[Federal Register Volume 87, Number 37 (Thursday, February 24, 2022)]
[Proposed Rules]
[Pages 10436-10501]
[FR Doc No: 2022-03143]

Vol. 87

Thursday,

No. 37

February 24, 2022

Part II

Securities and Exchange Commission

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17 CFR Parts 232, 240 and 275

Shortening the Securities Transaction Settlement Cycle; Proposed Rule

Federal Register / Vol. 87 , No. 37 / Thursday, February 24, 2022 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, and 275

[Release Nos. 34-94196, IA-5957; File No. S7-05-22]
RIN 3235-AN02

Shortening the Securities Transaction Settlement Cycle

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'')
proposes rules to shorten the standard settlement cycle for most
broker-dealer transactions from two business days after the trade date
(``T+2'') to one business day after the trade date (``T+1''). To
facilitate a T+1 standard settlement cycle, the Commission also
proposes new requirements for the processing of institutional trades by
broker-dealers, investment advisers, and certain clearing agencies.
These requirements are designed to protect investors, reduce risk, and
increase operational efficiency. The Commission proposes to require
compliance with a T+1 standard settlement cycle, if adopted, by March
31, 2024. The Commission also solicits comment on how best to further
advance beyond T+1.

DATES: Comments should be received on or before April 11, 2022.

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include
File Number S7-05-22 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-22. This file number
should be included on the subject line if email is used. 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
website (http://www.sec.gov/rules/proposed.shtml). Comments are also
available for website 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. Operating
conditions may limit access to the Commission's public reference room.
All comments received will be posted without change. Persons submitting
comments are cautioned that the Commission does not redact or edit
personal identifying information from comment 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 website. 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: Matthew Lee, Assistant Director, Susan
Petersen, Special Counsel, Andrew Shanbrom, Special Counsel, Jesse
Capelle, Special Counsel, Tanin Kazemi, Attorney-Adviser, or Mary Ann
Callahan, Senior Policy Advisor, Office of Clearance and Settlement at
(202) 551-5710, Division of Trading and Markets; Amy Miller, Senior
Counsel, at<PHONE_NUMBER>, Emily Rowland, Senior Counsel, at (202)
551-6787, and Holly H. Miller, Senior Policy Advisor, at (202) 551-
6706, Division of Investment Management; U.S. Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission proposes rules to shorten the
standard settlement cycle to T+1 and improve the processing of
institutional trades by broker-dealers, investment advisers, and
certain clearing agencies. First, the Commission proposes to amend 17
CFR 240.15c6-1 (``Rule 15c6-1'') to shorten the standard settlement
cycle for most broker-dealer transactions from T+2 to T+1 and to repeal
the T+4 standard settlement cycle for firm commitment offerings priced
after 4:30 p.m.,\1\ as discussed in Part III.A. Second, the Commission
proposes 17 CFR 240.15c6-2 (``Rule 15c6-2'') to prohibit broker-dealers
from entering into contracts with their institutional customers unless
those contracts require that the parties complete allocations,
confirmations, and affirmations by the end of the trade date, a
practice the securities industry has commonly referred to as ``same-day
affirmation,'' as discussed in Part III.B. Third, the Commission
proposes to amend 17 CFR 275.204-2 (``Rule 204-2'') to require
investment advisers that are parties to contracts under Rule 15c6-2 to
make and keep records of their allocations, confirmations, and
affirmations described in Rule 15c6-2, as discussed in Part III.C.
Fourth, the Commission proposes 17 CFR 240.17Ad-27 (``Rule 17Ad-27'')
to require a clearing agency that is a central matching service
provider (``CMSP'') to establish policies and procedures to facilitate
straight-through processing, as discussed in Part III.D. To assess and
manage the potential impact of a T+1 settlement cycle, the Commission
is also soliciting comment on the following Commission rules and
regulations: Regulation SHO; the financial responsibility rules for
broker-dealers; requirements in 17 CFR 240.10b-10 (``Rule 10b-10'');
and requirements related to prospectus delivery. The Commission
proposes to require compliance with each of the proposed rules and rule
amendments by March 31, 2024. The Commission solicits comment on this
proposed compliance date in Part III.F.
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    \1\ See infra Part III.A, notes 83-85, and accompanying text
(discussing the types of securities to which Rule 15c6-1 applies,
which includes equities, corporate bonds, unit investment trusts
(``UITs''), mutual funds, exchange-traded funds (``ETFs''), American
Depositary Receipts (``ADRs''), security-based swaps, and options).
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    In addition, accelerating beyond a T+1 settlement cycle to a same-
day standard settlement cycle (i.e., settlement no later than the end
of trade date, or ``T+0'') is an objective that the Commission is
actively assessing; however, the Commission is not proposing rules to
require a T+0 standard settlement cycle at this time. In Part IV, the
Commission discusses and requests comment regarding potential pathways
to T+0, as well as certain challenges to implementing T+0 that have
been identified by market participants. The comments received will be
used to inform any future action to further shorten the settlement
cycle beyond T+1.

Table of Contents

I. Introduction
II. Background
    A. Relevant History
    B. Current State of Post-Trade Processing
    1. Clearing Agencies--CCPs, CSDs, and CMSPs
    2. Broker-Dealers
    3. Retail and Institutional Investors
    C. Recent Initiatives and Market Events
III. Proposals for T+1
    A. Shortening the Length of the Standard Settlement Cycle
    1. Proposed Amendment to Rule 15c6-1(a)
    2. Basis for Shortening the Standard Settlement Cycle to T+1
    3. Proposed Deletion of Rule 15c6-1(c) and Conforming Technical
Amendments to Rule 15c6-1

    4. Basis for Eliminating T+4 Standard for Certain Firm
Commitment Offerings
    5. Request for Comment
    B. New Requirement for ``Same-Day Affirmation''
    1. Proposed Rule 15c6-2 Under the Exchange Act
    2. Basis for Requiring Affirmation No Later Than the End of
Trade Date
    3. Request for Comment
    C. Proposed Amendment to Recordkeeping Rule for Investment
Advisers
    1. Request for Comment
    D. New Requirement for CMSPs To Facilitate Straight-Through
Processing
    1. Policies and Procedures To Facilitate Straight-Through
Processing
    2. Annual Report on Straight-Through Processing
    3. Request for Comment
    E. Impact on Certain Commission Rules and Guidance and SRO Rules
    1. Regulation SHO Under the Exchange Act
    2. Financial Responsibility Rules Under the Exchange Act
    3. Rule 10b-10 Under the Exchange Act
    4. Prospectus Delivery and ``Access Versus Delivery''
    5. Changes to SRO Rules and Operations
    F. Proposed Compliance Date
IV. Pathways to T+0
    A. Possible Approaches to Achieving T+0
    1. Wide-Scale Implementation
    2. Staggered Implementation Beginning With Key Infrastructure
    3. Tiered Implementation Beginning With Pilot Programs
    B. Issues To Consider for Implementing T+0
    1. Maintaining Multilateral Netting at the End of Trade Date
    2. Achieving Same-Day Settlement Processing
    3. Enhancing Money Settlement
    4. Mutual Fund and ETF Processing
    5. Institutional Trade Processing
    6. Securities Lending
    7. Access to Funds and/or Prefunding of Transactions
    8. Potential Mismatches of Settlement Cycles
    9. Dematerialization
V. Economic Analysis
    A. Background
    B. Economic Baseline and Affected Parties
    1. Central Counterparties
    2. Market Participants--Investors, Broker-Dealers, and
Custodians
    3. Investment Companies and Investment Advisers
    4. 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+1
Settlement Cycle
    D. Reasonable Alternatives
    1. Amend 15c6-1(c) to T+2
    2. Propose 17Ad-27 To Require Certain Outcomes
    E. Request for Comment
VI. Paperwork Reduction Act
    A. Proposed Amendment to Rule 204-2
    B. Proposed Rule 17Ad-27
    C. Request for Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Regulatory Flexibility Act
    A. Proposed Rules and Amendments for Rules 15c6-1, 15c6-2, and
204-2
    1. Reasons for, and Objectives of, the Proposed Actions
    2. Legal Basis
    3. Small Entities Subject to the Proposed Rule and Proposed Rule
Amendments
    4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
    5. Duplicative, Overlapping, or Conflicting Federal Rules
    6. Significant Alternatives
    7. Request for Comment
    B. Proposed Rule 17Ad-27

Statutory Authority and Text of the Proposed Rules and Rule Amendments

I. Introduction

    In the 1920s, capital markets maintained a one-day settlement cycle
for transactions in securities.\2\ Over the course of the twentieth
century, the length of the settlement cycle grew to five days--a
response to the ever-growing number of investors, the rising volume of
transactions, and the increasing complexity of the processing
infrastructure necessary to facilitate the settlement of those
transactions.\3\ Since the late 1980s, the Commission, seeking to
protect investors and reduce risk, has been working with the securities
industry to minimize the time it takes for securities transactions to
settle. The first initiative to shorten the standard settlement cycle
emerged following studies by government and industry groups after the
October 1987 market break, including the Report of the Bachmann Task
Force on Clearance and Settlement Reform in U.S. Securities Markets.\4\
The Bachmann Report presented multiple recommendations to improve the
securities market by improving the safety and soundness of the National
C&S System.\5\ The Bachmann Report, submitted to the Commission in May
1992, recommended that by 1994 the Commission shorten the standard
settlement cycle from five days to three days.
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    \2\ See Kenneth S. Levine, Was Trade Settlement Always on T+3? A
History of Clearing and Settlement Changes, Friends of Financial
History No. 56, at 20, 22 (Summer 1996), https://archive.org/details/friendsoffinanci00muse_12/page/20/mode/2up?view=theater.
    \3\ See Levine, supra note 2, at 23-25.
    \4\ See Report of the Bachmann Task Force on Clearance and
Settlement Reform in U.S. Securities Markets, Submitted to The
Chairman of the U.S. Securities and Exchange Commission (May 1992)
(``Bachmann Report''), https://www.govinfo.gov/content/pkg/FR-1992-06-22/pdf/FR-1992-06-22.pdf. The task force was headed by John W.
Bachmann, the Managing Principal of Edward D. Jones & Co. of St.
Louis, Missouri. The recommendations in the Bachmann Report were
intended to help inform the Commission's approach to considering
reforms of the national system for clearance and settlement
(``National C&S System'').
    \5\ See id.
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    To support its recommendation, the Bachmann Report used the concept
``time equals risk'' to illustrate that ``less time between a
transaction and its completion reduces risk.'' \6\ In addition, the
report stated that a ``shorter settlement cycle will also uncover
potential problems sooner, before they mushroom or begin to cascade
throughout the industry.'' \7\ In recommending that the Commission
shorten the standard settlement cycle, the Bachmann Report also stated,
``[t]he system and legal initiatives necessary to accomplish the T+3
settlement for corporate and municipal securities should serve as a
stepping stone to further reductions in settlement periods over time as
technology and systems permit.'' \8\
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    \6\ See id. at 4. Specifically, the concept posits that the
length of time between the execution and settlement of a securities
transaction correlates to the financial risk exposure inherent in
the transaction, and that shortening this length of time can reduce
the overall risk exposure.
    \7\ Id.
    \8\ Id. at 6.
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    In 1993, the Commission adopted Rule 15c6-1 to shorten this process
by requiring the settlement of most securities transactions within
three business days (``T+3''),\9\ and in 2017, the Commission amended
the rule to require settlement within two business days (``T+2'').\10\
The Commission believes that further shortening of the settlement cycle
would promote investor protection, reduce risk, and increase
operational efficiency. This view has been informed by two recent
episodes of increased market volatility--in March 2020 following the
outbreak of the COVID-19 pandemic, and in January 2021 following
heightened interest in certain ``meme'' stocks.
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    \9\ Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891
(Oct. 13, 1993) (``T+3 Adopting Release''). In adopting Rule 15c6-1,
the Commission set a compliance date of June 1, 1995.
    \10\ Exchange Act Release No. 80295 (Mar. 22, 2017), 82 FR
15564, 15601 (Mar. 29, 2017) (``T+2 Adopting Release'').

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These two episodes have highlighted potential vulnerabilities in the
U.S. securities market that shortening the standard settlement cycle
could help mitigate.\11\ Accordingly, the Commission is proposing a
transition to a T+1 standard settlement cycle. The Commission also
believes that achieving settlement by the end of trade date (``T+0'')
could benefit investors as well.\12\ While the Commission is not
proposing a T+0 standard settlement cycle at this time, the Commission
would like to better understand the challenges that market participants
may need to address and resolve to achieve T+0. Accordingly, the
Commission solicits comments on potential paths to and challenges
associated with achieving a T+0 standard settlement cycle in Part
IV.\13\
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    \11\ See, e.g., Staff Report on Equity and Options Market
Structure Conditions in Early 2021 (Oct. 14, 2021), https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf. This report represents the views of
Commission staff. It is not a rule, regulation, or statement of the
Commission. The Commission has neither approved nor disapproved its
content. This report, like all staff reports, has no legal force or
effect: It does not alter or amend applicable law, and it creates no
new or additional obligations for any person.
    \12\ In this release, the Commission uses ``T+0'' to refer to a
settlement cycle that is complete by the end of the day on which the
trade was executed (``trade date''). This is sometimes referred to
as ``same-day'' settlement and is distinct from real-time
settlement, which contemplates settlement in real time or near real
time (i.e., immediately following trade execution) on a gross basis.
See infra Part IV (further discussing the concept of ``T+0'' as used
in this release, as well as the related concepts of real-time
settlement and rolling settlement, where trades are netted and
settled intraday on a recurring basis).
    \13\ Part IV discusses potential paths to and challenges
associated with implementing a T+0 settlement cycle. For example,
activities that are linked to the length of the settlement cycle
include securities lending activities. See infra Part IV.B.6.
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    On December 1, 2021, the Depository Trust and Clearing Corporation
(``DTCC''),\14\ the Investment Company Institute (``ICI''),\15\ the
Securities Industry and Financial Markets Association (``SIFMA''),\16\
and Deloitte & Touche LLP (``Deloitte'') \17\ published a report that
presented industry recommendations to implement a T+1 standard
settlement cycle in the U.S.\18\ The Commission has considered the
potential requirements, benefits, and costs associated with further
shortening the standard settlement cycle in the U.S., and proposes to
require that the standard settlement cycle transition to T+1, if
adopted, by March 31, 2024.\19\ As the securities industry considers
how it would implement T+1, the Commission believes that market
participants also generally should consider investments in new
technology or operations now that can be effective over the long term
at maximizing the benefits of risk reduction and improved efficiency in
post-trade processing that accompany shortening the settlement cycle,
mindful of efforts to shorten the settlement cycle beyond T+1.
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    \14\ DTCC is the holding company for three registered clearing
agencies: The Depository Trust Company (``DTC''), the National
Securities Clearing Corporation (``NSCC''), and the Fixed Income
Clearing Corporation (``FICC''). It is also the holding company for
DTCC ITP Matching (US) LLC (``DTCC ITP Matching''), which operates a
CMSP pursuant to an exemption from registration as a clearing
agency.
    \15\ ICI is an association representing regulated funds
globally, including mutual funds, ETFs, closed-end funds, and unit
investment trusts in the United States, and similar funds offered to
investors in jurisdictions worldwide.
    \16\ SIFMA is a trade association for broker-dealers, investment
banks, and asset managers operating in the U.S. and global capital
markets.
    \17\ See infra note 18.
    \18\ Deloitte, DTCC, ICI, & SIFMA, Accelerating the U.S.
Securities Settlement Cycle to T+1 (Dec. 1, 2021) (``T+1 Report''),
https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf. See
infra Part II.C (summarizing the recommendations in the T+1 Report).
    \19\ See infra Part III.F (discussing the proposed compliance
date). The T+1 Report contemplates implementation of T+1 in the
first half of 2024, and the Commission believes that sufficient time
is available to achieve T+1 by March 31, 2024, as discussed further
in Part III.F.
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    In Part II, the Commission provides (i) a history of the key
Commission and industry efforts to shorten the standard settlement
cycle, including past concerns related to T+1 and T+0 settlement
cycles, (ii) an overview of the current state of post-trade processing
in the market for U.S. equity securities, and (iii) a summary of other
recent market events related to this rule proposal. In Part III, the
Commission describes the rule proposals that are necessary to achieve
T+1. In Part IV, the Commission discusses the potential pathways and
challenges associated with implementing a standard T+0 settlement cycle
and requests comment on any and all aspects of achieving T+0.

II. Background

    In developing the rule proposals included in this release, the
Commission considered the history related to shortening the standard
settlement cycle, the current state of post-trade processing in the
U.S. equities market, and recent initiatives and market events that
have focused attention in the securities industry and the public on the
appropriate length of the standard settlement cycle. Each of these is
discussed further below.

A. Relevant History

    The first industry-level engagement on T+1 began in the late 1990s
and developed a business case for using straight-through processing to
achieve T+1,\20\ estimating that an industry investment of $8 billion
in improved settlement technologies and processes could reduce
settlement exposures by 67% and return $2.7 billion in annual savings.
Implementation of the building blocks described in the Securities
Industry Association (``SIA'') Business Case Report was postponed when
improving operational resilience following the terrorist attacks of
September 11, 2001 took priority,\21\ although many of them were
subsequently achieved.
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    \20\ The term ``straight-through processing'' generally refers
to processes that allow for the automation of the entire trade
process from trade execution through settlement without manual
intervention. See infra Part III.D.1 (further discussing the concept
of straight-through processing).
    \21\ See SIA, T+1 Business Case Final Report (July 2000) (``SIA
Business Case Report''), https://www.sifma.org/wp-content/uploads/2017/05/t1-business-case-final-report.pdf.
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    In 2012, DTCC commissioned a new study that found 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 with respect to reducing
risks and costs.\22\ The BCG Study ruled out as infeasible at the time
a settlement cycle with settlement on trade date (i.e., T+0) ``given
the exceptional changes required to achieve it and weak support across
the industry.'' \23\ It concluded that a T+0 settlement cycle would
face major challenges with processes such as trade reconciliation and
exception management, securities lending, and transactions with foreign
counterparties (especially where time zones are least aligned). It also
concluded that payment systems used for final settlement would need to
be significantly altered to enable transactions late in the day. 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 T+2
without certain building blocks would limit the amount of savings that
would be realized across the industry.
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    \22\ See The Boston Consulting Group (``BCG''), Cost Benefit
Analysis of Shortening the Settlement Cycle (Oct. 2012) (``BCG
Study''), https://www.dtcc.com/~/media/Files/Downloads/WhitePapers/
CBA_BCG_Shortening_the_Settlement_Cycle_October2012.pdf.
    \23\ Id. at 9.

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The BCG Study further concluded that moving to a T+1 settlement cycle
would require new infrastructure to enable near real-time trade
processing and would also require transforming the securities lending
and foreign buyer processes.\24\
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    \24\ Id.
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    In 2014, DTCC, ICI, SIFMA, and other market participants formed an
Industry Steering Group (``ISG'') to facilitate a transition to
T+2.\25\ The ISG and PricewaterhouseCoopers LLP published a white paper
describing certain ``industry-level requirements'' and ``sub-
requirements'' that the ISG believed would be required for a successful
migration to a T+2 settlement cycle.\26\ In conjunction with the ISG,
Deloitte published in December 2015 a ``T+2 Playbook'' setting 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 T+2.\27\ The
ISG White Paper also included an implementation timeline that targeted
the transition for the end of the third quarter of 2017.
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    \25\ See Press Release, DTCC, Industry Steering Committee and
Working Group Formed to Drive Implementation of T+2 in the U.S.
(Oct. 16, 2014), http://www.dtcc.com/news/2014/october/16/ust2.aspx.
    \26\ PricewaterhouseCoopers LLP & ISG, Shortening the Settlement
Cycle: The Move to T+2 (June 2015) (``ISG White Paper''), http://www.ust2.com/pdfs/ssc.pdf. This release uses ``ISG'' rather than
``ISC'' (``Industry Steering Committee,'' the term used in the ISG
White Paper) when referring to the T+2 effort so that this release
clearly distinguishes between the ISC's current work on T+1, as
reflected in the T+1 Report, supra note 18, from past work on T+2.
    \27\ Deloitte & ISG, T+2 Industry Implementation Playbook (Dec.
18, 2015) (``T+2 Playbook''), http://www.ust2.com/pdfs/T2-Playbook-12-21-15.pdf.
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    In 2015, the Commission's Investor Advisory Committee recommended
that the Commission pursue T+1 (rather than T+2), noting that retail
investors would significantly benefit from a T+1 standard settlement
cycle.\28\ In the event that the Commission determined to pursue a T+2
standard settlement cycle, the IAC recommended that the Commission work
with industry participants to create a clear plan for moving to T+1
shortly thereafter.\29\
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    \28\ Investor Advisory Committee (``IAC''), U.S. Securities and
Exchange Commission, Recommendation of the Investor Advisory
Committee: Shortening the Settlement Cycle in U.S. Financial Markets
(Feb. 12, 2015), https://www.sec.gov/spotlight/investor-advisory-committee-2012/settlement-cycle-recommendation-final.pdf.
    \29\ Id.
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    The Commission amended Rule 15c6-1 in 2017 to shorten the standard
settlement cycle from T+3 to T+2 and set a compliance date for
September 2017.\30\ The Commission recognized that the clearance and
settlement process for securities transactions encompassed by the rule
involved a number of market participants and entities whose functions
and capabilities would be impacted significantly by a change in the
standard settlement cycle, and the Commission considered these in its
analysis supporting the move to T+2. Among these entities were the NSCC
and the DTC, which respectively operate the central counterparty
(``CCP'') and central securities depository (``CSD'') for transactions
in U.S. equity securities,\31\ three CMSPs,\32\ and the diverse
population of market participants that depend on the clearance and
settlement services provided by NSCC, DTC, and the CMSPs. These market
participants include but are not limited to, retail and institutional
investors, registered investment advisers, broker-dealers, exchanges,
alternative trading systems, service providers, and custodian banks.
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    \30\ T+2 Adopting Release, supra note 10; see also Exchange Act
Release No. 78962 (Sept. 28, 2016), 81 FR 69240 (Oct. 5, 2016)
(``T+2 Proposing Release'').
    \31\ NSCC and DTC are subsidiaries of DTCC and each a clearing
agency registered with the Commission. See supra note 14.
    \32\ 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) (``BSTP and SS&C Order''). In the
T+2 Adopting Release, the Commission also referred to these entities
as ``matching and electronic trade confirmation service providers.''
T+2 Adopting Release, supra note 10, at 15566.
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    In the T+2 Adopting Release, the Commission explained that a T+1
standard settlement cycle could produce greater reductions in market,
credit, and liquidity risk for market participants than a move to T+2,
but that shortening beyond T+2 would require significantly larger
investments in new systems and processes.\33\ In an effort to analyze,
among other things, the impacts of further shortening beyond T+2, the
Commission directed Commission staff to study the issue.\34\ As a
result of the staff's study and analysis of the settlement cycle, the
Commission believes that, among other things, improvements to
institutional trade processing are critical to promoting the
operational efficiency necessary to facilitate a standard settlement
cycle shorter than T+2, as discussed further in Part III.B below.
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    \33\ T+2 Adopting Release, supra note 10, at 15582.
    \34\ Id. at 15582-83.
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B. Current State of Post-Trade Processing

    In the T+2 Proposing Release, the Commission provided a detailed
overview of post-trade processing for transactions in equity
securities, including the roles of the CCP, the CSD, and CMSPs.\35\ The
Commission also provided a summary of the affected market
participants--investors, broker-dealers, prime broker-dealers (``prime
brokers''), and custodian banks--and described at a high level the
different paths to settlement available depending on whether a
transaction involves a retail or institutional investor.\36\ While this
overview remains an accurate summary of the post-trade process, the
Commission recognizes that shortening the standard settlement cycle
beyond T+2 will require particular focus on improving institutional
trade processing.
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    \35\ T+2 Proposing Release, supra note 30, at 69243-46.
    \36\ As in the T+2 Proposing Release, 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.
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    To provide context for understanding the Commission's rule
proposals and the related economic analysis that follows in this
release, the Commission provides below an overview of the current state
of post-trade processing, including a brief summary of trade flows
relevant to the processing of institutional trades. As a general
matter, investors often rely on securities intermediaries to facilitate
the clearance and settlement of their securities transactions. These
intermediaries include broker-dealers, which maintain a securities
account on the investor's behalf to facilitate purchases and sales of
securities, and clearing agencies, which provide a range of services
designed to facilitate the clearance and settlement of a securities
transaction. As relevant to this release, a clearing agency may act as
a CCP, a CSD, or a CMSP. The role of each of these entities is
explained further below.
1. Clearing Agencies--CCPs, CSDs, and CMSPs
    As explained more fully in the T+2 Proposing Release,\37\ a CCP
interposes itself between the counterparties to a trade following trade
execution, 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 a registered

clearing agency that provides CCP services for transactions in U.S.
equity securities to its members.\38\ NSCC facilitates the management
of risk among its members 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; \39\ and (3) netting to reduce NSCC's overall exposure to
its counterparties.\40\
---------------------------------------------------------------------------

    \37\ T+2 Proposing Release, supra note 30, at 69243.
    \38\ As discussed further in the T+2 Proposing Release, NSCC
also provides CCP services for other types of securities, including
corporate bonds, municipal securities, and UITs. Id.
    \39\ Commission rules require a covered clearing agency that
provides CCP services to have policies and procedures reasonably
designed to maintain financial resources that cover a wide range of
foreseeable stress scenarios that include, but are not limited to,
the default of the participant family that would potentially cause
the largest aggregate credit exposure for the covered clearing
agency in extreme but plausible market conditions. See 17 CFR
240.17Ad-22(e)(4)(iii).
    \40\ These functions are discussed in more detail in the T+2
Proposing Release. See T+2 Proposing Release, supra note 30, at
69243. Since publication of the T+2 Proposing Release, NSCC has
amended its rules to provide a trade guarantee as soon as NSCC has
validated the trade upon submission for clearing.
---------------------------------------------------------------------------

    As discussed further in Part V.B.1, CCP netting reduces risk in the
settlement process by reducing the overall number of obligations that
must be settled. NSCC's netting and accounting system is called the
Continuous Net Settlement System (``CNS''). NSCC accepts trades into
CNS for clearing from the nation's exchanges and other trading venues,
and it uses CNS to net each NSCC member's trades in each security
traded that day to a single position for each security, either long
(i.e., the right to receive securities) or short (i.e., an obligation
to deliver securities). Throughout the day, NSCC records cash debit and
credit data generated by its members' activities, and at the end of the
processing day, NSCC nets the debits and credits to produce one
aggregate cash debit or credit for each member.\41\
---------------------------------------------------------------------------

    \41\ The operation of CNS is explained more fully in the T+2
Proposing Release. See id. at 69244.
---------------------------------------------------------------------------

    While NSCC provides final settlement instructions to its members
each day, the payment for and transfer of securities ownership occurs
at DTC, which serves as the CSD and settlement system for U.S. equity
securities. At the conclusion of each trading day, an NSCC member's
short and long positions are compared against its corresponding DTC
account to determine whether securities are available for settlement.
If securities are available, they will be transferred to cover the NSCC
member's short positions. Specifically, on settlement date NSCC submits
instructions to DTC to deliver (i.e., transfer) securities positions
for each security netted through CNS to 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.\42\
---------------------------------------------------------------------------

    \42\ The interaction between NSCC and DTC to achieve settlement
is explained more fully in the T+2 Proposing Release. See id. at
69245.
---------------------------------------------------------------------------

    As noted above, DTC is a CSD, which is an entity that holds
securities for its participants either in certificated or
uncertificated (i.e., immobilized or 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 U.S. equity
securities, providing custody and book-entry services.\43\ In
accordance with its rules, DTC accepts deposits of securities from its
participants, credits those securities to the depositing participants'
accounts, and effects book-entry transfer of those securities. 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.
---------------------------------------------------------------------------

    \43\ DTC's role as CSD is discussed more fully in the T+2
Proposing Release. See id. at 69245-46. As of 2017, DTC retained
custody of more than 1.3 million active securities issues valued at
$54.2 trillion, including securities issued in the U.S. and 131
other countries and territories. See DTCC, Businesses and
Subsidiaries: The Depository Trust Company (DTC), https://www.dtcc.com/about/businesses-and-subsidiaries/dtc. The corporate
bond market accounted for another $30 billion and the municipal bond
market saw over $10 billion on average traded every day in 2016. See
SIFMA, T+2 Fact Sheet, https://www.sifma.org/wp-content/uploads/2017/09/Sep-8-T2-Update-Fact-Sheet.pdf.
---------------------------------------------------------------------------

    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. 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 fund 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
Service (``NSS'') of the Federal Reserve System.\44\
---------------------------------------------------------------------------

    \44\ The relevance of NSS to achieving money settlement in a T+0
environment is discussed in Part IV.B.3.
---------------------------------------------------------------------------

    CMSPs electronically facilitate communication among a broker-
dealer, an institutional investor or its investment adviser, and the
institutional investor's custodian to reach agreement on the details of
a securities trade.\45\ 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 for the settlement of
institutional trades.
---------------------------------------------------------------------------

    \45\ The role of the CMSP in facilitating settlement is
discussed more fully in the T+2 Proposing Release. See T+2 Proposing
Release, supra note 30, at 69246.
---------------------------------------------------------------------------

    CMSPs provide the communication facilities to enable a broker-
dealer and an institutional investor to send messages back and forth
that results in the agreement of the trade details, generally referred
to as an ``affirmation'' or ``affirmed confirmation,'' which is then
sent to DTC to effect settlement of the trade.\46\ In general, the
formatting and content of messages used to communicate confirmations
and affirmations varies and may include use of, for example, SWIFT,
FIX, ISITC, or other formats. The delivery method of such messages also
may vary across market participants. The CMSP, by acting as a
centralized hub, helps promote standardization and facilitate
communication.
---------------------------------------------------------------------------

    \46\ Specifically, the CMSP will send the affirmed confirmations
to DTC where the DTC participants, who will deliver the securities,
will authorize the trades for automated settlement.
---------------------------------------------------------------------------

    In addition, a CMSP may offer a ``matching'' process by which it
compares and reconciles the broker-dealer's trade details with the
institutional investor's trade details to determine whether the two
descriptions of the trade agree, at which point it can generate an
affirmation to effect settlement of the trade. As part of such process,
the CMSP may offer services that can assist with the automated
identification of trades that do not match, allowing market
participants to identify errors and remediate any trade information
that does not match.

2. Broker-Dealers
    Broker-dealers are securities intermediaries that, among other
things, may hold accounts on behalf of investors to facilitate the
purchase and sale of securities transactions. Broker-dealers that are
direct members of clearing agencies are typically referred to as
``clearing brokers.'' Clearing brokers must comply with the rules of
the clearing agency, including but not limited to rules for operational
and financial requirements.\47\ Broker-dealers that submit transactions
to a clearing agency through a clearing broker are typically referred
to as ``introducing brokers.'' In general, broker-dealers executing
trades on a registered securities exchange are required to clear those
transactions through a registered clearing agency. Broker-dealers
executing trades outside the auspices of a trading venue (e.g., on an
internalized basis) may clear through a clearing agency or may choose
to settle those trades through mechanisms internal to that broker-
dealer.
---------------------------------------------------------------------------

    \47\ The requirements for membership or participation
established by the clearing agencies are discussed more fully in the
T+2 Proposing Release. See T+2 Proposing Release, supra note 30, at
69247.
---------------------------------------------------------------------------

3. Retail and Institutional Investors
    As discussed in the T+2 Proposing Release, institutional investors
are entities such as, but not limited to, pension funds, mutual funds,
hedge funds, bank trust departments, and insurance companies.\48\
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 CMSPs, bank custodians, or prime
brokers, and the need to manage certain regulatory or business
obligations.\49\ By contrast, the settlement of retail investor trades
generally occurs directly with the investor's broker-dealer,\50\
without relying on a separate custodian bank or prime broker.
---------------------------------------------------------------------------

    \48\ Institutional investors also include employee-benefit
plans, foundations, endowments, insurance companies and registered
investment companies (``RICs'') (of which mutual funds are one
type), among other investor types.
    \49\ See T+2 Proposing Release, supra note 30, at 69247
(discussing the same).
    \50\ As previously discussed, if the broker-dealer is an
introducing broker-dealer, the broker-dealer may use a clearing
broker-dealer to facilitate clearance and settlement. See id.
(discussing the same).
---------------------------------------------------------------------------

    Institutional investors may choose to trade through an executing
broker-dealer that clears and settles its securities transactions using
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, as described below, many institutional trades
settle on an allocated trade-for-trade basis through a custodian bank.
Many hedge funds settle their trades using prime brokers.
    Below are diagrams that illustrate at a high level the typical path
to settlement for retail trades and institutional trades.
(a) Retail Trades
    In general, individual retail investors rely on their broker-
dealers to execute trades on their behalf as customers of their broker-
dealers. As previously discussed, a broker-dealer may choose to
internalize a customer's order using its own inventory of securities.
However, the broker-dealer may also take other steps, away from its
customer, to deliver securities to its customer's account. Depending on
how the broker-dealer executes such trades away from its customer,
these other trades may clear through a clearing agency or may settle
bilaterally.
    Retail investors may engage in ``self-directed'' trading. Figure 1
illustrates, at a high level, the activities that take place for a
self-directed retail trade. In this scenario, when a retail investor
places an order to trade with its counterparty, the counterparty--
typically, the broker-dealer through which the retail investor holds
its securities account--will execute the trade. The counterparty will
issue a trade confirmation identifying certain trade details, such as
the transaction type, the account information, the security and
quantity of shares traded, the trade and settlement dates, and the net
amount of money to be received or paid at settlement.\51\ The
confirmation may also include other financial details, such as
commissions, taxes, and fees. A retail investor generally would review
the information provided in the confirmation and contact its broker-
dealer to correct any errors. In the absence of errors, the broker-
dealer can proceed with settlement processing.
---------------------------------------------------------------------------

    \51\ See infra Part III.B.1 (further discussing trade
confirmations and distinguishing the requirements with respect to a
confirmation under existing Rule 10b-10 and a confirmation under
proposed Rule 15c6-2).
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TP24FE22.000

    In some instances, self-directed retail trades and trades directed
by an investment adviser are executed together as part of a block trade
initiated by an investment adviser, which could also engage the use of
a CMSP to communicate the allocations of the block trade to
participating accounts.\52\ Further discussion of institutional trades
and the use of block trades by institutional investors follows below.
---------------------------------------------------------------------------

    \52\ See supra Part II.B.1 (discussing the services provided by
a CMSP); infra Part II.B.3.c) (discussing block trades).
---------------------------------------------------------------------------

(b) Institutional Trades
    Institutional investors often engage a broker-dealer or another
counterparty for trade execution, and separately, a bank custodian to
provide custodial safekeeping and asset servicing for their
investments.\53\ Because the counterparty and the custodian are
different entities in this scenario, additional steps are necessary to
complete the post-trade process, as identified by the black shapes in
Figure 2. Specifically, the institutional investor or its investment
adviser will need to instruct the bank custodian on the details of each
transaction and authorize the bank custodian to settle the trade. The
black shapes in Figure 2 also illustrate how the investor's
counterparty generally will provide the institutional investor or
investment adviser with execution details prior to issuing a trade
confirmation.\54\
---------------------------------------------------------------------------

    \53\ Some institutional investors use broker-dealers to custody
their securities, and in such cases their transactions will trade
and settle as described in Figure 1. In this release, we have
grouped such circumstances under the retail investor scenario
because of the similar transaction flow.
    \54\ An electronic copy of the execution details is sometimes
referred to as a ``notice of execution.''

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

[GRAPHIC] [TIFF OMITTED] TP24FE22.001

    Institutional investors, along with their broker-dealers and bank
custodians, may rely on the services of a CMSP to transmit
confirmations and affirmations or match the trade details to prepare a
trade for settlement. Alternatively, they may use other standardized
messaging protocols, such as FIX and SWIFT,\55\ to communicate trade
information. Some market participants, however, still rely on manual
processes to communicate trade information, such as through the use of
fax machines or email, and may use Excel data files rather than
standardized data protocols.\56\ Whichever the mechanism, achieving an
affirmed confirmation by the end of trade date is considered a
securities industry best practice.\57\ According to data from DTCC,
however, only 68% of trades are affirmed on trade date.\58\ Figure 2
illustrates a scenario where the institutional investor does not rely
on a CMSP to complete the confirmation/affirmation process.
---------------------------------------------------------------------------

    \55\ See T+1 Report, supra note 18, at 5.
    \56\ Protocols are the rules that govern the exchange or
transmission of data and may refer to the specific content and
formatting of trade information (i.e., ISO15022, FIX, SWIFT or an
Excel template), the method for delivery trade information (i.e.,
file transfer protocol (FTP), SSH file transfer protocol (SFTP),
SWIFT, DTC ITP, email, etc.), or both. They may also refer to the
frequency of transmission, deadlines for data delivery, and whether
data is sent for individual trades or a group (or ``batch'') of
trades. Some delivery mechanisms may offer a hub-and-spoke model for
delivery, in which the sender delivers data to a central hub and the
hub passes the data on to identified recipients. Other delivery
mechanisms are bi-lateral, in which the sender and receiver have a
direct communication with one another without transmission through a
hub.
    \57\ See T+1 Report, supra note 18, at 8-9.
    \58\ Sean McEntee, Executive Director, ITP Product Management,
DTCC, Remarks at the DTCC ITP Forum--Americas (June 17, 2021)
(``DTCC ITP Forum Remarks'') (recording available at https://www.dtcc.com/events/archives).
---------------------------------------------------------------------------

    For some institutional investors, such as hedge funds, a prime
broker may act as both the counterparty to the trade and the custodian
of the securities. In this scenario, the institutional investor or its
investment adviser provides trade details to the prime broker, and the
prime broker will affirm the transaction to facilitate settlement. As a
broker-dealer, the prime broker may also use NSCC to clear the
transaction. Generally, the Commission understands that the prime
broker will ``disaffirm'' a transaction if the institutional investor
does not make margin payments required of the investor by the prime
broker.
(c) Use of Block Trades
    Investment advisers commonly trade in ``blocks'' to manage the
accounts of their institutional clients. In such a scenario, investment
advisers aggregate the orders of multiple clients into a block for
trade execution. After trade execution of the block order by the
broker-dealer, the investment adviser

will allocate securities within the block to the accounts of its
clients participating in the block, as reflected in Figure 3. These
allocation instructions are communicated to the broker-dealer so that
the broker-dealer can generate a confirmation of the trade details for
each account for the investment adviser to affirm.
[GRAPHIC] [TIFF OMITTED] TP24FE22.002

BILLING CODE 8011-01-C

C. Recent Initiatives and Market Events

    Efforts to facilitate a settlement cycle shorter than T+2 began
soon after the transition to a T+2 standard settlement cycle had been
completed. For example, DTCC announced two initiatives in January 2018
to achieve additional operational and capital efficiencies, dubbed
``Accelerating Time to Settlement'' and ``Settlement Optimization.''
\59\ Among other things, the DTCC-owned clearing agencies have been
exploring steps to modify their settlement process to be more
efficient, such as by introducing new algorithms to position more
transactions for settlement during the ``night cycle'' process (which
currently begins in the evening of T+1) to reduce the need for activity
on the day of settlement. Portions of these two initiatives have been
submitted to the Commission and approved as proposed rule changes.\60\
---------------------------------------------------------------------------

    \59\ DTCC, Modernizing the U.S. Equity Markets Post-Trade
Infrastructure (Jan. 2018) (``DTCC Modernizing Paper''), https://
www.dtcc.com/~/media/Files/downloads/Thought-leadership/modernizing-
the-u-s-equity-markets-post-trade-infrastructure.pdf. These
initiatives are relevant to the discussion of T+0 building blocks
related to netting and batch processing, as discussed in Part IV.B.1
and Part IV.B.2.
    \60\ See, e.g., Exchange Act Release No. 87022 (Sept. 19, 2019),
84 FR 50541 (Sept. 25, 2019) (order amending NSCC's settlement guide
to implement a new algorithm for night cycle transactions); Exchange
Act Release No. 87756 (Dec. 16, 2019), 84 FR 70256 (Dec. 20, 2019)
(order extending the implementation timeframe for the new algorithm
for transactions processed in the night cycle); Exchange Act Release
No. 87023 (Sept. 19, 2019), 84 FR 50532 (Sept. 25, 2019) (order
amending the CNS Accounting Operation of NSCC's Rules & Procedures
with respect to receipt of securities from NSCC's CNS System).
---------------------------------------------------------------------------

    More recently, periods of increased market volatility--first in
March 2020 following the outbreak of the COVID-19 pandemic, and again
in January 2021 following heightened interest in certain ``meme''
stocks--highlighted the significance of the settlement cycle to the
calculation of financial exposures and exposed potential risks to the
stability of the U.S. securities market.\61\

Specifically, these two events have expanded a public debate over the
length of the settlement cycle, and whether a shorter settlement cycle
could have reduced the impact of the market volatility on investors by,
among other things, reducing the length of time over which a broker-
dealer member of NSCC is required to provide margin deposits with
respect to a given transaction, thereby also potentially reducing the
size of the deposits required per portfolio to manage the increased
volatility.
---------------------------------------------------------------------------

    \61\ According to DTCC, on March 12, 2020, NSCC processed over
363 million market-side transactions in equity securities, topping
by 15% its prior peak set in October 2008 during the financial
crisis. On an average day, NSCC processes approximately 106 million
market-side transactions. DTCC, Advancing Together: Leading the
Industry to Accelerated Settlement, at 4 (Feb. 2021) (``DTCC White
Paper''), https://www.dtcc.com/-/media/Files/PDFs/White%20Paper/DTCC-Accelerated-Settle-WP-2021.pdf.
---------------------------------------------------------------------------

    In February 2021, DTCC published the DTCC White Paper stating that
accelerating settlement beyond T+2 may bring significant benefits to
market participants but requires careful consideration and a balanced
approach so that settlement can be achieved as close to the trade as
possible without creating capital inefficiencies or introducing new,
unintended consequences--such as inadvertently reducing or eliminating
the benefits and cost savings provided by multilateral netting.\62\
DTCC suggested that shortening the settlement cycle to T+1 could occur
in the second half of 2023, and it estimated that a T+1 settlement
cycle could reduce the volatility component of NSCC margin requirements
by up to 41%.\63\ DTCC also contended that achieving T+1 could be
largely supported by using existing systems and available tools and
procedures.\64\ With respect to a T+0 settlement cycle, DTCC
distinguished between netted T+0 settlement and real-time gross
settlement,\65\ noting that in a netted settlement environment, trades
would be netted either during the day or prior to settlement at the end
of the day; with real-time gross settlement, trades would be settled
instantaneously without netting. Currently, the DTCC clearing agencies
can facilitate settlement on either T+1 or T+0 pursuant to their rules
and procedures for accelerated settlement.\66\ The DTCC White Paper
explained that DTCC's participants believe ``the hurdles to T+0
settlement,'' especially real-time gross settlement, are ``too great at
this time.'' \67\ Furthermore, DTCC noted that real-time gross
settlement could require trades to be funded on a trade-for-trade
basis, eliminating the liquidity and risk-reduction benefits of
existing CCP netting processes.\68\ Additionally, DTCC indicated that
over the past year it has been working collaboratively with a cross-
section of market participants to build support for further shortening
of the settlement cycle, and has outlined a plan to increase these
efforts to forge a consensus on setting a firm date and approach to
achieving a transition to T+1.\69\
---------------------------------------------------------------------------

    \62\ Id. at 2. The DTCC White Paper notes that centralized
multilateral netting reduces the value of payments that need to be
exchanged each day by an average of 98%, and netting is particularly
important during times of heightened volatility and volume.
    \63\ Id. at 5, 8.
    \64\ Id. at 5.
    \65\ See supra note 12 and accompanying text (making the same
distinction); infra Part IV (discussing three potential models for
T+0 settlement, and soliciting comment on these models).
    \66\ See, e.g., DTCC, Same-Day Settlement (SDS), https://www.dtcc.com/sds.
    \67\ DTCC White Paper, supra note 61, at 7.
    \68\ Id.
    \69\ See Press Release, DTCC, DTCC Proposes Approach to
Shortening U.S. Settlement Cycle to T+1 Within 2 Years (Feb. 24,
2021), https://www.dtcc.com/news/2021/february/24/dtcc-proposes-approach-to-shortening-us-settlement-cycle-to-t1-within-two-years.
---------------------------------------------------------------------------

    Following publication of the DTCC White Paper, the securities
industry formed an Industry Steering Committee (``ISC'') and an
Industry Working Group (``IWG'') \70\ with the intent of developing
industry consensus for an accelerated settlement cycle transition,
including to understand the impacts, evaluate the potential risks, and
develop an implementation approach. To support this effort, the ISC
engaged Deloitte to facilitate the IWG's analysis of the benefits and
barriers to moving to T+1, and coordinate with the industry on
recommending solutions for the transition.\71\ In April 2021, DTCC,
ICI, and SIFMA issued a joint press release to announce their
collaboration ``on efforts to accelerate the U.S. securities settlement
cycle from T+2 to T+1.'' \72\
---------------------------------------------------------------------------

    \70\ IWG participation consisted of over 800 subject matter
advisors representing over 160 firms from buy- and sell-side firms,
custodians, vendors, and clearinghouses. T+1 Report, supra note 18,
at 4.
    \71\ Id.
    \72\ See Press Release, DTCC, SIFMA, ICI and DTCC Leading Effort
to Shorten U.S. Securities Settlement Cycle to T+1, Collaborating
with the Industry on Next Steps (Apr. 28, 2021), https://www.dtcc.com/news/2021/april/28/sifma-ici-and-dtcc-leading-effort-to-shorten-us-securities-settlement-cycle-to-t1.
---------------------------------------------------------------------------

    As stated above, on December 1, 2021, DTCC, SIFMA and ICI, together
with Deloitte, published the T+1 Report, which outlined the ISC's
recommendations for achieving a T+1 standard settlement cycle, and
proposed transitioning to T+1 settlement by the second quarter of
2024.\73\ These recommendations focused on the following topics:
Allocation and confirmation of institutional trades, trade
documentation, global settlement and FX markets, corporate actions,
prime brokerage services, securities lending, settlement errors and
fails, creation and redemption of exchange traded funds (``ETFs''),
equity and debt offerings, and regulatory requirements.\74\
---------------------------------------------------------------------------

    \73\ See T+1 Report, supra note 18.
    \74\ Id.
---------------------------------------------------------------------------

    In addition to presenting the ISC's recommendations regarding the
requirements for moving to T+1, the T+1 Report stated that the IWG also
considered the impacts and benefits of moving to T+0 settlement.\75\
The ISC and IWG concluded, by consensus, that T+0 is not achievable in
the short term given the current state of the settlement ecosystem.\76\
The T+1 Report stated that a move towards a shortening of the
settlement cycle to T+0 would require an overall modernization of
current-day clearance and settlement infrastructure, changes to
business models, revisions to industry-wide regulatory frameworks, and
the potential implementation of real-time currency movements to
facilitate such a change.\77\ Additionally, the IWG indicated that
``adoption of such technologies would disproportionately fall on small
and medium-sized firms that rely on manual processing or legacy systems
and may lack the resources to modernize their infrastructure rapidly.''
\78\ The T+1 Report also described several ``key areas'' that the IWG
concluded would be significantly impacted by a move to T+0 settlement.
These areas included: Re-engineering of securities processing;
securities netting; funding requirements for securities transactions;
securities lending practices; prime brokerage practices; global
settlement; and primary offerings, derivatives markets and corporate
actions.\79\ The Commission is assessing these challenges, and in Part
IV, includes further discussion of them in requesting comment on
considerations related to T+0 settlement.
---------------------------------------------------------------------------

    \75\ Id. at 10.
    \76\ Id.
    \77\ Id.
    \78\ Id.
    \79\ Id. at 11.
---------------------------------------------------------------------------

III. Proposals for T+1

    The Commission is proposing the following rules to implement a T+1
standard settlement cycle. First, the Commission proposes to amend Rule
15c6-1 to establish a standard settlement cycle of T+1 for most broker-
dealer transactions.\80\ In so doing, the Commission also proposes to
repeal Rule 15c6-1(c), which currently establishes a T+4 standard
settlement cycle for certain firm commitment offerings.\81\ Second, the
Commission proposes three additional rules applicable, respectively, to
broker-

dealers, investment advisers, and CMSPs to improve the efficiency of
managing the processing of institutional trades under the shortened
timeframes that would be available in a T+1 environment. Specifically,
the Commission proposes new Rule 15c6-2 to prohibit broker-dealers who
have agreed with a customer to engage in an allocation, confirmation or
affirmation process from effecting or entering into a contract for the
purchase or sale of a security on behalf of that customer unless the
broker-dealer has also entered into a written agreement that requires
the allocation, confirmation, affirmation to be completed as soon as
technologically practicable and no later than the end of the day on
trade date in order to complete settlement in the timeframes required
under Rule 15c6-1(a). The Commission also proposes to amend the
recordkeeping obligations of investment advisers to ensure that they
are properly documenting their related allocations and affirmations, as
well as retaining the confirmations they receive from their broker-
dealers. Finally, the Commission proposes a requirement for CMSPs to
establish, implement, maintain, and enforce written policies and
procedures designed to facilitate straight-through processing. Each
proposal is discussed further below.
---------------------------------------------------------------------------

    \80\ See infra Part III.A.1.
    \81\ See infra Part III.A.3.
---------------------------------------------------------------------------

    In addition, the Commission also discusses the anticipated impact
of T+1 on other Commission rules and existing Commission guidance on
Regulation SHO, the financial responsibility rules for broker-dealers
under the Exchange Act, Rule 10b-10, prospectus delivery, and rules and
operations of self-regulatory organizations (``SROs''). Finally, the
Commission proposes to require compliance with each of the above rule
proposals, if adopted, by March 31, 2024. The Commission is soliciting
comment on all aspects of the proposals, and in each section below also
solicits comment on specific aspects of the proposed rules and rule
amendments, the anticipated impact on the other Commission rules noted
above, and the proposed compliance date.

A. Shortening the Length of the Standard Settlement Cycle

    Existing Rule 15c6-1(a) under the Exchange Act 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 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.\82\ Rule 15c6-1(a) covers contracts for
the purchase or sale of all types of securities except for the excluded
securities enumerated in paragraph (a)(1) of the rule. The definition
of the term ``security'' in Section 3(a)(10) of the Exchange Act
covers, among others, equities, corporate bonds, UITs, mutual funds,
ETFs, ADRs, security-based swaps, and options.\83\ Application of Rule
15c6-1(a) extends to the purchase and sale of securities issued by
investment companies (including mutual funds),\84\ private-label
mortgage-backed securities, and limited partnership interests that are
listed on an exchange.\85\
---------------------------------------------------------------------------

    \82\ 17 CFR 240.15c6-1(a).
    \83\ 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. The Commission in July 2011 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, 39938-39
(July 7, 2011). This temporary exemptive relief expired on February
5, 2020. See Order Granting a Limited Exemption from the Exchange
Act Definition of ``Penny Stock'' for Security-Based Swap
Transactions between Eligible Contract Participants; Granting a
Limited Exemption from the Exchange Act Definition of ``Municipal
Securities'' for Security-Based Swaps; and Extending Certain
Temporary Exemptions under the Exchange Act in Connection with the
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, Exchange Act Release No. 84991 (Jan. 25, 2019), 84 FR
863 (Jan. 31, 2019) (extending the expiration date for the relevant
portion of the temporary exemptive relief to February 5, 2020);
Order Extending Temporary Exemptions from Exchange Act Section 8 and
Exchange Act Rules 8c-1, 10b-16, 15a-1, 15c2-1 and 15c2-5 in
Connection with the Revision of the Definition of ``Security'' to
Encompass Security-Based Swaps, Exchange Act Release No. 87943 (Jan.
10, 2020), 85 FR 2763 (Jan. 16, 2020) (allowing the relevant portion
of the temporary exemptive relief to expire on February 5, 2020).
    \84\ The Commission applied Rule 15c6-1 to broker-dealer
contracts for the purchase and sale of securities issued by
investment companies, including mutual funds, because the Commission
recognized that these securities represented a significant and
growing percentage of broker-dealer transactions. See T+3 Adopting
Release, supra note 9, at 52900.
    \85\ With regard to limited partnership interests, the
Commission excluded non-listed limited partnerships due to
complexities related to processing the trades in these securities
and the lack of an active secondary market. In contrast, the
Commission included listed limited partnerships primarily to ensure
exclusion of these securities would not unnecessarily contribute to
the bifurcation of the settlement cycle for listed securities
generally. See id. at 52899.
---------------------------------------------------------------------------

    Rule 15c6-1(a) allows the parties to the trade to agree that
settlement will take place later than two business days after the trade
date, provided that such an agreement is express and reached at the
time of the transaction.\86\ This provision is sometimes referred to as
the ``override provision.'' When the Commission first adopted Rule
15c6-1(a), it stated that use of the override provision ``was intended
to apply only to unusual transactions, such as seller's option trades
that typically settle as many as sixty days after execution as
specified by the parties to the trade at execution.'' \87\ The override
provision in 15c6-1(a) continues to be intended to apply only to these
unusual transactions.\88\
---------------------------------------------------------------------------

    \86\ 17 CFR 240.15c6-1(a).
    \87\ T+3 Adopting Release, supra note 9, at 52902. In the T+2
Proposing Release, the Commission stated its preliminary belief that
the use of this provision should continue to be applied in limited
cases to ensure that the settlement cycle set by Rule 15c6-1(a)
remains a standard settlement cycle. T+2 Proposing Release, supra
note 30, at 69257 n.153.
    \88\ To date, the Commission has not identified instances
indicating a risk of overuse of this provision.
---------------------------------------------------------------------------

    Rule 15c6-1(b) provides an exclusion for contracts involving the
purchase or sale of 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.\89\
Pursuant to Rule 15c6-1(b), the Commission has granted an exemption
from Rule 15c6-1 for securities that do not have facilities for
transfer or delivery in the U.S.\90\ However, if the parties execute a
transaction on a registered securities exchange, the transaction will
be subject to both the rules of the exchange and Rule 15c6-1.\91\ Under
the exemption, an ADR is considered a separate security from the
underlying security.\92\ Thus, if there are no transfer facilities in
the U.S. for a foreign security but there are transfer facilities for
an ADR based on such

foreign security, only the foreign security will be exempt from Rule
15c6-1.\93\ The Commission has also granted a separate exemption for
contracts for the purchase or sale of any security issued by an
insurance company (as defined in Section 2(a)(17) of the Investment
Company Act \94\) that is funded by or participates in a ``separate
account'' (as defined in Section 2(a)(37) of the Investment Company Act
\95\), including a variable annuity contract or a variable life
insurance contract, or any other insurance contract registered as a
security under the Securities Act of 1933 (``Securities Act'').\96\
---------------------------------------------------------------------------

    \89\ 17 CFR 240.15c6-1(b). In recognition of the fact that the
Commission may not have identified all situations or types of trades
where T+2 settlement would be problematic, Rule 15c6-1(b) provides
that the Commission may exempt by order additional types of trades
from T+2 settlement, either unconditionally or on specified terms
and conditions, if the Commission determines that such an exemption
is consistent with the public interest and the protection of
investors. Id.
    \90\ See Exchange Act Release No. 35750 (May 22, 1995), 60 FR
27994, 27995 (May 26, 1995) (granting an exemption from Rule 15c6-1
for certain transactions in foreign securities). The exemption also
provides that if less than 10% of the annual trading volume in a
security that has U.S. transfer or deliver facilities occurs in the
U.S., the transaction in such security will be exempt from the
requirements in the rule.
    \91\ Id.
    \92\ Id. at n.7.
    \93\ Id.
    \94\ 15 U.S.C. 80a-2(a)(17).
    \95\ 15 U.S.C. 80a-2(a)(37).
    \96\ See Exchange Act Release No. 35815 (June 6, 1995), 60 FR
30906, 30907 (June 12, 1995) (granting an exemption from Rule 15c6-1
for transactions involving certain insurance contracts). The
Commission determined not to rescind or modify the exemptive order
when it shortened the settlement cycle from T+3 to T+2. See T+2
Adopting Release, supra note 10, at 15581.
---------------------------------------------------------------------------

    Rule 15c6-1(c) establishes a T+4 settlement cycle for firm
commitment underwritings for securities that are priced after 4:30 p.m.
Eastern Time (``ET'').\97\ Specifically, the rule states that the
standard settlement cycle set forth in Rule15c6-1(a) does not apply to
contracts for the sale of securities that are priced after 4:30 p.m. ET
on the date that such securities are priced and that are sold by an
issuer to an underwriter pursuant to a firm commitment offering
registered under the Securities Act or sold to an initial purchaser by
a broker-dealer participating in such offering. Under the rule, the
broker or dealer must effect or enter into a contract for the purchase
or sale of those securities that provides for payment of funds and
delivery of securities no later than the fourth business day after the
date of the contract unless otherwise expressly agreed to by the
parties at the time of the transaction.
---------------------------------------------------------------------------

    \97\ 17 CFR 240.15c6-1(c).
---------------------------------------------------------------------------

    Rule 15c6-1(d) provides that, for purposes of paragraphs (a) and
(c) of the rule, parties to a contract shall be deemed to have
expressly agreed to an alternate date for payment of funds and delivery
of securities at the time of the transaction for a contract for the
sale for cash of securities pursuant to a firm commitment offering if
the managing underwriter and the issuer have agreed to such date for
all securities sold pursuant to such offering and the parties to the
contract have not expressly agreed to another date for payment of funds
and delivery of securities at the time of the transaction.\98\
---------------------------------------------------------------------------

    \98\ 17 CFR 240.15c6-1(d).
---------------------------------------------------------------------------

1. Proposed Amendment to Rule 15c6-1(a)
    The Commission proposes to amend Rule 15c6-1(a) to prohibit a
broker-dealer from effecting or entering into a contract for the
purchase or sale of a security (other than an exempted security, a
government security, a municipal security, commercial paper, bankers'
acceptances, or commercial bills) that provides for payment of funds
and delivery of securities later than the first business day after the
date of the contract unless otherwise expressly agreed to by the
parties at the time of the transaction.\99\ The Commission's proposal
to amend Rule 15c6-1(a) would change only the standard settlement date
for securities transactions covered by the existing rule, and would not
impact the existing exclusions enumerated in the rule. In addition, the
Commission's proposal would retain the so-called ``override
provision,'' and the Commission continues to intend for the ``override
provision'' to apply only to unusual cases to ensure that the
settlement cycle set by Rule 15c6-1(a) is in fact the standard
settlement cycle.\100\
---------------------------------------------------------------------------

    \99\ 17 CFR 240.15c6-1(a).
    \100\ See supra note 88.
---------------------------------------------------------------------------

2. Basis for Shortening the Standard Settlement Cycle to T+1
    First, the Commission preliminarily believes that market
participants have made substantial progress toward identifying the
technological and operational changes that would be necessary to
establish a T+1 standard settlement cycle, and significant industry
support for such a move has emerged. By contrast, at the time the
Commission proposed to shorten the standard settlement cycle to T+2,
market participants generally supported moving to T+2 and many believed
that moving to T+1 would be substantially more costly and take longer
to achieve than moving to T+2.\101\ At that time, neither the
Commission nor the industry supported moving to a T+1 standard
settlement cycle.\102\ Since then, Commission staff has continued to
study the potential impact of further shortening the settlement cycle,
and the ISC has recommended that the securities industry implement a
T+1 standard settlement cycle.\103\
---------------------------------------------------------------------------

    \101\ See T+2 Adopting Release, supra note 10, at 15598-99.
    \102\ See id. at 15572.
    \103\ See supra notes 73-74 and accompanying text (discussing
the recommendations in the T+1 Report).
---------------------------------------------------------------------------

    The Commission acknowledges that a transition from a T+2 to T+1
standard settlement cycle, and implementation of the necessary
operational, technical, and business changes, will likely result in
varying burdens, costs and benefits for a wide range of market
participants.\104\ The Commission has remained mindful and observant of
industry initiatives and progress targeted at facilitating an
environment where a shortened standard settlement cycle could be
achieved in a manner that reduces risk for market participants while
also minimizing the likelihood of disruptive burdens and costs. Having
taken current industry initiatives and their relative progress into
consideration, the Commission preliminarily believes there has been
collective progress by market participants sufficient to facilitate a
transition to a T+1.
---------------------------------------------------------------------------

    \104\ See infra Part V (analyzing the economic effects of
shortening the standard settlement cycle to T+1).
---------------------------------------------------------------------------

    Furthermore, when the Commission adopted a T+2 standard settlement
cycle, it identified a number of incremental improvements to the
functioning of the U.S. securities market likely to result relative to
a T+3 standard settlement cycle.\105\ The Commission preliminarily
believes that a T+1 settlement cycle would produce similar incremental
improvements to the functioning of the U.S. securities market relative
to a T+2 settlement cycle. These benefits, discussed further in Part
V.C.1, are summarized briefly here.
---------------------------------------------------------------------------

    \105\ See T+2 Adopting Release, supra note 10, at 15569-75.
---------------------------------------------------------------------------

    First, as a general matter, time to settlement determines a
significant portion of a market participant's risk exposure on a given
securities transaction. As a result, all else being equal, shortening
the time to settlement reduces exposure to credit,\106\ market,\107\
and liquidity risk.\108\ In addition, assuming that trading volume
remains constant, shortening the time to settlement also decreases the
total number of unsettled trades that exists at any point in time, as
well as the total

market value of all unsettled trades.\109\ This reduction in the number
and total value of unsettled trades should correspond to a reduction in
a market participant's overall exposure to risk arising from unsettled
transactions.
---------------------------------------------------------------------------

    \106\ Credit risk refers to the potential for the market
participant's counterparty to a given transaction to default on the
transaction and therefore the market participant will not receive
either the cash or securities necessary to settle the transaction.
    \107\ Market risk refers to the potential for the value of the
security that underlies the transaction to change between trade
execution and settlement.
    \108\ Liquidity risk refers to the risk that the market
participant will be unable to timely settle a transaction because it
does not have access to sufficient cash or securities. The market
participant may not have access to sufficient cash or securities for
a given transaction if, for example, it has recently been exposed to
the default of a counterparty on a separate transaction and did not
receive the anticipated proceeds of that transaction.
    \109\ In other words, a T+2 settlement cycle results in two days
of unsettled transactions at any given time, whereas a T+1
settlement cycle would result in one day of unsettled transactions
at any given time.
---------------------------------------------------------------------------

    Second, the above dynamics produce noticeable effects for
transactions that are centrally cleared because they reduce the CCP's
exposure to credit, market, and liquidity risk arising from its
obligations to its participants, promoting the stability of the CCP and
thereby reducing the potential for systemic risk to transmit through
the financial system. For example, when the CCP faces a participant
default, the CCP will liquidate open positions of the defaulting
participant and use the defaulting participant's financial resources
held by the CCP to cover the CCP's losses and expenses. The CCP may
face losses if the market value of the defaulting participant's open
positions has moved significantly in the time between trade execution
and default.\110\ While the CCP works to close out the defaulting
participant's open positions, it also needs to continue to meet its
end-of-day settlement obligations to non-defaulting participants, and
so the CCP is exposed to liquidity risk when a member defaults because
it may need to use its own resources to complete end-of-day
settlement.\111\ In each instance, the amount of risk to which the CCP
is exposed is determined in part by the length of the settlement cycle,
and shortening the settlement cycle would reduce the CCP's overall
exposure to these risks.
---------------------------------------------------------------------------

    \110\ For example, if the open position is net long, to close
the position the CCP would obtain replacement securities in the
market, possibly at a higher price than the original transaction.
Conversely, if the open position is net short, to close the position
the CCP would sell the defaulting participant's securities in the
market, possibly at a lower price than the original transaction.
    \111\ The costs associated with deploying such resources are
ultimately borne by the CCP members, both in the ordinary course of
the CCP's daily risk management process and in the event of an
extraordinary event where members may be subject to additional
liquidity assessments. These costs may be passed on through the CCP
members to broker-dealers and investors.
---------------------------------------------------------------------------

    Third, reducing these risks to the CCP would reduce the overall
size of the financial resources that the CCP requires of its
participants,\112\ thereby reducing the risks and costs faced by the
CCP participants (i.e., broker-dealers) and, by extension, their
customers (i.e., investors).\113\ CCP participants may choose to pass
these reductions down to their customers.
---------------------------------------------------------------------------

    \112\ See T+2 Proposing Release, supra note 30, at 69251 n.77
(discussing mutual fund settlement timeframes and related liquidity
risk, which may be exacerbated during times of stress). The
Commission preliminarily believes that shortening settlement
timeframes for portfolio securities to T+1 will generally assist in
reducing liquidity and other risks for funds that must satisfy
investor redemption requests that settle pursuant to shorter
settlement timeframes (e.g., T+1).
    \113\ See id. at 69251.
---------------------------------------------------------------------------

    Fourth, the Commission anticipates that the above effects would
reduce the potential for systemic risk.\114\ When the Commission
proposed to shorten the standard settlement cycle from T+3 to T+2 it
explained that its ``views are even more apt today given the increasing
interconnectivity and interdependencies among markets and market
participants.'' \115\ In particular, in periods of market stress,
liquidity demands imposed by the CCP on its participants, such as in
the form of intraday margin calls, can have procyclical effects that
reduce overall market liquidity.\116\ Reducing the CCP's liquidity
exposure by shortening the settlement cycle can help limit this
potential for procyclicality,\117\ enhancing the ability of the CCP to
serve as a source of stability and efficiency in the national clearance
and settlement system.\118\
---------------------------------------------------------------------------

    \114\ As the Commission noted when it adopted Rule 15c6-1,
reducing the total volume and value of outstanding obligations in
the settlement pipeline at any point in time will better insulate
the financial sector from the potential systemic consequences of
serious market disruptions. See T+3 Adopting Release, supra note 9,
at 52894.
    \115\ T+2 Proposing Release, supra note 30, at 69258 n.160
(citing Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220,
66254 (Nov. 2, 2012) (``Clearing Agency Standards Adopting
Release'') and DTCC, Understanding Interconnectedness Risks--To
Build a More Resilient Financial System (Oct. 2015), http://www.dtcc.com/news/2015/october/12/understanding-interconnectedness-risks-article).
    \116\ For a discussion regarding procyclicality, see T+2
Proposing Release, supra note 30, at 69250-52.
    \117\ See T+3 Adopting Release, supra note 9, at 52894.
    \118\ See Standards for Covered Clearing Agencies, Exchange Act
Release No. 71699 (Mar. 12, 2014), 79 FR 16865 (Mar. 26, 2014),
corrected at 79 FR 29507, 29598 (May 22, 2014) (``CCA Standards
Proposing Release''). Clearing members are often members of larger
financial networks, and the ability of a covered clearing agency to
meet payment obligations to its members can directly affect its
members' ability to meet payment obligations outside of the cleared
market. Thus, management of liquidity risk may mitigate the risk of
contagion between asset markets.
---------------------------------------------------------------------------

    Finally, shortening the standard settlement cycle to T+1 would
enable investors to access the proceeds of their securities
transactions sooner than they are able to in the current T+2
environment. In particular, in a T+1 environment, sellers would have
access to cash proceeds one day sooner and buyers would see purchased
securities in their accounts one day earlier relative to a T+2 standard
settlement cycle.
    In addition, as noted above, the Commission has evaluated the
potential for shortening the settlement cycle to impose costs on market
participants, which are likely to vary across market participants
depending on a number of facts. These costs and considerations are
discussed in Part V.C.2. The costs include those costs associated with
investments in improved operations and new technologies to manage the
compression of time resulting from a shorter settlement cycle.
Shortening the settlement cycle may have other effects as well. For
example, shortening the standard settlement cycle to T+1 for equity
securities would disconnect settlement with foreign exchange (``FX'')
transactions, which settle on a T+2 basis. Mismatched settlement
timeframes between equities and FX transactions may increase the cost
needed to fund and hedge related securities transactions.\119\ In
addition, the Commission recognizes that a disorderly transition to a
shorter settlement cycle could lead to an increase in settlement fails.
However, as discussed in Part V.B.4, in analyzing the shortening of the
settlement cycle from T+3 to T+2, the Commission found no marked change
in the volume of such failures. The Commission preliminarily believes
that an orderly transition to a T+1 standard settlement cycle can limit
the negative effects of settlement fails. The Commission also believes
that facilitating an increase in same-day affirmations helps mitigate
the effects of settlement fails, as affirmations on trade date can
limit the potential for processing errors on settlement day that cause
fails.\120\ More generally, the Commission preliminarily believes that
the anticipated benefits of a shortened settlement cycle justify the
anticipated costs.
---------------------------------------------------------------------------

    \119\ See infra Part V.C.2 (noting that market participants will
have a choice between bearing an additional day of currency risk or
incurring the cost related to hedging away this risk in the forward
or futures market).
    \120\ See infra Part III.B (proposing new Rule 15c6-2 to
increase same-day affirmations); Part V.C.1 (noting that the
proposed rule can facilitate an orderly transition to T+1).
---------------------------------------------------------------------------

3. Proposed Deletion of Rule 15c6-1(c) and Conforming Technical
Amendments to Rule 15c6-1
    As explained above, Rule 15c6-1(c) establishes a T+4 settlement
cycle for firm commitment offerings for securities that are priced
after 4:30 p.m. ET, unless otherwise expressly agreed to by the parties
at the time of the transaction.

The Commission proposes to delete this provision. Deleting Rule 15c6-
1(c) would, in conjunction with the proposed amendment to Rule 15c6-
1(a), set a T+1 standard settlement cycle for firm commitment offerings
priced after 4:30 p.m. ET. However, the so-called ``override''
provisions in paragraphs (a) and (d) of Rule 15c6-1 would continue to
allow contracts currently covered by paragraph (c) to provide for
settlement on a timeframe other than T+1 if the parties expressly agree
to a different settlement timeframe at the time of the transaction.
    In proposing to delete paragraph (c) of Rule 15c6-1, the Commission
also proposes conforming amendments to paragraphs (a), (b), and (d) of
the rule. Specifically, the Commission is proposing to delete all
references to paragraph (c) of Rule 15c6-1 that currently appear in
paragraphs (a), (b) and (d) of the rule.
4. Basis for Eliminating T+4 Standard for Certain Firm Commitment
Offerings
    The Commission believes that expanded application of the ``access
equals delivery'' standard for prospectus delivery supports removing
paragraph (c) from Rule 15c6-1 because delays in the process that made
delivery of the prospectus difficult to achieve under the standard
settlement cycle have been mitigated by the ``access equals delivery''
standard. In addition, if paragraph (c) is removed as proposed,
paragraph (d) would continue to provide underwriters and the parties to
a transaction the ability to agree, in advance of a particular
transaction, to a settlement cycle other than the standard set forth in
Rule 15c6-1(a) when needed to manage obligations associated with the
firm commitment offering.
    The Commission adopted paragraphs (c) and (d) of Rule 15c6-1 in
1995, two years after Rule 15c6-1 was originally adopted.\121\ At the
time, the rule included a limited exemption from the requirements under
paragraph (a) of the rule for the sale for cash pursuant to a firm
commitment offering registered under the Securities Act.\122\ The
exemption for firm commitment offerings was added in response to public
comments stating that new issue securities could not settle on T+3
because prospectuses could not be printed prior to the trade date (the
date on which the securities are priced).\123\
---------------------------------------------------------------------------

    \121\ See Prospectus Delivery; Securities Transaction Settlement
Cycle, Exchange Act Release No. 34-35705 (May 11, 1995), 60 FR 26604
(May 17, 1995) (``1995 Amendments Adopting Release'').
    \122\ The exemption was limited to sales to an underwriter by an
issuer and initial sales by the underwriting syndicate and selling
group. Any secondary resales of such securities were to settle on a
T+3 settlement cycle. T+3 Adopting Release, supra note 9, at 52898.
    \123\ Id.
---------------------------------------------------------------------------

    When the Commission proposed to amend Rule 15c6-1 in 1995, it
stated that, since the adoption of the rule, members of the brokerage
community had suggested the Commission eliminate the exemption and ease
the problems associated with prospectus delivery by other means. The
primary reasons expressed for requiring T+3 settlement of such
offerings were: (i) The secondary market for a new issue may be subject
to greater price fluctuations or instability, which in turn may expose
underwriters, dealers and investors to disproportionate credit and
market risk; and (ii) the bifurcated settlement cycle created for
initial sales and resales of new issues would be disruptive to broker-
dealer operations and to the clearance and settlement system.\124\ In
particular, it was explained that if a purchaser of a new issue sells
on the first or second day after pricing, the purchaser's broker will
not be able to settle with the buyer's broker on a T+3 schedule because
the securities would not yet be available for settlement purposes.\125\
As a result, all such trades by the purchasers would ``fail'' and
result in expense, inefficiencies, and greater settlement risk for all
participants. A bifurcated settlement cycle also may require the
maintenance of separate computer systems and additional internal
procedures.
---------------------------------------------------------------------------

    \124\ See Exchange Act Release No. 34-35396 (Feb. 21, 1995), 60
FR 10724 (Feb. 27, 1995) (``1995 Amendments Proposing Release'').
    \125\ Id.
---------------------------------------------------------------------------

    The vast majority of commenters submitting feedback in response to
the 1995 Amendments Proposing Release supported T+4 as the standard
settlement cycle for firm commitment offerings price after 4:30
p.m.\126\ Several of these commenters reasoned that it is difficult to
print prospectuses within a T+3 timeframe when securities are priced
late in the day. These commenters also stated that the potential
systemic and market risks associated with the proposed T+4 provision
should be limited because most secondary market trading in the subject
securities would not begin trading until the opening of the market on
the next business day, and therefore the primary issuance of securities
would be available to settle secondary trading in the security.\127\
---------------------------------------------------------------------------

    \126\ 1995 Amendments Adopting Release, supra note 121, at
26608.
    \127\ Id.
---------------------------------------------------------------------------

    The T+1 Report stated that paragraph (c) is rarely used in the
current T+2 settlement environment, but the IWG expects a T+1 standard
settlement cycle would increase reliance on paragraph (c).\128\ The T+1
Report further stated that the IWG recommends retaining paragraph (c)
but amending it to establish a standard settlement cycle of T+2 for
firm commitment offerings.\129\ The T+1 Report cited issues with
respect to complex documentation and other operational elements of
equity offerings that may delay settlement to T+2 in a T+1 environment.
---------------------------------------------------------------------------

    \128\ T+1 Report, supra note 18, at 33-35.
    \129\ Id. at 33.
---------------------------------------------------------------------------

    With respect to debt offerings, the T+1 Report stated that many
such offerings frequently rely on the exception provided in Rule 15c6-
1(d).\130\ In describing the reasons debt offerings ``have historically
needed, and will continue to need, this exemption if the standard
settlement cycle is moved to T+1,'' the T+1 Report stated that such
offerings are ``document-intensive and typically have more
documentation than equity offerings.'' \131\ According to the T+1
Report, this documentation includes indentures, guarantees, and
collateral documentation, all of which are individually negotiated and
unique to the transaction.\132\ Thus, the T+1 Report states, a
substantial portion of debt offerings settle later than T+3.\133\
---------------------------------------------------------------------------

    \130\ Id.
    \131\ Id.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

    While the Commission appreciates that documentation relating to
firm commitment offerings for equities must be completed prior to
settlement of such transactions, the T+1 Report did not explain why or
how timely completion of such documentation would not be possible if
the exception in paragraph (c) of Rule 15c6-1 were eliminated. In
contrast, the T+1 Report states, as discussed above, that firm
commitment offerings generally settle in alignment with the standard
settlement cycle. As the Commission is not currently aware of any data
or facts indicating that the documentation associated with firm
commitment offerings cannot be completed by T+1, the Commission
preliminarily believes that the need to complete transaction
documentation prior to settlement does not justify proposing a separate
standard settlement cycle of T+2 for equity offerings. Rather, to the
extent that documentation may in some cases require more time to
complete than is available under a T+1 standard settlement cycle, the
parties to the

transaction can agree to a longer settlement period pursuant to
paragraph (d) when they enter the transaction. In this way, deleting
paragraph (c) does not prevent the parties from using paragraph (d) to
agree to a longer settlement period; it only removes the presumption
that such firm commitment offerings should be subject to a different
settlement cycle than the standard settlement cycle set forth in
paragraph (a).
    In addition, as discussed further in Part III.E.4, 17 CFR 230.172
(``Rule 172'') has implemented an ``access equals delivery'' model that
permits, with certain exceptions, final prospectus delivery obligations
to be satisfied by the filing of a final prospectus with the
Commission, rather than delivery of the prospectus to purchasers. As a
result of these changes, broker-dealers generally would not require
time to print and deliver prospectuses--a point originally cited by
many commenters in support of adopting paragraph (c)--and the
Commission preliminarily believes that broker-dealers are able to
satisfy their obligations with respect to these firm commitment
offerings on a timeline much shorter than the current T+4 standard
settlement cycle for these firm commitment offerings.
    In addition, establishing T+1 as the standard settlement cycle for
these firm commitment offerings, and thereby aligning the settlement
cycle with the standard settlement cycle for securities generally,
would reduce exposures of underwriters, dealers, and investors to
credit and market risk, and better ensure that the primary issuance of
securities is available to settle secondary market trading in such
securities.\134\ The Commission believes that harmonizing the
settlement cycle for such firm commitment offerings with secondary
market trading, to the greatest extent possible, limits the potential
for operational risk.
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    \134\ As noted above, prior to the Commission's 1995 amendments
to Rule 15c6-1 members of the broker-dealer community expressed the
view that (i) the secondary market for a new issue may be subject to
greater price fluctuations or instability, which in turn may expose
underwriters, dealers and investors to disproportionate credit and
market risk; and (ii) a bifurcated settlement cycle created for
initial sales and resales of new issues would be disruptive to
broker-dealer operations and to the clearance and settlement system.
See supra notes 124, 125, and accompanying text. While these
arguments were made by market participants when the standard
settlement cycle in the U.S. was still T+3, the Commission
preliminarily believes that they remain relevant to the Commission's
proposed amendment to Rule 15c6-1(a) and proposed deletion of Rule
15c6-1(c). In particular, if the Commission were to adopt the
proposed amendment to Rule 15c6-1(a) without deleting Rule 15c6-
1(c), a broker-dealer settling on behalf of a customer who sells
shares of a new issue on the first day after pricing might, in some
cases, not be able to settle with the purchaser's broker-dealer
because the securities may not yet be available for settlement.
Specifically, if the new issue settled on T+2 and the secondary
market transactions executed on the first day of trading settled on
T+1, the primary issuance would presumably not be available for
timely settlement of the secondary market transactions. Conversely,
if the Commission adopts both the proposed amendment to Rule 15c6-
1(a) and the proposed deletion of Rule 15c6-1(c), the settlement
cycle would not be bi-furcated and the basis for the above-described
concerns raised previously by the broker-dealer community related to
bi-furcation of the settlement cycle would not be applicable.
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    Therefore, in the Commission's view, deleting paragraph (c) while
retaining paragraph (d) provides sufficient flexibility for market
participants to manage the potential need for longer than T+1
settlement on certain firm commitment offerings priced after 4:30 p.m.
that may include ``complex'' documentation because paragraph (d) would
continue to permit the underwriters and the parties to a transaction to
agree, in advance of entering the transaction, whether T+1 settlement
or some other settlement timeframe is appropriate for the transaction.
In addition, the Commission believes that having the underwriters and
the parties to the transaction agree in advance of entering the
transaction whether to deviate from the standard settlement cycle
established in paragraph (a) would promote transparency among the
parties, in advance of entering the transaction, as to the length of
the time that it takes to complete documentation with respect to the
transaction. The Commission requests comment on these views. To the
extent that commenters agree with the T+1 Report, the Commission
requests that such commenters provide data or other detailed
information explaining why a T+1 settlement cycle is an inappropriate
standard for all firm commitment offerings priced after 4:30 p.m., such
as an explanation or description for what specific documentation cannot
be completed consistent with a T+1 settlement cycle.
5. Request for Comment
    The Commission is requesting comment on all aspects of the proposed
amendments to Rule 15c6-1 to shorten the current T+2 and T+4 standard
settlement cycles to T+1. The Commission also solicits comment on the
particular questions set forth below, and encourages commenters to
submit any relevant data or analysis in connection with their answers.
    1. Should the Commission amend Rule 15c6-1 to shorten the standard
settlement cycle to T+1 as proposed? Why or why not?
    2. Are efforts to shorten the standard settlement cycle to T+1 a
logical step on the path to T+0 settlement, or would shortening to T+1
require investments or processes that would be outdated or unnecessary
in a T+0 environment? \135\ Please explain why or why not.
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    \135\ See supra note 12 and accompanying text (explaining that
T+0 in this release is intended to refer to netted settlement by the
end of trade date); see also infra Part IV (discussing the same).
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    3. Is the current scope of securities covered by Rule 15c6-1,
including the exclusions provided in the text of Rule 15c6-1(a), still
appropriate in light of the Commission's proposal to shorten the
standard settlement cycle to T+1? Are there any asset classes,
securities as defined in Section 3(a)(10) of the Exchange Act, or types
of securities transactions for which the proposed amendment to Rule
15c6-1(a) would present compliance problems for broker-dealers? What
would be the quantitative and qualitative impacts of maintaining those
exclusions?
    4. The Commission requests that commenters provide information
regarding securities transactions that, in today's T+2 settlement
environment, generally settle later than T+2. To what extent does this
occur, and what are the circumstances that motivate market participants
to settle later than T+2? If Rule 15c6-1(a) is amended to shorten the
standard settlement cycle from T+2 to T+1, would market participants
continue to settle such securities transactions on a longer settlement
cycle? Would market participants who frequently settle certain
securities transactions later than T+2 settle such transactions later
than T+1 if the Commission adopts the proposed amendment to Rule 15c6-
1(a)? Conversely, under what circumstances are securities transactions
settled on an expedited basis (i.e., on timeframes less than T+2), and
how often how common is such settlement? What are the circumstances
that motivate earlier settlements? If Rule 15c6-1(a) is amended to
shorten the standard settlement cycle from T+2 to T+1, how will the
proposed amendment affect these expedited settlement decisions?
    5. To what extent do market participants currently rely on the
override provision in Rule 15c6-1(a)? Would market participants expect
use of the provision to increase or decrease in a T+1 environment? Why
or why not?
    6. As noted above, the Commission previously issued an order that
exempted security-based swaps from the requirements under Rule 15c6-1,
and

subsequently extended that exemptive relief on several occasions, but
the exemptive relief that previously covered compliance with Rule 15c6-
1 expired in 2020.\136\ Should the Commission issue a new order
providing exemptive relief from compliance with Rule 15c6-1 for
transactions in security-based swaps? If so, why or why not?
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    \136\ See supra note 83.
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    7. Should the Commission amend any other provisions of Rule 15c6-1
(other than the proposed amendments to the rule) for the purposes of
shortening the standard settlement cycle to T+1? If so, which
provisions and why?
    8. Are the conditions set forth in the Commission's exemptive order
for securities traded outside the U.S. still appropriate? \137\ If not,
why not? If the exemption should be modified, how should it be modified
and why?
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    \137\ See supra note 90 and accompanying text.
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    9. Are the conditions set forth in the Commission's exemptive order
for insurance contracts still appropriate? \138\ If not, why not? If
the exemption should be modified, how should it be modified and why?
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    \138\ See supra note 96 and accompanying text.
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    10. Should the Commission provide exemptive relief under Rule 15c6-
1(b) for any other securities or types of transactions?
    11. Would shortening the standard settlement cycle to T+1 as
proposed make it difficult for broker-dealers to comply with the
requirements of Rule 15c6-1? Please provide examples.
    12. How would retail investors be impacted by new processes that
broker-dealers may implement in support of a T+1 standard settlement
cycle? For example, do commenters believe that broker-dealers would
require changes to the way that retail investors fund their accounts in
a T+1 environment? If so, how? Would shortening the standard settlement
cycle to T+1 result in retail investors encountering ongoing costs due
to a delay in their ability to make investments? Would shortening the
standard settlement cycle to T+1 result in any benefits to retail
investors?
    13. How would institutional investors be impacted by new processes
that broker-dealers may implement in support of a T+1 standard
settlement cycle? For example, do market participants anticipate an
increase in prefunding requirements for institutional investors in a
T+1 environment?
    14. What impact, if any, would the proposed amendment to Rule 15c6-
1(a) have on market participants who engage in cross-border
transactions? To what extent would shortening the standard settlement
cycle in the U.S. to T+1 result in increased or decreased operational
costs to market participants? To what extent would shortening the
standard settlement cycle for securities transactions in the U.S.
increase or decrease risks associated with cross-border transactions or
related transactions, such as financing transactions?
    15. What impact, if any, would the proposed amendment to Rule 15c6-
1(a) have on market participants who engage in trading activity across
various financial product classes, each potentially involving a
different settlement cycle? For example, what would be the impact on
market participants conducting transactions in U.S. equities and U.S.
commercial paper on the same day? Alternatively, are there benefits to
alignment of the settlement timeframes across most U.S. security types
to one day? For example, options and government securities currently
settle on T+1 while equities, corporate bonds, and municipal debt
settle on T+2.
    16. What impact, if any, would the proposal have on trading
involving derivatives and exchange-traded products (``ETPs'')? \139\
Would shortening the settlement cycle for ETPs affect the costs of
creating or redeeming shares in ETPs that hold portfolio securities
that are on a different settlement cycle, such as net capital charges
related to collateral requirements? \140\ If so, would such a change in
costs affect the efficiency or effectiveness of the arbitrage between
an ETP's secondary market price and the value of its underlying assets?
Would such a change lead to other downstream effects, such as an
increase in the use of cash or custom baskets? \141\ Similarly, would
the proposed amendments affect transactions in derivatives instruments
if a derivative were to settle on a different timeframe than its
underlying reference assets?
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    \139\ ETPs constitute a diverse class of financial products that
seek to provide investors with exposure to financial instruments,
financial benchmarks, or investment strategies across a wide range
of asset classes. ETP trading occurs on national securities
exchanges and other secondary markets that are regulated by the
Commission under the Exchange Act, making ETPs widely available to
market participants, from individual investors to institutional
investors, including hedge funds and pension funds. The largest
category of ETPs are ETFs, which are open-end fund vehicles or UITs
that are registered investment companies under the Investment
Company Act. See Request for Comment on Exchange-Traded Products,
Exchange Act Release No. 75165 (June 12, 2015), 80 FR 34729 (June
17, 2015).
    \140\ For example, the way a market participant executes a
creation or redemption of an ETF share resembles a stock trade in
the secondary market. A market participant typically referred to as
an ``Authorized Participant'' or ``AP'' submits an order to create
or redeem (``CR'') ETF shares much like an investor submits an order
to his broker to buy or sell a stock. Also, similar to a stock
trade, the CR order settles on a T+2 settlement cycle through NSCC.
See ICI, 20 ICI Research Perspective, no. 5, Sept. 2014, at 14,
https://www.ici.org/pdf/per20-05.pdf; see also DTCC, Exchange Traded
Fund (ETF) Processing, http://www.dtcc.com/clearing-services/equities-trade-capture/etf; DTCC, ETF and CNS Processing Facts,
https://dtcclearning.com/content/220-equities-clearing/exchange-traded-fund-etf/about-etf/3613-etf-cns-processing-facts.html.
    \141\ Rule 6c-11 under the Investment Company Act permits ETFs
to use ``custom baskets'' if their basket policies and procedures:
(i) Set forth detailed parameters for the construction and
acceptance of custom baskets that are in the best interest of the
ETF and its shareholders, including the process for any revisions
to, or deviations from, those parameters; and (ii) specify the
titles or roles of the employees of the ETF's investment adviser who
are required to review each custom basket for compliance with those
parameters. See infra note 257 and accompanying text (further
discussing the creation unit purchase and redemption process for
ETFs).
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    17. What impact, if any, would shortening the standard settlement
cycle to T+1 have on the levels of liquidity risk that may currently
exist as a result of mismatches between the settlement cycles for
different markets? For example, would shortening the standard
settlement cycle to T+1 eliminate or reduce any liquidity risk that
mutual funds may face as a result of the mismatch between the current
T+1 settlement cycle for transactions in open-end mutual fund shares
that are settled through NSCC and the T+2 settlement cycle that is
applicable to many portfolio securities held by mutual funds?
    18. The Commission solicits comment on the status and readiness of
the technology and processes currently used by market participants to
support a T+1 settlement cycle.
    19. What impact would the Commission's proposed deletion of
paragraph (c) of Rule 15c6-1 have on underwriters, broker-dealers, and
other market participants?
    20. Have the technological and operational capabilities of broker-
dealers and their service providers improved sufficiently to allow
prospectuses to be printed and delivered on time if the standard
settlement cycle for firm commitment offerings priced after 4:30 p.m.
is shortened to T+1? Please describe such improvements and why they
would or would not be sufficient to support shortening the standard
settlement cycle for such transactions.
    21. Should the Commission shorten the standard settlement cycle for
firm commitment offerings priced after 4:30 p.m. to a time frame other
than T+1 (e.g., T+2, or T+3)? If so, why?

    22. Would any additional technological and operational changes, if
any, be necessary for broker-dealers to print and deliver prospectuses
on time for firm commitment offerings priced after 4:30 p.m. if a T+1
standard settlement cycle is adopted for such transactions? What costs
would be associated with such improvements?
    23. Would the Commission's proposed deletion of paragraph (c) of
Rule 15c6-1 decrease exposures of underwriters, dealers and investors
to market and credit risks related to the bifurcated settlement periods
for new issues and secondary market transactions? Please explain why or
why not.
    24. With respect to corporate actions, in most cases the ex-date
will be the record date (``RD''), meaning that RD-1 will be the last
day that a purchaser will gain the dividend or entitlement.\142\ Given
the shorter timeframes, the Commission requests comments on this
dynamic and statements in the T+1 Report urging a concerted effort
among exchanges, other authorities, and issuers to standardize some
currently fragmented procedures to set up and announce corporate
actions.\143\
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    \142\ See, e.g., ISITC Virtual Winter Forum, DTCC presentation
to Corporate Actions Working Group (Dec. 13, 2021).
    \143\ T+1 Report, supra note 18, at 20.
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    25. Regarding corporate actions that concern voluntary
reorganizations, the Commission solicits comments on the impact of a
T+1 settlement cycle on DTC's ``cover/protect'' process for certain
tenders, exchanges, or rights offerings.\144\ This procedure enables
DTC participants to allow their investors to make or change their final
elections until the end of an offer's expiration date; where an offer
allows, participants provide DTC with a notice of guaranteed delivery,
allowing later delivery of the shares or rights. How would this process
affect operations under a T+1 settlement cycle? Would any changes to
this process be needed?
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    \144\ Id. at 19-20; see also ISITC Virtual Winter Forum, DTCC
presentation to Corporate Actions Working Group (Dec. 13, 2021).
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    26. The Commission generally requests comment on the deadlines and
timeframes set forth in the T+1 Report. For example, the Commission
requests comment on their impact on DTC's IVORS function, used for
retiring a UIT by withdrawing assets and transferring them to a new
UIT.\145\
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    \145\ See DTC, IVORS Service Guide, https://www.dtcc.com/~/
media/Files/Downloads/Settlement-Asset-Services/EDL/IVORS.pdf.
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    27. If the Commission adopts the proposed deletion of paragraph (c)
of Rule 15c6-1 and the proposed conforming technical amendments to
paragraphs (a), (b) and (d) of the rule, should the Commission adopt
any additional amendments to Rule 15c6-1 in connection with such
changes?

B. New Requirement for ``Same-Day Affirmation''

    As discussed in Part II.B.1, integral to completing the
institutional trade process is achieving an affirmed confirmation,
which can require a series of communications between a broker-dealer
and its institutional customer. Since 2000, market participants have
identified accelerating this process, which requires agreement among
the parties regarding the trade details that facilitate trade
allocation when needed, as well as trade confirmation and affirmation,
as one of the core building blocks to improve the speed, safety, and
efficiency of the trade settlement process, and ultimately to achieve
shorter settlement cycles.\146\ In particular, in the SIA Business Case
Report, the securities industry noted the need to prioritize ensuring
that a higher number and proportion of trades were confirmed and
affirmed on trade date.\147\ These improvements were considered
essential to compressing the settlement cycle and facilitating an
environment less prone to operational risk.\148\ This objective, where
broker-dealers and their institutional customers allocate, confirm, and
affirm the trade details necessary to achieve settlement by the end of
trade date has sometimes been referred to as ``same-day affirmation.''
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    \146\ See SIA Business Case Report, supra note 21; BCG Study,
supra note 22; see also T+2 Proposing Release, supra note 30, at
69252, 69254 (describing in detail the SIA Business Case Report and
the BCG Study). The building blocks are described generally as the
core initiatives that need to be implemented prior to shortening the
settlement cycle. See SIA Business Case Report, supra note 21, at
18.
    \147\ See, e.g., Press Release, SIA, SIA Board Endorses Program
to Modernize Clearing, Settlement Process for Securities (July 18,
2002) (statement from the SIA Board of Directors endorsing straight-
through processing); letter from Jeffrey C. Bernstein, Chairman, SIA
STP Steering Committee, Securities Industry Association (June 16,
2004) (``SIA Letter''). The comment letter is available at https://www.sec.gov/rules/concept/s71304.shtml.
    \148\ T+2 Proposing Release, supra note 30, at 69252.
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    In its 2004 concept release seeking comment on methods to improve
the safety and operational efficiency of the National C&S System to
achieve straight-through processing,\149\ the Commission explored
whether to adopt its own rule or whether the SROs should amend their
existing rules to require the completion of the confirmation and
affirmation process on trade date.\150\ Many market participants
supported a Commission rule to mandate it, but believed that such
requirements should be implemented in phases to allow for the
development of certain processing improvements.\151\ Recommendations
for such improvements included: (i) Achieving 100% of trades as matched
or affirmed as soon as possible after execution on trade date; (ii)
achieving asynchronous (non-sequential) and electronic communication
between all trade parties, including notices of execution, allocations,
match status, confirmation status, and settlement instructions; (iii)
adoption of an industry standard electronic format for message
communication; and (iv) adoption of standards that allow manual
processing on an exception-only basis.\152\
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    \149\ Exchange Act Release No. 49405 (Mar. 11, 2004), 69 FR
12922 (Mar. 18, 2004) (``Concept Release'').
    \150\ Id.
    \151\ See SIA Letter, supra note 147 (commenting on the Concept
Release); letter from Margaret R. Blake, Counsel to the Association,
Dan W. Schneider, Counsel to the Association, The Association of
Global Custodians (June 28, 2004) (commenting on the Concept
Release). Copies of the comment letters are available at https://www.sec.gov/rules/concept/s71304.shtml.
    \152\ See supra note 151.
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    Since 2004, the industry has made significant progress in
developing new centralized systems and processes designed to automate