement cycle.
Thus, the Commission continues to believe that the $10.9 million per
entity estimate cost is a reasonable upper bound on the per-entity cost
estimate for Matching/ETC Providers. The Commission expects that
Matching/ETC providers will incur minimal ongoing costs after the
initial transition to a T+2 settlement cycle because the Commission
believes that the majority of the costs of migration to a T+2
settlement cycle entail behavioral changes of market participants and
pre-migration testing.
(3) Market Participants--Investors, Broker-Dealers, and Custodians
    The overall compliance costs that a market participant incurs in
connection with the amendment to Rule 15c6-1(a) will depend on the
extent to which it is directly involved in functions related to
clearance and settlement, asset servicing, and other activities. For
example, retail investors may bear few (if any) direct costs in a
transition to a T+2 standard settlement cycle, because their respective
broker-dealer handles the back-office functions of each transaction.
However, as is discussed below, this does not imply that retail
investors will not face indirect costs from the transition, such as
those passed through from broker-dealers or banks.
    Institutional investors may need to configure systems and update
reference data, which may also include updates to trade funding and
processing mechanisms, to operate in a T+2 environment. In the T+2
Proposing Release, the Commission preliminarily estimated that these
would require an initial expenditure of $2.32 million per entity.\341\
---------------------------------------------------------------------------

    \341\ T+2 Proposing Release, supra note 1, 81 FR at 69275.
---------------------------------------------------------------------------

    The SIFMA survey estimated that asset managers would have an
average cost of $74,000. The survey received 26 responses from asset
managers, which represented $7.8 trillion in assets under management
(``AUM''), approximately 48% of total ICI fund members' assets in open
ended mutual funds. The average cost varied depending on the asset
manager's size, with those with $20 billion to $250 billion in AUM with
an approximate average cost estimate of $151,000, while the largest
asset managers with over $200 billion in AUM had lower average costs of
approximately $58,000. The SIFMA survey argued that this difference in
cost may reflect the fact that larger asset managers may have already
made system changes to support their activity in non-U.S. markets that
have already moved to a T+2 settlement cycle.\342\ Asset managers
represent a subset of the institutional investors that will bear costs
as a result of the amendment. Based on these survey responses, the
Commission acknowledges that a portion of institutional investors will
likely bear lower costs than was initially estimated, and the
Commission is revising the lower bound of its per-entity cost estimate
to the SIFMA survey estimates $74,000 per institutional investor.
However, these costs may vary depending on the extent to which a
particular institutional investor has already automated their trade
processes, and the Commission is maintaining its initial estimate of
$2.32 million as an upper bound cost estimate. The Commission expects
institutional investors will incur minimal ongoing direct compliance
costs after the initial transition to a T+2 standard settlement cycle.
---------------------------------------------------------------------------

    \342\ See SIFMA at 24.
---------------------------------------------------------------------------

    Broker-dealers that serve institutional investors will not only
need to configure their trading systems and update reference data, but
may also need to update trade confirmation/affirmation systems,
documentation, cashiering and asset servicing functions, depending on
the roles they assume with respect to their clients. In the T+2
Proposing Release, the Commission preliminarily

estimated that, on average, each of these broker-dealers would incur an
initial compliance cost of up to $4.72 million.\343\ We expect that
these broker-dealers will incur minimal ongoing direct compliance costs
after the initial transition to a T+2 standard settlement cycle.
---------------------------------------------------------------------------

    \343\ T+2 Proposing Release, supra note 1, 81 FR at 69275.
---------------------------------------------------------------------------

    Broker-dealers that serve retail investors may also need to spend
significant resources to educate their clients about the shorter
settlement cycle. In the T+2 Proposing Release, the Commission
preliminarily estimated that these broker-dealers would incur an
initial compliance cost of up to $8.6 million each.\344\ Retail
investors may require additional education and customer service, which
may impose costs on their broker-dealers. The Commission preliminarily
estimated that a reasonable upper bound for the costs associated with
this requirement is $30,000 per broker-dealer.\345\
---------------------------------------------------------------------------

    \344\ Id.
    \345\ This estimate is based on the assumption that a broker-
dealer chooses to educate customers using a 10-minute view that
takes at most $3,000 per minute to produce. See Crowdfunding,
Exchange Act Release No. 76324 (Oct. 30, 2015), 80 FR 71388, 71529 &
n.1683 (Nov. 16, 2015).
---------------------------------------------------------------------------

    The SIFMA survey reported that introducing firms reported a de
minimis direct implementation investment cost, as the necessary
investments were made at their clearing firms and other service
providers.\346\ The survey also stated that introducing firms would
likely only have costs related to employee education and outreach to
customers, and used the Commission estimate of $30,000 for each
introducing firm for these costs.\347\ Given the survey responses, the
Commission believes that the total average cost of $30,000 is an
appropriate lower bound for the per-entity cost for introducing firms,
and that the previous estimate from the T+2 Proposing Release of
$8,630,000 remains an appropriate upper bound.
---------------------------------------------------------------------------

    \346\ SIFMA at 12.
    \347\ See SIFMA at 24.
---------------------------------------------------------------------------

    Assuming all clearing and introducing broker-dealers must educate
retail customers, the total costs of retail investor education would be
approximately $50.5 million for all broker-dealers.\348\
---------------------------------------------------------------------------

    \348\ Calculated as $30,000 per broker-dealer x (186 broker-
dealers reporting as self-clearing + 1,497 broker-dealers reporting
as introducing but not self-clearing) = $50,490,000.
---------------------------------------------------------------------------

    Custodian banks will need to update their asset servicing functions
to comply with a shorter settlement cycle. In the T+2 Proposing
Release, the Commission preliminarily estimated that custodian banks
would incur an initial compliance cost of $1.16 million per custodian
bank.\349\ The SIFMA survey estimated that the average cost for each
custodian bank would be approximately $782,000, which the Commission
uses as a lower bound estimate for the average cost. In addition, the
Commission expects custodian banks to incur minimal ongoing compliance
costs after the initial transition because most of the costs will stem
from pre-migration updates and testing.
---------------------------------------------------------------------------

    \349\ See T+2 Proposing Release supra note 1, 81 FR at 69275.
---------------------------------------------------------------------------

(4) Indirect Costs
    In estimating these implementation costs, we note that market
participants who bear the direct costs of the actions they undertake to
comply with Rule 15c6-1 may pass these costs on to their customers. For
example, retail and institutional investors might not directly bear the
cost of all of the necessary upgrades for a T+2 settlement cycle, but
might indirectly bear these costs as their broker-dealers might
increase their fees to amortize the costs of updates among their
customers. The Commission is unable to quantify the overall magnitude
of the indirect costs that retail and institutional investors may bear,
because it will depend on the market power of each broker-dealer, and
its willingness to pass on the costs of migration to a T+2 standard
settlement cycle to their customers. However, the Commission believes
that in situations where broker-dealers have little or no competition,
broker-dealers may at most pass on the entire cost of the initial
investment to their customers. As discussed above, this could be as
high as $4.72 million for broker-dealers that serve institutional
investors, and $8.6 million for broker-dealers that serve retail
investors. However, in situations where broker-dealers face heavy
competition for customers, broker-dealers may bear the costs of the
initial investment entirely, and avoid passing on these costs to their
customers.
    As noted in Part VI.A above, the ability of market participants to
pass implementation costs on to customers likely depends on their
relative bargaining power. For example, CCPs, like many other
utilities, exhibit many of the characteristics of natural monopolies
and, as a result, may have market power, particularly relative to
broker-dealers who submit trades for clearing. This means that they may
be able to share implementation costs they directly face related to
shortening the settlement cycle with broker-dealers through higher
clearing fees. Conversely, if institutional investors have market power
relative to broker-dealers, broker-dealers may not be in a position to
impose indirect costs on them.
(5) Industry-Wide Costs
    To estimate the aggregate, industry-wide cost of a transition to a
T+2 standard settlement cycle, the Commission takes its per-entity
estimates and multiplies them by its estimate of the respective number
of entities. The Commission estimates that there are 965 buy-side
firms, 186 broker-dealers, and 53 custodian banks.\350\ Additionally,
as noted in Part III.C.1.c above, there are three Matching/ETC
Providers, and 1,683 broker-dealers that will incur investor education
costs. One way to establish a total industry initial compliance cost
estimate would be to multiply each estimated per-entity cost by the
respective number of entities and sum these values, which would result
in an estimate of $4.0 billion.\351\ The Commission, however, believes
that this estimate is likely to overstate the true initial cost of
transition to a T+2 settlement cycle for a number of reasons, and thus
uses this value as an upper bound for our cost estimates. First, the
Commission's per-entity estimates do not account for the heterogeneity
in market participant size, which may have a significant impact on the
costs that market participants face. While the SIFMA survey and the BCG
Study included both estimates of the number of entities in different
size categories as well as estimates of costs that an entity in each
size category is likely to incur, it did not provide sufficient
underlying information to allow the Commission to estimate the
relationship between market participant size and compliance cost and
thus the Commission cannot produce comparable estimates.
---------------------------------------------------------------------------

    \350\ The estimate for the number of buy-side firms is based on
the Commission's 13(f) holdings information filers with over $1
billion in AUM, as of December 31, 2015. The estimate for the number
of broker-dealers is based on FINRA FOCUS Reports of firms reporting
as self-clearing. See supra note 258 and accompanying text. The
estimate for the number of custodian banks is based on the number of
``settling banks'' listed in DTC's Member Directories, available at
http://www.dtcc.com/client-center/dtc-directories.
    \351\ Calculated as 186 broker-dealers (self-clearing) x
$8,606,000 + 1683 broker-dealers (self-clearing and introducing) x
$30,000 + 53 custodian banks x $1,159,000 + 965 buy-side firms x
$2,319,000 + 3 Matching/ETC Providers x $10,900,000 + 2 FMUs x
$10,900,000 = $ 4,005,034,800.
---------------------------------------------------------------------------

    Second, the Commission's estimate assumes that broker-dealers will
not repurpose existing systems that allow them to participate in
foreign markets that require settlement by T+2. For example,
approximately 99 of the

broker-dealers that reported self-clearing also reported that they were
affiliates or subsidiaries of foreign broker-dealers or banks. To the
extent that a broker-dealer has a foreign affiliate or parent that
already has systems in place to support T+2 settlement in foreign
markets, it may bear lower costs under the proposed amendment to Rule
15c6-1(a) than the estimate above. Removing all 99 of these broker-
dealers from the computation of total industry initial compliance cost
estimate presented above results in a reduction of this estimate to
approximately $3.2 billion.\352\ One commenter stated that those firms
that had already made investments to support the move to T+2 settlement
in Europe were expected to be able to draw on their experience to rely
on already modified systems to support the move in their U.S.
operations.\353\
---------------------------------------------------------------------------

    \352\ Calculated as 87 broker-dealers (self-clearing) x
$8,606,000 + 1683 broker-dealers (self-clearing and introducing) x
$30,000 + 53 custodian banks x $1,159,000 + 965 buy-side firms x
$2,319,000 + 3 Matching/ETC Providers x $10,900,000 + 2 FMUs x
$10,900,000 = $ 3,153,040,800.
    \353\ See SIFMA at 12.
---------------------------------------------------------------------------

    Third, investments by third-party service providers may mean that
many of the estimated compliance costs for market participants are
duplicated. The SIFMA survey and BCG Study suggests that the use of
service providers may yield a savings of $194 million, reducing
aggregate costs by approximately 29%.\354\ Based on information
gathered from the recent available financial reports of service
providers, the Commission believes that a reasonable range of estimates
for the average cost reduction associated with service providers across
all entities could be between 16% and 32%.\355\ Applying this range to
the total industry initial compliance cost estimate presented above
yields a range of total industry initial compliance cost estimates
between $2.7 billion and $3.4 billion. One commenter supported this
point, stating that ``[s]ome self-clearing firms reported that they
anticipate making only de minimis investments beyond client
communications and staff education, due to their use of third party
service providers that will make the bulk of necessary investments.''
\356\
---------------------------------------------------------------------------

    \354\ See BCG Study supra note 247, at 79.
    \355\ Commission Staff hand collected information on operating
margins for business segments related to settlement services of
three large service providers for fiscal years 2013, 2014, and 2015.
The median estimate was 16.4%. To arrive at the lower bound of 16%,
the Commission assumes service providers capture all of the cost
reduction they provide; to arrive at the upper bound, the Commission
assumes that service providers share half of the overall cost
reduction with their customers. Generally, the extent to which
service providers share the efficiencies they provide with their
customers may depend on service providers' bargaining power. See,
e.g., Binmore, Ken, Ariel Rubinstein, and Asher Wolinsky, The Nash
Bargaining Solution In Economic Modelling, The RAND Journal of
Economics, 17, no. 2, Summer, 1986, at 176-188.
    \356\ See SIFMA at 12.
---------------------------------------------------------------------------

    Taking into account potential cost reductions due to repurposing
existing systems and using service providers as described above, the
Commission initially estimated that $2.1 billion to $4.2 billion
represented a reasonable range for the total industry initial
compliance costs.\357\ Having reviewed the survey data provided by
SIFMA, the Commission believes that compliance costs for some types of
entities may be lower than initially estimated in the T+2 Proposing
Release and has revised down the lower bound of this range to $687
million. However, the Commission notes that the survey information also
suggested substantial variation in per entity costs and, as a result,
the Commission believes that $4.2 billion continues to be a reasonable
upper bound for this range.
---------------------------------------------------------------------------

    \357\ See T+2 Proposing Release, supra note 1, 81 FR at 69276.
---------------------------------------------------------------------------

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

D. Consideration of Alternatives

1. Shift to a T+1 Standard Settlement Cycle
    Although the Commission proposed a two day standard settlement
cycle, the Commission acknowledged that amending Rule 15c6-1(a) to
further shorten the standard settlement cycle (e.g., T+1 or T+0) could
potentially result in further risk reduction in the national clearance
and settlement system.\358\ The T+2 Proposing Release requested comment
on whether the standard settlement cycle should be shortened to T+1 or
some other shorter settlement cycle, as well as the reasons for or
against such further shortening.\359\ The Commission stated its
preliminary belief that shortening the standard settlement cycle to T+2
is the appropriate step to take at this time because implementing a T+1
or T+0

settlement cycle could require market participants to incur
comparatively larger investments and would necessitate more lead time
and greater coordination.\360\
---------------------------------------------------------------------------

    \358\ T+2 Proposing Release, supra note 1, 81 FR at 69259.
    \359\ Id. at 69262.
    \360\ Id. at 69259.
---------------------------------------------------------------------------

    The Commission has considered standard settlement cycles shorter
than T+2, along with the related comments, and does not believe that a
shorter settlement cycle is appropriate at this time.\361\ The
Commission believes that although a move to a T+1 standard settlement
cycle could have similar qualitative benefits of market, credit, and
liquidity risk reduction as a move to a T+2 standard settlement cycle,
the types of investments and changes necessary to move to a T+1
standard settlement cycle will also introduce greater costs for market
participants.
---------------------------------------------------------------------------

    \361\ The Commission noted in the T+2 Proposing Release that the
Commission's Investor Advisory Committee (``IAC'') issued in
February 2015 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. See 81 FR at 69255. 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. 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 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.
---------------------------------------------------------------------------

    As stated earlier, a T+1 standard settlement cycle might result in
a larger reduction in certain settlement risks than would result from a
T+2 standard settlement cycle because, as explained above, the risks
associated with counterparty default tend to increase with the passage
of time. Price volatility, as measured by the standard deviation of a
price, is concave in time, which means that as a period of time
increases, volatility will increase, but at a decreasing rate. This
suggests that the reduction in price volatility from moving from T+2
settlement to T+1 settlement is larger than the reduction in price
volatility from moving from T+3 settlement to T+2 settlement.
Similarly, assuming constant trading volume, the volume of unsettled
trades for a T+1 standard settlement cycle would be reduced again by
one-third, and, as a result, for any given adverse movement in prices,
the financial losses resulting from counterparty default will be two-
thirds less than those under a T+3 standard settlement cycle.
    A few commenters urged the Commission to adopt a T+1 or shorter
standard settlement cycle citing benefits similar to those of a T+2
standard settlement cycle, but greater in magnitude.\362\ One commenter
argued that the Commission should adopt a T+1 standard settlement cycle
precisely because it would require more investments and transformations
in securities processing.\363\ This commenter stated that while the
proposal constitutes an improvement over the status quo, the proposal
is ``woefully'' insufficient to properly protect market participants
from credit, market, and liquidity risks, safeguard the financial
system from excessive and unnecessary threats, and ensure the timely
processing of investors transactions. The commenter urged the
Commission to go further to mitigate these shortcomings, including by
moving without undue delay toward a T+1 standard based on STP. The
commenter stated that T+2 still constitutes an unreasonably lengthy
settlement process ``in this day and age,'' and effectively preserves
other suboptimal processes within the settlement cycle.\364\
---------------------------------------------------------------------------

    \362\ CFA at 1-4; Spydell; Parker.
    \363\ CFA at 1.
    \364\ CFA at 2, 3. More specifically, the commenter argued that
a longer cycle allows settlement processes to be structured in
inefficient ways that are iterative, redundant, and error prone, and
a T+2 settlement cycle does not necessarily address these issues
because, although a T+2 settlement cycle requires reducing the time
between steps in the settlement process, it does not necessarily
require the fundamental overhaul of settlement procedures so that
they are most efficient, automated, and least error-prone. While
acknowledging that a direct move to a T+1 settlement cycle would
require higher initial costs compared with a move to a T+2
settlement cycle, the commenter stated that those costs would be
``paid back'' in a relatively short amount of time.
    In addition, the commenter opposed what it characterized as the
industry coalescing around the idea that the Commission should adopt
at a `T+2' standard and then pause for further assessment of
industry readiness and appetite for a future move to T+1. The
commenter further argued that the industry has already proven it is
unwilling or unable to move collectively and in a timely manner
toward a shorter and more automated settlement cycle, even one that
is based on T+2 timeframe.
---------------------------------------------------------------------------

    An additional commenter stated that the proposal did not go far
enough to treat all investors equally and the settlement cycle should
be ``24 hours maximum and 1 hour at a minimum.'' \365\ Another
commenter stated that it was time to implement ``instantaneous''
settlement of trades, noting that the practical impact of longer
settlement cycles is that if he is ``actively trading,'' the commenter
would not have access to the proceeds of a transaction until it settled
and therefore had to keep funds ``un-invested'' at all times.\366\
---------------------------------------------------------------------------

    \365\ Spydell.
    \366\ Parker.
---------------------------------------------------------------------------

    Another commenter stated that cash account customers' transactions
handled as principal by the executing broker should be settled on a
next day (T+1) basis and that same day settlement of principal trades
may be possible. In support of these statements, the commenter observed
that it is common for execution, clearance, settlement, and custody to
be provided by a single entity or interrelated entities, and that when
this occurs, all aspects of the trade have occurred the instant that
execution has been recorded on the customer account. The commenter
further stated that these are effectively cash on delivery (``COD'')
transactions and require only the sweep of funds to/from an
individual's sweep account for their settlement. Finally, the commenter
noted that funds available for trading by individual accounts are
adjusted instantly following a trade, but when an outside sweep account
is used, the sweep account may adjust only at day's end.\367\
---------------------------------------------------------------------------

    \367\ Finn I.
---------------------------------------------------------------------------

    The Commission believes that the initial costs of complying with a
T+1 standard settlement cycle will be greater than with a T+2 standard
settlement cycle. Successful transition to a settlement cycle that is
shorter than T+2 could require larger investments by market
participants to adopt new systems and processes. The upgrades necessary
for a T+1 standard settlement cycle might include changes such as a
transformation of lending and foreign buyer processes, real-time or
near real-time trade processing capabilities, as well as a further
acceleration of the retail funding timeline, which would require larger
structural changes to the settlement process and more cross-industry
coordination than the upgrades for a T+2 standard settlement cycle
would. Because these upgrades could require more changes across
multiple markets and settlement systems, they may be more expensive to
implement than the upgrades necessary for T+2 settlement. Additionally,
the lead time and level of coordination by market participants required
to implement such changes to transition to a T+1 standard settlement
cycle would be longer and greater than the time and coordination
required to move to a T+2 standard settlement cycle, which could delay
the realization of the risk-reducing benefits of shortening the
settlement cycle and increase the risk that market

participants would not be able to transition to a T+1 standard
settlement cycle in a coordinated fashion.
    Several commenters argued against a move to a T+1 standard
settlement cycle at this time for similar reasons, citing the industry
coordination challenges, higher investment costs, and the longer time
needed to recoup the investment.\368\ One such commenter stated that
the implementation effort, in terms of system and process changes, is
considerably more to move to T+1, and that shifting efforts to achieve
T+1 at this time would only delay ``our ability'' to achieve the risk
reduction associated with the T+2 initiative.\369\ Another commenter
representing two of the registered clearing agencies that would be most
impacted by the T+2 proposal stated that shortening the settlement
cycle to T+0 or T+1 would present significant challenges and changes
for many industry members.\370\ The commenter further stated that
transitioning to a T+1 or T+0 model would likely require a
significantly larger effort across the industry due to the significant
investments required to react to major process changes in existing
business practices.\371\ In addition, the commenter noted, some firms
may incur significant investment costs when implementing new systems
and/or transitioning existing systems from batch mode of operation to
near real-time.\372\
---------------------------------------------------------------------------

    \368\ Thomson Reuters at 2, WFA at 3, MFA at 2, and DTCC Letter
at 4.
    \369\ Thomson Reuters at 2.
    \370\ DTCC Letter at 3.
    \371\ Id.
    \372\ Id.
---------------------------------------------------------------------------

    Another commenter expressed support for the Commission's proposal
and stated that the commenter does not believe consideration of
alternative settlement options is appropriate at this time.\373\ An
additional commenter noted its agreement with the reasons the
Commission's proposal provides for transitioning to T+2 rather than
T+1, and concurred that the costs associated with the T+2 proposal are
proportionate to the benefits to investors.\374\ The commenter further
stated that it was not sure a change to T+1 would justify the
additional expense to investors at this time, but did not provide any
data to support their statement.\375\
---------------------------------------------------------------------------

    \373\ WFA at 3.
    \374\ MFA at 2.
    \375\ Id.
---------------------------------------------------------------------------

    Two studies have examined the costs and benefits of a transition to
a T+1 settlement cycle. The BCG Study examined the costs and benefits
of a T+1 settlement cycle as an alternative to a T+2 settlement cycle,
while the SIA T+1 Business Case, published in 2000, examined only a T+1
settlement cycle.
    The BCG Study estimated that the transition to a T+1 settlement
cycle would cost the industry $1.77 billion in incremental investments
(compared to $550 million for a T+2 settlement cycle), with an annual
operational cost savings of $175 million per year and $35 million from
clearing fund reductions (compared to $170 million and $25 million per
year in a T+2 settlement cycle, respectively). Risk reduction benefits
were estimated to be $410 million for a T+1 settlement cycle (compared
to $200 million per year in a T+2 settlement cycle).\376\ Although the
Commission believes that these numbers cannot be fully accepted as cost
estimates for the amendment to Rule 15c6-1(a),\377\ the magnitude of
the difference between the BCG Study's T+2 and T+1 cost and benefit
estimates likely indicate additional larger structural changes
necessary to transition to a T+1 standard settlement cycle. However,
the Commission notes that these studies evaluated technology and
operations that were in use prior to 2012.
---------------------------------------------------------------------------

    \376\ See BCG Study, supra note 247, at 41.
    \377\ See supra Part VI.C.5.a.
---------------------------------------------------------------------------

    In addition, the SIA Business Case Report estimated the initial
investment cost of a shortened standard settlement cycle to T+1 to be
$8 billion, with net annual benefits of $2.7 billion per year. The
report estimated that broker-dealers would have an initial investment
of $5.4 billion, with net annual benefits of $2.1 billion per year;
asset managers would have an initial investment of $1.7 billion, with
net annual benefits of $403 million per year; custodians would have an
initial investment of $600 million, with net annual benefits of $307
million per year; and infrastructure service providers would have an
initial investment of $237 million, with net annual loss of $81 million
per year.\378\ Although the SIA estimates have higher costs and
benefits than the estimates in the BCG Study, the SIA estimates were
made in 2000, and are much older than the BCG Study estimates, which
were made in 2012. In the seventeen years since the publication of the
SIA Business Case Report, significant technological and industry
changes may have affected the costs and benefits of a T+1 standard
settlement cycle, which may limit the usefulness of the report's
estimates for assessing the costs and benefits of a T+1 standard
settlement cycle today.
---------------------------------------------------------------------------

    \378\ See SIA Business Case Report at 3.
---------------------------------------------------------------------------

    Further, the Commission believes that a move to a T+1 standard
settlement cycle could introduce certain financial risks and costs as a
result of its impact on transactions in certain foreign markets. As
discussed in the T+2 Proposing Release, the Commission believes that
shortening the settlement cycle further than T+2 at this time may
increase funding costs for market participants who rely on the
settlement of foreign currency exchange (``FX'') transactions to fund
securities transactions that settle regular way. As noted in the T+2
Proposing Release, because the settlement of FX transactions occurs on
T+2, market participants who seek to fund a cross-border securities
transaction with the proceeds of an FX transaction would, in a T+1 or
T+0 environment, be required to settle the securities transaction
before the proceeds of the FX transaction become available and would be
required to pre-fund securities transactions in foreign currencies.
Under these circumstances, a market participant would either incur
opportunity costs and currency risk associated with holding FX reserves
or be exposed to price volatility by delaying securities transactions
by one business day to coordinate settlement of the securities and FX
legs. In addition, shortening the settlement cycle to T+1 at this time
may make it more difficult for market participants to timely settle
cross-border transactions because the U.S. settlement cycle would not
be harmonized with non-U.S. markets that have already transitioned to a
T+2 settlement cycle.\379\ The disparity between the settlement cycles
would most likely increase the costs associated with such cross-border
transactions.
---------------------------------------------------------------------------

    \379\ For further discussion regarding the potential benefits of
harmonization of settlement cycles for market participants engaging
in cross-border transactions, see supra Part III.A.4.
---------------------------------------------------------------------------

    The Commission agrees that a successful transition to a settlement
cycle shorter than T+2 would require comparatively larger investments
by market participants to adopt new systems and processes, and the
additional lead time necessary to implement such an approach would
delay the realization of the expected benefits from a reduction of
credit, market, liquidity, and systemic risk that are expected to
result from shortening the standard settlement cycle to T+2.\380\ On
balance, for the reasons discussed herein the Commission believes that
it is appropriate to adopt a T+2 standard settlement cycle at this
time. However,

the Commission believes that establishing a T+2 settlement cycle does
not foreclose, and could promote, ongoing efforts by market
participants to explore in a meaningful and considered manner the
possibility of moving to further shorten the standard settlement cycle.
Further, the Commission notes that the costs incurred to transition to
a T+2 settlement cycle will likely impact the costs that may be
incurred for future reductions in the settlement cycle.
---------------------------------------------------------------------------

    \380\ Conditional on the availability of data and information,
the staff of the Commission will assess, among other things, the
impact of the rule on financial risk management in its report to the
Commission. See Part III.A.3.
---------------------------------------------------------------------------

2. Straight-Through Processing Requirement
    The Commission has also considered the consequences of mandating
specific clearance and settlement practices, such as STP, in lieu of
the amendment to Rule 15c6-1(a). STP involves the electronic entry of
trade details during the settlement process, which avoids the manual
entry and re-entry of trade details. By avoiding the manual entry of
trade details, STP can speed up the settlement process as well as
reduce error rates. However, the Commission believes that although many
of the costs and benefits of a T+2 standard settlement cycle could be
achieved by mandating specific clearance and settlement practices,
there are several reasons why mandating a shorter standard settlement
cycle may substantively differ from a specific practice requirement.
    First, the Commission believes that many of the amended rule's
benefits stem directly from the fact that the length of the settlement
cycle has been shortened, and not from the particular practices used to
comply with the amendment. As discussed above in Part III.A, the
Commission believes that shortening the standard settlement cycle is
likely to reduce a number of risks associated with securities
settlement, including credit and market risks that stem from
counterparty exposures. Moreover, the Commission believes that
intermediaries that manage these types of risk as a result of their
role in the clearance and settlement system may share a portion of
potential cost savings associated with reduced risks with market
participants. While the Commission acknowledges that an alternative
approach that primarily focuses on mandating STP may achieve some of
the operational benefits associated with a shortened standard
settlement cycle, such an approach may not reduce counterparty
exposures and attendant risks.
    Three of the commenters that have expressed support for a T+2 or
shorter settlement cycle have identified STP as an important practice
that would facilitate a shortened standard settlement cycle.\381\
However, no commenter argued specifically for the Commission to mandate
a STP requirement. While the Commission recognizes that STP may be a
natural enabler for a shorter settlement cycle, it may not be the most
efficient enabler available to firms. The Commission believes that
market participants have a variety of methods to comply with a T+2
standard settlement cycle, and may prefer the least costly method of
shortening the settlement cycle. By allowing market participants to
choose how to comply with a shorter standard settlement cycle, rather
than mandating a specific practice, the amendment to Rule 15c6-1(a) may
allow the market to realize the benefits of a shorter standard
settlement cycle at the lowest cost to market participants.
---------------------------------------------------------------------------

    \381\ See ICI at 5; SIFMA at 14; Bloomberg at 2.
---------------------------------------------------------------------------

    Additionally, mandating specific clearance and settlement practices
instead of mandating a shortened standard settlement cycle may have
adverse effects on competition in the market for back-office services.
Back-office service providers may have a variety of methods to help
their clients comply with a shorter settlement cycle, and mandating
specific clearance and settlement practices may adversely affect the
number of providers that market participants might use, and a reduction
in competition among back-office service providers that can comply with
required practices may result in higher compliance costs for market
participants. One commenter specifically argued against a mandate on
specific practices, citing to the potential for an adverse effect on
competition and innovation for back-office services.\382\
---------------------------------------------------------------------------

    \382\ Bloomberg at 2-3.
---------------------------------------------------------------------------

VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis has been prepared in
accordance with the Regulatory Flexibility Act (``RFA'').\383\ It
relates to the amendment to Rule 15c6-1(a) under the Exchange Act. An
Initial Regulatory Flexibility Analysis (``IRFA'') was prepared in
conjunction with the T+2 Proposing Release in September 2016.\384\ The
T+2 Proposing Release included, and solicited comment on, the IRFA.
---------------------------------------------------------------------------

    \383\ 5 U.S.C. 604.
    \384\ See Proposing Release, supra note 1, 81 FR at 69279-80.
---------------------------------------------------------------------------

A. Need for the Rule

    The Commission is adopting the amendment to Rule 15c6-1(a) under
the Exchange Act to achieve the benefits of shortening the standard
settlement cycle to T+2 discussed above, such as the further reduction
of credit, market, and liquidity risk, and as a result a reduction in
systemic risk, for U.S. market participants.\385\
---------------------------------------------------------------------------

    \385\ See Part III supra.
---------------------------------------------------------------------------

B. Summary of Significant Issues Raised by Public Comment

    As noted above, the T+2 Proposing Release solicited comment on the
IRFA. Although the Commission received no comments specifically
concerning the IRFA, one commenter discussed the one-time costs
introducing broker-dealers, a subset of which are small entities, may
face to support the initial transition to a shorter settlement
cycle.\386\ This comment is discussed further below.
---------------------------------------------------------------------------

    \386\ See SIFMA at 12.
---------------------------------------------------------------------------

C. Description and Estimation of Number of Small Entities Subject to
the Rule

    Paragraph (c) of Rule 0-10 under the Exchange Act provides that,
for purposes of Commission rulemaking in accordance with the provisions
of the RFA, when used with reference to a broker or dealer, the
Commission has defined the term ``small entity'' to mean a broker or
dealer: (1) With total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
Rule 17a-5(d) under the Exchange Act,\387\ or if not required to file
such statements, a broker-dealer with total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last business
day of the preceding fiscal year (or in the time that it has been in
business, if shorter); and (2) is not affiliated with any person (other
than a natural person) that is not a small business or small
organization.\388\
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    \387\ 17 CFR 240.17a-5(c).
    \388\ 17 CFR 240.0-10(d).
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    The amendment to Rule 15c6-1(a) prohibits broker-dealers, including
those that are small entities, from effecting or entering into a
contract for the purchase or sale of a security (other than an exempted
security, government security, municipal security, commercial paper,
bankers' acceptances, or commercial bills) that provides for payment of
funds and delivery of securities no later than the second business day
after the date of the contract unless otherwise expressly agreed to by
the parties at the time of the transaction. Currently, based on

FOCUS Report \389\ data, as of December 31, 2015, it is estimated that
there are 1,235 broker-dealers that may be considered small entities.
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    \389\ FOCUS Reports, or ``Financial and Operational Combined
Uniform Single'' Reports, are monthly, quarterly, and annual reports
that broker-dealers generally are required to file with the
Commission and/or SROs pursuant to Exchange Act Rule 17a-5, 17 CFR
240.17a-5.
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D. Projected Reporting, Recordkeeping, or Other Compliance Requirements

    The amendment to Rule 15c6-1(a) will not impose any new reporting
or recordkeeping requirements on broker-dealers that are small
entities. However, the amendment to Rule 15c6-1(a) may impact certain
broker-dealers, including those that are small entities, to the extent
that broker-dealers may need to make changes to their business
operations and incur certain costs in order to operate in a T+2
environment.
    For example, conversion to a T+2 standard settlement cycle may
require broker-dealers, including those that are small entities, to
make changes to their business practices, as well as to their computer
systems, and/or to deploy new technology solutions. Implementation of
these changes may require broker-dealers to incur new or increased
costs, which may vary based on the business model of individual broker-
dealers as well as other factors. Additionally, conversion to a T+2
standard settlement cycle may also result in an increase in costs to
certain broker-dealers who finance the purchase of customer securities
until the broker-dealer receives payment from its customers. To pay for
securities purchases, many customers liquidate other securities or
money fund balances held for them by their broker-dealers in
consolidated accounts such as cash management accounts. However, some
broker-dealers may elect to finance the purchase of customer securities
until the broker-dealer receives payment from its customers for those
customers that do not choose to liquidate other securities or have a
sufficient money fund balance prior to trade execution to pay for
securities purchases. Broker-dealers that elect to finance the purchase
of customer securities may incur an increase in costs in a T+2
environment resulting from settlement occurring one day earlier unless
the broker-dealer can expedite customer payments.
    As discussed above, one commenter stated that introducing broker-
dealers, including 1,235 firms that are small entities, may face a one-
time cost to support the transition to a shorter settlement cycle.\390\
The commenter estimated this cost, including education of employees and
outreach to customers, to be $30,000 per introducing broker-dealer. The
commenter also stated that introducing broker-dealers will benefit from
the shorter settlement cycle by a reduction in liquidity risk and lower
costs related to margin and other charges fees imposed by the
introducing firm's clearing broker-dealer in association with managing
credit risk. The commenter further stated that customers of introducing
broker-dealers will realize significant benefits from a shorter
settlement cycle, such as a more rapid return of the proceeds from a
sale of a security.\391\
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    \390\ SIFMA at 12.
    \391\ See note 346 supra and accompanying text for further
discussion of this comment.
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E. Description of Commission Actions To Minimize Effect on Small
Entities

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

VIII. Statutory Authority

    The Commission is adopting an amendment to Rule 15c6-1 pursuant to
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].

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of the Final Amendment

    For the reasons stated in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is to be amended as follows:

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

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

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

0
2. Amend Sec.  240.15c6-1 by revising paragraph (a) to read as follows:

Sec.  240.15c6-1  Settlement cycle.

    (a) Except as provided in paragraphs (b), (c), and (d) of this
section, a broker or dealer shall not effect or enter into a contract
for the purchase or sale of a security (other than an exempted
security, government security, municipal security, commercial paper,
bankers' acceptances, or commercial bills) that provides for payment of
funds and delivery of securities later than the second business day
after the date of the contract unless otherwise expressly agreed to by
the parties at the time of the transaction.
* * * * *

    By the Commission.

    Dated: March 22, 2017
Brent J. Fields,
Secretary.
[FR Doc. 2017-06037 Filed 3-28-17; 8:45 am]
BILLING CODE 8011-01-P