operational costs associated with shortening the standard settlement
cycle should be indirect to the extent that third-party service
providers pass through the costs of infrastructure upgrades to their
customers. The degree to which customers bear operational costs depends
on their bargaining position relative to third-party providers. Large
customers with market power may be able to avoid internalizing these
costs, while small customers in a weaker negotiation position relative
to service providers may bear the bulk of these costs. In either case,
to the extent that the costs of infrastructure upgrades are fixed, the
distribution of the cost burden across many customers of the third-
party service provider implies that the costs to each individual
customer is likely to be less than if they did not outsource the
clearance and settlement of their transactions.
    Further, changes to initial and ongoing operational costs may make
some self-clearing market participants alter their decision to continue
internally managing the clearance and settlement of their transactions.
Entities that currently internally manage their clearance and
settlement activity may prefer to restructure their businesses to rely
instead on third-party providers of clearance and settlement services
that may be able to amortize the initial fixed cost of upgrade across a
much larger volume of transaction activity.
    In addition, the shortening of the settlement cycle may increase
the need for some market participants engaging in cross-border and
cross-asset transactions to hedge risks stemming from mismatched
settlement cycles and differences in time zones, resulting in
additional costs. For example, as discussed in Part II.B.1 above, a
comment letter submitted by an industry association representing the
alternative investment industry stated that the T+1 Proposing Release
``raises considerable risks for asset managers with primary or
significant exposure to markets that will remain at T+2.'' \596\ The
commenter's letter references specifically ``misalignment concerns''
relating to FX settlement risk, international banking and coordination
issues, and collateral/liquidity risk.\597\
---------------------------------------------------------------------------

    \596\ See supra note 31.
    \597\ See supra note 34.
---------------------------------------------------------------------------

    One commenter stated that because FX transactions largely settle on
a T+2 basis, market participants that seek to fund a cross-border
securities transaction with the proceeds of an FX transaction would be
required to settle the securities transaction before the proceeds of
the FX transaction become available and pre-fund these securities
transactions, which would potentially adversely impact client
performance and increase operating and settlement risk for
advisers.\598\ The commenter said that, while both domestic and
internationally based investment advisers would be impacted by these
issues, non-U.S.-based investment advisers would face additional
expenses because they would need to set up an FX trading and settlement
presence in the U.S., or add staff abroad to create, execute, and
settle FX transactions to meet a T+1 timeline.\599\ Although there
currently exists misalignment of settlement cycles across asset classes
and as a result of time zone differences, the Commission agrees that
misalignment introduced by the rule amendment being adopted will likely
present some challenges for, and increase costs for, certain market
participants, including asset managers.\600\ For example, as discussed
in the proposing release, under the T+1 settlement cycle, a market
participant selling a security in European equity markets to fund a
purchase of securities

in U.S. markets would face a one day lag between settlement in Europe
and settlement in the U.S. The market participant could choose between
bearing an additional day of market risk in the U.S. trading markets by
delaying the purchase by a day, or funding the purchase of U.S. shares
with short-term borrowing. Additionally, because the FX market has a
T+2 settlement cycle,\601\ the market participant will also be faced
with a choice between bearing an additional day of currency risk due to
the need to sell foreign currency as part of the transaction, or
incurring the cost related to hedging away this risk in the forward or
futures market.
---------------------------------------------------------------------------

    \598\ IAA October Letter, supra note 222, at 4. The commenter
also suggested certain actions the Commission could take to reduce
disruption in FX markets. See supra note 41.
    \599\ IAA October Letter, supra note 222, at 4 (suggesting
certain actions the Commission could take to reduce disruption in FX
markets, such as by (i) working with other regulators and market
participants to support the move to T+1 by, among other things,
modifying the FX and equity trading day(s) in the U.S., and (ii)
``allow[ing] for a mismatch of FX settlement dates as a valid reason
for T+2 settlement arrangements without it breaching an investment
adviser's best execution obligation'').
    \600\ See Part II.C.1. (discussing challenges and costs
associated with the misalignment of securities and FX settlement
cycles).
    \601\ See, e.g., CME, CME Rulebook Chapter 13, at 3, https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/I/13.pdf (``Spot
FX Transaction means a currency purchase and sale that is
bilaterally settled by the counterparties via an actual delivery of
the relevant currencies within two Business Days.''). U.S. and
Canadian dollar spot FX transactions settle on the next business
day. Id. at 5-6.
---------------------------------------------------------------------------

    Another commenter stated that if the U.S. settlement cycle is
shortened to T+1 while other major global financial centers remain on a
T+2 settlement cycle, ``there will be increased operational cost and
significant settlement risks associated with multi-leg cross border
transactions.'' \602\ This commenter further stated that it expects
mismatched settlement cycles would result in increased financing costs
associated with transactions in which a U.S. market participant is
selling to a cross-border participant because ``we will be forced to
receive (and pay for) a securities position on T+1 for the U.S. leg,
but generally be unable to onward deliver the position on the foreign
leg until T+2.'' \603\ This commenter also stated its expectation that
mismatched settlement cycles will result in a significant number of
settlement fails, that the increase in financing costs and settlement
fails in connection with cross-border transactions may force broker-
dealers to decrease or cease offering cross-border services to their
clients, that any decrease or cessation of cross-border trading
ultimately will reduce liquidity for U.S. investors.\604\
---------------------------------------------------------------------------

    \602\ See supra note 43.
    \603\ Id.
    \604\ Id.
---------------------------------------------------------------------------

    Another commenter stated that the shortened settlement cycle in
conjunction with time zone differences between markets may not allow
sufficient time for investment advisers to match foreign currency
amount to settle all trades on T+1.\605\ In the context of discussing
potential exemptions to 15c6-1, another commenter stated that settling
trades with different time zones is already a difficult process and
accelerating the settlement cycle for these securities would make
cross-border transactions even more challenging.\606\
---------------------------------------------------------------------------

    \605\ See supra note 50. This commenter also suggested certain
``options'' for actions that could be taken to reduce disruption in
the FX markets. See supra Part II for a discussion of these options.
    \606\ See supra note 107.
---------------------------------------------------------------------------

    Commenters also stated that the misalignment of settlement cycles
between U.S. securities and non-U.S. securities will impact U.S.
securities that are exchangeable for a foreign security or a basket
including foreign securities.\607\ The commenter highlighted in
particular ADRs, and ETFs with an underlying basket that includes
foreign securities, which according to the commenter, illustrate this
misalignment.\608\ The commenter stated that market makers and other
market participants may purchase foreign shares and sell related ADRs
in the U.S. on the same trading day, and thus timely settle the sale of
the ADRs using the newly created ADRs.\609\ According to the commenter,
this type of trade will not be possible if the underlying foreign
shares settle on T+2 and the related ADR is required to settle on
T+1.\610\ The result, the commenter stated, is likely to be wider bid-
ask spreads for the ADR because market makers must take into account
the additional cost of borrowing securities and other financing costs
to avoid settlement failures.\611\ Additionally, the commenter argued,
the incidence of fails would likely increase as a result of the
misaligned settlement cycles, particularly where it is not possible to
borrow securities to make delivery, and a knock-on effect could be to
increase the incidence of buy-ins as well.\612\
---------------------------------------------------------------------------

    \607\ See SIFMA April Letter, supra note 15, at 8.
    \608\ See id.
    \609\ See SIFMA April Letter, supra note 16, at 8.
    \610\ See id.
    \611\ See id.
    \612\ See id.
---------------------------------------------------------------------------

    Separately, the same commenter argued that the ETF creation/
redemption process is impacted by the misalignment of global securities
transaction settlement cycles where the basket of securities underlying
an ETF includes foreign securities.\613\ A second commenter stated that
the misalignment in settlement cycles between the U.S. and foreign
jurisdictions that continue to settle on a T+2 basis, coupled with time
zone differences, may increase certain risks, such as failed trades,
accrual differences, net asset value miscalculations, and investment
guideline breaches.\614\ The same commenter stated that due to the
resulting misalignment in settlement cycles between the U.S. and
foreign markets upon transitioning to T+1, an ADR provider may incur
borrowing and other costs related to the underlying foreign security to
facilitate T+1 settlement of the ADR.\615\ According to the commenter,
these costs would likely be passed down to investors and thus make it
more expensive to obtain investment exposure to foreign markets.\616\
---------------------------------------------------------------------------

    \613\ See id. and referencing text for a discussion of
settlement cycle misalignment on the create and redeem process for
ETFs that include securities not traded in the U.S.
    \614\ See supra note 122.
    \615\ See id.
    \616\ See id.
---------------------------------------------------------------------------

    The Commission understands that variation in the length of the
settlement cycle across asset classes and jurisdictions and variation
in time zone introduce certain risks and costs on investors, broker-
dealers, custodians, and other market participants,\617\ but the
Commission notes that currently and in the recent past settlement
cycles have varied across asset classes and jurisdictions. The
Commission further understands that the financial services industry has
managed the challenges provided by these settlement cycle mismatches
and time zone differences between markets albeit at some cost.\618\ Our
information on these costs is limited regarding how firms will overcome
the specific challenges identified by certain commenters. If other
jurisdictions subsequently follow the U.S. in shortening the settlement
cycle, however, many of the additional costs will only be incurred
during that interval.\619\ In addition, the Commission understands that
solutions to specific challenges may still need to be worked out by the
affected industry participants and that those solutions may require
additional costs to overcome.
---------------------------------------------------------------------------

    \617\ See supra Part II.C.1. for a discussion of the
Commission's recognition of the challenges and costs associated with
the prospective misalignment of settlement cycles, the Commission
actions suggested by commenters, and examples of actions market
participants may take in order to mitigate those challenges and
costs.
    \618\ For example, during periods of heightened uncertainty it
is common for some investors to sell equities, including foreign
equities, and invest in U.S. Treasury securities (which generally
settle on T+1). Such a trade would include many of the issues cited
by commenters including differences in time zones, currency, and
settlement cycle.
    \619\ See supra Part VIII.C.1.
---------------------------------------------------------------------------

    The way that different market participants will likely bear costs
as a result of the amendment to Rule 15c6-1(a) may also vary based on
their business structure. For example, a shorter standard settlement
cycle will require payment for securities that settle regular-way by
T+1 rather than T+2.

Generally, regardless of current funding arrangements between investors
and broker-dealers, removing one business day between execution and
settlement will mean that broker-dealers could choose between requiring
investors to fund the purchase of securities one business day earlier,
while extending the same level of credit they do under T+2 settlement,
or providing an additional business day of funding to investors.\620\
In other words, broker-dealers could pass through some of the costs of
a shorter standard settlement cycle by imposing the same shorter cycle
on investors, or they could pass these costs on to investors by raising
transactions fees to compensate for the additional business day of
funding the broker-dealer may choose to provide. The extent to which
these costs get passed through to customers may depend on, among other
things, the market power of the broker-dealer. Generally, if a broker-
dealer does not face significant competition, it will have an incentive
to absorb part of the cost increase. On the other hand, in the extreme
case of a perfectly competitive market, there are no economic profits
and price equals marginal costs so an increase in cost could be fully
passed through to the customer.\621\
---------------------------------------------------------------------------

    \620\ The direct cost of such a delay would be the one-day
borrowing cost of the market intermediary providing the extra day of
financing or the opportunity cost of funds to the investor times the
value of the transaction. Such funding and opportunity costs will
vary across investors, intermediaries, and time.
    \621\ More specifically, the market clearing quantity of the
good or service supplied will adjust and the extent of industry-wide
cost pass-through in a perfectly competitive market depends on the
elasticity of demand relative to supply. The more elastic is demand,
and the less elastic is supply, the smaller the extent of pass-
through, all else being equal. See RBB Economics, Cost Pass-through:
Theory, Measurement and Potential Policy Implications, A Report
Prepared for the Office of Fair Trading, at 4 (Feb. 2014) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/320912/Cost_Pass-Through_Report.pdf.
---------------------------------------------------------------------------

    However, broker-dealers that predominantly serve retail investors
may experience the costs of an earlier payment requirement differently
from broker-dealers with more institutional clients or large custodian
banks because of the way retail investors fund their accounts. Retail
investors may find it difficult to accelerate payments associated with
their transactions, which may cause broker-dealers, who are unwilling
to extend additional credit to retail investors, to instead require
that these investors pre-fund their transactions.\622\ These broker-
dealers may also experience costs unrelated to funding choices. For
instance, retail investors may require additional or different services
such as education regarding the impact of the shorter standard
settlement cycle.
---------------------------------------------------------------------------

    \622\ See infra Part VIII.C.5.(b)(3) for additional discussion
regarding retail investors and their broker-dealers.
---------------------------------------------------------------------------

    Finally, a shorter settlement cycle may result in higher costs
associated with liquidating a defaulting member's position, as a
shorter horizon may result in larger price impacts, particularly for
less liquid assets. For example, when a clearing member defaults, NSCC
is obligated to fulfill its trade guarantee with the defaulting
member's counterparty. One way it accomplishes this is by liquidating
assets from clearing fund contributions from clearing members. However,
liquidating assets in shorter periods of time can have larger adverse
impacts on the prices of the assets. Shortening the standard settlement
cycle from two business days to one business day could reduce the
amount of time that NSCC has to liquidate its assets, which may
exacerbate the price impact of liquidation.
    As discussed above, the Commission is amending the recordkeeping
obligations of investment advisers with respect to any securities
transaction that is subject to the requirements of Rule 15c6-2(a) to
require advisers to make and keep records of their related allocations
and affirmations sent or received, as well as the confirmations they
receive.\623\ The amendment to Rule 204-2 requires advisers to time and
date stamp records of any such allocation and affirmation. The
Commission recognizes, however, that requiring these records, and
adding time and date stamps to records, will add additional costs and
burdens for those advisers that do not currently make and keep these
records, or do not use electronic systems to send allocations and
affirmations to brokers or dealers, or retain confirmations.\624\ For
example, some advisers may incur costs to update their processes to
accommodate these records.
---------------------------------------------------------------------------

    \623\ See supra Part IV.C.
    \624\ A commenter sought clarification regarding an adviser's
ability to rely on third parties to meet its recordkeeping
obligations for allocations, confirmations, and affirmations. See
supra note 304 and accompanying text. As discussed above in Part
IV.C., the Commission is confirming that an adviser may rely on a
third party to make and keep the required records, although using a
third party to make and keep records does not reduce an adviser's
obligations under Rule 204-2.
---------------------------------------------------------------------------

3. Economic Implications Through Other Commission Rules
    As noted in Part III.E of the T+1 proposing release, the amendment
to Rule 15c6-1(a), by shortening the standard settlement cycle, could
have an ancillary impact on the means by which market participants
comply with existing regulatory obligations that relate to the
settlement timeframe. The Commission also provided illustrative
examples of specific Commission rules that include such requirements or
are otherwise reference the settlement date, including Regulation
SHO,\625\ and certain provisions included in the Commission's financial
responsibility rules.\626\ The Commission invited and received public
comment on these effects, and these comments are discussed in detail in
Part VI. Those public comments inform this analysis, but did not
provide information the Commission could use to quantify the ancillary
economic impact the amendments and new rules might have on how market
participants comply with other Commission rules.
---------------------------------------------------------------------------

    \625\ 17 CFR 242.200 through 242.204.
    \626\ See T+1 Proposing Release, supra note 2, at 10462-63; see
also supra Parts VI.A. and VI.C. (discussing comments received). The
Commission also solicited comment on the impact of shortening the
settlement cycle on compliance with Rule 10b-10 under the Exchange
Act and broker-dealer obligations with regard to prospectus
delivery. See T+1 Proposing Release, supra note 2, at 10463-64; see
also supra Parts VI.B. and VI.C. (discussing comments received).
---------------------------------------------------------------------------

    Financial markets and regulatory requirements have evolved
significantly since the Commission adopted Rule 15c6-1 in 1993. Market
participants have responded to these developments in diverse ways,
including implementing a variety of systems and processes, some of
which may be unique to specific market participants and their
businesses, and some of which may be integrated throughout business
operations of certain market participants. Because of the broad variety
of ways in which, depending on their particular circumstances, market
participants currently satisfy regulatory obligations pursuant to
Commission rules, it is difficult to identify particular practices that
may be specific to a single or group of market participants will need
to change in order to meet these other obligations. In this case, the
Commission is unable to quantify the ancillary economic impact that the
amendment to Rule 15c6-1(a) will have on how market participants comply
with other Commission rules. As above, the Commission invited
commenters to provide quantitative and qualitative information about
these potential economic effects. These comments are discussed in in
detail in Part VI above and inform this analysis.
    In certain cases, based on information about current market
practices, the Commission believes that the

amendment to Rule 15c6-1(a) will be unlikely to change the means by
which market participants comply with existing regulatory requirements.
In these cases, the Commission believes that market participants will
not incur significant increased costs of compliance from such
regulatory requirements from shortening the settlement cycle to T+1.
    In other cases, however, the amendment may incrementally increase
the costs associated with complying with other Commission rules, where
such rules potentially require broker-dealers to engage in purchases of
securities. Two examples of these types of rules are Regulation SHO and
the Commission's financial responsibility rules. In most instances,
Regulation SHO governs the timeframe in which a ``participant'' of a
registered clearing agency must close out a fail to deliver position by
purchasing or borrowing securities.\627\ Similarly, some of the
Commission's financial responsibility rules relate to actions or
notifications that reference the settlement date of a transaction. For
example, Exchange Act Rule 15c3-3(m) \628\ uses the settlement date to
prescribe the timeframe in which a broker-dealer must complete certain
sell orders on behalf of customers. As noted above, the term
``settlement date'' is also incorporated into paragraph (c)(9) of Rule
15c3-1,\629\ which explains what it means to ``promptly transmit''
funds and ``promptly deliver'' securities within the meaning of
paragraphs (a)(2)(i) and (a)(2)(v) of Rule 15c3-1. As explained above,
the concepts of promptly transmitting funds and promptly delivering
securities are incorporated in other provisions of the financial
responsibility rules.\630\ Under the amendment to Rule 15c6-1(a), the
timeframes included in these rules will be one business day closer to
the trade date.
---------------------------------------------------------------------------

    \627\ See T+1 Proposing Release, supra note 2, at 10461-62.
    \628\ 17 CFR 240.15c3-3(m).
    \629\ 17 CFR 240.15c3-1(c)(9).
    \630\ See, e.g., 17 CFR 240.15c3-1(a)(2)(i) and (v); 17 CFR
240.15c3-3(k)(1)(iii) and (k)(2)(i) and (ii); 17 CFR 240.17a-
5(e)(1)(i)(A); 17 CFR 240.17a-13(a)(3).
---------------------------------------------------------------------------

    The Commission believes that shortening these timeframes should not
materially affect the costs that broker-dealers incur to meet their
Regulation SHO obligations and obligations under the Commission's
financial responsibility rules.\631\ Nevertheless, the Commission
acknowledges that a shorter settlement cycle could affect the processes
by which broker-dealers manage the likelihood of incurring these
obligations. For example, broker-dealers may currently have in place
inventory management systems that help them avoid failing to deliver
securities by T+2. Broker-dealers will likely incur costs in order to
update these systems to support a shorter settlement cycle.
---------------------------------------------------------------------------

    \631\ See supra Parts VI.A. (Regulation SHO) and VI.C.
(Financial Responsibility Rules for Broker-Dealers) for a discussion
of commenters concerns and the reasons why the Commission believes
that costs should not be materially affected.
---------------------------------------------------------------------------

    In cases where market participants will need to adjust the way in
which they comply with other Commission rules, the magnitude of the
costs associated with these adjustments is difficult to quantify. As
noted above, market participants employ a wide variety of strategies to
meet regulatory obligations. For example, broker-dealers may ensure
that they have securities available to meet their obligations by using
inventory management systems, or they may choose instead to borrow
securities. An estimate of costs is further complicated by the
possibility that market participants could change their compliance
strategies in response to a shorter standard settlement cycle.
    As with the T+2 transition, the Commission anticipates that the
transition to T+1 will again require changes to SRO rules and changes
to the operations or market participants subject to those rules to
achieve consistency with a T+1 standard settlement cycle. Certain SRO
rules reference existing Rule 15c6-1 or currently define ``regular
way'' settlement as occurring on T+2 and, as such, may need to be
amended in connection with shortening the standard settlement cycle to
T+1. Certain timeframes or deadlines in SRO rules also may refer to the
settlement date, either expressly or indirectly. In such cases, the
SROs may need to amend these rules in connection with shortening the
settlement cycle to T+1.\632\
---------------------------------------------------------------------------

    \632\ The T+1 Report similarly indicates that SROs will likely
need to update their rules to facilitate a transition to a T+1
standard settlement cycle. T+1 Report, supra note 61, at 35.
---------------------------------------------------------------------------

    The Commission invited commenters to provide quantitative and
qualitative information about the impact of the amendment to Rule 15c6-
1(a) on the costs associated with compliance with other Commission
rules. Although several commenters raised issues related to SRO rules
and operations,\633\ no commenters provided quantitative information
about the impact of the rules and rule amendments being adopted on the
costs associated with compliance with other Commission rules or SRO
rules.
---------------------------------------------------------------------------

    \633\ See supra Part VI.E.
---------------------------------------------------------------------------

    4. Effect on Efficiency, Competition, and Capital Formation
    In response to the T+1 Proposing Release, the Commission received
numerous comment letters supporting a shorter settlement cycle for
securities transactions citing positive effects of the proposed rule on
efficiency, competition, and capital formation. One commenter stated
that the Commission's proposal to shorten the settlement cycle is an
example of an initiative aimed at introducing more efficiency to the
marketplace while reducing risks for investors and other market
participants.\634\ Another commenter noted that shortening the current
settlement cycle would improve capital and operational
efficiencies.\635\ Another commenter cited benefits of the proposed
rule including enhanced efficiency of the equity markets and better use
of capital.\636\ Another commenters stated that the proposed rule may
improve capital efficiency and may increase competition.\637\ A
commenter also noted that the ``reasonably designed'' standard for
policies and procedures fosters innovation and encourages competition
by enabling each registrant to adopt compliance methodologies aligned
to its role and capabilities.\638\ While discussing changes necessary
to implement a shorter settlement cycle, a commenter noted that the
settlement process would be modernized to remove dependencies on manual
processes and facilitate straight-through processing utilizing
technology to achieve a more robust process which would reduce risks
and remove impediments to an efficient settlement process.\639\
---------------------------------------------------------------------------

    \634\ See Virtu Financial Letter, supra note 16, at 5.
    \635\ See Cornell Law Letter, supra note 16, at 3; see also RMA
Letter, supra note 16, at 3, stating that ``We further agree that
acceleration of the standard settlement cycle to T+1 could increase
the efficiency of capital market transactions and reduce systemic
risk.'' See also NYSE Group Letter, supra note 16, at 1, stating
that ``A T+1 settlement cycle will significantly increase market
efficiency, mitigate risk (particularly during times of extreme
volatility and stressed markets) and free up liquidity--cash or
shares--held to ensure the completion of trades. This will allow
industry participants to take advantage of capital and operational
efficiencies, and benefit from significant risk reduction and a
potential lowering of margin requirements.''
    \636\ See MMI Letter, supra note 16, at 2.
    \637\ See Wilson-Davis Letter, supra note 16, at 5-6.
    \638\ See OCC Letter, supra note 16, at 3.
    \639\ See Jeffrey S. Davis, Senior Vice President, Senior Deputy
General Counsel, Nasdaq (April 11, 2022) (``Nasdaq Letter''), at 2.
---------------------------------------------------------------------------

    Market participants may incur initial costs for the investments
necessary to comply with a shorter standard settlement cycle.\640\
However, these

costs are likely to differ across market participants, and these
differences may exacerbate coordination problems. First, per-
transaction operational costs clearing members incur in connection with
the clearing services they provide may be higher for members that clear
fewer transactions than such costs are for members that clear a higher
volume of transactions. Thus, the extent to which many of the upgrades
necessary for a T+1 standard settlement cycle are optimal for a member
to adopt unilaterally may depend, in part, on the transaction volume
cleared by such member. For example, certain upgrades necessary for a
T+1 standard settlement cycle may result in economies of scale, where
large clearing members are able to comply with the amendment to Rule
15c6-1(a) at a lower per-transaction cost than smaller members. As a
result, larger members might take a short time to recover their initial
costs for upgrades; smaller members with lower transaction volumes
might take longer to recover their initial cost outlays and might be
more reluctant to make the upgrades in the absence of the amendment.
These differences in cost per transaction may be mitigated through the
use of third-party service providers.
---------------------------------------------------------------------------

    \640\ See supra Part VIII.C.2.
---------------------------------------------------------------------------

    In addition, the Commission acknowledges that the upgrades
necessary to implement a shorter standard settlement cycle may produce
indirect economic effects. We analyze some of these indirect effects,
such as the impact on competition and third-party service providers, in
the following section.
    A shorter settlement cycle might improve the efficiency of the
clearance and settlement process through several channels. First, the
Commission believes that the primary effect that a shorter settlement
cycle will have on the efficiency of the settlement process will be a
reduction in the credit, market, and liquidity risks that broker-
dealers, CCPs, and other market participants are subject to during the
standard settlement cycle.\641\ A shorter standard settlement cycle
will generally reduce the volume of unsettled transactions that could
potentially pose settlement risk to counterparties. Shortening the
period between trade execution and settlement should enable trades to
be settled with less aggregate risk to counterparties or the CCP. A
shorter standard settlement cycle may also decrease liquidity risk by
enabling market participants to access the proceeds of their
transactions sooner, which may reduce the cost market participants
incur to handle idiosyncratic liquidity shocks (i.e., liquidity shocks
that are uncorrelated with the market). That is, because the time
interval between a purchase/sale of securities and payment is reduced
by one business day, market participants with immediate payment
obligations that they could cover by selling securities will be
required to obtain short-term funding for one less day.\642\ As a
result of reduced cost associated with covering their liquidity needs,
market participants may, under particular circumstances, be able to
shift assets that would otherwise be held as liquid collateral towards
more productive uses, improving allocative efficiency.\643\
---------------------------------------------------------------------------

    \641\ Reduction of these risks should result in the reduction of
margin requirements and other risk management activity that requires
resources that could be put to another use.
    \642\ See supra Part VIII.B.2.
    \643\ See supra Part VIII.A.
---------------------------------------------------------------------------

    Second, a shorter standard settlement cycle may increase price
efficiency through its effect on credit risk exposures between
financial intermediaries and their customers. In particular, a prior
study noted that certain intermediaries that transact on behalf of
investors, such as broker-dealers, may be exposed to the risk that
their customers default on payment obligations when the price of
purchased securities declines during the settlement cycle.\644\ As a
result of the option to default on payment obligations, customers'
payoffs from securities purchases resemble European call options and,
from a theoretical standpoint, can be valued as such. Notably, the
value of European call options increases in the time to expiration
\645\ suggesting that the value of call options held by customers who
purchase securities is increasing in the length of the settlement
cycle. In order to compensate itself for the call option that it
writes, an intermediary may include the cost of these call options as
part of its transaction fee and this cost may become a component of
bid-ask spreads for securities transactions. By reducing the value of
customers' option to default by reducing the option's time to maturity,
a shorter standard settlement cycle may reduce transaction costs in
U.S. securities markets. In addition, to the extent that any benefit
buyers receive from deferring payment during the settlement cycle is
incorporated in securities returns,\646\ the amendment to Rule 15c6-
1(a) may reduce the extent to which such returns deviate from returns
consistent with changes in fundamentals.
---------------------------------------------------------------------------

    \644\ See Madhavan et al., supra note 508.
    \645\ All other things equal, an option with a longer time to
maturity is more likely to be in the money given that the variance
of the underlying security's price at the exercise date is higher.
    \646\ See supra Part VIII.B.2.
---------------------------------------------------------------------------

    As discussed in more detail in Part VIII.C.2 above, the Commission
believes that the amendment to Rule 15c6-1(a) will likely require
market participants to incur costs related to infrastructure upgrades,
and will likely yield benefits to market participants, largely in the
form of reduced operational and financial risks related to settlement.
As a result, the Commission believes that the amendment to Rule 15c6-
1(a) could affect competition in a number of different, and potentially
offsetting, ways.
    The prospective reduction in financial risks related to shortening
the standard settlement cycle may represent a reduction in barriers to
entry for certain market participants.\647\ Reductions in the financial
resources required to cover an NSCC member's clearing fund requirements
that result from a shorter standard settlement cycle could encourage
financial firms that currently clear transactions through NSCC clearing
members to become clearing members themselves.
---------------------------------------------------------------------------

    \647\ See supra Part VIII.C.1. for a discussion of the reduction
in credit, market, and liquidity risks to which NSCC would be
subject as a result of a shortening of the settlement cycle and the
subsequent reduction financial resources dedicated to mitigating
those risks.
---------------------------------------------------------------------------

    Their entry into the market could promote competition among NSCC
clearing members. Furthermore, if a reduction in settlement risks
results in lower transaction costs for the reasons discussed above,
market participants that were, on the margin, discouraged from
supplying liquidity to securities markets due to these costs, could
choose to enter the market for liquidity suppliers, increasing
competition.
    At the same time, the Commission acknowledges that the process
improvements required to enable a shorter standard settlement cycle
could adversely affect competition. Among clearing members, where such
process improvements might be necessary to comply with the shorter
standard settlement cycle required under the amendment to Rule 15c6-
1(a), the cost associated with compliance might increase barriers to
entry, because new firms will incur higher fixed costs associated with
a shorter standard settlement cycle if they wish to enter the market.
Clearing members might choose to comply by upgrading their systems and
processes or may choose instead to exit the market for clearing
services. The exit of clearing members could have negative consequences
for competition

among clearing members. Clearing activity tends to be concentrated
among larger broker-dealers.\648\ Clearing member exit could result in
further concentration and additional market power for those clearing
members that remain.
---------------------------------------------------------------------------

    \648\ See supra Part VIII.B.2.
---------------------------------------------------------------------------

    Alternatively, some current clearing members may choose to comply
in part by outsourcing their operational needs to third-party service
providers. Use of third-party service providers may represent a
reasonable response to the operational costs associated with the
amendment to Rule 15c6-1(a). To the extent that third-party service
providers are able to spread the fixed costs of compliance across a
larger volume of transactions than their clients, the Commission
believes that the use of third-party service providers might impose a
smaller compliance cost on clearing members than if these firms
directly bore the costs of compliance. The Commission believes that
this impact may stretch beyond just clearing members. The use of third-
party service providers may mitigate the extent to which the amendment
to Rule 15c6-1(a) raises barriers to entry for broker-dealers. Because
these barriers to entry may have adverse effects on competition between
clearing members, the Commission believes that the use of third-party
service providers may mitigate the adverse effects of the amendment to
Rule 15c6-1(a) on competition between broker-dealers.
    Existing market power may also affect the distribution of
competitive impacts stemming from the amendment to Rule 15c6-1(a)
across different types of market participants. While, as noted above,
reductions in the credit, market, and liquidity risks that broker-
dealers, CCPs, and other market participants are subject to during the
standard settlement cycle could promote competition among clearing
members and liquidity suppliers, these groups may benefit to differing
degrees, depending on the extent to which they are able to capture the
benefits of a shortened standard settlement cycle.
    Finally, a shorter standard settlement cycle might also improve the
capital efficiency of the clearance and settlement process, which will
promote capital formation in U.S. securities markets and in the
financial system generally.\649\ A shorter standard settlement cycle
will reduce the amount of time that collateral must be held for a given
trade, thus freeing the collateral to be used elsewhere earlier. For a
given quantity of trading activity, collateral will also be committed
to clearing fund deposits for a shorter period of time. The greater
collateral efficiency promoted by a shorter settlement cycle might also
indirectly promote capital formation for market participants in the
financial system in general. Specifically, the improved capital
efficiency that results from a shorter standard settlement cycle will
enable a given amount of collateral to support a larger amount of
financial activity.
---------------------------------------------------------------------------

    \649\ See supra Part VIII.A. for more discussion regarding
capital formation and efficiency.
---------------------------------------------------------------------------

5. Quantification of Direct and Indirect Effects of a T+1 Settlement
Cycle
    In previous years, several industry groups have released estimates
for compliance costs associated with a shorter standard settlement
cycle, including the SIA, the Industry Steering Committee (``ISC''),
and BCG.\650\ Although all of these studies examined prior shortenings
of the settlement cycle including from T+5 to T+3 and from T+3 to T+2,
in the absence of a current study examining shortening from the current
T+2 to T+1, they serve as a useful rough initial estimate of the costs
involved in a settlement cycle shortening. The most recent of these,
the BCG Study, performed a cost-benefit analysis of a T+2 standard
settlement cycle. Below is a summary of the cost estimates in the BCG
Study, and in the following subsections, an evaluation of these
estimates as part of the discussion of the potential direct and
indirect compliance costs related to the amendment to Rule 15c6-1(a).
In addition, the Commission encouraged commenters to provide additional
information to help quantify the economic effects that we are currently
unable to quantify due to data limitations.
---------------------------------------------------------------------------

    \650\ See SIA Business Case Report, supra note 323; see also BCG
Study, supra note 565; 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. The SIA has since merged with other groups to form
SIFMA.
---------------------------------------------------------------------------

(a) Industry Estimates of Costs and Benefits
    The BCG Study concluded that the transition to a T+2 settlement
cycle would cost approximately $550 million in incremental initial
investments across industry constituent groups,\651\ which would result
in annual operating savings of $170 million and $25 million in annual
return on reinvested capital from clearing fund reductions.\652\
---------------------------------------------------------------------------

    \651\ The BCG Study generally refers to ``institutional broker-
dealers,'' ``retail broker-dealers,'' ``buy side'' firms, and
``custodian banks,'' without defining these particular groups. The
Commission uses these terms when referring to estimates provided by
the BCG Study but notes that its own definitions of various affected
parties may differ from those in the BCG Study.
    \652\ See BCG Study, supra note 565, at 9-10.
---------------------------------------------------------------------------

    The BCG Study also estimated that the average level of required
investments per firm could range from $1 to 5 million, with large
institutional broker-dealers incurring the largest amount of
investments on a per-firm basis, and buy side firms at the lower end of
the spectrum.\653\ The investment costs for ``other'' entities,
including DTCC, DTCC ITP Matching (US) LLC (f/k/a Omgeo Matching (US)
LLC), service bureaus, registered investment companies (``RICs''), and
non-self-clearing broker-dealers totaled $70 million for the entire
group. Within this $70 million, DTCC and Omgeo were estimated to have a
compliance investment cost of $10 million each. The study's authors
estimated that institutional broker-dealers would have operational cost
savings of approximately 5%, retail broker-dealers of 2% to 4%, buy-
side firms of 2%, and custodial banks of 10% to 15% for an industry
total operational cost savings of approximately $170MM per year.\654\
---------------------------------------------------------------------------

    \653\ Id. at 30-31.
    \654\ Id. at 41.
---------------------------------------------------------------------------

    The BCG Study also estimated the annual clearing fund reductions
resulting from reductions in clearing firms' clearing funds
requirements to be $25 million per year.\655\ The study estimated this
by multiplying the reduction in clearing fund requirements and the
average Federal Funds target rate for the 10-year period up until 2008
(3.5%). The BCG Study also estimated the value of the risk reduction in
buy side exposure to the sell side. The implied savings were estimated
to be $200 million per year, but these values were not included in the
overall cost-benefit calculations.
---------------------------------------------------------------------------

    \655\ See supra note 565 for a discussion of the impact on this
estimate of increases in daily trading volume since the time of the
BCG study.
---------------------------------------------------------------------------

    Several factors limit the usefulness of the BCG Study's estimates
of potential costs and benefits of the amendment to Rule 15c6-1(a).
First, a further shortening of the settlement cycle to T+1 may require
investments in new technology and processes that were not necessary
under the previous shortening to T+2. Second, technological
improvements since 2012 when the report was first published, such as
the increased use of computers and automation in post-trade processes,
may have reduced the cost of the upgrades necessary to comply with a
shorter

settlement cycle. This may, in turn, reduce the costs associated with
the amendment,\656\ as a larger portion of market participants may have
already adopted many processes that would reduce the cost of a
transition to a shorter settlement cycle. In addition, the BCG Study
considered as a part of its cost estimates operational cost savings as
a result of improvements to operational efficiency.
---------------------------------------------------------------------------

    \656\ See supra Part VIII.A. While market participants may have
already made investments consistent with implementing a shorter
settlement cycle, the fact that these investments have not resulted
in a shorter settlement cycle is consistent with the existence of
coordination problems among market participants.
---------------------------------------------------------------------------

    Lastly, the BCG Study was premised on survey responses by a subset
of market participants that may be affected by the rule. Surveys were
sent to 270 market participants and 70 responses were received,
including 20 institutional broker-dealers, prime brokers, and
correspondent clearers; 12 retail broker-dealers; 17 buy side firms; 14
registered investment advisers; and seven custodian banks. Given the
low response rate, as well as the uncertainty regarding the sample of
market participants that was asked to complete the survey, the
Commission cannot conclude that the cost estimates in the BCG Study are
representative of the costs of all market participants.\657\
---------------------------------------------------------------------------

    \657\ See BCG Study, supra note 565, at 15.
---------------------------------------------------------------------------

(b) Estimates of Costs
    The amendment to Rule 15c6-1(a) will generate direct and indirect
costs for market participants, who may need to modify and/or replace
multiple systems and processes to comply with a T+1 standard settlement
cycle. The T+1 Playbook included a timeline with milestones and
dependencies necessary for a transition to a T+1 standard settlement
cycle, as well as activities that market participants should consider
in preparation for the transition, and the Commission believes that
this provides an initial guide to the activities that will be necessary
for a transition to a T+1 standard settlement cycle.\658\ The
Commission estimates that many of the activities for migration to a T+1
standard settlement cycle will stem from behavior modification of
market participants and systems testing.\659\ These modifications will
include a compression of the settlement timeline, as well as an
increase in the fees that brokers may impose on their customers for
trade failures. Although the T+1 Playbook does not include any direct
estimates of the compliance costs for a T+1 standard settlement cycle,
the Commission utilizes the timeline in the T+1 Playbook for specific
actions necessary to migrate to a T+1 settlement cycle to directly
estimate the inputs needed for migration, and form preliminary
compliance cost estimates for the shortening to T+1 standard settlement
cycle.
---------------------------------------------------------------------------

    \658\ See T+1 Playbook, supra note 134.
    \659\ See id. at 67-68 (discussing customer and staff
education); see also id. at 103-107 (discussing testing and
migration).
---------------------------------------------------------------------------

    In addition, the T+1 Playbook, the ISG White Paper, and the BCG
Study identified several categories of actions that market participants
might need to take to comply with a T+2 settlement cycle and likely
also with a T+1 settlement cycle--processing, asset servicing, and
documentation.\660\ While the following cost estimates for these
remedial activities span industry-wide requirements for a migration to
a T+1 settlement cycle, the Commission does not anticipate each market
participant directly undertaking all of these activities for several
reasons. First, some market participants work with third-party service
providers to facilitate certain functions that may be impacted by a
shorter standard settlement cycle, such as trade processing and asset
servicing, and thus may only bear the costs of the requirements through
updates to systems and processes that interface with and fees paid to
those service providers. Second, certain costs might only fall on
specific categories of entities. For example, the costs of updating the
Continuous Net Settlement (``CNS'') and ID Net systems should only
directly fall on NSCC, DTC, and members/participants of those clearing
agencies. Finally, some market participants may already have the
processes and systems in place to accommodate a T+1 standard settlement
cycle or will be able to adjust to a T+1 settlement cycle without
incurring significant costs. For example, some market participants may
already have the systems and processes in place to meet the
requirements for same-day trade affirmation and matching consistent
with the requirements in new Rule 15c6-2.\661\ These market
participants may thus bear a significantly lower cost to update their
trade affirmation systems/processes to settle on a T+1 standard
settlement cycle.\662\
---------------------------------------------------------------------------

    \660\ See id. at 14.
    \661\ See BCG Study, supra note 565, at 23.
    \662\ The BCG Study, as it is based on survey responses from
market participants, does reflect the heterogeneity of compliance
costs for market participants.
---------------------------------------------------------------------------

    The following section examines several categories of market
participants and includes estimates the compliance costs for each
category. The Commission's estimate of the number and type of personnel
that may be required is based on the scope of activities for a given
category of market participant necessary for the market participant to
migrate to a T+1 settlement cycle, the market participant's role within
the clearance and settlement process, and the amount of testing
required to minimize undue disruptions.\663\ Hourly salaries for
personnel are from SIFMA's Management and Professional Earnings in the
Securities Industry 2013.\664\ These estimates use the timeline from
the T+1 Playbook to determine the length of time personnel will work on
the activities necessary to support a T+1 settlement cycle. The
timeline provides an indirect method to estimate the inputs necessary
to migrate to a T+1 settlement cycle, rather than relying directly on
survey response estimates. The Commission acknowledges many entities
are already undertaking activities to support a migration to a T+1
settlement cycle in anticipation of the amendment. However, to the
extent that the costs of these activities have already been incurred,
the Commission considers these costs sunk, and they are not included in
the analysis below.
---------------------------------------------------------------------------

    \663\ For example, FMUs that play a critical role in the
clearance and settlement infrastructure would require more testing
associated with a T+1 standard settlement cycle than institutional
investors.
    \664\ To monetize the internal costs, the Commission staff used
data from SIFMA publications, modified by Commission staff to
account for an 1800 hour work-year, and multiplied by 5.35
(professionals) or 2.93 (office) to account for bonuses, firm size,
employee benefits and overhead. See SIFMA, Management and
Professional Earnings in the Security Industry--2013 (Oct. 7, 2013);
SIFMA, Office Salaries in the Securities Industry--2013 (Oct. 7,
2013). These figures have been adjusted for inflation using the
Bureau of Labor Statistics' Consumer Price Index inflation
calculator, https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------

(1) FMUs--CCPs and CSDs
    CNS, NSCC/DTC's ID Net service, and other systems will require
adjustment to support a T+1 standard settlement cycle. The T+1 Playbook
includes an estimate that regulation-dependent planning,
implementation, testing, and migration activities associated with the
transition to a T+1 settlement cycle could last up to six
quarters.\665\ The Commission estimates that these activities will
impose a one-time compliance cost of $16.1 million \666\ for

DTC and NSCC each. After this initial compliance cost, the Commission
expects that both DTC and NSCC will incur minimal ongoing costs from
the transition to a T+1 standard settlement cycle, because the
Commission estimates that the majority of costs will stem from pre-
migration activities, such as implementation, updates to systems and
processes, and testing.
---------------------------------------------------------------------------

    \665\ See T+1 Playbook, supra note 134, at 14. The T+1 Playbook
assumes an implementation date during the third quarter of 2024. We
assume that the necessary tasks and the total time required to
complete them would be similar for an earlier implementation date.
    \666\ The estimate is based on the T+1 Playbook timeline, which
estimates regulation-dependent implementation activity, industry
testing, and migration lasting six quarters. The Commission assumes
10 operations specialists (at $159 per hour), 10 programmers (at
$316 per hour), and 1 senior operations manager (at $426/hour),
working 40 hours per week. (10 x $159 + 10 x $316 + 1 x $426) x 6 x
13 x 40 = $16,149,120.
---------------------------------------------------------------------------

(2) Matching/ETC Providers--Exempt Clearing Agencies
    Matching/ETC Providers may need to adapt their trade processing
systems to comply with a T+1 standard settlement cycle. This may
include actions such as updating reference data, configuring trade
match systems, and configuring trade affirmation systems to affirm
trades on T+0. Matching/ETC Providers will also need to conduct testing
and assess post-migration activities. The Commission estimates that
these activities will impose a one-time compliance cost of up to $16.1
million \667\ for each Matching/ETC Provider. However, the Commission
acknowledges that some ETC providers may have a higher cost burden than
others based on the volume of transactions that they process. The
Commission expects that ETC providers will incur minimal ongoing costs
after the initial transition to a T+1 standard settlement cycle because
the Commission estimates that the majority of the costs of migration to
a T+1 settlement cycle entail behavioral changes of market participants
and pre-migration testing.
---------------------------------------------------------------------------

    \667\ The estimate is based on the T+1 Playbook timeline, which
estimates regulation- dependent implementation activity for trade
systems, matching, affirmation, testing, and post- migration testing
lasting six quarters. The Commission assumes 10 operations
specialists (at $159 per hour), 10 programmers (at $316 per hour),
and 1 senior operations manager (at $426/hour), working 40 hours per
week. (10 x $159 + 10 x $316 + 1 x $426) x 6 x 13 x 40 =
$16,149,120.
---------------------------------------------------------------------------

    New Rule 17Ad-27 requires a CMSP to establish, implement, maintain,
and enforce reasonably designed, written policies and procedures. Based
on the similar policies and procedures requirements, and the
corresponding burden estimates previously made by the Commission for
Rule 17Ad-22(d)(8) and (e)(2),\668\ the Commission estimates that
respondent CMSPs will incur an aggregate one-time cost of approximately
$27,600.\669\
---------------------------------------------------------------------------

    \668\ See Clearing Agency Standards, Exchange Act Release No.
68080 (Oct. 22, 2012), 77 FR 66219, 66260 (Nov. 2, 2012) (``Clearing
Agency Standards Adopting Release''); Standards for Covered Clearing
Agencies, Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR
70786, 70891-92 (Oct. 13, 2016) (``CCA Standards Adopting
Release'').
    \669\ There are currently three CMSPs and the Commission
anticipates that one additional entity may seek to become a CMSP in
the next three years. The aggregate cost was estimated as follows:
(Assistant General Counsel at $543/hour x 8 hours = $4,344) +
(Compliance Attorney at $426/hour x 6 hours = $2,556) = $6,900 x 4
CMSPs equals $27,600.
---------------------------------------------------------------------------

    The rule also imposes ongoing burdens on a respondent CMSP as
follows: (i) ongoing monitoring and compliance activities with respect
to the written policies and procedures required by the proposed rule;
and (ii) ongoing documentation activities with respect to the required
annual report. As discussed in Part V.C.2, the Commission has modified
the final rule to identify specific data elements to be included in the
annual report. Based on the similar reporting requirements, and the
corresponding burden estimates previously made by the Commission for
Rule 17Ad-22(e)(23),\670\ the Commission estimates that the ongoing
activities required by new Rule 17Ad-27 will impose an aggregate annual
cost of this ongoing burden of approximately $71,400.\671\
---------------------------------------------------------------------------

    \670\ See CCA Standards Adopting Release, supra note 668, at
70899.
    \671\ This figure was calculated as follows: [(Compliance
Attorney at $426/hour x 24 hours = $10,224) + (Computer Operations
Manager at $514/hour x 10 hours = $5,140) = $15,364 x 4 CMSPs =
$61,456]. In addition, we estimate that the Inline XBRL requirement
would require respondent CMSPs to spend $1,200 each year to license
and renew Inline XBRL compliance software and/or services, and incur
3 internal burden hours to apply and review Inline XBRL tags for the
disclosure requirements on the report, resulting in a total annual
aggregate cost of $9,912 [(Compliance Attorney at $426/hour x 3
hours = $1,278) + $1,200 in external costs = $2,478 x 4 CMSPs =
$9,912]. The total costs are the non-XBRL related costs ($61,546) +
XBRL related costs ($9,912) = $71,368. We have increased these
estimates because, compared to the proposal, the reports required by
Rule 17Ad-27 will contain significantly more disclosures, and each
of those additional disclosures will need to be tagged. In addition,
respondent CMSPs that do not already have access to EDGAR would be
required to file a Form ID so as to obtain the access codes that are
required to file or submit a document on EDGAR. We anticipate that
each respondent would require 0.30 hours to complete the Form ID,
and for purposes of the PRA, that 100% of the burden of preparation
for Form ID will be carried by each respondent internally. Because
two respondent CMSPs already have access to EDGAR, we anticipate
that proposed amendments would result in a one-time nominal increase
of 0.60 burden hours for Form ID, which would not meaningfully add
to, and would effectively be encompassed by, the existing burden
estimates associated with these reports.
---------------------------------------------------------------------------

(3) Market Participants--Investors, Broker-Dealers, Investment
Advisers, and Bank Custodians
    The overall compliance costs that a market participant incurs will
depend on the extent to which it is directly involved in functions
related to clearance and settlement including trade confirmation/
affirmation, asset servicing, and other activities. For example, retail
investors may bear few (if any) direct costs in a transition to a T+1
standard settlement cycle, because their respective broker-dealer
handles the back-office functions of each transaction. However, as is
discussed below, this does not imply that retail investors will not
face indirect costs from the transition, such as those passed through
from broker-dealers or banks.
    Institutional investors may need to configure systems and update
reference data, which may also include updates to trade funding and
processing mechanisms, to operate in a T+1 environment. The Commission
estimates that this will require an initial expenditure of $4.29
million per entity.\672\ However, these costs may vary depending on the
extent to which a particular institutional investor has already
automated its processes. The Commission expects institutional investors
will incur minimal ongoing direct compliance costs after the initial
transition to a T+1 standard settlement cycle.
---------------------------------------------------------------------------

    \672\ The estimate is based on the T+1 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, and testing activity to last six quarters.
We assume 2 operations specialists (at $159 per hour), 2 programmers
(at $316 per hour), and 1 senior operations manager (at $426 per
hour), working 40 hours per week. (2 x $159 + 2 x $316 + 1 x $426) x
6 x 13 x 40 = $4,293,120.
---------------------------------------------------------------------------

    Broker-dealers that serve institutional investors will not only
need to configure their trading systems and update reference data, but
may also need to update trade confirmation/affirmation systems,
documentation, cashiering and asset servicing functions, depending on
the roles they assume with respect to their clients. The Commission
estimates that, on average, each of these broker-dealers will incur an
initial compliance cost of $8.74 million.\673\ The Commission expects
that these broker-dealers will incur minimal ongoing direct compliance
costs after the initial

transition to a T+1 standard settlement cycle.
---------------------------------------------------------------------------

    \673\ The estimate is based on the T+1 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, documentation, asset servicing, and testing
to last six quarters. We assume 5 operations specialists (at $159
per hour), 5 programmers (at $316 per hour), and 1 senior operations
manager (at $426 per hour), working 40 hours per week. (5 x $159 + 5
x $256 + 1 x $345) x 6 x 13 x 40 = $8,739,120.
---------------------------------------------------------------------------

    Broker-dealers that also serve retail customers may need to spend
significant resources during the implementation period to educate their
clients about the shorter settlement cycle. The Commission estimates
that these broker-dealers will incur an initial compliance cost of
$12.73 million each.\674\ However, unlike previously mentioned market
participants, the Commission expects that broker-dealers that serve
retail investors may face significant one-time compliance costs after
the initial transition to T+1. Retail investors may require additional
education and customer service, which may impose costs on their broker-
dealers. The Commission estimates that a reasonable upper bound for the
costs associated with this requirement is $30,000 per broker-
dealer.\675\ Assuming all clearing and introducing broker-dealers must
educate retail customers, the upper bound for the aggregate costs of
post implementation retail investor education will be approximately
$38.2 million.\676\
---------------------------------------------------------------------------

    \674\ The estimate is based on the T+1 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, documentation, asset servicing, customer
education and testing to last five quarters. We assume 5 operations
specialists (at $159 per hour), 5 programmers (at $316 per hour), 5
trainers (at $256 per hour) and 1 senior operations manager (at $426
per hour), working 40 hours per week. (5 x $159 + 5 x $316 + 5 x
$256 + 1 x $426) x 6 x 13 x 40 = $12,732,720.
    \675\ This estimate is based on the assumption that a broker-
dealer chooses to educate customers using a 10-minute video that
takes at most $3,000 per minute to produce. See Exchange Act Release
No. 76324 (Oct. 30, 2015), 80 FR 71388, 71529 n.1683 (Nov. 16,
2015).
    \676\ Calculated as $30,000 per broker-dealer x (92 broker-
dealers reporting as self-clearing but not introducing + 1,114
broker-dealers reporting as introducing but not self-clearing + 68
broker-dealers reporting as introducing and self-clearing) =
$38,220,000.
---------------------------------------------------------------------------

    As discussed above in Part III.C, the Commission is modifying
proposed Rule 15c6-2 to provide two options by which broker-dealers may
comply with the rule, as adopted. The two options are set forth in new
paragraphs (a)(1) and (2). The first option, reflected in paragraph
(a)(1), is the proposed requirement for written agreements, modified in
the ways discussed above. The second option, reflected in paragraph
(a)(2), is an alternative to the written agreements requirement, in
lieu of which a broker-dealer may choose to establish, maintain, and
enforce written policies and procedures reasonably designed to ensure
the completion of the allocation, confirmation, affirmation, or any
combination thereof, for the transaction as soon as technologically
practicable and no later than the end of the day on trade date in such
form as necessary to achieve settlement of the transaction.
    The first option, reflected in paragraph (a)(1), will require
broker-dealers to either enter into or modify existing written
agreements with the relevant parties that ensure the completion of the
allocation, confirmation, and affirmation process. Such parties may be
the customer, the customer's investment adviser, the customer's
custodian, or another agent acting directly or indirectly on behalf of
the customer. The number of such agreements will vary depending on the
number of relevant parties which will vary by the size of the broker-
dealer, the number of customers, and the particular business
relationship that the broker-dealer has with each of them. As discussed
in Part III.B.5 above, several commenters expressed a number of
concerns with the written agreement requirement as proposed. First,
commenters stated that in many scenarios written agreements do not
currently exist between the parties to an institutional transaction and
would be highly burdensome to establish specifically for the purpose of
facilitating same day affirmation. In addition, commenters expressed
the view that the proposed written agreement requirement would create
unnecessary practical burdens and costs.\677\
---------------------------------------------------------------------------

    \677\ See supra note 222.
---------------------------------------------------------------------------

    The Commission acknowledges that in cases such as the ones
described by commenters above--where these written agreements do not
already exist, a client may not authorize its investment adviser to
enter into this type of written agreement, or various third parties are
relied upon to complete certain elements of the allocation,
confirmation, and affirmation process--a requirement to enter into
written agreements specifically to address the same-day affirmation
objective may create substantial burdens and challenges for the parties
to an institutional transaction. Accordingly, as discussed in Part
III.C above, the Commission is including in the final rule a second
option, reflected in paragraph (a)(2), that specifies as an alternative
to the written agreement requirement a policies and procedures
requirement.
    The Commission believes that establishing policies and procedures
as an alternative approach to compliance aside from entering into
written agreements enables broker-dealers to avoid the substantial
burdens and challenges that may be associated with negotiating written
agreements in some cases. However, the Commission also believes that it
may be less costly for broker-dealers that already use written
agreements to manage their commercial relationships with their
customers' advisers, custodians or other agents using such agreements
and that broker-dealers will generally chose to comply with the rule
using the option that is less costly for that broker-dealer's
particular circumstances.
    The second option, reflected in paragraph (a)(2) of new Rule 15c6-
2, requires a broker-dealer to establish, maintain, and enforce
policies and procedures to ensure completion of the allocation,
confirmation, affirmation, or any combination thereof, for a
transaction as soon as technologically practicable and no later than
the end of the day on trade date, in such form as necessary to achieve
settlement. As a general matter, most broker-dealers maintain policies
and procedures to ensure the timely settlement of their
transactions,\678\ and the securities industry considers achieving
``same-day affirmation'' an industry best practice.\679\ Nonetheless,
the Commission believes that respondent broker-dealers will need to
evaluate existing policies and procedures, identify any gaps, and then
develop modifications to address those gaps.\680\ Accordingly, the
Commission estimates that respondent broker-dealers would incur an
aggregate one-time burden of approximately 240 hours to create policies
and procedures required under the rule,\681\ and that the cost of this
one

time burden per broker-dealer would be $88,880.\682\ The Commission
estimates that approximately 411 broker-dealers would be subject to the
requirements of Rule 15c6-2.\683\ The total industry cost is estimated
to be approximately $36.5M.\684\
---------------------------------------------------------------------------

    \678\ See, e.g., SIFMA August 26th Letter, supra note 207, at 2.
    \679\ See supra note 515.
    \680\ Rule 15c6-2(b)(1) requires that the written policies and
procedures that any broker or dealer may establish, maintain, and
enforce as required by Rule 15c6-2 should, among other requirements:
(1) Identify and describe any technology systems, operations, and
processes that the broker or dealer uses to coordinate with other
relevant parties, including investment advisers and custodians, to
ensure completion of the allocation, confirmation, or affirmation
process for the transaction, and (2) Describe how the broker or
dealer plans to identify and address delays if another party,
including an investment adviser or a custodian, is not promptly
completing the allocation or affirmation for the transaction, or if
the broker or dealer experiences delays in promptly completing the
confirmation. In cooperation with the broker or dealer, the relevant
parties (including investment advisers and custodians) may incur
some costs; however, those costs will vary depending on current
systems at the relevant party and broker or dealer, the nature of
the business relationship between the relevant party and the broker
or dealer, and how the business of the relevant party is organized.
    \681\ This figure was calculated as follows: (Assistant General
Counsel for 20 hours + Compliance Attorney for 120 hours + Senior
Risk Management Specialist for 20 hours + Risk Management Specialist
for 80 hours) = 240 hours x 411 respondents = 98,640 hours.
    \682\ This figure was calculated as follows: (Assistant General
Counsel at $543/hour x 20 hours = $10,860) + (Compliance Attorney at
$426/hour x 120 hours = $51,120) + (Senior Risk Management
Specialist at $417/hour x 20 hours = $8,340) + (Risk Management
Specialist at $232/hour x 80 hours = $18,560) = $88,880 x 411
respondents = $36,529,680.
    \683\ See infra Part IX.C.2.
    \684\ See supra note 682.
---------------------------------------------------------------------------

    Rule 15c6-2 also imposes ongoing burdens on a respondent broker-
dealer as follows: (i) ongoing monitoring and compliance activities
with respect to the written policies and procedures required by the
rule; and (ii) ongoing documentation activities with respect to its
obligations to measure, monitor, and document the rates of allocations,
confirmations, and affirmations completed as soon as technologically
practicable and no later than the end of the day on trade date. The
Commission estimates that the ongoing activities required by Rule 15c6-
2 would impose an aggregate annual burden on respondent broker-dealers
of 480 hours,\685\ and a cost per broker-dealer of $172,416.\686\ The
total industry cost is estimated to be approximately $107M.\687\
---------------------------------------------------------------------------

    \685\ This figure was calculated as follows: (Assistant General
Counsel for 48 hours + Compliance Attorney for 192 hours + Senior
Risk Management Specialist for 48 hours + Risk Management Specialist
for 192 hours) = 480 hours x 411 respondents = 197,280 hours.
    \686\ This figure was calculated as follows: (Assistant General
Counsel at $543/hour x 48 hours = $26,064) + (Compliance Attorney at
$426/hour x 192 hours = $81,792) + (Senior Risk Management
Specialist at $417/hour x 48 hours = $20,016) + (Risk Management
Specialist at $232/hour x 192 hours = $44,544) = $172,416 x 411
respondents = $70,862,976.
    \687\ This figure was calculated as follows: $36,529,680
(industry one-time burden) + $70,862,976 (industry ongoing burden) =
$107,392,656.
---------------------------------------------------------------------------

    The Commission believes this estimate is an upper bound on the
compliance costs associated with the second option, reflected in
paragraph (a)(2) of new Rule 15c6-2 for at least two reasons. First,
broker-dealers may choose the first option, reflected in paragraph
(a)(1), if it is less burdensome for them to do so. Second, if a large
number of broker-dealers chose the second option it may be more
efficient for a third party to develop a set of best practices that
could form the basis of the policies and procedures required for each
broker-dealer that choses the second option.
    Custodian banks will need to update their asset servicing functions
to comply with a shorter settlement cycle. The Commission estimates
that custodian banks will incur an initial compliance cost of $4.29
million,\688\ and expects custodian banks to incur minimal ongoing
compliance costs after the initial transition because the Commission
believes that most of the costs will stem from pre-migration updates
and testing.
---------------------------------------------------------------------------

    \688\ The estimate is based on the T+1 Playbook timeline, which
estimates regulation-dependent implementation activity for asset
servicing and testing to last six quarters. We assume 2 operations
specialists (at $159 per hour), 2 programmers (at $316 per hour),
and 1 senior operations manager (at $426 per hour), working 40 hours
per week. (2 x $159 + 2 x $316 + 1 x $426) x 6 x 13 x 40 =
$4,293,120.
---------------------------------------------------------------------------

    The amendment to Rule 204-2 will require registered investment
advisers to make and keep records of confirmations they receive and of
allocations and affirmations they send or receive for securities
transactions that are subject to the requirements of Rule 15c6-2(a).
Based on Form ADV filings, approximately 15,160 advisers registered
with the Commission are required to make and keep copies of certain
books and records relating to their advisory business.\689\ The
Commission further estimates that of these advisers, 2,169 registered
advisers will not retain the required records under the final rule
because they do not have any institutional advisory clients. Therefore,
the Commission estimates that 12,991 advisers will be subject to the
final amendment to Rule 204-2 under the Advisers Act because they will
facilitate transactions with a broker or dealer that is subject to the
requirements of Rule 15c6-2(a) and therefore will be subject to the
related recordkeeping requirement.\690\ As discussed above, based on
staff experience, the Commission believes that many advisers already
have recordkeeping processes in place to make and keep records of
confirmations received, and allocations and affirmations sent or
received. The Commission believes these are customary and usual
business practices for many advisers, but that some small and mid-size
advisers may not currently retain these records. Further, the
Commission believes that the vast majority of these books and records
are kept in electronic fashion with an ability to capture a date and
time stamp, such as in a trade order management or other recordkeeping
system, through system logs of file transfers, email archiving, or as
part of DTC's Institutional Trade Processing services, but that some
advisers maintain paper records (e.g., confirmations) and/or
communicate allocations by telephone. In addition, as noted in Part
III.C above, we believe that up to 70% of institutional trades are
affirmed by custodians, and therefore advisers may not retain or have
access to the affirmations these custodians sent to brokers or
dealers.\691\
---------------------------------------------------------------------------

    \689\ See infra note 4 to Table 2.
    \690\ See id.
    \691\ See DTCC ITP Forum Remarks, supra note 264.
---------------------------------------------------------------------------

    In a change from the proposal, we estimate three-hour information
collection burden annually per impacted adviser associated with the new
recordkeeping requirements.\692\ We estimate that the amendments to
Rule 204-2 will result in an additional internal cost of approximately
$3.02 million per year.\693\ This estimate takes into account potential
additional burdens associated with the new recordkeeping requirement
for advisers that do not currently retain these records, but will be
required to do so under the final rule. These estimates are also
designed to address any burdens for advisers that may retain such
documents, but do not do so electronically and/or do not time and date
stamp such documents or otherwise retain the documents in a way that
complies with the final rule.\694\ In addition, the revised estimates
factor in any costs associated with receiving copies of, or having
access to, required records that are retained by a custodian or other
third-party, including cost-savings associated with the adviser's
ability to rely on third parties to meet its recordkeeping obligations
under the rule.\695\
---------------------------------------------------------------------------

    \692\ The Commission believes that most of the necessary records
are already being retained as advisers generally retain their
communications and trade instructions to comply with other
recordkeeping obligations. If these records are not being kept, the
Commission believes the burden will be small to start retaining them
because the requirement pertains to records that are sent or
received and does not require new records to be created.
    \693\ The estimate assumes that the amendments to Rule 204-2
will result in an incremental increase in the collection of
information burden estimate by 3 hours for 12,991 investment
advisers. For each such adviser, we assume 1.5 hour for a compliance
clerk (at $82 per hour) and 1.5 hour for a general clerk (at $73 per
hour) = $233 per investment adviser * 12,991 investment advisers =
an incremental increase of $3,020,408 in internal costs.
    \694\ For more discussion, see infra Part IX.A.
    \695\ One commenter recommended that the Commission update these
estimates. See infra Part IX.A for a discussion of the commenter's
recommendation and the Commission's justification for the burden
estimates.
---------------------------------------------------------------------------

(4) Indirect Costs
    In estimating these implementation costs, the Commission notes that
market

participants who bear the direct costs of the actions they undertake to
comply with the amendment to Rule 15c6-1 may pass these costs on to
their customers. For example, retail and institutional investors might
not directly bear the cost of all of the necessary upgrades for a T+1
standard settlement cycle, but might indirectly bear these costs as
their broker-dealers might increase their fees to amortize the costs of
updates among their customers. The Commission is unable to quantify the
overall magnitude of the indirect costs that retail and institutional
investors may bear, because such costs will depend on the market power
of each broker-dealer, and each broker-dealer's willingness to pass on
the costs of migration to a T+1 standard settlement cycle to its
customers. However, the Commission believes that in situations where
broker-dealers have little or no competition, broker-dealers will have
an incentive to absorb part of the cost increase. As discussed in Part
VIII.C.5.b)(3) above, this could be as high as the full amount of the
estimated $8.74 million for each broker-dealer that serves
institutional investors, and $12.73 million for each broker-dealer that
serves institutional and retail investors. However, in situations where
broker-dealers face heavy competition for customers, there may be
little or no economic profits and price may equal marginal cost so an
increase in costs could be fully passed through to the customer.\696\
---------------------------------------------------------------------------

    \696\ See supra note 621.
---------------------------------------------------------------------------

    As noted in Part VIII.B.4, the ability of market participants to
pass implementation costs on to customers likely depends on their
relative bargaining power. For example, CCPs, like many other
utilities, exhibit many of the characteristics of natural monopolies
and, as a result, may have market power, particularly relative to
broker-dealers who submit trades for clearing. This means that CCPs may
be able to share implementation costs they directly face related to
shortening the settlement cycle with broker-dealers through higher
clearing fees. Conversely, to the extent that institutional investors
have market power relative to broker-dealers, broker-dealers may not be
in a position to impose indirect costs on them.
(5) Industry-Wide Costs
    To estimate the aggregate, industry-wide cost of a transition to a
T+1 standard settlement cycle, the Commission takes its own per-entity
estimates and multiplies them by our estimate of the respective number
of entities. The Commission estimates that there are 1,229 buy-side
firms, 160 self-clearing broker-dealers, and 48 custodian banks.\697\
Additionally, while there are three Matching/ETC Providers, the
Commission believes that only one of these is currently providing
services in the U.S. We estimate there are 1,274 broker-dealers that
will incur investor education costs. One way to establish a total
industry initial compliance cost estimate is to multiply each estimated
per-entity cost by the respective number of entities and sum these
values, which results in an estimate of $7.76 billion.\698\ The
Commission, however, believes that this estimate is likely to overstate
the true initial cost of transition to a T+1 standard settlement cycle
for a number of reasons. First, our per-entity estimates do not account
for the heterogeneity in market participant size, which may have a
significant impact on the costs that market participants face. While
the BCG Study included both estimates of the number of entities in
different size categories as well as estimates of costs that an entity
in each size category is likely to incur, it did not provide sufficient
underlying information to allow the Commission to estimate the
relationship between participant size and compliance cost and, thus, we
cannot produce comparable estimates. The Commission solicited comment
on the extent to which market participants believe that the compliance
costs for Rule 15c6-1(a) would scale with market participant size and
did not receive data that could be used to improve these estimates.
---------------------------------------------------------------------------

    \697\ The estimate for the number of buy-side firms is based on
the Commission's 13(f) holdings information filers with over $1
billion in assets under management, as of December 31, 2020. The
estimate for the number of broker-dealers is based on FINRA FOCUS
Reports of firms reporting as self-clearing. See supra note 525 and
accompanying text. The estimate for the number of custodian banks is
based on the number of ``settling banks'' listed in DTC's Member
Directories, http://www.dtcc.com/client-center/dtc-directories.
    \698\ Calculated from estimates derived above in this section
(Part VIII.C.5) as 160 broker-dealers (self-clearing) x $12,733,000
+ + 48 custodian banks x $4,293,000 + 1,229 buy-side firms x
$4,293,000 + 4 Matching/ETC Providers x ($16,149,000 + $6,900) + 2
FMUs x $16,149,000 + 12,991 IAs x $233 + 411 broker-dealers with
institutional customers x $88,880$ 7,763M.
---------------------------------------------------------------------------

    Second, investments by third-party service providers may mean that
many of the estimated compliance costs for market participants are
duplicated. The BCG Study suggests that ``leverage'' from service
providers may yield a savings of $194 million, reducing aggregate costs
by approximately 29%.\699\ In the T+1 Proposing Release, the Commission
sought further comment on the extent to which the efficiencies
generated by the investments of service providers might reduce the
compliance costs of market participants. Taking into account potential
cost reductions due to repurposing existing systems and using service
providers as described above, the Commission believes that $5.51
billion represents a reasonable range for the total industry initial
compliance costs.\700\
---------------------------------------------------------------------------

    \699\ See BCG Study, supra note 565, at 79.
    \700\ The lower bound of this range is calculated as ($7.76
billion x (1-0.29)) = $5.51 billion.
---------------------------------------------------------------------------

    In addition to these initial costs, a transition to a shorter
settlement cycle may also result in certain ongoing industry-wide
costs. Though the Commission believes that a move to a shorter
settlement cycle will generally bring with it a reduced reliance on
manual processing, a shorter settlement cycle may also exacerbate
remaining operational risk. This is because a shorter settlement cycle
will provide market participants with less time to resolve errors. For
example, if there is an entry error in the trade match details sent by
either counterparty for a trade, both counterparties will have one
extra day to resolve the error under the baseline than in a T+1
environment. For these errors, a shorter settlement cycle may increase
the probability that the error ultimately results in a settlement fail.
However, the Commission believes that a large variety of operational
errors are possible in the clearance and settlement process, and some
of these errors are likely to be infrequent, the Commission is unable
to quantify the impact that a shorter settlement cycle may have on the
ongoing industry-wide costs stemming from a potential increase in
operational risk.

D. Consideration of Reasonable Alternatives

1. Delete 15c6-1(c) to T+2
    In the T+1 Proposing Release the Commission proposed to delete
paragraph (c) of the rule,\701\ which would, in conjunction with the
proposed amendment to paragraph (a), establish a T+1 standard
settlement cycle for firm commitment offerings priced after 4:30 p.m.
ET. The Commission requested comment on whether, as an alternative to
deleting paragraph (c), it be amended in order to shorten the
settlement cycle for firm commitment offerings to T+2. In response to
comments received and as discussed in Part II.B.3 and Part II.C.4

above, the Commission is adopting this alternative.
---------------------------------------------------------------------------

    \701\ See T+1 Proposing Release, supra note 2, at 10448-49.
---------------------------------------------------------------------------

2. Adopt 17Ad-27 To Require Certain Outcomes
    The Commission proposed Rule 17Ad-27 to require a CMSP establish,
implement, maintain, and enforce policies and procedures to facilitate
straight-through processing for transactions involving broker-dealers
and their customers.\702\ As proposed, Rule 17Ad-27 would require a
CMSP to submit every twelve months to the Commission a report that
describes the following: (i) the CMSP's current policies and procedures
for facilitating straight-through processing; (ii) its progress in
facilitating straight-through processing during the twelve month period
covered by the report; and (iii) the steps the CMSP intends to take to
facilitate and promote straight-through processing during the twelve
month period that follows the period covered by the report.\703\
---------------------------------------------------------------------------

    \702\ See id. at 10457-61.
    \703\ As adopted, the Rule 17Ad-27 reporting requirement has
been revised. See supra Part V.C.
---------------------------------------------------------------------------

    The Commission proposed a ``policies and procedures'' approach in
developing the rule because it believes such an approach will remain
effective over time as CMSPs consider and offer new technologies and
operations to improve the settlement of institutional trades. The
Commission also believes that improving the CMSPs' systems to
facilitate straight-through processing can help market participants
consider additional ways to make their own systems more efficient. In
addition, a ``policies and procedures'' approach can help ensure that a
CMSP considers, in a holistic fashion, how the obligations it applies
to its users will advance the implementation of methodologies,
operational capabilities, systems, or services that support straight-
through processing.
    The Commission has considered as an alternative to the policies and
procedures approach in proposed Rule 17Ad-27, proposing a rule to
require CMSPs to achieve certain outcomes that would facilitate
straight-through processing. For example, the Commission considered a
requirement that a CMSP do the following: (i) enable the users of its
service to complete the matching, confirmation, or affirmation of the
securities transaction as soon as technologically and operationally
practicable and no later than the end of the day on which the
transaction was effected by the parties to the transaction; or (ii)
forward or otherwise submit the transaction for settlement as soon as
technologically and operationally practicable, as if using fully
automated systems.
    However, as discussed in Part V.C.1. above, the Commission believes
that a policies and procedures approach will better meet the objectives
of promoting STP by requiring policies and procedures that include a
holistic review and framework for considering how systems and processes
facilitate straight-through processing, and that can adapt over time to
changes in technology and operations, both among and beyond the CMSP's
systems. Therefore the Commission is adopting new Rule 17Ad-27 as
proposed but with the two modifications discussed above.
3. Adopt Rule Changes to Rule 15c6-2 as Recommended by SIFMA's August
Comment Letter
    As previously mentioned in Part III.B.7., the Commission received
an additional comment letter from SIFMA addressing alternatives to
proposed Rule 15c6-2.\704\ SIFMA recommended that the Commission revise
proposed Rule 15c6-2 to replace the written agreement requirement with
a requirement for policies and procedures that can support faster
processing, which would allow individual firms to advance the
Commission's interest in same-day affirmation while ensuring that
broker-dealers can design policies and procedures tailored to their
business models, products, and unique customer bases.\705\
---------------------------------------------------------------------------

    \704\ See SIFMA August 26th Letter, supra note 194, at 2-3.
    \705\ See id. at 2. In Part III.B.5., above, the Commission has
previously discussed why it believes it appropriate to retain the
written agreement requirement in the rule, while also adding an
option to establish, maintain, and enforce written policies and
procedures.
---------------------------------------------------------------------------

    SIFMA's recommendation included a number of elements. First, SIFMA
requested that Rule 15c6-2 be revised to require policies and
procedures reasonably designed to maintain timely settlement
rates.\706\ Second, SIFMA recommended that such policies and
procedures: (i) address the timing of allocations, confirmations, and
affirmations to ensure timely settlement; (ii) include a communication
plan with market participants; (iii) provide a description of a broker-
dealers' ability to monitor compliance; (iv) include the development of
controls and supervisory procedures; and (v) include the development of
metrics to measure compliance.\707\
---------------------------------------------------------------------------

    \706\ See id.
    \707\ See id. at 2-3.
---------------------------------------------------------------------------

    The Commission agrees that the policies and procedures approach is
beneficial, and thus is revising final Rule 15c6-2 to allow broker-
dealers to achieve compliance with the rule either by entering into
written agreements or by establishing, implementing, and maintaining
policies and procedures. Economically, options always have a positive
value when they allow the holder to choose amongst a menu of choices;
in this case, the ability to choose amongst approaches should present a
benefit to broker-dealers, who can better assess which one of these two
alternatives provides the most efficient path to compliance with the
rule. Discussion of the costs for each of these alternatives can be
found in section C.5.(b)(3).
    In terms of what the policies and procedures dictate, the
Commission believes, as mentioned in Part III.B.7, that timely
settlement is a separate, if related, objective from same-day
affirmation. As discussed in Part III.B.1 above, the Commission
continues to believe that improving affirmation rates on trade date is
an objective separate and apart from, though related to, shortening the
settlement cycle, because it promotes an orderly settlement process
regardless of the length of the settlement cycle.
    Other than the different specifications of the policies and
procedures just mentioned, the Commission believes that it is generally
adopting SIFMA's recommendations with respect to: addressing the timing
of allocations, confirmations, and affirmations to ensure timely
settlement; including a communication plan with market participants;
providing a description of a broker-dealers' ability to monitor
compliance; including the development of controls and supervisory
procedures; and including the development of metrics to measure
compliance.
4. Replace the Written Agreement Requirement in Proposed Rule 15c6-2
With a Principles-Based Approach
    The Commission received comment letters from the Investment Company
Institute (ICI) and from the American Securities Association (ASA) that
advocate for a principles-based approach that allows broker-dealers to
adopt their own internal policies that promote the allocation,
confirmation and affirmation of trades for relevant customers. That
would include, according to ICI, a requirement that broker-dealers
adopt policies and procedures ``reasonably designed'' to ensure that
allocations, confirmations, and affirmations are completed on a
timeline that allows settlement on T+1.
    The Commission is mindful that each broker-dealer is best suited to
assess the

challenges that it faces in accelerating the settlement process.
Therefore, as already discussed, the Commission is providing broker-
dealers with the additional choice of a policies and procedures
alternative besides the written agreements requirement. The Commission
believes that the policies and procedures alternative affords broker-
dealers sufficient flexibility without sacrificing the main objective
of the rule, which is solving the collective action problem of
improving the overall current affirmation rates of 68%. A principles-
based approach relies almost exclusively on the existing commercial
incentives discussed on Part III.B.1, which the Commission already
considered insufficient to overcome the incremental gains in same-day
affirmation rates to date.
5. Select a Later Implementation Date for Adoption of the Rule
    The Commission received a number of comment letters \708\ that
recommend a later date than the proposed implementation date of March
31, 2024. Reasons given by the industry for more time include the
additional convenience attendant to a transition to T+1 settlement over
a three-day weekend (e.g., Memorial Day, Labor Day); the possibility of
coordinating the T+1 settlement transition with a closely aligned
market (i.e., Canada on Labor Day 2024); and the ability to have more
thorough preparation and testing protocols, among others.
---------------------------------------------------------------------------

    \708\ See, e.g., DTCC Letter, supra note 16, at 4; SIFMA April
Letter, supra note 16, at 4; State Street Letter, supra note 16, at
5; MFA Letter, supra note 16, at 2; ICI Letter, supra note 16, at 2;
AGC April Letter, supra note 16, at 4; CCMA April Letter, supra note
16, at 1; RMA Letter, supra note 16, at 8; IAA April Letter, supra
note 16, at 2; IIAC Letter, supra note 16, at 2; ASA Letter, supra
note 16, at 1-2; OCC Letter, supra note 16, at 3; STA Letter, supra
note 16, at 2.
---------------------------------------------------------------------------

    The Commission acknowledges that there are additional costs to an
earlier transition date, as a more compressed timeline to
implementation will have an opportunity cost over scarce operational
resources. Additional time also allows for more robust preparation and
testing.\709\ Nevertheless, postponing the implementation of T+1
settlement delays the realization of the market-wide benefits of the
rule. While there may be increases in up-front costs from an earlier
date, there are also benefits attendant to general reductions in
liquidity, credit and market risk. Periods of high volatility could
materialize on any date between the implementation date and any of the
suggested dates, and such occurrence would reduce the benefits of the
rule precisely at the moment when it is most useful. Given the extent
of planning, operational changes, and testing necessary to achieve a
successful and orderly transition to a T+1 standard settlement
cycle,\710\ the Commission is moving the compliance date to Tuesday,
May 28, 2024, which follows a Federal holiday for which both markets
and banks will be closed, providing market participants with a three-
day weekend to facilitate the transition to a T+1 standard settlement
cycle, and providing market participants an additional two months. The
Commission believes that a May 28, 2024, compliance date will ensure an
orderly transition to a T+1 standard settlement cycle that realizes the
substantial benefits of shortening the settlement cycle as soon as
possible.
---------------------------------------------------------------------------

    \709\ See supra Part VII.A.
    \710\ Id.
---------------------------------------------------------------------------

IX. Paperwork Reduction Act

    As discussed in the proposing release, Rule 17Ad-27 and the
amendments to Rule 204-2(a) contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\711\ The Commission submitted the proposed collections of
information to the Office of Management and Budget (``OMB'') for review
in accordance with the PRA. For the amendments to Rule 204-2(a), the
title of the information collection is ``Rule 204-2 under the
Investment Advisers Act of 1940'' (OMB Control No. 3235-0278). For Rule
17Ad-27, the title of the information collection is ``Shortening the
Securities Transaction Settlement Cycle'' (OMB Control No. 3235-
0799).\712\ In addition, the modifications to Rule 15c6-2 contain
``collection of information'' requirements, which will be submitted to
OMB for review in accordance with the PRA. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \711\ See 44 U.S.C. 3501 et seq.
    \712\ The T+1 Proposing Release stated that the Commission
intended to include Rule 17Ad-27 in an existing information
collection, ``Clearing Agency Standards for Operation and
Governance'' (OMB Control No. 3235-0695). The Commission has
subsequently determined to request a new OMB Control Number for the
collection of information in Rule 17Ad-27.
---------------------------------------------------------------------------

    The Commission received several comments concerning its PRA
estimates for the proposed amendment to Rule 204-2, which are discussed
below. In response to these comments, and in view of the changes
between the proposed and adopted recordkeeping requirements, the
Commission is modifying its PRA estimates, as reflected in Part IX.A.
The Commission is also modifying its PRA estimates for Rule 17Ad-27 in
view of the changes between the proposed and adopted rule requirements,
as explained in Part IX.B. In addition, the Commission corrects a
tabulation error for Rule 17Ad-27 that was included in the T+1
Proposing Release.
    Finally, because the modifications to Rule 15c6-2 discussed in Part
III.C would impose PRA burdens, the Commission below provides PRA
estimates for Rule 15c6-2. The Commission will submit these burdens to
OMB for review in accordance with the PRA.\713\
---------------------------------------------------------------------------

    \713\ See supra note 712 and accompanying text (providing the
title of the information collection and the OMB control number for
these rulemakings, ``Shortening the Securities Transaction
Settlement Cycle'' (OMB Control No. 3235-0799)).
---------------------------------------------------------------------------

A. Advisers Act Rule 204-2

    Under section 204 of the Advisers Act, investment advisers
registered or required to register with the Commission under section
203 of the Advisers Act must make and keep for prescribed periods such
records (as defined in section 3(a)(37) of the Exchange Act), furnish
copies thereof, and make and disseminate such reports as the
Commission, by rule, may prescribe as necessary or appropriate in the
public interest or for the protection of investors. Advisers Act Rule
204-2 sets forth the requirements for maintaining and preserving
specified books and records. This collection of information is found at
17 CFR 275.204-2 and is mandatory. The Commission staff uses the
collection of information in its regulatory and examination program.
Responses to the requirements of the proposed amendments to Rule 204-2
that are provided to the Commission in the context of its regulatory
and examination program are kept confidential subject to the provisions
of applicable law.\714\
---------------------------------------------------------------------------

    \714\ See section 210(b) of the Advisers Act, 15 U.S.C. 80b-
10(b).
---------------------------------------------------------------------------

    The final amendments to Rule 204-2 will require all registered
investment advisers to make and keep certain records with respect to
any securities transaction that is subject to the requirements of Rule
15c6-2(a). Those records include each confirmation received, and any
allocation and each affirmation sent or received, with a date and time
stamp for each allocation and affirmation that indicates when the
allocation and affirmation were sent or received.
    The proposed amendments to Rule 204-2 would have required
recordkeeping by any registered adviser

that is a party to a contract under proposed Rule 15c6-2 while the
final rule references more specifically transactions subject to Rule
15c6-2(a), although both concern the same subset of transactions. We
estimate that 12,991 advisers, or 86% of the total registered advisers
subject to amended Rule 204-2, will facilitate transactions subject to
Rule 15c6-2(a) and thus be subject to the amendments.\715\ As discussed
in the T+1 Proposing Release, the Commission stated that based on staff
experience, it believed that many advisers already have processes in
place to make and keep records of confirmations received, and
allocations and affirmations sent as part of their customary and usual
business practices, though recognizing that some small and mid-sized
advisers do not currently retain these records, and some advisers still
maintain certain records in paper and/or communicate by telephone.\716\
Paper records are less likely to be date and time stamped, and those
communicated by telephone are not date or time-stamped at all, unless a
memorial of the communication is retained). The Commission also stated
that it believed many such records are electronically maintained, and
are sent or received electronically, in which case such documents were
already date and time stamped in many instances.\717\
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    \715\ Based on Form ADV data as of June 2022. See also infra
note 4 to Table 2.
    \716\ See T+1 Proposing Release, supra note 2, at 10494.
    \717\ See T+1 Proposing Release, supra note 2, at 10456-57,
10490, 10494.
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    Some commenters discussed aspects of the burden estimates for the
proposed amendments to Rule 204-2. One commenter stated that the
Commission has underestimated the time and cost burdens for
implementing the proposed recordkeeping requirements but did not
provide specific estimates.\718\ As one basis for that statement, the
commenter explained that most investment advisers use third parties to
perform or communicate allocations or affirmations, and do not
necessarily currently retain the records themselves.\719\ This
commenter stated that if such advisers were required to retain those
records on an ongoing basis, they would likely incur costs associated
with directing the third parties to electronically copy the investment
adviser on any allocations or affirmations and ensuring that their own
systems and infrastructure could adequately accommodate these
additional records. The commenter suggested that if advisers could not
rely on third parties to meet their recordkeeping obligations, the
Commission should update its estimates, while also asking the
Commission to review the potential cost savings associated with
allowing advisers to use third parties to retain the required
records.\720\ In this regard, we note that investment advisers may
continue to rely on third parties to meet their recordkeeping
obligations, including those required by the final amendments to Rule
204-2.\721\
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    \718\ See IAA April Letter, supra note 16, at 7.
    \719\ Id. (noting the Commission's estimate in the T+1 Proposing
Release that 70 percent of investment adviser trades are affirmed by
their custodian is consistent with information received from IAA
members, and also noting that advisers may utilize separately
managed accounts where trading and allocations are conducted by a
third-party investment manager under an agreement with the
investment adviser).
    \720\ Id.
    \721\ See supra Part IV.C. As previously noted, we estimate that
70% of trades are affirmed by custodians, which may retain the
affirmations on the adviser's behalf.
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    Several comments also addressed timestamping. One suggested that
the costs could be higher than we estimated in the proposal,\722\ while
another stated that timestamps are already included in electronic
communications protocols.\723\ We agree, consistent with the latter
comment, that timestamps are generally included in many electronic
communications and many advisers currently send allocations and
affirmations electronically.
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    \722\ AIMA Letter, supra note 29.
    \723\ FIX Trading Letter, supra note 218.
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    In a change from the proposal, we estimate that each adviser that
will be subject to the new recordkeeping requirements will incur an
additional three-hour burden each year, increased from two hours as
proposed. We are not amortizing any of the burdens as proposed, because
we believe investment advisers that will be subject to the new
requirements will incur the same hour burden initially and then
annually thereafter.\724\
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    \724\ The T+1 Proposing Release amortized the annual two-hour
burden over three years, resulting in an annual internal burden of
0.667 hours per adviser per year.
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    The Commission estimates that 12,991 registered advisers will be
subject to the new recordkeeping requirements because they manage
institutional accounts and are thus likely to facilitate transactions
that are subject to the requirements of Rule 15c6-2(a).\725\ This
estimate takes into account potential additional burdens associated
with the new recordkeeping requirement for advisers that do not
currently make and retain these records, but will be required to do so
under the final rule. The revised estimates are also designed to
address any burdens for advisers that may make and retain such
documents, but do not do so electronically and/or do not time and date
stamp such documents or otherwise retain the documents in a way that
complies with the final rule. In addition, the revised estimates factor
in any costs associated with receiving copies of, or having access to,
required records that are retained by a custodian or other third-party,
offset by cost-savings associated with the adviser's ability to rely on
third parties to meet its recordkeeping obligations under the rule. As
discussed above, we believe that many advisers already have
recordkeeping processes in place to retain the new required records,
and may only incur minimal additional burdens to comply with the final
recordkeeping requirements. However, some advisers may need to spend
more time to modify their recordkeeping systems. Accordingly, the
three-hour burden estimate reflects an average across all advisers
likely to be subject to the new requirements. Finally, in response to
the comment that our staffing cost estimates were too low, we have
increased the hours burden to three and the time we estimate the
compliance clerk and general clerk will spend on the collection of
information, and we updated the wage rates to account for
inflation.\726\
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    \725\ The Commission is using a different methodology than the
proposal in order to simplify the calculation and include more
advisers that we estimate will be subject to the new recordkeeping
requirement. The final estimate includes one category of 12,991
advisers that will be subject to the new recordkeeping requirements
because they manage institutional accounts and are thus likely to
facilitate transactions that are subject to the requirements of Rule
15c6-2(a). The estimate excludes advisers that only have individuals
or high-net-worth individuals as clients in Item 5.D. and do not
report participation in any wrap fee program in Item 5.I., and
advisers that do not report any regulatory assets under management
in Item 5.F. In contrast, the T+1 Proposing Release estimated 11,283
of advisers that are subject to Rule 204-2, would enter a contract
with a broker or dealer under proposed Rule 15c6-2 and therefore be
subject to the related proposed recordkeeping amendment. The
estimate included three categories of advisers that would have had
the same burden hours: (1) 220 small and mid-size advisers that have
institutional clients that we believed do not maintain the proposed
records; (2) 113 advisers that have institutional clients that staff
estimated do not send allocations or affirmations; and (3) 7,898
advisers with institutional clients that the staff estimated make
institutional trades that are affirmed by custodians and therefore
do not maintain the proposed affirmations.
    \726\ The wage rate estimate takes into account an updated
inflation adjustment since the proposal and estimates that the
higher paid compliance clerk will spend approximately 50% of the
time performing the function instead of 17% as estimated in the T+1
Proposing Release.
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    In our most recently approved Paperwork Reduction Act submission
for Rule 204-2, we estimated for Rule

204-2 a total annual aggregate hour burden of 2,764,563 hours, and a
total annual aggregate internal cost burden of $175,980,426.\727\ The
estimated additional burdens associated with the final amendments to
Rule 204-2, which take into account an increase in annual hour burdens
and internal cost burdens due to the comments received and an increase
in the internal wage rates due to an updated inflation adjustment
reflecting inflation through the end of 2022, are reflected in the
table below.
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    \727\ Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Revisions to Rule 204-2, OMB
Report, OMB 3235-0278 (Aug. 2021).

                   Table 2--Summary of Burden Estimates for the Final Amendments to Rule 204-2
----------------------------------------------------------------------------------------------------------------
                                         Annual internal hour                             Internal time cost per
               Advisers                       burden \1\         Internal wage rate \2\          year \3\
----------------------------------------------------------------------------------------------------------------
12,991 advisers \4\..................  3 hours per adviser \5\  $77.50 per hour........  Incremental aggregate
                                       Incremental aggregate                              internal cost =
                                        burden = 38,973 hours                             $3,020,408 ($77.5 x
                                        (12,991 advisers x 3                              38,973 hours =
                                        hours = 38,973 hours).                            $3,020,408).
----------------------------------------------------------------------------------------------------------------
Currently approved aggregate burden    2,764,563 aggregate                        $175,980,426
 \6\.                                   hours per year.
----------------------------------------------------------------------------------------------------------------
Estimated revised aggregate burden     2,803,536 aggregate                      $179,000,834 \8\
 \7\.                                   hours per year.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ In a change from the Proposing Release, we are not amortizing the initial internal hour burden over a three-
  year period. Instead, we believe that the estimated internal hour burdens associated with the final amendments
  will be annual burdens.
\2\ As with our estimates relating to the previous amendments to Advisers Act Rule 204-2, the Commission expects
  that performance of these functions will most likely be allocated between compliance clerks and general
  clerks. Data from SIFMA's Office Salaries in the Securities Industry 2013, modified by Commission staff to
  account for an 1800-hour work-year and inflation through the end of 2022, and multiplied by 2.93 to account
  for bonuses, firm size, employee benefits and overhead, suggest that costs for these position are $82 and $73,
  respectively. A blended hourly rate is therefore: ($82 + $73) / 2 = $77.5 per hour.
\3\ Under the currently-approved PRA for Rule 204-2, there is no cost burden other than the internal cost of the
  hour burden described herein, and we believe that the amendments will not result in any external cost burden.
\4\ We estimate there were 15,160 total registered advisers as of June 2022 based on Form ADV filings received
  through the Investment Adviser Registration Depository (IARD) through August 31, 2022. Of these 15,160
  advisers, we estimate that 12,991 will be subject to the new recordkeeping requirements because they manage
  institutional accounts and are thus likely to facilitate transactions that are subject to the requirements of
  Rule 15c6-2(a). We have excluded advisers that only have individuals or high-net-worth individuals as clients
  in Item 5.D. and do not report participation in any wrap fee program in Item 5.I. We also excluded advisers
  that do not report any regulatory assets under management in Item 5.F.
\5\ We estimate an average of three hours per adviser to update procedures and instruct personnel to make and
  retain the required records in the advisers' recordkeeping systems, including any such documents it may
  receive in paper format and does not currently retain, and to actually retain those records for the required
  retention periods. Because we believe that many advisers already have recordkeeping systems to accommodate
  these records, which include, at a minimum, spreadsheet formats and email retention systems that have an
  ability to capture a date and time stamp, such advisers are likely to incur minimal incremental costs
  associated with the new recordkeeping requirement.
\6\ See supra note 727.
\7\ The new recordkeeping burden will add 38,973 aggregate annual hours, resulting in a revised estimate of
  2,803,536 aggregate hours for all registered advisers subject to these amendments to Rule 204-2 (2,764,563
  current hours + 38,973 additional hours = 2,803,536 aggregate hours per year). The new recordkeeping burden
  would also add $3,020,408 in aggregate internal costs, resulting in a revised estimate of $179,000,834 in
  aggregate internal costs ($175,980,426 current internal costs + $3,020,408 additional internal costs =
  $179,000,834).
\8\ This reflects a reduction in the internal time cost per year that appeared in the T+1 Proposing Release, to
  account for corrections to the internal time costs calculations as they appeared in the T+1 Proposing Release.

B. Exchange Act Rule 17Ad-27

    As discussed in the T+1 Proposing Release, the purpose of the
collections under Exchange Act Rule 17Ad-27 is to ensure that CMSPs
facilitate the ongoing development of operational and technological
improvements associated with the straight-through processing of
institutional trades. The collections are mandatory. To the extent that
the Commission receives confidential information pursuant to this
collection of information, such information would be kept confidential
subject to the provisions of applicable law.\728\
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    \728\ See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of the Freedom
of Information Act provides an exemption for trade secrets and
commercial or financial information obtained from a person and
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of
the Freedom of Information Act provides an exemption for matters
that are contained in or related to examination, operating, or
condition reports prepared by, on behalf of, or for the use of an
agency responsible for the regulation or supervision of financial
institutions. See 5 U.S.C. 552(b)(8).
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    Respondents under this rule are the three CMSPs to which the
Commission has granted an exemption from registration as a clearing
agency, as previously discussed in the T+1 Proposing Release. The
Commission also continues to anticipate that one additional entity may
seek to become a CMSP in the next three years, and so for purposes of
this PRA collection the Commission has assumed four respondents.
    As discussed in Part V.C.1, Rule 17Ad-27(a) requires a CMSP to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to facilitate straight-through
processing. Although the Commission has modified the text of Rule 17Ad-
27(a) to provide that such policies and procedures be ``reasonably
designed,'' the Commission believes that the initial burden under this
portion of the rule is unchanged. As discussed in the T+1 Proposing
Release, the Commission continues to estimate that respondent CMSPs
would incur an aggregate one-time burden of approximately 56 hours to
create such new policies and procedures,\729\ and that the aggregate
cost of this one time burden would be $27,600.\730\
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    \729\ This figure was calculated as follows: (Assistant General
Counsel for 8 hours + Compliance Attorney for 6 hours) = 14 hours x
4 respondent CMSPs = 56 hours.
    \730\ This figure was calculated as follows: (Assistant General